The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that the Centralised Processing Centre (CPC) could not disallow employees’ contribution to Provident Fund (PF) and Employees’ State Insurance (ESI) through automated processing for Assessment Years (AYs) 2019-20 and 2020-21.
The bench of Keshav Dubey (Judicial Member) and Waseem Ahmed (Accountant Member) has observed that an adjustment involved a debatable legal issue at the relevant time and therefore fell outside the limited scope of prima facie adjustments under Section 143(1).
The assessee, a proprietor engaged in the business of manpower supply and labour contracts, had filed returns for AYs 2019-20 and 2020-21. During processing of the returns under Section 143(1), the CPC disallowed employees’ contributions to PF and ESI that had been deposited after the due dates prescribed under the respective welfare statutes, although the payments had been made before the due date for filing the income tax return.
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For AY 2019-20 alone, the CPC added over ₹55.32 lakh, comprising delayed employees’ PF contribution of ₹47.68 lakhand ESI contribution of ₹7.64 lakh, resulting in a substantial increase in taxable income. The assessee’s rectification application under Section 154 was also rejected, and the first appellate authority upheld the disallowance by relying upon the Supreme Court’s decision in Checkmate Services Pvt. Ltd. v. CIT.
Before the Tribunal, the assessee argued that at the time when the CPC processed the returns and passed the rectification order, the law was not settled. The Karnataka High Court’s judgment in Essae Teraoka (P.) Ltd. permitted deduction where employees’ contributions were deposited before the due date of filing the return under Section 139(1). The amendments introduced by the Finance Act, 2021 to Sections 36(1)(va) and 43B were expressly prospective from AY 2021-22. Since the issue was highly debatable, it could not be the subject matter of an adjustment under Section 143(1), which is confined to apparent and undisputed mistakes.
The department defended the additions by relying upon the Supreme Court’s judgment in Checkmate Services Pvt. Ltd. v. CIT (2022) 448 ITR 518, contending that employees’ contributions deposited beyond the due dates prescribed under the PF and ESI laws are not allowable deductions, irrespective of payment before the return filing date.
It was further argued that once the Supreme Court interprets a statutory provision, the interpretation operates from the inception of the provision.
The Tribunal acknowledged that the Supreme Court in Checkmate Services ultimately settled the legal position against taxpayers. However, it emphasized that the Supreme Court delivered that judgment only on 12 October 2022, whereas the CPC’s processing under Section 143(1) and the rectification order under Section 154 had both been passed much earlier.
The Bench observed that prior to the Supreme Court ruling, several High Courts had taken divergent views, and the Karnataka High Court’s decision in Essae Teraoka (P.) Ltd. was binding within the jurisdiction and favoured taxpayers by allowing deductions where the payment was made before the due date of filing the return.
Accordingly, the Tribunal held that the issue was clearly debatable at the relevant time and therefore unsuitable for adjustment under Section 143(1).
The Tribunal also relied upon its earlier decision in Chandrakant Shamappa Kontha v. DCIT, where it had extensively analysed the legislative amendments introduced by the Finance Act, 2021.
Referring to the memorandum explaining the Finance Bill, the Tribunal noted that Parliament itself had clarified that the amendments to Sections 36(1)(va), 43B and Section 143(1) would take effect only from Assessment Year 2021-22 onwards, thereby reinforcing that similar adjustments could not be retrospectively made for earlier years through CPC processing.
Following the earlier precedent, the Tribunal held that the CPC was not justified in making adjustments under Sections 143(1) or 154 in respect of delayed employees’ PF and ESI contributions for AYs 2019-20 and 2020-21.
It directed the Assessing Officer to delete the adjustments for both assessment years and allowed both appeals filed by the assessee.
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