The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has held that the Centralised Processing Centre (CPC) could not have made an adjustment under Section 143(1)(a) of the Income Tax Act, 1961, towards delayed payment of employees’ contribution to Provident Fund (PF) and Employees’ State Insurance (ESI) for Assessment Year (AY) 2019-20, as the issue was debatable at the relevant time and the jurisdictional Karnataka High Court had taken a view favourable to taxpayers. 

The Bench of  Keshav Dubey (Judicial Member) and Waseem Ahmed (Accountant Member) has observed that the Supreme Court had ultimately settled the legal position by holding that employees’ contributions not deposited within the statutory due date are not allowable as deductions. However, it emphasised that the legal position was not so settled on the date when the CPC processed the assessee’s return.

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The assessee was a partnership firm engaged in providing manpower supply services to various clients. For AY 2019-20, it filed its return of income on October 31, 2019, declaring total income of ₹5,97,780.

The return was subsequently processed under Section 143(1) of the Income Tax Act. The CPC issued an intimation dated April 10, 2020, determining the assessee’s total income at ₹42,40,310 and raising a demand of ₹5,89,018.

While processing the return, the CPC noticed that the assessee had received employees’ contributions towards PF/ESI which had not been credited to the employees’ accounts within the respective statutory due dates. An amount of ₹36,42,529 was therefore disallowed and added to the assessee’s income.

The assessee challenged the adjustment before the appellate authority. However, the Addl./JCIT(A), Ranchi dismissed the appeal for non-prosecution by order dated November 8, 2025. The assessee thereafter approached the ITAT.

The principal issue before the Tribunal was whether the CPC was justified in making an adjustment under Section 143(1) by disallowing employees’ PF and ESI contributions that had been deposited after the statutory due dates.

The assessee argued that, when the Section 143(1) intimation was issued on April 10, 2020, the law on the allowability of delayed employees’ contributions was not settled. Various High Courts had expressed divergent views, while the Karnataka High Court, being the jurisdictional High Court, had at that point taken a view favourable to the assessee.

According to the assessee, a debatable issue involving conflicting judicial opinions could not be subjected to an adjustment under the limited processing mechanism of Section 143(1).

The Department, on the other hand, relied upon the Supreme Court’s judgment in Checkmate Services Pvt. Ltd., reported in (2022) 448 ITR 518 (SC), pronounced on October 12, 2022.

The Revenue contended that the Supreme Court had categorically held that employees’ contributions to PF and ESI are not allowable as deductions where they are not deposited within the due dates prescribed under the relevant welfare legislation.

It was therefore argued that the CPC had correctly made the adjustment, particularly because the assessee’s audit report and return contained an inconsistency concerning the delayed payments. The Department further contended that a Supreme Court judgment ordinarily operates retrospectively unless the Court expressly directs prospective application.

The ITAT noted that there was no dispute that the Section 143(1) intimation had been issued on April 10, 2020, whereas the Supreme Court delivered its judgment in Checkmate Services only on October 12, 2022.

The Bench observed that, prior to October 12, 2022, there were divergent judgments of various High Courts on the issue. Significantly, the Karnataka High Court had, in four cases, decided the issue in favour of the assessee at the relevant time.

The Tribunal therefore held that the assessee was entitled, under the law prevailing at that stage, to claim deduction for employees’ contributions deposited belatedly but before the due date for filing the return of income.

A crucial observation of the Tribunal was that the CPC does not possess the power to make adjustments concerning a debatable issue while processing a return under Section 143(1).

The Bench held that the question was whether the issue was debatable on the date on which the Section 143(1) intimation was issued. Since conflicting High Court decisions existed at that point, and the jurisdictional Karnataka High Court had taken a position favourable to the assessee, the issue could not properly be treated as an apparent adjustment for the purposes of Section 143(1).

The Tribunal specifically concluded that the CPC should not have disallowed the belated employees’ PF and ESI contributions while issuing the Section 143(1) intimation because the issue was debatable at the relevant time.

The Bench also relied upon its coordinate Bench’s earlier decision in Shri Chandrakant Shamappa Kontha v. DCIT, ITA Nos. 2396 & 2397/Bang/2024, dated December 9, 2025.

That case also concerned adjustments made by the CPC towards employees’ PF and ESI contributions deposited beyond the statutory due dates for AYs 2019-20 and 2020-21.

The coordinate Bench had noted that the Supreme Court’s Checkmate Services ruling came only on October 12, 2022, while earlier judicial opinion, including that of the Karnataka High Court, had supported the taxpayers’ position.

The earlier Bench consequently held that such adjustments could not have been made under Section 143(1)(a) for the relevant assessment years before AY 2021-22.

The Tribunal also examined the statutory amendments introduced through the Finance Act, 2021.

The order records that employees’ contributions are treated as income under Section 2(24)(x), while Section 36(1)(va) provides for deduction where the employee contribution is credited to the relevant fund on or before the statutory due date.

The Finance Act, 2021 inserted Explanation 1 to Section 36(1)(va), clarifying the meaning of “due date”, and Explanation 5 to Section 43B, clarifying that Section 43B does not apply to sums covered by Section 2(24)(x). The amendments were made effective from April 1, 2021 and were to apply from AY 2021-22 onwards.

The Tribunal referred to the legislative memorandum accompanying the amendments, which distinguished employees’ contributions from employers’ contributions.

The order notes that employees’ contributions represent money belonging to employees and are deposited by the employer in a fiduciary capacity. It further records the legislative explanation that Section 36(1)(va) was intended to ensure compliance with labour welfare laws and to address misuse or delayed utilisation of employees’ contributions.

The Tribunal also considered the amendments made to Section 143(1).

The Finance Act, 2021 amended Section 143(1)(a) to permit certain adjustments based on increases in income indicated in the audit report but not taken into account while computing total income. These amendments were made effective from April 1, 2021.

The coordinate Bench had therefore reasoned that the legislative changes themselves were intended to operate from AY 2021-22 onwards and could not be retrospectively used to justify adjustments for AY 2019-20 and AY 2020-21.

The coordinate Bench’s reasoning was also supported by judicial precedents from other High Courts.

The order refers to the Chhattisgarh High Court’s decision in Sanjay Kumar Sharma v. Income Tax Officer, reported in (2025) 174 taxmann.com 592, as well as the Delhi High Court’s decision in Principal Commissioner of Income Tax v. TV Today Network Ltd., reported in (2022) 141 taxmann.com 275.

According to the Tribunal’s discussion, these decisions supported the position that the relevant Finance Act, 2021 amendments would operate from AY 2021-22 and not retrospectively for earlier assessment years.

The Tribunal further noted the principle that where contradictory judgments of non-jurisdictional High Courts exist, the view favourable to the assessee is to be followed.

Following its coordinate Bench decision, the Bangalore ITAT held that the adjustment made by the CPC concerning employees’ contributions deposited beyond the respective statutory due dates could not have been made under Section 143(1)(a) for assessment years prior to AY 2021-22.

The Assessing Officer was accordingly directed to delete the adjustment relating to the employees’ PF and ESI contributions.

The Tribunal ultimately allowed the assessee’s appeal and pronounced the order in open court on August 17, 2026.

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