The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that a disallowance relating to delayed deposit of employees’ contributions towards PF/ESI cannot be sustained through an adjustment under Section 143(1)(a) of the Income Tax Act where the issue was debatable on the date of processing the return. The Tribunal deleted the addition made against taxpayer Purshottam Lal Dhingra for Assessment Year 2018-19.
The bench of Anubhav Sharma (Judicial Member) and Amitabh Shukla (Accountant Member) has observed that the Chhattisgarh High Court in Raj Kumar Bothra had specifically held that the Assessing Officer should not have invoked Section 143(1)(a) for making such adjustments because, on the date of issuance of the intimation, the issue was highly debatable and had not yet been conclusively settled by the Supreme Court.
The bench had observed that if the Department intended to examine such a contentious issue, it should have resorted to a regular assessment under Section 143(3) rather than making an automated adjustment while processing the return.
The controversy arose from an adjustment made by the Centralized Processing Centre (CPC) while processing the taxpayer’s return under Section 143(1). The tax department had disallowed deductions claimed in respect of employees’ contributions deposited towards statutory welfare funds, alleging that the payments were made beyond the due dates prescribed under the relevant labour laws.
Subsequently, the taxpayer challenged the adjustment, contending that the issue was not amenable to prima facie adjustment under Section 143(1)(a) because the legal position on delayed deposit of employees’ contributions was highly contentious during the relevant period. The taxpayer relied upon the judgment of the Chhattisgarh High Court in Raj Kumar Bothra v. DCIT and the Delhi ITAT decision in A2Z Infra Services Ltd. v. DCIT.
The appellate authority rejected the taxpayer’s claim and upheld the disallowance by relying on the Supreme Court’s landmark ruling in Checkmate Services Pvt. Ltd. v. CIT. According to the CIT(A), employees’ contributions to PF and ESI are deductible only if deposited within the due dates specified under the respective welfare statutes. Payments made after those statutory due dates, even if made before filing the income tax return, are not eligible for deduction.
Based on this reasoning, the CIT(A) sustained the disallowance of ₹76.65 lakh and dismissed the appeal.
Before the Tribunal, the central issue was not whether the deduction was ultimately allowable under the law as clarified by the Supreme Court, but whether such a disallowance could have been made through the limited adjustment mechanism under Section 143(1)(a) at a time when courts across the country had expressed divergent views on the issue.
The Tribunal further observed that a coordinate bench in A2Z Infra Services Ltd. had already followed the Chhattisgarh High Court’s reasoning and deleted a similar disallowance. Following the same legal principle, the Delhi Bench concluded that the adjustment could not survive.
The ITAT allowed the taxpayer’s appeal and directed deletion of the impugned disallowance.
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