Case Law Details
Dondapati Sudhakara Rao Vs ITO (ITAT Hyderabad)
The Income Tax Appellate Tribunal (ITAT), Hyderabad, considered an appeal against an order of the CIT(A) arising from an intimation issued under Section 143(1) for assessment year 2020–21. The assessee, engaged in providing security services, had filed a return declaring income of Rs. 11,11,250. The Centralized Processing Centre (CPC) disallowed a deduction of Rs. 36,63,930 relating to delayed deposit of employees’ contribution to Provident Fund (PF) and Employees’ State Insurance (ESI), resulting in assessed income of Rs. 50,83,778. The CIT(A) upheld the disallowance in an ex parte order.
Before the Tribunal, the assessee argued that the disallowance was made on a debatable issue at the time of processing under Section 143(1), as the legal position regarding allowability of delayed deposits was unsettled prior to the Supreme Court decision in Checkmate Services Pvt. Ltd. dated 12.10.2022. It was contended that such debatable issues fall outside the scope of adjustments permissible under Section 143(1). The Revenue supported the lower authorities, relying on statutory provisions clarifying due dates.
The Tribunal observed that the core issue was whether delayed employee contributions could be disallowed through a summary intimation under Section 143(1) before the Supreme Court had settled the law. Relying on the decision of the Chhattisgarh High Court, the Tribunal held that prior to the Supreme Court ruling, the issue was highly debatable due to divergent High Court views. It reiterated that adjustments under Section 143(1) are limited to apparent errors and cannot extend to debatable matters requiring detailed examination.
Accordingly, the Tribunal held that the Assessing Officer exceeded jurisdiction by making the disallowance through Section 143(1). It set aside the order of the CIT(A) and directed deletion of the disallowance. The appeal was allowed in favour of the assessee.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
The present appeal filed by the assessee is directed against the order passed by the Addl/JCIT(A), Panaji, dated 07.02.2025, which in turn arises from the intimation issued by the Assessing Officer (for short “A.O.”) / CPC, Bengaluru under Section 143(1) of the Income Tax Act, 1961 (for short “the Act”) dated 16.12.2021 for A.Y. 2020-21. The assessee has assailed the impugned order on the following grounds of appeal before us:
2. Succinctly stated, the assessee, who is engaged in providing security services, had filed his return of income for A.Y. 2020-21 on 29.01.2021 declaring an income of Rs. 11,11,250/-. The CPC, Bangalore, vide its intimation issued under Section 143(1) of the Income Tax Act, 1961, dated 16.12.2021, declined the assessee’s claim for deduction of delayed deposit of employees’ share of contributions towards ESI/PF amounting to Rs. 36,63,930/-. Thereafter, the income of the assessee vide intimation issued under Section 143(1) of the Act, dated 16.12.2021, after, inter alia, making the aforesaid addition/disallowance under Section 36(1)(va) of the Act was determined at Rs. 50,83,778/-.
3. Aggrieved, the assessee carried the matter in appeal before the CIT(A), but without success. As the assessee, despite sufficient opportunity, failed to participate in the proceedings before the CIT(A), therefore, he was constrained to proceed with and dispose of the appeal vide an ex parte The CIT(A), finding no infirmity in the view taken by the A.O., upheld the addition/disallowance made by him under Section 36(1)(va) of the Act and dismissed the appeal.
4. The assessee, being aggrieved with the order of the CIT(A), has carried the matter in appeal before us.
5. We have heard the learned Authorized Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.
6. Shri Polireddy Srikanth, the learned Authorized Representative (for short “Ld.AR”) for the assessee, at the threshold of hearing of the appeal, submitted that both the authorities below had grossly erred in law and on facts of the case in disallowing the assessee’s claim for deduction of delayed deposit of employees’ share of contribution of ESI/PF amounting to Rs. 36,63,930/- vide an intimation issued u/s 143(1) of the Act, dated 16.12.2021. Elaborating on his contention, the Ld. AR submitted that, as the issue pertaining to allowability of the delayed deposit of employees’ share of contribution towards labour welfare fund by an assessee, prior to the judgment of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT [2022] 143 Taxman.com 178 (SC), which was delivered on 12.10.2022 was highly debatable and had only been settled after the aforesaid judgment, therefore, the A.O., CPC, Bengaluru had clearly traversed beyond the scope of his jurisdiction and disallowed the assessee’s claim for deduction on the aforesaid issue which was highly debatable on the date when the subject intimation was passed under Section 143(1) of the Act i.e. on 16.12.2021. It was, thus, the Ld. AR’s claim that as the entitlement of the assessee to claim deduction for the delayed deposit of the employees’ share of contribution towards ESI/PF account on the date on which his return of income was summarily processed under Section 143(1) of the Act i.e. on 16.12.2021, was highly debatable, therefore, the same could not have been disallowed by the A.O. by taking recourse to the provisions of Section 143(1) of the Act. The Ld. AR, in support of his aforesaid contention that a disallowance on a debatable issue was beyond the scope of Section 143(1) of the Act, had relied upon the judgment of the Hon’ble High Court of Telangana in the case of CIT Vs. GVK Industries Ltd. [2023] 147 Taxman.com 281 (Telangana). Also, support was drawn from the judgment of the Hon’ble Supreme Court in the case of Kvaverner John Brown Engg (India) (P.) Ltd, Vs. ACIT [2008] 305 ITR 103 (SC).
7. Apart from that, the Ld. AR submitted that the issue involved in the present appeal, as to whether or not the A.O., CPC, Bangalore, prior to the judgment of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT (supra), could, vide an intimation issued under Section 143(1)(a) of the Act, disallow an assessee’s claim for deduction of the delayed deposit of employees’ share of contribution towards ESI/PF is covered by the judgment of the Hon’ble High Court of Chhattisgarh in the case of Raj Kumar Bothra Vs. DCIT, Tax Case No. 56 of 2025, dated 08.05.2025.
8. Per contra, Dr. Sachin Kumar, the learned Senior Departmental Representative (for short “Ld. DR”) relied upon the orders of the lower authorities. The Ld. DR submitted that as the amendment made available on the statute wherein “Explanation 1” was inserted under Section 36(1)(va) of the Act, had not been considered in the aforesaid judicial pronouncements relied upon by the Ld. AR, therefore, the same would not carry his case any further. The Ld. DR submitted that “Explanation 1” (supra) had clarified beyond doubt that the “due date” within which an assessee is obligated to deposit the employees’ share of contribution in the employees’ welfare funds was the date contemplated in the relevant Acts, Rules, Orders or Notification issued thereunder or under any standing Order, Award or Contract or Services or otherwise. The Ld. DR submitted that as the assessee in the present case had failed to deposit within the prescribed period the employees’ share of contribution towards ESI/PF, therefore, the A.O./CPC, Bangalore had rightly disallowed the same under Section 143(1) of the Act.
9. We have thoughtfully considered the issue in hand and find that the controversy therein involved lies in a narrow compass, i.e. as to whether or not the A.O., CPC, Bengaluru is justified in disallowing the delayed deposit of employees’ share of contribution towards ESI/PF by the assessee prior to the judgment of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT (supra), vide an intimation issued under Section 143(1)(a) of the Act.
10. We find that the present issue is squarely covered by the judgment of the Hon’ble High Court of Chhattisgarh in the case of Raj Kumar Bothra Vs. DCIT (supra), wherein, based on extensive deliberations, it was held that, as prior to the judgment of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. (supra), the issue regarding the allowability of the assessee’s claim for deduction of the delayed deposit of employees’ share of contribution towards ESI/PF was highly debatable, therefore, the same could not have been disallowed by taking recourse to the provisions contained under Section 143(1)(a) of the Act. For the sake of clarity, the observations of the Hon’ble High Court of Chhattisgarh are culled out as under :
pending consideration before the Supreme Court in the matter of Checkmate Services Pvt. Ltd. (supra). In the said judgment, their Lordships of the Supreme Court noticed a division of opinion on the issue of interpretation under Section 36(1) (va) of the Act of 1961, with the High Courts of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi favouring the interpretation beneficial to the assessees on the one hand, and the High Courts of Kerala and Gujarat preferring the interpretation in favour of the Revenue on the other hand. Ultimately, their Lordships resolved the issue authoritatively by holding that to claim deduction under Section 36(1) (va) of the Act of 1961, the employees’ contribution should be deposited on or before the due dates specified under the respective Employee Welfare Act. Their Lordships of the Supreme Court settled the issue by making the following observation :-
“62. The distinction between an employer’s contribution which is its primary liability under law — in terms of Section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers’ income, and the later retains its character as an income (albeit deemed), by virtue of Section 2(24)(x) – unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts — the employer’s liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees’ income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B.
63. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ contributions- which are deducted from their income. They are not part of the assessee employer’s income, nor are they heads of deduction per se in the form of statutory pay out. They are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction.”
8. As such, their Lordships of the Supreme Court, in the above judgment rendered on 12.10.2022, settled the issues authoritatively and also clarified the legal position. In the instant case, at the time of passing of the intimation order under Section 143(1)(a) of the Act of 1961 on 16.12.2021, the decision of Supreme Court in Checkmate Service Pvt. Ltd (supra) was not available in view of the divergent view amongst the various High Courts, as it was rendered on 12.10.2022.
9. At this stage, it would be appropriate and beneficial to notice the nature of powers under sub-section (1) of Section 143 as against sub-sections (2) and (3) of the Act of 1961. The power under sub-section (1) of Section 143 of the Act of 1961 is summary in nature designed to cause adjustment which is apparent from the return while that under sub-sections (2) and (3) is to scrutinize the return and cause deeper probe to arrive at correct determination of the liability {See : Vodafone Idea Limited Vs. Assistant Commissioner of Income Tax Circle’ Para 17}.
10. Further, in Section 143(1)(a) of the Act of 1961, the procedure to process the return in a given case is provided. Section 143 (1) (a) is produced hereunder reference:-
“Assessment
143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:-
(a) the total income or loss shall be computed after making the following adjustments, namely:—
(i) any arithmetical error in the return;
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;
(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139
(iv) disallowance of expenditure or increase in income indicated in the audit report but not taken into account in computing the total income in the return;
(v) disallowance of deduction claimed under [section 10AA or under any of the provisions of Chapter VI-A under the heading “C.—
Deductions in respect of certain incomes”, if] the return is furnished beyond the due date specified under sub-section (1) of section 139; or
(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:
Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:
Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made:
Provided also that no adjustment shall be made under sub-clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018″
11. In the matter of Kvaverner John Brown Engg. (India) Pvt. Ltd. (supra), their Lordships of the Supreme Court observed that when there are conflicting judgments on interpretation of Section 80-0, of the Act of 1961 prima facie adjusrments contemplated under Section 143 (1) (a) is not applicable and observed as under :-
“…When there were conflicting judgments on interpretation of Section 80-0, in our view, prima facie adjustments contemplated under Section 143(1)(a) was not applicable and, therefore, consequently appellant was not liable to pay additional tax under Section 143(1A) of the 1961 Act.”
12. Similarly, in the matter of Rajesh Jhaveri Stock Brokers Pvt (supra), their Lordships of the Supreme Court held explicitly that the Assessing Officer had no authority to make adjustments or adjudicate upon any debatable issues under Section 143(1) (a) of the Act of 1961 and held as under:-
“11. What were permissible under the first proviso to section 143(1)(a) to be adjusted were, (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return and similarly (iii) those claims which were on the basis of the information available in the return, prima facie inadmissible, were to be rectified/ allowed/disallowed. What was permissible was correction of errors apparent on the basis of the documents accompanying the return. The Assessing Officer had no authority to make adjustments or adjudicate upon any debatable issues. In other words, the Assessing Officer had no power to go behind the return, accounts or documents, either in allowing or in disallowing deductions, allowance or relief.”
13. Coming back to the facts of the present case, while following the principles of law laid down in above stated judgments of the Supreme Court for exercise of power and jurisdiction under Section 143 (1) (a) of the Act of 1961, it is quite vivid that on the date of issuance of intimation order by the Assessing Officer i.e. on 16.12.2021 under Section 143(1)(a) of the Act of 1961, the issue as to whether the delayed deposit of employees’ share of contribution towards Employees State Insurance and Employees Provident Fund, though deposited by the assessee beyond the due date prescribed under the relevant Acts, but before the due date of filing of the return of income under Section 139 (1) of the Act of 1961, could be held as the income of the appellant/assessee under Section 36(1)(va) read with Section 2(24)(x) of the Act of 1961 or not or whether it is subject to the provisions contained in Section 43-B of the of the Act of 1961, was highly debatable, which was pending consideration before the Supreme Court in Checkmate Services Pvt Ltd (supra) and subsequently, it was resolved by the Supreme Court by the judgment dated 12.10.2022. Furthermore, the assessee in its audit report had only furnished the details of delayed deposit in Column 20 (b) of the Form No.3CB and had not shown the same as disallowance. Therefore, the Assessing Officer has committed a grave legal error in processing the return of the assessee under Section 143(1)(a) of the Act of 1961, in light of principles of law laid down by their Lordships of Supreme Court in the matters of Kvaverner John Brown Engg. (India) Pvt. Ltd (supra) and Rajesh Jhaveri Stock Brokers Pvt (supra).
14. Furthermore, the orders passed in Satpal Singh Sandhu (supra) and Pary Buildcon (Supra) by the ITAT holding that Section 143 (1) (a) of the Act of 1961 cannot be resorted to in case of highly debatable issue were challenged by the Revenue before this Court by filing two appeals and ultimately, both the appeals vide Tax No.149/2024 (DCIT Vs. Pary Buildon) and TAX No.15/2024 (DCIT Vs. Satpal Singh Sandhu), were withdrawn by the Revenue by orders dated 10.02.2025 and 21.05.2025, respectively, and thereby, the Revenue has allowed the plea of the assessees therein to stand that in a highly debatable issue, the Assessing Officer ought not to have resorted to Section 143 (1)(a) of the Act of 1961. Therefore, the Revenue cannot be allowed to take a different stand before different forums as it may lead to uncertainty and chaos.
15. In the instant case, the ITAT has committed a grave legal error by relying upon the decision rendered by this Court in M/s. BPS Infrastructure (supra), wherein, this Court has dismissed the appeal preferred by the assessee as barred by limitation summarily without formulating any substantial question of law and as such the substantial question of law formulated herein the subject issue was highly debatable and ultimately, that issue was resolved by their Lordships in the matter of Checkmate Services Pvt Ltd (supra) on a later date.
18. As a fallout and consequence of above-stated discussion, the prima fade disallowance of impugned contribution towards ESI and EPF under Section 36(1)(va) read with Section 2(24)(x) of the Act of 1961 made by the Assessing Officer under Section 143(1)(a) by order dated 16.12.2021 is hereby set-aside. Consequently, the order dated 15.07.2024 passed by the CIT (Appeals) and the subsequent order dated 26.09.2024 passed by the ITAT are also set-aside. However, liberty is reserved in favour of the respondent/Revenue to proceed in accordance with law
19. The substantial question of law is answered in favour of the appellant/assessee and against the respondent/Revenue.
20. In the result, the appeal is allowed to the extent indicated above leaving the parties to bear their own cost(s).
As the facts and the issue involved in the present appeal before us is squarely covered by the aforesaid judgment of the Hon’ble High Court of Chhattisgarh in the case of Raj Kumar Bothra Vs. DCIT (supra), we respectfully follow the same.
11. Resultantly, we herein set aside the order of the CIT(A) and direct the A.O. to vacate the disallowance of the assessee’s claim for deduction of the delayed deposit of employees’ share of contribution of Rs. 36,63,930/- made by him vide intimation issued under Section 143(1) of the Act, dated 16.12.2021.
12. Resultantly, the appeal filed by the assessee is allowed in terms of our aforesaid observations.
Order pronounced in the Open Court on August, 2025.
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