ITAT Agra Quashes EPF/ESI Disallowance as Section 143(1) Adjustment not allowed for Debatable Issues

Abhilakh Singh Sikarwar Vs ITO (ITAT Agra)

The Agra Bench of the Income Tax Appellate Tribunal (ITAT), in Abhilakh Singh Sikarwar v. ITO, held that disallowance of employees’ contribution towards EPF and ESI under Section 36(1)(va) of the Income-tax Act could not be made while processing the return under Section 143(1), as the issue was highly debatable on the date the intimation was issued. Accordingly, the Tribunal quashed the disallowance and allowed the assessee’s appeal.

The appeal arose from an order passed by the JCIT(A), which had upheld the adjustment made by the Centralised Processing Centre (CPC) under Section 143(1). The assessee’s appeal before the Tribunal was filed with a delay of 54 days. Considering the reasons furnished in the condonation petition and in the interest of substantial justice, the Tribunal condoned the delay and admitted the appeal for adjudication.

The sole issue before the Tribunal concerned the disallowance of employees’ contributions to Provident Fund (PF) and Employees’ State Insurance (ESI) under Section 36(1)(va). It was not disputed that the contributions had been deposited after the due dates prescribed under the respective welfare enactments, though they had been remitted before the due date for filing the return of income.

The Tribunal noted that the return had been processed under Section 143(1), resulting in disallowance of ₹33,47,986 on account of delayed remittance of employees’ contributions to PF and ESI. The assessee had challenged this adjustment before the appellate authority. Meanwhile, scrutiny assessment proceedings under Section 143(3) were completed, and the returned income was accepted without making any disallowance under Section 36(1)(va), based on the judicial precedents prevailing at that time in favour of the assessee. The Tribunal observed that, by virtue of the scrutiny assessment, the intimation under Section 143(1) stood merged with the assessment order under Section 143(3). However, since the original intimation had created a tax demand that was the subject matter of appeal, the assessee continued to pursue the appellate remedy.

The Tribunal further observed that the Supreme Court’s decision in Checkmate Services Pvt. Ltd. v. CIT, which settled the legal position against the assessee, had been delivered on 12 October 2022, subsequent to both the processing of the return under Section 143(1) and the completion of scrutiny assessment under Section 143(3). The Tribunal emphasized that the question before it was not whether the Supreme Court’s ruling operated retrospectively, but whether the CPC could have made such an adjustment under Section 143(1) when the issue was still subject to divergent judicial views.

Relying on decisions of the Delhi Tribunal in R.K. and Company Manpower Private Limited v. DCIT and Hisar Metal Industries Pvt. Ltd., the Tribunal held that, as on the date of issuance of the intimation under Section 143(1), the allowability of delayed employees’ contributions deposited before the due date of filing the return was a highly debatable issue. Therefore, such a matter could not be adjusted while processing returns under Section 143(1).

The Tribunal also relied upon the judgment of the Chhattisgarh High Court in Raj Kumar Bothra v. DCIT, which held that powers under Section 143(1)(a) are summary in nature and confined to adjustments apparent from the return. Debatable issues requiring adjudication cannot be decided under this provision. The High Court had observed that, prior to the Supreme Court’s decision in Checkmate Services, conflicting judicial opinions existed on the issue, rendering it unsuitable for prima facie adjustment under Section 143(1)(a).

Respectfully following these judicial precedents, the Tribunal concluded that the CPC was not justified in making the disallowance under Section 36(1)(va) while processing the return under Section 143(1), as the issue was highly debatable at the relevant point in time. Accordingly, the disallowance was deleted, and the appeal of the assessee was allowed.

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ITAT Quashes EPF/ESI Disallowance Because Debatable Issues Cannot Be Adjusted Under Section 143(1)

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Employees’ PF/ESI Disallowance Deleted Because CPC Exceeded Scope of Section 143(1), Rules ITAT

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ITAT Allows Appeal Because Delayed EPF/ESI Issue Was Debatable When Intimation Was Issued

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Section 143(1) Cannot Be Used to Decide Controversial PF/ESI Issues, Holds ITAT Agra

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ITAT Deletes PF/ESI Addition Because Conflicting Court Decisions Existed at Relevant Time

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CPC Cannot Make Section 36(1)(va) Disallowance Through Intimation on Debatable Issues, Says ITAT

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ITAT Relies on Raj Kumar Bothra to Strike Down EPF/ESI Disallowance Under Section 143(1)

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Delayed Deposit of Employees’ Contributions Could Not Trigger Automatic Adjustment, Rules ITAT

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ITAT Holds Summary Processing Powers Do Not Extend to Complex Legal Questions

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FULL TEXT OF THE ORDER OF ITAT AGRA

1. The appeal in ITA No. 255/AGR/2026 for AY 2020-21, arises out of the order of the ADD/JCIT(A)-2, Nagpur [hereinafter referred to as ‘ld. JCIT(A)’, in short] dated 17.11.2025 against the order of assessment passed u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 30.11.2021 by the Assessing Officer, CPC, Bengalure (hereinafter referred to as ‘ld. AO’).

2. At the outset, there is a delay in filing of appeal by assessee by 54 days before me. Considering the reason adduced in the condonation petition, in the interest of substantial justice, I am inclined to condone the delay and admit the appeal of the assessee for adjudication.

3. The only effective issue to be decided in this appeal is challenging the disallowance of employees’ contribution to PF & ESI u/s 36(1)(va) of the Act made by the ld CPC u/s 143(1) of the Act.

4. We have heard the rival submissions and perused the material available on record. It is not in dispute that employees’ contribution to Provident and ESI were deposited by the assessee to the Government account beyond the due date prescribed under the respective Acts, but well before the due date of filing of return of income. The return of income for AY 2018-19 was filed with assessee on 20.10.2018, declaring total income of Rs. 4,34,71,238. This return was duly processed by the ld CPC u/s 143(1) the Act vide intimation dated 02.10.2019, wherein disallowance of Rs. 33,47,986 was made u/s 36(1)(va) of the Act on account of delayed remittance of the employees’ contribution to PF & ESI. The assessee preferred an appeal before the ld CIT(A). Meanwhile, the case of the assessee was selected for scrutiny and assessment u/s 143(3) of the Act was framed on 21.07.2021, accepting the returned income of the assessee without making any disallowance is u/s 36(1)(va) the Act on account of employees’ contribution to PF and ESI, based on the then prevailing decisions of various Hon’ble High Courts in favour of the assessee. By this process, the intimation u/s 143(1) of the Act stood merged with the assessment order u/s 143(3) of the Act. But since there was a demand raised in the original intimation u/s 143(1) of the Act, which was subject matter of appeal before ld CIT(A), the assessee had to pursue the appeal. The ld CIT(A) merely followed the decision of the Hon’ble Supreme Court in the case of Checkmate Services Private Limited Vs. CIT reported in 448 ITR 518 (SC) and dismissed the appeal of the assessee.

5. It is pertinent to note that the said judgement of the Hon’ble Supreme Court was delivered on 12.10.2022, which is after the date of completion of the intimation u/s 143(1) and scrutiny assessment u/s 143(3) in the instant case. The short question that arises for our consideration is as to whether the ld CIT(A) was justified in confirming the disallowance made u/s 36(1)(va) of the Act while processing the return in the intimation u/s 143(1) of the Act. This issue is no longer integra in view of the coordinate bench decision of the Delhi Tribunal in the case of R.K. and Company Manpower Private Limited Vs. DCIT reported in 185 taxmann.com 986 (Del ITAT) dated 29.04.2026, wherein it was held that as on the date of intimation u/s 143(1) of the Act, this issue was a highly debatable issue and hence ld CPC could not have resorted to make such disallowance in intimation proceedings u/s 143(1) of the Act. Similar view was also taken by the coordinate bench of Delhi Tribunal in the case of Hisar Metal Industries Pvt. Ltd in ITA Nos. 2244 & 2248/Del/2022 dated 15.05.2026. We also find that the Hon’ble Chhattisgarh High Court in the case of Raj Kumar Bothra Vs. DCIT in TAXC No. 56 of 2025 dated 08.05.2025 had settled the issue in dispute before us. Relevant operative portion of the said judgement of the Hon’ble Chattisgarh High Court is as under:-

“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 Circle10 ,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 sub­section (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-O of the Act of 1961 prima facie adjustments contemplated under Section 143 (1) (a) is not applicable and observed as under :-

“…When there were conflicting judgments on interpretation of Section 80-O, 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 Parv 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. Parv 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 in this appeal was neither involved, formulated and answered in M/s. BPS Infrastructure (supra).

16. Furthermore, the submission of the Revenue that the judgment passed in Checkmate Services Pvt Ltd (supra) would have retrospective effect, as held in Ramesh Prasad Verma (supra), P.V. George (supra) and in R.R. Kishore’s case (supra), is no longer a dispute and well settled as the law declared by a Court will have a retrospective effect if not otherwise stated to be so specifically. However, the retrospective effect of the decision rendered by the Supreme Court in Checkmate Services Pvt Ltd. (supra) is not an issue involved in present case, as the question involved herein was quite different as to whether Section 143 (1) (a) of the Act of 1961 can be resorted to when there is highly debatable issue. Therefore, the case laws relied upon by the Revenue are not applicable to the facts of the present case.

17. Concludingly, we are of the considered opinion that the Assessing Officer should not have resorted to the provisions contained under Section 143(1)(a) of the Act of 1961 and instead could have resorted to the provisions under Section 143(3) of the Act of 1961, as on the date of issuance of intimation order dated 16.12.2021 by the Assessing Officer, exercising power under Section 143(1)(a) of the Act of 1961, 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 facie 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).”

6. Respectfully following the aforesaid decisions, we hold that the disallowance u/s 36(1)(va) of the Act could not have been made in the intimation u/s 143(1), being highly debatable issue as on the date of intimation u/s 143(1) of the Act, in the peculiar facts and circumstances of the instant case. Accordingly, the grounds raised by the assessee are allowed.

7. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 02/06/2026.