Kanthi Agency Networks Vs Assessing Officer CPC (ITAT Bangalore)
Bangalore ITAT Deletes ₹36.43-Lakh PF/ESI Adjustment: CPC Cannot Decide a Debatable Issue Under Section 143(1)
The assessee deposited employees’ contributions to PF and ESI after the due dates prescribed under the respective welfare laws but before filing its return for AY 2019-20. While processing the return on 10 April 2020, CPC disallowed ₹36,42,529 under Section 143(1) based on the tax audit report. The first appellate authority dismissed the appeal for non-prosecution.
The Bangalore ITAT noted that when the intimation was issued, conflicting High Court decisions existed on the allowability of delayed employees’ contributions. Significantly, the jurisdictional Karnataka High Court had taken a view favourable to the assessee. Therefore, the issue was clearly debatable and fell outside the limited scope of prima facie adjustments permissible under Section 143(1).
The Tribunal acknowledged that the Supreme Court’s later ruling in Checkmate Services (P.) Ltd. v. CIT applies retrospectively unless expressly made prospective. However, the relevant question was whether CPC could have made the adjustment on the date of processing, when the issue was debatable and the binding jurisdictional precedent favoured the assessee. A later Supreme Court ruling could not retrospectively validate an adjustment that was beyond CPC’s jurisdiction when made.
The Tribunal also noted that the Finance Act, 2021 amendments concerning employees’ contributions and corresponding processing adjustments were expressly made applicable from AY 2021-22 onwards.
Accordingly, the Tribunal directed deletion of the entire ₹36.43-lakh adjustment.
List of Cases Discussed / Relied Upon
- Kanthi Agency Networks Vs Assessing Officer CPC— ITAT Bangalore — AY 2019-20.
- Checkmate Services Private Limited Vs. Commissioner of Income Tax-11— Supreme Court — dated 12.10.2022; reported in (2022) 448 ITR 518 (SC). The supplied analysis expressly discusses this decision on the allowability of employees’ PF/ESI contributions and its retrospective application.
- Shri Chandrakant Shamappa Kontha vs. DCIT— ITAT Bangalore — ITA Nos. 2396 & 2397/Bang/2024, dated 12.2025. The supplied Tribunal order expressly follows this coordinate-bench decision.
- CIT v. Premkumar Arjundas Luthra (HUF)— Bombay High Court — [2017] 297 CTR 614 (Bombay). It is expressly cited in Ground No. 2 concerning dismissal of an appeal by the CIT(A) for non-prosecution.
- Sanjay Kumar Sharma versus Income Tax Officer— Chhattisgarh High Court — (2025) 174 com592 (Chhattisgarh). The supplied coordinate-bench decision expressly discusses this case in relation to the Section 143(1) adjustment issue.
- Principal Commissioner of Income Tax versus TV Today Network Ltd— Delhi High Court — (2022) 141 taxmann.com 275 (Delhi). The supplied coordinate-bench decision expressly refers to this decision concerning the Finance Act, 2021 amendments and their applicability from AY 2021-22. TaxGuru material also identifies the decision as ITA 227/2022, order dated 27.07.2022.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against the order of the ld. Addl/JCIT(A), Ranchi dated 08.11.2025 vide DIN & Order No. ITBA/APL/S/250/2025-26/1082408609 (1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2019-20.
2. The assessee has raised the following grounds of appeal:-
1. The disallowance of delayed payment of employee’s share of ESI and PF could not have been made under section 143(1)(a)(ii) by way of intimation dt.10-04-2020 under section 143(1) by the Assessing Officer, Central Processing Centre, Bengaluru, when the issue was debatable prior to the decision by Supreme Court in the case of Checkmate Services Private Limited Vs. Commissioner of Income Tax-11 dt.12-10-2022 is opposed to law.
2. The order passed by the Ld. Commissioner of Income Tax(Appeals) for non-prosecution is opposed to law laid down by the Honorable High Court of Bombay, in the case of CIT v. Premkumar Arjundas Luthra (HUF)(2017) 297 CTR 614 (Bombay HC), wherein it was held that the Commissioner of Income Tax (Appeals) [CIT(A)] cannot dismiss an appeal for “non-prosecution” or solely due to the assessee’s failure to appear. The CIT(A) has a statutory duty under Sections 250 and 251 to dispose of the appeal on its merits by passing a reasoned order. Hence the order dt.08-11-2025 passed by Ld. Commissioner of Income Tax(Appeals) is liable to be set aside.
3. As per the law laid down by Honorable Division Bench of Chhattisgarh High Court in the Case No.TAXC 56 of 2025 dt.08-05-2025, the disallowance of delayed payment of ESI and PF could not have been made under section 143(1)(a)(ii) prior to the decision by Supreme Court in the case of Checkmate Services Private Limited Vs. Commissioner of Income Tax-11 dt.12-10-2022, hence based on the decision of the Honorable Division Bench of Chhattisgarh High Court, the assessment order u/s 143(1) dt.10-04-2020 passed by Assessing Officer, Central Processing Centra, Bengaluru, is liable to be set aside.
4. The appellant may be permitted to adduce any other ground at the time of hearing.
3. The brief facts of the case are that the assessee is a partnership firm and engaged in providing manpower supply services to various clients. The assessee firm filed its return of income for AY 2019-20 on 31.10.2019 by declaring total income of Rs. 5,97,780/-. Thereafter, the said return was processed and accordingly, the intimation u/s. 143(1) of the Act was passed on 10.04.2020 by determining the total income of Rs. 42,40,310/- and accordingly raised a demand of Rs. 5,89,018/-. While passing the intimation u/s. 143(1) of the Act, it was seen that the sum received from the employees as contribution to PF / SF / ESI to the extent not credited to the employees account on or before the due date, the disallowance of which was indicated in the audit report but not taken into account in computing the total income in the return amounting to Rs. 36,42,529/- and accordingly, the same was disallowed and added to the income while passing the intimation u/s. 143(1) of the Act.
4. Aggrieved by the intimation passed u/s. 143(1) of the Act dated 10.04.2020, the assessee preferred an appeal before the ld. CIT(A)/Addl./JCIT(A).
5. The ld. Addl./JCIT(A) dismissed the appeal for non prosecution.
6. Again, aggrieved by the order of ld. Addl./JCIT(A), Ranchi dated 08.11.2025, the assessee has filed the present appeal before this tribunal.
7. Before us, the ld. AR of the assessee vehemently submitted that the only issue for consideration before the ITAT is whether the CPC had rightly processed the return of income u/s. 143(1) of the Act by disallowing the expenditure of employee’s contribution of ESI & PF, in light of conflicting judgement of various high courts on the issue of allowability of employee’s contribution of ESI & PF on the date of passing intimation u/s. 143(1) of the Act on 10.04.2020. Further, the ld. AR submitted that the issue is already dealt by the division bench of this ITAT, Bengaluru in case of Shri. Chandrakant Shamappa Kontha vs. DCIT, Circle 1(1), Hubli in ITA No. 2396 & 2397/Bang/2024 for AY 2019-20 and 2020-21 respectively and allowed the appeal in favour of the assessee and hence, in the present case also in which the same issue is due for consideration for AY 2019-20, the appeal deserves to be allowed.
8. The ld. DR on the other hand vehemently submitted that in view of the judgement of the Apex Court in the case of Checkmate Services Pvt. Ltd., reported in 143 taxmann.com 178 dated 12.10.2022, the deduction in respect of delay deposit of employee’s contribution of PF & ESI had rightly been disallowed while passing intimation u/s. 143(1) of the Act. Further, the ld. DR submitted that when the Hon’ble Supreme Court renders the decision, it applies from the date of the enactment of a particular provision. Therefore, the CPC has correctly made an adjustment with respect to the disallowance of PF & ESI contribution pertaining to employees which are not paid by the assessee within the prescribed time as per the respective act and based on the inconsistency in form 3CD and return filed by the assessee, the disallowance made by the CPC is justified.
9. We have heard the rival submissions and perused the material available on record. It is an undisputed fact that, the intimation u/s. 143(1) of the Act for the AY 2019-20 was passed on 10.04.2020. It is also an undisputed fact that the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. reported in (2022) 448 ITR 518 (SC) has held that such deduction is not allowable to assessee if the employee’s contribution is not paid within the due date prescribed under the respective acts. However, the said judgement was rendered by the Hon’ble Supreme Court on 12.10.2022. Undisputedly, the intimation was passed on 10.04.2020 i.e. way before the pronouncement of the judgement by the Hon’ble Supreme Court. Undoubtedly, prior to the date of judgement by the Apex Court, there were divergent opinions of the various High Courts on this issue. As rightly contended by the ld. AR of the assessee, the jurisdictional Karnataka High Court in 4 Nos. of cases has decided the issue, at that particular time, in favour of the assessee and therefore, the assessee was entitled at that time for the deduction of the employee’s contribution paid belatedly according to the provisions of the respective acts but before the due date of furnishing the returns. Thus, prior to 12.10.2022, the decision was in favor of the assessee by the judgment of the jurisdictional High Court and it is apparent that the intimation is passed for AY 2019-20 prior to the judgment of the Hon’ble Supreme Court. In our considered opinion, the CPC has no power to tinker with the income relating to the debatable issue while passing intimation u/s. 143(1) of the Act. We are also of the considered opinion that if a decision of the Apex Court does not expressly provide its application to be prospective, then it is settled law that all decisions of the Apex Court are retrospective in application. However, the moot question here is whether at the time of passing the intimation u/s. 143(1) of the Act, the issue on which the disallowances were made was debatable or not. In our considered opinion, there were conflicting judgments of various High Courts on the issue of allowability of employee’s contribution of ESI & PF on the date of passing intimation u/s. 143(1) of the Act on 10.04.2022, however the jurisdictional High Court of Karnataka was in favour of the assessee. Therefore, in our opinion, the CPC should not have disallowed the belated deposits of employee’s contribution to PF & ESI while passing the intimation u/s. 143(1) of the Act being a debatable issue.
9.1 In the similar facts and circumstances of the case, the coordinate bench of this Tribunal in the case of Shri Chandrakant Shamappa Kontha vs. DCIT in ITA Nos. 2396 & 2397/Bang/2024 dated 09.12.2025 had passed a detailed order. The relevant paragraphs are reproduced below for ease of reference and convenience:
“24. We have carefully considered the rival contention and perused the orders of the learned lower authorities. The issue involved in this appeal is the adjustment made by the central processing Centre for assessment year 2019 – 20 and the 2020 – 21 to the total income of the assessee being amount of employee’s contribution of the P F and ESIC contribution which are deposited beyond the specified due dates prescribed in the respective acts. . For assessment year 2019 – 20, the intimation was passed under section 143 (1) of the income tax act on 14 July 2020 wherein in annexure of computation of the intimation of business income there is an adjustment/addition to the total income of the assessee at serial No. 14 ‘that the amounts debited to the profit and loss account to the extent of disallowable under section 36’ of ₹ 10,048,794/– was added to the total income. This sum is stated to be in respect of employees’ contribution paid towards provident fund and employee state insurance scheme admittedly paid beyond the due date specified under the respective act. Similarly for assessment year 2020 – 21 the intimation under section 143 (1) was passed on 16 December 2021 wherein a sum of ₹ 12,922,206/– was adjusted in similar manner.
25. Undoubtedly the decision of the honourable Supreme Court in case of checkmate services ltd [ supra ]has held that such deduction is not allowable to the assessee if the employee’s contribution is not paid within the due date prescribed under the respective acts. However, said judgement was rendered by the honourable Supreme Court on 12 October 2022 reported in (2022) for 48 ITR 518 (SC) (2023) 6 SCC 451. However, prior to that decision there were divergent opinions of the various high courts. Honourable Karnataka High Court has decided this issue at that particular time in favour of the assessee and therefore the assessee was entitled at that time for the deduction of the employee’s contribution paid belatedly according to the provisions of the respective act but before the due date of filing of the return of income. Therefore, prior to 12 October 2022 the decision was in favour of the assessee. It is apparent that the intimation for both these years are passed prior to the decision of the honourable Supreme Court.
26. It is the provision of the law that that employee’s contribution of this respective acts collected by the employer’s income of the assessee in terms of provisions of section 2 (24) (x) of the act. Thereafter at the time of deposit of those sums, within the due dates prescribed in the respective act, deduction is allowable under the provisions of section 36 (1) (va) of the act. To this section an explanation – 1 was inserted with effect from 1 April 2021 by The Finance Act 2021 providing that the’due date’ means the date by which the assessee is required as an employer to credit an employee’s contribution to the employees account in the relevant fund under any act, rule, order or notification issued there under or under any standing order, award, contract of services or otherwise. Further explanation 5 was also added to the provisions of section 43B of the act by The Finance Act, 2021 with effect from 1 April 2021 providing that “for the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of subclause (x) of clause 24 of section 2 applies.
27. The memorandum explaining the provision in the Finance Bill, 2021 has referred to the amendment as under:-
Rationalization of various Provisions
Payment by employer of employee contribution to a fund on or before due date Clause (24) of section 2 of the Act provides an inclusive definition of the income. Sub-clause (x) to the said clause provides that income to include any sum received by the assessee from his employees as contribution to any provident fund or superannuation fund or any fund set up under the provisions of ESI Act or any other fund for the welfare of such employees.
Section 36 of the Act pertains to the other deductions. Sub-section (1) of the said section provides for various deductions allowed while computing the income under the head ̳ Profits and gains of business or profession ‘.
Clause (va) of the said sub-section provides for deduction of any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section apply if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.
Explanation to the said clause provides that, for the purposes of this clause, “due date‖ to mean the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued there-under or under any standing order, award, contract of service or otherwise.
Section 43B specifies the list of deductions that are admissible under the Act only upon their actual payment. Employer’s contribution is covered in clause (b) of section 43B. According to it, if any sum towards employer’s contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is actually paid by the assessee on or before the due date for furnishing the return of the income under sub-section (1) of section 139, assessee would be entitled to deduction under section 43B, and such deduction would be admissible for the accounting year. This provision does not cover employee contribution referred to in clause (va) of sub-section (1) of section 36 of the Act.
Though section 43B of the Act covers only employer ‘s contribution and does not cover employee contribution, some courts have applied the provision of section 43B on employee contribution as well. There is a distinction between employers 40contribution and employee ‘s contribution towards welfare fund. It may be noted that employee ‘s contribution towards welfare funds is a mechanism to ensure the compliance by the employers of the labour welfare laws. Hence, it needs to be stressed that the employer ‘s contribution towards welfare funds such as ESI and PF needs to be clearly distinguished from the employee ‘s contribution towards welfare funds. Employee’s contribution is employee own money and the employer deposits this contribution on behalf of the employee in fiduciary capacity. By late deposit of employee contribution, the employers get unjustly enriched by keeping the money belonging to the employees. Clause (va) of sub-section (1) of Section 36 of the Act was inserted to the Act vide Finance Act 1987 as a measure of penalizing employers who mis-utilize employee ‘s contributions.
Accordingly, in order to provide certainty, it is proposed to –(i) amend clause (va) of sub-section (1) of section 36 of the Act by inserting another explanation to the said clause to clarify that the provision of section 43B does not apply and deemed to never have been applied for the purposes of determining the ―due date‖ under this clause; and (ii) amend section 43B of the Act by inserting Explanation 5 to the said section to clarify that the provisions of the said section do not apply and deemed to never have been applied to a sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section 2 applies.
These amendments will take effect from 1st April 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.
[Clauses 8 and 9]
28. Further necessary amendment were also made under section 143 (1) of the act which are also explained as under:
Rationalisation of the provision relating to processing of returned income and issuance of notice under sub-section (2) of section 143 of the Act
The existing provisions of clause (a) of sub-section (1) of section 143 of the Act provides that at the time of processing of return of income made under section 139, or in response toa notice under sub-section (1) of section 142, the total income or loss shall be computed after making the adjustments specified in clauses (i) to (vi) therein.
It is proposed to amend the following provisions of sub-section (1) of section 143 of the Act, –
(i)Amend sub-clause (iv) of clause (a) of sub-section (1) of the section 143 of the Act, to allow for the adjustment on account of increase in income indicated in the audit report but not taken into account in computing the total income.(ii)Amend sub-clause (v) of clause (a) of sub-section (1) of the section 143 of the Act so as to give consequential effect to amendment carried out in section 80 AC vide Finance Act 2018.(iii)Amend the provisions of section 143 to reduce the time limit for sending intimation under sub-section (1) of section 143 of the Act from one year to nine months from the end of the financial year in which the return was furnished. Consequently, it is also proposed to reduce the time limit for issue of notice under sub-section (2)of section 143 of the Act from six months to three months from the end of thefinancial year in which the return is furnished. These amendments will take effect from 1st April 2021[Clause 34]
29. Thus, if one reads the memorandum explaining the provision in the Finance Bill 2021, it is apparent that Parliament would also like to introduce such an amendment with effect from the assessment year 2021 – 22 and subsequent assessment years. The assessment years before us are 2019 – 20 and 2020 – 21. Therefore, it is apparent that for the impugned assessment year which are in appeal before us the adjustment made by the learned central processing Centre of disallowing the contribution of employees deposited beyond the due date prescribed under the respective act is not correct.
30. The decision of the honourable Chhattisgarh High Court in case of Sanjay Kumar Sharma versus income tax officer (2025) 174 com592 (Chhattisgarh) is also covers the issue in favour of the assessee. The honourable Delhi High Court in principal Commissioner of income tax versus TV today network Ltd (2022) 141 taxmann.com 275 (Delhi) though with respect to the assessment year 2012 – 13 has categorically held that that the said amendment will take effect from 1 April 2021 and further the amendment itself is proposed to be made with effect from assessment year 2021 – 22, the decision of the honourable Delhi High Court also support the case of the assessee.
31. When there are contradictory judgements of non jurisdictional high court the view in favour of the assessee is required to be taken.
32. In view of the above facts we hold that the adjustment made by the learned central processing Centre with respect to the deposit of employees’ contribution to the credit of provident fund account beyond the due date specified under the respective act could not have been adjusted under section 143 (1) (a) of the act prior to assessment year 2021 – 22 and therefore the AO is directed to delete the adjustment to that extent.
33. As we have directed the ld AO to delete the additions, other issues are merely academic and are dismissed.
34. In the result both the appeals are allowed for statistical purposes.”
9.2 Respectfully, following the decision of this coordinate bench of the Tribunal, we held that the adjustment made by the CPC with respect to the deposit of employees contribution to the credit of provident fund account and ESI account beyond the due date specified under the respective Act could not have been made u/s 143(1)(a) of the Act prior to assessment year 2021-22 and therefore, the AO is directed to delete the adjustment to that extent.
10. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 17th Aug, 2026
