Case Law Details
Sanjay Kumar Vs ITO (ITAT Delhi)
ITAT held that the assessing officer’s use of Section 154 before 12.10.2022 to disallow EPF and ESI contributions was not justified, as the issue was debatable and there were conflicting views and such views. Hon’ble Supreme Court judgment, giving a conclusive finding in favor of the Revenue in Checkmate Services Pvt. Ltd. Vs. CIT (Civil Appeal No. 2833 of 2016), was pronounced on 12.10.2022. As per the judgment, the disallowance of employees’ contribution to EPF and ESI has been sustained if the same was not deposited before the due date prescribed in the respective statutes.
After the Supreme Court delivered its judgment in the case of “CHECKMATE SERVICES” on October 12, 2022, regarding the delayed deposit of Employees’ Contribution to PF and ESI, several Tribunals have been dismissing the appeals of the Assessee’s by relying on the said Supreme Court order. It is important to note that the Supreme Court’s ruling is applicable retrospectively from the date when the relevant section was enacted in the Income Tax Act.
In the Instant Case, an intimation was initially issued by the tax department accepting the returned income without making any adjustments for the delayed PF and ESI contributions.
However, subsequently, a rectification order was passed by the department u/s. 154 of the Income Tax Act, adding the delayed employees’ contribution to PF and ESI and raising a demand against the assessee.
Upon appealing to the Commissioner of Income Tax (Appeals) [CIT(A)], the appeal was dismissed, with the CIT(A) relying on the Supreme Court’s decision in the case of “CHECKMATE”.
Arguments advanced on behalf of the assessee:
That the disallowance made on account of EPF and ESI was beyond the jurisdiction and powers u/s. 154 of the Income-tax Act, as the expenditure was already allowed in the assessment under Section 143(1) of the Act.
that when the rectification order was passed, the Supreme Court’s decision in the case of “CHECKMATE” had not yet been pronounced. The Assessing Officer (AO) did not refer to this subsequent Supreme Court order while issuing the rectification order. Therefore, it was contended that the debatable nature regarding the allowability of delayed deposit of Employees’ Contribution to PF and ESI, which existed at the time of the rectification order, cannot be diluted by a subsequent Supreme Court order.
As per the instruction No. 1814 dated 04.04.89 issued by the CBDT discourages the adjustments u/s. 143(1) when there are conflicting views of the High Court or the Tribunal.
the Hon’ble Madhya Pradesh HC in the case of CIT vs. Mahavir Drilling Co., [2005] 142 taxmann 663 held that any benefit granted cannot be withdrawn by invoking Section 154.
Arguments advanced on behalf of the revenue:
That the learned CIT(A) properly considered the judgment of the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. case to sustain the order u/s. 154.
Observations of the tribunal:
The tribunal considered the issue of whether the addition made by the assessing officer (AO) under Section 154 of the Act was justified.
The tribunal noted that the AO had accepted the return filed u/s. 139 of the Act based on the tax audit report, and the question of delay in deposit of employees’ contribution was already in the assessment records.
It concluded that since there was a law in favor of the assessee allowing such expenditure at the time of assessment, the failure to follow a divergent view in favor of the revenue cannot be considered an error apparent on record.
The tribunal referred to the judgment in the case of CIT vs. Mahavir Drilling Co., where the High Court held that rectification under Section 154 was not justified when the issue was debatable and there was a cleavage of judicial opinion.
Based on these observations, the tribunal held that the AO and the CIT(Appeals) erred in making and sustaining the order under Section 154, respectively.
The appeal of the assessee was allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
The assessee has come in appeal against the order dated 07.11.2022 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), (hereinafter referred as “learned First Appellate Authority” or in short “FAA”) in Appeal no. NFAC/2018-19/10043670, for the assessment year 2019-20, arising out of the rectification order 27.07.2020 u/s 154 of the Income-tax Act, 1961 (hereinafter referred as the “Act”), passed by the ADIT, CPC, Bengaluru(hereinafter referred in short as “Ld. AO”).
2. Heard and perused the record.
3. Facts in brief are in regard to disallowance made on account of EPF and ESI amounting to Rs. 73,18,988/- by learned AO vide order dated 27.07.2020 u/s 154 of the Act the assessee had claimed before the learned CIT(A) that it was beyond the jurisdiction and powers under Section 154 of the Act to make an addition for which expenditure was allowed in assessment u/s 143(1) of the Act. It is claimed that the same cannot be considered to be an error apparent on record to exercise rectification powers u/s 154 of the Act, because when such powers were exercised on 27.07.2020, there were judgments both favouring the Revenue and the assessee and the Hon’ble Supreme Court judgment giving conclusive finding in favour of Revenue in Checkmate Services Pvt. Ltd. Vs. CIT, Civil Appeal No. 2833 of 2016 was pronounced on 12.10.2022, by which the disallowance of employees’ contribution to EPF and ESI have been sustained, if the same are not deposited before the due date prescribed in the respective statutes.
4. Learned AR has placed reliance on Instruction No. 1814 dated 4.4.1989 of the Board to submit that even the Board discourages adjustments u/s 143(1) of the Act where there are conflicting views of Hon’ble High Court or the Tribunal. Learned AR specifically relied on the judgment of the Hon’ble Madhya Pradesh High Court in the case of CIT Vs. Mahavir Drilling Co. (2005) 142 Taxman 663 (MP) to submit that Hon’ble M.P. High Court has held that any benefit granted cannot be withdrawn by taking recourse to Section 154.
5. On the other hand, learned DR supported the orders of learned tax authorities below and submitted that the learned CIT(Appeals) has duly taken note of the judgment of the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. case (supra) to sustain the order u/s 154 of the Act.
6. After giving thoughtful consideration to the material on record the Bench is of the considered opinion that the issue involved in the appeal is not with regard to merits of addition but whether such addition could be made by learned AO by exercising powers u/s 154 of the Act. The matter of fact is that learned AO had accepted the return filed u/s 139 of the Act vide intimation u/s 143(1) of the Act dated 24.11.2019. The same was based on the tax audit report in form no. 3CB and 3CD. Thus, the question of delay in deposit of the employees’ contribution was very much in the assessment records upon which the intimation u/s 143(1) was served upon the assessee. As at relevant time there was law in favour of assessee allowing such expenditure so it has to be concluded that assessee was benefited by same and failure to follow a divergent view in favour of Revenue cannot be considered to be an error apparent on record and thus learned AO was not justified to substitute his opinion by invoking provision of Section 154. The question of relying any judgment in favour of Revenue to invoke section 154 powers is not manifested from the order U/s. 154 and thus the learned CIT(Appeals) too erred to sustain the order on the basis of the judgment of the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. case (supra)
6. In the case of CIT Vs. Mahavir Drilling Co. (supra), investment allowance claimed by the assessee on drilling machines was granted by the AO. The AO later realised that the investment allowance could not have been claimed by the assessee on the drilling machine or in other words, it was noticed that the same was wrongly granted. However by order dated 19-10-1992, the AO withdrew the benefit of investment allowance by taking recourse to the provisions of rectification. The revenue submitted that in the light of law laid down by Supreme Court in the case of CIT v. N. C. Budharaja & Co. (1993) 204 ITR 412 (SC) the issue in relation to claiming of investment allowance in the activity of drilling stood decided in favour of revenue. It was contended that once the issue is decided by the Hon’ble Supreme Court against an assessee, the action on the part of AO in invoking section 154 of the Act rectifying the mistake in wrongly granting the benefit to assessee in the original assessment order could always be withdrawn. The assessee submitted that the law laid down in Budharaja’s case (supra) was prospective in nature, therefore, the same would not apply to this case because, on the date when AO granted relief to assessee, the issue in relation to claiming of investment allowance on drilling activity was a debatable one. The Tribunal allowed assessee’s appeal on the ground that the Hon’ble Supreme Court’s decision in N. C. Budharaja (supra) was not available on the date of rectification, i.e., on 19-10- 1992, therefore, the same could not be made a basis for withdrawing the investment allowance. Hon’ble High Court held that as on the date, when the assessee claimed the benefit of investment allowance, i.e., on 31-3-1989, the issue in regard to its claim was debatable one as there was cleavage of judicial opinion between several High Courts. On the date of rectification i.e., on 19-10-1992, the decision in N. C. Budharaja (supra) was not rendered by the Supreme Court, therefore, invocation of provisions of section 154 was not justified.
7. Thus in the case in hand also order of Ld. CIT(A) cannot be sustained. Ground no. 1 raised in the additional grounds, which goes to the root of erroneous exercise of jurisdiction, stands allowed in favour of appellant and remaining grounds are left academic. Thus, the appeal of the assessee is allowed.
Order pronounced in open court on 21.06.2023.
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