Disallowance U/S 143(1)(a) Of Income Tax Act Inapplicable When Issue Involved Is Pending Before Supreme Court: Chhattisgarh High Court

The Chhattisgarh High Court has held that an Assessing Officer (AO) cannot apply Section 143(1)(a) of the Income Tax Act, 1961 (the 1961 Act), to disallow a claim where the issue involved, such as the deductibility of employees' contributions to EPF/ESI under Section 36(1)(va), was pending consideration before the Supreme Court in Checkmate Services Pvt. Ltd. v. CIT [(2023) 6 SCC 451].

In this regard, a Division Bench of Justice Sanjay K. Agrawal and Justice Deepak Kumar Tiwari held,

“…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.”

Facts:

Initially, the appellant/assessee had filed the return for income for the Assessment Year 2020-21, declaring a total income of Rs.3,76,34,910/- and paid tax amounting to Rs.1,44,33,865/-. When the same was processed by Central Processing Centre (CPC), Bengaluru/Assessing Officer (AO), an intimation order was issued on 16.12.2021, under Section 143(1)(a) of the Act, disallowing a claim for deduction of Rs. 28,21,065/- as delayed deposit of employees' contributions to Employees' State Insurance (ESI) and Employees Provident Fund (EPF). Aggrieved by the same, the assessee challenged the intimation order before the Commissioner of Income Tax (Appeals) under Section 246A of the Act.

Meanwhile, the Supreme Court delivered its judgment in Checkmate Services, whereby it clarified and settled the issue regarding claim of deduction under Section 36(1)(va) of the Act and held that– to claim deduction under the said provision, employees' contribution should be deposited on or before the due dates specified under the respective employees welfare Acts.

Ultimately, the CIT (Appeals) dismissed the appeal, which was further challenged before the Income Tax Appellate Tribunal (ITAT), where the appeal was again dismissed vide order dated 26.09.2024 (impugned order). Aggrieved, the assessee preferred an appeal before the High Court under Section 260A of the 1961 Act.

It was the case of the appellant that on the date of issuance of the intimation order under Section 143(1)(a), i.e. on 16.12.2021, the issue of deduction under Section 36(1)(va) relating to delayed deposit of employees' EPF/ESI contributions was pending before the Supreme Court in Checkmate Services and it was only on 12.10.2022 that the issue was settled. It was thus a debatable legal issue on the date of passing the intimation order, and the same was ignored both by the CIT (Appeals) and ITAT. It was further argued that the scope of Section 143(1)(a) only extends to carrying out prima facie adjustments, and disallowance of a claim as debatable as employees' contribution under Section 36(1)(va), falls beyond its scope.

On the contrary, the respondent contended that the judgment in Checkmate Services would have retrospective effect and that the adjustment made towards delayed deposit of employees' contribution was within the scope of powers of the AO to prima facie make adjustment at the time of processing of return.

The question which the ITAT framed and which was subsequently posed before the Division Bench of the High Court was whether the CIT (Appeals) and the ITAT were justified in holding that the AO had rightly processed the return of the appellant under Section 143(1)(a) of the 1961 Act, ignoring the fact that in light of conflicting judgments on the issue of due date, the AO was required to apply the provisions contained in Section 143(3)/Section 147.

Court's Findings:

At the outset, the Division Bench acknowledged that on the date of issuance of the intimation notice, the issue of deduction under Section 36(1)(va) was pending consideration before the Supreme Court in Checkmate Services, which was clarified eventually on 12.10.2022. Prior to the judgment of the Supreme Court in Checkmate Services, divergent views on the same issue were given, with High Courts of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi favouring the interpretation beneficial to the assesses, while High Courts of Kerala and Gujarat favoring the Revenue's understanding that such contributions must be deposited strictly within the due dates prescribed. This divergence of views between different High Courts made the issue a highly debatable one.

The Court thereafter examined the grammar of Section 143 and highlighted that power under sub-section (1) of Section 143 of the 1961 Act is summary in nature designed to cause adjustment which is apparent from the return whereas power under sub-sections (2) and (3) extends to scrutinising the return and causing deeper probe to arrive at correct determination of the liability.

The Court thus held that the AO should not have resorted to the provisions of Section 143(1)(a) of the Income Tax Act, 1961.

Furthermore, the Court noted,

“…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…”

With respect to the question of Checkmate Services having retrospective effect, the Court observed that the same was not posed as an issue in the present case.

Allowing the appeal, the Court set aside the prima facie disallowance of impugned contribution towards ESI and EPF under Section 36(1)(va) read with Section 2(24)(x) of the 1961 Act made by the AO under Section 143(1)(a) and consequently set aside the dismissal orders passed by the CIT (Appeals) and ITAT.