Assessments under s.143(1) cannot sustain retrospective additions on debatable ESI/PF delay; adjustments set aside for assessee

ITAT DELHI - AT held that adjustments made by Revenue via intimation under s.143(1) on a debatable and controversial issue (delay in depositing employees' contributions to ESI/PF) were beyond the scope of s.143(1). The tribunal found retrospective amendment inapplicable to sustain such additions by intimation and that the lower authority erred in confirming the addition. Decision rendered in favour of the assessee, setting aside the s.143(1) adjustments.

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Issues Involved:
1. Addition of Rs. 21,63,304/- under Section 36(1)(va) of the Income Tax Act for delayed deposit of employee contributions to ESI/EPF.
2. Disallowance of Education Cess and Secondary and Higher Education Cess amounting to Rs. 1,27,329/- under Section 40(a)(ii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition under Section 36(1)(va) for Delayed Deposit of Employee Contributions to ESI/EPF:

(A) The appeal was filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals), Delhi, dated 09.09.2020 for the Assessment Year 2018-19. The primary issue was the addition of Rs. 21,63,304/- made by the Assessing Officer under Section 36(1)(va) of the Income Tax Act for delayed deposit of employee contributions to ESI/EPF. Although these payments were deposited after the specified date prescribed under the relevant laws, they were made before the due date of filing the return of income under Section 139(1) of the Income Tax Act.

(B) The Assessing Officer had made these additions by way of adjustments under Section 143(1) of the Income Tax Act, which was upheld by the Ld. CIT(A) with directions to verify the claim and arrive at the correct quantification of the addition.

(C) The Assessee appealed to the ITAT, arguing that the Ld. CIT(A) should have deleted the additions instead of directing the Assessing Officer to work out the correct quantification. The Revenue relied on the impugned appellate order.

(D) The ITAT examined whether the additions made under Section 143(1) for delayed payments, which were deposited before the due date of filing the return under Section 139(1), should be sustained or deleted. The Tribunal acknowledged the amendments to Section 36(1)(va) and Section 43B of the Income Tax Act brought by the Finance Act, 2021, and noted that these amendments are prospective from 01.04.2021. The present appeal pertains to the Assessment Year 2018-19, which is before this date.

(D.1) The ITAT referred to various decisions by different Benches of the Income Tax Appellate Tribunal, which held that the amendments are prospective and not applicable for periods before 01.04.2021. The Tribunal noted that even if the Revenue contests this view, it is at least debatable and controversial.

(D.1.1) The Tribunal considered two alternate views: one in favor of the Assessee and one in favor of the Revenue. If the amendments are prospective, the decisions of the Hon'ble Delhi High Court in CIT vs. AIMIL Ltd. and CIT vs. P.M. Electronics Ltd. would apply, where delayed payments made before the due date of filing the return do not constitute the Assessee’s income. Thus, the additions would have no basis and should be deleted. If the amendments are considered retrospective, the question arises whether such a debatable issue can be adjusted under Section 143(1).

(D.1.2) The Tribunal emphasized that adjustments under Section 143(1) on debatable issues are beyond the scope of this section. The Tribunal cited various judgments, including ACIT vs. Haryana Telecom Pvt. Ltd., supporting this view. The Tribunal concluded that the adjustments made on 16.10.2019 were unfair, unjust, and bad in law since the amendments were not enacted at that time, and binding precedents were in favor of the Assessee.

(D.2) The Tribunal also noted that retrospective amendments cannot be invoked for adjustments under Section 143(1), referencing the Supreme Court's decision in CIT vs. Hindustan Electro Graphites Ltd.

(D.2.1) The Tribunal concluded that:
- Payments were made after the stipulated date but before the due date of filing the return.
- The amendments' retrospective or prospective nature is debatable.
- Adjustments made by Revenue were unfair and beyond the scope of Section 143(1).
- The Ld. CIT(A) erred in not deleting the addition.

(E) The Tribunal set aside the appellate order and directed the Assessing Officer to delete the addition of Rs. 21,63,304/-.

(E.1) The Tribunal clarified that it did not express a view on whether the amendments are prospective or retrospective, as the issue was academic in nature.

2. Disallowance of Education Cess and Secondary and Higher Education Cess:

(F) The second issue was the addition of Rs. 1,27,329/- for disallowance of Education Cess and Secondary and Higher Education Cess. The Tribunal noted that this issue was not raised before the Ld. CIT(A) and does not arise from the impugned appellate order. The Assessee’s representative withdrew this ground during the hearing.

(G) Consequently, the Tribunal dismissed this ground as withdrawn and not pressed by the Assessee.

(H) The appeal was partly allowed, and the order was pronounced orally on 22.03.2022, with the written order signed on the same date.

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