2025 (7) TMI 1910 - AT - Income Tax

Disallowance under s.36(1)(va) for ESI/PF not sustainable via s.143(1)(a) processing; order quashed, assessee restored against Revenue

ITAT DELHI - AT held that disallowance under s.36(1)(va) of ESI/PF could not be imposed in a s.143(1)(a) processing, the issue being highly debatable. ... Disallowing ESI/PF contribution - processing a return u/s 143(1)(a) - section 36(1)(va) disallowance of ESI/PF is a highly debatable issue to be rejected in section 143(1) 'processing' - Revenue vehemently argues that the learned CIT(A)/NFAC has erred in law and on facts in not having followed hon'ble apex court recent landmark decision in Checkmate Services P. Ltd. [2022 (10) TMI 617 - SUPREME COURT (LB)]. HELD THAT:- It could hardly dispute that their lordships have already considered the same herein whilst settling the issue in assessee's favour and against the department that the impugned section 36(1)(v) disallowance of ESI/PF contribution could not be made in section 143(1) 'processing' being a highly debatable issue. The impugned section 143(1) 'processing' dated 08.02.2020 is quashed. We accordingly reject the Revenue's instant sole substantive grievance. ISSUES PRESENTED AND CONSIDERED 1. Whether a prima facie disallowance under Section 36(1)(va) (employees' share of ESI/EPF contribution) can be made by the Assessing Officer by processing a return under Section 143(1)(a) where the legal question as to entitlement to deduction was a highly debatable matter pending authoritative resolution. 2. Whether the processing adjustment under Section 143(1)(a) in respect of delayed deposit of employees' contributions was sustainable in light of subsequent authoritative pronouncement resolving conflicting High Court views on the interpretation of Section 36(1)(va). 3. Whether reliance on an earlier coordinate Bench decision (dismissing an appeal as barred by limitation) was appropriate to sustain the processing disallowance under Section 143(1)(a), when that decision did not consider the substantial question formulated in the present proceedings. ISSUE-WISE DETAILED ANALYSIS Issue 1: Power and scope of Section 143(1)(a) - can a highly debatable question be finally or prima facie decided at processing? Legal framework: Section 143(1)(a) permits processing of returns and limited adjustments apparent from the return (arithmetical errors, incorrect claims apparent from return, certain disallowances where return filed beyond due date, additions from information in prescribed forms), with the provisos requiring intimation and allowance of response. Sections 143(2)/(3) permit scrutiny and deeper enquiry. The distinction between summary prima facie adjustments (s.143(1)) and substantive adjudication (s.143(3)) is central. Precedent treatment: Supreme Court authority establishes that where interpretation involves conflict/divergent judicial views, prima facie adjustments under s.143(1)(a) are not appropriate (examples relied upon by the Court include judgments holding Assessing Officer cannot decide debatable issues at processing stage; cf. Kvaverner John Brown Engg., Rajesh Jhaveri). The Tribunal and Courts have applied this principle to deny summary disallowance on debatable points. Interpretation and reasoning: The Court analysed the nature of s.143(1)(a) as summary and restricted to adjustments apparent on the face of the return and attendant documents. Where a legal issue is 'highly debatable' - evidenced by conflicting High Court decisions - the Assessing Officer lacks jurisdiction to resolve that controversy in a processing/intimation order and should instead proceed under s.143(3) for fuller scrutiny. The Court considered the specific facts: the audit report showed delayed deposits disclosed in a form column (not shown as disallowance), and the question whether delayed deposit of employees' contributions (deducted from employees) qualifies for deduction under s.36(1)(va) depended on the then-unsettled interpretation. Ratio vs. Obiter: Ratio - where a legal question is genuinely debatable and conflicting authoritative decisions exist, the Assessing Officer must not make prima facie disallowance under s.143(1)(a) but should resort to s.143(3) for adjudication. Observations about the precise content of the audit report and facts are ancillary but applied to the ratio. Conclusion: The processing disallowance under s.143(1)(a) in respect of the employees' share of ESI/EPF (Section 36(1)(va)) was not sustainable because the issue was highly debatable and pending authoritative adjudication; therefore the Assessing Officer should not have resorted to s.143(1)(a). Issue 2: Effect of subsequent authoritative decision resolving the controversy (interpretation of Section 36(1)(va)) on the validity of prior processing disallowance and retrospective effect considerations Legal framework: Judicial decisions declaring law generally operate retrospectively unless expressly limited; however, the operative question before the Court was whether an earlier processing action was permissible when the legal position was unsettled at the time of processing. Precedent treatment: The Court relied on the Supreme Court decision that ultimately held that deduction under s.36(1)(va) requires deposit of employees' contributions on or before the due date under the relevant welfare enactment; that ruling resolved conflicting High Court views. The Court also referred to authorities establishing that prima facie adjustments cannot resolve such conflicts at processing. Interpretation and reasoning: The Court distinguished two issues: (a) validity of the processing adjustment made on an earlier date when conflicting jurisprudence existed, and (b) whether the later authoritative decision operates retrospectively. The Court found the retrospective effect of the Supreme Court ruling to be an accepted legal proposition but held the retrospective question immaterial to the present controversy: the decisive point is that at the time of processing the issue was unsettled, so s.143(1)(a) was the wrong procedural vehicle irrespective of the later clarification. The subsequent Supreme Court decision reinforced that the underlying issue was debatable and thus confirmed the processing order's impropriety. Ratio vs. Obiter: Ratio - a later authoritative ruling that resolves prior conflict demonstrates that the issue was debatable at the time of processing and thus supports setting aside a processing disallowance; observations on retrospective effect were treated as not determinative for the present procedural question (more explanatory/obiter for this aspect). Conclusion: The subsequent authoritative decision confirmed the issue was debatable when the processing order was passed; retrospective application of that decision is not necessary to decide the procedural impropriety of the earlier s.143(1)(a) disallowance, and the Court set aside the processing disallowance accordingly. Issue 3: Reliance on a coordinate decision dismissing an appeal as barred by limitation to sustain processing disallowance Legal framework: Judicial precedent is persuasive, but the weight of a precedent depends on whether it considered and decided the same substantial question of law. A decision that does not engage with the substantive legal question cannot be relied upon to justify an opposing outcome on that substantive question. Precedent treatment: The Court noted a coordinate Bench decision was cited by the Revenue, but that decision had dismissed an appeal as time-barred without formulating or addressing the substantial question of law central to the present proceedings. Interpretation and reasoning: The Court held that reliance on such a decision to uphold a s.143(1)(a) processing adjustment was misplaced. Because the earlier decision did not consider the same substantial question (whether s.143(1)(a) can be used to adjust a highly debatable issue), it could not justify the processing disallowance here. The Court further observed that two appeals where the Revenue had challenged Tribunal rulings on the same procedural question were withdrawn by the Revenue in subsequent proceedings, which the Court treated as undermining the Revenue's consistency on this point. Ratio vs. Obiter: Ratio - a coordinate decision that did not address the relevant substantial question cannot be relied upon to sustain a processing disallowance on that question; withdrawal of appeals by the Revenue before the Court is a relevant contextual consideration but not determinative of legal principle. Conclusion: Reliance on the coordinate decision was inappropriate; the processing disallowance could not be sustained on that basis. Overall Conclusion and Disposition The Court concluded that the Assessing Officer erred in resorting to Section 143(1)(a) to disallow employees' share of ESI/EPF under Section 36(1)(va) where the issue was highly debatable and pending authoritative resolution; the processing order is set aside, and consequential appellate orders affirming that processing disallowance are also set aside, while preserving the Revenue's liberty to proceed according to law. The substantial question formulated was answered in favour of the assessee on the procedural point considered.