2024 (5) TMI 1644 - AT - Income Tax

PF/ESI disallowance via CPC intimation u/s 143(1) quashed for breaching first proviso and audi alteram partem

ITAT Bang allowed the assessee's appeal challenging disallowance of employees' PF/ESI contribution made through adjustment in intimation u/s 143(1). The ... Disallowance of Employee’s contribution towards PF/ESI on account of non-deposit within the due date - adjustment made in the intimation generated u/s 143(1) - fundamental principle of “audi alterm partem” - HELD THAT:- As mandated under the provisions of sec. 143(1) of the Act that no adjustment can be made to the total income of the assessee unless an opportunity of being heard is given to the assessee either in writing or in electronic form. In the present case, it is an admitted position that the return was processed u/s 143(1) of the Act after making adjustment without giving any opportunity to the assessee. We also find that the ITAT Ahmedabad Bench in the case of Devendra Singh Bhaskar [2023 (12) TMI 701 - ITAT AHMEDABAD] involving identical facts and circumstances has decided the issue in favor of the assessee notice as held that the intimation passed u/s.143(1) dated 15-07- 2021 is violation of 1st proviso to section 143(1)(a) of the Act by not offering hearing to the assessee. Therefore the entire proceedings u/s. 143(1) is vitiated and invalid in law - Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether an adjustment under section 143(1)(a) disallowing employees' contribution to PF/ESI can be made without prior intimation and opportunity of hearing as mandated by the proviso to section 143(1)(a). 1.2 Whether the intimation under section 143(1) and the consequent disallowance/addition are legally sustainable when the requirement of such prior intimation and opportunity is not complied with. 1.3 Whether, upon holding the intimation under section 143(1) to be invalid on technical grounds, any adjudication on the merits of the disallowance under section 36(1)(va) is required. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of adjustment under section 143(1)(a) without prior intimation and opportunity Legal framework 2.1 The Court reproduced and relied upon section 143(1)(a) of the Act, detailing the scope of permissible 'adjustments' at the time of processing a return, including adjustments for arithmetical errors, incorrect claims apparent from the return, specified disallowances and additions. 2.2 The Court specifically emphasized the first proviso to section 143(1)(a), which mandates that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode, and that any response received within thirty days must be considered before making the adjustment. Interpretation and reasoning 2.3 The Court noted, as an admitted factual position, that the return was processed under section 143(1) after making an adjustment for employees' contribution to PF/ESI without giving any opportunity of being heard to the assessee. 2.4 The Court relied on the information furnished by the departmental officer confirming that no intimation under section 143(1)(a) had been sent to the assessee before making the adjustment, and that there was no provision to verify to which email ID and when any such mail was sent. 2.5 The Court applied the ratio of a coordinate bench decision where it was held that failure to issue intimation and afford an opportunity as per the first proviso to section 143(1)(a) violates the principle of 'audi alteram partem' and renders the section 143(1) proceedings invalid in law. 2.6 Following the cited precedent, the Court held that in the absence of prior intimation and opportunity of hearing, the adjustment made by CPC under section 143(1)(a) was in violation of the statutory mandate of the first proviso to section 143(1)(a). Conclusions 2.7 The Court concluded that the intimation passed under section 143(1) making the impugned adjustment, without issuing prior intimation and without affording an opportunity of being heard as required by the first proviso to section 143(1)(a), is vitiated and invalid in law. Issue 2: Sustainability of the disallowance and intimation under section 143(1) Interpretation and reasoning 2.8 Having held that the mandatory pre-condition of prior intimation and opportunity under section 143(1)(a) was not satisfied, the Court treated the entire proceedings under section 143(1) as invalid. 2.9 The Court, therefore, considered that the disallowance of employees' contribution to PF/ESI made by way of such defective intimation cannot stand, since the very foundation (the intimation under section 143(1)) is legally unsustainable. 2.10 Respectfully following the coordinate bench decision in an identical factual situation, the Court set aside the finding of the appellate authority that had upheld the CPC adjustment and directed deletion of the corresponding addition. Conclusions 2.11 The Court held that the intimation under section 143(1), being violative of the first proviso to section 143(1)(a), is invalid, and accordingly the addition/disallowance made therein is liable to be deleted. 2.12 The appellate order sustaining the adjustment under section 143(1) was set aside, and the assessing officer was directed to delete the addition. Issue 3: Necessity of adjudication on the merits of the disallowance under section 36(1)(va) Interpretation and reasoning 2.13 The Court noted that the assessee had succeeded on a technical ground, namely, invalidity of the section 143(1) proceedings for non-compliance with the proviso to section 143(1)(a). 2.14 It was observed that the authorised representative did not advance arguments on the substantive merits concerning the allowability of employees' contribution to PF/ESI under section 36(1)(va). 2.15 In view of the quashing of the intimation on technical grounds, the Court considered that adjudication of the grounds on merits was not required and would be academic. Conclusions 2.16 The Court declined to adjudicate the grounds relating to the merits of the disallowance under section 36(1)(va), treating them as infructuous in light of the technical success, and dismissed those grounds accordingly. 2.17 The appeal was thus partly allowed, limited to the technical ground resulting in deletion of the disallowance arising from the impugned intimation under section 143(1).