PF/ESI contributions paid before due date allowed as deductions, rectification order void for lack of notice under section 154

ITAT Delhi allowed assessee's appeal against CPC's rectification order u/s 154 disallowing PF/ESI contributions. The tribunal held the rectification order was void ab initio as CPC failed to issue prior notice and provide opportunity of being heard as mandated under section 154(3). Additionally, the disallowance could not be considered a mistake apparent on record since divergent judicial views existed on the issue, with the jurisdictional Delhi HC in AIMIL Ltd. favoring the assessee's position that PF/ESI contributions paid before due date u/s 139(1) are allowable deductions.

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Issues Involved:
1. Legality of the rectification order passed under Section 154 without prior notice.
2. Scope of Section 154 regarding debatable issues.
3. Disallowance under Section 36(1)(va) concerning PF/ESI contributions paid before the due date under Section 139(1).

Detailed Analysis:

1. Legality of the Rectification Order Passed Under Section 154 Without Prior Notice:

The assessee challenged the rectification order passed by CPC under Section 154, arguing that it was issued without any prior notice or opportunity for a hearing, as mandated by sub-section (3) of Section 154. The Ld. Counsel for the assessee cited the decision in ACIT Vs. Humboldt Wedag Pvt. Ltd. and the recent decision of the High Court of Telangana in Apollo Specialty Hospitals Pvt. Ltd. Vs. DCIT, which emphasized the necessity of issuing a notice and providing a reasonable opportunity of being heard before passing any rectification order that enhances the assessment or increases the liability of the assessee.

The Tribunal observed that the DR could not provide any evidence of prior notice being issued to the assessee before the rectification order was passed. It was noted that the failure to issue such a notice renders the rectification order void ab initio, as established in the cited cases. Consequently, the Tribunal held that the rectification order dated 15/06/2019 was in violation of the mandate of sub-section (3) of Section 154 and thus, was bad in law.

2. Scope of Section 154 Regarding Debatable Issues:

The assessee argued that the disallowance under Section 36(1)(va) was a debatable issue as of the date of the rectification order, and therefore, outside the scope of Section 154. The Ld. Counsel pointed out that various High Courts, including the jurisdictional High Court of Delhi in CIT Vs. AIMIL Ltd., had divergent views on the matter. The Tribunal agreed, noting that the issue was indeed debatable and could not be classified as a "mistake apparent from record" under Section 154. This was supported by several precedents, including ITO vs. M/s Volkart Brothers and CIT Vs. Hero Cycles (P) Ltd., which held that debatable legal issues could not be rectified under Section 154.

3. Disallowance Under Section 36(1)(va) Concerning PF/ESI Contributions Paid Before the Due Date Under Section 139(1):

The assessee contended that the disallowance of Rs. 1,80,95,758/- under Section 36(1)(va) was unjustified, particularly as Rs. 97,54,041/- pertained to employer's contributions to PF/ESI paid within the due date under Section 139(1) and was therefore allowable under Section 43B. The Tribunal observed that as of the date of the rectification order, the jurisdictional High Court's decision in CIT Vs. AIMIL Ltd. was in favor of the assessee, allowing such contributions as deductions. Thus, the disallowance made by CPC could not be deemed a "mistake apparent from record" and was outside the purview of Section 154.

Conclusion:

The Tribunal concluded that the rectification order passed by CPC on 15/06/2019 was void ab initio due to the lack of prior notice and opportunity for a hearing, as required by Section 154(3). Additionally, the issue of disallowance under Section 36(1)(va) was deemed debatable and thus, not subject to rectification under Section 154. Consequently, the appeal was partly allowed, and the additional grounds raised by the assessee were accepted. The order was pronounced in the open court on 09/08/2024.

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