AO's allowance of PF/ESI contributions upheld; assessment valid under Sections 153A and 153C for AY 2017-18

The ITAT Chennai held that the AO's allowance of employees' contribution towards PF/ESI was not erroneous or prejudicial to Revenue, as it was consistent with the jurisdictional HC ruling favoring the assessee. The AO's assessment framed before the Supreme Court's Checkmate decision was a plausible view and could not be faulted. Regarding limitation, the assessment for AY 2017-18 was held to be unabated under sections 153C read with 153A, as the search occurred after the expiry of the regular assessment period. However, since no incriminating material was found during the search to justify disallowance of PF/ESI contributions, the AO rightly refrained from making additions. The appeal was allowed in favor of the assessee.

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ISSUES:

Whether the revisional jurisdiction under section 263 of the Income Tax Act, 1961 can be validly invoked against an assessment order passed under section 153C of the Act.Whether the Assessing Officer's order allowing deduction for employees' contribution towards PF/ESI despite delayed remittance was erroneous and prejudicial to the interest of the Revenue.Whether the Assessing Officer was obliged to disallow the employees' contribution towards PF/ESI based on a subsequent Supreme Court decision rendered after the assessment order.Whether additions can be made under section 153C in the absence of incriminating material found during search proceedings related to the issue in question.

RULINGS / HOLDINGS:

The revisional jurisdiction under section 263 of the Act can be exercised only if the order of the Assessing Officer is both "erroneous" and "prejudicial to the interest of the Revenue" by satisfying the twin conditions laid down by the Supreme Court.The Assessing Officer's order framed under section 153C allowing deduction for employees' contribution towards PF/ESI was not erroneous or prejudicial to the Revenue since it was based on the binding decision of the jurisdictional High Court prevailing at the time of assessment.The subsequent Supreme Court decision in Checkmate Services (P) Ltd. v. CIT dated 12.10.2022 could not be applied retrospectively to invalidate the AO's order passed on 05.07.2021; hence, the AO's view was a "plausible view" and not unsustainable in law.In the absence of any incriminating material relating to the employees' contribution towards PF/ESI found during the search under section 132, no addition could be made under section 153C, and the AO was justified in not making any disallowance on that ground.The Principal Commissioner of Income Tax erred in invoking section 263 revisional jurisdiction and the order passed under section 263 was quashed.

RATIONALE:

The Court applied the legal framework established by the Supreme Court in Malabar Industries Ltd. v. CIT, which requires satisfaction of twin conditions-(i) the AO's order must be erroneous, and (ii) the erroneous order must be prejudicial to the Revenue-for valid exercise of section 263 jurisdiction.The Court relied on the principle that an order is erroneous under section 263 only if passed on incorrect facts or law, without application of mind, or in violation of natural justice, and that mere loss of revenue is insufficient unless the AO's view is unsustainable in law.The Court noted that at the time of assessment, the binding precedent was the jurisdictional High Court decision allowing deduction where employees' contribution was remitted before filing the return, which the AO followed, constituting a plausible view.The Court emphasized that subsequent Supreme Court decisions do not automatically render prior assessments erroneous or prejudicial for purposes of section 263.The Court referred to the settled position of law on unabated assessments under section 153C read with section 153A, requiring incriminating material specific to the assessee and assessment year for additions; absence of such material precluded disallowance.The Court distinguished the facts from the Supreme Court decision in Checkmate Services (P) Ltd., holding that the AO's order was not erroneous given the factual and legal context prevailing at the time.

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