2025 (8) TMI 1592 - AT - Income Tax

AO must delete disallowance: employee PF/ESI contributions paid after deposit date but before return filing deductible under s.36(1)(va) & s.2(24)(x)

A2Z Infra Services Limited Versus DCIT, Central Circle-2, Gurugram and Central Circle-27, Delhi

A2Z Infra Services Limited Versus DCIT, Central Circle-2, Gurugram and Central Circle-27, Delhi - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 36(1)(va) read with section 2(24)(x) in respect of employees' contributions to EPF/ESI can be made while processing a return under section 143(1)(a) when the legal position was then debatable. 2. Whether amounts representing employees' contributions to EPF/ESI, deposited after statutory due dates under welfare enactments but before the due date for filing return under section 139(1), are deductible under section 36(1)(va) (and/or saved by section 43B) or treated as deemed income under section 2(24)(x). 3. Whether summary processing under section 143(1)(a) permits adjustment/disallowance of debatable issues vis-à-vis the limits of prima facie/arithmetic or apparent errors. 4. Whether other additions (alleged double additions in the return and additions for non-deduction of TDS) require remand/verification by the Assessing Officer. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Permissibility of disallowance under section 36(1)(va) while processing under section 143(1)(a) Legal framework: Section 143(1)(a) permits processing of returns by making specified adjustments that are apparent from the return (arithmetical errors, incorrect claims apparent from return, audit-report indicated adjustments, etc.). The provisos require intimation and consideration of any response. Jurisprudence (supreme court authorities discussed) limits the use of section 143(1)(a) to prima facie/apparent errors and excludes adjudication of debatable legal questions at the processing stage. Precedent Treatment: The Court relied on Supreme Court principles in Kvaverner John Brown Engg. and Rajesh Jhaveri Stock Brokers that Assessing Officer cannot adjudicate debatable issues under section 143(1)(a). The Tribunal also noted recent High Court authority (Chhattisgarh) and ITAT decisions (Satpal Singh Sandhu, Parv Buildcon) holding that highly debatable issues cannot be summarily disallowed at processing; Revenue had withdrawn appeals against those ITAT orders. Interpretation and reasoning: The Court examined the timing: intimations under section 143(1) were issued on dates when divergent High Court views existed and the Supreme Court decision resolving the issue (Checkmate Services) was not yet rendered. Given the conflicting authorities, the question whether employee contributions paid after statutory due dates but before return-filing date could be disallowed under section 36(1)(va) was a highly debatable legal issue. Under established law, such debatable questions cannot be resolved by prima facie adjustments at the processing stage and should instead be dealt with under deeper scrutiny (e.g., section 143(3)). Ratio vs. Obiter: Ratio - Where the legal position on a claim is genuinely debatable (divergent High Court/tribunal views) and not an apparent error, the Assessing Officer lacks jurisdiction to make a substantive disallowance under section 143(1)(a); such matters require scrutiny beyond processing. Obiter - observations on the revenue's inconsistent litigation posture and some collateral case law distinctions. Conclusion: The disallowances under section 36(1)(va) made at the processing stage were beyond the permissible scope of section 143(1)(a) where the issue was debatable at that time; such disallowances were set aside and remitted (with liberty to proceed in accordance with law). (Cross-reference: Issues 2 and 3.) ISSUE-WISE DETAILED ANALYSIS - Issue 2: Characterisation of employees' contributions paid late but before filing date - deduction vs deemed income Legal framework: Section 36(1)(va) permits deduction in respect of certain sums; section 2(24)(x) deems amounts received or retained as income in specified circumstances; section 43B addresses timing of deduction for particular statutory liabilities and contains a non-obstante clause. Welfare statutes (EPF Act, ESI Act) prescribe due dates for deposit of employees' contributions which are legally distinct from employer's own liabilities. Precedent Treatment: The Supreme Court in Checkmate Services held (authoritatively, rendered later than the processing intimations in these appeals) that employees' contributions withheld or deducted by the employer retain character as third-party monies and that deduction under section 36(1)(va) is available only if such amounts are deposited on or before the due dates prescribed under the respective welfare Acts; the latitude under section 43B for deposit before return-filing does not apply to employees' contributions. Interpretation and reasoning: The Court accepted the Supreme Court's distinction between the employer's primary liability (section 36(1)(iv)) and the distinct category of amounts deducted from employees (section 36(1)(va) read with section 2(24)(x)). The non-obstante clause in section 43B does not supplant the statutory condition that employees' contributions must be deposited by the due dates specified in the Welfare Acts for deduction; amounts retained without timely deposit remain deemed income unless deposited by the statutory due date. Ratio vs. Obiter: Ratio - Deduction under section 36(1)(va) for employees' contributions requires deposit on or before the due date specified in the relevant welfare Act; section 43B's leeway for deposits after the statutory due date but before return filing does not apply to employees' contributions. Obiter - discussion of the divergence of High Court authorities prior to the Supreme Court ruling. Conclusion: The binding legal position (post-Checkmate) is that late deposit of employees' contributions (i.e., after statutory due dates under EPF/ESI laws) does not qualify for deduction under section 36(1)(va) even if made before return-filing date; however, because the Supreme Court decision post-dated the intimations, the processing-stage disallowances could not lawfully have been made. (Cross-reference: Issue 1.) ISSUE-WISE DETAILED ANALYSIS - Issue 3: Scope and limits of section 143(1)(a) - prima facie adjustments versus adjudication of contentious questions Legal framework: Section 143(1)(a) enumerates limited categories of adjustments that may be made when processing a return; adjustments must be apparent from the return/attached documents and any intimation and response procedure must be followed. Precedent Treatment: Supreme Court authorities (Kvaverner John Brown Engg.; Rajesh Jhaveri Stock Brokers) limit section 143(1)(a) to apparent errors and bar resolution of conflicting or debatable legal questions at the processing stage. Tribunal and High Court decisions (as referenced) have affirmed that highly debatable issues cannot be adjusted under section 143(1)(a). Interpretation and reasoning: The Court analysed the nature of adjustments made in the intimations and found that the disallowances involved legal interpretation and contested statutory construction (not an arithmetic or document-apparent error). Given that, and given divergent judicial views at the relevant time, the AO erred in using section 143(1)(a) powers rather than initiating scrutiny under section 143(3) or other proper adjudicatory processes. Ratio vs. Obiter: Ratio - Section 143(1)(a) cannot be used to make adjustments on issues that involve substantial or debatable questions of law; such matters require fuller scrutiny and cannot be finalised by prima facie processing adjustments. Obiter - remarks on comparative interplay with section 143(3) and on the procedural safeguards in the provisos to section 143(1)(a). Conclusion: The adjustments/disallowances in issue were beyond the permissible scope of section 143(1)(a) and were therefore unlawful when made at the processing stage; they were set aside accordingly. (Cross-reference: Issues 1 and 2.) ISSUE-WISE DETAILED ANALYSIS - Issue 4: Other additions (double additions and non-deduction of TDS) and remand for verification Legal framework: Assessments must correctly reflect amounts declared in returns; where a taxpayer demonstrates that the return already accounted for an item, duplicative additions should not stand. The AO retains fact-finding powers subject to natural justice. Precedent Treatment: No binding precedent was necessary; the Tribunal exercised its supervisory remit to prevent double taxation where the return showed the relevant treatment, subject to verification. Interpretation and reasoning: The assessee claimed that certain disallowances/ additions were already reflected as 'add-backs' in the filed return, resulting in double addition if the AO again disallowed them. The Tribunal found the contention required factual verification and therefore restored those grounds to the file of the Assessing Officer for appropriate verification and decision after affording opportunity to the assessee. Ratio vs. Obiter: Ratio - Where a taxpayer demonstrates that an alleged disallowance was already accounted for in the return, the matter requires verification and cannot be allowed to stand as duplicative addition without enquiry. Obiter - procedural directions on opportunity and compliance with law. Conclusion: Grounds alleging double addition and non-deduction of TDS were remitted to the Assessing Officer for verification and decision in accordance with law after affording adequate opportunity to the assessee. FINAL CONCLUSIONS 1. The prima facie disallowances of employees' contributions to EPF/ESI under section 36(1)(va) read with section 2(24)(x) made while processing returns under section 143(1)(a) (when the legal position was divergent) were beyond the powers conferred by section 143(1)(a) and are set aside. 2. The jurisprudential position later settled by the Supreme Court (Checkmate Services) holds that deduction under section 36(1)(va) requires deposit of employees' contributions on or before the due dates prescribed by the respective welfare Acts; the Court applied that authority to the extent relevant but vacated the processing-stage disallowances because the controlling authoritative decision was not available at the time of processing. 3. Other factual/contention-based additions (double additions; TDS-related addition) were remitted to the Assessing Officer for verification and decision in accordance with law after providing the assessee an opportunity to be heard.