Employee PF, ESI disallowance under s.36(1)(va) r.w.s.43B cannot be added via s.143(1) intimation pre-Checkmate for AYs 2017-18 to 2019-20

ITAT Delhi allowed the assessee's appeals, holding that disallowance of employees' contribution to PF and ESI under s.36(1)(va) r.w.s. 43B could not be made through intimation under s.143(1) for AYs 2017-18 to 2019-20. The Tribunal held that, prior to the SC ruling in Checkmate Services, the taxability of delayed employees' contributions was a highly debatable issue. Consequently, such disallowance did not fall within the limited prima facie adjustments permissible under s.143(1). The impugned adjustments were deleted and the assessee's claims were restored.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, in processing returns under section 143(1) for the relevant assessment years, disallowance of employees' contribution to PF and ESI under section 36(1)(va) read with section 2(24)(x) / section 43B could validly be made, when the legal position on such disallowance was highly debatable and unsettled prior to the decision of the Supreme Court in Checkmate Services Pvt. Ltd.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Scope of adjustment under section 143(1) in relation to disallowance of employees' contribution to PF/ESI prior to Checkmate Services Pvt. Ltd.

(a) Legal framework (as discussed)

2.1 The Tribunal examined the scope of section 143(1), particularly section 143(1)(a), which permits only specified "prima facie" adjustments while processing returns, such as arithmetical errors, apparent incorrect claims, and other adjustments explicitly enumerated.

2.2 The Tribunal relied on judicial exposition (as reproduced from the High Court judgment followed) that under section 143(1)(a) the Assessing Officer may make only adjustments based on errors or claims which are prima facie apparent from the return and accompanying documents, and has no authority to adjudicate or adjust debatable issues.

2.3 The Tribunal noted that the controversy on deductibility of delayed employees' contribution to PF/ESI under section 36(1)(va) read with section 2(24)(x) vis-à-vis section 43B was authoritatively settled only by the Supreme Court in Checkmate Services Pvt. Ltd. on 12.10.2022, after divergent opinions of various High Courts.

(b) Interpretation and reasoning

2.4 The Tribunal observed that in the assessee's case the Centralized Processing Centre made disallowances of employees' contributions to PF and ESI while issuing intimations under section 143(1) for assessment years 2017-18, 2018-19 and 2019-20, on dates prior to 12.10.2022.

2.5 The Tribunal followed a coordinate bench decision which, in identical factual circumstances and relying on a High Court ruling, had held that prior to the Supreme Court's decision in Checkmate Services Pvt. Ltd. the issue of disallowance of employees' contribution to PF/ESI was "highly debatable" with divergent judicial views.

2.6 It was emphasized that, as on the dates of the relevant intimations under section 143(1), there existed judicial precedents favourable to assessees on this issue, including a binding jurisdictional High Court decision in another case (as noted in the earlier coordinate bench order), thereby demonstrating that the legal position was not settled against the assessee.

2.7 By adopting and reproducing the reasoning of the High Court (as quoted in the earlier coordinate bench order), the Tribunal accepted that:

(i) Section 143(1)(a) permits only summary, prima facie adjustments and cannot be invoked for issues requiring interpretation or resolution of conflicting judicial views;

(ii) Where an issue is "highly debatable" and was in fact pending consideration before the Supreme Court at the relevant time, it falls outside the limited adjustment powers under section 143(1)(a); and

(iii) In such a situation, if any disallowance was sought to be made, the proper course would be scrutiny assessment under section 143(3), not adjustment under section 143(1)(a).

2.8 Applying the above principles, the Tribunal held that, since the intimations for all three assessment years were issued before the Supreme Court's judgment in Checkmate Services Pvt. Ltd., and at a time when the issue of delayed employees' contribution to PF/ESI was unsettled and contentious, the Assessing Officer / CPC could not lawfully make the impugned disallowances while processing the returns under section 143(1).

(c) Conclusions

2.9 The Tribunal concluded that the disallowances of employees' contribution to PF and ESI made in the intimations under section 143(1) for assessment years 2017-18, 2018-19 and 2019-20 were beyond the permissible scope of prima facie adjustment under section 143(1)(a), as the underlying issue was highly debatable at the relevant time.

2.10 The Tribunal therefore directed the Assessing Officer to delete the disallowances made under section 36(1)(va) read with section 2(24)(x) / section 43B in all three assessment years, and allowed the assessee's appeals on this ground.

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