2026 (4) TMI 179 - AT - Income Tax

Merger of processing and scrutiny assessment depends on the same issue; PF and ESIC disallowance needs contribution-wise verification.

An intimation under section 143(1) does not automatically merge with a later scrutiny assessment under section 143(3); merger applies only where the same ... Intimation order passed u/s 143(3) - automatic merger of the section 143(1) intimation with the section 143(3) assessment - Doctrine of merger - Delayed payment of employees’ contribution to PF & ESIC paid after the due date prescribed under the relevant Acts but before filing of the return of income Intimation u/s 143(1) - Scrutiny assessment u/s 143(3) - Whether or not section 143(1) order would merge with section 143(3) automatically as alleged by the Ld. AR? - HELD THAT: - The Tribunal held that processing u/s 143(1) is confined to prima facie adjustments on the basis of the return, whereas assessment u/s 143(3) is made after examination of evidence on issues taken up in scrutiny. Since the two proceedings operate in distinct fields, merger is not automatic. We place reliance in the decision of Innovsource Services Pvt. Ltd [2025 (1) TMI 1809 - ITAT MUMBAI] where it was held that only where there are common issues in both the 143(1) intimation order and the 143(3) order, the doctrine of merger would be applicable and not in a case where the issues are different The principle of merger can apply only where the issues in the intimation and the scrutiny assessment are common, particularly where the scrutiny proceeds on the income earlier determined in the intimation. As that position was not established, the assessee's contention that the earlier intimation ceased to exist upon passing of the scrutiny assessment was rejected. [Paras 8] The challenge founded on automatic merger of the section 143(1) intimation with the section 143(3) assessment was rejected, and grounds 1 to 4 were dismissed. Employees' contribution to PF and ESIC - Employer's contribution - Admission of additional legal grounds - HELD THAT: - The Tribunal noted that the disallowance made in processing under section 143(1) was based on the tax audit report, while the assessee contended that the reported sum was not confined to employees' contribution but also included employer's contribution, which is governed by a different statutory test. It held that such legal ground deserved admission, and also recognized that in proceedings under section 143(1) there is no effective scope for the assessee to explain the relevant details or for the authority to call for clarification. Since the correctness of the bifurcation required verification, the matter was restored to the Assessing Officer only for examining whether the impugned disallowance related to both employer's and employees' contribution, with liberty to the assessee to furnish supporting material and additional evidence in accordance with law. [Paras 10, 11] The additional grounds were admitted, and the issue was remanded to the Assessing Officer for limited verification of the nature of the contribution and adjudication in accordance with law. Final Conclusion: The Tribunal rejected the contention that the section 143(1) intimation stood superseded by the subsequent scrutiny assessment. It, however, admitted the additional grounds and restored the disallowance issue to the Assessing Officer for limited verification of whether the amount comprised employer's contribution as well as employees' contribution; the appeal was thus partly allowed for statistical purposes. Issues: (i) Whether an intimation under section 143(1) of the Income-tax Act, 1961 automatically merges with a subsequent scrutiny assessment under section 143(3) of the Income-tax Act, 1961 so as to nullify the earlier adjustment. (ii) Whether the disallowance relating to PF and ESIC contributions required verification to determine whether it pertained to employer's contribution under section 43B of the Income-tax Act, 1961 or employees' contribution under section 36(1)(va) of the Income-tax Act, 1961.Issue (i): Whether an intimation under section 143(1) of the Income-tax Act, 1961 automatically merges with a subsequent scrutiny assessment under section 143(3) of the Income-tax Act, 1961 so as to nullify the earlier adjustment.Analysis: The statutory scheme treats processing under section 143(1) of the Income-tax Act, 1961 as a prima facie exercise based on the return and apparent adjustments, whereas assessment under section 143(3) of the Income-tax Act, 1961 is made on scrutiny of evidence and issues selected for examination. Merger is not automatic in every case. It applies only where the same issues arise in both proceedings and the later assessment covers the same matter. On the facts, the challenged adjustment was not shown to have been superseded merely because a scrutiny assessment was also completed.Conclusion: The plea of automatic merger was rejected and the issue was decided against the assessee.Issue (ii): Whether the disallowance relating to PF and ESIC contributions required verification to determine whether it pertained to employer's contribution under section 43B of the Income-tax Act, 1961 or employees' contribution under section 36(1)(va) of the Income-tax Act, 1961.Analysis: The legal position distinguishes employer's contribution, which falls for consideration under section 43B of the Income-tax Act, 1961, from employees' contribution, which is governed by section 36(1)(va) of the Income-tax Act, 1961. The record suggested that the impugned disallowance may have been based on a tax audit reporting error and could include employer's contribution as well. The additional ground was admitted as a pure question of law, and the matter was restored for limited factual verification because the issue could not be conclusively resolved without examining the contribution-wise details.Conclusion: The additional ground was allowed for statistical purposes and the matter was remitted to the Assessing Officer for verification.Final Conclusion: The appeal did not succeed on the merger argument, but the disallowance issue was sent back for limited verification, resulting in only partial relief to the assessee.Ratio Decidendi: An intimation under section 143(1) of the Income-tax Act, 1961 merges with a later scrutiny assessment under section 143(3) of the Income-tax Act, 1961 only where the same issue is common to both proceedings, and a contribution-based disallowance must be examined by distinguishing employer's contribution from employees' contribution before applying the relevant provision.