Debatable ESI/EPF Disallowance Cannot Be Processed Under Section 143(1)(a): Chhattisgarh High Court

Overview of the Judgment

The Chhattisgarh High Court, in the matter of Sanjay Kumar Sharma Vs ITO, delivered a significant ruling concerning the permissible scope of summary adjustments under Section 143(1)(a) of the Income Tax Act, 1961. The Court held that where a legal issue is highly contentious and unresolved at the time of processing the return, the Assessing Officer cannot invoke the summary adjustment mechanism under Section 143(1)(a) to disallow a claim. The judgment pertains to Assessment Year 2020-21 and addresses the disallowance of delayed employees' contributions towards ESI and EPF aggregating to ₹44,46,494/-.

The appeal before the High Court was admitted on 09.04.2025 under Section 260A of the Income Tax Act, 1961, upon formulation of a substantial question of law. The High Court ultimately decided the question in favour of the assessee, setting aside the disallowance and all subsequent orders passed by the lower authorities.

Background and Factual Matrix

Return Filing and Intimation Under Section 143(1)(a)

The assessee filed its return of income for Assessment Year 2020-21. Upon processing the return, the Central Processing Centre, Bengaluru, issued an intimation dated 30.11.2021 under Section 143(1)(a) of the Income Tax Act, 1961. Through this intimation, the deduction claimed by the assessee on account of delayed deposit of employees' share of contribution towards Employees' State Insurance (ESI) and Employees' Provident Fund (EPF) amounting to ₹44,46,494/- under Section 36(1)(va) of the Act was disallowed.

Subsequent Proceedings Before Lower Authorities

Following the disallowance, the assessee filed a rectification application under Section 154 of the Act, which was dismissed on 01.04.2022, thereby confirming the intimation. The assessee then challenged the order before the Commissioner of Income Tax (Appeals) by filing Form No. 35. While the appeal was pending, the Supreme Court delivered its landmark judgment in Checkmate Services Pvt. Ltd. Vs. Commissioner of Income Tax-1 — (2023) 6 SCC 451 on 12.10.2022, conclusively settling the interpretation of Section 36(1)(va).

Despite this, the CIT(A) dismissed the appeal on 31.07.2024. The assessee carried the matter further to the Income Tax Appellate Tribunal, which also dismissed the appeal by order dated 21.10.2024. This led to the filing of the present appeal before the Chhattisgarh High Court under Section 260A of the Income Tax Act, 1961.

Substantial Question of Law Admitted

The High Court admitted the appeal on the following substantial question of law:

"Whether the CIT (Appeals) and the Income Tax Appellate Tribunal are justified in dismissing the appeals holding that the Assessing Officer has rightly processed the return of the appellant herein under Section 143(1)(a) of the Act ignoring the fact that in light of conflicting judgments on the issue of due date the Assessing Officer was required to resort to the provisions contained in Section 143(3)/Section 147 of the Act, by recording a finding which is perverse to the record?"

Arguments Advanced by the Assessee

The assessee's counsel put forth the following key contentions:

  • On 30.11.2021, when the intimation under Section 143(1)(a) was issued, the question of whether employees' contributions deposited after the statutory due dates but before the due date for filing the return could qualify as a deduction under Section 36(1)(va) was pending before the Supreme Court.

  • The issue was characterised by sharp judicial disagreement across various High Courts, making it highly debatable and unfit for summary adjustment.

  • The Supreme Court ultimately resolved the controversy in Checkmate Services Pvt. Ltd. Vs. Commissioner of Income Tax-1 — (2023) 6 SCC 451 on 12.10.2022 — a date well after the intimation was issued.

  • Section 143(1)(a) of the Income Tax Act, 1961 is a summary provision designed only for adjustments that are apparent on the face of the return and does not empower the Assessing Officer to adjudicate debatable legal questions.

  • Reliance was placed on:

    • Kvaverner John Brown Engg. (India) Pvt. Ltd. Vs. Assistant Commissioner of Income Tax — (2008) 305 ITR 103 (SC)
    • Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. — (2008) 14 SCC 208

  • The ITAT decisions in Satpal Singh Sandhu Vs. DCIT — ITA No.04/RPR/2023 and Parv Buildcon Vs. DCIT — [2024] 159 taxmann.com 1574 (Raipur-Trib.) had already held that Section 143(1)(a) could not be resorted to in cases involving highly contentious issues.