Delhi High Court Ruling: Woodland (Aero Club) Private Limited Vs ACIT

The treatment of employee contributions towards Provident Fund (PF) and Employee State Insurance (ESI) has been a highly contentious subject in Indian taxation jurisprudence. While the Supreme Court’s landmark judgment in Checkmate Services (P) Ltd. vs Commissioner of Income Tax settled the substantive law regarding the deductibility of late deposits, a procedural question remained: Can such disallowances be made summarily via an intimation under Section 143(1) of the Income Tax Act 1961, or do they require a full scrutiny assessment?

In the recent case of Woodland (Aero Club) Private Limited Vs ACIT, the Delhi High Court has decisively ruled on this matter. The Court held that adjustments regarding late deposits of employee contributions are permissible under Section 143(1)(a), even if the payments were made before the filing of the Income Tax Return (ITR).

Factual Matrix of the Case

The appellant, a partnership firm operating under the brand name "Woodland," is engaged in the manufacturing, supply, and export of leather products, including garments and shoes. For the Assessment Year (AY) 2019-20, the firm filed its return of income electronically on November 30, 2019.

Following the filing, the Centralized Processing Centre (CPC) issued a notice dated December 17, 2019, under Section 143(1)(a) of the Income Tax Act 1961. The notice proposed adjustments amounting to ₹4,14,22,293/-. These adjustments pertained to the disallowance of deductions claimed for employee contributions towards Provident Fund, ESI, and the Labour Welfare Fund. The rationale provided by the Revenue was that these amounts were deposited after the "due date" prescribed under the respective welfare acts (such as the EPF Act and ESI Act), although they were paid before the due date for filing the ITR under Section 139(1).

The assessee contested these proposed adjustments, arguing that since the payments were made prior to the ITR filing deadline, they should be allowable as per various judicial precedents available at that time. However, the Revenue rejected these contentions and passed an intimation order on May 28, 2020, enhancing the assessee's income by the disputed amount of ₹4,14,22,293/-, thereby disallowing the deduction under Section 36(1)(va).

The primary legal conflict revolved around two main issues:

  1. Substantive Law: Whether employee contributions paid after the statutory due date of the respective fund but before the ITR filing date are deductible.
  2. Procedural Validity: Whether the Assessing Officer (AO) or CPC has the jurisdiction to make such disallowances as "prima facie adjustments" under the limited scope of Section 143(1)(a), or if such issues are "debatable" and thus require a scrutiny notice under Section 143(2).

Arguments by the Assessee

The legal counsel for the assessee presented a robust defense based on the procedural limitations of Section 143(1). The key arguments included: