ITAT Hyderabad Sends Back PF and ESI Disallowance Matter to First Appellate Authority for Fresh Consideration Following Supreme Court Precedent

Case Background and Factual Matrix

CES Limited approached the Income Tax Appellate Tribunal, Hyderabad Bench, challenging the directive issued on 07.03.2025 by the Addl./JCIT(A)-1, Kolkata. The original assessment arose from processing conducted by the Centralized Processing Centre under section 143(1) of the Income Tax Act, 1961 for the fiscal year 2018-19.

The core controversy revolved around a disallowance amounting to ₹79,83,715 pertaining to statutory employee welfare contributions comprising Provident Fund and Employees' State Insurance scheme deposits.

The assessee's primary submission centered on the timing of the disputed payments. The company maintained that all challenged contributions were remitted prior to the deadline prescribed under section 139 for submission of the return of income. Consequently, the assessee argued for admissibility under the combined provisions of section 36(1)(va) read with section 43B of the Act.

Additionally, the assessee raised procedural objections regarding the processing methodology adopted by the revenue authorities. The company highlighted that despite the issuance of a notice under section 143(2), the return was subjected to processing under section 143(1). The assessee invoked CBDT Instruction No.1/2015 which addresses the operational scope of section 143(1D) in such circumstances.

Grounds of Appeal Presented

The appellant presented multiple grounds challenging the first appellate authority's order:

  • The order dated 07.03.2025 passed under section 250 of the Act contained factual and legal errors detrimental to the appellant's interests
  • Disallowance of ₹79,83,715 regarding Provident Fund and ESI was unjustified given that payments were completed before the return filing due date under section 139
  • The appellate commissioner failed to properly appreciate that the disputed amount qualified for deduction under section 36(1)(va)
  • Insufficient consideration was given to the fact that all PF and ESI remittances were completed within statutorily prescribed timelines
  • The additions were made without proper application of section 36(1)(va) read with section 43B, which permits deduction when payment occurs within the return filing due date
  • Processing of the return on 03-10-2019 was undertaken despite prior issuance of notice under section 143(2) by NFAC-AO on 22-09-2019
  • CBDT Instruction No.1/2015 dated 13th January 2015 was not properly applied, which clarifies that return processing cannot proceed after issuance of notice under section 143(2)

Tribunal Proceedings and Submissions

Assessee's Representative Arguments

During the appellate hearing, the authorized representative for the assessee brought to the Tribunal's attention that an identical controversy had already been adjudicated in a parallel appeal. This earlier appeal challenged the assessment order passed under section 143(3) for the identical assessment year 2018-19.

The representative informed the Bench that through its order dated 21.06.2023 in ITA.No.256/Hyd./2023, the Tribunal had already remanded the substantially similar matter back to the Commissioner of Income Tax (Appeals) for fresh adjudication. Critically, that remand was directed to be undertaken in conformity with the authoritative pronouncement of the Hon'ble Supreme Court in Checkmate Services Pvt. Ltd. vs. CIT (2022) 448 ITR 518 (SC).

Given this precedent in the assessee's own case for the same year, the representative requested similar remand treatment for the present appeal.

Revenue's Position

The Departmental Representative took a straightforward position, acknowledging that the controversy fell squarely within the ambit of the Supreme Court's decision in Checkmate Services Pvt. Ltd.

Tribunal's Analysis and Findings

Review of Earlier Tribunal Order

The Bench conducted a thorough examination of the previous order dated 21.06.2023 in ITA.No.256/Hyd./2023 for assessment year 2018-19. That order contained significant observations and directions regarding:

  1. Scope of Limited Scrutiny: The Assessing Officer conducting limited scrutiny examination under section 143(3) was duty-bound to confine the assessment proceedings strictly to the specified issues identified for scrutiny. Any expansion beyond those parameters required proper authorization from competent authorities for converting limited scrutiny into comprehensive assessment.