DELL INTERNATIONAL SERVICES INDIA PRIVATE LIMITED,BANGALORE vs. THE JOINT COMMISSIONER OF INCOME TAX (LTU) AND DCIT, CIRCLE 2(2)(1), BANGALORE

In this appeal, the assessee has raised the following grounds: -

Ground No. 1 is general in nature. Therefore, the same needs no separate adjudication.

Ground No. 2, raised in assessee’s appeal, pertains to disallowance of delayed payment of employees’ contribution towards Provident Fund (“PF”) and Employees’ State Insurance Corporation Scheme (“ESIC”).

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of providing IT- enabled Services and related operations. For the year under consideration, the assessee filed its return of income on 30.11.2011, declaring a total income of Rs. 35.55 crore. The return filed by the assessee was selected for scrutiny and, vide order dated 27.01.2016 passed under section 143(3) r.w.s. 144C(13) of the Act, the scrutiny proceedings were concluded, assessing the total income of the assessee at Rs. 29.94 crore. Pursuant to the order passed under section 263 of the Act, the assessment order was modified, and the total income of the assessee was computed at Rs. 150.45 crore, after disallowing the deduction claimed under section 10AA of the Act. As the assessee noticed certain mistakes in the order passed under section 143(3) r.w.s. 263 of the Act, a rectification application under section 154 of the Act was filed by the assessee on 12.02.2018. During the rectification proceedings, in addition to the mistakes sought to be rectified by the assessee, the Assessing Officer (“AO”) noticed that the assessee had credited the employees’ contributions towards PF and ESIC to the Government's account after the due date prescribed under the respective statutes. After considering the response of the assessee on this aspect, the AO, vide order dated 10.06.2019 passed under section 154 of the Act, inter alia, disallowed the delayed payment of employees’ contribution towards PF and ESIC under section 36(1)(va) r.w.s. 2(24) of the Act and added the same to the total income of the assessee.

In the appeal by the assessee against the rectification order passed under section 154 of the Act, the learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee by placing reliance upon the decision of the Hon’ble Supreme Court in Checkmate Services (P) Ltd. vs. CIT, reported in [2022] 448 ITR 518 (SC). The learned CIT(A) held that though at one stage conflicting decisions of the Hon’ble High Courts existed on the allowability of employees’ contributions deposited after the due date prescribed under the respective statute, the said controversy now stands conclusively settled by the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd.(supra). Thus, the learned CIT(A) held that after the decision of the Hon’ble Supreme Court, this issue no longer remains debatable and the rectification carried out by the AO is in line with the decision of the Hon’ble Supreme Court. Accordingly, the learned CIT(A) upheld the disallowance of Rs. 87,67,420/- made by the AO on account of delayed payment of employees’ contribution towards PF and ESIC under section 36(1)(va) r.w.s. 2(24) of the Act. Being aggrieved, the assessee is in appeal before us.

On the other hand, the learned Departmental Representative (“learned DR”) relied upon the order passed by the lower authorities.

We have considered the submissions of both sides and perused the materials available on record. In the present case, it is evident that the disallowance of delayed payment of employees’ contribution to PF and ESIC after the due date prescribed under the respective statute was neither made by the AO vide order passed under section 143 r.w.s. 144C(13) nor the same was made vide order passed under section 143(3) r.w.s. 263 of the Act. The AO, only while considering the assessee’s rectification application under section 154 of the Act in respect of certain mistakes, which were sought to be rectified by the assessee, suo motu raised the issue of disallowance of delayed payment of employees’ contribution towards PF and ESIC in the proceedings under section 154 of the Act. The primary contention of the assessee is that on the date of passing of the rectification order, i.e. 10.06.2019, the issue of allowability of delayed payment of employees’ contribution towards PF and ESIC was debatable as various Hon’ble High Courts have expressed divergent issues. Accordingly, as per the assessee, on the date of passing of the rectification order, i.e. on 10.06.2019, this issue was debatable. It is further the plea of the assessee that, even though the Hon’ble Supreme Court subsequently settled the controversy vide its decision in Checkmate Services Pvt Ltd. (supra), the same does not support the AO's view in making the impugned disallowance vide order passed under section 154 of the Act.

From the careful perusal of the decision in Checkmate Services Pvt. Ltd. (supra), we find that in paragraphs 11 and 12 of the decision, the Hon’ble Supreme Court has also noted the divergent views of the Hon’ble High Courts on this issue. After considering the submissions of both sides, the Hon’ble Supreme Court, vide its judgment dated 12.10.2022, decided the issue in favour of the Revenue by categorically holding that the delayed payment of employees’ contribution towards PF and ESIC after the due date prescribed under the respective statute shall be taxable under section 2(24) of the Act. Therefore, it is evident that prior to the decision of the Hon’ble Supreme Court on 12.10.2022 this issue was indeed debatable.

Therefore, since on the date of passing of the rectification order, i.e. on 10.06.2019, the issue of allowability of delayed payment of employees’ contribution to PF and ESIC was a debatable issue, we of the considered view that the said rectification order qua this issue clearly falls beyond the ambit of the expression “mistake apparent from the record”. At this stage, it is also worth noting that on the date of passing of the rectification order even the view of the Hon’ble Jurisdictional Karnataka High Court (in Essae Teraoka (P.) Ltd. v. Dy. CIT, reported in [2014] 366 ITR 408) was in favour of the taxpayer, which was subsequently overruled by the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. (supra).

Insofar as the findings of the learned CIT(A) that once the highest court of the land has clarified the scope of section 36(1)(va) of the Act, the disallowance no longer remains debatable, it is pertinent to note that in the present case the rectification order was not passed after the decision of the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. (supra) and the same was in fact passed prior to the aforesaid decision. Thus, we are of the considered view that only after the decision of the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. (supra) can the issue be said to have been conclusively settled. Prior thereto, even the Hon’ble Supreme Court has noted the divergent views taken by different Hon’ble High Courts. In any case, it is now well-settled that the rectification order under section 154 of the Act cannot be made on the basis of subsequent judgment. In this regard, gainful reference can be made to the decision of the Hon’ble Supreme Court in Mepco Industries vs. CIT, reported in (2009) 319 ITR 208 (SC).

Therefore, since on the date of passing of the rectification order under section 154 of the Act, in the instant case, the issue of allowability of delayed payment of employees’ contribution towards PF and ESIC was debatable, we are of the considered view that the AO erred in passing the rectification order on this issue as the same cannot be treated as “mistake apparent from record”. Consequently, the impugned order passed by the learned CIT(A) upholding the disallowance made on this issue vide order passed under section 154 of the Act is set aside. As a result, Ground No. 2 raised in assessee’s appeal is allowed.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 04-Sept-2026.