M/S. LUCAS INDIAN SERVICE LTD.,CHENNAI vs. DCIT, CORPORATE CIRCLE-4(1), CHENNAI

The effective grounds raised by the assessee in this appeal in respect of AY 2018-19 are against (i) the disallowance of Rs.7,05,594/- made u/s.36(1)(va) of the Act, wherein the AO merely adopted the adjustment made in the intimation issued u/s.143(1) of the Act in the assessment order passed u/s.143(3) of the Act dated 13.02.2021; and (ii) the disallowance of Rs.26,42,435/- made u/s.14A read with Rule 8D of the Income-tax Rules, 1962,(in short “the Rules”) without appreciating the suo motu disallowance made by the assessee.

The brief facts of the case emanating from the records are that the assessee is a company filed its return of income for AY 2018-19 on 31.10.2018 declaring gross total income of Rs.26,44,57,580/-. The return filed by the assessee was processed by the Central Processing Centre, Bengaluru (the CPC) and an intimation u/s.143(1) of the Act was issued on 12.11.2019, wherein an amount of Rs.7,05,594/- was disallowed u/s.36(1)(va) of the Act in respect of employees’ contribution towards PF/ESI and the gross total income was determined at Rs. 26,51,63,170/-.

Subsequently, the return of income was also selected for compulsory scrutiny under the E-Assessment Scheme, 2019 and notice u/s.143(2) of the Act was issued on 22.09.2019. The scrutiny proceedings were thereafter completed and the AO passed an order u/s.143(3) of the Act dated 13.02.2021. In the said assessment order, the AO adopted the gross total income of Rs.26,51,63,170/- as determined in the intimation issued

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). The Ld.CIT(A), vide order dated 10.12.2025, dismissed the appeal and upheld the order passed by the AO. With regards to the disallowance made u/s.36(1)(va) of the Act, the Ld.CIT(A) relied upon the judgment of the Hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd. v. CIT [2022] 448 ITR 518 (SC), wherein it was held that employees’ contribution towards PF/ESI is allowable as deduction only where the same is deposited within the due dates prescribed under the respective legislations and also upheld the disallowance made u/s.14A of the Act by the AO.

Aggrieved, the Assessee has filed the present appeal challenging the disallowance u/s.36(1)(va) and 14A of the Act in respect of AY 2018- 19.

Mr.S.P.Chidambaram, Ld.AR for the Assessee submitted that the issue before the Tribunal is not merely the ultimate allowability of the employees’ contribution u/s.36(1)(va) of the Act, but the legality of the adjustment made u/s.143(1) of the Act. The Ld.AR submitted that the scope of an intimation issued u/s.143(1)(a) of the Act is limited to making

He further contended that, at the relevant point of time when the intimation u/s.143(1)(a) of the Act was issued, the aforesaid issue was pending consideration before the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. (supra) and there were divergent judicial views on the allowability of employees’ contribution deposited beyond the due dates prescribed under the respective welfare legislations but before the due date prescribed u/s.139(1) of the Act. In particular, the jurisdictional High Court, in CIT v. Industrial Security & Intelligence India Pvt. Ltd., TCA Nos. 585 & 586 of 2015, dated 24.07.2015, had taken a view favourable to the Assessee. Accordingly, the claim could not, at the relevant point of time, have been regarded as an incorrect claim apparent from the information contained in the return so as to warrant an adjustment u/s.143(1)(a) of the Act.

The Ld.AR submitted that it was only subsequently, on 12.10.2022, that the Hon’ble Supreme Court, in Checkmate Services Pvt. Ltd. (supra), settled the issue by holding that employees’ contribution towards PF and

The Ld.AR also placed reliance upon the recent decision of the Hon’ble Chhattisgarh High Court in Raj Kumar Bothra v. DCIT, TAXC No.56 of 2025 dated 08.05.2025, wherein, in materially similar circumstances, the Hon’ble High Court held that where the issue relating to employees’ contribution towards PF/ESI was highly debatable on the date of issuance of the intimation u/s.143(1)(a), the AO ought not to have resorted to the provisions of section 143(1)(a) of the Act. The Ld. AR also placed reliance upon another decision of the Hon’ble Chhattisgarh High Court in Harsiddhi Infra Developers Private Limited vs. Assistant Commissioner Of Income Tax [TAXC No. 152 of 2025], wherein similar principle was laid down.

The Ld.AR further submitted that the assessment order passed u/s.143(3) did not independently examine or adjudicate upon the disallowance of Rs.7,05,594/-. According to the Ld.AR, the AO merely adopted the income determined in the intimation u/s.143(1) of the Act, including the impugned disallowance. Therefore, the disallowance originated from the intimation u/s.143(1) of the Act and got incorporated

On the issue of maintainability, the Ld. AR submitted that since the AO has adopted the total income from the intimation, the adjustment continues to be retained in the assessment order passed u/s.143(3) and as such the assessee is entitled to challenge the same in the present appeal. Reliance in this regard was placed on the decision of the Lucknow ITAT in matter of Paliwal Diagnostics (P.) Ltd. v. DCIT, ITA No.684/Lkw/2025 and decision of the Delhi ITAT in Imperial Auto Industries Ltd. v. DCIT, ITA No.3927/Del/2023.

The Ld. AR also relied upon the judgments of the Hon’ble Gujarat High Court in Patel & Co. v. CIT [1986] 24 Taxman 203 (Guj.) and the Hon’ble Bombay High Court in Hansa Agencies v. CIT [1980] 121 ITR 147 (Bom.), to contend that the right of appeal should be construed liberally and that a technical objection regarding the filing of a separate appeal ought not to defeat the substantive right of the assessee to challenge the resultant tax liability. The Ld.AR also argued that since the ld.CIT(A) has adjudicated the issue, this Tribunal may also adjudicate the said issue.

The Ld. Departmental Representative (ld.DR), on the other hand, relied on the orders of the lower authorities and submitted that the issue relating to allowability of employees’ contribution u/s.36(1)(va) of the Act now stands settled by the judgment of the Hon’ble Supreme Court in Checkmate Services (P.) Ltd. (supra). It was therefore submitted that the disallowance was correctly sustained by the Ld.CIT(A).

We have heard the rival contentions and perused the material on record. The undisputed facts are that the assessee filed its return of income on 31.10.2018, which was processed u/s.143(1) of the Act and an adjustment of Rs.7,05,594/- was made towards employees’ contribution to PF/ESI u/s.36(1)(va) of the Act. Thereafter, the case was selected for scrutiny, and the AO passed an order u/s.143(3) of the Act dated 13.02.2021. From the assessment order placed before us, we find that the AO merely adopted the income determined in the intimation u/s.143(1) and there was no independent examination or adjudication of the impugned disallowance.

An extract of the assessment order passed by the AO is reproduced as below:

The first issue which arises for our consideration is whether we can adjudicate this issue (adjustment made u/s.143(1) by CPC, which was merely copied by AO in the assessment order), which as such is not emanating from the underlying assessment order. We find that since the AO has reckoned the total income determined in the intimation as the

The Co-ordinate Bench of the Tribunal in Paliwal Diagnostics (P.) Ltd. (supra), on materially similar facts, has held that even where the assessee had not preferred a separate appeal against an intimation u/s.143(1), it was open to the assessee to challenge the adjustment in an appeal against the subsequent assessment order u/s.143(3) of the Act, where the adjustment was retained in the assessment order. The relevant extract is as under:

We also find support from the principles laid down by the Hon’ble Gujarat High Court in Patel & Co. (supra). The relevant extract is under:

Similarly, the Hon’ble Bombay High Court in Hansa Agencies (supra), wherein it has been held as under:

Both the above decisions have categorically emphasized that the right of appeal conferred by the statute has to be construed liberally and that a purely procedural or technical objection should not defeat the substantive right of an assessee to challenge an order resulting in tax liability. Thus, the assessee cannot be denied the right to challenge the resultant addition merely on the ground that a separate appeal was not filed against the earlier intimation u/s.143(1) of the Act.

The next question which needs to be decided is when an addition made in an intimation is adopted in the scrutiny assessment order and thereafter an appeal is preferred against the scrutiny assessment order, whether it has to be construed as an addition forming part of scrutiny assessment order or should it still be construed as an addition made in the intimation. The AO has not adjudicated or given any independent finding in the assessment order which could be said to constitute a fresh adjudication of the issue u/s.36(1)(va) of the Act. However, the AO has reckoned the total income determined in the intimation u/s.143(1) of the Act as the starting point for making additions/disallowances as per assessment order. Though the intimation is subsumed in the assessment order, it does not take away the right of the parties to challenge the validity of such intimation.

Therefore, we are of the view that the addition should be construed to be made only in the intimation, and the validity of such addition could be challenged from all legal aspects including jurisdictional aspect of making such addition in an intimation in respect of an issue which is debatable. Furthermore, in our above discussions, on the basis of judicial precedents cited supra, we have concluded that though separate appeal is not filed against intimation u/s.143(1) of the Act, the same could be challenged in an appeal against order u/s.143(3) of the Act, which impliedly means that in case an appeal has been against intimation u/s.143(1) of the Act, the Assessee would be in a position to challenge the jurisdictional aspect as well the merits of the addition made in such intimation. Therefore, even in the present appeal, the Assessee would be able to challenge the validity of such intimation as well as the addition made thereunder. We make it clear that what is dispensed with is only filing of separate appeal and

Having decided that the Assessee can challenge the jurisdictional validity of Section 143(1) of the Act, we now turn to said issue i.e. whether the disallowance could be made by way of adjustment while issuing an intimation u/s.143(1) of the Act.

The Hon’ble Supreme Court in Kvaverner John Brown Engg. (India) Pvt. Ltd. (supra) has held that where conflicting judicial views existed on an issue of interpretation, a prima facie adjustment u/s.143(1)(a) was not permissible and observed as under:-

In the present case, on the date of issuance of the intimation u/s.143(1), i.e. 12.11.2019, the issue relating to allowability of employees’ contribution towards PF/ESI deposited after the due date prescribed under the respective welfare legislations but before the due date for filing the return u/s.139(1) was undoubtedly a contentious and debatable issue. At

It is true that the Hon’ble Supreme Court subsequently, in Checkmate Services (P.) Ltd. v. CIT [2022] 448 ITR 518 (SC), settled the controversy by holding that employees’ contribution is allowable as deduction only where the same is deposited within the due date prescribed under the relevant welfare legislation. However, the subsequent declaration of law by the Hon’ble Supreme Court does not alter the character of the issue as a debatable issue on the date on which the intimation u/s.143(1) was issued.

We find that the aforesaid proposition has been authoritatively considered by the Hon’ble Chhattisgarh High Court in Raj Kumar Bothra (supra). The relevant observation of the Hon’ble High court is reproduced as below:

In that case also, the assessee’s employees’ contribution towards PF/ESI had been disallowed while processing the return u/s.143(1)(a), at the point of time, when the issue was pending consideration before the Hon’ble Supreme Court in Checkmate Services (supra). The Hon’ble Chhattisgarh High Court in Raj Kumar Bothra, after considering the decisions of the Hon’ble Supreme Court in Kvaverner John Brown Engg. (India) Pvt. Ltd. (supra) and Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra), held that the AO ought not to have resorted to section 143(1)(a) when the issue was highly debatable. The Hon’ble High Court specifically observed that the power u/s.143(1)(a) is summary in nature and is designed to make adjustments which are apparent from the return, whereas the proceedings u/s.143(3) are intended to scrutinise the return and undertake a deeper examination for arriving at the correct determination of liability. The Hon’ble High Court consequently set aside the prima facie disallowance

We find that the facts of the present case are materially similar. In the present case also, on the date of issuance of the intimation u/s.143(1), the issue was not free from controversy. Therefore, the impugned adjustment could not have been made merely by treating the claim as an incorrect claim apparent from the information contained in the return. We also find merit in the contention of the assessee that the subsequent order passed u/s.143(3) does not cure the defect in the original adjustment, as the assessment order dated 13.02.2021 does not contain any independent examination, discussion or finding with regard to the applicability of section 36(1)(va) or the allowability of the sum of Rs.7,05,594/-. The AO has merely adopted the income determined in the intimation issued u/s.143(1).

In other words, the assessment order u/s.143(3) of the Act has not independently determined the disallowance u/s.36(1)(va) of the Act. The disallowance continued to have its origin in the adjustment made u/s.143(1) of the Act and was merely incorporated into the computation forming part of the assessment order. Further, the ld.CIT(A) has also adjudicated this issue on merits by relying on the Supreme Court decision in the case of Checkmate Services (supra).

Accordingly, considering the totality of the facts and circumstances of the case and respectfully following the ratio laid down by the Hon’ble Supreme Court in Kvaverner John Brown Engg. (India) Pvt. Ltd. (supra) and Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra), as well as the decision of the Hon’ble Chhattisgarh High Court in Raj Kumar Bothra (supra), we

In view of the above discussion, the disallowance of Rs.7,05,594/- made u/s.36(1)(va) of the Act is hereby deleted. The AO is directed to delete the said disallowance from the assessed income.

The Ld.AR submits that the AO has made a disallowance of Rs.26,42,435/- for AY 2018-19 u/s.14A of the Act read with Rule 8D of the Rules, over and above the suo motu disallowance made by the assessee in its return of income.

It is submitted that during AY 2018-19, the assessee earned exempt dividend income of Rs.6,31,88,048/- and having regard to the exempt income earned, had suo motu disallowed a sum of Rs.14,22,000/- u/s.14A of the Act. It is further submitted that the exempt income only consists of dividend income, which were earned from equity investments made in India Nippon Electricals Ltd (dividend income of Rs.6,22,63,992/-) and Delphi TVS Technologies Limited (dividend income of Rs.9,24,056/-).

The Ld. AR would further submit that, the AO has erred in computing the disallowance under Rule 8D(2)(iii) by considering the total investments of the assessee, instead of restricting the computation to investments which had actually yielded exempt income during the relevant previous year. In support of the above contention, the ld.AR would also

He would submit that the aforesaid decision is directly applicable to the facts of the present case, since the AO has similarly included investments which did not yield any exempt income during the relevant previous year while computing the disallowance under Rule 8D(2)(iii). In the present case, the exempt income primarily comprises dividend income earned from investments made in India Nippon Electricals Ltd. and Delphi TVS Technologies Ltd., whereas the investments in preference shares and other investments which did not yield any dividend income during the relevant previous year have also been considered by the AO for the purposes of computing the disallowance.

He further submits that a revised computation, restricting the investments considered for the purposes of Rule 8D to those investments which had actually yielded exempt income during the relevant previous year, has been furnished before the Tribunal. On such revised computation, the total disallowance for AY 2018-19 that could be computed u/s.14A read with Rule 8D works out to Rs.11,37,552/-.

The Ld. AR would finally submit that the amount of Rs.11,37,552/- so computed, even on the basis of the revised computation furnished before the Tribunal, is lower than the sum of Rs.14,22,000/- which had

The Ld.AR would further submit that in assessee’s own case, the coordinate bench of the Chennai Tribunal, in ITA Nos.2684 to 2687/Mds/2016 vide its order dated 23.03.2017, had considered the disallowance u/s.14A of the Act and had held that investment in equity shares of subsidiary companies were made out of interest free funds for strategic purposes and therefore provisions of section 14A could not be invoked on such investments. The Ld.AR, however, fairly admitted that the aforesaid decision was rendered prior to the decision of the Hon’ble Supreme court in the case of Maxopp Investments Ltd. v. CIT [2018] 91 taxmann.com 154 (SC). Accordingly, notwithstanding the favorable decision rendered by the co-ordinate bench in the assessee’s own case, in view of the subsequent judicial precedents of higher forums, the Ld.AR did not seriously insist that earlier order of this Tribunal in Assessee’s own case should be followed.

We have heard the rival submissions and perused the materials available on record and gone through the orders along with the judicial precedents relied on. The AO has made a disallowance of Rs.26,42,435/-

We find that the aforesaid decision of Mumbai Bench of the Tribunal in Geecee Ventures Ltd. v. DCIT (Supra), wherein the Tribunal, following the decision of the Special Bench in ACIT v. Vireet Investment (P.) Ltd. (Supra) is squarely applicable to the facts of the present case. The assessee has furnished before us a revised computation of disallowance u/s.14A read with Rule 8D of the Rules by taking into consideration only those investments which have actually yielded exempt income during the relevant previous year. The exempt income earned by the assessee during the year primarily comprises dividend income from investments in India Nippon Electricals Ltd. and Delphi TVS Technologies Ltd. On considering only such investments which have yielded exempt income, the disallowance u/s.14A of the Act read with Rule 8D of the Rules has been worked out at Rs.11,37,552/- for the A.Y. 2018-19.

We note that the aforesaid amount of Rs.11,37,552/- is lower than the suo motu disallowance of Rs.14,22,000/- which has already been made by the assessee in its return of income. Therefore, even if the computation under Rule 8D is undertaken by considering only the investments which have yielded exempt income during the relevant previous year, the amount so computed does not result in any further disallowance over and above the amount already disallowed by the assessee.

In these circumstances, we are of the considered view that the disallowance made by the AO cannot be sustained. We also note that this

In the result, the appeal filed by the assessee is allowed.

In respect of AY 2020-21, the effective grounds raised by the assessee in this appeal are against (i) the disallowance of Rs.19,21,870/- made u/s.14A of the Act read with Rule 8D of the Rules, which was made without appreciating the suo motu disallowance made by the assessee and (ii) the disallowance of Rs.2,70,800/- made to Arms Forces Fund and CRPF Fund which are allowable as deduction u/s.80G of the Act.

The Ld.AR submits that the AO has made disallowance of Rs.19,21,870/- u/s.14A of the Act read with Rule 8D of the Rules, over and above the suo motu disallowance made by the assessee in its return of income. It is submitted that the assessee earned exempt dividend income of Rs.11,90,55,681/- and accordingly had suo-moto disallowed a sum of Rs.28,55,000/- u/s.14A of the Act. It primarily consists of dividend income

He further submits that a revised computation, restricting the investments considered for the purposes of Rule 8D to those investments which had actually yielded exempt income during the relevant previous year, has been furnished before the Tribunal. On such revised computation, the total disallowance that could be computed u/s.14A of the Act read with Rule 8D works out to Rs.18,20,602/-.

The Ld.AR would finally submit that the amount of Rs.18,20,602/- so computed, even on the basis of the revised computation furnished before the Tribunal, is lower than the sum of Rs.28,55,000/- which had already been suo motu disallowed by the assessee in its return of income. Therefore, according to him, even assuming that the provisions of Rule 8D are applicable and the disallowance is required to be computed thereunder, no further disallowance can be sustained in the hands of the assessee, since the amount already disallowed by the assessee exceeds the amount otherwise computable under Rule 8D. He accordingly submits that the disallowance of Rs.19,21,870/- made by the AO u/s.14A of the Act deserves to be deleted.

We have heard the contentions and perused the materials available on record. We find that the issue relating to disallowance u/s.14A of the Act is factually and principally similar to the issue considered by us in Assessee’s own case for AY 2018-19 as above. Hence, as held by us in

Based on the revised computation shared with us for AY 2020-21, the disallowance computed by the assessee by considering only those investments which have yielded exempt income during the relevant previous year amounts to Rs.18,20,602/- which is lower than the suo-moto disallowance of Rs.28,55,000/- made by the assessee in its return of income. Accordingly, no further disallowance over and above the amount disallowed by the assessee is warranted. We, therefore direct the AO to delete the disallowance made u/s.14A of the Act. Accordingly, the ground raised by the assessee is allowed.

The ld.AR submits that the assessee has claimed deduction u/s.80G of the Act in respect of contributions amounting to Rs.10,000/- towards the Armed Forces Fund and Rs.2,60,800/- towards the Central Reserve Police Force (CRPF) and accordingly had submitted the relevant payment evidence, in support of the aforesaid contributions before the AO during the course of assessment proceedings.

We find that the issue involves verification of the factual details and genuineness of the payments on the basis of supporting donation receipts furnished by the Assessee. Accordingly, in interest of justice, we deem it appropriate to restore this issue to the file of the Jurisdictional AO for the

In the result the appeal of the assessee is partly allowed for statistical purposes.