M/S VARSHA CONSTRUCTION vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE - 1(1)

Facts

The assessee, M/s Varsha Construction, filed its return for Assessment Year 2019-20. The Assessing Officer (AO), through an intimation order dated 3-1-2021 under Section 143(1)(a) of the Income Tax Act, 1961, disallowed a claim of Rs. 4,64,728/- for delayed deposit of employees' share of contribution towards ESI and EPF under Section 36(1)(va). The assessee appealed to the CIT(Appeals), which dismissed the appeal. The Income Tax Appellate Tribunal (ITAT) also dismissed the assessee's further appeal by its order dated 22-1-2025. The assessee then filed an appeal before the High Court, which admitted it on a substantial question of law.

Held

The High Court held that the Assessing Officer committed a grave legal error by processing the return under Section 143(1)(a) of the Act. On the date of the intimation order (3-1-2021), the issue of whether delayed deposit of employees' share of contribution towards ESI and EPF, even if deposited before the due date of filing the return, could be disallowed under Section 36(1)(va) read with Section 2(24)(x) or was subject to Section 43-B, was highly debatable and pending before the Supreme Court in *Checkmate Services Pvt Ltd*. The Supreme Court settled this issue on 12-10-2022. The AO should have resorted to Section 143(3) or Section 147 for such a debatable issue, not Section 143(1)(a), as per the principles laid down in *Kvaverner John Brown Engg. (India) Pvt. Ltd.* and *Rajesh Jhaveri Stock Brokers Pvt. Ltd.*. The Court also noted that the Revenue had withdrawn its appeals against similar ITAT orders in *Satpal Singh Sandhu* and *Parv Buildcon*, indicating a consistent stance that Section 143(1)(a) is not for debatable issues. The ITAT's reliance on *M/s. BPS Infrastructure* was found to be erroneous as that case was decided on limitation. The disallowance made under Section 143(1)(a) was set aside, and the orders of the CIT(Appeals) and ITAT were also set aside. Liberty was granted to the Revenue to proceed in accordance with law. The substantial question of law was answered in favour of the assessee.

Key Issues

1. Whether the CIT(Appeals) and the ITAT were justified in dismissing the appeals, holding that the AO rightly processed the return under Section 143(1)(a) despite the issue regarding the due date for deposit of employees' contribution being debatable at the time of the intimation order, and whether the AO should have resorted to Section 143(3) or Section 147 instead, rendering the finding perverse? (Mixed question of law and fact, concerning Section 143(1)(a), Section 143(3), and Section 147 of the Act). Assessee's contentions: - The issue regarding the claim of deduction under Section 36(1)(va) was highly debatable and pending before the Supreme Court in *Checkmate Services Private Limited* when the intimation order was passed on 3-1-2021. - Section 143(1)(a) only permits prima facie adjustments, not adjustments on highly debatable issues. - Relied on *Kvaverner John Brown Engg. (India) Pvt. Ltd.* and *Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd.*. - The ITAT's reliance on *M/s. BPS Infrastructure v. ITO* was erroneous as that case dealt with limitation and did not involve the substantial question of law here. - The ITAT had previously held in *Satpal Singh Sandhu v. DCIT* and *Parv Buildcon v. DCIT* that Section 143(1)(a) could not be used for summarily disallowing delayed deposits of ESI/EPF contributions on debatable issues. - Revenue had withdrawn appeals against these ITAT orders before the High Court. Revenue's contentions: - The adjustment made for delayed deposit of employees' contribution is within the AO's powers under Section 143(1)(a) for prima facie adjustments. - The issue is settled by the Supreme Court's decision in *Checkmate Services Pvt. Ltd.*.