Disallowance of employees contribution: SC Decision favoring department not applicable on assessment made u/s 143(1)(a)

This appeal in ITA No.2376/Mum/2022 for A.Y.2019-20 is preferred by the assessee against the order of the Commissioner of Income Tax, National Faceless Appeal Centre, Delhi (NFAC) (Ld.CIT in short), dated 22/07/2022.

Though the assessee has raised several grounds of appeal before us, the only effective issue to be decided in this appeal is as to whether the Ld.CIT(A) was justified in upholding the action of the ADIT-CPC Bangalore in making disallowance of employees contribution to Provident Fund based on the statement made in the Tax Audit Report while processing the return under section 143(1) of the Act.

After hearing the rival submissions and perusing the materials available on record ITAT said that it is not in dispute that assessee had remitted the employees contribution to Provident Fund beyond the due date prescribed under the Provident Fund Act, but had duly remitted the same before the due date of filing the return of income under section 139(1) of the Act. This fact of remittance made by the assessee with delay had been reported by the Tax Auditor in the Tax Audit Report. The copy of the Tax Audit Report is placed on record by the Ld.AR before us together with its annexures. On perusal of the same, we find that the Tax Auditor had merely mentioned the due date for remittance of Provident Fund as per the Provident Fund Act and the actual date of payment made by the assessee. The Tax Auditor had not even contemplated to disallow the employees’ contribution to Provident Fund wherever it is remitted beyond the due date prescribed under the Provident Fund Act. Hence, it is merely recording of facts and a mere statement made by the Tax Auditor in his audit report. The Ld.CPC Bangalore had taken up this data from tax audit report and sought to disallow the same while processing the return under section 143(1) of the Act, apparently by applying the provisions of section 143(1)(a)(iv) of the Act.

For the sake of convenience, the relevant provisions is reproduced hereunder:-

“143(1) Where a return has been made under section 139, or in response to a notice under sub section (1) of section 142, such return shall be processed in the following manner, namely:-

(a) The total income or loss shall be computed after making the following adjustments, namely:-

(iv) disallowance of expenditure (or increase in income) indicated in the audit report but not taken into account in computing the total income in the return.”

From the aforesaid provisions, it is very clear that the said clause (iv) would come into operation when the Tax Auditor had suggested for a disallowance of expense or increase in income, but the same had not been carried out by the assessee while filing the return of income. As stated supra, the tax auditor had not stated in the instant case to disallow Employees Contribution to Provident Fund wherever it is remitted beyond the due date under the respective Act. Hence, in our considered opinion, the said action of the Ld.CPC Bangalore in disallowing the employees’ contribution to Provident Fund while processing the return under section 143(1) of the Act is against the provisions of the Act as it would not fall within the ambit of prima facie adjustments.

Further ITAT was conscious of the fact that the issue on merits is decided against the assessee by the recent decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt Ltd vs CIT reported in 143 taxmann.com 178 (SC) dated 12/10/2022. This decision was rendered in the context where the assessment was framed under section 143(3) of the Act and not under section 143(1)(a).

Hence the tribunal directed the Ld Assessing Officer to delete the addition made in respect of employees’ contribution to Provident Fund, in the facts and circumstances of the instant case.

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