ITAT Holds Debatable PF/ESI Issue Cannot Be Adjusted Under Section 143(1):

The assessee is Dozco (India) Pvt. Ltd. Who filed its return of income for AY 2020-21 under Section 139(1), declaring total income of Rs 8,82,95,060. The return was subsequently processed under Section 143(1) of the Income Tax Act. While processing the return, the AO determined the income at Rs 35,03,07,107 after making, inter alia, disallowances relating to PF and ESI of Rs 1,39,20,904, contingent liability of Rs 23,29,89,737 and a disallowance under Section 43B of Rs 1,51,00,801. The Section 43B disallowance was subsequently deleted through rectification, whereas the other additions remained.

The assessee challenged the action before the CIT(A). In relation to the PF and ESI issue, the CIT(A) restored the matter to the file of the AO. The assessee contended before the Tribunal that the contributions had been deposited only a few days late under Section 36(1)(va), but were nevertheless deposited within the due date prescribed under Section 139(1). The payment position had also been reported in the tax audit report under Section 44AB.

The Tribunal held that the adjustment could not be sustained for two reasons. First, the issue was debatable and therefore could not be subjected to an adjustment in an intimation issued under Section 143(1). Second, the disallowance had been made before the Supreme Court’s decision in Checkmate Services Case.

The Tribunal set aside the CIT(A)’s order and directed the AO to delete the addition relating to PF and ESI. The Tribunal observed that the amount was merely reported in the tax audit report as a statutory requirement. The CPC had picked up the figure from the tax audit report and added it to the assessee’s income even though the contingent liability was not an actual liability but only an estimate of a liability which might or might not materialise in the future.

Accordingly, the Tribunal set aside the CIT(A)’s order on this issue and directed the AO to delete the Rs 23.29 crore addition.