The Income Tax Appellate Tribunal held that the Central Processing Centre could not disallow delayed employee contributions to PF and ESI for assessment year 2019-20, as the issue was still debatable at the time of the intimation and the Supreme Court’s later decision was not retrospectively applicable. The order directs deletion of the addition and sets a precedent for handling similar adjustments.
Background & Facts
The Dispute
The appellant, Kanthi Agency Networks, a partnership firm engaged in manpower supply services, filed its return of income for AY 2019-20 on 31.10.2019 declaring total income of Rs 5,97,780/-. The Assessing Officer (AO) processed the return and issued an intimation under section 143(1) on 10.04.2020, determining total income of Rs 42,40,310/- and raising a demand of Rs 5,89,018/-. The AO disallowed the employee’s share of Provident Fund (PF) and Employee State Insurance (ESI) contributions, adding Rs 36,42,529/- to the income.
Key Facts
- 31.10.2019: Return of income for AY 2019-20 filed, total income Rs 5,97,780/-.
- 10.04.2020: AO issued intimation u/s 143(1), total income Rs 42,40,310/-, demand Rs 5,89,018/-. Disallowed employee PF/ESI contributions, addition Rs 36,42,529/-.
- 12.10.2022: Supreme Court judgment in Checkmate Services Pvt. Ltd. v. Commissioner of Income Tax-11 held that deduction is not allowable if employee contribution is not paid within the due date.
- 08.05.2025: Chhattisgarh High Court decision (Case No.TAXC 56 of 2025) supporting the assessee’s position.
- 09.12.2025: ITAT Bangalore coordinate bench in Shri Chandrakant Shamappa Kontha v. DCIT (ITA Nos.2396 & 2397) allowed the appeal on similar facts.
- 08.11.2025: Order of the Ld. Additional/Jurisdictional Commissioner of Income Tax (Addl./JCIT(A)), Ranchi, dismissed the appeal for non-prosecution.
- 04.06.2026: Date of hearing before the ITAT, Bangalore Bench.
- 17.08.2026: Date of pronouncement of the present order.
Procedural History
- 31.10.2019: Return filed.
- 10.04.2020: AO intimation under s.143(1).
- (Date not specified): Appeal filed before Ld. Addl./JCIT(A), Ranchi.
- 08.11.2025: Ld. Addl./JCIT(A) order dismissing appeal for non-prosecution.
- 04.06.2026: Hearing before ITAT, Bangalore.
- 17.08.2026: ITAT judgment allowing the appeal.
Parties' Positions
- Appellant (Kanthi Agency Networks): Contended that at the time of the 2020 intimation the law was debatable; Karnataka High Court had ruled in favour of the assessee; therefore the CPC could not adjust income under s.143(1)(a). Relied on Checkmate Services (2022), CIT v. Premkumar Arjundas Luthra (2017), Chhattisgarh HC (2025) and ITAT coordinate bench (2025).
- Respondent (Commissioner of Income Tax): Argued that the Supreme Court decision is retrospective and thus the disallowance was proper; the CPC has authority to make adjustments under s.143(1)(a); employee contributions are not covered by section 43B and therefore should be added.
Relief Sought
The appellant sought deletion of the addition of Rs 36,42,529/- made under s.143(1)(a) for AY 2019-20 (and similarly for AY 2020-21), and a declaration that the adjustment was not permissible.
The Legal Issue
Whether the Central Processing Centre could validly disallow delayed employee contributions to Provident Fund and Employee State Insurance under section 143(1)(a) of the Income Tax Act, 1961 for assessment year 2019-20, given that at the time of the intimation the legal position was still debatable and the Supreme Court’s later judgment was not expressly prospective.
Arguments Presented
For the Appellant
- Asserted that the issue of deductibility of delayed employee contributions was unsettled in 2020; Karnataka High Court had ruled in favour of the assessee, creating a legitimate doubt.
- Cited Checkmate Services Pvt. Ltd. v. Commissioner of Income Tax-11 (2022) to acknowledge the later position but emphasized that the decision was rendered after the intimation.
- Relied on CIT v. Premkumar Arjundas Luthra (2017) and Chhattisgarh HC (2025) to show that the Commissioner of Income Tax (Appeals) cannot dismiss an appeal on “non-prosecution” when the issue is debatable.
- Highlighted the statutory duty under sections 250 and 251 of the Act for the Commissioner of Income Tax (Appeals) to decide on merits.
For the Respondent
- Maintained that Supreme Court decisions are retrospective unless expressly made prospective; therefore the Checkmate Services ruling applied to the 2020 intimation.
- Argued that employee contributions are not covered by section 43B and consequently the CPC could adjust income under s.143(1)(a).
- Submitted that the CPC’s power to make adjustments under s.143(1) is unfettered and that the disallowance was a correct application of the law as it stood.
The Court's Analysis
The Tribunal first examined the legislative scheme of section 143(1)(a), which permits the Assessing Officer to make adjustments based on the audit report. It noted that the provision is intended for undisputed items and that the due-date concept for employee contributions was clarified only by the Finance Act, 2021, effective from 1 April 2021. Consequently, for AY 2019-20 the statutory framework did not expressly bar the addition.
However, the Tribunal emphasized that when a question is debateable, the CPC cannot unilaterally adjust income. It observed that prior to the Supreme Court’s 12 October 2022 judgment, there existed divergent High Court opinions. The Karnataka High Court had consistently held in favour of the assessee, and the ITAT coordinate bench (09 December 2025) had allowed similar appeals. The Tribunal therefore concluded that at the time of the 10 April 2020 intimation the issue was still open, rendering the CPC’s adjustment ultra vires.
"the CPC has no power to tinker with the income relating to the debatable issue while passing intimation u/s 143(1) of the Act."
The Tribunal also addressed the retrospective effect of Supreme Court decisions. It reiterated that a Supreme Court judgment is retrospective unless it expressly states otherwise. Since Checkmate Services did not contain a prospective clause, its effect would be retrospective, but the Tribunal held that retrospective operation cannot cure a pre-existing adjustment made on a debatable issue. Hence, the adjustment made before the Supreme Court’s pronouncement must be set aside.
Finally, the Tribunal applied the principle that the Commissioner of Income Tax (Appeals) must dispose of appeals on merits under sections 250 and 251. The dismissal for “non-prosecution” by the Ld. Addl./JCIT(A) was therefore contrary to law and was set aside.
The Verdict
The appeal is allowed. The Assessing Officer is directed to delete the addition of Rs 36,42,529/- made under section 143(1)(a) for assessment year 2019-20 (and the analogous addition for AY 2020-21). All other issues are dismissed as academic. The order of the Ld. Addl./JCIT(A) dated 08 November 2025 is set aside.
What This Means For Similar Cases
Debatable Issues Require High Court Guidance
- When a statutory provision is unsettled, the CPC must await a definitive High Court ruling before making adjustments under s.143(1)(a).
- Practitioners should cite the controlling High Court decision prevailing at the time of the intimation.
Supreme Court Decisions Are Not Automatically Prospective
- A Supreme Court judgment is retrospective unless it expressly states prospective operation.
- However, retrospective effect cannot validate an adjustment made on a debateable issue before the judgment.
Section 143(1) Adjustments Must Align With Legislative Amendments
- The Finance Act, 2021 clarified the definition of “due date” for employee contributions, effective from AY 2021-22.
- Adjustments for earlier years must be based on the law as it stood at that time; post-2021 amendments cannot be applied retroactively.
Practical takeaways
- Verify the status of High Court jurisprudence on the issue at the date of the AO’s intimation.
- If the issue was debatable, argue that the CPC lacks authority to adjust income.
- Cite the specific statutory provisions (s.143(1), s.36(1)(va), s.43B) and relevant Finance Act amendments.
