The Chhattisgarh High Court has clarified that Assessing Officers cannot make disallowances under Section 143(1)(a) of the Income Tax Act for issues that were legally contentious at the time of processing, even if later settled by the Supreme Court. This ruling reinforces the limited scope of summary adjustments and protects assessees from premature adverse determinations on unsettled legal questions.
Background & Facts
The Dispute
The appellant, M/s Varsha Construction, filed its return of income for Assessment Year 2019-20 declaring a total income of Rs. 1,27,98,874 and paid tax of Rs. 44,72,437. It claimed a deduction of Rs. 4,64,728 under Section 36(1)(va) for delayed deposit of employees' contributions towards Employees' State Insurance (ESI) and Employees Provident Fund (EPF). The Assessing Officer disallowed this claim in an intimation order dated 03.01.2021 issued under Section 143(1)(a), on the ground that the contributions were deposited after the due dates prescribed under the EPF Act, 1952 and ESI Act, 1948.
Key Facts
- The appellant deposited the ESI and EPF contributions after the statutory due dates but before the due date for filing the return under Section 139(1).
- The legal position on whether such delayed deposits qualified for deduction under Section 36(1)(va) was unsettled at the time of the intimation order.
- The appellant disclosed the delayed deposits in Column 20(b) of Form 3CB in its audit report but did not treat them as disallowed expenses.
- The Supreme Court had not yet decided the issue; the matter was pending before it in Checkmate Services Private Limited v. Commissioner of Income Tax.
- The intimation order was issued on 03.01.2021, prior to the Supreme Court’s judgment in Checkmate Services on 12.10.2022.
Procedural History
- 03.01.2021: Intimation order issued under Section 143(1)(a) disallowing Rs. 4,64,728 deduction.
- 10.11.2022: Commissioner of Income Tax (Appeals) dismissed the appeal, upholding the disallowance.
- 22.01.2025: Income Tax Appellate Tribunal (ITAT) dismissed the appeal, relying on M/s BPS Infrastructure v. ITO.
- 16.04.2026: Appeal filed before the Chhattisgarh High Court under Section 260A of the Income Tax Act.
The Parties' Positions
For the Appellant: Argued that the issue of deduction under Section 36(1)(va) was highly debatable on 03.01.2021, with conflicting High Court rulings. Relied on Kvaverner John Brown Engg. (India) Pvt. Ltd. v. Assistant Commissioner of Income Tax and Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. to assert that Section 143(1)(a) permits only prima facie adjustments, not adjudication of legal disputes. Cited ITAT decisions in Satpal Singh Sandhu v. DCIT and Parv Buildcon v. DCIT, both of which had been upheld by the Revenue’s withdrawal of appeals.
For the Respondent: Contended that the disallowance was valid under Section 143(1)(a) as the deposits were made after due dates. Argued that the Supreme Court’s judgment in Checkmate Services had retrospective effect and therefore validated the disallowance. Relied on State of Bihar v. Ramesh Prasad Verma, P.V. George v. State of Kerala, and CBI v. R.R. Kishore to support retrospective application.
Relief Sought
The appellant sought setting aside of the intimation order dated 03.01.2021, the CIT(Appeals) order dated 10.11.2022, and the ITAT order dated 22.01.2025. It requested restoration of the claimed deduction of Rs. 4,64,728 under Section 36(1)(va) and direction to the Revenue to proceed afresh under Section 143(3) or Section 147 if deemed necessary.
The Legal Issue
Can an Assessing Officer disallow a deduction under Section 36(1)(va) of the Income Tax Act through a summary adjustment under Section 143(1)(a) when the legal interpretation of the provision was unsettled and pending before the Supreme Court at the time of the adjustment?
Arguments Presented
For the Appellant
The appellant’s counsel relied on Kvaverner John Brown Engg. (India) Pvt. Ltd. and Rajesh Jhaveri Stock Brokers Pvt. Ltd. to argue that Section 143(1)(a) permits only corrections of arithmetical errors or adjustments apparent from the return itself. Where a legal issue is in dispute, as evidenced by conflicting High Court judgments, the Assessing Officer lacks authority to make a final determination. The issue under Section 36(1)(va) was pending before the Supreme Court on 03.01.2021, and the intimation order was therefore ultra vires. The appellant further highlighted that the Revenue had previously withdrawn appeals against ITAT orders in Satpal Singh Sandhu and Parv Buildcon that reached the same conclusion, estopping it from taking a contrary position.
For the Respondent
The Revenue contended that Section 143(1)(a) empowers the Assessing Officer to make any adjustment apparent from the return, including disallowance of deductions based on non-compliance with statutory due dates. It argued that the Supreme Court’s judgment in Checkmate Services clarified the law retrospectively, validating the disallowance. The Revenue also relied on M/s BPS Infrastructure to assert that the ITAT’s decision was correct, despite the appellant’s argument that the case dealt only with limitation and not the substantive issue.
The Court's Analysis
The Division Bench of the Chhattisgarh High Court undertook a detailed examination of the nature and scope of Section 143(1)(a). It emphasized that this provision is designed for summary processing, limited to adjustments that are apparent on the face of the return or accompanying documents. The Court cited Kvaverner John Brown Engg. and Rajesh Jhaveri Stock Brokers to affirm that the Assessing Officer has no power to adjudicate legal disputes under this provision.
"The Assessing Officer had no authority to make adjustments or adjudicate upon any debatable issues. In other words, the Assessing Officer had no power to go behind the return, accounts or documents, either in allowing or in disallowing deductions, allowance or relief."
The Court noted that on 03.01.2021, when the intimation order was issued, the Supreme Court had not yet resolved the conflict among High Courts on the interpretation of Section 36(1)(va). The Bombay, Delhi, Calcutta, Guwahati, and Himachal Pradesh High Courts had ruled in favor of assessees, while Kerala and Gujarat had sided with the Revenue. This judicial divergence rendered the issue highly debatable.
The Court rejected the Revenue’s reliance on M/s BPS Infrastructure, observing that the case dealt solely with limitation and did not address the substantial question of law now before it. It further held that while the Supreme Court’s judgment in Checkmate Services had retrospective effect, that principle was irrelevant to the question of whether the Assessing Officer could lawfully apply it in a summary proceeding under Section 143(1)(a). The Court clarified that retrospective application of a judgment does not validate an unlawful procedural action taken before the judgment was delivered.
The Court also noted the Revenue’s withdrawal of appeals in Satpal Singh Sandhu and Parv Buildcon, which had held that Section 143(1)(a) could not be invoked for debatable issues. The Court held that the Revenue could not now take a contrary stance without undermining legal certainty.
The Verdict
The appeal was allowed. The intimation order dated 03.01.2021 under Section 143(1)(a) disallowing Rs. 4,64,728 was set aside. The orders of the CIT(Appeals) dated 10.11.2022 and the ITAT dated 22.01.2025 were also set aside. The Revenue is granted liberty to reassess the claim under Section 143(3) or Section 147, if it so desires, in accordance with law. The parties were directed to bear their own costs.
What This Means For Similar Cases
Prima Facie Adjustments Cannot Resolve Legal Ambiguities
- Practitioners must now argue that any disallowance under Section 143(1)(a) based on unsettled legal interpretations is invalid, regardless of the eventual Supreme Court ruling.
- Where conflicting High Court judgments exist, the Assessing Officer must defer to scrutiny proceedings under Section 143(3) or initiate reassessment under Section 147.
- Taxpayers should raise this objection at the first opportunity, even if the final judgment later favors the Revenue.
Revenue’s Withdrawal of Appeals Creates Binding Precedent
- When the Revenue withdraws appeals against favorable ITAT orders on a specific legal point, it cannot later contest the same issue in other cases.
- This principle of consistency prevents forum shopping and promotes uniformity in tax administration.
- Practitioners should cite such withdrawals as estoppel in pending proceedings.
Section 143(1)(a) Is Not a Shortcut for Disallowance
- The provision is not a tool to bypass proper adjudication.
- Any adjustment must be based on clear, unambiguous errors - not on contested interpretations of statutory provisions.
- Audit reports disclosing disputed items without claiming disallowance further strengthen the taxpayer’s position against summary disallowance.
