Disallowance of delayed employee contributions to EPF/ESI U/s 36(1)(va) not valid if made by CPC U/s 143(1)(a) as the issue was debatable at that point of time: Chhattisgarh High Court

 

Here was an interesting issue before Chhatisgrah HC as to whether the disallowance of delayed employee contributions to EPF/ESI under Section 36(1)(va) could be validly made by CPC under Section 143(1)(a), when the issue was debatable and pending before the Supreme Court at the time of processing.

 

Let us have a Short Overview of the case:

 

The case detail is as under:

CHHATTISGARH HIGH COURT:-RAJ KUMAR BOTHRA VERSUS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2 (1) RAIPUR, CHHATTISGARH.

TAXC No. 56 of 2025,Dated: – 8-5-2025

Facts:
Raj Kumar Bothra filed a return for AY 2020–21, declaring income of ₹3.76 Cr and paid ₹1.44 Cr in tax. CPC disallowed ₹28.21 lakhs for delayed employee contributions to EPF/ESI under Section 36(1)(va) through intimation dated 16.12.2021. Appeals before CIT(A) and ITAT failed. The assessee then approached the High Court, arguing that the issue was unsettled at the time and should not have been adjusted under 143(1)(a).

Assessee’s Argument:
The issue was legally debatable at the time of CPC’s action. Conflicting High Court rulings existed and the Supreme Court’s decision in Checkmate Services Pvt. Ltd. v. CIT (2022) came after the intimation. Under settled law, particularly Kvaerner John Brown and Rajesh Jhaveri, 143(1)(a) cannot be used for disallowance on contentious legal questions.
Revenue’s Argument:

Disallowance was valid as the delay was disclosed in the audit report. After the Supreme Court’s ruling in Checkmate, the legal position is clear that late employee contributions are not deductible. The ruling has retrospective effect, as held in Ramesh Prasad Verma, P.V. George, and R.R. Kishore.

High Court’s Findings:
The Court held that on 16.12.2021, the issue was indeed highly debatable. The AO should not have invoked Section 143(1)(a), which is limited to prima facie errors and not designed to resolve legal controversies. Reliance on Checkmate was misplaced for action taken before its pronouncement. The Court also rejected the relevance of the ITAT’s reliance on BPS Infrastructure, as it was a case dismissed on limitation, not law.

Decision:
The High Court set aside the disallowance made under Section 143(1)(a), and the subsequent appellate orders. It held that summary processing cannot be used to decide unsettled legal issues, and that the Revenue could have pursued the matter under Section 143(3) instead. The substantial question of law was answered in favour of the assessee.

The copy of the order is as under:

TAXC No. 56 of 2025 New