2024 (8) TMI 683 - AT - Income Tax

Scope of rectification u/s 154 - disallowance of PF/ESI contributions - whether PF ESI contributions made by employees is an allowable deduction or not ? - submission of the Ld. Counsel that before passing rectification order u/s 154 CPC-Bangluru did not issue any prior notice/intimation granting an opportunity of being heard to the assessee as mandated under sub-section (3) of section 154 HELD THAT - As several opportunities were granted to the Ld. DR to place on record any evidence of issue or prior notice to the assessee before passing 154 order proposing the disallowance u/s 36(1)(va) of the Act - DR could not place any evidence on record to suggest that any prior intimation/notice was given to the assessee proposing to make disallowance u/s 36(1)(va) of the Act before passing rectification order u/s 154 of the Act. We observe that in the case of ACIT Vs. Humboldt Wedag Pvt. Ltd. 2018 (6) TMI 1829 - ITAT DELHI held that it is obligatory under the statute to issue notice by the tax authorities and give a reasonable opportunity of being heard to the assessee and this is clearly set out under 154 of the Act. If this procedure of issuing notice and giving reasonable opportunity of being heard is not followed any further exercise will be nonest and the order itself becomes void ab initio. Thus we hold that the 154 order passed by the CPC was without issuing any prior notice/intimation granting an opportunity of being heard to the assessee and therefore is in violation of the mandate as provided in sub-section (3) of section 154 of the Act. Thus, the rectification order of CPC is bad in law. Diversified views on issue - As observed that as on the date of passing the order u/s 154 there were divergent views on the issue of disallowance u/s 36(1)(va) of the Act which were paid before due date u/s 139(1) of the Act. As on the date of passing rectification order the jurisdictional High Court in the case of CIT Vs. AIMIL Ltd. 2009 (12) TMI 38 - DELHI HIGH COURT was in favour of the assessee, wherein the Hon ble High Court held that the contributions to PF/ESI paid before the due date u/s 139(1) of the Act are allowable as deduction. Therefore, the issue of disallowance u/s 36(1)(va) of the Act stands decided in favour of the assessee as on the date of passing of the rectification order u/s 154 - thus adjustment made by CPC disallowing PF/ESI contributions by way of rectification u/s 154 of the Act cannot be said to be a mistake apparent on record as contemplated u/s 154 - Assessee appeal allowed.

Summary

Issues Involved:
1. Legality of the rectification order passed under Section 154 without prior notice.
2. Scope of Section 154 regarding debatable issues.
3. Disallowance under Section 36(1)(va) concerning PF/ESI contributions paid before the due date under Section 139(1).

Detailed Analysis:

1. Legality of the Rectification Order Passed Under Section 154 Without Prior Notice:

The assessee challenged the rectification order passed by CPC under Section 154, arguing that it was issued without any prior notice or opportunity for a hearing, as mandated by sub-section (3) of Section 154. The Ld. Counsel for the assessee cited the decision in ACIT Vs. Humboldt Wedag Pvt. Ltd. and the recent decision of the High Court of Telangana in Apollo Specialty Hospitals Pvt. Ltd. Vs. DCIT, which emphasized the necessity of issuing a notice and providing a reasonable opportunity of being heard before passing any rectification order that enhances the assessment or increases the liability of the assessee.

The Tribunal observed that the DR could not provide any evidence of prior notice being issued to the assessee before the rectification order was passed. It was noted that the failure to issue such a notice renders the rectification order void ab initio, as established in the cited cases. Consequently, the Tribunal held that the rectification order dated 15/06/2019 was in violation of the mandate of sub-section (3) of Section 154 and thus, was bad in law.

2. Scope of Section 154 Regarding Debatable Issues:

The assessee argued that the disallowance under Section 36(1)(va) was a debatable issue as of the date of the rectification order, and therefore, outside the scope of Section 154. The Ld. Counsel pointed out that various High Courts, including the jurisdictional High Court of Delhi in CIT Vs. AIMIL Ltd., had divergent views on the matter. The Tribunal agreed, noting that the issue was indeed debatable and could not be classified as a "mistake apparent from record" under Section 154. This was supported by several precedents, including ITO vs. M/s Volkart Brothers and CIT Vs. Hero Cycles (P) Ltd., which held that debatable legal issues could not be rectified under Section 154.

3. Disallowance Under Section 36(1)(va) Concerning PF/ESI Contributions Paid Before the Due Date Under Section 139(1):

The assessee contended that the disallowance of Rs. 1,80,95,758/- under Section 36(1)(va) was unjustified, particularly as Rs. 97,54,041/- pertained to employer's contributions to PF/ESI paid within the due date under Section 139(1) and was therefore allowable under Section 43B. The Tribunal observed that as of the date of the rectification order, the jurisdictional High Court's decision in CIT Vs. AIMIL Ltd. was in favor of the assessee, allowing such contributions as deductions. Thus, the disallowance made by CPC could not be deemed a "mistake apparent from record" and was outside the purview of Section 154.

Conclusion:

The Tribunal concluded that the rectification order passed by CPC on 15/06/2019 was void ab initio due to the lack of prior notice and opportunity for a hearing, as required by Section 154(3). Additionally, the issue of disallowance under Section 36(1)(va) was deemed debatable and thus, not subject to rectification under Section 154. Consequently, the appeal was partly allowed, and the additional grounds raised by the assessee were accepted. The order was pronounced in the open court on 09/08/2024.