2022 (12) TMI 421 - AT - Income Tax

Delay in making the payment towards the employees contribution for the provident fund, under section 36(1)(va) r.w.s. 2(24)(x) - intimation under section 143(1) - HELD THAT - As decided in KALPESH SYNTHETICS PVT LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX, CPC BENGALURU. 2022 (5) TMI 461 - ITAT MUMBAI when the due date under Explanation to Section 36(1)(va) is judicially held to be not decisive for determining the disallowance in the computation of total income, there is no good reason to proceed on the basis that the payments having been made after this due date is indicative of the disallowance of expenditure in question. While preparing the tax audit report, the auditor is expected to report the information as per the provisions of the Act, and the tax auditor has done that, but that information ceases to be relevant because, in terms of the law laid down by Hon ble Courts, which binds all of us as much as the enacted legislation does, the said disallowance does not come into play when the payment is made well before the due date of filing the income tax return under section 139(1). Viewed thus also, the impugned adjustment is vitiated in law, and we must delete the same for this short reason as well. In view of the detailed discussions above, we are of the considered view that the impugned adjustment in the course of processing of return under section 143(1) is vitiated in law, and we delete the same. Assessee appeal allowed.

Summary

Issues Involved:
1. Correctness of the order passed by CIT(A) regarding the processing of income tax returns under section 143(1) of the Income Tax Act, 1961 for assessment years 2018-19 and 2019-20.
2. Disallowance of provident fund dues due to delays in payment.
3. Scope and application of section 143(1) adjustments.
4. Significance and binding nature of tax audit reports.
5. Jurisdictional High Court's binding precedents.
6. Prospective application of amendments to Sections 36(1)(va) and 43B by the Finance Bill 2021.

Issue-wise Detailed Analysis:

1. Correctness of the CIT(A) Order:
The Assessing Officer challenged the CIT(A)'s order dated 26th May 2022 concerning the processing of income tax returns under section 143(1) for assessment years 2018-19 and 2019-20. The CIT(A) had ruled in favor of the assessee, which was contested by the Assessing Officer.

2. Disallowance of Provident Fund Dues:
The disallowance under section 143(1) was based on delays in depositing provident fund dues as reported in the tax audit report under section 44AB(a). The assessee contended that payments made after the due date under the respective statute but before filing the income tax return are deductible. The CIT(A) upheld the disallowance, but the assessee argued that this was contrary to judicial precedents, including those by the jurisdictional High Court.

3. Scope and Application of Section 143(1) Adjustments:
The judgment highlighted the significant changes in the scheme of processing income tax returns under section 143(1) compared to earlier provisions. The current scheme allows for broader adjustments, including disallowance of expenditure indicated in the audit report but not taken into account in computing total income. The Assessing Officer CPC is required to consider the assessee's response to proposed adjustments, making the process interactive and quasi-judicial.

4. Significance and Binding Nature of Tax Audit Reports:
The tax audit report, prepared by an independent auditor, indicated delays in provident fund payments. However, the court emphasized that audit reports are opinions and cannot bind the auditee. Disallowances based solely on audit reports, especially when contrary to judicial precedents, are not justified. The court reiterated that the auditor's observations should not override the correct legal position as determined by higher courts.

5. Jurisdictional High Court's Binding Precedents:
The court emphasized that the law laid down by the jurisdictional High Court is binding. In this case, the jurisdictional High Court had ruled that provident fund payments made before the due date of filing the income tax return are deductible, even if made after the due date under the relevant statute. The Assessing Officer CPC should have adhered to this binding precedent.

6. Prospective Application of Amendments to Sections 36(1)(va) and 43B:
The Finance Bill 2021 introduced explanations to Sections 36(1)(va) and 43B, clarifying that certain provisions do not apply retrospectively. The court agreed with the assessee's contention that these amendments are prospective and do not affect periods before 1st April 2021. Therefore, disallowances based on these amendments for earlier periods are not justified.

Conclusion:
The court concluded that the adjustments under section 143(1) were not justified, as they were contrary to binding judicial precedents and based on audit report observations that did not align with the correct legal position. The CIT(A)'s decision was upheld, and the appeals were dismissed. The judgment emphasized the need for Assessing Officers to provide specific reasons for rejecting objections and adhere to binding judicial precedents.