AO Can’t Use Section 143(1) to Decide Debatable Legal Issues: Delhi HC Raps Revenue, But Denies PF/ESI Relief Citing Supreme Court Verdict

“Section 143(1) is Not Meant for Legal Guesswork—If the Law Wasn't Settled, AO Had No Right to Disallow Claims at Summary Stage,”  In a detailed and nuanced ruling dated September 8, 2025, the Delhi High Court addressed a complex legal battle between Woodland (Aero Club) Pvt. Ltd. and the Assistant Commissioner of Income Tax, revolving around delayed payments to Provident Fund (PF) and Employees' State Insurance (ESI) and the scope of powers under Section 143(1) of the Income Tax Act.

The Court emphatically held that “debatable or arguable issues of law cannot be unilaterally decided by the Assessing Officer (AO) at the time of summary processing of returns under Section 143(1)”, yet refused to provide relief to the assessee on the main ₹4.14 crore disallowance, citing the binding authority of the Supreme Court’s judgment in Checkmate Services Pvt. Ltd. (2022) 6 SCC 451.

The outcome: the Court upheld the disallowance under Section 36(1)(va) for delay in deposit of employee contributions to PF/ESI but allowed the deduction of ₹44.28 lakhs and ₹72,151, which were deposited the day after a national holiday, affirming that statutory compliance cannot be expected on a day banks are shut.

“Summary Assessment Can't Override Binding High Court Precedents Existing at the Time of Filing”: Court Calls Out AO's Overreach

The High Court noted that when the Assessing Officer made the adjustment on May 28, 2020, there existed a “solid wall of binding precedents” from various High Courts—including Vinay Cement, Alom Extrusions, and more than 40 rulings—which allowed such deductions if the amounts were deposited before the due date of filing ITR under Section 139(1).

Justice V. Kameswar Rao observed: “The AO under Section 143(1) of the Act cannot make any adjustment or additions in respect of debatable or arguable matters, especially when binding judgments at the time held the issue in favour of the assessee.”

Yet, the Court ultimately upheld the disallowance, noting that the legal position changed with finality after the Supreme Court’s Checkmate ruling, which clarified that:

“Employees’ contributions must be deposited within the statutory due dates as prescribed under the EPF/ESI Acts, and not merely before filing of return.”

The Court held that the Checkmate Services judgment had interpreted the law independently of Explanation 5 to Section 43B, and applied to all assessment years, including AY 2019–20, making any contrary earlier judgments no longer good law.

“It Is a Legal Fiction That Employer Holds Employee’s Contributions in Trust”: Court Quotes Checkmate to Deny ₹4.14 Crore Deduction

Reiterating the principle laid down in Checkmate Services, the Court stressed:

“Amounts deducted from employees’ salaries are deemed to be income under Section 2(24)(x). These must be deposited on or before the due date specified under the relevant welfare law. Otherwise, no deduction can be claimed.”

The Bench further noted:

“The non obstante clause in Section 43B does not override the express condition in Section 36(1)(va) for timely deposit of employees’ contribution.”

Thus, despite agreeing that AO’s powers under Section 143(1) are narrow and limited, the Court concluded that the ultimate legal interpretation settled by the Supreme Court must prevail, and sustained the ITAT’s decision upholding the disallowance.

“Deposit Delayed Due to National Holiday Is Legally Valid”: Court Allows Deduction for 16 August 2018 Payment Made After Independence Day

The second issue before the Court was whether ₹44.28 lakhs (PF) and ₹72,151 (ESI), deposited by the assessee on 16.08.2018, were liable to be disallowed as the statutory deadline of 15.08.2018 fell on Independence Day, a National Holiday.

Answering in the negative, the Bench ruled:

“Where the due date for making a statutory deposit falls on a public holiday, payment made on the next working day must be treated as compliant.”

The Court referred to Section 10 of the General Clauses Act, 1897, and reiterated its own earlier judgment in Pepsico India Holdings Pvt. Ltd., where it had held:

“Since the due date fell on a date which was a National Holiday, the deposit could have been made by the assessee only on the date which followed.”

Accordingly, this part of the disallowance was reversed, and the deduction was allowed.

The Delhi High Court, in a balanced ruling, rejected the retrospective application argument against the Checkmate judgment, emphasizing that it was a substantive interpretation of the law, not based on a subsequent amendment. The Court firmly held that employees’ contributions deposited after the statutory due date under PF/ESI laws are not deductible, even if paid before filing the return.

At the same time, the Court reined in arbitrary adjustments by the AO under Section 143(1) and provided clarity on payment made after a holiday, marking this decision as a crucial reference point for both tax professionals and employers.

Date of Decision: September 8, 2025