INCOME TAX: Processing of an Income Tax Return – Scope of adjustments under section 143(1)

Under Section 143(1) of the Act, as the same originally stood, an Assessing Officer was required to make a summary assessment by passing an Order of assessment. After the amendment under the Direct Tax Laws (Amendment) Act, 1987 effective from 01.04.1989, the scheme of summary assessment was omitted along with the assessee’s right to object to the summary assessment, and only an Intimation was to be sent without prejudice to Section 143(2) of the Act which authorized the Assessing Officer to scrutinize the return and consider all the claims and pass an Order of assessment under sub-section (3) dealing with the issues involved in the assessment. The amendment carried out warranted an Assessing Officer to accept the return and the information furnished therewith within the scope of the proviso to Section 143(1)(a) of the Act viz., in the nature of obvious corrections and not beyond.

Scope of adjustments to be made under section 143(1)(a)

The scope of adjustments to be made under section 143(1)(a) is limited only to the specified items mentioned therein. Only such errors which are prima facie found from the return, documents accompanying the return can be adjusted as per the provisions of section 143(1)(a) and all those issues which involve prolonged arguments or are debatable in nature fall outside the scope of prima facie adjustments mentioned under section 143(1)(a).

Text of Section 143

^[1][143. Assessment.

^[2][(1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—

(a) the total income or loss shall be computed after making the following adjustments, namely: -

(i) any arithmetical error in the return;^[3][***]

(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;

^[4][(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;

(iv) ^[5][disallowance of expenditure or increase in income indicated] in the audit report but not taken into account in computing the total income in the return;

(v) disallowance of deduction claimed under ^[6][section 10AA or under any of the provisions of Chapter VI-A under the heading “C. - Deductions in respect of certain incomes”, if] the return is furnished beyond the due date specified under sub-section (1) of section 139; or

(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

PROVIDED that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:

PROVIDED FURTHER that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made:

^[7][PROVIDED ALSO that no adjustment shall be made under sub-clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018;]

(b) the tax ^[8][, interest and fee], if any, shall be computed on the basis of the total income computed under clause (a);

(c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax, ^[8][, interest and fee], if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, ^[9][any relief allowable under section 89,] any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax^[8][, interest or fee];

(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

PROVIDED that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax ^[8][, interest or fee] is payable by, or no refund is due to, him:

PROVIDED FURTHER that no intimation under this sub-section shall be sent after the expiry of ^[10][nine months] from the end of the financial year in which the return is made.

Explanation. - For the purposes of this sub-section,

(a) “an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return, -

(i) of an item, which is inconsistent with another entry of the same or some other item in such return;

(ii) in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or

(iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;

(b) the acknowledgement of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a).

^[11][(1A) For the purposes of processing of returns under sub-section (1), the Board may make a scheme for centralised processing of returns with a view to expeditiously determining the tax payable by, or the refund due to, the assessee as required under the said sub-section.

(1B) Save as otherwise expressly provided, for the purpose of giving effect to the scheme made under sub-section (1A), the Central Government may, by notification in the Official Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no direction shall be issued ^[12][after ^[13][the 31st day of March, 2012]].

(1C) Every notification issued under sub-section (1B), along with the scheme made under sub-section (1A), shall, as soon as may be after the notification is issued, be laid before each House of Parliament.

^[14][(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2):

PROVIDED that the provisions of this sub-section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017.]

KEY NOTE

1. Substituted by Direct Tax Laws (Amendment) Act, 1987, with effect from 01.04.1989.

2. Sub sections (1), (1A), (1B) and (1C) substituted for subsections (1) by the Finance Act, 2008, with effect from 01.04.2008.

3. Word “or” omitted by the Finance Act, 2016, with effect from 01.04.2017.

4. Inserted by the Finance Act, 2016, with effect from 01.04.2017.

5. Substituted for the words “disallowance of expenditure indicated” by the Finance Act, 2021, with effect from 01.04.2021.

6. Substituted for the words section 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-IE, if by the Finance Act, 2021, with effect from 01.04.2021.

7. Inserted by the Finance Act, 2018, with effect from 01.04.2008.

8. Substituted for “and interest” by the Finance Act, 2017, with effect from 01.04.2018.

9. Inserted by the Finance (No. 2) Act, 2019, with retrospective effect from 01.04.2007.

10. Substituted for the words “one year” by the Finance Act, 2021, with effect from 01.04.2021.

11. Sub sections (1), (1A), (1B) and (1C) substituted for subsections (1) by the Finance Act, 2008, with effect from 01.04.2008.

12. Substituted after the “31^st day of March, 2010” by the Finance Act, 2010, with retrospective effect from 01.04.2010.

13. Substituted for “31^st day of March, 2011” by the Finance Act, 2011, with retrospective effect from 01.04.2011.

14. Substituted by the Finance Act, 2016, with effect from 01.04.2017.

An incorrect claim, if such incorrect claim is apparent from any information in the return [Section 143(1)(a)(ii)]

Section 143(1)(a)(ii) refers to prima facie adjustment under section 143(1)(a)(ii) (an incorrect claim, if such incorrect claim is apparent from any information in the return

No Adjustment shall be made unless an intimation is given to assessee of such adjustment either in writing or in electronic mode [First proviso to section 143(1)(a)]

A return can be processed under section 143(1) by making adjustments on six types of adjustments only, however, first proviso to section 143(1)(a) makes it very clear that no such adjustment shall be made unless an intimation is given to assessee of such adjustment either in writing or in electronic mode

Clause (i) of Explanation (a) refers to a situation in which there is a claim of income or expenditure at two places in the return of income and there is inconsistency in them. For example, if deduction is claimed under a specific section for a sum of Rs. 100/-in the Profit and loss account accompanying the return, but in the computation of income, the amount has been taken as Rs. 110/-, leading to inconsistency, requiring an adjustment.

Clause (ii) of Explanation (a) covers a situation in which claim is made, say, for a deduction under section 80IA for which audit report is required to be furnished, but such report has not been furnished along with the return.

Clause (iii) contemplates a situation in which deduction exceeds specified statutory limit. For example, section 24(a) provides for a standard deduction for a sum equal to 30% of the annual value, but the assessee has claimed deduction at 40%. These situations warrant an adjustment.

Clause (iv) of section 143(1)(a) which provides for ‘disallowance of expenditure or increase in income indicated in the audit report but not taken into account in computing the total income in the return’. The words “or increase in income” in the above provision were inserted by the Finance Act, 2021 with effect from 01.04.2021.

Meaning of ‘prima facie’

The word prima facie ‘used in clauses (ii) and (iii) means on the face of it’. It is more akin to the purport of the expression error apparent on the face of the record, occurring in Order 47, Rule 1 of the Code of Civil Procedure than the expression mistake apparent from the record, used in section 154 of the Act. The former expression has been held to have a restrictive content as compared to the latter - Kil Kotagiri Tea & Coffee Estates Co. Ltd. v. ITAT (1988) 174 ITR 579, 586 (Ker.) But even for the purpose of Order 47, Rule 1, the Supreme Court held in State of Kerala v. P.K. Syed Akbar Sahib (1988) 173 ITR 1 (SC) that a subsequent binding authority taking a different view of law is a good ground for review because the order sought to be reviewed, passed on an antecedent decision, which stands over-ruled, constitutes an error apparent on the face of the record. With regard to the scope of the expression ‘mistake apparent from the record’ in section 154 of the Act, the Supreme Court held in T.S. Balaram, ITO v. Vollcart Bros. (1971) 82 ITR 50 as under:

“... mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record.” (p. 50)

This shows that when there can be conceivably two opinions on a particular legal issue, the powers under section 154 cannot be exercised. The scope of the prima facie adjustments is practically similar to the mistakes ‘apparent from record’.

Remedy available

The only remedy available to the assessee against an intimation under section143(1)(a) or/and the levy of additional tax under section 143(1A) is to file an application for rectification under section 154 of the Act. Against the order passed under the section, an assessee can file an appeal under section 246.

Section 143(1D) provides that before making an assessment under section 143(3), a return shall be processed under section 143(1) [Section 143(1D)]

Section 143(1D) was brought in the statute from 01.07.2012 which provided that processing of the returns shall not be necessary where a notice under section 143(2) of the Act has been issued. The provisions of section 143(1D) were subsequently amended vide Finance Act, 2016, with effect from 01.04.2017 by inserting a proviso which states that provisions of this sub-section shall, cease to apply to returns furnished for Assessment year 2017-18 and onwards. In other words, Amendment to the said sub-section brought by Finance Act, 2017 provides that with effect from assessment year 2017-18, processing under section 143(1) is to be done before passing of assessment order.

Thus from Assessment year 2017-18, discretion of Assessing Officer in processing returns under scrutiny has been completely removed and therefore, all returns have to be processed as per provisions of section 143(1) of the Act. This is irrespective of the fact whether in cases under scrutiny, the Assessing Officer is contemplating taking recourse under section 241A of the Act to withhold the refund so arising on ground of concern for recovery of revenue. [CBDT Letter No. F. No.225/53/2018/ITA.II], Dated 28.03.2018 (As amended by letter [F. No. 225/53/2018/ITA.II], Dated 16.04.2018)]

CBDT Letter No. F. No.225/53/2018/ITA.II], Dated 28.03.2018

(As amended by letter [F. No. 225/53/2018/ITA.II], Dated 16.04.2018)

Section 143 of the Income-tax Act, 1961 - Assessment - General - Processing of Returns under section 143(1) which are pushed to assessing officers by CPC

Section 143(1D) of the Income-tax Act, 1961 (Act) was brought in the statute from 01.07.2012 which provided that processing of the returns shall not be necessary where a notice under section 143(2) of the Act has been issued. The provisions of section 143(1D) were subsequently amended vide Finance Act, 2017 with effect from 01.04.2017 by inserting a proviso which states that provisions of this sub-section shall, cease to apply to returns furnished for Assessment Year 2017-18 and onwards.

2. Thus from Assessment Year 2017-18, discretion of Assessing Officer in processing returns under scrutiny has been completely removed and therefore, all returns have to be processed as per provisions of section 143(1) of the Act. This is irrespective of the fact whether in cases under scrutiny, the Assessing Officer is contemplating taking recourse under section 241A of the Act to withhold the refund so arising on ground of concern for recovery of revenue.

3. The CBDT has launched software for processing of returns on Income-tax Business Application (ITBA) which has been functioning since 31st October, 2017. The returns pushed to the Assessing Officer for processing by the CPC are required to be processed electronically on the ITBA. However, in exceptional circumstances, whenever returns cannot be processed because of technical difficulties in functioning of ITBA, in order to provide an uninterrupted taxpayer service, the Assessing Officer can also manually process the return that is pushed to them by the CPC with prior administrative approval of Pr. CIT. However, before taking up the return for processing manually, the difficulty being faced in processing the return electronically on ITBA on a case to case basis would be referred to the Pr. DGIT (System,) who shall satisfy himself that due to technical difficulties the return cannot be processed electronically on ITBA within a reasonable period & thereafter, permit manual processing in that case. However, in all such cases, the Assessing Officers have to mandatorily upload the same in the system.

4. To avoid any arbitrariness, the returns of Assessment Year 2017-18 and onwards which are pushed by the CPC to the Assessing Officer for processing, 1[***], shall be handled in a chronological manner.

CBDT Instruction No. 10/2017 [F. No. 225/333/2017-ITA.II], Dated 15.11.2017

Section 143, read with section 119, of the income-tax act, 1961 - Assessment - General - Processing of Income-tax returns filed in forms ITR-2, 3, 4, 5 & 6 under section 143(1) - applicability of section 143(1)(a)(vi)

Sub-clause (vi) of clause (a) of sub-section (1) of section143 of the Income-tax Act, 1961 (‘Act’) as introduced vide Finance Act, 2016, w.e.f. 01.042017, while processing the return of income, prescribes that the total income or loss shall be computed after making adjustment for addition of income appearing in Form 26 AS or Form 16A or Form 16 (the three Forms) which has not been included in computing the total income in the return.

2. In this regard, while processing income-tax returns filed in Forms ITR-2, 3, 4, 5 & 6, doubts have arisen regarding the nature, extent and scope of comparison of information as contained in the return of income with the three Forms which might lead to issuance of intimation proposing adjustments in the returned income. It has also come to notice that some of the information so available in the ITRs is incomparable with information contained in the three Forms. In this backdrop, it has become imperative to lay down suitable guidelines for CPC/AOs so that provisions of section 143(1)(a)(vi) of the Act are invoked only in appropriate cases.

3. After examining the matter, Central Board of Direct Taxes (CBDT), in exercise of its powers undersection 119 of the Act, hereby lays down following guidelines regarding applicability of section143(1)(a)(vi) of the Act while considering returns for processing pertaining to ITR Forms 2, 3, 4, 5 & 6:

3.1 For purposes of section 143(1)(a)(vi) of the Act, only the information so contained in the three Forms specified therein, would be taken into consideration.

3.2 In returns filed in ITR-4 Form, information about a particular head/item of income under the heads ‘Salary’, ‘Income from House Property’, or ‘Income from other sources’ is only on net basis and thus, complete data/information may not be available therein which may enable any comparison with the data/information as contained in the three Forms. Therefore, section 143(1)(a)(vi) shall not be applicable in such instances. However, if the receipts under these heads are completely omitted from the return, then the provisions of section 143(1)(a)(vi) shall be applicable. Further in ITR-4, wherever in the return Form, presumptive income under both Sections 44AD and 44AE is disclosed, it will be difficult to correlate the receipts in the return with the information in the three Forms. Hence, any likely difference in the receipts under these items in the return with the receipts in the three Forms under this scenario would be excluded from the purview of Section 143(l)(a)(vi). Similarly, it will be difficult to correlate the income under Section 44AE in the return with the information in the three Forms. However, where the presumptive income from business either under section 44AD or profession under section 44ADA alone are reported in the return and the gross receipts from presumptive business or profession shown in the return is less than the gross receipts as per the three Forms, intimation proposing adjustment would be issued.

3.3 For returns in Forms ITR-2 & 3, as receipts/income under the heads 'salary' is comparable with information available in the three Forms on a gross basis, provisions of section143(l)(a)(vi) of the Act may be invoked in such cases wherever applicable.

3.4 In ITRs 3, 5 & 6, in respect of income under the heads 'income from house property' or 'income from other sources', there may be difficulties in ascertaining whether the receipt being shown in the three Forms is getting reflected under the head 'income from house property' or 'income from other sources' in the ITR Form or is being treated as business income under the head 'income from business or profession' by the concerned assessee. Under these circumstances, any likely difference in income shown under the head 'income from house property' or 'income from other sources' as contained in ITRs 3, 5 & 6 with the three Forms, being difficult to verify undersection143(1)(a)(vi) of the Act, would be excluded from purview of intimations proposing adjustments. However, there are certain types of income which are only taxable under the head 'income from other sources', in such situations, in case of mismatch at gross level, adjustments u/s 143(1)(a)(vi) of the Act shall be proposed. In respect of income under the head ‘Income from House Property’ being shown in ITR-2, as receipts/income are comparable with information available in the three Forms on a gross basis, provisions of section143(1)(a)(vi) of the Act may be invoked.

3.5 In case of business receipts being taxable under the head 'income from business or profession' which are reported in ITRs 3, 5 & 6 Forms, comparison of such receipts in the three Forms with data in ITR at gross level may not be possible as receipts shown in the three Forms would get subsumed in the consolidated income in P&L A/c. Further, items in the P&L A/C such as commission, interest etc. may be shown at a net basis whereas the details in the three forms are reported on a gross basis. Hence, any likely difference in business receipts as contained in ITRs 3, 5 & 6 with the three Forms is excluded from the purview of intimations proposing adjustments under section 143(1)(a)(vi) of the Act since they may not be comparable.

3.6 In case of income under the head 'capital gains' being shown under any of the ITR Forms i.e. 2, 3, 5 & 6, for purposes of section 143(l)(a)(vi) of the Act, the information of payment, which may span multiple years, being reflected in the three Forms and the information being captured in the ITRs may not be comparable. Therefore, section 143(1)(a)(vi) of the Act shall not be applicable in case of income under the head 'capital gains' being shown under any of the ITR Forms i.e. 2, 3, 5 & 6. However, the credit for tax which is deducted at source and paid to the credit of the Central Government shall be governed by section 199 of the Act read with Rule 37BA of I.T. Rules, 1962. Further, information in the three Forms regarding TDS on immovable property in the case of persons engaged in real estate etc. may be in the nature of business income, such cases being covered under para 3.5 above, section 143(l)(a)(vi) would not be applicable on them.

4. This instruction may be brought to the notice of all concerned.

CBDT Instruction No. 9/2017 [F. NO.225/333/2017-ITA.II], Dated 11.10.2017

Section 143 of The Income-Tax Act, 1961 - Assessment - Prima Facie Adjustments - Processing of Returns in Form ITR-1 Under Section 143(1) - Applicability of Section 143(1)(a)(vi)

Clause (vi) of sub-section (a) of section143(1) of the Income-tax Act, 1961 (‘Act’) as introduced vide Finance Act, 2016, w.e.f. 01.04.2017, while processing the return of income prescribes that the total income or loss shall be computed after making adjustment of addition of income appearing in Form 26AS or Form 16A or Form 16 (the three Forms) which has not been included in computing the total income in the return.

2. In this regard, while processing income-tax returns filed in Form ITR-l, doubts have arisen regarding the nature, extent and scope of comparison of information as contained in the return of income with the three Forms which might lead to issuance of intimation proposing adjustments to the returned income.

3. The matter has been examined by the Central Board of Direct Taxes (the Board). In returns filed in ITR-1 Form, information about a particular head/item of income is only on net basis and thus, complete data/information may not be available therein which may enable comparison with the data/information as contained in the three Forms in a meaningful manner. Therefore, in exercise of its powers undersection 119 of the Act, the Board hereby directs that provision of section143(1)(a)(vi) of the Act would not be invoked to issue intimation proposing adjustment to the income/loss so filed in ITR-1 Form in such situations.

4. However, where any head/item of income has been altogether omitted to be included in the return of income filed in ITR-1 while the three Forms contain specific detail in this regard pertaining to that item/head of income, section 143(1)(a)(vi) of the Act shall continue to apply. Further, for purpose of section 143(1)(a)(vi) of the Act, only the three Forms specified therein would be taken into consideration.

5. The pending intimations proposing adjustments under section 143(1)(a)(vi) wherein the taxpayer has tendered an explanation without revising the return or has not tendered any response till now shall be dealt with in accordance with the above direction. However, in cases where on receiving the intimation under section 143(1)(a)(vi) of the Act, the concerned assessee has already filed a revised return, such returns shall be treated as valid and handled accordingly.

6. This may be brought to the notice of all for necessary compliance.

CBDT Instruction No. 1928 [F. No. 246/10/95-A&PAC.IT], Dated 07.08.1995

Remedial Action in respect of Revenue Audit Objections

It has come to the notice of the Board that despite existing instructions making it mandatory for taking remedial action in case of Revenue Audit objections, steps are not taken by the Assessing Officers to initiate remedial actions. The proforma reports, sent on the draft paras proposed to be included - in the Annual Report of the C&AG, contain tentative remarks such as "being initiated", "instructions are being issued for taking remedial action" etc. Sometimes it is stated that no remedial action is being taken as the "objection is not accepted" which clearly violates the instructions presently holding the field. viz., remedial action should invariably be initiated in all cases of Revenue Audit objections. In order to reiterate the importance of taking prompt remedial action in the interest of revenue and in supersession of all earlier instructions of the Board on taking remedial action, following guidelines are being laid down.

1. Remedial action should invariably be initiated as a precautionary measure in respect of all audit objections, even if the objection is not accepted by the CIT. where an objection is accepted, suitable remedial action should be initiated and completed expeditiously.

2. Once the remedial action is initiated, it can be dropped with the approval of the CIT if the objection raised is one of facts and the facts stated to the audit are found to be incorrect.

3. If, however the issue raised by Audit pertains to interpretation of statute or involves conflicting High court decisions, the remedial action should be dropped only with the prior approval of the Board. For this purpose, a reference should be sent to the Board (A&PAC) section soon after the receipt of 'Statement of Facts' (SOF) stating cogently the reasons for proposed dropping of remedial action, where there is a decision of the jurisdictional High Court against the view of the audit but not accepted by the Department the High Court or the Supreme Court should be moved for staying the operation of the judgement.

4 Remedial action need not be initiated in audit objection where the Assessing Officer has acted in conformity with Board's Instruction\Circular. Such matters should immediately be referred to the concerned sections of the Board for examination and decision indicating clearly the date of expiry of limitation of taking remedial action.

5. While processing draft paras received from the Office of the C&AG it has been noticed that the mistakes pointed out by Audit, though outside the scope of prima facie adjustments as per the first Proviso to Section143(1)(a) do need to be rectified in the interest of revenue. For instance in cases where Audit-points out-excess set-off of loss or carry forward of loss, records should be linked and remedial action should invariably be taken even though the objection is not accepted. There can be similar instances undersections 32, 32A, 43B or deductions under Chapter VI-A such as 80-HHA, 80-HHC, 80-I, 80-O etc.

6. Remedial action should be initiated and completed where the Board specifically instructs the CIT to do so and the compliance report sent to the Board within three months.

These guidelines for taking remedial action may please be brought to the notice of all the officers working in your charge.

CBDT Circular No. 689, Dated 24.08.1994

Scope of prima facie disallowances under section 143(1)(A)

Section 143(1)(a) authorises, with effect from assessment year 1989-90, inter alia, disallowance of any loss carried forward, deduction, allowance or relief claimed which, on the basis of information available in the return or the accompanying accounts or documents, is prima facie inadmissible. The earlier instructions of the Board were to the effect that no disallowance should be made of items on which two opinions are possible. The matter has been further considered by the Board in the light of the recommendations of the Tax Reforms Committee headed by Prof. Raja J. Chelliah and it has been decided that prima facie disallowance shall be made only in respect of the following types of claims :

(a) an incorrect claim, if such incorrect claim is apparent from the existence of other information in the return or the accompanying accounts or documents.

EXAMPLE

If a deduction has been claimed under the head Capital Gains undersection 54F, and if there is information in the return of income or the accompanying accounts or documents to show that the unutilised net consideration had not been deposited in an account specified in the notified scheme as stipulated undersection 54F(4), the claim is incorrect and can be disallowed as a prima facie adjustment.

(b) any claim in respect of which there is an omission of information which is required, under the specific provisions of the Act or the Rules, to be furnished along with the return to substantiate such claim :

EXAMPLE

If the audit report specified undersection 80HHC(4), which is required to be filed along with the return of income, is not so filed, the deduction claimed under that section can be disallowed as a prima facie adjustment. Some more examples in this regard are the non-filing of audit reports or other evidence along with the return of income as required undersections 12A(b), 33AB(2), 35E(6), 43B (first proviso), 54(2), 54B(2), 54D(2), 54F(4), 54G(2), 80HH(5), 80HHA(4), 80HHB(3), 80HHD(6), 80HHE(4), 80-I(7), 80-IA(8) and the like. But if evidence is subsequently furnished, rectification undersection 154 should be carried out to the extent permitted by Board's Circular No. 669, dated 25.10.1993. No prima facie disallowance shall however be made if any evidence, required to be filed along with the return of income only in pursuance of the non-statutory guidance notes for filling in the return of income, is not so filed.

(c) A claim for deduction or rebate of any amount which exceeds statutory limit imposed, if such limit is expressed either as a specific mandatory amount or as a percentage, ratio or a fraction, and if the information relevant to application of the statutory limits appear in the return or the accompanying accounts or documents.

EXAMPLE

(i) If undersection 24(1)(i) the deduction in respect of repairs and collection charges to claimed in excess of 1/5th of the annual value (applicable with effect from assessment year 1993-94), such excess can be disallowed as aprima facie adjustment.

(ii) If the rebate on contribution eligible undersection 88 is claimed in excess of 20 per cent of such contribution, the excess can be disallowed, provided there is indication of the total amount of such contribution in the return or the accompanying accounts or documents.

(d) Any claim which is patently inadmissible in law.

EXAMPLE

Deduction of items like income-tax, wealth-tax, personal expenses, depreciation claimed on conveyance under the head salary, depreciation claimed under the head house property and the like. The items of disallowance should be such that no two opinions are possible on their inadmissibility.

3. The Board desires that no other prima facie disallowance should be made except with the previous approval of the Commissioner of Income-tax who will, after according approval in suitable cases, bring the same to the notice of the Board.

4. The above procedure applies to all returns pending processing undersection143(1) on the date of issue of this Circular.

CLARIFICATION ONE

Section 143 relating to assessments has been substituted with effect from 1st April, 1989 by a new section by the Direct Tax Laws (Amendment) Act, 1987 (hereinafter referred to as the Amendment Act.)

2. Clause (a) of sub-section (1) of the substituted section provides that where a return has been made undersection 142(1) of the Act, and any tax or interest is found due on the basis of the return, an “INTIMATION” shall be sent to the assessee specifying the sum so payable. Similarly if any refund is due on the basis of the return it shall be granted to the assessee.

3. For the purposes of computing the tax or interest payable by or refundable to the assessee the following adjustments are required to be made, under the proviso to sub-clause (a) of sub-section (1) of section143 to the income or loss declared in the return : -

(i) Any arithmetical error in the return, accounts or documents accompanying it shall be rectified.

(ii) Any loss carried forward, deduction allowance or relief which on the basis of the information available in such return, accounts or documents is prima facie admissible but which is not claimed in the return, shall be allowed.

(iii) Any loss carried forward deduction, allowance or relief claimed in the return, which on the basis of the information available in such return account or documents is prima facie inadmissible, shall be disallowed.

This circular seeks to explain the ambit and scope of adjustments required to be made under the aforesaid provision.

4. At the outset, it has to be noted that by virtue of para 2 of the Income-tax (Removal of Difficulties) Order, 1989 GSR 376(E), dated 23rd March, 1989 made by the Central Government the substituted section143 shall apply only in relation to the assessment year 1989-90 and subsequent years. Hence, the adjustments which were not permissible under the section as it stood prior to its substituted section, cannot be made in the returns relating to the assessment year 1988-89 and earlier assessment years irrespective of whether such returns are filed before 1st April, 1989 or on or after the said date.

5. It is also to be noted that the procedure outlined in clause (a) of sub-section (1) of section 143 is applicable only in cases where any tax or interest or any refund is found due on the basis of the return after making the adjustments specified in the proviso to the aforesaid clause. Hence, in cases where no tax or interest or refund is found due on the basis of the loss declared in the return the case will fall outside the ambit of section 143(1)(a) and the Assessing Officer should issue a notice undersection 143(2) for determination of the correct loss of the assessee undersection 143(3) of the Act. In cases where action undersection 143(2) of the Act is not taken within the time limit laid down on this behalf the Assessing Officer will have to take action undersection 147 of the Act.

6. It has also to be noted that for purposes of making the adjustment sunder the aforesaid proviso, it will not be permissible to refer to the record of past assessments in the case of the assessee. For instance, it will not be permissible for the Assessing Officer to make an addition to the profits by applying a higher rate of gross profit than that shown in the books, even though in an assessment for an earlier year the profits so estimated may have been confirmed in appeal. Similarly it will not be permissible for the Assessing Officer to disallow any claim in respect of interest on loans even though the amounts on which interest is claimed to have been paid had been added to the assessees income as unexplained cash credits in the assessment for an earlier year. Again the Assessing Officer will not be able to make any disallowance in respect of estimated expenses attributable to personal use of motor car, telephone etc. by relying on a similar disallowance for an earlier year which may not have been contested by the assessee or, if contested has been confirmed in appeal.

7. Of the three types of adjustments permitted under clauses (i) to (iii) of the proviso to the substituted section143(1)(a) of the Act, the adjustment relating to the rectification of any arithmetical errors in the return account or documents accompanying the return is self-evident and does not require any elaboration.

8. The adjustments required to be made under clause (ii) and clause (iii) of the said proviso hinges on the meaning of the expressions prima facie Admissible and prima facie inadmissible. The word prima facie means on the face of it. Hence, an adjustment referred to in clause (ii) of the said proviso relates to any error in not claiming any loss carried forward deduction allowance or relief which on the face of it is admissible and an adjustment referred to in clause (iii) of the proviso relates to an error in claiming any loss carried forward deduction, allowance or relief which on the face of it, is not admissible. In other words the error, in either case, should be patent obvious or apparent. In fact for determining whether there is a prima facie error for purposes of making an adjustment under the aforesaid proviso it will be correct and proper to apply the same test as has been laid down by the Supreme Court for purposes of rectification of mistakes undersection 154 of the Act. According to the Supreme Court a mistake can be rectified undersection 154 of the Act only if it is an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions vide T.S. Balaram, ITO v. Volkart Brothers (1971) 80 ITR 50 (SC).

9. In the context of the legal position as outlined above, it follows that it will not be permissible for the Assessing Officer to disallow a claim for deduction allowance or relief in cases where the claim is made on the basis of the decision of any High Court, Appellate Tribunal or other appellate authority even though a contrary view in the matter may have been expressed by another High Court or another Bench of the Tribunal or any other appellate authority. The fact that the claim is based on a decision which has not been accepted by the board will also not make any difference to this position.

10. An assessee aggrieved by an adjustment under the aforesaid proviso would be entitled to make an application undersection 154 of the Act. Where the Assessing Officer makes any adjustment which does not fall within the ambit of the proviso the aggrieved assessee will inevitably make an application undersection 154 of the Act. The resultant additional work of making a speaking order undersection 154 could be avoided if the Assessing Officers exercised due care in the matter and strictly confined the scope of the adjustments to patent or obvious mistakes as determined within the parameters laid down by the Supreme Court.

CBDT Instruction No. 1814, Dated 04.04.1989

Section 143 of the income - tax act, 1961 - assessment - general - scope of prima facie disallowances under section 143(1)(A)

Section 143 relating to assessments has been substituted with effect from 1st April, 1989 by a new section by the Direct Tax Laws (Amendment) Act, 1987 (hereinafter referred to as the Amendment Act.)

(i) Any arithmetical error in the return, accounts or documents accompanying it shall be rectified.

This circular seeks to explain the ambit and scope of adjustments required to be made under the aforesaid provision.

5. It is also to be noted that the procedure outlined in clause (a) of sub-section (1) of section143 is applicable only in cases where any tax or interest or any refund is found due on the basis of the return after making the adjustments specified in the proviso to the aforesaid clause. Hence, in cases where no tax or interest or refund is found due on the basis of the loss declared in the return the case will fall outside the ambit of section 143(1)(a) and the Assessing Officer should issue a notice undersection143(2) for determination of the correct loss of the assessee undersection143(3) of the Act. In cases where action undersection143(2) of the Act is not taken within the time limit laid down on this behalf the Assessing Officer will have to take action undersection 147 of the Act.

6. It has also to be noted that for purposes of making the adjustments under the aforesaid proviso, it will not be permissible to refer to the record of past assessments in the case of the assessee. For instance, it will not be permissible for the Assessing Officer to make an addition to the profits by applying a higher rate of gross profit than that shown in the books, even though in an assessment for an earlier year the profits so estimated may have been confirmed in appeal. Similarly it will not be permissible for the Assessing Officer to disallow any claim in respect of interest on loans even though the amounts on which interest is claimed to have been paid had been added to the assessees income as unexplained cash credits in the assessment for an earlier year. Again the Assessing Officer will not be able to make any disallowance in respect of estimated expenses attributable to personal use of motor car, telephone etc. by relying on a similar disallowance for an earlier year which may not have been contested by the assessee or, if contested has been confirmed in appeal.

Processing of return under section 143(1) does not amount to framing an opinion on return filed by assessee

Assessment in case of assessee was completed under section 143(1). Subsequently, Assessing Officer issued a reopening notice under section 148A(b) upon assessee on ground that income by way of professional services charges from a party was not offered to tax - He further passed a reassessment order under section 148A(d) making additions an account of same to income of assessee - Assessee contended that revenue in assessee's own case in subsequent assessment year 2019-20 had accepted assessee’s claim that said income was not taxable under article 15 of relevant DTAA and, therefore, during relevant assessment year also similar view was to be taken. He further contended that there was no new concrete material to form belief that income had escaped assessment so as to initiate reopening. Order passed under section 143(1) was not an assessment for purpose of section 147, therefore, when original proceeding had been completed under section 143(1), it was not necessary for Assessing Officer to come across some fresh tangible material to form a belief that income had escaped assessment and doctrine of change of opinion did not arise.

The Supreme Court in ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 : 210 CTR 30 : 161 Taxman 316 : (2008) 14 SCC 208 (SC) , has held that there is a distinction between 'intimation' and 'assessment' under sections 143(1) and 143(3) of the Act.

The Supreme Court and this Court have repeatedly held that when the original proceeding has been completed under section 143(1), there is no need for fresh tangible material for reopening the assessment and the doctrine of change of opinion does not arise since under section 143(1) an intimation is issued and no opinion is formed by way of the said order.

Further, since assessee did not place on record any documents such as contract agreement, copy of original invoices (not just invoice breakup) to show that service rendered in instant assessment year were similar/identical to service rendered in subsequent assessment year 2019-20, thus, reassessment proceedings was justified. [In favour of revenue] (Related Assessment year : 2018-19) – [Ernst & Young U.S. LLP v. ACIT (International Taxation) [2023] 146 taxmann.com 64 (Del.)]

On going through the intimation made under section 143(1), CPC has not followed the provisos by giving proper opportunity to the assessee to defend its case as per the first proviso to section 143(1)(a). Further, the NFAC order is also silent about the intimation to the assessee. Therefore, we find that intimation issued under section 143(1) dated 19.10.2019 is against first proviso to section 143(1)(a), and therefore, the entire 143(1) proceedings is invalid in law. [In favour of assessee] (Related Assessment year : 2018-19) – [Arham Pumps v. DCIT (2022) 195 ITD 679 : 140 taxmann.com 204 (ITAT Ahmedabad)]

Adjustment under section 143(1)(a) by means of disallowance made for late deposit of employees’ share to relevant funds beyond date prescribed under respective Acts was proper

The assessee-company claimed employees contribution towards employees' provident fund (EPF)/employees state insurance corporation (ESIC) as deduction undersection 36(1)(va). The Assessing Officer made disallowance of said payment on ground that the employees contribution was not credited by the assessee to the employees' accounts on or before the due date as prescribed under the respective Acts. The Commissioner (Appeals) upheld the disallowance made by the Assessing Officer. On the assessee’s appeal to the Tribunal :

Held : Clause (iv) of section 143(1)(a) talks of two different limbs, namely, ‘disallowance of expenditure’ and 'increase in income' by means of indication in audit report, both limbs are independent of each other. Thus, adjustment under section 143(1)(a) by means of disallowance made for late deposit of employees’ share to relevant funds beyond date prescribed under respective Acts, was a case of ‘disallowance of expenditure’ and not ‘increase of income’ and thus same was valid. [In favour of revenue] (Related Assessment years : 2017-18 to 2020-21) – [Cemetile Industries v. ITO (2022) 145 taxmann.com 209 (ITAT Pune)]

Revised return was filed by assessee within statutory time limits provided under Income-tax Act, same could not be rejected merely because same was filed after issuance of intimation under section 143(1)

Assessee filed original return of income on 29.09.2012 and intimation under section 143(1) was issued on 18.05.2013. Thereafter, assessee filed revised return by considering amortization of toll modernization expenses and preliminary expenses written off, which were inadvertently omitted to be considered in original return. The Assessing Officer did not consider the revised return by observing that the return was filed after the intimation under section 143(1) was issued on 18.05.2013. The ld. CIT(A) allowed the appeal of the appellant company by considering direct judgment of Gujarat High Court namely CIT v. Himgiri Foods Ltd. (2011) 333 ITR 508 : (2010) 231 CTR 470 (Guj.) wherein the Hon’ble Court has held that if after the issuance of an intimation, a revised return is filed under section 139(5), it is incumbent upon the Assessing Officer to process the revised return and amend the intimation issued under section 143(1)(a) on the basis of revised return. The Hon'ble Court has also held that an intimation under section 143(1)(a) of the Act cannot be equated with an assessment framed under section 143(3) of Income Tax Act. Considering the above decision, another decision namely S.R. Koshti v. CIT (2005) 276 ITR 165 : 193 CTR 518 : 146 Taxman 335 (Guj.) and also decision of coordinate Jaipur bench of ITAT in the case of ACIT v. Kiran Infra Engg. Ltd. (2013) 143 ITD 346 : 35 taxmann.com 73 (ITAT Jaipur), ld. CIT(A) ordered to consider the revised return and income shown therein. The department is in appeal before us. Same argument has been taken as mentioned in the assessment order. Considering the various decisions as referred by the ld. AR and also considered by ld. CIT(A) and there being no contrary decision so cited on behalf of revenue, we find no infirmity in the order of ld. CIT(A) particularly when the revised return was filed within the statutory time limits provided under the Act. In view of the above discussion the ground of appeal taken by the revenue is rejected. [In favour of assessee] (Related Assessment year : 2012-13) -

Scope of an ‘intimation’ under section 143(1)(a), extends only to making of adjustments based upon errors apparent from return of income and patent from record

The scope of an ‘intimation’ under section 143(1)(a) of the Act, extends to the making of adjustments based upon errors apparent from the return of income and patent from the record. Thus to say that the scope of ‘incorrect claim’ should be circumscribed and restricted by the Explanation which employs the term ‘entry’ would, in my view, not be correct and the provision must be given full and unfettered play. The explanation cannot curtail or restrict the main thrust or scope of the provision and due weightage as well as meaning has to be attributed to the purposes of section 143(1)(a) of the Act.

The provisions of section 80AC(ii) make it clear that any deduction that is claimed under Part C of Chapter VIA would be admissible only if the return of income in that case were filed within the prescribed due date. Thus no claim under any of the provisions of Part C of Chapter VIA would be admissible in the case of a belated return. There is no dispute on this position. The date of filing of a return of income would be apparent on the face of return and upon a perusal thereof, it would be clear as to whether the return is a valid return, having been filed within the statutory time limit, or a belated one. This is mechanical exercise and one that can be carried out by the CPC, very much within the scope of section 143(1)(a)(ii) of the Act. The conduct of the petitioners is also relevant. Not only have the returns been filed belatedly but the petitioners have also chosen not to co-operate in the conduct of assessment. They are admittedly in receipt of the defect notices from the CPC, but have not bothered to respond to the same. The writ petitions have themselves been filed belatedly and after the elapse of more than six to eight months from the dates of impugned orders, in all cases. It is only when the Revenue has initiated proceedings for recovery by attachment of bank accounts have the petitioners approached this Court. This factor also strengthens my resolve that these are not matters warranting interference in terms of Article undersection 226 of the Constitution of India, quite apart from the decision that I have arrived at on the legal issue. These writ petitions are dismissed [In favour of revenue] (Related Assessment year : 2018-19) - [AA520 Veerappampalayam Primary Agricultural Cooperative Credit Society Ltd. v. DCIT (2022) 138 taxmann.com 571 (Mad.)]

Addition by way of adjustment and intimation under section 143(1) on debatable and controversial issues and on basis of retrospective amendment to Act is beyond scope of section 143(1)

No adjustment can be made on debatable and controversial issues while issuing intimation under section 143(1).

Payments by way of employees’ contribution to ESI/EPF were deposited by the assessee belatedly but well before due date of filing of return of income under section 139(1). The addition was made by the Assessing Officer by way of adjustments under section 143(1) vide intimation dated 16.10.2019. The Commissioner (Appeals) directed the Assessing Officer to verify the assessee’s claim and to arrive at the correct quantification of addition after affording reasonable opportunity for producing the requisite details/evidences to the assessee. On appeal :

Amendments are made to sections 36(1)(va) and 43B, and brought into effect by the Finance Act, 2021. The different Benches of the Tribunal have, in fact, specifically considered the aforesaid amendments brought to the Income-tax Act by the Finance Act, 2021; and have taken the view that the amendments are prospective in nature, having no application for the period prior to 01.04.2021. Even if revenue does not accept the view, that the aforesaid amendments are prospective in nature having no application for assessment years prior to assessment year 2021-22, it is clearly established in the light of aforesaid decisions of the Tribunal that the issue whether the aforesaid amendments are prospective or retrospective, is at least debatable and controversial, on which a view in favour of the assessee (that the aforesaid amendments are prospective) can legitimately exist, even if such a view favourable to the assessee is contested by revenue.

It is well settled that any adjustments under section 143(1) by way of intimation under section 143(1), on debatable and controversial issues, is beyond the scope of section 143(1). In the present case, the additions have been made by way of adjustments vide intimation under section 143(1), dated 16.10.2019. As on 16.10.2019, the aforesaid amendments to section 36(1)(va) and section 43B had not been enacted. Accordingly, the aforesaid amount of Rs. 21,63,304 could not have been added to assessee.s income. Therefore, the aforesaid adjustments made by the revenue was unfair, unjust, and bad in law. At the very least, revenue should have given due consideration to the fact that the issue was highly debatable and controversial. As already discussed earlier, adjustments under section 143(1) by way of intimation under section 143(1), on debatable and controversial issues, is beyond the scope of section 143(1). Revenue was clearly in error, in making the aforesaid adjustments under section 143(1) on a debatable and controversial issue. [In favour of assessee] (Related Assessment year : 2018-19) - [Chintoo Creations v. DCIT (2022) 138 taxmann.com 499 (ITAT Delhi)]

Assessing Officer cannot disallow expenditure under section 143(1)(a)(iv) where opinion in tax audit report is contrary to the view of jurisdictional High Court

Section 143(1)(a)(iv) specifically provides for an adjustment in respect of “disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return”. It does proceed on the basis that when a tax auditor indicates a disallowance in the tax audit report, for this indication alone, the expense must be disallowed while processing under section 143(1) by the CPC. It is nevertheless important to bear in mind the fact that a tax audit report is prepared by an independent professional. The fact that the tax auditor is appointed by the assessee himself does not dilute the independence of the tax auditor. The fact remains that the tax auditor is a third party, and his opinions cannot bind the auditee (assessee) in any manner. These are mere opinions and at best these opinions flag the issues which are required to be considered by the stakeholders. On such fine point of law, as the nuances about the manner in which Hon’ble Courts have interpreted the legal provisions of the Income Tax Act in one way or the other, these audit reports are inherently even less relevant- more so when the related audit report requires reporting of a factual position rather than express an opinion about legal implication of that position. The adjustments under section 143(1)(a)(iv) in respect of “disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return” is to be read as, for example, subject to the rider “except in a situation in which the audit report has taken a stand contrary to the law laid down by Hon’ble Courts above”. Assessing Officer, CPC must dispose off objections of assessee against proposed adjustments under section 143(1)(a) by a reasoned order as reasons constitute the soul of a quasi-judicial order. – [Kalpesh Synthetics (P) Ltd. v. DCIT, CPC Bangaluru (2022) 137 taxmann.com 475 (ITAT Mumbai)]

Adjustment in Section 143(1) intimation due to non-reflection of contingent liability, a rectifiable error

Bombay High Court allows Assessee’s writ petition and holds that the mistake of reflecting the wrong figure under the heading ‘Amount in the Income Tax Returns’ as 0 instead of Rs. 42,94,12,920/, is an ex facie error which deserves to be rectified; Directs Revenue to consider Assessee’s rectification application within a period of three months from passing this order and pass a speaking order with respect to contingent liability of Rs. 42,94,12,920/; Assessee-Company, was issued intimation under Section 143(1)(a) proposing adjustment with respect to contingent liability of Rs. 42,94,12,920/, aggrieved with which Assessee preferred the present writ petition; High Court notes that Assessee filed a rectification application before the Revenue under Section 154 to correctly reflect the amount under the head ‘Amount in Income Tax Returns’ in the said intimation at Rs. 42,94,12,920/. instead of 0, however, no relief was granted to the Assessee in the rectification order, with respect to the said issue; Notes Assessee’s argument that Revenue ought to have considered Assessee’s response before making the adjustment as per Section 143(1)(a) (ii); Refers to the electronic dialogue on the Income Tax Portal between the Revenue and the Assessee with respect to the above stated inconsistency as per which Assessee submitted that the proposed adjustment with respect to contingent liability was incorrect as already disclosed in Form 3CD [Clause 21(g)] and disallowed in the computation of income; High Court opines that the error mentioned above is an ex facie error which deserves to be rectified and thus, directs Revenue to consider Assessee’s rectification application; In this view of the matter, we direct the respondent no.1 – Centralized Processing Centre to consider the application of the petitioner for rectification in the light of the above discussion, within a period of three months and pass a speaking order with respect to the amount of Rs. 42,94,12,920/-. - [Sodexo India Services (P) Ltd. v. Centralized Processing Centre And Others [TS-982-HC-2022(BOM)] – Date of Judgement : 16.12.2022 (Bom.)]

Disallowance of delayed PF deposit not debatable; Supreme Court Checkmate Services ruling applies retrospectively

Bangalore ITAT dismisses Assessee’s appeal, upholds prima facie disallowance of employees' PF & ESI contribution while processing the return by CPC under Section 143(1) based on information in the Tax Audit Report that payment was made after the due date prescribed under Section 36(1)(va); Holds that issue of disallowance of employees’ contribution to PF is now settled by Supreme Court ruling in Checkmate Services (P) Ltd. v. CIT (2022) 448 ITR 518 : 143 taxmann.com 178 (SC) and the same cannot be considered as debatable; Relies on Supreme Court ruling in CIT v. Saurashtra Kutch Stock Exchange (2008) 14 SCC 171 (SC) and observes that law laid down by the Supreme Court operates retrospectively and is deemed to the law as it has always been unless, it is expressly stated that ruling would operate prospectively; Assessee-Company filed return of income for Assessment year 2018-19 and 2019-20 and claimed expenditure on employees contribution to PF and ESI under Section 36(i)(va) read with Section 43B(b); CPC, while processing the return under Section 143(1), disallowed the employees’ contribution to PF and ESI on the basis of the statement made in the Tax Audit Report reporting the delay in remittances and accordingly made addition of the same to Assessee’s income; Assessee filed rectification application under Section 154 which was subsequently rejected by the Revenue; CIT(A) dismissed Assessee’s appeal; Before ITAT, Assessee contended that prima facie disallowance under Section 143(1) cannot be made in case of debatable issue and the processing of return under Section 143(1) is merely restricted to arithmetical calculations; Relied on coordinate bench ruling in Kalpesh Synthetics (P) Ltd. v. DCIT(CPC) in ITA No.1785/Mum/2021 dated 27.04.2022, wherein it was held that disallowance under Section 36(1)(va) cannot be called for particularly when the return of income is processed under Section 143(1); While Revenue relied on Supreme Court ruling in Checkmate Services and contended that prima facie disallowance under Section 143(1) can be made of those claims which are apparent on record; ITAT relies on Checkmate Services ruling wherein it was held that Section 36(1)(va) and Section 43B(b) operate differently and have different parameters for due dates; Observes that the issue of non-payment of contribution of PF and ESI of employees is apparent from the tax audit report filed by the Assessee under Section 44AB and on that basis, CPC came to know that there was incorrect claim of deductions towards employees contribution to PF and ESI in the year under consideration and the same was disallowed after following the due procedure prescribed in Section 143(1)(a)(ii) as the issue in dispute is not debatable at the time of disallowance; Rejects Assessee’s reliance on coordinate bench ruling in Kalpesh Synthetic and observes that the said ruling is wholly misplaced as the said ruling did not consider the law laid down in Checkmate Services ruling; Accordingly, affirms CIT(A) order and dismisses Assessee’s appeal. [In favour of revenue] (Related Assessment years : 2018-19 & 2019-20) – [Garuda Security Services [TS-1005-ITAT-2022(Bang)] – Date of Judgement : 15.12.2022 (ITAT Bangalore)]

Absent Tax Auditor’s suggestion, Provident Fund (PF) disallowance by CPC not ‘prima facie adjustment’

Mumbai ITAT allows Assessee’s appeal and deletes the addition made by CPC towards employees’ contribution to Provident Fund (PF) on the basis of the statement of tax auditor reporting the delay in remittances of employees’ contribution; Holds that Section 143(1)(a)(iv) is not applicable to the present case since the auditor merely recorded the facts and had not stated in the instant case to disallow employees' contribution to PF wherever it is remitted beyond the due date under the Provident Fund Act; Being conscious of the fact that the issue on merits has recently been decided against the Assessee by Supreme Court in Checkmate Services (P) Ltd v. CIT reported in 143 taxmann.com 178 (SC) dated 12.10.2022., ITAT observes, “This decision was rendered in the context where assessment was framed under section 143(3) of the Act and not under section 143(1)(a)”; Thus, opines, “disallowing the employees’ contribution to Provident Fund while processing the return under section 143(1) of the Act is against the provisions of the Act as it would not fall within the ambit of prima facie adjustments”; Assessee-Company, for Assessment year 2019-20, remitted the employees contribution to PF beyond the due date prescribed under the Provident Fund Act; CPC, while processing the return under section 143(1), disallowed the employees’ contribution to PF on the basis of the statement made in the Tax Audit Report reporting the delay in remittances and accordingly made addition of the same to Assessee’s income; CIT(A) confirmed the disallowance, aggrieved with which Assessee preferred the present appeal; ITAT notes that even though the Assessee had remitted the employees’ contribution to PF beyond the due date prescribed under the Provident Fund Act, the same had been duly remitted before the due date of filing the return of income; Further notes that the said delay in remittance of employees’ contribution to PF was reported in the tax audit report wherein the tax auditor had merely mentioned the due date for remittance of PF contribution as per the Provident Fund Act and the actual date of payment made by the Assessee; Thus, finds that it is merely recording of facts and a mere statement made by the tax auditor in his audit report; Takes note that the Revenue disallowed employees’ contribution to PF while processing Assessee’s return under Section 143(1) by applying the provisions of Section 143(1)(a)(iv); Analyses Section 143(1)(a)(iv) and observed that clause (iv) providing for disallowance of expenditure indicated in the audit report, would come into operation when the tax auditor had suggested for a disallowance of expense or increase in income, but the same had not been carried out by the Assessee while filing the return of income; Notes that the tax auditor, in the present case, had not suggested any disallowance of Employees’ Contribution to PF wherever it is remitted beyond the due date under the respective Act; Draws strength from co-ordinate bench ruling in Kalpesh

Synthetics (P) Ltd v. DCIT reported in 195 ITD 142 (ITAT Mumbai) to hold that disallowance made by CPC was vitiated in law; Thus, holds that employees’ contribution to PF cannot be disallowed while processing the return under Section 143(1) and directs Revenue to delete the addition made towards the same. [In favour of assessee] (Related Assessment year : 2019-20) – [P R Packaging Service v. ACIT [TS-961-ITAT-2022(Mum)] – Date of Judgement : 07.12.2022 (ITAT Mumbai)]

Following Supreme Court’s Checkmate Services (P) Ltd. v. CIT ruling, disallows employees’ PF/ESI contribution for depositing beyond statutory due-date

Bangalore ITAT dismisses Assessee's appeal, holds that deposit of employee's PF and ESI contribution specified under Section 36(1)(va) after due date stipulated in the respective welfare statutes but before filing of return of income under Section 139(1) is disallowable under Section 43B; Assessee-Company engaged in software development services and filed return of income for Assessment year 2018-19 declaring total income of Rs. 2.54 Cr which was processed by CPC under Section 143(1) by disallowing Rs. 17.78 Cr on account of delay in deposit of employee's contribution to provident fund and ESI fund after due date; CIT(A) confirmed the disallowance passed in intimation order under Section 143(1); Before ITAT, Assessee contended that the payment of employee's contribution to PF and ESI though belated but was before the due date of filing the return of income under Section 139(1) and otherwise allowable under Section 43B; ITAT relies on recent SC ruling in Checkmate Services (P) Ltd. v. CIT (2022) 143 taxmann.com 178 (SC) wherein it was held that Section 43B(b) does not cover employee's contribution to PF and ESI deducted by employer from the salary of employees and that employees contribution has to be deposited within due dates under relevant legislation like PF Act, failing which the same would be treated as income in the hands of employer under Section 2(24)(x); ITAT holds that the employees' contribution to PF and ESI should have been remitted before the statutory due date, thus, finds no reason to interfere with CIT(A) order. [In favour of revenue] (Related Assessment years : 2018-19 & 2019-20) – [Pivotree Solutions India (P) Ltd. v. ADIT, CPC [TS-852-ITAT-2022(Bang)] – Date of Judgement : 21.10.2022 (ITAT Bangalore)]

Section 10(23C)(vi)/11 claim, a debatable issue, not adjustable while processing ITR

Bangalore ITAT holds that no prima facie disallowance under Section 143(1) can be made on a debatable issue without affording a reasonable opportunity of being heard to the Assessee, remands the issue of disallowance of exemption under Section 11; Assessee, a University, filed the return of income for Assessment year 2016-17 declaring Nil income along with Form 10 and claimed a refund of Rs. 4.71 Cr. which was processed under Section 143(1) by CPC determining a total income of Rs. 172.29 Cr by disallowing: (i) sum of Rs. 70.83 Cr accumulated and set apart under Section 11(2) for special purpose and (ii) sum of Rs. 74.91 Cr accumulated under Section 11(1); Assessee's rectification application under Section 154 which was disposed off by enhancing the total income of Rs. 176.99 Cr as against Rs. 172.29 Cr thereby withdrawing exemption of Rs. 4.70 Cr that was allowed in intimation order under Section 143(1); On appeal, CIT(A) upheld the disallowance of Rs. 70.83 Cr. on the ground that Assessee failed to satisfy the conditions for accumulation of income under Section 11; Assessee's plea of exemption under Section 10(23C)(vi) was denied by the Revenue on the ground that there was no order granting approval for the purpose of Section 10(23C)(vi) and a fresh claim cannot be made through rectification application, which was upheld by CIT(A); ITAT observes that first proviso to Section 143(1) mandates that no adjustments except arithmetical mistakes or an incorrect claim that is apparent from any information in the return can be made under Section 143(1); Relies on Bombay High Court ruling in Bajaj Auto Finance Ltd. v. CIT reported in (2018) 93 taxmann.com 63 (Bom.) wherein it was held that prima facie disallowance cannot be made by intimation under Section 143(1)(a) unless an opportunity is given to Assessee to establish its claim for deduction; Also observes that Revenue was not right on its part to unilaterally proceed by disallowing the claim given the fact that no opportunity was granted to Assessee to put forth its stand before disallowing the deduction claimed; Accordingly, remits back the matter to Revenue with direction to consider claim of the Assessee by providing reasonable opportunity of being heard before making any disallowance. – [Rajiv Gandhi University of Health Sciences v. DCIT(CPC) – Date of Judgement : 29.09.2022 (ITAT Bangalore)]

In view of deletion of Explanation to section 143 from 01.06.1999, intimation under section 143(1) ceases to be an order for purposes of section 264

The Explanation to section 143 prior to 01.06.1999 provides that an intimation sent to the assessee under sub-section (1) or sub-section (1B) shall be deemed to be an order for the purposes of sections 246 and 264. The aforesaid Explanation was deleted by Finance Act, 1999 with effect from 01.06.1999. The effect of the deletion is that intimation under section 143(1) ceases to be an order for the purposes of section 264 of the Act. (Related Assessment year : 2007-08) – [Karnataka State Co-Operative Apex Bank Ltd. v. DCIT (2021) 130 taxmann.com 114 (Karn.)]

Revenue could not avoid processing of return under section 143(1) and granting of refund to assessee on ground that notice under section 143(2) had been issued to assessee

Assessee sought refund of tax for relevant assessment year - Assessing Officer issued notice for scrutiny assessment under section 143(2) and held that refund could not be issued in view of section 143(1D) because notice under section 143(2) was already issued. Revenue had not cited justifiable reasons, as to why such refund could not be released. As per settled law, revenue could not avoid processing of return under section 143(1) and granting refund to assessee if due as per such return, therefore, revenue was to be directed to release said refund with statutory interest. [In favour of assessee] Assessment year 2015-16 – [Tata Communications Ltd. v. DCIT (2020) 425 ITR 279 : 114 taxmann.com 728 (Bom.)]

Issue as to whether claim of a provision for bad debts is deductible under section 36(1)(vii) or not, is debatable, and such a debatable claim cannot be disallowed by way of an intimation under section 143(1)(a)

Merely making of provision of bad debts would not entitle a party to claim deduction; it would be a matter where assessee should be given an opportunity to establish its claim. Assessee was an auto finance company. It debited in its profit and loss account certain amount representing provision for doubtful overdue under hire purchase finance agreements and claimed said amount as bad debts under section 36(1)(vii) indicating in computation sheet that claim was made on basis of decision of Vithaldas Dhanjibhai v. CIT (1981) 130 ITR 95 : 6 Taxman 105 (Guj.). Assessing Officer, taking a different view, made addition merely by issuing intimation under section 143(1)(a) without hearing assessee.

In Khatau Junkar Ltd. v. K.S. Pathania (1992) 196 ITR 157 : 102 CTR 194 : 61 Taxman 157 (Bom.) had, while dealing with the word ‘prima facie inadmissible’ in clause (iii) of section 143(1)(a), has held that the word ‘prima facie’ means ‘on the face of it the claim is not admissible’. It means the claim does not require any further inquiry before disallowing the claim. The Court observed that where a claim has been made which requires further inquiry, it cannot be disallowed without hearing the parties and/or giving the party an opportunity to submit proof in support of its claim. In the absence of section143(1)(a) being read in the above manner i.e. debatable issues cannot be adjusted by way of intimation under section 143(1)(a), would lead to arbitrary and unreasonable intimations being issued, leading to chaos.

In the present facts, while mere making of provision for bad debts will not by itself (on application of amended law) entitle the party to deduction, yet it would be a matter where the assessee should be given an opportunity to establish its claim. This by producing its evidence of the manner in which it treated the provision of bad debts written off in accounts as well as in its balance sheet. Therefore, the disallowance cannot be made by intimation under section 143(1)(a), as it requires that a party be given an opportunity to establish its claim before disallowing it. When assessee filed application under section 154 for deduction of such adjustment, it was disallowed on ground that it was a debatable issue. Issue as to whether claim of a provision for bad debt is deductible under section 36(1)(vii) or not, is debatable; such a debatable claim cannot be disallowed by way of an intimation under section 143(1)(a). Therefore, for the above purpose it is necessary that the party to be given an opportunity to establish its claim. Therefore, in the present facts, adjustment by way of disallowing deduction by intimation under section 143(1)(a) is not proper. [In favour of assessee] (Related Assessment year 1993-94) – [Bajaj Auto Finance Ltd. v. CIT, Pune (2018) 404 ITR 564 : 93 taxmann.com 63 (Bom.)]

Assessing Officer after issuing intimation under section 143(1)(a) noticed that provision for gratuity made by assessee was omitted to be disallowed and, accordingly, he passed an order undersection 154, wherein he disallowed provision for gratuity and levied additional tax upon assessee, levy of additional tax was only a consequential event to prima facie adjustment

Assessing Officer processed return of income filed by assessee and made certain adjustments in intimation under section 143(1)(a). Subsequently Assessing Officer having noticed that provision for gratuity made by assessee was omitted to be disallowed as no payments were made on this account issued on it a notice undersection 154 calling upon its objections for proposed revision. Assessee did not object for said revision. There upon Assessing Officer passed an order undersection 154, wherein he disallowed gratuity provision and levied additional tax upon assessee. Assessee raised objection against levy of additional tax. Since assessee did not file any objection to disallowance of gratuity provision and same was accepted by it, levy of additional tax was only a consequential event to prima facie adjustment, which was carried out through order passed undersection 154. Therefore, order of Assessing Officer levying additional tax by his order undersection 154 deserved to be upheld. [In favour of revenue] (Related Assessment year : 1992-93) – [Tamilnadu Magnesite Ltd. v. DCIT, Special Range (2013) 357 ITR 687 ; 31 taxmann.com 397 (2014) 224 Taxman 116 (Mad.)]

Notice under section 143(2), which was issued prior to filing of revised return by assessee, could not bar Assessing Officer from processing said revised return under section 143(1)(a)

In the instant case, the original return of income was filed on January 31, 1997, declaring the total income of Rs. 6,97,59,206. Thereafter, the assessee filed a revised return on March 30, 1998, declaring the loss of Rs. 74,97,579 in which expenses amounting to Rs. 8,14,55,626 were further claimed and in respect of the said claim, the assessee, vide letter dated March 30, 1998, clarified that the necessity of revising the return has arisen as during the course of finalization of return for the assessment year 1997-98, it transpired that the expenses totalling to Rs. 8,14,55,626 relating to and which accrued for the previous year relevant to the assessment year 1996-97, have been paid and accounted for in the subsequent year and as per the mercantile system of accounting, the same are allowable in the assessment year 1996-97 and, as such, the claim thereof has been made in the revised return. The revised return was processed under section 143(1)(a) of the Act on December 14, 1998, on a total income of Rs. 9,86,85,952 by treating the status of the assessee as an association of persons undersection 185 and also making certain prima facie adjustment in the return of negative income.

Not being satisfied, the assessee has filed an appeal before the Commissioner of Income-tax (Appeals)-II, Lucknow, who has allowed the appeal, vide its order dated December 13, 1999, for the assessment year under consideration. Being aggrieved, both the parties have filed appeals before the Tribunal, where the Tribunal has admitted the above mentioned additional ground and allowed the claim of the assessee.

There is no dispute that the hon’ble Supreme Court in the case of Gujarat Electricity Board (2003) 260 ITR 84 (SC) held that it is not open to the Revenue to issue intimation under section 143(1)(a) of the Income-tax Act, 1961, after notice for regular assessment has been issued under section 143(2) of the Act but, in the instant case, intimation under section 143(1)(a) was issued for the revised return while the notice under section 143(2) was issued for the original return of income. Therefore, the ratio laid down in the aforesaid case is distinguishable from the facts of the case in hand. The revised return was filed by the respondent on March 30, 1998, i.e., after the receipt of notice under section 143(2) dated March 11, 1997. Thus, the Assessing Officer has rightly made the necessary adjustment on the basis of the revised return. The said notice under section 143(2), which was issued prior to the filing of the revised return by the assessee, cannot bar the Assessing Officer from processing the said revised return undersection 143(1)(a) of the Act. [In favour of revenue] (Related Assessment year : 1996-97) – [CIT v. Sahara India (2012) 347 ITR 331 : (2013) 33 taxmann.com 550 (All.)]

Levy of additional income-tax on disallowance of deductions

Assessee-company filed return declaring a total loss of Rs. 67,24,21,020. The Assessing Officer processed the return and issued an intimation by invoking section143(1)(a). Subsequent thereto, he issued a notice calling upon the assessee on the ground that the same claims for deduction made by it, were prima facie inadmissible, and therefore, wrongly allowed to it. The Assessing Officer passed a rectification order undersection 154. He disallowed these deductions. Thus, after making the adjustments of the aforestated amounts to the tune of Rs. 59,71,605 reduced the loss returned by the assessee to that extent. An order charging additional income tax on the adjustment of Rs. 59,71,605 was also passed.

On appeal, the Commissioner (Appeals) following the judgment of Indo-Gulf Fertilizers & Chemicals Corpn. Ltd. v. Union of India (1992) 195 ITR 485 : 64 Taxman 96 (All.) allowed the appeal. On revenue’s appeal, the Tribunal rejected the same. On appeal :

It reveals that the Apex Court in case of ACIT v. J.K. Synthetics Ltd. (2001) 251 ITR 200 : 116 Taxman 598 (SC) has held that where the assessee had returned a net loss and after adjustment made under section 143(1)(a), the amount of loss is to be reduced, the levy of additional tax on the assessee undersection 143(1A) is justified. The Apex Court has held that sub-section (1A) was amended by the Finance Act, 1993 with effect from 01.04.1989; it was the date upon which sub-section (1A) had been introduced into the Act. It has been held that the substituted sub-section (1A) made it clear that even where the loss declared by an assessee has been reduced by reason of adjustments made under sub-section (1)(a), the provisions of sub-section (1A) would apply.

In view of the authoritative pronouncement [decision in case of ACIT v. J.K. Synthetics Ltd. (2001) 251 ITR 200 : 116 Taxman 598 (SC)], there is sufficient force in the argument of the revenue that the Tribunal was not justified in setting aside the order passed by the Assessing Officer so far as it relates to charge of additional income tax on the adjustment of Rs. 59,71,605. The Tribunal was not correct in upholding the deletion made by the Commissioner (Appeals) of the additional income tax levied under section 143(1A). The order passed by the Commissioner (Appeals) and the Tribunal holding that assessee is not liable to pay additional income tax is legally bad and, therefore, are not sustainable in law. [In favour of revenue] (Related Assessment year : 1989-90) – [CIT, Kanpur v. U.P. Textiles Corpn. Ltd. (2012) 204 Taxman 19 : (2011) 16 taxmann.com 130 (All.)]

Interest on the outstanding sales-tax amount is part of sales-tax and can be disallowed in the course of making ‘prima facie’ adjustments under section 143(1)(a); this issue is not debatable

Assessee claimed deduction of Rs. 7,38,11,883 under section 43B of the Act on account of interest at the rate of 24 per cent per annum undersection 47(4A) of the Gujarat Sales Tax Act on the outstanding sales tax amount. An identical question came to be considered by the hon'ble Supreme Court in the case of Mahalakshmi Sugar Mills Co. v. CIT (1980) 123 ITR 429 (SC), where, considering the provisions of the U. P. Sugarcane Sales Act, 1956, the hon'ble Supreme Court held that interest provided undersection 3(3) of the said Act was in the nature of compensation paid to the Government for delay in payment of sales tax and it was not by way of penalty and the interest payable on arrears of cess under section 3(3) is part and parcel of the liability to pay cess.

Under the circumstances, the Assessing Officer was justified in invoking the provisions of section 143(1)(a) for including the aforesaid amount of Rs. 7,38,11,883 towards interest on unpaid sales tax in the income and disallowing the same by holding that it was prima facie inadmissible. Merely because in the preceding year the Assessing Officer had, by mistake and/or for any other reason, wrongly allowed the deduction, the question, which was already settled by the Supreme Court, will not become a debatable one. As rightly observed by the Commissioner of Income-tax (Appeals) and the Tribunal, the Assessing Officer was not required to repeat the mistake, or wrong, and/or perpetuate the illegality committed. On the contrary, the Assessing Officer is justified in disallowing the deduction of the aforesaid amount and treating it as inadmissible and has rightly disallowed the same by following the decision of the hon’ble Supreme Court in the case of Mahalakshmi Sugar Mills Co. v. CIT (1980) 123 ITR 429 (SC). It is not in dispute that the law declared by the hon’ble Supreme Court is binding on all under article 141 of the Constitution of India. The assessee was supposed to know the law, and it is not even the case of the assessee that the assessee was not aware of the correct law. However, the assessee is simply relying upon the order passed by the Assessing Officer for the immediate preceding year and accordingly he has tried to submit that the issue was a debatable issue. However, as stated above, even if the Assessing Officer granted the benefit in the preceding year, in breach of the clear decision of the hon'ble Supreme Court, it cannot be said that the issue remained debatable. Under the circumstances, the contention on behalf of the assessee, that the Assessing Officer has committed an error in adjusting the aforesaid amount of interest on unpaid sales tax and disallowing deduction by invoking the provision undersection 143(1)(a) of the Act, cannot be accepted. Once the provisions of section 143(1)(a) of the Act are invoked and certain amount is held to be prima facie inadmissible, and is disallowed, and is included as income on adjustment, necessary consequences of payment of an additional income-tax calculated at the rate of 20 per cent of the tax payable on such excess amount must follow as required undersection 143(1A)(a)(i) of the Act and the Assessing Officer shall further increase the amount of tax payable under sub-section (1) after additional income-tax is calculated at the rate of 20 per cent of the tax payable on such excess amount and he is required to specify the additional income-tax in the intimation to be sent under sub-clause (i) of clause (a) of sub-section (1) of section143 of the Act. Under the circumstances, neither the Assessing Officer, nor the Commissioner, Income-tax (Appeals), nor the Income-tax Appellate Tribunal, has committed any error in holding that the provisions of section 143(1)(a) would be attracted; that there was no debatable question; and that the Assessing Officer was also justified in holding that it was prima facie inadmissible. For the foregoing reasons, the question is answered against the interests of the assessee and in favour of the Revenue. [In favour of revenue] - [Shree Digvijay Cement Co. Ltd. v. CIT (2007) 289 ITR 250 : (2006) 206 CTR 1 (Guj.)]

Intimation under section 143(1)(a) would survive even after passing an order of assessment under section 143(3) - Additional income-tax under section 143(1A) could be levied for first time in order undersection 154(1)(b) if Assessing Officer has failed to levy it at first instance in intimation issued under section 143(1)(a)

The assessee filed a return of income for the assessment year 1990-91 declaring a loss. The Assessing Officer processed the return under section 143(1)(a) and completed the assessment under section 143(3). Later, the Assessing Officer noticed that a mistake was committed in processing the return as the provisions of section 43B were not applied in respect of the assessee’s claim of bonus. Consequently, the Assessing Officer rectified the intimation issued earlier, undersection 154 and also levied additional income-tax undersection 143(1A). On appeal, the Commissioner (Appeals) rejected the plea of the assessee that after the return was processed under section 143(1)(a), the Assessing Officer completed the regular assessment under section 143(3) and that after the passing of the assessment order, the intimation under section 143(1)(a) did not survive and so the same could not be subjected to rectification undersection 154, and dismissed the assessee’s appeal. On further appeal, the Tribunal confirmed the order of the Commissioner (Appeals). On reference :

Section 143(1A)(b) was inserted with effect from 01.04.1989 by the Direct Tax Laws (Amendment) Act, 1989 and subsequently amended with effect from 01.04.1989 by the Finance Act, 1992 operative from 01.04.1989. The provision was however ultimately omitted with effect from 01.06.1999 by the Finance Act, 1999. This provision deals with increase/decrease of amount of additional income-tax as a result of an order under section 143(3) or section 154 or section 250, etc. The provision made to increase or reduce the amount of additional tax as a result of an order under sub-section (3) of section 143 would show that the intimation under section 143(1)(a) would survive after an order undersection 143(3) is passed. The above-mentioned facts would evidently show that the Legislature had envisaged a situation that an intimation under section 143(1)(a) would survive even after the order under section 143(3) is passed or else there was no need to introduce section 143(1A)(b), a provision to increase or reduce the amount of additional income-tax as a result of section 143(3). After making regular assessment under section 143 on the basis of the income thus determined if there is any move for enhancement or reduction in the additional income-tax this could be possible only if the proceedings under section 143(1)(a) survive after the completion of assessment under section 143(3). In order to meet this situation, sub-section (3) to section 143 was incorporated by the Finance Act, 1992, with effect from 01.04.1989, so as to provide for enhancement or reduction in additional income-tax.

Therefore, additional income-tax under section 143(1A) could be levied in an order undersection 154(1)(b) if the Assessing Officer has failed to levy at the first instance in the intimation issued undersection 143(1)(a). The contention that undersection 154 only a mistake in the quantification of the income could be corrected and not a mistake in not levying additional income-tax, could not be accepted.

Therefore, the Tribunal was right in holding that the intimation under section 143(1)(a) would survive after passing an order of assessment under section 143(3); that the intimation under section 143(1)(a) could be rectified after the order under section 143(3) was passed; and that there could be a levy of additional tax under section 143(1A) for the first time by an order undersection 154. [In favour of revenue] (Related Assessment year : 1990-91) – [Janatha Tile Works Ltd. v. CIT (2006) 283 ITR 35 : 202 CTR 102 : 154 Taxman 104 (Ker.)]

Assessee had received certain amount by way of cash compensatory support but did not include same in its return filed on 29.12.1989 - Subsequently in 1990, clause (iiib) came to be inserted in section 28 treating cash compensatory support as profits and gains of business or profession with retrospective effect from 01.04.1967 - Assessing Officer treated said amount as additional income under section 143(1A) and levied additional tax - In view of fact that when assessee had filed its, return of income, it was correct as per law on date of filing of return, levy of additional tax was not warranted

The assessee had received in the previous year relevant to the assessment year 1988-89 certain amount by way of cash compensatory support. It did not include this income in its return which was filed on 29.12.1989. The Assessing Officer treated cash compensatory support receipt as additional income under section 143(1A) in view of insertion of clause (iiib) to section 28 by the Finance Act, 1990 with retrospective effect from 01.04.1967, and levied tax at higher rate and also charged interest undersection 234. The Commissioner (Appeals) allowed the assessee’s appeal partly. The Tribunal, however, held that no additional tax could be levied in respect of amount of cash compensatory support and no interest undersection 234 could be levied. The High Court also favoured the assessee. On revenue’s appeal to the Supreme Court :

Held : One has to see the law on the date of filing the return. To attract penal provisions, there has to be some element of lack of bona fides unless the law specifically provides otherwise. The instant case did not represent even a bona fide mistake. In fact it was not a case where under some mistaken belief the assessee did not disclose the cash compensatory support received by it which it could offer to tax. It is true that income by way of cash compensatory support became taxable retrospectively with effect from 01.04.1967 but that was by amendment of section 28 by the Finance Act, 1990 which amendment could not have been known before the Finance Act came into force. Levy of additional tax bears all the characteristics of penalty. Additional tax was levied as the assessee did not in its return show the income by way of cash compensatory support. The Assessing Officer on that account levied additional income-tax. No additional tax would have been leviable on the cash compensatory support if the Finance Act, 1990 had not so provided even though retrospectively. The assessee could not have suffered additional tax but for the Finance Act, 1990. After it had filed its return of income, which was correct as per law on the date of filing of the return, it was thereafter that the cash compensatory support also came within the sway of section 28. When additional tax has imprint of penalty, the revenue cannot be heard saying that levy of additional tax is automatic under section 143(1A). If additional tax could be levied in such circumstances, it would be punishing the assessee for no fault of it. That cannot ever be the legislative intent. It shocks the very conscience if in the circumstances section143(1A) could be invoked to levy the additional tax. In the circumstances of the case, levy of additional tax taking into account the income by way of cash compensatory support was not warranted. [In favour of assessee] (Related Assessment year : 1989-90) – [CIT v. Hindustan Electro Graphites Ltd. (2000) 243 ITR 48 : 160 CTR 8 : 109 Taxman 342 (SC)]

On facts stated under heading ‘Losses - In speculation business’ Assessing Officer was justified in disallowing loss claimed by assessee, by treating it as speculation loss, by way of prima facie adjustment

For the assessment year 1997-98, the assessee-company, engaged in construction, lending, hire purchase and trading in shares, earned contract receipts, interest receipts, lease rental, share of profit from a firm etc. and credited the income to the profit and loss account. Against the profit so credited the assessee, inter alia, debited loss on sale and decrease in value of shares. The Assessing Officer disallowed the loss while making adjustmentundersection143(1)(a), on the ground that loss arising on account of purchase or sale of shares was a speculation loss within the deeming provisions of Explanation to section 73 and as such could have been given set off only against speculation profit and not against business profit. On appeal, the Commissioner (Appeals) upheld the disallowance and also rejected the assessee’s contention that the entire income was income from ‘other sources’.

On second appeal it was contended by the assessee that the issue whether the Explanation to section 73 was applicable to the facts of the case or not was a debatable one and involved prolonged arguments and, therefore, fell outside scope of the provisions of section 143(1)(a). The assessee argued that as per the provisions of Explanation to section 73, only the loss arising on account of purchase and sale of shares could be treated as speculation loss and not the loss resulting due to the revaluation of the closing stock of shares.

Held : Considering the facts that the entire income of the assessee company was shown under the head ‘Profits and gains of business or profession’, the assessee was carrying on business of trading in shares and the assessee did not fall in the exceptions provided in the Explanation, the provisions of Explanation to section 73 clearly applied to the facts of the case and the entire loss relating to the share transactions including the valuation of closing stock was a speculation loss within the meaning of Explanation to section 73. This was prima facie clear from the return and the documents accompanying the return. This did not involve any controversy or prolonged debate or arguments. Therefore, the adjustment made by the Assessing Officer fell within the scope of adjustments provided undersection 143(1)(a).

The assessee had contended that at the most the loss relating to purchase and sale of shares could be treated as speculation loss and not the loss resulting on account of valuation of the closing stock. Where the assessee was carrying on business of purchase and sale of shares, the value of opening stock and the closing stock formed integral part of the computation of profit or loss from share trading. The correct profit or loss could not be determined without taking into account the value of opening stock and the value of closing stock. In fact, in the profit and loss account, the entire loss arising on account of share transactions, including valuation of closing stock, had been adjusted against the profit and gains from business. The assessee had adjusted the entire loss to the business profit. Therefore, while making the adjustment under section 143(1)(a), the Assessing Officer was duty bound to examine this aspect as to whether loss arising from the share transactions was correctly adjusted against business profit or not. Since the assessee had adjusted the entire loss, the Assessing Officer was justified in treating the entire loss as speculation loss. There could not be any controversy as made out by the assessee that the loss on share transactions had to be determined by excluding the value of closing stock of the shares. It was only made out by the assessee to wriggle out the rigours of Explanation to section 73. Accordingly, the assessee’s appeal was to be dismissed. [In favour of revenue] (Related Assessment year : 1997-98) - [Prudential Construction Co. Ltd. v. ACIT (2000) 75 ITD 338 : (2001) 70 TT

INCOME TAX

Wednesday 18 January 2023

Processing of an Income Tax Return – Scope of adjustments under section 143(1)

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