2012 (7) TMI 215 - AT - Income Tax

Rectification of order passed u/s 143(1)(a) - AO adjustments in regard to the particulars of capital expenditure written off (debited under operational expenses)on the basis of observations of the auditor in the tax audit report - CIT(A) deleted additions made by AO - Held that - Considering the provisions of sec. 143(1)(a) that unless the return or the accompanying documents or accounts show that the deduction, allowance or relief claimed therein is prima facie inadmissible on the basis of information available in the said documents, such deduction or allowance claimed cannot be disallowed. Only those adjustments can be made under the said clause which on the basis of return and documents accompanying it are prima facie inadmissible - it is not open to the AO to make any adjustment in the returned income by disallowing any claim for deduction, allowance or relief, unless he is satisfied on the basis of information available in the return, documents, and the accounts accompanying it that such a claim is inadmissible on the face of it and there is no possibility of any debate thereon on such claim. As disallowance is made without giving an opportunity to the assessee to explain his view point in support of the deduction or allowance, and additional tax on the increased amount is charged from him arbitrarily neither proof in support of a claim can be requisitioned nor nature of expenditure can be judged in proceedings u/s 143(1)(a) no basis to interfere with the findings of the CIT(A) - in favour of assessee.

Summary

Issues Involved:
1. Legality of adjustments made by the Assessing Officer (AO) under section 143(1)(a) of the Income-tax Act.
2. Whether the adjustments made were within the permissible scope of section 143(1)(a).
3. Validity of the CIT(A)'s direction to rectify the order by deleting the adjustments.

Detailed Analysis:

Issue 1: Legality of Adjustments Made by the AO under Section 143(1)(a)
The primary issue revolves around the legality of the adjustments made by the AO under section 143(1)(a) of the Income-tax Act. The AO processed the return filed by the assessee and made prima facie adjustments based on the tax audit report. These adjustments included disallowances for capital expenditure, trade tax payable, professional tax payable, bonus, and employer's contribution to PF, totaling Rs. 6,481,461.

The AO justified these adjustments by stating that:
- The capital expenditure was identified in the Tax Audit Report and was clearly disallowable under section 37(1) of the Act.
- Other items were shown in the Tax Audit Report as debited to the P&L account but not paid during the previous year, thus falling under the mischief of section 43B.

Issue 2: Permissibility of Adjustments under Section 143(1)(a)
The CIT(A) directed the AO to rectify the order by deleting the adjustments, stating that:
- Adjustments permissible under section 143(1)(a) were limited to apparent arithmetical errors, prima facie admissible or inadmissible claims based on the return and accompanying documents.
- The AO was not permitted to adjudicate debatable issues under the guise of making adjustments.
- Judicial precedents, including decisions from the Madhya Pradesh High Court, Bombay High Court, Allahabad High Court, and Delhi High Court, supported the view that the AO could not disallow claims without issuing a notice under section 143(2) if the claims were not prima facie inadmissible based on the return and accompanying documents.

Issue 3: Validity of CIT(A)'s Direction to Rectify the Order
The Tribunal upheld the CIT(A)'s decision, emphasizing that:
- Adjustments under section 143(1)(a) must be based on information available in the return and accompanying documents, and only prima facie inadmissible claims could be disallowed.
- The AO could not make adjustments requiring further evidence or adjudication of the nature of expenditure without issuing a notice under section 143(2).
- Judicial precedents, including decisions from the jurisdictional High Court and other High Courts, supported the CIT(A)'s view that the AO's adjustments were beyond the permissible scope of section 143(1)(a).

The Tribunal concluded that the AO's adjustments were not justified under section 143(1)(a) and upheld the CIT(A)'s direction to rectify the order by deleting the adjustments. The appeal by the Revenue was dismissed, affirming that the AO could not unilaterally disallow claims without issuing a notice under section 143(2) if the claims were not prima facie inadmissible based on the return and accompanying documents.

Conclusion
The Tribunal dismissed the Revenue's appeal, affirming that the adjustments made by the AO under section 143(1)(a) were not within the permissible scope of the provision. The CIT(A)'s direction to rectify the order by deleting the adjustments was upheld, reinforcing the principle that only prima facie inadmissible claims based on the return and accompanying documents could be disallowed without issuing a notice under section 143(2).