2016 (12) TMI 1845 - AT - Income Tax

Changing of status of the assessee while processing return under Section 143(1) - As in the course of processing the returns the Assessing Officer changed the status of the assessee as AOP and levied tax under Section 164(1) of the Act at maximum marginal rate - HELD THAT - The assessee admittedly filed their returns of income electronically and the same were processed under Section 143(1) of the Act. Section 143(1) of the Act enables the Assessing Officer to make prima facie adjustment on the basis of the material available on record. Changing of status is something outside the purview of the prima facie adjustment under Section 143(1) of the Act. Therefore this Tribunal is of the considered opinion that changing of status of the assessees cannot be made while processing return under Section 143(1) of the Act. Therefore this Tribunal is unable to uphold the orders of the lower authorities. Accordingly the same are set aside. However it is made clear that it is open to the Assessing Officer to take up the matter for scrutiny as provided under the provisions of the Income-tax Act. Appeals of the assessees stand allowed.

Summary

Issues involved:
1. Whether changing the status of assessees and levying tax at maximum marginal rate under Section 164(1) during processing under Section 143(1) of the Income-tax Act is permissible?
2. Whether the income of Trusts is liable for taxation at maximum marginal rate under Section 164(1) of the Act due to uncertainty in the trust and vesting of income in the hands of future beneficiaries?

Analysis:
1. The appeals were against orders of the Commissioner of Income Tax (Appeals)-13, Chennai, where the Assessing Officer changed the assessees' status to AOP and levied tax under Section 164(1) of the Act during processing under Section 143(1). The representative argued that Section 143(1) allows only prima facie adjustments, not debatable issues like changing status or tax rate. Citing a Bombay High Court judgment, it was contended that such changes require scrutiny with notice to the assessee. The Tribunal agreed, stating that changing status is beyond Section 143(1) adjustments. The orders were set aside, allowing the Assessing Officer to scrutinize the matter separately.

2. The Departmental Representative argued that the Trusts' income, sourced from a parent trust, house property, and fixed deposits, should be taxed at the maximum marginal rate under Section 164(1) due to uncertainty in trust allocation. Citing a Supreme Court judgment, it was contended that the Revenue could assess the beneficiary's interest directly. The Tribunal found uncertainty in the trust's allocation, leading to taxation at the maximum marginal rate. However, the Tribunal set aside the lower authorities' orders, allowing the Assessing Officer to further scrutinize the matter as per the Income-tax Act provisions.

In conclusion, the Tribunal allowed the appeals, emphasizing that changing assessees' status and levying tax at the maximum marginal rate during processing under Section 143(1) is impermissible. The Tribunal directed the Assessing Officer to conduct a separate scrutiny if necessary. The Trusts' income was deemed liable for taxation at the maximum marginal rate due to uncertainty in allocation, but the matter was left open for further examination.