2023 (10) TMI 969 - AT - Income Tax

Adjustment u/s 143(1) - inadmissible interest paid to partners in terms of Section 40(b) as reported in the Tax Audit Report filed by the assessee u/s 44AB - HELD THAT - As not disputed by the DR that this amount of interest paid to partners was shown both as admissible and inadmissible in the Tax Audit Report itself takes the issue out of the purview of Section 143(1) of the Act, more particularly Section 143(1)(a)(iv) of the Act which has been invoked in the present case. As pointed out by assessee, the provisions of Section 143(1)(a)(iv) of the Act permits adjustment to the income of the assessee on account of expenses which are indicated as disallowable in the Tax Audit Report, but not disallowed while computing the total income of the assessee. In the present case, the Tax Audit Report indicates the amount as both admissible and inadmissible. Therefore, the provisions of Section 143(1)(a)(iv) of the Act were not attracted. Even otherwise, the purport of intimation u/s 143(1) is to make a preliminary assessment of the income of the assessee based on the documents filed along with the return of income, permitting the adjustment to be made only on those counts which are apparently liable to be made. Also find that the assessee has given a plausible explanation for this reporting in the Tax Audit Report pointing out that since in the computation of income this impugned amount of interest paid to partners was first added to the income and then claimed as deduction; therefore, inadvertently in the Tax Audit Report it was reported as both admissible and inadmissible. Grounds raised by the assessee are allowed.

Summary

Issues Involved:
The judgment involves the adjustment made to the income of the assessee in the intimation under Section 143(1) of the Income Tax Act, 1961 regarding inadmissible interest paid to partners under Section 40(b) of the Act.

Adjustment Made to Income - Inadmissible Interest Paid to Partners:
The only issue in the appeal was the adjustment of Rs. 6,94,190/- made to the income of the assessee under Section 143(1) of the Act due to inadmissible interest paid to partners as reported in the Tax Audit Report. The intimation mentioned the adjustment being on account of disallowance of expenditure indicated but not considered in the total income returned by the assessee. The Tax Audit Report highlighted the inconsistency in the amount of interest paid to partners, leading to the adjustment. The auditor reported the amount as both admissible and inadmissible, causing confusion regarding its treatment.

The counsel for the assessee argued that the ambiguity in the Tax Audit Report regarding the admissibility of the interest amount prevented the application of Section 143(1)(a)(iv) for disallowing the sum. It was explained as a punching error, as the interest paid to partners was initially disallowed and then claimed as allowable, resulting in the dual reporting. The counsel contended that this mistake should not lead to an adjustment in the income of the assessee.

The Tribunal acknowledged the error in the Tax Audit Report, where the interest amount was shown as both admissible and inadmissible. It held that this ambiguity prevented the application of Section 143(1)(a)(iv) for making adjustments to the income. The Tribunal emphasized that the intimation under Section 143(1) aims to assess the income based on filed documents, allowing adjustments only for clear errors or inadmissible amounts. As there was uncertainty about the interest's admissibility, the adjustment of Rs. 6,94,190/- was deemed unjustified and directed to be deleted. The Tribunal accepted the explanation provided by the assessee for the reporting error and allowed the appeal, ruling in favor of the assessee.

Therefore, the appeal of the assessee was allowed, and the adjustment made to the income on account of interest paid to partners was directed to be deleted.