2024 (9) TMI 1699 - AT - Income Tax

Validity of intimation u/s 143(1) passed without granting opportunity to the assessee wherein an adjustment was made that was debatable in nature - HELD THAT - Where a claim was made which require further inquiry it cannot be disallowed without hearing the parties and / or giving the opportunity to submit proof in support of its claim. Hon ble Bombay High Court in Bajaj Auto Finance Ltd. 2018 (2) TMI 1716 - BOMBAY HIGH COURT thus observed that debatable issues cannot be adjusted by way of intimation u/s 143(1)(a) which would lead to an arbitrary and unreasonable intimation being issued leading to chaos. Also see JKs Employees Welfare Fund 1992 (3) TMI 41 - RAJASTHAN HIGH COURT Ground No. 1 of the assessee stands allowed. Income of the assessee chargeable to Normal Tax rates or the Maximum Marginal Tax rates - AR submitted that provisions of Section 164(2) of the Act governs the case of a registered charitable trust which is the case of the present assessee and the tax should be charged accordingly to Section 164(2) - HELD THAT -Section 164 is a special provision that prevails over the general provision of Section 167B. The decision of Marsons Beneficiary Trust 1990 (7) TMI 37 - BOMBAY HIGH COURT has considered the fact in a case of a Trust where the beneficiaries in the share was determinate and therefore Hon ble Court held that the earnings on behalf of such Trust would be taxed as an AOP. As a corollary in the present facts the share of the beneficiaries are not known though the assessee in the return of income mentioned itself to be an AOP and therefore provisions of Section 167B are not applicable. If we analyze the alternative plea raised that the assessee had not claimed any exemption under Sections 11 and 12 for the year under consideration therefore there not being a situation of denial of exemption under Sections 13(1)(c) or 13(1)(d) the assessee come within the ambit to subject that portion of income to the maximum marginal rate. Accordingly assessee cannot be subjected to maximum marginal rate for the year under consideration merely because it filed its return of income in form ITR 7 as against ITR 5. Ground No. 2 raised by the assessee stands allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the intimation under Section 143(1) of the Income Tax Act, 1961, was validly issued without providing an opportunity to the assessee, given that the adjustment made was debatable in nature.

2. Whether the application of the maximum marginal rate (MMR) of tax to the appellant's total income was appropriate, considering the appellant's status as a public charitable trust and the filing of its return in Form ITR-5 instead of ITR-7.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Intimation under Section 143(1)

Relevant Legal Framework and Precedents:

The legal framework involves Section 143(1) of the Income Tax Act, which allows for prima facie adjustments during the processing of returns. The proviso to this section requires prior intimation to the assessee when such adjustments are made. The precedents considered include decisions from the Bombay High Court and Rajasthan High Court, which clarify the scope of prima facie adjustments.

Court's Interpretation and Reasoning:

The Tribunal noted that adjustments under Section 143(1) should only be made when the claim is prima facie inadmissible, meaning it does not require further inquiry. The Tribunal relied on the Bombay High Court's interpretation that debatable issues cannot be adjusted without providing an opportunity to the assessee, as this would lead to arbitrary intimation.

Key Evidence and Findings:

The Tribunal considered the lack of prior communication regarding the adjustment and the debatable nature of the tax rate applied.

Application of Law to Facts:

The Tribunal found that the adjustment made by the CPC was debatable and required further inquiry, thus necessitating prior intimation to the assessee.

Treatment of Competing Arguments:

The Tribunal favored the assessee's argument that the adjustment was debatable and required prior intimation, over the Department's position that no prior intimation was necessary.

Conclusions:

The Tribunal concluded that the intimation under Section 143(1) was invalid due to the lack of prior communication regarding the debatable adjustment.

Issue 2: Application of Maximum Marginal Rate

Relevant Legal Framework and Precedents:

The relevant legal provisions include Section 167B and Section 164 of the Income Tax Act. The Tribunal considered the decision in CIT vs. Marsons Beneficiary Trust, which addressed the tax treatment of trusts and AOPs.

Court's Interpretation and Reasoning:

The Tribunal noted that Section 164 is a special provision that prevails over Section 167B. It emphasized that a public charitable trust, like the assessee, does not have determinate beneficiaries, unlike an AOP.

Key Evidence and Findings:

The Tribunal found that the assessee's status as a public charitable trust meant that the shares of beneficiaries were indeterminate, thus Section 167B was not applicable.

Application of Law to Facts:

The Tribunal applied Section 164(2) to the facts, concluding that the maximum marginal rate should not apply to the assessee's income, as it did not claim exemptions under Sections 11 and 12.

Treatment of Competing Arguments:

The Tribunal sided with the assessee's argument that the filing of the return in the wrong form should not dictate the application of the maximum marginal rate.

Conclusions:

The Tribunal concluded that the maximum marginal rate was not applicable to the assessee's income for the year under consideration.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

"Debatable issues cannot be adjusted by way of intimation under Section 143(1)(a), which would lead to an arbitrary and unreasonable intimation being issued leading to chaos."

Core Principles Established:

1. Debatable issues require prior intimation to the assessee under Section 143(1).

2. The status of a public charitable trust with indeterminate beneficiaries precludes the application of the maximum marginal rate under Section 167B.

Final Determinations on Each Issue:

1. The intimation under Section 143(1) was deemed invalid due to the lack of prior communication regarding the debatable adjustment.

2. The application of the maximum marginal rate was not appropriate for the assessee's income, given its status as a public charitable trust.