2023 (9) TMI 1677 - AT - Income Tax

Adjustments made u/s. 143(1)(a)(iv) while processing the return of income u/s. 143(1) - powers/scope given to CPC Bangalore through section 143(1) - HELD THAT - Neither assessee s response to proposed adjustment was considered nor application u/s. 154 of the Act was disposed of these falls in the violation of proviso 1 and 2 of the section 143(1) and makes whole action null and void. Further as the case of assessee was scrutinized u/s. 143(2) and assessment order u/s. 143(3) was passed technically the doctrine of merger comes into picture therefore the impugned adjustment by CPC gets merged into order passed u/s. 143(3) of the Act and order passed u/s. 143(3) only survives. As far as reporting by Tax Auditor is concerned maybe he has been appointed by the assessee still his independence is always assumed and he is always free to give his own legal opinion but the same is not binding on assessee or revenue. Thus final order in this case is assessment order passed by AO u/s. 143(3) r.w.s. 144B and not the intimation/order passed by CPC Bangalore u/s. 143(1). Effectively when order passed by AO u/s. 143(3) r.w.s. 144B of the Act is final and therein no such addition is there whole issue becomes academic including the appeal order passed by the Ld. CIT (A) U/s. 250 of the Act. In the result grounds of appeal raised by the assessee is allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

1. Whether the adjustments made by the Assistant Director of Income Tax, CPC under Section 143(1)(a)(iv) of the Income Tax Act, 1961, without considering the response filed by the appellant, were valid.

2. Whether the adjustments made under Section 143(1)(a)(iv) were beyond the scope of the section, given that the issues involved required further verification or were debatable questions of law.

3. Whether the adjustments made under Section 143(1)(a)(iv) were justified when the Assessing Officer, in the assessment order under Section 143(3) read with Section 144B, had accepted the appellant's claim of deduction for abandoned project expenses.

4. Whether the disallowance of abandoned project expenses based on the tax audit report was appropriate, particularly when the appellant disagreed with the tax auditor's view.

5. Whether the CIT(A) erred in confirming the addition by holding that the appellant failed to provide evidence substantiating the nature of the expenditure and its write-off.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Adjustments under Section 143(1)(a)(iv)

- Relevant Legal Framework and Precedents: Section 143(1)(a) allows for adjustments during the processing of returns, including disallowance of expenditure indicated in the audit report but not accounted for in the return. The proviso mandates consideration of the assessee's response before making adjustments.

- Court's Interpretation and Reasoning: The Tribunal noted that the assessee's response to the proposed adjustments was not considered, which violated the proviso of Section 143(1)(a). This oversight rendered the adjustments invalid.

- Key Evidence and Findings: The Tribunal found that the CPC ignored the response filed by the assessee, which should have been considered before finalizing the adjustments.

- Application of Law to Facts: By not considering the response, the CPC failed to comply with the procedural requirements of Section 143(1)(a), making the adjustments procedurally flawed.

- Treatment of Competing Arguments: The Tribunal acknowledged the procedural lapse and sided with the appellant, emphasizing the need for interactive processing under Section 143(1).

- Conclusions: The adjustments under Section 143(1)(a)(iv) were invalid due to the failure to consider the assessee's response.

2. Scope of Section 143(1)(a) and Requirement for Further Verification

- Relevant Legal Framework and Precedents: Section 143(1)(a) is intended for clear, non-debatable issues. Complex or debatable issues requiring further verification fall outside its scope.

- Court's Interpretation and Reasoning: The Tribunal noted that the issues involved required further verification and were debatable, thus falling outside the scope of Section 143(1)(a).

- Key Evidence and Findings: The Tribunal observed that the case was selected for scrutiny assessment, indicating the complexity of the issues.

- Application of Law to Facts: The Tribunal concluded that the nature of the issues necessitated a detailed examination, not suitable for resolution under Section 143(1)(a).

- Treatment of Competing Arguments: The Tribunal recognized the appellant's argument that such issues require scrutiny beyond the scope of automated processing.

- Conclusions: The adjustments were beyond the scope of Section 143(1)(a) as they required further verification.

3. Acceptance of Deduction in Assessment Order under Section 143(3)

- Relevant Legal Framework and Precedents: An assessment order under Section 143(3) involves a detailed examination and overrides adjustments made under Section 143(1).

- Court's Interpretation and Reasoning: The Tribunal emphasized that the assessment order under Section 143(3) accepted the appellant's claim, rendering the CPC's adjustments academic.

- Key Evidence and Findings: The Tribunal noted that the assessment order under Section 143(3) did not include the disputed addition, confirming the appellant's position.

- Application of Law to Facts: The Tribunal applied the doctrine of merger, whereby the assessment order supersedes the CPC's adjustments.

- Treatment of Competing Arguments: The Tribunal acknowledged the appellant's argument that the assessment order should prevail.

- Conclusions: The assessment order under Section 143(3) prevails, making the CPC's adjustments irrelevant.

4. Disallowance Based on Tax Audit Report

- Relevant Legal Framework and Precedents: The tax audit report is advisory and not binding on the assessee or revenue.

- Court's Interpretation and Reasoning: The Tribunal noted that the tax auditor's opinion is independent and not binding, especially when contrary to judicial precedents.

- Key Evidence and Findings: The Tribunal found that the auditor's opinion conflicted with the appellant's claim, but this did not justify the disallowance.

- Application of Law to Facts: The Tribunal concluded that the auditor's opinion alone could not justify the disallowance, especially when the appellant disagreed.

- Treatment of Competing Arguments: The Tribunal sided with the appellant, emphasizing the non-binding nature of the auditor's opinion.

- Conclusions: The disallowance based solely on the tax audit report was unjustified.

5. Requirement for Evidence Substantiating Expenditure

- Relevant Legal Framework and Precedents: Section 143(1) does not require detailed evidence for expenditure verification.

- Court's Interpretation and Reasoning: The Tribunal noted that the CPC's adjustments were based on the tax audit report, not the genuineness of the expenditure.

- Key Evidence and Findings: The Tribunal found no requirement for additional evidence under Section 143(1), as the CPC did not question the genuineness of the expenditure.

- Application of Law to Facts: The Tribunal concluded that the CPC's adjustments were unwarranted, given the absence of any challenge to the expenditure's genuineness.

- Treatment of Competing Arguments: The Tribunal supported the appellant's position that the CPC acted beyond its scope.

- Conclusions: The requirement for evidence was beyond the scope of Section 143(1).

SIGNIFICANT HOLDINGS

- Verbatim Quotes of Crucial Legal Reasoning: "Neither assessee's response to proposed adjustment was considered, nor application u/s. 154 of the Act was disposed of, these falls in the violation of proviso 1 and 2 of the section 143(1) and makes whole action null and void."

- Core Principles Established: The Tribunal reinforced the procedural requirements under Section 143(1), emphasizing the need for considering the assessee's response and the non-binding nature of the tax audit report.

- Final Determinations on Each Issue: The Tribunal allowed the appeal, holding that the adjustments under Section 143(1)(a)(iv) were invalid and that the assessment order under Section 143(3) prevailed.