2009 (4) TMI 210 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of the intimation under section 143(1) of the Income-tax Act, 1961.
2. Consideration of disclosures made in the notes to the computation of income.
3. Levy of interest under sections 234A, 234B, and 234C.
4. Validity of adjustments made in the intimation issued by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Legitimacy of the Intimation under Section 143(1) of the Income-tax Act, 1961:
The core issue is whether the Assessing Officer (AO) was justified in issuing an intimation under section 143(1) of the Act, which included a demand of tax and interest based on the income shown in the return. The AO computed the tax liability at 15% on the declared income, treating it as "royalty" under Article 12(7) of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. However, the assessee contended that the income was business profits not liable to tax in India due to the absence of a permanent establishment (PE) in India. The Tribunal held that the AO's action exceeded the scope of section 143(1), which permits only the determination of tax or refund based on the return filed without changing the nature of income. Thus, the intimation was annulled.

2. Consideration of Disclosures Made in the Notes to the Computation of Income:
The assessee argued that the AO failed to consider the notes attached to the computation of income, which explained why the income was not taxable in India. The Tribunal agreed, stating that the AO must consider the entire return, including notes, when issuing an intimation under section 143(1). The AO's failure to do so and the subsequent tax demand were beyond the permissible scope of section 143(1).

3. Levy of Interest under Sections 234A, 234B, and 234C:
The AO levied interest under sections 234A, 234B, and 234C for the respective assessment years. The Tribunal noted that the interest provisions are mandatory. However, since the primary tax demand was annulled, the associated interest levies under these sections also could not be sustained.

4. Validity of Adjustments Made in the Intimation Issued by the Assessing Officer:
The Tribunal examined whether the AO made any unauthorized adjustments to the returned income. It was found that the AO had accepted the total income as declared by the assessee but computed the tax at 15%, treating the income as royalty. The Tribunal held that such a change in the nature of income is not permissible under section 143(1) and should be addressed through a regular assessment under section 143(3), which involves issuing a notice and providing an opportunity for hearing.

Conclusion:
The Tribunal concluded that the AO's intimation under section 143(1), which included a tax demand treating the income as royalty, was beyond the scope of the section. The AO should have considered the entire return, including the notes, and any change in the nature of income should have been addressed under section 143(3). Consequently, the intimation was annulled, and the appeals filed by the assessee were allowed. The Tribunal clarified that the decision did not address the merits of whether the income was taxable as royalty or business profits, which would be determined in the regular assessment proceedings under section 143(3).