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2024 (6) TMI 641 - AT - Income TaxValidity of order u/s 143(1)(a) - assessee submitted that the AO has not passed a speaking order nor provided a proper opportunity of hearing - HELD THAT - As under the provisions of section 143(1) of the Act, the AO is required to compute the income after taking into consideration the adjustment as prescribed subject to communication to the assessee. In the intimation letter, AO has referred the reasons for adjustment. He has made adjustment on the basis of entry made by the tax Auditor of the assessee under the row prescribed for expenditure by way of penalty or fine for violation of law for time in being in force. Out of the two items listed under this row in tax audit report, one item was already added by the assessee for computing returned income but the second item of Rs. 1,00,000/- was omitted for including in the returned income. On the basis of omission observed, the AO (CPC) communicated the proposed adjustment and thereafter passed the intimation order along with reasons of adjustment duly specified as part of intimation order. Therefore, the arguments of the ld counsel that intimation order passed is not reasoned, are incorrect. Hon ble Supreme Court in the case of CIT Vs Rajesh Jhaveri Stock Brokers P ltd 2007 (5) TMI 197 - SUPREME COURT distinguished between intimation and assessment and held that under intimation the authority of the AO is limited to carry out adjustment based on the return of income or accompanying documents and he can t go beyond that and make adjustment on any debatable issue. In our opinion, in view of above observation, the AO was not required to pass a speaking order for adjustments made in strict terms, although he has duly proposed the said adjustment twice to the assessee and thereafter in the intimation he has provided reasons of adjustment. Regarding the ratio of PR Packaging 2022 (12) TMI 841 - ITAT MUMBAI , we find that in said case in the Audit report it was not clearly mentioned whether said amount was disallowable or not but in the instant case , the amount has been categorized by the Tax Auditor under penalty or fine for violation of law for time being in force, therefore, the amount being prima-facie disallowable u/s 143(1)(a)(iv). Ground of the appeal of the assessee is accordingly allowed for statistical purposes.
Issues Involved:
1. Prima facie adjustment under Section 143(1)(a) of the Income-tax Act. 2. Consideration of assessee's response before making adjustments under Section 143(1)(a). 3. Nature of expenditure as penalty or business expense. 4. Examination of the merit of the adjustment by the First Appellate Authority (FAA). Issue-wise Detailed Analysis: 1. Prima Facie Adjustment under Section 143(1)(a) of the Income-tax Act: The assessee's return of income for the assessment year 2019-2020 was processed by the Computer Processing Centre (CPC), Bangalore, under Section 143(1) of the Income-tax Act. The Assessing Officer made an adjustment of Rs. 1 crore, which was recorded in the tax audit report as an expenditure by way of penalty or fine for the violation of any law. The adjustment was made despite the assessee's contention that the payment was made to Tata Memorial Hospital as per the directions of the Hon'ble High Court of Bombay and was not in the nature of a penalty. 2. Consideration of Assessee's Response Before Making Adjustments under Section 143(1)(a): The assessee argued that the Assessing Officer failed to consider their response before making the adjustment, as required by the second proviso to Section 143(1)(a). The FAA upheld the adjustment, stating that the CPC followed the provisions of Section 143(1)(a)(iv) by making the adjustment due to a mismatch between the values reported in the tax audit report and the return of income. The FAA concluded that the CPC's adjustment was in order and upheld the adjustment, noting that the decisions cited by the assessee were not applicable to the facts of the case. 3. Nature of Expenditure as Penalty or Business Expense: The assessee contended that the payment of Rs. 1 crore was made in the course of business to protect business interests and was not in the nature of a penalty. The FAA, however, observed that the payment was made for the infringement of registered design and trademarks, which is prohibited by law. Therefore, under the Explanation to Section 37(1) of the Income-tax Act, the expenditure was not allowable. The FAA noted that the tax auditor had categorized the payment as a penalty or fine for the violation of law, making it prima facie disallowable under Section 143(1)(a)(iv). 4. Examination of the Merit of the Adjustment by the First Appellate Authority (FAA): The assessee's counsel argued that the Assessing Officer did not pass a speaking order or provide a proper opportunity for hearing, rendering the order void ab initio. The FAA, however, noted that the Assessing Officer had communicated the proposed adjustment twice and provided reasons for the adjustment in the intimation order. The FAA referred to the Hon'ble Supreme Court's decision in CIT Vs Rajesh Jhaveri Stock Brokers P Ltd, which distinguished between intimation and assessment, concluding that the Assessing Officer was not required to pass a speaking order for adjustments made under Section 143(1)(a). Ground No. 4 - Adjustment on Merit: The assessee's counsel argued that the payment was not a penalty or expenditure prohibited by law, citing the order of the Hon'ble High Court of Bombay. The Departmental Representative (DR) submitted that the FAA had not decided the issue on merit, and the matter should be restored for fresh consideration. The Tribunal noted that the FAA had not examined whether the expenditure was in violation of Explanation 1 to Section 37(1) and restored the issue to the FAA for a fresh decision on the merit of the addition. Conclusion: The appeal was partly allowed for statistical purposes, with the Tribunal directing the FAA to re-examine the merit of the adjustment. The FAA's decision to uphold the adjustment under Section 143(1)(a) was supported, but the issue of whether the expenditure was a penalty or a business expense was remanded for further consideration.
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