2023 (10) TMI 969 - AT - Income Tax

Tribunal Rules Adjustment Under Section 143(1) Unjustified Due to Ambiguity in Tax Audit Report, Orders Deletion

The Tribunal allowed the appeal of the assessee, ruling that the adjustment of Rs. 6,94,190/- to the income under Section 143(1) of the Income Tax Act, ... 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. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether an adjustment under Section 143(1)(a)(iv) of the Income Tax Act can be made on the basis of a tax audit report where the same expenditure item is simultaneously indicated as both admissible and inadmissible in the audit report. 2. Whether an intimation under Section 143(1) may make a prima facie disallowance of an expense where there is no clear indication in the audit report that the expense is disallowable (i.e., whether lack of clarity in the audit report removes the item from the scope of summary adjustment under Section 143(1)). 3. Whether a bona fide/punching error in the tax audit report (reporting the same figure as both admissible and inadmissible) can justify deletion of an adjustment made by the processing center under Section 143(1). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Section 143(1)(a)(iv) where audit report indicates the same item as both admissible and inadmissible Legal framework: Section 143(1)(a)(iv) permits the processing of a return to effect 'disallowance of expenditure [or increase in income] indicated in the audit report but not taken into account in computing the total income in the return.' The intimation under Section 143(1) is a preliminary processing mechanism to correct clear errors or effect adjustments apparent from documents filed with the return, including the audit report. Precedent treatment: No specific precedents were cited or applied in the judgment; the Tribunal relied on the plain language and scope of Section 143(1)(a)(iv) and the purpose of the intimation process. Interpretation and reasoning: The Court interpreted Section 143(1)(a)(iv) as permitting adjustments only where the audit report clearly indicates disallowance (i.e., the item is indicated as disallowable). Where the audit report itself simultaneously records the same amount as both admissible and inadmissible, there is ambiguity as to whether the item is indicated as disallowable. The Tribunal reasoned that ambiguity in the audit report defeats the statutory precondition for invoking Section 143(1)(a)(iv), because the provision requires that the disallowance be 'indicated in the audit report.' Ratio vs. Obiter: Ratio. The holding that Section 143(1)(a)(iv) cannot be invoked when the audit report ambiguously indicates an item as both admissible and inadmissible is the operative legal principle applied to dispose of the appeal. Conclusions: Adjustment under Section 143(1)(a)(iv) cannot be made where the audit report does not clearly indicate the expenditure as disallowable; the existence of simultaneous entries for admissibility and inadmissibility removes the statutory basis for summary disallowance under Section 143(1). Issue 2: Scope of Section 143(1) - preliminary nature and requirement of apparentness/clarity Legal framework: Section 143(1) provides for processing the return to make preliminary adjustments based on matters apparent from the return and documents filed therewith (mathematical errors, amounts clearly inadmissible, audit report indicated disallowance, etc.). The intimation process is not a full adjudicatory exercise but a summary assessment step. Precedent treatment: No prior authority was applied; the Tribunal used statutory interpretation and the accepted administrative purpose of Section 143(1). Interpretation and reasoning: The Tribunal emphasized that Section 143(1) is intended to permit only preliminary corrections on matters 'apparently' liable to adjustment. If admissibility is not clear on the face of the audit report and accompanying return documents, the intimation mechanism is not the proper forum to effect an adjustment; such matters require fuller adjudication where issues of fact and interpretation can be addressed with opportunity to be heard. Ratio vs. Obiter: Ratio. The Tribunal's reasoning that Section 143(1) adjustments are limited to matters with clarity on the face of filed documents is central to its decision to delete the impugned adjustment. Conclusions: The intimation under Section 143(1) should be confined to adjustments that are apparent and unambiguous from the return and audit report; absence of clarity as to admissibility precludes summary disallowance under Section 143(1). Issue 3: Effect of bona fide/punching error in the tax audit report on summary adjustments Legal framework: The procedural scheme requires the processing center to act on the materials filed. Where the audit report contains errors, the correctness and clarity of the report determine whether a Section 143(1) adjustment is tenable. The assessee may explain inconsistencies in the audit report and demonstrate that apparent disallowance is not intended. Precedent treatment: None cited; Tribunal assessed facts and explanation tendered by the assessee. Interpretation and reasoning: The Tribunal accepted the assessee's explanation that the dual entries arose from the manner of computing income (interest/remuneration to partners being initially added back and subsequently allowed as deduction in computation), and that a punching/uploading error resulted in the same figure appearing as both admissible and inadmissible in the audit report. Given that the mistake was plausible, documented (by reference to the computation of income) and not disputed by the Departmental Representative as to the fact of dual reporting, the Tribunal concluded the adjustment could not stand. The Tribunal noted that the intimation process is not intended to resolve such ambiguities and that the assessee had provided a reasonable explanation for the inconsistency. Ratio vs. Obiter: Ratio to the extent that the Court applied the principle that an observable clerical/punching error in the audit report which creates ambiguity bars summary disallowance; obiter insofar as acceptance of the particular explanation might not bind other fact patterns where the error is not plausibly shown. Conclusions: A bona fide error in the audit report that renders the admissibility of an expense ambiguous, when reasonably explained and supported by the computation, justifies deletion of a processing-center adjustment made under Section 143(1). Such errors remove the necessary indicia for summary disallowance and require fuller adjudication rather than summary rectification. Cross-reference Issues 1-3 are interrelated: the inadmissibility of the Section 143(1)(a)(iv) adjustment flows from the combination of (a) the statutory requirement that the audit report clearly indicate disallowance, (b) the limited, preliminary scope of Section 143(1) adjustments to matters apparent from filed documents, and (c) the proven punching/clerical error in the audit report that created ambiguity regarding admissibility.