2024 (6) TMI 1495 - AT - Income Tax

Intimation under s.143(1)(a) violated natural justice; non-speaking s.154 order, allow carry-forward of long-term capital loss

Fortum SAR B.V. Versus Assistant Director of Income Tax, Central Processing Centre, Bengaluru DCIT-1 (3) (1), International Taxation, Delhi

ITAT held the intimation under s.143(1)(a) violated audi alteram partem because no show-cause notice was issued, and the 154 order was non-speaking; the ... Adjustment u/s 143(1)(a) - principle of audi alteram partem - Disallowing carry forward of current year's loss from the returned loss - HELD THAT:- In the facts of the present appeal, admittedly, no show cause notice in terms of first proviso to Section 143(1)(a) of the Act was issued by the CPC before carrying out the adjustment. In fact, learned First Appellate Authority has also accepted the aforesaid factual position. Thus, it is a proven fact on record that the assessee has been deprived of its valuable right of representation, thereby, the intimation issued u/s 143(1)(a) of the Act suffers from gross violation of rules of natural justice. FAA has glossed over the issue of violation of the mandatory condition of section 143(1)(a) of the Act by stating that it is a mere procedural irregularity, which, according to us, is unacceptable. More surprising is the way in which assessee’s application u/s 154 of the Act was dealt with. Neither the intimation issued u/s 143(1)(a) nor the order passed u/s 154 of the Act provides any basis for disallowance of assessee’s claim of carry forward of long term capital loss. Unfortunately, learned First Appellate Authority has supported the disposal of assessee’s application u/s 154 of the Act through a non-speaking and unreasoned order by stating that since 154 application was to be disposed of by CPC through a computerized system without any human interfere, there is no requirement for passing a speaking order. The aforesaid reasoning of the First Appellate Authority, in our view, is wholly misconceived and against the principle of audi alteram partem. In our view, the assessee cannot be left remediless against an order passed u/s 143(1)(a). Whether the First Appellate Authority is justified in restoring the issue to the CPC/AO with a direction to issue a show cause notice to the assessee and pass a fresh intimation u/s 143(1)(a) of the Act - On going through the provisions of Section 250 of the Act, we are of the view that learned First Appellate Authority could not have issued such direction as section 250 read with section 251 of the Act does not vest any power with the first Appellate Authority to restore/remand the appeal to the AO. Even otherwise also, it is a fact on record that the assessee has claimed set off and carry forward of loss in a return of income filed u/s 139(1) of the Act within due date. Neither the CPC nor the first Appellate Authority have given any adverse observation with regard to the genuineness of the loss claimed. Thus, once the claim of carry forward of loss is in accordance with statutory provisions, such claim has to be allowed. There is no observation by the Departmental Authorities that assessee’s claim is not in accordance with the statutory provisions. In fact, CPC has allowed carry forward of short term capital loss. However, claim of carry forward of long term capital loss was denied for some unknown reasons. We are unable to uphold the adjustment made by the CPC. The Assessing Officer is directed to allow assessee’s claim of carry forward of long term capital loss as well. ISSUES PRESENTED AND CONSIDERED 1. Whether an adjustment by the Centralized Processing Centre (CPC) under section 143(1)(a) of the Act can lawfully deny carry forward of long term capital loss claimed in a return filed within the due date under section 139(1). 2. Whether the provisos to section 143(1)(a) (requirement of intimation/show cause and consideration of response) are mandatory, and whether failure to issue such intimation/show cause vitiates an adjustment made by CPC under section 143(1)(a) on grounds of violation of natural justice. 3. Whether an order disposing of an application under section 154 (rectification) made against an intimation under section 143(1)(a) may be non-speaking/computerized and whether such non-speaking disposal is sustainable. 4. Whether the First Appellate Authority (under section 250 read with section 251) has jurisdiction/power to remit or restore the matter to the Assessing Officer/CPC for fresh processing (issue of show cause and re-processing) instead of deciding the matter on merits or quashing the defective adjustment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of CPC's power under section 143(1)(a) to deny carry forward of loss Legal framework: Section 143(1)(a) permits adjustment while processing returns 'for the purpose of computation of total income or loss.' The first proviso requires intimation to the assessee before making an adjustment; the second proviso mandates consideration of the assessee's response to the show cause before adjustment. Precedent treatment: The assessee relied on various authorities arguing limited CPC power where return filed under section 139(1) - those decisions were placed before the Tribunal and considered in submissions. Interpretation and reasoning: The Tribunal examined the statutory language and the practical effect of provisos. While the Commissioner (Appeals) read section 143(1)(a) as empowering CPC to adjust returned income/loss, the Tribunal scrutinized the surrounding statutory safeguards (provisos) and the facts showing no show cause/intimation was issued prior to adjustment. The Tribunal found CPC's action to be perfunctory and without any stated reason for denying carry forward of long term capital loss, and therefore beyond acceptable exercise of power in absence of compliance with statutory conditions. Ratio vs. Obiter: Ratio - CPC cannot lawfully sustain an adjustment to deny carry forward of loss where the mandatory provisos to section 143(1)(a) (intimation and consideration of response) were not complied with and no reasons are recorded. Conclusion: The CPC's denial of carry forward of long term capital loss (without intimation and without reasons) is illegal, arbitrary and without jurisdiction; the claim of carry forward, being in accordance with statutory provisions and filed within section 139(1) time, must be allowed absent adverse findings on genuineness. Issue 2 - Mandatory nature of provisos to section 143(1)(a) and rules of natural justice Legal framework: First proviso to section 143(1)(a) mandates intimation to the assessee before adjustment; second proviso requires consideration of the assessee's response to the show cause notice before adjustment is effected. Precedent treatment: The First Appellate Authority accepted that no notice was issued but treated the failure as a mere procedural irregularity and directed re-processing; that approach was considered by the Tribunal. Interpretation and reasoning: The Tribunal held the provisos impose mandatory conditions; failure to issue the requisite intimation deprives the assessee of the right of representation and violates audi alteram partem. The Tribunal rejected the characterization of the omission as merely procedural and upheld that such omission vitiates the intimation/adjustment under section 143(1)(a). Ratio vs. Obiter: Ratio - The provisos to section 143(1)(a) are mandatory and non-compliance amounts to gross violation of rules of natural justice, rendering the adjustment invalid. Conclusion: The absence of the statutorily mandated show cause/intimation renders the adjustment under section 143(1)(a) null and void; the assessee was deprived of a valuable right of representation. Issue 3 - Validity of non-speaking/computerized disposal of section 154 application Legal framework: Section 154 permits rectification of mistakes; administrative practice may involve CPC computerized processing, but legal standards of reasoned decision and opportunity of representation remain relevant. Precedent treatment: The Commissioner (Appeals) accepted the CPC's non-speaking disposal on the ground of computerized processing; the Tribunal addressed this rationale. Interpretation and reasoning: The Tribunal found disposal of the section 154 application in a perfunctory, non-speaking manner unacceptable. It held that an assessee cannot be left remediless by a non-reasoned order, particularly where a statutory right (carry forward of loss) is denied. The Tribunal emphasized that orders affecting assessee's substantive rights must disclose reasons and cannot be justified solely because processed by computerized system. Ratio vs. Obiter: Ratio - A non-speaking/computerized disposal of a rectification application under section 154 that effects denial of carry forward of loss without reasons is legally impermissible and contrary to principles of audi alteram partem. Conclusion: The section 154 disposal sustaining denial of carry forward without reasons is unlawful; the Tribunal cannot uphold such non-speaking action. Issue 4 - Power of First Appellate Authority to remit/restore to AO under section 250 read with section 251 Legal framework: Sections 250 and 251 define the powers of the Commissioner (Appeals)/First Appellate Authority on appeals; the scope of authority to restore/remand to Assessing Officer is to be determined from those provisions. Precedent treatment: The assessee argued that the First Appellate Authority lacked remand power and relied on case law; the First Appellate Authority nevertheless directed re-processing by CPC/ AO. Interpretation and reasoning: The Tribunal interpreted section 250 read with section 251 as not vesting an express power in the First Appellate Authority to restore/remand the appeal to the AO for fresh issuance of show cause and re-processing. Further, in the factual matrix where the return was filed under section 139(1), the claim complied with statutory provisions and no adverse findings on genuineness were recorded by departmental authorities, the Tribunal found remand unnecessary and inappropriate. Given the CPC's failure to comply with mandatory provisos and absence of any reasoned objection, the Tribunal concluded the appropriate remedy was to direct allowance of the carry forward rather than remand for fresh processing. Ratio vs. Obiter: Ratio - The First Appellate Authority does not possess power under section 250/251 to remit the matter to the AO in the circumstances where mandatory statutory conditions were not complied with and there are no adverse observations on the claim; remand in such circumstances is unwarranted. Conclusion: The First Appellate Authority erred in remitting the matter to the CPC/AO; instead the Assessing Officer is directed to allow the carry forward of long term capital loss. Cross-reference Issues 1-3 are interrelated: the substantive invalidity of the CPC adjustment (Issue 1) flows from mandatory non-compliance with the provisos (Issue 2) and is compounded by a non-speaking rectification order (Issue 3). Issue 4 (remand power) was resolved by reference to the statutory scheme and the absence of departmental adverse findings - leading to direct allowance rather than restoration for re-processing.