2025 (5) TMI 602 - AT - Income Tax

Revenue loses appeal as CPC violated natural justice by making Section 143(1) adjustments without mandatory intimation to assessee

ITAT Mumbai dismissed revenue's appeal regarding additions made by CPC under Section 143(1) for ICDS adjustments and stock valuation deviations. The court ... Addition made by the CPC u/s 143(1) - ICDS (Income Computation and Disclosure Standards) adjustments and deviations in stock valuation - allegation of non considering the provisions of Section 40 and Section 43B of the Act through Notification No. 28/2021, dated 01.04.2021 - Whether assessee was entitled to file a revised tax audit report after the end of the relevant assessment year to rectify a typographical error in the original tax audit report, particularly in relation to the inclusion of GST in purchase figures under clause 14(b) of Form 3CD? AR argued that there was a gross violation of principles of natural justice, where the ld. CPC/AO cannot make adjustment/addition without duly giving notice to the assessee - AR contended that the assessee was brought to the notice of discrepancy in the tax audit report only during the Section 143(1) proceeding subsequent to which the assessee had filed its revised tax audit report and there is no express bar in the provision of law for filing the revised tax audit report in case of the other additions made when there has been a genuine error crept in in the tax audit report HELD THAT:- It is observed that the assessee has received intimation u/s. 143(1) pertaining to only the addition made u/s. 41 of the Act, where there was inconsistency in the amount of profit chargeable to tax u/s. 41 specified in the report and in the audit report. In the present case in hand, the CPC/ld. AO has failed to include the adjustment in the proposed adjustment u/s.143(1)(a) of the Act and has merely mentioned the adjustmen on account of inconsistency in the amount of profit chargeable to tax u/s. 41 of the Act as per the return of income and the audit report. There is no iota of doubt that the CPC/AO has not sought for the assessee’s response either in writing or via mail pertaining to the said adjustment. It is also evident that the CPC/ld. AO has merely stated that the said adjustment is made due to non-compliance/no response from the assessee, which fact is not correct as per the records placed before us. Proviso to Section 143(1)(a) categorically specifies that before making an adjustment it is mandatory for the CPC/AO to provide an intimation to the assessee either in writing or in electronic mode pertaining to the proposed adjustment. In the present case in hand, this exercise has been carried out before processing the return u/s. 143(1) of the Act, thereby violating the principles of natural justice. On the above observation, we do not find any infirmity in the order of the ld. CIT(A) on this issue. Revision of the tax audit report in case of any arithmetical error or incorrect claim - The decisions relied upon by the ld. AR has dealt with identical issues, where the coordinate benches have decided the issue based on the revised tax audit report in case of inadvertent error and the same has not been restricted to the disallowance u/s 40 or Section 43B of the Act. We are conscious of the fact that a tax audit report could be amended strictly only as per the method recommended in Statement on Auditing Standards - SA-560 on ‘Subsequent Events’, there is no bar on the Tribunal to decide on an issue based on the revised tax audit report especially in cases where there has been inadvertent error crept in in the original tax audit report. Even otherwise, there has to be a recourse to the assessee in case of any inadvertent error which are not malafide, where the assessee should not be put to unnecessary hardships due to mere technicalities. We therefore deem it fit to uphold the order of ld. CIT(A) on this issue where it has been held that the same is a typographical error with no malafide intention, thereby directing the ld. AO to delete the impugned adjustment after duly verifying that the said adjustment is merely due to the typographical error in the figures in the original tax audit report. On the above observation, the grounds of appeal filed by the revenue holds no merit and is hereby dismissed. Appeal filed by the revenue is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal were:Whether the adjustments made by the Central Processing Centre (CPC) under Section 143(1) of the Income Tax Act, 1961 without issuing proper intimation or notice to the assessee, particularly relating to ICDS (Income Computation and Disclosure Standards) adjustments and deviations in stock valuation, violated principles of natural justice.Whether the assessee was entitled to file a revised tax audit report after the end of the relevant assessment year to rectify a typographical error in the original tax audit report, particularly in relation to the inclusion of GST in purchase figures under clause 14(b) of Form 3CD.Whether the limitation imposed by Notification No. 28/2021 dated 01.04.2021, restricting the filing of revised audit reports only to recalculation of disallowances under Sections 40 or 43B of the Act, barred the assessee from filing a revised report for other disallowances or errors.The validity of the additions made by the CPC/AO on account of ICDS adjustments and stock valuation deviations amounting to Rs. 34,56,43,410/- and Rs. 11,77,61,410/- respectively.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Violation of Principles of Natural Justice due to Non-Issuance of Proper Notice under Section 143(1)(a)Relevant Legal Framework and Precedents: Section 143(1)(a) of the Income Tax Act mandates that before making any adjustment to the return of income during processing, the Assessing Officer (AO) or CPC must issue an intimation to the assessee either in writing or electronic mode specifying the proposed adjustment. The proviso to this section ensures that no adjustment can be made without such intimation, thereby safeguarding the principles of natural justice.Court's Interpretation and Reasoning: The Tribunal observed that the CPC/AO issued intimation only with respect to an adjustment under Section 41 of the Act amounting to Rs. 68,20,418/-, but failed to include the substantial adjustment of Rs. 23,41,32,000/- relating to ICDS and stock valuation deviations in the intimation. Consequently, the CPC/AO proceeded to make additions without giving the assessee an opportunity to respond or be heard.Key Evidence and Findings: The record showed that the assessee had responded to the notice relating to the Section 41 adjustment, but no notice or intimation was issued regarding the other significant additions. The CPC/AO's claim of non-response from the assessee was contradicted by the assessee's submissions.Application of Law to Facts: Since Section 143(1)(a) explicitly requires intimation to the assessee before making adjustments, the failure to provide such notice for the ICDS and stock valuation related additions amounted to a breach of natural justice.Treatment of Competing Arguments: The revenue did not dispute the absence of intimation but contended the correctness of the additions. The Tribunal prioritized procedural fairness over the merits of the additions at this stage.Conclusions: The Tribunal upheld the deletion of the additions on the ground of violation of principles of natural justice due to non-issuance of proper intimation under Section 143(1)(a).Issue 2: Entitlement to File Revised Tax Audit Report Post Assessment Year to Rectify Typographical ErrorRelevant Legal Framework and Precedents: Rule 6G of the Income Tax Rules, 1962, as amended by Notification No. 28/2021, permits filing of a revised audit report before the end of the relevant assessment year only for recalculation of disallowances under Sections 40 or 43B. The assessee sought to file a revised tax audit report to correct a typographical error involving the inclusion of GST in purchase figures, which impacted ICDS adjustments.Court's Interpretation and Reasoning: The Tribunal acknowledged the existence of a genuine typographical error in the original tax audit report, where the amount of increase in purchase was misreported as Rs. 2,60,14,197 instead of Rs. 26,01,46,197. The assessee filed a revised audit report dated 13.02.2024 to rectify this error.Key Evidence and Findings: The revised tax audit report was filed after receipt of the intimation under Section 143(1) and after the end of the relevant assessment year. The revenue contended that such filing was impermissible under the notification restricting revision to Sections 40 and 43B disallowances.Application of Law to Facts: The Tribunal noted that while the notification restricts revisions to recalculation of disallowances under Sections 40 or 43B, it does not expressly bar revisions for other inadvertent errors such as typographical mistakes. The Tribunal further recognized that the Statement on Auditing Standards (SA-560) permits amendment of audit reports in case of subsequent events, and there is no absolute bar on considering revised audit reports in such circumstances.Treatment of Competing Arguments: The revenue argued that the notification's limitation was strict and mandatory, barring any revisions outside Sections 40 and 43B. The assessee relied on precedents from coordinate benches which allowed revisions for inadvertent errors beyond the scope of Sections 40 and 43B.Conclusions: The Tribunal held that the assessee was entitled to file the revised tax audit report to correct the typographical error, as the error was inadvertent and not mala fide. The Tribunal emphasized that technicalities should not cause undue hardship to the assessee, and the revised report should be accepted for correction of genuine mistakes.Issue 3: Validity of Additions on Account of ICDS Adjustments and Stock Valuation DeviationsRelevant Legal Framework and Precedents: ICDS prescribes standards for computation of income and disclosure. Deviations from prescribed stock valuation methods and adjustments under ICDS can lead to additions or disallowances. The revenue sought to uphold additions of Rs. 34,56,43,410 and Rs. 11,77,61,410 respectively on these grounds.Court's Interpretation and Reasoning: The Tribunal found that the large additions were a consequence of the typographical error in the original tax audit report concerning GST inclusion in purchases. Since the error was corrected via the revised audit report, the basis for the additions was undermined.Key Evidence and Findings: The original misreported figure led to inflated ICDS adjustments. The revised tax audit report corrected the figure, and the assessee's submissions were consistent with this correction.Application of Law to Facts: Given the correction, the additions lacked merit. The Tribunal directed the AO to delete the impugned adjustments after verifying that the additions arose solely due to the typographical error.Treatment of Competing Arguments: The revenue contended the additions were valid and that the revised audit report was not permissible. The Tribunal rejected this, emphasizing the absence of mala fide intent and the need to avoid penalizing the assessee for inadvertent mistakes.Conclusions: The additions on account of ICDS adjustments and stock valuation deviations were deleted as they were based on a rectifiable typographical error.3. SIGNIFICANT HOLDINGS'The proviso to Section 143(1)(a) categorically specifies that before making an adjustment it is mandatory for the CPC/AO to provide an intimation to the assessee of such adjustments either in writing or in electronic mode.''There is no bar on the Tribunal to decide on an issue based on the revised tax audit report especially in cases where there has been inadvertent error crept in in the original tax audit report.''The assessee should not be put to unnecessary hardships due to mere technicalities where there has been no mala fide intention.''The impugned adjustment is merely due to typographical error in the figures in the original tax audit report and hence deserves to be deleted.'The Tribunal conclusively held that the additions made by the CPC/AO without proper intimation violated principles of natural justice and were liable to be deleted. Further, it recognized the right of the assessee to file a revised tax audit report to correct genuine inadvertent errors beyond the strict scope of Sections 40 and 43B disallowances. Consequently, the appeal filed by the revenue was dismissed, affirming the order of the CIT(A) in favor of the assessee on both procedural and substantive grounds.