TaxTMI 
TaxTMI 
2026 (6) TMI 912
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.... 29.07.2023. Since common issues are involved, both the appeals are heard together and are being disposed of by this consolidated order. Brief Facts of the Case 2. The assessee is a private limited company engaged in the business of manufacturing and trading of biscuits and confectionery products through its own as well as contract manufacturing units. 3. For both the years under consideration, the assessee filed its return of income declaring substantial taxable income, which was processed by the Centralized Processing Centre (CPC) under section 143(1) of the Act. In the case of A.Y. 2021-22, the matter further culminated in a rectification order passed under section 154 read with section 143(1), whereas for A.Y. 2022-23, the controversy arises from the original intimation issued under section 143(1). 3.1 In both the years, while processing the return of income, the CPC made adjustments primarily on the ground that there existed inconsistencies between the figures reported in the return of income and those reflected in the tax audit report. Based on such alleged inconsistencies, adjustments were made to the total income, inter alia, by way of disallowance under section....
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....o-moto rectification was made without providing an opportunity of being heard under section 154(3) of the Act. 1.3 The learned CIT(A) erred in not appreciating the submissions by the appellant in the correct perspective. 2. Disallowance of expenses under section 14A of the Act 2.1 The learned CIT(A) erred in confirming the additional disallowance of INR 1,43,34,800 under section 14A of the Act as expenses incurred in respect of tax-free income. 2.2 The learned CIT(A) erred in not appreciating that the impugned rectification order disallowing expenses under section 14A of the Act on a legal issue which is subject matter of debate is outside the scope of section 154 read with section 143(1) of the Act. 2.3 The learned CIT(A) erred in not considering the decision of Hon'ble Mumbai Tribunal in the appellant's own case for AYs 2008-09 to 2011-12. 3. Levy of interest under section 234A of the Act 3.1 The learned CIT(A) erred in confirming the incorrect levy of interest under section 234A of the Act. 4. Excess levy of interest under section 234B of the Act 4.1 The learned CIT(A) erred in confirming the incorr....
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....d AR submitted that the assessee had filed its return of income for A.Y. 2021-22 on 15.03.2022 declaring total income of Rs. 14,90,40,39,780/-. The said return was processed by the CPC under section 143(1) of the Act vide intimation dated 23.12.2022, wherein the total income was computed at Rs. 14,96,86,44,590/- after making adjustments, inter alia, on account of amount of profit chargeable to tax under section 41 of Rs. 6,12,43,292/-, adjustment in respect of leave encashment of Rs. 2,31,931/-, and adjustment in respect of bonus/commission payable to employees amounting to Rs. 31,29,581/-. 6.1 It was further submitted that against the aforesaid intimation, the assessee had preferred an appeal before the appellate authority and had also filed rectification applications under section 154 of the Act pointing out mistakes apparent from record. The details of such rectification applications were placed on record, including application dated 19.01.2023 against the intimation under section 143(1), and subsequent applications dated 14.04.2023, 18.04.2023, 29.08.2023 and 10.07.2024 seeking reprocessing of the return. However, it was contended that the CPC failed to grant appropriate rel....
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....ponse of the assessee, it was submitted that during the original processing under section 143(1), the assessee had filed a detailed response explaining the reconciliation of section 14A disallowance. The CPC had accepted the explanation at that stage and did not make disallowance under section 14A, however, in the subsequent rectification proceedings, the CPC ignored the earlier response and made fresh disallowance without any fresh notice or opportunity, which is arbitrary and unsustainable. 6.6 The learned AR further submitted that observations in the tax audit report are merely opinions of an independent professional and cannot bind the assessee, and that such observations by themselves cannot justify disallowance under section 143(1)(a)(iv), particularly when the same are contrary to the settled legal position. Accordingly, it was contended that the adjustment made by CPC solely on the basis of tax audit report is unsustainable in law. 6.7 The AR relied on several judicial precedents to contend that debatable issues cannot be subject matter of adjustment under section 143(1) including: i. Bajaj Auto Finance Ltd. v. CIT (Bom HC) - [2018] 93 taxmann.com 63 ....
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....on 143(1) and an intimation dated 29.07.2023 was issued, wherein an adjustment of Rs. 2,09,39,865/- was made on account of disallowance under section 14A of the Act. The learned AR submitted that prior to making the said adjustment, the CPC had issued a communication dated 28.12.2022 proposing adjustment under section 143(1)(a)(iv) on account of alleged inconsistency between the return and the tax audit report. In response thereto, the assessee filed an online reply explaining that the disallowance of Rs. 2,10,39,865/- reported in Clause 21(h) of Form 3CD comprised of: i. Direct expenses of Rs. 68,24,563/-, which pertained to taxable income in the nature of dividend and capital gains and had already been disallowed under section 37 while computing total income; and ii. Indirect expenses of Rs. 1,41,15,302/-, out of which the assessee had already disallowed a sum of Rs. 1,00,000/-under section 14A on a reasonable basis following the decisions of the Tribunal in assessee's own case for A.Ys. 2008-09 to 2011-12. 7.1 It was submitted that despite the aforesaid detailed response, the CPC proceeded to make disallowance of Rs. 2,09,39,865/- under section 14A in the in....
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....ration is whether the adjustment proposed and made by the CPC under section 143(1)(a)(iv) on the basis of Clause 21(h) of Form 3CD can be said to be without jurisdiction merely because the assessee disputed the disallowance in its response. The second controversy, which is confined to A.Y. 2021-22, is whether the subsequent rectification order passed under section 154 read with section 143(1) is sustainable when the same was passed without properly considering the assessee's reply and without granting effective opportunity before enhancing the liability. 9.1 Section 143(1)(a), as applicable to the years under consideration, empowers the processing authority to compute the total income or loss after making certain specified adjustments. Clause (iv) specifically provides for adjustment in respect of "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 proviso thereto mandates that no such adjustment shall be made unless an intimation is given to the assessee, either in writing or in electronic mode, and the second proviso further mandates that the response received from the ass....
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....ad already been disallowed under section 14A on the basis of the Tribunal orders in assessee's own case. For A.Y. 2021-22 also, the assessee had filed a response to the proposed adjustment, wherein it was explained that the amount of Rs. 4,26,73,518/- as per Clause 21(h) comprised Rs. 2,83,38,718/- of direct expenses and Rs. 1,43,34,800/- of indirect expenses, and that Rs. 1,00,000/- had already been disallowed under section 14A. These facts establish that the first and second provisos to section 143(1)(a) stood substantially complied with at the stage of processing the return. 9.5 We are, therefore, unable to accept the assessee's broad proposition that merely because the issue concerns section 14A, the CPC had no jurisdiction at all to invoke section 143(1)(a)(iv). The jurisdictional trigger under clause (iv) is not the final correctness of disallowance on merits, but the existence of a disallowance of expenditure indicated in the audit report which has not been taken into account in computing the total income in the return. Once such figure is indicated in Form 3CD and the assessee's computation does not fully take it into account, the CPC is not denuded of jurisdiction to pr....
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....en applicable, such payment, if made before the due date of filing return under section 139(1), was allowable, and therefore the mere reporting of the due date under the respective welfare statute could not be treated as an indication of disallowance. The headnote itself records that "due date under Explanation to section 36(1)(va) as mentioned in tax audit report was judicially held to be not decisive by High Court for determining disallowance in computation of total income" and that the High Courts had held that disallowance would not arise when payment was made before due date under section 139(1). 9.9 The ratio of Kalpesh Synthetics is, therefore, fact-specific. It was a case where the tax auditor reported a factual due date under another statute, but the legal consequence of that factual reporting had already been settled by binding High Court decisions in favour of the assessee. The Co-ordinate Bench itself observed that "the due date... has not been found to be decisive in the light of the law laid down by Hon'ble Courts above" and therefore reporting of payment beyond that date could not constitute "disallowance of expenditure indicated in the audit report" for the purpo....
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....tion 44AB, the Hon'ble Gujarat High Court noticed that a reporting auditor's certificate is a written confirmation of accuracy of facts whereas a report includes opinion, and that an auditor's report may involve inquiry, examination or review. The extracted portion states that "A certificate is a written confirmation of the accuracy of the facts stated therein and does not involve any estimate or opinion. A report, on the other hand, is a formal statement usually made after an inquiry, examination or review of specified matters under report and includes the reporting auditor's opinion thereon." The said decision only explains the nature of tax audit reporting and does not deal with the specific statutory power subsequently enacted in section 143(1)(a)(iv). Therefore, while the audit report may not be conclusive on merits and while the assessee is always entitled to explain or rebut the reporting, the existence of such report cannot be ignored when the statute itself specifically permits adjustment of expenditure indicated in the audit report but not taken into account in computing total income. 9.14 We also distinguish the older decisions relied upon by the assessee such as ....
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....s governing the issue. Instead, the quantification appears to have been made in a mechanical manner by straightaway applying Rule 8D. 9.18 It is well settled that the invocation of Rule 8D is not automatic and is conditional upon the Assessing Officer recording a clear dissatisfaction with the correctness of the assessee's claim having regard to the accounts, which is a jurisdictional requirement to be fulfilled by the Assessing Officer alone. The auditor, by the very nature of his function, neither records nor is competent to record such statutory satisfaction. Therefore, any quantification made in the audit report based on Rule 8D, particularly in the absence of independent evaluation of the assessee's claim and without due regard to judicial precedents, remains merely indicative in nature and cannot be elevated to the status of a conclusive or binding determination under section 14A of the Act. 9.19 At the same time, the scheme of section 143(1)(a)(iv), as amended, specifically contemplates a situation where the CPC may make an adjustment based on "disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the retu....
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....tice to the assessee of its intention and has allowed a reasonable opportunity of being heard. In the present case, the rectification under section 154 resulted in enhancement of liability by making a fresh disallowance under section 14A. Such exercise could not have been undertaken in a mechanical manner without dealing with the assessee's explanation, more particularly when the assessee had already placed on record a reconciliation of the amount reported in Form 3CD. 10.3 Even though we have held that the CPC had jurisdiction under section 143(1)(a)(iv) to make an adjustment based on the tax audit report, the power under section 154 stands on a different footing. Section 154 is not a substitute for review, nor can it be used to revisit an issue without considering the assessee's response where the rectification enhances the liability. The defect in the present rectification order is not merely technical. The assessee's explanation went to the root of the matter, namely whether the amount reported in Clause 21(h) had already been partly disallowed under section 37 and whether only Rs. 1,00,000/- was required to be disallowed under section 14A as per the consistent view of the C....
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....that the direct expenses forming part of the reported amount were already disallowed under section 37 while computing the total income. This factual position has not been controverted by the Revenue. Therefore, inclusion of such amount again in the computation under section 14A would clearly result in double disallowance, which is impermissible in law. 12.2 In so far as the balance indirect expenditure is concerned, the assessee has consistently taken a position that a reasonable disallowance of Rs. 1,00,000/- would meet the ends of justice. This position is not ad hoc but is based on the orders of the co-ordinate benches in assessee's own case for A.Ys. 2008-09 to 2011-12, wherein the Co-ordinate Bench, after examining the nature of investments, PMS fees and depository charges, held that over and above such specific expenses, a further disallowance of Rs. 1,00,000/- would be appropriate. 12.3 At this stage, it is relevant to examine the statutory scheme of section 14A. Sub-section (2) of section 14A provides that the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income in accordance with the prescribed method, only if he is not sa....