TaxTMI 
TaxTMI 
2026 (7) TMI 1492
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....e Ld. AO has grossly erred in considering starting point of computation in Assessment order as income computed under Section 143(1) of INR 201,08,95,650 as against the total income as per the return of income filed under Section 139(1) of INR 191,58,60,950 thereby making an erroneous addition to the total income of the Appellant Company by INR 9,50,34,695 without any cogent reason, without any show cause and without any opportunity to explain thus, in clear violation of principal of natural justice. 1.2 On the facts and in the circumstances of the case and in law, the Ld. AO and the Ld. CIT(A) has erred in not considering the submission of the Appellant that the intimation under Section 143(1) of the Act merges into the Assessment Order passed under Section 143(3) of the Act and the Assessing Officer has to re-examine the correctness of the disallowances/adjustment made in the intimation issued under Section 143(1) of the Act. 1.3 On the facts and in the circumstances of the case and in law, the Ld. AO and the Ld. CIT(A) has erred in not appreciating the submission of the Appellant that the intimation under Section 143(1) of the Act is time barred hence the underl....
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....either at the time of the hearing or before the hearing of this appeal." 3. The brief facts of the case are that assessee company filed its return of income under section 139(1) of the Income-tax Act, 1961 ["the Act"] declaring total income of Rs. 191,58,60,950. The case was selected for scrutiny and notice under section 143(2) of the Act was issued on 28.06.2022. Subsequently, the Central Processing Centre ("CPC") processed the return under section 143(1) of the Act and made adjustments aggregating to Rs. 9,50,34,695 on account of alleged discrepancies between the particulars furnished in the return of income and Form 3CD. The intimation under section 143(1) was digitally signed on 15.07.2023. Thereafter, the Assessing Officer completed the assessment under section 143(3) of the Act by adopting the income determined under section 143(1) as the starting point of computation instead of the income originally returned by the assessee. In addition, the Ld. AO made disallowance of ESOP expenditure of Rs. 51,68,730. The Ld. CIT(A) confirmed the action of the Assessing Officer. 4. Aggrieved by the additions and disallowances sustained by the Ld. CIT(A), the assessee is in further ap....
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....of the intimation under section 143(1). 7. We have heard the rival submissions and perused the material available on record. The principal grievance of the assessee is that while completing the assessment u/s 143(3) of the Act, the Assessing Officer adopted the income determined in the intimation issued u/s 143(1) amounting to Rs. 201,08,95,650/- as the starting point of computation instead of the total income originally returned by the assessee u/s 139(1) at Rs. 191,58,60,950/-. Consequently, the adjustment of Rs. 9,50,34,695/- made by CPC while processing the return stood mechanically incorporated in the assessment order without any independent examination. 7.1 The relevant chronology of events, which has a bearing on the issue under consideration, is as under:- * The assessee filed its return of income on 08.03.2022 declaring total income of Rs. 191,58,60,950/- for the AY 2021-22. * The case was selected for scrutiny and notice u/s 143(2) was issued on 28.06.2022. * Thereafter, CPC processed the return under section 143(1) on 21.10.2022 and the intimation was digitally signed on 15.07.2023 making adjustments aggregating to Rs. 9,50,34,695/-, enha....
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....1(1) and disallowance of ESOP expenses of Rs. 51,68,730/-. 7.4 The Ld. Senior Advocate, Shri S.N. Soparkar argued that the Assessing Officer passed the order u/s 143(3) of the Act considering starting point of computation in the assessment order as income as "income computed as per intimation u/s 143(1) of the Act as against the total income as per the return of income filed u/s 139(1) of the Act and continued with the disallowance made while processing the return of income u/s 143(1) of the Act. The Ld. Sr. Counsel argued that Assessing Officer erred in adopting the computation u/s 143(1) as the basis for assessment instead of the return filed u/s 139(1). The Ld. Sr. Counsel thus submitted that this had resulted in an unjustified addition made without reasons, notice, or opportunity to explain, in violation of natural justice. The Ld. Sr. Counsel further submitted that the intimation u/s 143(1) stands merged with the scrutiny assessment u/s 143(3), requiring the Assessing Officer to independently verify any earlier adjustments. The authorities failed to consider this settled legal position. It was also submitted by the Ld. Sr. Counsel that the intimation u/s 143(1) was time-bar....
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....ssing Officer has clearly examined the issue of ESOPs and obligatory upon the Assessing Officer to examine the disallowances computed by the CPC. 9.1 With regard to the grounds that the Revenue cannot process the return u/s 143(1) once the notice u/s 143(2) has been issued, the Ld. Sr. Counsel argued that once proceedings u/s 143(2) of the Act have commenced, the Assessing Officer has no power to pass order u/s 143(1) of the Act. The Ld. Sr. Counsel relied on the judgment of the Hon'ble High Court of Gujarat in the case of Gujarat Poly-Avx Electronics Ltd. Vs. DCIT, 222 ITR 140 (Guj.), wherein it was held that "after issuance of notice under s. 143(2) of the Act, it is not open for the AO to make adjustment or to pass order under s. 143(1) of the Act but he has to make assessment in accordance with law, i.e., under s. 143(3) of the Act". The Ld. Sr. Counsel has also relied upon the judgment of Hon'ble Apex Court in the case of CIT Vs. Gujarat Electricity Board, [260 ITR 84 (SC)], wherein it was held as under:- "5. Even otherwise, the view taken by the Gujarat High Court seems to be correct on principle. There is no dispute that Section 143(1)(a) of the Act enacts a summ....
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.... be payable by, or the amount of refund due to, the assessee under clause (c); and (e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee: Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax or interest is payable by, or no refund is due to, him: Provided further that no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the return is made. Explanation.-For the purposes of this sub-section,- (a) "an incorrect claim apparent from any information in the return" shall mean a claim, on the basis of an entry, in the return,- (i) of an item, which is inconsistent with another entry of the same or some other item in such return; (ii) in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or (iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed ....
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....omputed excessive loss or has not under-paid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return: ^74[Provided that no notice under clause (ii) shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.]] ^75[(3) On the day specified in the notice,- (i) issued under clause (i) of sub-section (2), or as soon afterwards as may be, after hearing such evidence and after taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss accordingly, and determine the sum payable by the assessee on the basis of such assessment; (ii) issued under clause (ii) of sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require o....
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....ctivities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university, college or other institution was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommend to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assessing Officer:] ^79a[Provided also that notwithstanding anything contained in the first and the second proviso, no effect shall be given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in such previous year, whether or not the approval granted to such trust or institution or notification issued in respect of such trust or institution ....
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....hin thirty days of the issue of such intimation, such adjustments shall be made; (b) the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a); (c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and interest, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest; (d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and (e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee: Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted bu....
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....Act, 2016, w.e.f. 1-4-2017 : (1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary before the expiry of the period specified in the second proviso to sub-section (1), where a notice has been issued to the assessee under sub-section (2): Provided that such return shall be processed before the issuance of an order under sub-section (3). ^43[(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return: Provided that no notice under this sub-section shall be served on the assessee after the expiry of six mon....
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....b-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, by such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, where in his view such contravention has taken place; and (ii) the approval granted to such research association or other association or fund or trust or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded : Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university, college or other institution was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other ....
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.... 80-IE, if the return is furnished beyond the due date specified under sub-section (1) of section 139; or (vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return: Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode: Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made;] (b) the tax ^15[and interest], if any, shall be computed on the basis of the total income computed under clause (a); (c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax 15[and interest], if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowab....
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....fication; so, however, that no direction shall be issued after the 31st day of March, 2012. (1C) Every notification issued under sub-section (1B), along with the scheme made under sub-section (1A), shall, as soon as may be after the notification is issued, be laid before each House of Parliament. 17[(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2): Provided that the provisions of this sub-section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017.] ^18[(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessin....
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....ucational institution or any hospital or other medical institution, where in his view such contravention has taken place; and (ii) the approval granted to such research association or other association or fund or trust or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded : Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university, college or other institution was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommend to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assess....
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....s furnished beyond the due date speciKied under sub-section (1) of section 139; or (vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return: Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode: Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made: Provided also that no adjustment shall be made under sub-clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018; (b) the tax, interest and fee, if any, shall be computed on the basis of the total income computed under clause (a); (c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax, interest and fee, if any, computed under clause (b) by any tax deducted at source, any tax collected at....
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....he OfKicial Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modiKications and adaptations as may be speciKied in that notiKication; so, however, that no direction shall be issued after the 31st day of March, 2012. (1C) Every notiKication issued under sub-section (1B), along with the scheme made under sub-section (1A), shall, as soon as may be after the notiKication is issued, be laid before each House of Parliament. (1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2): Provided that the provisions of this sub-section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017. (2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing OfKicer or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or....
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....e (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, by such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, where in his view such contravention has taken place; and (ii) the approval granted to such research association or other association or fund or trust or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notiKication issued in respect of such news agency or fund or trust or institution has been rescinded : Provided further that where the Assessing OfKicer is satisKied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university, college or other institution was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommend to ....
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....paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment ; (b) if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly. (5) [Omitted by the Finance Act, 1999, w.e.f. 1-6-1999.] 9.6 To clarify, the provisions of 143(1D) as inserted by Finance Act, 2012 reads as under:- ^71a[(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2).] The provisions of 143(1D) as inserted by Finance Act, 2016 reads as under:- "(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2). Following sub-section (1D) shall be substituted for the existing subsection (1D) of section 143 by the Finance Act, 2016, w.e.f. 1-4-2017 : (1....
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....due is to be issued to the taxpayer. Some returns of income are also selected for scrutiny which may lead to raising a demand for taxes although refunds may have been issued earlier at the time of processing. It is therefore proposed to amend the provisions of the income-tax Act to provide that processing of return will not be necessary in a case where notice under sub-section (2) of Section 143 has already been issued for scrutiny of the return. This amendment will take effect from the 1st day of July, 2012." The Hon'ble Court held that it is evident that Section 143 (1D) in the manner it is worded gives a discretion to the AO to decide whether the return of income has to be processed where a notice has been issued under Section 143 (2) of the Act. It is significant that sub-section (1D) was inserted in Section 143 subsequent to the insertion of sub-section (1A) which provides for centralised processing of returns. Under the Scheme framed by the CBDT in 2011 in terms of Section 143(1A), there is a computerized random selection of returns which might be taken up for scrutiny. Thus, the discretion regarding picking up a return for scrutiny is no longer left with....
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.... or the later orders legally disappear and merged for every purpose. An intimation u/s 143(1) is a separate operative order so as the assessment order passed subsequently u/s 143(3). Similarly, if a reassessment u/s 148 has been undertaken based on specific information, that also do not merge with the earlier 143(3) order, but operate separately for that year. Further, if an assessment is made u/s 153A or 153C based on the seized material in consequence to a search and seizure operation, the assessment becomes operative per se on stand-alone basis for that assessment year and the legal remedies are available for each order. We further clarify that there cannot be two orders u/s 143(3), 148, 153A, 153C for the same assessment year. The operative assessment order for determining assessee's total income and the doctrine of merger applies only to the matters actually dealt and decided in the later proceedings. This concept is reflected in decisions holding that a reassessment is a reassessment of the original assessment and that, once validly made, it becomes the effective assessment for that year. At the same time, the Supreme Court has clarified that the doctrine of merger is not aut....
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....d on 15.07.2023 is factually wrong as email & SMS issued pertained to the "refund status" and ultimately the refund was issued on 16.08.2023. Thus, the arguments of the Ld. Counsel cannot be accepted as the page No. 350 of the paper-book clearly shows "download intimation order" and after that the details mentions thereof pertained to the refund but not of processing. Hence, we have no hesitation to hold that the processing u/s 143(1) and intimation issued was within the time limit prescribed in the Act. 9.11 The CPC made adjustments on account of three items namely:- i. Disallowance of incentive/bonus paid to the employees, ii. Disallowance of Leave Encashment paid to employee, iii. Addition u/s 41(1) of the Act. These adjustments were made u/s 143(1A) of the Act and not a subject matter of the order u/s 143(3) of the Act. The assessee may choose to appeal against the order u/s 143(1), as per the provisions of Section 245A of the Act. In view of the above, Ground Nos. 1 & 2 raised by the assessee are dismissed. 10. The Assessing Officer has made only one disallowance i.e. Rs. 51,68,730/- on account of ESOPs in the order passed u/s 143(3) whic....
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....section 37(1) of the Act. The Ld. AR further submitted that the assessee has consistently followed a prudent approach by disallowing the ESOP expense recognised in the books under Ind AS and claiming deduction only when the liability crystallises upon exercise of options by employees. It was contended that denial of deduction would result in economic double taxation since the employees are taxed on the corresponding perquisite value while the assessee is denied deduction of the related expenditure. Reliance was placed on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Biocon Ltd., 121 taxmann.com 351 (Karnataka High Court) and various decisions of the Coordinate Benches of the Tribunal, wherein it has been held that ESOP expenditure incurred for employee compensation is allowable as business expenditure under section 37(1) of the Act. 11.6 The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that the expenditure is directly linked with issue of shares under the ESOP scheme and is therefore capital in nature. Accordingly, it was submitted that the disallowance made by the Assessing Officer and confirmed by the lea....