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2023 (6) TMI 1485 - AT - Income TaxAdjustment made issuing intimation u/s. 143(1) - as submitted no intimation is given to the assessee of such adjustments either in writing or electronic mode - HELD THAT - In this case there is no dispute whatsoever with regard to the fact that the AO has not issued a communication to the assessee as required under first proviso to sec.143(1)(a) of the Act before making adjustment to total income u/s. 143(1) of the Act. When the Bench directed the Ld. DR present for the Revenue to verify the records and ascertain whether the AO has issued mandatory communication proposing the adjustment before issuing intimation u/s. 143(1) of the Act for which the Ld. DR vide his written submissions dated 02.06.2023 stated that the details of communication proposing the adjustment are not available for extraction as the CPC-2.0 Project was in transition phase for AY 2020-21 From the above it is clear that the details of communication issued by the AO as per the first proviso to Sec.143(1)(a) of the Act is not available with the AO. Therefore intimation issued u/s. 143(1) of the Act with various adjustments to total income cannot be sustained and thus the intimation issued u/s. 143(1)(a) is held to be unsustainable in law and thus we direct the AO to delete additions made towards disallowance of various expenses in the said intimation. Assessee appeal allowed. Rate of tax applicable for domestic companies - whether it is 25% or 30% - other income should be included in the computation of gross turnover/gross receipts or not? - HELD THAT - There is no dispute with regard to the fact that as per audited financials of the assessee for AY 2017-18 the assessee has reported gross Revenue from operations at Rs.173.30 Crs. which is less than the prescribed limit for applying concessional rate of tax. Further other income reported by the assessee does not constitutes gross turnover/ gross receipts generated from main business activity of the assessee. Therefore for the purpose of computing turnover those items of other income cannot be considered. Out of other income three major items i.e. income from guarantee commission fair value gain on financial instrument and gain on extinguishment of financial liability are notional incomes credited to P L A/c for re-statement of existing income and liabilities while adopting INDAS standards and thus same cannot be considered as gross receipts or other income generated from business. If you exclude those three items then the gross turnover/ gross receipts of the assessee including other income does not exceed Rs.250 Crs. Therefore we are of the considered view that the assessee has rightly computed tax liability by adopting 25% concessional rate of tax. Assessee ground allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these consolidated appeals are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Intimation under Section 143(1) of the Act without Show Cause Notice as per First Proviso to Section 143(1)(a) Relevant Legal Framework and Precedents: Section 143(1)(a) of the Income Tax Act provides for processing of the return of income by the AO and making certain adjustments, including arithmetic errors, incorrect claims apparent from the return, and other specified adjustments. The first proviso to section 143(1)(a) mandates that no adjustment shall be made unless an intimation is given to the assessee of such adjustment either in writing or electronic mode. This implies that before issuing the intimation, the AO must issue a show cause notice proposing the adjustment, thereby giving the assessee an opportunity to respond. The principle of audi alteram partem (right to be heard) is thus embedded in this provision. The Tribunal relied on the decision of the ITAT Ahmedabad Bench in Arham Pumps v. DCIT, which emphasized the mandatory nature of the first proviso to section 143(1)(a) and held that failure to issue the required communication renders the intimation invalid. Court's Interpretation and Reasoning: The Tribunal examined the facts and found that the AO did not issue any show cause notice or communication proposing the adjustments prior to issuing the intimation under section 143(1). The Revenue's contention that the non-availability of communication records was due to the CPC-2.0 Project being in a transition phase was accepted as a factual position but did not absolve the AO from the statutory mandate. The Tribunal held that absence of such communication violates the first proviso to section 143(1)(a) and renders the intimation unlawful and unsustainable in law. Key Evidence and Findings: The assessee produced screenshots from the ITBA portal showing no communication was issued. The Revenue conceded that records of such communication were not available. The Tribunal noted that the CIT(A) and the National Faceless Appeal Centre (NFAC) did not consider this procedural lapse and proceeded on merits, which was held to be erroneous. Application of Law to Facts: The Tribunal applied the statutory requirement strictly, emphasizing that the AO must issue a show cause notice proposing adjustments before issuing intimation under section 143(1). The failure to comply with this mandatory procedure vitiates the entire assessment process under section 143(1). Treatment of Competing Arguments: The Revenue's argument that adjustments under section 143(1)(a) are mandatory and based on the Tax Audit Report was rejected because the procedural requirement of issuing a show cause notice is independent and mandatory. The Tribunal also rejected the Revenue's contention that the absence of communication was due to technical transition, holding that statutory compliance cannot be excused on such grounds. Conclusion: The intimation issued under section 143(1) of the Act without prior issuance of show cause notice as mandated by the first proviso to section 143(1)(a) is invalid. Consequently, the additions and disallowances made in the intimation cannot be sustained and are quashed. Issue 2: Applicability of Concessional Tax Rate of 25% for AY 2019-20 Based on Turnover/Gross Receipts Threshold Relevant Legal Framework and Precedents: The Finance Act, 2019, Part 1, Chapter 2, prescribes a concessional tax rate of 25% for domestic companies whose total turnover or gross receipts in the previous year do not exceed Rs. 250 crores. If the turnover or gross receipts exceed Rs. 250 crores, the normal corporate tax rate of 30% applies. Court's Interpretation and Reasoning: The Tribunal analyzed the turnover and gross receipts of the assessee for the relevant financial year (2016-17) to determine eligibility for the concessional tax rate. The Revenue contended that the total gross receipts, including other income, exceeded Rs. 250 crores, thereby disqualifying the assessee from the concessional rate. The assessee argued that only revenue from business operations should be considered, excluding other income items such as guarantee commission, fair value gains on financial instruments, and gains on extinguishment of financial liability, which are not part of core business turnover and are notional in nature. Key Evidence and Findings: The audited financial statements showed business revenue of Rs. 173.30 crores and other income of Rs. 235.51 crores. The Tribunal noted that the 'other income' included notional gains arising from restatement of liabilities due to adoption of IND-AS accounting standards, which are not actual cash receipts or business turnover. Application of Law to Facts: The Tribunal held that for the purpose of determining the concessional tax rate, only turnover/gross receipts arising from the business activity should be considered. Notional or accounting gains do not qualify as turnover or gross receipts. Excluding the specified other income items, the assessee's total receipts were below the Rs. 250 crore threshold. Treatment of Competing Arguments: The Revenue's argument that total gross receipts inclusive of other income should be considered was rejected. The Tribunal accepted the assessee's submission that the other income items are not linked to core business operations and are notional in nature, thus not to be included for turnover computation. Conclusion: The assessee was rightly allowed to adopt the concessional tax rate of 25% for AY 2019-20. The Revenue's appeal on this issue was dismissed. 3. SIGNIFICANT HOLDINGS The Tribunal made the following crucial legal determinations:
Final determinations: The Tribunal allowed the assessee's appeal for AY 2020-21 by quashing the intimation under section 143(1) due to non-compliance with the procedural requirement of issuing show cause notice. It dismissed the Revenue's appeal for AY 2019-20, upholding the concessional tax rate of 25% applied by the assessee after excluding certain notional other income from gross receipts.
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