2025 (5) TMI 1171 - AT - Income Tax

Scrutiny assessment - Assessment framed u/s. 143(3) - HELD THAT - Return of the assessee filed on 31.12.2020 for A.Y. 2020-21 was processed u/s.143(1)(a) of the Act on 11.10.2021 but prior to passing of the intimation u/s.143(1) case of the assessee selected for scrutiny and intimation u/s.143(1) of the Act was issued on 29.06.2021 Ideally once the notice has been issued u/s.143(2) of the Act CPC should not have carried the proceeding u/s. 143(1) but the interesting point is that even after the notice was issued u/s. 143(2) on 29.06.2021 but still ld. AO while concluding the proceedings on 22.09.2022 has taken into consideration the adjustments made in the order u/s. 143(1) of the Act and even reversed one of the adjustment made by CPC by allowing deduction u/s. 10AA of the Act which was disallowed in the income computed by CPC u/s. 143(1) of the Act. In one of the impugned order which was filed against the intimation u/s. 143(1)(a) there was delay of 827 days in filing of the appeal for which valid reasons were given. Ld.CIT(A) ought to have condoned the delay and dealt with merits of the case. However ld.CIT(A) has dismissed the appeal in limine . It is also noticed that another appeal filed before the ld.CIT(A) against the order u/s. 143(3) of the Act though ld.CIT(A) has passed an elaborate order but the order is general/cryptic and not specific and the same deserves to be re-adjudicated considering the facts and circumstances of the case. Both the impugned orders are restored to the file of ld.CIT(A) who shall carry out the appellate proceedings for the various issues raised in the intimation order u/s. 143(1)(a) as well as assessment order u/s. 143(3) of the Act. Needless to say that sufficient opportunity of hearing will be provided to the assessee. Appeals of the assessee are allowed for statistical purposes.

Summary

Several core legal questions were presented and considered by the Appellate Tribunal (AT) in the appeals arising from the assessment and intimation orders under the Income-tax Act, 1961 (the Act). These issues primarily pertain to the validity and legality of the orders passed under sections 143(1), 143(3), and 250 of the Act, the correctness of disallowances and deductions claimed under various provisions, computation of book profits and MAT credit utilization, levy of interest under multiple sections, and procedural aspects related to the filing and hearing of appeals.

The principal issues identified include:

• Whether the orders passed under sections 143(1)(a) and 143(3) of the Act were legal, valid, and in conformity with statutory provisions.
• The correctness of disallowance of deduction claimed under section 10AA of the Act on interest income earned on short-term deposits and fixed deposits.
• Validity of disallowance under section 36(1)(va) regarding delayed payment of employees' contribution to ESIC.
• Disallowance of unpaid amounts relating to various taxes and duties, employers' contributions to provident fund and ESIC, and bonus payments.
• Accuracy of computation of book profits under section 115JB and the corresponding MAT credit utilization under section 115JAA.
• Justification for levy of interest under sections 234A, 234B, and 234C of the Act, including allegations of excess interest levied.
• Legality of initiation of penalty proceedings under section 270A of the Act.
• Procedural compliance concerning issuance of mandatory opportunity of hearing under section 143(1)(a) before passing intimation orders.
• Whether the delay in filing appeal against the intimation order under section 143(1)(a) should have been condoned by the Commissioner of Income Tax (Appeals) (CIT(A)).

Issue-wise Detailed Analysis

1. Legality and Validity of Orders Passed under Sections 143(1)(a), 143(3), and 250 of the Act

Legal Framework and Precedents: Section 143(1)(a) provides for processing of income tax returns and issuance of intimation, which may include prima facie adjustments. Section 143(3) allows the Assessing Officer (AO) to scrutinize and assess income with detailed inquiry. Section 250 governs appeals to the Income Tax Appellate Tribunal (ITAT). The procedural fairness requires that before passing an intimation under section 143(1), the AO should issue a proposal under section 143(1)(a) and provide the assessee an opportunity of being heard as per the first proviso to section 143(1).

Court's Interpretation and Reasoning: The Tribunal observed that the intimation under section 143(1) was passed without issuing a proposal under section 143(1)(a) and without providing the mandatory opportunity of hearing, which is a procedural lapse. However, the AO had issued a valid notice under section 143(2) before passing the intimation, indicating the case was selected for scrutiny. The Tribunal noted that once notice under section 143(2) is issued, ideally, the proceedings under section 143(1) should not continue. Yet, the AO considered the adjustments made in the intimation under section 143(1) while framing the assessment under section 143(3), effectively merging the two orders.

Key Evidence and Findings: The Tribunal found that the CIT(A) dismissed the appeal against the intimation order under section 143(1)(a) in limine due to delay of 827 days in filing the appeal, without condoning the delay or considering merits. The appeal against the assessment order under section 143(3) was dismissed with a cryptic and non-specific order.

Application of Law to Facts: Given the procedural irregularities and the merger of intimation order with assessment order, the Tribunal held that the appeal against the intimation order had become infructuous. The Tribunal also found that the CIT(A) ought to have condoned the delay and decided the appeal on merits. The cryptic order on the assessment appeal warranted re-adjudication.

Treatment of Competing Arguments: The Departmental Representative supported the lower authorities' orders but did not object to restoration of the appeals for fresh adjudication. The assessee's counsel prayed for restoration and condonation of delay.

Conclusion: Both appeals were restored to the file of CIT(A) for fresh adjudication after providing reasonable opportunity of hearing, and delay in filing appeal against intimation order was to be condoned.

2. Disallowance of Deduction under Section 10AA on Interest Income

Legal Framework and Precedents: Section 10AA grants deduction to units located in Special Economic Zones (SEZ) on profits and gains derived from export of articles or things or services. Interest income on fixed deposits or short-term deposits not connected with the business activity is generally not eligible for deduction under section 10AA.

Court's Interpretation and Reasoning: The AO disallowed deduction claimed on interest income amounting to Rs. 17,49,170 (assessment order) and Rs. 17,09,96,537 (intimation order), reasoning that interest earned on fixed deposits was not from the business activity qualifying for deduction under section 10AA. The AO accepted the claim of deduction on business income but excluded interest income.

Key Evidence and Findings: The assessee contended that the interest income was eligible for deduction and was reported in Form 56F. The AO and CIT(A) did not accept this submission fully. The Tribunal noted that the AO allowed deduction on business income but disallowed the interest component.

Application of Law to Facts: The Tribunal observed that interest income on fixed deposits is not eligible for deduction under section 10AA as it is not derived from the SEZ business activity. The disallowance was therefore upheld in principle, but the quantum and correctness of the amount disallowed required reconsideration by the CIT(A).

Treatment of Competing Arguments: The assessee argued for full deduction; the AO and Departmental Representative supported disallowance. The Tribunal directed reconsideration by CIT(A).

Conclusion: The issue was restored to CIT(A) for fresh adjudication with due opportunity.

3. Disallowance under Section 36(1)(va) on Delayed Payment of Employees' Contribution to ESIC

Legal Framework and Precedents: Section 36(1)(va) disallows deduction for employer's contribution to ESIC if not paid within prescribed time. However, payment made within the due date specified under the ESIC Act may be allowed.

Court's Interpretation and Reasoning: The AO disallowed Rs. 29,602 on account of delayed payment without assigning reasons. The assessee submitted that the amount was paid within due date under ESIC Act and reported in Tax Audit Report.

Key Evidence and Findings: The Tribunal found that the AO failed to assign reasons for disallowance and did not appreciate the payment details and audit report. The CIT(A) also did not deal with the issue specifically.

Application of Law to Facts: The Tribunal held that disallowance without reasons and without appreciating the facts was not sustainable.

Treatment of Competing Arguments: The assessee's submissions were not adequately considered by AO or CIT(A). The Departmental Representative supported disallowance but did not oppose restoration.

Conclusion: The issue was restored to CIT(A) for fresh consideration.

4. Disallowance of Unpaid Amounts of Tax, Duties, Employers' Contributions, and Bonus

Legal Framework and Precedents: Deduction for expenses like profession tax, provident fund, ESIC contributions, and bonus is allowable if paid on or before due date of filing return as per provisions and Tax Audit Report.

Court's Interpretation and Reasoning: AO disallowed amounts aggregating several crores without assigning reasons, despite these being reported as paid within due dates in the Tax Audit Report.

Key Evidence and Findings: The Tribunal noted the lack of reasons and failure to appreciate documentary evidence by AO and CIT(A).

Application of Law to Facts: Without proper reasons and ignoring audit report, disallowance was unsustainable.

Treatment of Competing Arguments: The assessee argued for allowance; the Departmental Representative supported disallowance but did not oppose restoration.

Conclusion: The matter was remanded for fresh adjudication.

5. Computation of Book Profit under Section 115JB and MAT Credit Utilization under Section 115JAA

Legal Framework and Precedents: Book profit under section 115JB is computed as per prescribed adjustments. MAT credit under section 115JAA is allowed as per the returned income and assessed income.

Court's Interpretation and Reasoning: AO computed book profit at Rs. 44,18,82,070 against Rs. 34,13,91,024 declared by assessee. MAT credit granted was less than claimed without reasons.

Key Evidence and Findings: CIT(A) did not provide specific findings. The Tribunal found the orders cryptic.

Application of Law to Facts: The Tribunal directed fresh consideration of these issues with detailed reasons.

Treatment of Competing Arguments: The assessee challenged the computations; the Departmental Representative supported AO's position.

Conclusion: Issues restored for fresh adjudication.

6. Levy of Interest under Sections 234A, 234B, and 234C

Legal Framework and Precedents: Sections 234A, 234B, and 234C prescribe interest for delay in filing return, non-payment or short payment of advance tax, and deferment of advance tax installments respectively. Interest should be levied with reasons and in accordance with law.

Court's Interpretation and Reasoning: AO levied interest under these sections without assigning reasons and in some cases levied excess interest.

Key Evidence and Findings: The Tribunal found that the orders did not provide reasons for interest levies and excess interest amounts.

Application of Law to Facts: The Tribunal held that interest cannot be levied arbitrarily and directed fresh examination.

Treatment of Competing Arguments: The assessee challenged the interest levies; the Departmental Representative supported AO's orders.

Conclusion: Issues restored for reconsideration.

7. Initiation of Penalty Proceedings under Section 270A

Legal Framework and Precedents: Section 270A provides for penalty for concealment of income or furnishing inaccurate particulars. Penalty proceedings require proper initiation and justification.

Court's Interpretation and Reasoning: The AO initiated penalty proceedings but the Tribunal found no detailed discussion in the impugned orders.

Key Evidence and Findings: CIT(A) did not deal with penalty issue specifically.

Application of Law to Facts: The Tribunal restored the issue for fresh adjudication.

Treatment of Competing Arguments: The assessee disputed penalty; Departmental Representative supported it.

Conclusion: Issue restored for fresh consideration.

8. Procedural Compliance and Delay in Filing Appeal

Legal Framework and Precedents: The first proviso to section 143(1) mandates issuance of a proposal and opportunity of hearing before passing intimation. Delay in filing appeal can be condoned for sufficient cause.

Court's Interpretation and Reasoning: CIT(A) dismissed appeal against intimation order due to delay of 827 days without condoning delay or considering merits. The Tribunal held that CIT(A) ought to have condoned delay and decided appeal on merits.

Key Evidence and Findings: Valid reasons for delay were submitted by assessee.

Application of Law to Facts: The Tribunal restored appeal for fresh adjudication and condonation of delay.

Treatment of Competing Arguments: Departmental Representative did not oppose restoration.

Conclusion: Delay condoned and appeal restored.

Significant Holdings

The Tribunal held that:

"Once the notice has been issued under section 143(2) of the Act, the processing under section 143(1) should ideally not continue; however, since the AO considered the adjustments made under section 143(1) while framing assessment under section 143(3), the intimation order under section 143(1) has merged with the assessment order under section 143(3), rendering the appeal against the intimation order infructuous."

"The CIT(A) ought to have condoned the delay in filing the appeal against the intimation order and decided the appeal on merits instead of dismissing it in limine."

"Disallowance of deduction under section 10AA on interest income earned on fixed deposits is justified as such income is not derived from the business activity qualifying for deduction under section 10AA."

"Disallowances and levy of interest without assigning reasons and without appreciating documentary evidence and submissions of the assessee are not sustainable."

"The appeals are restored to the file of the CIT(A) for fresh adjudication on all issues after providing reasonable opportunity of hearing to the assessee."

The Tribunal emphasized the necessity of reasoned orders, adherence to procedural safeguards, and proper appreciation of facts and evidence in tax assessment and appellate proceedings. The final determination was to restore the appeals for fresh adjudication, condone delay in filing appeal against intimation order, and allow the grounds of appeal for statistical purposes.