2025 (6) TMI 296 - AT - Income Tax

No show cause notice issued before making the adjustment u/s 143(1)(a) - HELD THAT - We set aside the order of the Ld. Addl./Joint CIT(A) and remand the matter to him to decide the issue in accordance with law as to whether any show cause notice was issued before making the adjustment as the adjustment u/s 143(1)(a) of the Act could not have been made without issuing the show cause notice and whether the exemption was allowable to the assessee as filing of Form No. 10B i.e. the audit report is held to be directory and not mandatory in the orders of the Tribunal relied upon by the assessee. Prima facie it appears that no show cause notice was issued to the assessee hence there was no justification for making the impugned addition however in the absence of any evidence in this regard the issue is remitted to the Ld. Addl./Joint CIT(A) to decide after ascertaining the facts of the case and in case no show cause notice was issued the adjustment made is liable to be deleted - Appeal filed by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

(a) Whether the delay in filing the appeal before the Ld. Addl./Joint CIT(A) was liable to be condoned given the explanation provided by the assessee.

(b) Whether the disallowance of exemption claimed under section 11 of the Income Tax Act, 1961 (the Act) by the CPC during processing of the return under section 143(1) was valid, particularly when no prior intimation or show cause notice under section 143(1)(a) was issued before making such disallowance.

(c) Whether the filing of the audit report in Form No. 10B beyond the due date is a mandatory requirement for claiming exemption under section 11 or merely directory, and whether exemption can be denied solely on the ground of delay in filing Form 10B.

(d) Whether the adjustment made by the CPC under section 143(1) disallowing the exemption claimed under section 11 was within the permissible scope of that section.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Delay in Filing Appeal and Condonation

Legal Framework and Precedents: The Income Tax Act permits condonation of delay in filing appeals if sufficient cause is shown. The Tribunal examined the affidavit filed by the assessee's authorized representative explaining the delay due to Covid-19 related disruptions and inadvertent misplacement of the order.

Court's Interpretation and Reasoning: The Tribunal found the explanation to constitute sufficient cause, noting the accidental and unintentional nature of the delay and absence of any benefit accrued to the assessee by such delay.

Application of Law to Facts: The Tribunal condoned the delay of 384 days in filing the appeal before the Ld. Addl./Joint CIT(A), thereby allowing the appeal to be heard on merits.

(b) Validity of Disallowance under Section 143(1) Without Prior Intimation

Legal Framework and Precedents: Section 143(1)(a) of the Act permits certain specified adjustments during processing of returns, but mandates issuance of prior intimation (show cause notice) to the assessee before making such adjustments. The first proviso to section 143(1)(a) requires such intimation to be served either in writing or electronically, and the second proviso requires consideration of any response received before making the adjustment.

The Tribunal relied on the decision of a Coordinate Bench and the Hon'ble Calcutta High Court in the case of Camellia Educare Trust, which held that disallowance of exemption under section 11 without prior intimation is invalid.

Court's Interpretation and Reasoning: The Tribunal observed that the CPC did not issue any prior intimation or show cause notice before disallowing the exemption claimed under section 11 during processing of the return. The documentary evidence did not indicate compliance with the procedural requirements of section 143(1)(a).

Application of Law to Facts: The Tribunal concluded that the impugned intimation under section 143(1)(a) dated 30.11.2021 was not in compliance with the statutory mandate and hence invalid.

Treatment of Competing Arguments: The Revenue did not controvert the failure to issue prior intimation. The assessee's contention that the disallowance was made without assigning specific reasons was upheld, noting that the intimation merely stated "no form has been filled" without detailed explanation.

(c) Mandatory vs Directory Nature of Filing Form No. 10B

Legal Framework and Precedents: Section 11 of the Act deals with exemption to charitable trusts subject to conditions including furnishing of audit report in Form No. 10B. The Tribunal referred to CBDT Instruction F.No.173/193/2019-ITA-I dated 23.04.2019 and the Coordinate Bench decision in Camellia Educare Trust, which held that filing of Form 10B along with the return is directory and not mandatory for claiming exemption under section 11.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had filed the audit report belatedly on 07.06.2023, well after the return and the intimation under section 143(1). While the AO disallowed exemption on this ground, the Tribunal emphasized that such procedural lapse should not result in denial of substantive exemption.

Application of Law to Facts: The Tribunal observed that the return was processed as a valid return, with acceptance of revenue and capital expenditure, and that denial of exemption solely on the ground of delayed Form 10B filing was not in consonance with commercial prudence or the legal framework.

Treatment of Competing Arguments: The Revenue contended that the delay warranted disallowance, relying on the procedural requirements. The Tribunal disagreed, relying on the CBDT instruction and judicial precedents that the requirement is directory.

(d) Scope of Adjustment under Section 143(1)

Legal Framework and Precedents: Section 143(1) enumerates specific grounds on which the AO can make adjustments during processing of returns, such as arithmetical errors, incorrect claims apparent from the return, and disallowance of set-off of losses filed beyond due dates.

Court's Interpretation and Reasoning: The Tribunal examined whether disallowance of exemption under section 11 on the ground of delayed audit report filing falls within the permissible adjustments under section 143(1). It found that such adjustment was not a permissible ground under section 143(1) without following the procedural safeguards.

Application of Law to Facts: The Tribunal remanded the matter to the Ld. Addl./Joint CIT(A) to verify whether any show cause notice was issued before making the adjustment, and if not, to delete the adjustment. The assessee was to be given opportunity to file details and raise contentions, with adherence to Rule 46A of the Income Tax Rules, 1962.

3. SIGNIFICANT HOLDINGS

"The impugned intimation issued u/s. 143(1)(a) of the Act, dated 30.11.2021 is not in compliance with the 1st proviso to section 143(1)(a) of the Act and thus, the impugned intimation is invalid under the Act."

"Filing of Form No. 10B, i.e., the audit report is held to be directory and not mandatory in the orders of the Tribunal relied upon by the assessee."

"Once a return has been processed as a valid return, there are restrictions within section 143(1)(a) which lists down six specific adjustments which can be made in the processing of return."

"In the absence of any evidence that show cause notice was issued, the adjustment made is liable to be deleted."

"The delay in filing the appeal before the Ld. Addl./Joint CIT(A) is hereby condoned."

Core principles established include:

(i) Procedural safeguards under section 143(1)(a) must be strictly complied with before making adjustments during return processing.

(ii) The requirement of filing audit report in Form 10B for claiming exemption under section 11 is directory, not mandatory, and delay in filing should not automatically lead to denial of exemption.

(iii) Delay in filing appeal may be condoned if sufficient cause is shown, especially in exceptional circumstances such as Covid-19 disruptions.

(iv) Adjustments outside the scope of section 143(1) or without following prescribed procedure are liable to be set aside.

Final determinations on each issue are:

- Delay in filing appeal was condoned.

- The disallowance of exemption under section 11 without prior intimation under section 143(1)(a) was invalid.

- Filing of Form 10B is directory; exemption cannot be denied solely for delay in filing.

- The matter was remanded to the Ld. Addl./Joint CIT(A) for fresh adjudication in accordance with law, ensuring procedural compliance and allowing the assessee to present its case.