Adjustment of incorrect claim apparent from any information in return is permissible u/s 143(1)

Sree Gokulam Chit and Finance Co. P. Ltd. Vs DCIT (ITAT Chennai)

ITAT Chennai held that post amendment w.e.f. 01.04.2008, the scope of adjustment u/s.143(1) of the Act has widened and enlarged. Accordingly, adjustments with regard to incorrect claim apparent from any information in the return of income permissible.

Facts- The assessee filed ROI and the same was processed by the ADIT, CPC, Bangalore by intimation u/s.143(1) of the Act thereby making adjustment in regard to delayed payment of employees contributions of PF funds amounting to Rs.2,09,425/- and ESI contribution amounting to Rs.3,408/- aggregating to Rs.2,12,833/- beyond the prescribed period under the respective statutes of PF Act and ESI Act. The CPC, Bangalore made this adjustment by making disallowance under intimation u/s.143(1) of the Act under Annexure ‘other information’ clause – 6(s), wherein amount debited to profit & loss account are disallowable u/s.36(b) of the Act due to non-fulfillment of conditions specified in the relevant clause and as per sub-clause (s), total amount disallowable and consequently disallowed u/s.36 of the Act was Rs.2,12,833/-.

Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) upheld the prime-facie adjustment made u/s.143(1) of the Act by the CPC, Bangalore. Being aggrieved, the present appeal is filed.

Conclusion- The provisions of section 143(1)(a)(ii) specifies the incorrect claim particularly if such incorrect claim is apparent from any information in the return of income and that can be any information as such as the audit report or some other information as provided by assessee in the return of income. In this context, it is pertinent to mention that earlier only prima-facie arithmetic adjustments can be made but in view of the amendment provisions by the Finance Act, 2008 w.e.f. 01.04.2008, the amended provisions empowers adjustments to be made interalia on the basis of remarks indicated in the return of income or incorrect claim apparent from any information in the return of income. Post amendment w.e.f. 01.04.2008, the scope of adjustment u/s.143(1) of the Act has widened and enlarged. It provides that total income shall be computed after making adjustments inter-alia on account of incorrect claim, if such incorrect claim is apparent from any information in the return of income. In the present case before us, the adjustment u/s.143(1)(a) has been made on the basis of information contained in the tax audit report.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (Appeals)-18, Chennai-1 vide ITA No.97/CIT(A)-18/2021-22 dated 17.08.2022. The return of income for the assessment year 2020-21 was processed by ADIT, CPC, Bangalore by issuing intimation u/s.143(1) of the Income Tax Act, 1961 (hereinafter the ‘Act’) dated 24.12.2021.

2. The first issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of ADIT, CPC, Bangalore in making adjustment u/s.143(1) of the Act in regard to the claim of deduction of employees contributions of Provident Fund (PF) amounting to Rs.2,09,425/- and Employees State Insurance (ESI) contribution of Rs.3,408/-, aggregating Rs.2,12,833/- by holding that these payments are made beyond the due date prescribed under the respective statutes i.e., Provident Fund Act and ESI Act.

According to the grounds raised, the first facet of ground raised is that these adjustments falls outside the scope / ambit of the provisions of section 143(1) of the Act and hence, the CIT(A) & ADIT, CPC both erred in fact and in law.

3. Brief facts are that the assessee filed return of income on 30.03.2021 for the relevant assessment year 2020-21 and the same was processed by the ADIT, CPC, Bangalore by intimation u/s.143(1) of the Act dated 24.12.2021 thereby making adjustment in regard to delayed payment of employees contributions of PF funds amounting to Rs.2,09,425/- and ESI contribution amounting to Rs.3,408/- aggregating to Rs.2,12,833/- beyond the prescribed period under the respective statutes of PF Act and ESI Act. The CPC, Bangalore made this adjustment by making disallowance under intimation u/s.143(1) of the Act under Annexure ‘other information’ clause – 6(s), wherein amount debited to profit & loss account are disallowable u/s.36(b) of the Act due to non-fulfillment of conditions specified in the relevant clause and as per sub-clause (s), total amount disallowable and consequentlydisallowed u/s.36 of the Act was Rs.2,12,833/-. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) upheld the prime-facie adjustment made u/s.143(1) of the Act by the CPC, Bangalore by observing in para 7.9 as under:-

“7.9 Therefore, in view of the remarks in the audit report, adjustments can be made in terms of section 143(1). This is also in the nature of incorrect claim which is apparent from the information contained in the tax audit report. Hence, I find that the adjustment is within the purview of section 143(1) of the Income Tax Act. The case laws cited by the assessee relating to adjustments u/s 143(1) of the Act were prior to the amendments to Section 143(1) and therefore quite distinguishable to the facts and circumstances of the assessee’s case.”

4. As regards to merits of the case, the CIT(A) confirmed the disallowance u/s.36(1)(va) of the Act and now before us the ld.counsel for the assessee could not make any argument when the decision of Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd., in Civil Appeal No.2833 of 2016, order dated 12.10.2022 was pointed out. We noted that the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd., supra, has categorically held that the payments on account of employees contributions of PF & ESI are allowable only if those are made within the due dates as prescribed under the respective statutes i.e., PF & ESI Act. Accordingly, the CIT(A) dismissed the claim and even now before us, the ld.counsel on merits has not made any arguments.

5. Before us, the ld.counsel in regard to making prima-facie adjustment u/s.143(1) of the Act only argued and drew our attention to the audit report, copy of which is filed in Form No.3CD in assessee’s paper-book from pages 6 to 21. The ld.counsel drew our attention to specific clause 20B of the audit report and stated that there are only indicative payments and not the actual. The ld.counsel further drew our attention to clause 21, sub-clause (b)(8) i.e., payment to PF and other funds, etc., in sub-clause (4), which was left blank and there is no indication.

6. On the other hand, the ld. Senior DR, relied on the provisions of section 143(1) of the Act as amended from time to time and stated that any incorrect claim and if such incorrect claim is apparent from any information in the return of income and moreover disallowance of expenditure indicated in the audit report and not taken into account in the total income in the return of income, the same is to be disallowed while making prima-facie adjustment under this provision. The ld.senior DR relied on the order of CIT(A) who has elaborately discussed this issue.

7. We have heard rival contentions and gone through facts and circumstances of the case. The admitted facts are that as per audit report filed by assessee along with the return of income in Form No.3CA, the assessee has filed complete details of the dates of payments of PF & ESI. Admittedly, the assessee has remitted delayed payment of employees contributions of PF & ESI beyond the due date as prescribed under the PF & ESI Act but before the date of filing of return of income. The details are as under:-

Employees Provident Fund

Employees State Insurance

This is extracted from the audit report as filed by assessee along with return of income and particularly clause No.20(b). The details are completely provided by assessee.

8. Now, the question arises whether in view of the provisions of section 143(1)(a) of the Act, while processing the return of income filed by the assessee, the total income or loss shall be computed after making the following adjustments as described u/s. 143(1)(a) (ii) of the Act i.e., an incorrect claim, if such incorrect claim is apparent from any information in the return or not. The Memorandum of Finance Bill, 2008 as well as Finance Bill, 2016 explaining the provisions of section 143(1)(a)(ii) of the Act will explain the situation and the relevant memorandum of Finance Bill, 2008 and Finance Bill, 2016 are being reproduced as it is:-

Memorandum to Finance Bill, 2008

Correction of arithmetical mistakes and adjustment of incorrect claim under section 143(1) through Centralised Processing of Returns. Generally, tax administrations across countries adopt a two-stage procedure of assessment as part of risk management strategy. In the first stage, all tax returns are processed to correct arithmetical mistakes, internal inconsistency, tax calculation and verification of tax payment. At this stage, no verification of the income is undertaken. In the second stage, a certain percentage of the tax returns are selected for scrutiny/audit on the basis of the probability of detecting tax evasion. At this stage, the tax administration is concerned with the verification of the income. In India, the scheme of summary assessment being in force since the 1^st day of June, 1999 does not contain any provision allowing for prima facie adjustment. The scope of the present scheme is limited only to checking as to whether taxes have been correctly paid on the income returned. Under the existing provisions of section 143(1), there is no provision for correcting arithmetical mistakes or internal inconsistencies. This leads to avoidable revenue loss. With an objective to reduce such revenue loss, it is proposed to amend section 143(1) of the Income-tax Act. It is proposed to provide that the total income of an assessee shall be computed under section 143(1) after making the following adjustments to the total income in the return:-

(a) any arithmetical error in the return; or

(b) an incorrect claim, if such incorrect claim is apparent from any information in the return. Further it is proposed to clarify the meaning of the term “an incorrect claim apparent from any information in the return”.

This term shall mean such claim on the basis of an entry, in the return,-

(a) of an item, which is inconsistent with another entry of the same or some other item in such return;

(b) in respect of which, information required to be furnished to substantiate such entry, has not been furnished under this Act; or

(c) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction.

Further, these adjustments will be made only in the course of computerized processing without any human interface. In other words, the software will be designed to detect arithmetical inaccuracies and internal inconsistencies and make appropriate adjustments in the computation of the total income. (emphasis supplied). For this purpose the Department is in the process of establishing a system for Centralized Processing of Returns. To facilitate this. it is also proposed that-

(a) the Board may formulate a scheme with a view to expeditiously determine the tax payable by, or refund due to, the assessee,

(b) the Central Government may issue a notification in the Official Gazette, directing that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such restrictions, modifications and adaptations as may be specified in the notification. However, such direction shall not be issued after 31st March 2009;

(c) every notification shall be laid before each House of Parliament as soon as such notification is issued. Along with the notification, the scheme referred above is also required to be laid before each House of Parliament. Similar amendment has also been proposed in section 115WE of the Income-tax Act, relating to fringe benefits.

These amendments will take effect from lst April, 2008.

Memorandum to Finance Bill 2016

Legislative framework to enable and expand the scope of electronic processing of information In order to expeditiously remove the mismatch between the return and the information available with the Department, it is proposed to expand the scope of adjustments (emphasis supplied) that can be made at the time of processing of returns under sub-section (1) of section 143. It is proposed that such adjustments can be made based on the data available with the Department in the form of audit report filed by the assessee, returns of earlier years of the assessee, 26AS statement, Form 16, and Form 16A. (emphasis supplied) However, before making any such adjustments, in the interest of natural justice, an intimation shall be given to the assessee either in writing or through electronic mode requiring him to respond to such adjustments. The response received, if any, will be duly considered before making any adjustment. However, if no response is received within thirty days of issue of such intimation, the processing shall be carried out incorporating the adjustments.

These amendments will take effect from the 1st day of June, 2016.

9. From the above Memorandum to Finance Bill, 2008 & 2016 explaining the provisions of section 143(1)(a)(ii) specifies the incorrect claim particularly if such incorrect claim is apparent from any information in the return of income and that can be any information as such as the audit report or some other information as provided by assessee in the return of income. In this context, it is pertinent to mention that earlier only prima-facie arithmetic adjustments can be made but in view of the amendment provisions by the Finance Act, 2008 w.e.f. 01.04.2008, the amended provisions empowers adjustments to be made interalia on the basis of remarks indicated in the return of income or incorrect claim apparent from any information in the return of income. Post amendment w.e.f. 01.04.2008, the scope of adjustment u/s.143(1) of the Act has widened and enlarged. It provides that total income shall be computed after making adjustments inter-alia on account of incorrect claim, if such incorrect claim is apparent from any information in the return of income. In the present case before us, the adjustment u/s.143(1)(a) has been made on the basis of information contained in the tax audit report with respect to the belated payments of employees contribution of EPF and ESI paid beyond the due dates as prescribed under the respective Act and these various funds are referred in section 36(1)(va) of the Act. The information gives the details of due date of payment, actual date of payment to the concerned authorities and these payments have been made beyond the due dates specified in the respective acts i.e., Provident Fund Act & ESI Act, which attracted the provisions of section 36(1)(va) r.w.s. 2(24)(x) of the Act leading to disallowance of this sum to the extent not paid on or before the due date stipulated in the respective PF Act and ESI Act.

10. Coming to another angle that this issue has been settled by the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd., supra and what will be the impact of law laid down by Hon’ble Supreme Court and this has been explained by Hon’ble High Court of Madras in the case of South Industrial Corporation Ltd., (2002) 258 ITR 481, wherein it is held as “When a statutory provisions is interpreted by the apex court in a manner different from the interpretation made in the earlier decisions by a Smaller Bench, the order which does not conform to the law laid down by the Larger Bench in the later decision which decision would constitute the law of the land and is to be regarded as the law as it always was, unless declared by the court itself to be prospective in operation, would clearly suffer from a mistake which would be apparent from the record. The rectification under section 154(1) on the ground that the order sought to be rectified is not in conformity with the law declared by the apex court is required to be upheld”. It means that there is no ambiguity of law after Hon’ble Supreme Court judgement. Even it cannot be said that this is a debatable issue because Hon’ble Supreme Court has interpreted the law and is to be regarded as law as it always was unless declared by the court itself to be prospective in operation.

11. Coming to judgment of Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd., supra, wherein the Hon’ble Supreme Court has considered the aspect of deemed income in regard to money held by assessee as a custodian on account of employees contribution of ESI and PF payments and that is also held not be an expenditure. The Hon’ble Supreme Court considered that the money held by employer of employees contribution to ESI and PF as custodian is deemed income in view of provisions of section 36(1)(va) as well as section 2(24)(x) of the Act. The Hon’ble Supreme Court held as under:-

52. When Parliament introduced Section 43B, what was on the statute book, was only employer’s contribution (Section 34(1)(iv)). At that point in time, there was no question of employee’s contribution being considered as part of the employer’s earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions – especially second proviso to Section 43B – was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income – it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee’s income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of “income” amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time – by way of contribution of the employees’ share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers’ contribution (Section 36(1)(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)) was maintained – and continues to be maintained. On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees’ liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure.

53. The distinction between an employer’s contribution which is its primary liability under law – in terms of Section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers’ income, and the later retains its character as an income (albeit deemed), by virtue of Section 2(24)(x) – unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts – the employer’s liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees’ income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B.

12. In view of the above discussion carried out in view of the amended provisions of the Act by the Finance Act, 2008 w.e.f. 01.04.2008 and subsequently by Finance Act, 2016 w.e.f. 01.06.2016, the legal position is very clear that while processing return of income u/s.143(1)(a)(ii) of the Act, an incorrect claim, if such incorrect claim is apparent from any information in the return of income is to be disallowed and such adjustment is to be made on the total income or loss to the assessee. We find not infirmity in the order of CIT(A) and that of the CPC and hence, the same are confirmed. This issue of assessee’s appeal is dismissed.

13. The next issue in this appeal of assessee is as regards to the order of CIT(A) in confirming the action of AO denying the tax benefit / tax rates to be adopted while computing tax liability in term of Section 115BAA(5) of the Act.

14. Brief facts are that the CPC, Bangalore while processing the return of income computed the tax liability and comparative chart as provided by the assessee and as computed by the CPC is as under:-

The difference between the computation of tax as provided by the assessee and as per AO in CPC is on account of computation of tax on total income @ 30% plus surcharge of 12% plus cess instead of applying tax rate u/s.115BAA(5) @ 22% plus surcharge of 10% plus cess. The assessee in return of income specifically mentioned the exercise option u/s.115BBA in the return of income in schedule part ‘A’, Joint I and also filed Form No.10IC on 29.05.2021 through e-filing. The assessee aggrieved by the above charging of tax and denying charging of taxability u/s.115BAA of the Act and charging higher rate of tax filed appeal before CIT(A).

14.1 The CIT(A) uphold the action of AO in charging tax rate @30% and denying the benefit u/s.115BAA(5) of the Act by observing in para 9.6 & 9.7 as under:-

“9.6 In the instant case, the assessee has filed the Return of Income belatedly on 30.03.2021 when the due date of filing return u/s 139(1) was 15.02.2021, thereby failing in fist condition. The assessee has satisfied the second condition by exercising the option in the Return of Income and the third condition by filing Form 10-IC on 29.05.2022, i.e. before 30.06 2022. The delay in filing Form 10-IC can be condoned only when all the three conditions stipulated by the Board are satisfied. Since the assessee has failed in the first condition by belatedly filing the Return of Income, condonation of delay is not available to the assessee as stipulated by the Board in the said Circular.

9.7 Considering the pandemic situation prevailed at that time, the CBDT itself has extended the due date of fling the return of income for AY 2020-21 from 31.10.2020 to 15.02.2021. The assessee has highlighted the SC decision in the case of G.M. Knitting Industries Pvt Ltd ([2016] 71 taxmann.com 35 (SC) / (2015] 376 ITR 455 (SC) /(2015] 279 CTR 534 (SC)[24-07-2015] wherein additional depreciation was denied to the assessee on the ground that the assessee has failed to furnish Form 3AA along with the return of income. The facts of the said case is distinguishable to that of assessee’s case since in the instant case, there is a specific Circular issued by the CBDT for condonation of delay in filing Form 10-IC. When the conditions stipulated in the Board’s Circular are not satisfied, condonation of delay is not available to the assessee. Accordingly, the grounds 5, 6 and 8 are dismissed.”

Aggrieved assessee came in appeal before the Tribunal.

15. We have heard rival contentions and gone through the facts and circumstance of the case. We noted that the assessee has already moved petition for condonation of delay in filing the return of income u/s.119(2)(b) of the Act dated 09.11.2022 before CBDT, New Delhi. The Revenue can await decision of this petition and in the eventuality, the CBDT condones the delay, the assessee is liable to assess at a lower rate of tax in the given facts and circumstances of the case. Hence, we restore this issue back to the file of the AO to await and pursue the petition for condonation of delay filed by assessee before CBDT, New Delhi. The assessee will also pursue the same and we are confident that CBDT will take up this decision and will decide this issue at the earliest. In term of the above, this issue of assessee’s appeal is allowed for statistical purposes.

16. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 21^st December, 2022 at Chennai.