“Explore the challenges of AI-driven tax processing, focusing on the controversial addition under section 143(1)(a) of the Income Tax Act for GST not deposited by the due date. Understand the implications and potential issues arising from automated systems.”

Addition under section 143(1)(a) of the income tax Act with respect to GST not deposited on or before due date of ITR under section 139 of the Act when the client has not made payment to the assessee.

The adoption of AI and automated systems by the Income Tax Department in India has brought about certain challenges and problems for taxpayers. Firstly, the complexity of AI algorithms and automated processes may make it difficult for taxpayers to understand the basis on which their tax liabilities are determined. And secondly, the lack of transparency in the decision-making process can lead to frustration and a sense of helplessness among taxpayers.

ITR due date when client not paid fees

An apt example of it would be the addition being by CPC-Bengaluru vide intimations issued u/s 143(1)(a) w.r.t GST not deposited on/before due date of ITR u/s 139 of the Act (hereinafter referred to as “Undeposited GST”) even in cases where the client itself has not made payment to the assessee towards the value of goods/services together with GST thereon due to any dispute. Even in many cases, the businesses of assessee have closed due to such huge non-payments but still a mechanical additions are being made against the principles of natural justice and equity.

I would like to make a critical analysis on this issue in a pointwise manner for interest of the readers.

1. Non-speaking and arbitrary intimations issued in a mechanical and pre-defined manner without proper application of mind.

Generally, the intimations u/s 143(1)(a) w.r.t undeposited GST are being issued to the Assessee wherein the following reason is mentioned to support the addition:

“…. As there has been no response/the response(s) provided is not acceptable the adjustments(s) as mentioned below are being made to the total income as per the provisions of section 143(1)(a).”

As it can be seen that the reason mentioned in these intimations is a standard template used without even striking out the inapplicable clause. There is no proper reasoning whatsoever given for the additions made. This is a clear indication that this whole exercise is mechanical without any human interference or even if there is any human intervention, there is no application of mind involved therein. The CPC-Bengaluru is a quasi-judicial authority who is bound to follow the principles of natural justice. One of the principles is that the order passed must be a Speaking Order i.e., an order must incorporate reasons for a conclusion arrived at by the authority passing the order and it should be free from arbitrariness. The rule requiring reasons to be given in support of an order is one of the basic principles of natural justice which must inform every quasi-judicial process and this rule must be observed in its proper spirit and mere pretence of compliance with it would not satisfy the requirement of law.

But when we go through these intimations, it seems that the process of issuing notice and asking for response in this case is just a facade to cover up a pre-defined and mechanical practice where a standard text is to be pasted whether the taxpayer sends a reply or not. Such a practice of sending intimation orders u/s 143(1) has also been criticised by the tribunals in Kalpesh Synthetics Pvt Ltd. Vs. Deputy Commissioner of Income Tax, CPC Bengaluru and K A Hospitality Private Ltd. Vs. Income Tax Department, CPC Bangalore wherein it was observed that (Emphasis supplied) –

“……The Assessing Officer CPC has used a standard reason to the effect that “As there has been no response/the response given is not acceptable, the adjustment(s) as mentioned below are being made to the total income as per provisions of Section 143(1)(a)”, and has not even struck off the portion inapplicable. To put a question to ourselves, can such casually assigned reasons, which are purely on a standard template, can be said to be sufficient justifications for a quasi-judicial decision that the disposal of objections inherently is? The answer must be emphatically in negative. It is important to bear in mind the fact that intimation under section 143(1) is an appealable order, and when consideration of objections raised by the assessee is an integral part of the process of finalizing the intimation under section 143(1) unless the reasons for such rejection are known, a meaningful appellate exercise can hardly be carried out………While on this aspect of the matter, we may usefully refer to the observations made by the Hon’ble Supreme Court, in the case of Union Public Service Commission v. Bibhu Prasad Sarangi and Ors., [2021] 4 SCC 516. While these observations are in the context of the judicial officers, these observations will be equally applicable to the decisions by the quasi-judicial officers like us as indeed the Assessing Officer CPC. In the inimitable words of Hon’ble Justice Chandrachud, Hon’ble Supreme Court has made the following observations:

……. Reasons constitute the soul of a judicial decision. Without them, one is left with a shell. The shell provides neither solace nor satisfaction to the litigant. We are constrained to make these observations since what we have encountered in this case is no longer an isolated aberration. This has become a recurring phenomenon.

……How judges communicate in their judgments is a defining characteristic of the judicial process. While it is important to keep an eye on the statistics on disposal, there is a higher value involved. The quality of justice brings legitimacy to the judiciary

7. These observations of Their Lordships apply equally, and in fact with much greater vigour, to the quasi-judicial functionaries as well. Viewed thus, reasons in a quasi-judicial order constitute the soul of the quasi-judicial decision. A quasi-judicial order, without giving reasons for arriving at such a decision, is contrary to the way the functioning of the quasi-judicial authorities is envisaged. A quasi-judicial order, as a rejection of the objections against the proposed adjustments under section 143(1) inherently is, can hardly meet any judicial approval when it is devoid of the cogent and specific reasons, and when it is in a standard template text format with clear indications that there has not been any application of mind as even the inapplicable portion of the template text, i.e whether there was no response or whether the response is unacceptable, has not been removed from the reasons assigned for going ahead with the proposed adjustment under section 143(1).

The importance of recording reasons for a decision has also been emphasised in the case of Gurdas Ram & Co. vs. Union of India.

2. Adjustment is not as per the intent of the legislature –

Section 43B was originally inserted by the Finance Act, 1983 w.e.f. 1st April, 1984 after taking note of the fact that in several cases taxpayers were not discharging their statutory liability such as in respect of excise duty, employer’s contribution to provident fund, Employees State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. But in a case, where the assessee has itself not received the value of services and the GST amount from the client, especially in cases where the prospects of receiving the payment is bleak due to legal/financial disputes, such arbitrary additions would result in unjust enrichment and would cause undue hardship on the assessee as he is being asked to pay tax on amounts which have not been received by him. (An affidavit can be furnished regarding non-receipt of payment and/or legal dispute and the ledger of the service receiver can also be attached).

3. Any adjustment u/s 143(1)(a) cannot be made in respect of an issue that is debatable and subject to interpretation.

The issue under consideration i.e., addition of amount of tax, duty, cess etc remaining undeposited on or before the due date of filing ITR u/s 139(1) to the income is a debatable and controversial issue in view on contrary rulings given by various authorities. I would like to mention the conflicting decisions w.r.t. the issue to support my contention –

IN FAVOUR OF ASSESSEE IN FAVOUR OF REVENUE
Sdce Projects Pvt. Ltd.,, … vs The Dy. Cit, Circle-2(1)(1) (ITAT Ahmedabad) Astt. CIT vs. Real Image Media Technolosies (P) Ltd. [2008] 114 ITD 573 (Chennai)
CIT vs. Noble & Hewitt (I)(P) Ltd [166 Taxman 48 – Delhi High Court] Chowranghee Sales Bureau Ltd. Vs. CIT [1977] 110 ITR 385
Jet Lite (India) Ltd. Vs. CIT – [TS-5546-HC-2015(DELHI)]
Royal Calcutta Turf Club vs. Dy. CIT [1993] 44ITD 735 (Cal.)

It is a well settled principle that adjustments in respect of a debatable and controversial issues is beyond the scope of section 143(1). The H’ble ITAT (Delhi) in Prowiz Mansystems Private Limited vs. ITO held that (Emphasis supplied) –

It is well settled that any adjustments u/s 143(1) of Income Tax Act by way of intimation u/s 143(1) of Income Tax Act, on debatable and controversial issues, is beyond the scope of Section 143(1) of Income Tax Act. In this regard, we respectfully mention the order of Hon’ble Jurisdictional High Court in the case of ACIT vs. Haryana Telecom Pvt. Ltd. 14 taxman.com 122 (Delhi). Similar view was taken by Hon’ble Courts in the cases of George Williamson (Assam) Ltd. vs. CIT & Anr. [2006] 286 ITR 0533 (Gauhati); Tata Yadogawa Ltd. vs. CIT [2011[] 335 ITR 0053 (Jharkhand); God Granites vs. Central Board of Direct Taxes & Ors. [1996] 218 ITR 0298 (Karnataka); Swamy Distributors vs. ACIT & Ors. [2003] 180 CTR 0290; 139 Taxman 0310 (Karnatka), CIT vs. Eicher Goodearth Ltd. [2008] 296 ITR 0125 (Delhi); Smt. Shanta Chopra vs. ITO [2004] 271 ITR 0132 (Delhi); Kvaverner John Brown Engg. (India) (P.) Ltd. vs. ACIT, [2008] 305 ITR 0103 (Supreme Court).”

Some other decisions supporting the above observation are as –

1. Garg Heart Center & Nursing Home Private Limited & Others in ITA No. 1 700/Del/2022.

2. Paris Elysees India Private Limited Vs DCIT (ITAT Jaipur)

3. 360-Realtors-LLP-Vs-ADIT-ITAT-Delhi

4. SVS Guarding Services Pvt. Ltd. Vs ITO (ITAT Delhi)

5. ACIT v. Haryana Telecom Pvt Ltd, 14 taxmann.com 122 (Delhi HC)

6. CIT vs. Mekins Agro Products Limited (2015)( 55 Taxmann.com 216 (Andhra Predesh and Telangana High Court)

7. Modern Fibotex India Ltd. v. Dy. CIT [1995] 126 CTR (Cal.) 69 : [1995] 212 ITR 496 (Cal.),

8. Khatau Junkar Ltd. v . K.S. Pathania, Dy. CIT [1992] 102 CTR (Bom.) 194 : [1992] 196 ITR 55 (Bom.)

4. An adjustment cannot be made solely on the basis of form 3cd when no adverse opinion has been given in the audit report.

The readers are requested to refer to rule 6G on the income tax rules which has also been reproduced below:

Report of audit of accounts to be furnished under section 44AB.

6G. (1) The report of audit of the accounts of a person required to be furnished under section 44AB shall,—

(a) in the case of a person who carries on business or profession and who is required by or under any other law to get his accounts audited, be in Form No. 3CA;

(b) in the case of a person who carries on business or profession, but not being a person referred to in clause (a), be in Form No. 3CB.

(2) The particulars which are required to be furnished under section 44AB shall be in Form No. 3CD.”

As the readers may note that the heading of Form No. 3CD also states – “Statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961.” It signifies that the auditor is required to furnish the tax audit report in Form 3CB whereas Form 3CD is merely a ‘statement’ of specified particulars required to be annexed to the audit report. It is not the audit report per se. It is only a compilation of additional information to be provided by the auditor that can be referred to in case of any assessment to be made in the future so that an Assessing Officer can compute the correct income for levy of income-tax. Thus, the onus of any addition to be made on the basis of Form 3CD is on the Assessing Officer during an assessment (that too after due consideration of facts and law) but it is certainly not on the auditor.

The clause 26(i)(B)(b) of the statement in Form 3CD in our case, only STATES the amount that not have been paid before the due date of filing the ITR, it nowhere discusses the allowance or disallowance of the amounts. It is merely a factual statement and not the opinion of the auditor or auditor’s conclusion on the legal position. The auditor generally does not mention any observation regarding the issue of undeposited GST in his audit report Form 3CB and in absence of specific opinion of the auditor, any addition made by the CPC-Bengaluru merely on the basis of statement of a fact in Form 3CD is unwarranted and unjust.

5. Opinions/statements of auditor are not conclusive and binding on the assessee

Even if we assume that the statement of fact in Form 3CD is an opinion of the auditor, even then the auditor’s opinion is not conclusive with ref. to an issue and cannot be a sole factor for making additions u/s 143(1)(a)(iv) as the opinions/statements made by the auditor are not binding on the auditee. The auditor is duty bound to state the opinions/statements in Form 3CD but the auditee is nowhere bound to accept the opinions/statements made by the auditor. The same has been held by H’ble Tribunal (Mumbai) in Kalpesh Synthetics Pvt Ltd. Vs. Deputy Commissioner of Income Tax, CPC Bengaluru and K A Hospitality Private Ltd. Vs. Income Tax Department, CPC Bangalore (Emphasis supplied) as follows –

“….Can the observations in a tax audit report, by themselves, be justifications enough for any disallowance of expenditure under the Act? As we deal with this question, we are alive to the fact section 143(1)(a)(iv) specifically an adjustment in respect of “disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return”. It does proceed on the basis that when a tax auditor indicates a disallowance in the tax audit report, for this indication alone, the expense must be disallowed while processing under section 143(1) by the CPC. It is nevertheless important to bear in mind the fact that a tax audit report is prepared by an independent professional. The fact that the tax auditor is appointed by the assessee himself does not dilute the independence of the tax auditor. The fact remains that the tax auditor is a third party, and his opinions cannot bind the auditee in any manner. As a matter of fact, no matter how highly placed an auditor is, and even within the Government mechanism and with respect to CAG audits, the audit observations are seldom taken an accepted position by the auditee- even when the auditor is appointed by the auditee himself. These are mere opinions and at best these opinions flag the issues which are required to be considered by the stakeholders. On such fine point of law, as the nuances about the manner in which Hon’ble Courts have interpreted the legal provisions of the Income Tax Act in one way or the other, these audit reports are inherently even less relevant- more so when the related audit report requires reporting of a factual position rather than express an opinion about legal implication of that position. In the light of this ground reality, an auditee being presumed to have accepted, and concurred with, the audit observations, just because the appointment of auditor is done by the assessee himself, is too unrealistic and incompatible with the very conceptual foundation of independence of an auditor. On the one hand, the position of the auditor is treated so subservient to the assessee that the views expressed by the auditor are treated as a reflection of the stand of the assessee, and, on the other hand, the views of the auditor are treated as so sacrosanct that these views, by themselves, are taken as justification enough for a disallowance under the scheme of the Act. There is no meeting ground in this inherently contradictory approach……”

6. The adjustment made is beyond the scope of section 143(1)(a)

Any adjustment to income u/s 143(1)(a) can be made only if it is covered within the scope of the section. Section 143 is reproduced below –

“(1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely: —

(a) the total income or loss shall be computed after making the following adjustments, namely: —

(i)  any arithmetical error in the return;

(ii)  an incorrect claim, if such incorrect claim is apparent from any information in the return;

(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;

(iv)  disallowance of expenditure [or increase in income] indicated in the audit report but not taken into account in computing the total income in the return;

(v)  disallowance of deduction claimed under 69 [section 10AA or under any of the provisions of Chapter VI-A under the heading “C.—Deductions in respect of certain incomes”, if] the return is furnished beyond the due date specified under sub-section (1) of section 139;”

In the intimation issued by CPC-Bengaluru, the undeposited GST is added by mentioning reason as –

“There is inconsistency in Any amount disallowed under section 43B in any preceding previous year but allowable during the previous year claimed in return and audit report.”

Let’s compare it with another adjustment/disallowance that is generally made u/s 143(1)(a) i.e. Employer portion of EPF and ESI contribution remaining undeposited on or before the due date of filing ITR u/s 139(1). The unpaid EPF and ESI contributions are added back by mentioning reason as – “There is inconsistency in Any amount debited to profit and loss account of the previous year but disallowable under section 43B claimed in return and audit report.” And the intimation order specifies sub-clause (iv) of section 143(1)(a) as the reason for adjustment in both cases.

The above sub-clause talks of two different limbs, namely, `disallowance of expenditure’ and `increase in income’ by means of indication in the audit report. Both the limbs are independent of each other.

The reasons for addition of amounts involved in both issues are different as evident from the language. It claims that the undeposited EPF & ESI contributions are disallowed since these amounts are ‘debited to profit and loss account.’  It means that adjustment for this issue has been made under 1st limb of clause (iv) of the section i.e., Disallowance of expenditure. But for issue of Undeposited GST, it does not give any clear indication as to what is the reason for addition and rather it provides a generic text as a reason that ‘Any amount disallowed under section 43B in any preceding previous year but allowable during the previous year’. This reasoning is cryptic and does not fall in place. It would be apt to mention here that the Goods and Service Tax (GST) is generally not routed through the profit and loss account.

But nevertheless, one thing that can be concluded that the reasons for addition of amounts involved in both the issues are not same because for one issue the amount is added as it has been debited to the profit and loss account and for the other, no specific reason has been given and since GST has not been debited to the profit and loss account, the adjustment for undeposited GST has been made under the 2nd limb of clause (iv) of the section i.e. increase in income’.  This increase in income is qua ‘GST remaining undeposited.’ However, it is worthwhile to note that this 2nd limb i.e., ‘increase in income’ was introduced by Finance Act 2021 w.e.f. 01-04-2021 and hence it will not apply in with ref. to previous years commencing before 01-04-2021.

In conclusion, the adoption of AI and automated systems by the Income Tax Department in India has introduced a series of challenges for taxpayers, particularly concerning non-deposits of taxes, duties, cess etc. It is crucial for tax authorities to address these issues, ensuring clear communication, accessible explanations, and fair treatment to foster trust and confidence among taxpayers. As the digital landscape continues to evolve, a balance must be struck between automation and the human touch to ensure a just and efficient tax system that works for all stakeholders involved.

(Disclaimer – This article is for general information purposes only and does not constitute legal advice. No professional-client relationship is formed by reading this article. The author and publisher are not liable for any reliance on the information. Seek legal advice from a qualified professional for specific legal concerns. External links are provided (if any) for convenience, and their content is not endorsed.)

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Company: Maurya & Associates (Chartered Accountants)
Location: Rudrapur, Uttarakhand, India
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