Adjustment u/s 143(1)(a) by disallowing exemption u/s 11 without prior intimation is unjustified

ITO Vs Camellia Educare Trust (ITAT Kolkata)

ITAT Kolkata held that in respect of any adjustment proposed to be made u/s 143(1)(a), a prior intimation is required to be served on the assesse. Failure to issue such prior intimation to the assessee before making an adjustment by way of disallowing the claim of exemption u/s. 11 of the Act is unjustified.

Facts- The assessee is a Trust registered u/s. 12AA of the Act. Assessee filed its return of income in Form ITR 7 u/s. 139(4A) of the Act on 31.03.2021 reporting total income at Rs. Nil. Assessee also filed Form 10B on 30.03.2021. The extended due date for filing return of income in respect of year under consideration was 15.02.2021. In the return filed by the assessee, it reported total receipts of Rs.5,67,16,797/-. Against these receipts, assessee claimed application of income u/s. 11 of the Act of Rs.6,83,64,500/-

Since return of the assessee was a belated return in terms of provisions contained in Sec. 139(4A), Centralised Processing Centre of Income Tax, Bengaluru (CPC) while processing the return, made an adjustment by not allowing the claim of the assessee u/s. 11 towards application of income.

CIT(A) allowed the claim of the assessee by observing that the delay in filing the return of income and Form 10B was due to the outbreak of Pandemic of Covid-19 coupled with a fire which broke at the premises of the assessee wherein most of the original office records, files, documents and computer hard disk were burnt.

Being aggrieved, revenue has preferred the present appeal.

Conclusion- In the present case has filed a belated return u/s. 139(4) of the Act which the department has not held it to be a defective return u/s. 139(9) and has processed it by accepting the revenue and capital expenditure though denying the exemption claimed u/s. 11 and computed the total income equal to the total receipts of the assessee for the year. 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 respect of any adjustment which is proposed to be made, a prior intimation is required to be served on the assessee, either in writing or electronically, as contained in 1st proviso to section 143(1)(a) of the Act. Ld. Counsel has evidently demonstrated before us, the failure on the part of CPC to issue such prior intimation to the assessee before making an adjustment by way of disallowing the claim of exemption u/s. 11 of the Act.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

Appeal filed by the revenue and Cross Objection filed by the assessee are against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi vide Order No. ITBA/NFAC/S/250/2022- 23/1044890142(1) dated 24.08.2022 against the order of Centralised Proceeding Centre (CPC), Bengaluru u/s. 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 30.11.2021 for AY 2020­21.

2. Essentially, grounds taken by the Revenue are in respect of allowing the exemption claimed by the assessee u/s. 11 of the Act when assessee has filed its return of income and Form 10B without compliance of Section 139(4A) i.e. after the due date of filing the return. In the Cross Objection, assessee has taken the ground in respect of intimation issued u/s. 143(1) by not following the mandate as required by the ^1st proviso to the said section according to which no adjustment shall be made unless an intimation is given to the assessee for the adjustment proposed to be made.

3. Brief facts of the case are that assessee is a Trust registered u/s. 12AA of the Act. Assessee is running an educational institution in the name of Camellia School of Engineering & Technology at Nadibhag, Post Badu Road, Madhyamgram, Kolkata-700129. Assessee filed its return of income in Form ITR 7 u/s. 139(4A) of the Act on 31.03.2021 reporting total income at Rs. Nil. Assessee also filed Form 10B on 30.03.2021. The extended due date for filing return of income in respect of year under consideration was 15.02.2021. In the return filed by the assessee, it reported total receipts of Rs.5,67,16,797/-. Against these receipts, assessee claimed application of income u/s. 11 of the Act of Rs.6,83,64,500/- comprising of the following components:

3.1. Since return of the assessee was a belated return in terms of provisions contained in Sec. 139(4A), Centralised Processing Centre of Income Tax, Bengaluru (CPC) while processing the return, made an adjustment by not allowing the claim of the assessee u/s. 11 towards application of income. CPC, Bengaluru computed the total income of the assessee at Rs.5,67,16,797/- which is nothing but the total receipts of the assessee for the year under consideration. From the perusal of intimation u/s 143(1) dated 30.11.2021, in details relating to return, following facts are stated –

3.2. In respect of details pertaining to ‘Forms’ it is stated as ‘No forms filed’. It is claimed that Form 10B was filed electronically by the assessee on 30.03.2021, copy of which is placed in the paper book. On the computation of total income by CPC at Rs.5,67,16,797/-, assessee went in appeal before the Ld. CIT(A) who allowed the claim of the assessee by observing that the delay in filing the return of income and Form 10B was due to the outbreak of Pandemic of Covid-19 coupled with a fire which broke at the premises of the assessee wherein most of the original office records, files, documents and computer hard disk were burnt. There was a delay in completing the books of account, due to these circumstances. Ld. CIT(A) further observed that Hon’ble Supreme Court taking suo moto cognizance of the prevailing situation due to Covid Pandemic, had excluded, for the purpose of limitation, the period from 15.03.2020 to 28.02.2022, in view of which there is no delay in filing the return and Form 10B and, therefore, CPC was wrong in denying the exemption u/s. 11 of the Act. Aggrieved, revenue is in appeal before the Tribunal and assessee by way of Cross Objection.

4. Before us, Ld. Sr. DR submitted that the exclusion of limitation granted by the Hon’ble Supreme Court relied on by the Ld. CIT(A) is misplaced since the exclusion given by the Hon’ble Apex Court is in respect of all the judicial or quasi judicial proceedings. According to Ld. Sr. DR, filing of return and Form 10B does not fall within the meaning of judicial or quasi judicial proceedings and, therefore, exclusion of limitation shall not apply in this respect. According to Ld. Sr. DR, since the return and Form 10B have not be been filed within the prescribed due date as per Sec. 139(4A) of the Act and both, the return of income and Form 10B are belated, which have been filed u/s. 139(4) of the Act, the exemption claimed u/s. 11 has been rightly rejected. In addition to the oral arguments by Ld. Sr. DR, a written submission has also been placed on record by way of an e-mail dated 21.05.2023 sent to the Registry, wherein the oral arguments have been compiled. Copy of this e-mail was made available to the ld. Counsel of the assessee also.

5. Per contra, Ld. Counsel for the assessee submitted that CPC while processing the belated return of the assessee has accepted the revenue expenditure of Rs.4,56,99,706/- and capital expenditure of Rs.1,41,57,274/- as claimed by the assessee in its return, which is evident from pages 21 and 24 of the impugned intimation. He also stated that CPC has duly acknowledged the fact that assessee is a registered trust u/s. 12A of the Act. He further pointed out to the fact that Form 10B has been filed electronically on 30.03.2021 though the intimation u/s. 143(1) states that ‘No form filed’.

5.1. Ld. Counsel placed reliance on the instruction of CBDT vide File no. F. No.173/193/2019-ITA-I dated 23.04.2019, wherein CBDT clarified with regard to the time allowed for filing of return of income subsequent to the insertion of clause (ba) in sub-section (1) of Section 12A of the Act. According to this instruction, returns included returns filed within the time allowed u/s. 139 of the Act. Ld. Counsel submitted that provision contained in Sec. 12(1)(ba) states that “the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of sec. 139, within the time allowed under that section.” He, then referred to sec. 139(4A), which provides that every person in receipt of income derived from property held under Trust or other legal obligation wholly for charitable or religious purposes shall furnish a return of such income in the prescribed form and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be furnished under sub-section (1). In this respect, ld. Counsel referred to para 3 of CBDT Instruction (supra), wherein it was clarified that for a trust registered u/s. 12AA of the Act, to avail the benefit of exemption u/s. 11 shall, inter alia, file its return of income within the time allowed u/s. 139 of the Act. Accordingly, orders u/s. 143(1)(a) in those cases in which demand has been raised on this issue may please be rectified. Reference is also made to para 2 of the said instruction wherein the memorandum explaining the relevant provision of Finance Bill, 2017 is reproduced. From the perusal of the same, it is pointed that the amendment brought in by insertion of clause (ba) to sub-section (1) of section 12A is clarificatory in nature and will apply in relation to AY 2018-19 and subsequent years. It is categorically stated in the memorandum that “in order to provide clarity ……………  furnish the return within the time allowed under section 139 of the Act.” Ld. Counsel on the strength of this clarification which is binding on the Department asserted that time allowed u/s. 139 includes time available u/s. 139(4). Assessee has filed its return within the time allowed u/s. 139(4) which has been processed by CPC.

5.2. The said Instruction of CBDT is reproduced as under:

6. To deal with the grounds of Cross Objection section 143(1)(a) is reproduced below:

“Assessment

143 (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 the audit report but not taken into account in computing the total income in the return;

(v) disallowance of deduction claimed under [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; or

(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

Provided that no such adjustments shall be made unless an intimation given to the assessee of such adjustments either in writing or in electronic mode:

Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made:

Provided also that no adjustment shall be made under sub-clause (vi) in relation to a return furnished for the assessment year commencing on or after the ^1st day of April, 2018.”

6.1. From the above section, it is noted that total income or loss of the assessee shall be computed after making the adjustments listed therein. However, before making the adjustments, an intimation is to be given to the assessee in respect of such adjustments either in writing or in electronic mode, as contained in the 1st proviso. Ld. Counsel submitted that in the present case, no intimation has been given to the assessee for making the adjustment/disallowance either in writing or in electronic mode. According to Ld. Counsel, there is an absolute failure on the part of the CPC by not following the condition prescribed in proviso to sec. 143(1)(a).

6.2. In support of his contention, Ld. Counsel placed on record, e-proceeding downloaded from the income tax portal account of the assessee for the year under consideration, placed in paper book volume 2 at page 1 to 6. Ld. Counsel demonstrated from this e-proceeding download that there is no evidence of issue of intimation as required in 1st proviso to sec. 143(1)(a) of the Act.

6.3. Ld. Counsel also stated without prejudice to his aforesaid submissions that income should be understood in its commercial sense i.e. book income, after adding back any appropriations or applications thereof towards the purpose of the trust or otherwise. He placed reliance on the CBDT Circular No. 5-P(LXX-6) of 1968 dated 19.06.1968. He thus, submitted that in the present case when entire income of the trust in the commercial sense has been spent for the purpose of charity, there was no reason to deny the benefit of exemption granted u/s. 11 merely by holding that return has been filed after the due date prescribed u/s. 139(1) of the Act.

7. We have heard the rival contentions and perused the material available on record and have gone through various references made by both the parties in the course of their arguments. We do find force in the submissions made by the Ld. Counsel for his reliance on the CBDT Instruction extracted above, wherein reference is made to sec. 139 in respect of filing of return for the purpose of claiming benefit of exemption u/s. 11 for trust registered u/s. 12AA of the Act. Clarification given by the CBDT instruction gets verified when we refer to the amendment brought in section 12(1)(ba) which now incorporates the time allowed in sub-section (1) or sub-section (4) of section 139 for the purpose of compliance of sub-section (4A) of the said section in respect of furnishing of return of income.

7.1. Assessee in the present case has filed a belated return u/s. 139(4) of the Act which the department has not held it to be a defective return u/s. 139(9) and has processed it by accepting the revenue and capital expenditure though denying the exemption claimed u/s. 11 and computed the total income equal to the total receipts of the assessee for the year. 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.

7.2. Further, in respect of any adjustment which is proposed to be made, a prior intimation is required to be served on the assessee, either in writing or electronically, as contained in ^1st proviso to section 143(1)(a) of the Act. Ld. Counsel has evidently demonstrated before us, the failure on the part of CPC to issue such prior intimation to the assessee before making an adjustment by way of disallowing the claim of exemption u/s. 11 of the Act. Thus, there are two aspects which emerges on this issue as to whether the disallowance made is a permissible adjustment contained in sec. 143(1)(a) and whether this adjustment, if permissible, has been made in compliance to 1st proviso to sec. 143(1)(a) of the Act.

8. Considering the facts on record and the perusal of the provisions contained in sec. 143(1)(a) of the Act, we find that on both the aspects, the revenue fails. This position has not been controverted by Ld. Sr. DR also. Even if we assume for a moment that such an intimation was given to the assessee in accordance with the ^1st proviso, then the second proviso stipulates that if any response is received from the assessee then, the same should be considered before making any adjustment or disallowance. In case, where there is no response received from the assessee then, within thirty days of the issue of such intimation, department is free to make such adjustment or disallowance. The documentary evidence placed on record and the e-proceedings downloaded from the Income Tax portal, no where suggests that such a process has been followed. Thus, we find that 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.

8.1. Further, without prejudice to our above finding, we are in agreement with the submission made by the ld. Counsel that income should be understood in its commercial sense and computing the total income of the assessee equal to the total receipts for the year is not in accordance with the commercial prudence and commercial sense, despite the fact that in the intimation itself, both revenue and capital expenditure have been accepted by CPC in the processing of the return. It is important to note that intimation format contains tabulated columns which runs into several pages. There are two main columns, one column description shows ‘as provided by tax payers’ and the another column shows ‘as computed u/s. 143(1)’. Thus, on pages 21 and 24, in both the columns, the figures claimed by the assessee towards revenue and capital expenditure have been stated which evidently demonstrates that the same have been accepted in the processing of the return.

8.2. Since we have given our observations and findings by taking recourse to CBDT instruction extracted above, read with sect. 139(4) and sec. 12(1)(ba), we do not find any relevance to discuss and adjudicate on the applicability of Taxation and Other Laws (Relaxation and Amendment of certain provisions) Act, 2020 (TOLA), as contended by Ld. Sr. DR in respect of filing of return and Form 10B beyond the extended due date covered by TOLA.

8.3. Considering the above discussion, factual matrix, documentary evidence placed on record, CBDT Instruction and circulars and the applicable provisions of law, we are of the considered view to allow the grounds of Cross objection raised by the assessee and dismiss the grounds raised by the revenue in its appeal. Accordingly, Cross Objection by the assessee is allowed and the appeal of the revenue is dismissed.

9. In the result, appeal of the revenue is dismissed and Cross Objection o the assessee is allowed.

Order pronounced in the open Court on 30th May, 2023.