CBDT_e-Filing_ITR 3_Validation Rules_V 1.0

APPEAL FOR TAR CL. 16(d) INCOME ADJUSTMENT IN S. 143(1) INTIMATION

(DESCRIPTIVE SUBJECT – SUGGESTED GROUNDS AND STATEMENT OF FACTS FOR APPEAL AGAINST INTIMATION U/S. 143(1) ISSUED FOR ADJUSTMENT OF INCOME REPORTED IN CLAUSE 16(d) OF TAX AUDIT REPORT)

INTRODUCTION : Recently in cases of large no. of tax payers an intimation U/s. 143(1) of the Income Tax Act, 1961 (“Act”) has been issued, wherein an adjustment has been made regarding income reported in clause 16(d) of the tax audit report (“TAR”). In many cases, the above income was already reported by the tax payers themselves in their income tax returns (“ITR”). Therefore, in such cases there is double taxation of the above income. The above addition adjustment has been made by mentioning that there is some mismatch between clause 16(d) income and information in ITR.

PROBABLE REASON FOR ADJUSTMENT OF ALREADY REPORTED INCOME : The probable reason for the above adjustment, despite reporting of income in the return, may be the non compliance with the various ITR validation technical rules. Some of these rules are mentioned below.

FIRST RELEVANT VALIDATION RULE :

Table 4: Category D Rules

All the effects reported in the audit reports Form 3CD are expected to be routed through Schedule OI and Schedule BP, based on the mappings provided. Mapping related to these rules are provided in Annexure 1 below

SECOND RELEVANT VALIDATION RULE :

Annexure 1

Following fields of ITR should be tallied with corresponding amount mentioned in Tax Audit report i.e., Form 3CD

SCHEDULE OI – SECTION 28

FIELD NAME IN ITR FIELD IN ITR FIELD IN FORM 3CD
the items falling within the scope of section 28 Sr. No. 5(a) Schedule OI Form 3CD clause 16 (a)
The proforma credits, drawbacks, refund of duty of customs or excise or service tax, or refund of sales tax or value added tax, or refund of GST, where such credits, drawbacks or refunds are admitted as due by the authorities concerned Sr. No. 5(b) Schedule OI Form 3CD clause 16 (b)
escalation claims accepted during the previous year Sr. No. 5(c) Schedule OI Form 3CD clause 16 (c)
Any other item of income Sr. No. 5(d) Schedule OI Form 3CD clause 16 (d)

THIRD RELEVANT VALIDATION RULE :

In Sch BP, Sl. No.23 should be minimum of sum of amounts entered at Sl. No.5a to 5d of Schedule Part A-OI

The crux of these validation rules is that the clause 16(d) income is to be routed in the ITR through Schedule OI and BP. However, in most of the cases, the income reported in clause 16(d) of TAR has not been routed through Schedule OI and BP, but the same has been directly mentioned under the other relevant heads e.g., Income from other sources, Income from salary etc. This may be the probable reason of above alleged mismatch and consequential addition adjustment.

FILING OF RECTIFICATION APPLICATION U/S. 154 :

The filing of application U/s. 154 may be one of the appropriate remedy for resolution of the above problem. The application can be filed within 4 years from the date of receipt of the intimation U/s. 143(1). The articles written by the author regarding step by step procedure for preparation of the above application can be read through the following links –

(a) link for article 1 – https://taxguru.in/income-tax/section-1431-notice-intimation-tax-audit-report-clause-16d.html

 (b) link for article 2 – https://taxguru.in/income-tax/step-preparation-section-154-application-section-1431-clause-16d-tax-audit-report.html

The video displaying the above procedure can also be viewed through the following link – https://youtu.be/FB79gcqgueY

FILING OF APPEAL :  Filing of an appeal before CIT(A) may also be an another appropriate remedy in the above matter. The appeal may be filed against original intimation U/s. 143(1). The same may also be filed against the rectified intimation U/s. 154/143(1) if the above rectification application U/s. 154 is rejected and the above adjustment of TAR clause 16(d) income is not deleted.

TIME PERIOD FOR FILING OF APPEAL – The appeal against original intimation U/s. 143(1) may be made within 30 days of the date of service of the original intimation. Similarly, the appeal against the rectification order i.e., intimation U/s. 154/143(1) can also be made within 30 days from the receipt of rectified order U/s. 154. If the appeal is filed beyond the above period, then the CIT(A) may condone the delay and admit the appeal, if there is sufficient cause for the delay.

APPEAL FEES – The appeal fee is payable alongwith the appeal. The appeal fee is required to be paid at Rs. 250/- (If assessed total income is Rs. 1 lakh or less), at Rs. 500/- (If assessed total income is over Rs. 1 Lakh to Rs. 2 Lakh), at Rs. 1000/- (If assessed total income is over Rs. 2 Lakh).

APPEAL FORM – The appeal to the CIT(A) is required to be filed in form no. 35. The same is to be filed online through the e filing portal of the income tax department.

20% OF DEMAND NOT REQUIRED TO BE PAID FOR FILING OF APPEAL – The 20% of demand is not required to be paid for filing of appeal. The payment of 20% of demand is not precondition for filing of appeal. The appeal can be filed without payment of above 20%.

The 20% of demand is required to be paid for another purpose. It is to be paid for obtaining stay against the full amount of demand. There may be three type of situations i.e., (i) No appeal is filed, only application U/s.154 is filed, then in such cases, the income tax department may proceed for full recovery of demand. (ii) appeal is filed but no stay is obtained by paying at least 20% of demand, then also the department may proceed for full recovery of demand. (iii) appeal is filed and stay is obtained by paying at least 20% of demand, then in such case the department may not proceed for full recovery of demand till decision of appeal.

If 20% of demand is paid for obtaining the stay. Then later on, if on decision of appeal, the adjustment addition is deleted, the assessee may obtain refund of above 20% of demand paid. However, if adjustment is not deleted in appeal, then the department may proceed for recovery of balance 80% of demand.

SUGGESTED GROUNDS OF APPEAL (FOR APPEAL AGAINST ORIGINAL INTIMATION U/S. 143(1)) –

GROUND NO. 01 – That the Intimation passed U/s. 143(1) of the Income Tax Act, in the case of the appellant for AY 2021-22 is wrong and invalid.

GROUND NO. 02 –That the adjustment and addition of Rs. XXX/- made in the above intimation, to the returned income of the appellant, by alleging that “there is some mismatch between the income reported in clause 16(d) of tax audit report and income tax return”, is also wrong and invalid (particularly without considering that the income was already suo moto duly reported in respective schedule of the Income Tax Return).

GROUND NO. 03 – That it is also submitted that the additional interest levied at Rs. XXXX U/s. XXXX and Rs. XXXX U/s. XXXX, and additional demand (on account of additional tax and interest) raised on the appellant at Rs. XXXX are also wrong, invalid and unjustified.

GROUND NO. 04 – That the appellant craves leave to add, alter, amend or modify all or any of the above grounds of appeal at any time before completion of the hearing.

(Submitted By)

SUGGESTED STATEMENT OF FACTS (FOR APPEAL AGAINST ORIGINAL INTIMATION U/S. 143(1)) –

01. That the appellant is an XXX (Please mention status e.g., individual, HUF etc.).

02. That this appeal pertains to the Assessment Year 2021-22. During the above assessment year, the appellant was engaged in the business of XXX (Please mention nature of business e.g., retail trading, manufacturing etc.).

03. That for the above assessment year, the appellant was required to get accounts of his business audited under section 44AB of the Income Tax Act, 1961.

04. That the appellant duly got his accounts audited U/s. 44AB and also duly submitted the audit report vide e filing mode on the Income Tax Department e filing portal within due date i.e., on dd/mm/yyyy (Please mention date of submission of audit report).

05. That during the year, apart from the above business income, the appellant also earned some non business incomes i.e., XXXX (Exempt U/s. XX) at Rs. XXXX and also XXXX income at Rs. XXX (which is chargeable under the head “Income from other sources”).

06. That both the above amounts were duly recorded by the appellant in his capital account (attached with the above tax audit report submitted on dd/mm/yyyy).

07. That it is a general practice that the income / receipts which are specifically related to the business are shown directly in the Profit and Loss Account of business and those income / receipts which are not directly related to the business but are recorded in the books of account of business are shown in the capital account. The same pattern of reporting the above incomes was followed by the appellant. The above XXXX income (exempt U/s. XX)  and XXXX income (chargeable under head “Income from other sources”) are not directly related with business. The same are also not chargeable under the head “Profits and gains of business”. Therefore, both the above incomes were shown in the capital account.

08. That in the above tax audit report, the above amounts were also duly reported in the point no. 16(d) of the Form No. 3CD.

09. That thereafter, the appellant filed his Income Tax Return on dd/mm/yyyy. Both the above incomes were duly included by the appellant in his return. The above XXXX income of Rs. XXX was duly reported in ITR in Schedule OS – Income From Other Sources, at its point no. XX. Similarly, the above XXXX income was also duly reported in Schedule EI (Exempt Income) of the return at its point no. XX.

10. That in this manner, the appellant duly accounted and reported both the above incomes in the capital account, tax audit report Form 3CD as well as in the income tax return. Thus, full compliances were duly made by the appellant in this regard.

Appeal For TAR CL. 16(d) Income Adjustment In Section 143(1) Intimation

11. That later on, the appellant received notice for adjustment U/s. 143(1) of the Act. The proposed adjustment was regarding above income of Rs. XXXX (exempt income) and Rs. XXXX/- (Income chargeable under Other Source head) (total Rs.XXXX) as reported in the tax audit report point no. 16(d).

12. That the appellant duly submitted in response to the above notice that the above incomes were duly included in the return of income (with complete description of the income, schedule of return where income is reported etc.).

13. That on dd/mm/yyyy, an Intimation U/s. 143(1) of the Act has been passed wherein the addition / adjustment has been made for the above amount of Rs. XXXX. The total income of the appellant has been increased by the above amount. The submissions made by the appellant (which are verifiable from the income tax return itself) are not considered at all and the addition has been made mechanically without any application of mind and without verifying the facts mentioned in the submissions.

14. That the above addition has been made as business income. It is very surprising that the addition has been made on the basis of tax audit report. In the tax audit report itself, the nature of the above income has been mentioned clearly. In the TAR, it has been clearly mentioned that the amount is XXXX (Exempt Income), XXXX (Other Source income) etc.

15. That in the above situation, the Ld. AO should have suo moto understood that the XXXX is an exempt income but this fact has not been considered. The addition of XXXX income (exempt income) as taxable income and that too under business head is really surprising and shows that the intimation has been passed without proper application of mind.

16. That similarly, the Ld. AO should also have considered that the XXXX income reported as “any other item of income” is generally chargeable under the head “Income from other sources”, by its nature itself. Therefore, instead of making blind addition adjustment, first it should have verified from the income reported in concerned “Other Sources” schedule. But the same has not been done and the addition for the above amount which has already been offered in the ITR has been again made.

17. That it is also mentionable here that the above adjustment has been made merely due to technical reason. In the above Intimation itself, it has been mentioned that the above addition has been made merely because of some mismatch between information reported in clause 16(d) of TAR and in the income tax return.

18. That the above mismatch is not due to non inclusion of above clause 16(d) TAR income in the income tax return. But it is only due to difference in manner of reporting of the above income in the ITR. The Income Tax Department has framed some validation rule that the income reported in clause 16(d) of TAR is to be shown in the ITR under a particular pattern. The above validation rule is mentioned as – “Table 4: Category D Rules – All the effects reported in the audit reports Form 3CD are expected to be routed through Schedule OI and Schedule BP, based on the mappings provided. Mapping related to these rules are provided in Annexure 1 below.”

19. That according to the above validation rule, the clause 16(d) income are to be routed through specific schedules OI and BP. It means if the clause 16(d) income is directly reported in the concerned schedule, the departmental computer system’s validation rule will not get satisfied and it will show mismatch. The same has happened in the present case.

20. That it is a traditional practice that the above clause 16(d) income is reported in the ITR directly in the respective schedule in which it is taxable. For example above income is taxable under the head “Income from other sources”, then it is directly included in the concerned schedule. It is correct, logical and practiced since long. The department has never raised any objection regarding the above manner of reporting income in ITR.

21. That now suddenly the department has applied the above validation rule in its computer system. According to this rule, the clause 16(d) income is to be first reported in clause 5(d) of Schedule OI PART A. Thereafter, it is required to be included in point no. 23 of Schedule BP. Thereafter, the same can be deducted in the relevant point no. 3 (for income chargeable under other heads) or point no. 5 (exempt income) or point no. 32 (other deductions) of Schedule BP itself. Thereafter, the same is to be reported in the concerned schedules i.e., Schedule EI (Exempt Income), Schedule OS (Other Sources) etc. If this sequence is not followed, then the departmental computer system will show the mismatch and thereafter, the adjustment will be made U/s. 143(1).

22. That the same has happened in the present case. The income has been directly included in the respective EI, OS etc. schedule instead of routing the same through OI, BP schedules. In this regard it is submitted that the same is not a valid and justified reason for making addition adjustment. Because it has resulted in double taxation of the one and same income. Firstly, the appellant himself has offered the above income in the respective schedules of the return and secondly, the same has been added in the above intimation U/s. 143(1). The same is not permissible specially only on account of the reason that merely some technical computer validation rule could not got satisfied. The addition adjustment could have been made only if the income was not included in the ITR which is not the case here.

23. That due to non compliance with any technical validation rule, the department could have issued deficiency notice, but the adjustment addition of the same is not proper, valid and justified.

24. That it is also submitted that if the above technical validation rule is so much important, then the income tax department e filing portal should not had allowed filing of the return without satisfaction of the same. The portal should have shown error at the time of e filing of return itself for the above reason. But the same has not been done.

25. That it is also submitted that the present mismatch is not merely in the case of the appellant only. It is learnt that the same has been observed by the departmental computer system in large no. of cases. The addition for the above reason has been made in the cases of large no. of tax payers. If such mismatch had occurred in the case of only few taxpayers, then it could have been concluded that there might be mistake on part of the assessee. But since the mismatch has been alleged in the cases of large no. of taxpayers, it can be reasonably concluded that the mistake is not owing to the tax payers but the reason for such mismatches are on part of the department only.

26. That ensuring compliance with technical validation rules is the responsibility of the ITR preparation software vendors. The taxpayers are not responsible for any deficiency in the softwares available in the market. If any such deficiency is found in the softwares, then the department may take action against them. But in no way the taxpayers can be held responsible for that. The taxpayers cannot be expected to understand the software coding, technical validation rules etc. The user only mention information in the given input area in the software. Thereafter, how the information is to flow within the software is not matter of the user. The same has happened here. The appellant mentioned the income of clause 16(d) in the respective input area. Now, thereafter, the appellant can not be expected to have knowledge about the manner in which the information flows inside the software in the form of coding etc. Therefore, the appellant should not be punished for deficiency occurred due to non assurance of compliance with validation rules by the softwares.

25. That on the basis of above, facts, circumstances, submissions, clarifications and evidences, it is requested that the above adjustment / addition made merely on the basis of some technical software validation reasons may please be deleted, particularly when the income has been correctly reported in the ITR itself. It is also requested that the above intimation may please also be held to be wrong and invalid.

(Submitted By)

CONCLUSION – Thus, the appeal against adjustment made in Intimation U/s. 143(1) may be made in the above manner. The above suggested grounds and statement of facts may be suitably amended as per the need of the respective case. The above suggested grounds and facts are regarding appeal against original Intimation U/s. 143(1). For filing of appeal against rejection of application U/s. 154 regarding adjustment U/s. 143(1), the above grounds of appeal and statement of facts may also be suitably amended.

DISCLAIMER : The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author do not owns any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article. Before taking any action relevant to the above topic, it is advised that the user may please refer relevant Act, Rules etc.

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