Case Law Details
Toyota Industries Engine India Pvt. Ltd. Vs ACIT (ITAT Bangalore)
“Once Scrutiny Starts, CPC Can’t Play Parallel Cricket” – ITAT Bangalore Quashes ₹7,778 Cr 143(1) Adjustment After 143(2) Notice
In a significant ruling, the Bangalore ITAT held that once a notice under section 143(2) is issued initiating regular scrutiny assessment, the Department cannot subsequently resort to summary processing under section 143(1) for making prima facie adjustments. The Tribunal deleted massive adjustments including ₹7,778.48 crore towards GST collections and disallowance under section 43B, holding the entire 143(1) exercise to be without jurisdiction.
The assessee demonstrated that the scrutiny notice u/s 143(2) was issued on 28.06.2022, whereas the intimation u/s 143(1) was issued later on 22.09.2022. Relying on the Supreme Court ruling in CIT vs. Gujarat Electricity Board, the Tribunal reiterated that once regular assessment proceedings commence, there is “no need for a summary proceeding under section 143(1)”. The Bench observed that the very sequence of events vitiated the CPC adjustments.
On transfer pricing issues, the Tribunal delivered multiple important findings. It directed exclusion of MSL Driveline as a comparable due to contradictory RPT disclosures and unreliable financial data, observing that comparability analysis must rest on consistent and trustworthy financials.
The Tribunal also held that Bharat Gears Ltd. and JMT Auto Ltd. cannot be rejected merely as “persistent loss makers” when they had earned profits in one of the relevant years. It clarified that the persistent loss filter should be tested using operating profits and not PBT, and a company with profit in any of the three years cannot automatically fail the filter.
Further, recognizing that the assessee operated in a capital-intensive manufacturing industry, the ITAT accepted the principle that depreciation differences materially affect comparability under TNMM and restored the issue to the AO/TPO for granting suitable depreciation adjustment after verification.
The Tribunal also reaffirmed the settled principle that TP adjustment must be restricted only to AE transactions and cannot be extended to non-AE dealings merely because entity-level margins are used. Since AE transactions constituted only 6.24% of total operating cost, the AO/TPO was directed to confine adjustment strictly to international transactions with AEs.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The present appeal has been instituted by the assessee against the order of the AO u/s 143(3) r.w.s 144C of the Act.
2. The assessee in the memo of appeal has filed 22 grounds of appeal, challenging both Transfer pricing and corporate issues, which we for the sake of brevity and convenience, are not inclined to reproduce it here.
3. At the outset, we note that the ground No. 1 raised by assessee is general in nature and does not call for any fresh adjudication.
4. Ground Nos. 2 to 9 are interconnected and pertain to fresh economic analysis conducted by the TPO and inclusion and exclusion of certain comparables by the TPO and by the Ld. DRP for computing the ALP of the international transactions carried out with the AE.
5. The brief facts of the case on hand are that the assessee, a private limited company, is engaged in manufacture and sale of transmission automobile components and diesel engines to its group companies in India, Thailand, New Zealand, Australia etc. During the period under consideration, the assessee provided manufacturing services to its AE’s. The assessee benchmarked its transaction under manufacturing segment by adopting TNNM as most appropriate method and further PLI as OP/OC which arrived at 0.17% for manufacturing segment. The assessee for the comparability analysis under manufacturing segment selected 14 comparables.
5.1 However, the TPO during the assessment proceedings rejected 08 comparables out of 14 comparables selected by the assessee. The assessee’s 06 comparables accepted by the TPO are detailed as under:
(a) Q H Talbros Ltd.
(b) Gajra Gears Pvt Ltd
(c) MSL Driveline Systems Ltd
(d) Musashi Auto Parts India Pvt Ltd
(e) GNA Axies Ltd
(f) RACL Geartech Ltd
6. Thereafter, the TPO applied own filter and selected 09 additional comparable companies exclusive of 06 assessee’s comparables. The final TPO’s comparables are detailed as under:
1. Q H Talbros Ltd.
2. Gajra Gears Pvt Ltd
3. MSL Driveline Systems Ltd
4. Musashi Auto Parts India Pvt Ltd
5. GNA Axies Ltd
6. RACL Geartech Ltd
7. Rane Madras Ltd
8. Axles India Ltd.
9. Setco Automotive Ltd.
10. G G Automotive Gears Ltd
11. G K N Driveline (India) Ltd
12. I M Gears Pvt Ltd
13. Emmbros Autocomp Ltd
14. Deshpande Automech Pvt Ltd
15. Adroit Industries (India) Ltd.
7. The average PLI/margin of the comparables companies was computed at 10.14% with respect to manufacturing Segment. Accordingly, an upward TP adjustment was made by the TPO for Rs. 1,24,29,93,600/- only.
8. Aggrieved assessee filed objections before the Ld. DRP.
9. Before the Ld. DRP, the assessee submitted that MSL Driveline fails the RPT filter applied by the TPO and therefore cannot be considered as a valid comparable.
9.1 The Ld. DRP, however, rejected the contention of the assessee. It was observed that the said comparable was originally selected by the assessee itself in its TP study report. The Ld. DRP further held that the assessee has incorrectly computed the RPT percentage by taking the gross value of RPT and comparing the same with total revenue and total expenditure. According to the Ld. DRP, the correct method is to compare RPT revenue with total revenue or RPT expenses with total expenses, as the case may be. On this basis, the objection of the assessee was rejected.
10. Aggrieved by the order/ direction of the AO/TPO/ld. DRP, the assessee preferred an appeal before us.
11. The Ld. AR before us submitted that the financials of MSL Driveline are not reliable due to various inconsistencies. It was pointed out that as per the annual report (page 267), there are no RPT transactions; however, at page 265 of the same annual report, RPT transactions are disclosed. Further, pages 25–26 of the financial statements also indicate that the company has entered into RPT transactions during the year.
12. Without prejudice, the assessee further submitted that even if the RPT figures as stated in the financial statements are considered for the purpose of applying the TPO’s RPT filter, the same works out to 30.25%. Accordingly, the impugned comparable fails the RPT filter applied by the TPO and therefore deserves to be excluded from the final set of comparables.
13. On the contrary, the Ld. DR vehemently supported the orders of the TPO and the Ld. DRP. It was submitted that MSL Driveline was originally selected by the assessee itself in its TP study report and therefore the assessee cannot now seek its exclusion without demonstrating any material change in facts or functional profile. The Ld. DR further contended that there is no inconsistency in the financial statements as alleged by the assessee. It was submitted that the disclosures relied upon by the assessee are being misread and the existence of RPT, if any, does not automatically render the comparable unacceptable unless it breaches the prescribed threshold.
13.1 It was further argued that the assessee has adopted an incorrect method for computing the RPT percentage by aggregating RPT and comparing the same with total revenue and total expenditure. As per the Ld. DR, the correct approach is to compute RPT either with reference to revenue or expenses, and on such correct computation, the comparable does not fail the RPT filter applied by the TPO. Accordingly, the Ld. DR submitted that MSL Driveline has been rightly retained as a comparable and the objections raised by the assessee are liable to be rejected.
14. We have considered the rival submissions and perused the materials placed on record. The short issue before us is whether MSL Driveline can be retained as a valid comparable in view of the objections raised by the assessee. At the outset, we note that the assessee has pointed out apparent inconsistencies in the financial statements of the said comparable. As brought to our notice, the annual report at one place indicates that there are no RPT transactions, whereas at another place, RPT transactions are disclosed. Further, the financial statements also indicate existence of RPT during the year. In our considered view, such contradictory disclosures create serious doubt on the reliability of the financial data of the comparable. It is a settled principle that comparability analysis must be based on reliable and consistent financial information. Where the financials themselves are not free from ambiguity, such comparable cannot be safely relied upon.
14.1 Without prejudice to the above, we also examine the alternate contention of the assessee regarding the RPT filter. The assessee has demonstrated that even if the figures disclosed in the financial statements are taken into account, the RPT works out to 30.25%, which is beyond the acceptable threshold applied by the TPO.
14.2 In transfer pricing analysis, the purpose of applying an RPT filter is to eliminate companies whose margins may be influenced by related party transactions. Once it is shown that the RPT exceeds the threshold, such company loses its comparability. In the present case, considering the inconsistencies in the financial statements and the possibility of RPT exceeding the threshold, the benefit of doubt must go in favor of the assessee. Accordingly, on both counts, i.e., unreliability of financial data and failure of RPT filter on a without-prejudice basis, we hold that MSL Driveline cannot be considered as a valid comparable. The Assessing Officer/TPO is directed to exclude the said company from the final set of comparables.
15. Coming to 05 comparables viz. (a) Avtec Limited (b) JMT Auto Ltd (c) Bharat Gears Ltd (d) IP Rings Ltd and (e) Sintercom India Limited, we note that the assessee before us has pressed only two comparables i.e. (a) Bharat gears Ltd and (b) JMT Auto Ltd
16. Regard Bharat Gears Ltd. and JMT Auto Limited, the assessee submitted before the Ld. DRP that the said comparables were rejected by the TPO on the grounds that it was persistent loss-making companies. The assessee contended that the TPO has applied this filter based on Profit Before Tax (PBT) instead of Operating Profit (OP), which is not appropriate for transfer pricing analysis.
17. However, the Ld. DRP rejected the contention of the assessee and upheld the action of the TPO in applying the persistent loss filter based on PBT.
18. Aggrieved by the directions of the Ld. DRP, the assessee is in appeal before us.
19. Before us, Ld. AR submitted that Bharat Gears was originally accepted by the assessee in response to the show cause notice dated 20.09.2023 but was subsequently rejected by the TPO on the ground that it is a persistent loss-making company (TPO order page 9). It was further submitted that even the Ld. DRP has observed that the said comparable had earned profit in AY 2018-19, which shows that it is not a persistent loss-making company.
19.1 The assessee placed reliance on the decision of the Hon’ble Chennai Tribunal in the case of Genesys Telecom Labs India Pvt. Ltd. vs. DCIT in IT(TP)A No. 38/CHNY/2024 dated 28.11.2024 in support of its contention.
19.2 Regarding JMT Auto, the assessee submitted the said comparable has earned a profit of Rs. 11.18 crore in the AY 2018-19. The assessee submitted that persistent loss filter can be applied only if there is a successive loss in 3 years.
20. The Ld. DR, on the contrary, vehemently supported the action of the TPO and the Ld. DRP in rejecting Bharat Gears as a comparable. It was submitted that the company has incurred losses in consecutive years and hence rightly fails the persistent loss filter. The Ld. DR contended that application of the filter based on PBT is appropriate and consistent with the approach adopted by the TPO. It was further argued that a single year of profit does not change the overall loss-making trend of the company. Accordingly, the exclusion of the comparable was justified.
21. We have considered the rival submissions of both the parties and perused the materials on record. The issue for our consideration is whether Bharat Gears and JMT Auto have been rightly excluded by the TPO by treating them as persistent loss-making companies.
21.1 At the outset, we note that the TPO has applied the persistent loss filter based on Profit Before Tax (PBT). In our considered view, for the purpose of transfer pricing analysis under TNMM, the relevant parameter is Operating Profit (OP) and not PBT. The use of PBT, which includes non-operating items, may distort the true operating performance of a company. Therefore, the application of the persistent loss filter on PBT is not appropriate.
21.2 Further, it is an admitted position, even as observed by the Ld. DRP at page 59-60 of appeal set, that Bharat Gears and JMT Auto has earned profit in AY 2018-19. Once a company has shown profit in one of the relevant years, it cannot be said to be a persistent loss-making company. The concept of persistent loss implies continuous losses over a period without exception. In the present case, such condition is not satisfied.
21.3 We also note that the assessee had originally accepted the said comparable and the same has been rejected by the TPO only on account of the persistent loss filter. Since we have held that the said filter has been incorrectly applied, the basis for exclusion does not survive.
21.4 In this regard, we find support from the decision of the Hon’ble Chennai Tribunal in the case of Genesys Telecom Labs India Pvt. Ltd. vs. DCIT in IT(TP)A No. 38/CHNY/2024 dated 28.11.2024, wherein it was held that persistent loss filter should be applied based on operating results and not on PBT, and that a company cannot be treated as a persistent loss-maker if it has earned profit in one of the relevant years. The relevant para is reproduced below:
“Moreover the Bangalore Bench of ITAT in the case of Inteva Products India Automotive Pvt. Ltd., in IT(TP)A No.2843/Bang/2017 (order dated 23.12.2020) and KBACE Technologies Pvt. Ltd., in ITA No.3189/Bang/2018 (order dated 29.01.2020) had held that persistent loss filter can be applied only if there is successive losses in three years and if there is a profit in any one financial year out of three successive financial years, then that company cannot be excluded from the list of comparable on the basis of persistent loss making filter. ”
21.5 Respectfully following the above judicial precedent, we hold that Bharat Gears and JMT Auto cannot be excluded merely on the ground of persistent losses in the given facts of the case. Accordingly, we direct the Assessing Officer/TPO to include Bharat Gears and JMT Auto in the final set of comparables.
22. Ground No. 11 raised by assessee relates to Covid-19 period adjustment
23. At the outset, we note that the assessee at the time of hearing did not press this ground. Accordingly, the same is dismissed as not pressed and does not require any separate and independent adjudication.
24. Ground Nos. 10 and 12 raised by assessee relate to Cash PLI & Depreciation adjustment to OP/OR
25. The relevant facts are that the assessee has made substantial investments in capital goods and accordingly incurs significant depreciation expenses, amounting to around 11.08% of its operating revenue as reflected in the profit and loss account. In this background, the assessee requested the TPO to adopt Cash Profit to Sales as the appropriate PLI for benchmarking its international transactions. It was contended that cash profits, being operating profits excluding depreciation, eliminate the impact arising from differences in technology, age of assets used in production, and varying depreciation policies followed by different comparable companies. The assessee also furnished a detailed computation showing that the depreciation to sales ratio of the comparables works out to only 5.25%, along with details of the depreciation methods adopted by such comparables.
25.1 Without prejudice, the assessee alternatively requested that if Cash PLI is not accepted, suitable depreciation adjustment should be granted while computing OP/OR margins.
26. The TPO, however, rejected both the contentions. It was held that adopting Cash PLI would amount to ignoring depreciation as an operating expense, which is not permissible. With regard to the alternative plea, the TPO observed that depreciation adjustment depends on the context and purpose of profit computation. Considering that the assessee is engaged in the manufacturing of diesel engines in a capital-intensive automobile industry, exclusion of depreciation would distort the comparability analysis. Accordingly, both the primary and alternative claims of the assessee were rejected.
27. Aggrieved, the assessee preferred objections before the Ld. DRP. The assessee reiterated that Cash PLI ought to be considered as the appropriate PLI. It was further submitted that since the assessee has charged depreciation at higher rates compared to its comparables, a suitable adjustment should be made to the operating margins of the comparables.
28. The Ld. DRP, however, rejected the contentions of the assessee. It was observed that both the assessee and the comparables have followed the Straight-Line Method (SLM) of depreciation and the differences in depreciation arise only due to variation in useful lives of assets. The Ld. DRP further held that under TNMM, differences in individual cost components such as depreciation or administrative expenses do not materially affect the analysis, as the focus is on net profit margins. On this basis, the objections of the assessee were rejected.
29. Aggrieved by the order/ directions of the AO/TPO and Ld. DRP, the assessee is in appeal before us.
30. The Ld. AR before us submitted that the assessee has made substantial investment in capital goods and therefore its depreciation cost is significantly higher, amounting to 11.08% of operating revenue as against average of 5.25% in case of comparables. It was submitted that due to such high depreciation, the operating margins of the assessee do not reflect its true functional profitability.
30.1 The Ld. AR therefore contended that Cash PLI (Operating Profit less depreciation divided by sales) should be adopted for benchmarking, as depreciation is a non-cash charge and varies based on asset intensity, age of assets, and accounting policies. It was submitted that exclusion of depreciation ensures better comparability and removes distortions arising due to different depreciation methods such as SLM and WDV followed by comparables.
30.2 Without prejudice, the Ld. AR submitted that if Cash PLI is not accepted, suitable depreciation adjustment should be granted while computing margins under TNMM. It was argued that Rule 10B(1)(e) permits adjustments for differences affecting net margins, and depreciation being dependent on asset base and policy differences, requires adjustment to ensure fair comparison.
30.3 The Ld. AR relied on the decisions of the Hon’ble Bangalore Tribunal in AMD India Pvt. Ltd. in IT(TP)A No. 775/Bang/2022 dated 11.09.2023, the Hon’ble Karnataka High Court in Novell Software Development [2021] 126 taxmann.com 29, and CIT vs. B.A. Continuum India Pvt. Ltd. in I.T.T.A No. 440 of 2014 to submit that depreciation differences materially impact comparability and suitable adjustment ought to be granted.
30.4 The Ld. AR further relied on the decision of the Hon’ble Bangalore Tribunal in the case of its group company, Toyota Tsusho India Pvt. Ltd. in IT(TP)A No. 3372/Bang/2018, wherein depreciation-related adjustments were considered in similar circumstances.
31. The Ld. DR, on the contrary, vehemently supported the orders of the TPO and the Ld. DRP. It was submitted that depreciation is an integral part of operating cost in a manufacturing business and cannot be excluded while computing margins. Adoption of Cash PLI would result in ignoring a major cost component and would distort the true profitability.
31.1 The Ld. DR further contended that under TNMM, comparison is based on net margins and differences in individual cost components such as depreciation do not materially affect the analysis. It was submitted that both the assessee and comparables have followed recognized methods of depreciation and mere variation in rates or asset base does not warrant any adjustment.
31.2 With regard to the alternative plea, the Ld. DR submitted that depreciation adjustment is not automatic and can be granted only when reliable and accurate data is available to quantify such differences. In the present case, no scientific basis has been provided to justify such adjustment. Accordingly, it was submitted that both the claims of the assessee are devoid of any merit and have been rightly rejected by the lower authorities.
32. We have considered the rival submissions of both the parties and perused the materials on record. The limited issue before us under this ground is with respect to the alternate plea of the assessee for grant of depreciation adjustment. From the preceding discussion by assessee at para 30 above, we note that the assessee is operating in a capital-intensive industry and has demonstrated that its depreciation to operating revenue is significantly higher at 11.08% as against around 5.25% in case of comparables. Such variation, in our considered view, arises on account of differences in asset base, age of assets, and depreciation policies followed by the respective companies. These factors materially impact the operating margins and therefore cannot be ignored while carrying out comparability analysis under TNMM.
32.1 The contention of the Ld. DRP that differences in individual cost components do not matter under TNMM cannot be accepted in absolute terms. Rule 10B(1)(e) clearly provides that suitable adjustments are to be made to eliminate material differences affecting net profit margins. Depreciation, being a significant cost component in manufacturing entities, is one such factor which can materially distort comparability if not appropriately adjusted.
32.2 We also find merit in the contention of the assessee that though depreciation is an operating expense, the quantum thereof may vary significantly due to differences in accounting policies, useful life of assets and method of computation. Therefore, where reliable data is available, adjustment for such differences is warranted to arrive at a more accurate arm’s length result.
32.3 In this regard, we find support from the decision of the coordinate bench of this Tribunal in the case of Toyota Tsusho India Pvt. Ltd. (IT(TP)A No. 3372/Bang/2018), wherein in similar circumstances, the Tribunal has considered the impact of depreciation differences while determining the arm’s length margin. The relevant para is reproduced below:
“Ground No.11 is on the issue of disallowance of the assessee’s claim for depreciation adjustment while computing ALP. The claim was made by the assessee before the TPO after perusing the order of the TPO as well as the DRP, we are of the considered opinion that this adjustment on account of differences in depreciation rates etc., has to be granted. The AO is directed to verify the data and compute the adjustment that is required to be granted on account of variation in the rate of depreciation claimed and then grant the same to the assessee. ”
32.4 In view of the above, we deem it appropriate to restore this issue to the file of the AO/TPO with a direction to examine the claim of the assessee for depreciation adjustment. The AO/TPO shall verify the computation and, if found correct, grant suitable adjustment to the margins of the comparables so as to eliminate the impact of differences in depreciation. Needless to say, the assessee shall be afforded adequate opportunity of being heard. Accordingly, the alternate plea of the assessee is allowed for statistical purposes.
33. Ground No. 13 raised by assessee relates to capacity utilization adjustment.
34. At the outset, we note that the assessee at the time of hearing did not press this ground. Accordingly, the same is dismissed as not pressed.
35. Ground No. 14 raised by assessee relates to working capital adjustment.
36. At the outset, we note that the assessee at the time of hearing did not press this ground. Accordingly, the same is dismissed as not pressed.
37. Ground No. 15 raised by assessee relates to proportionate adjustment restricting to the international transactions only.
38. The relevant facts are that the assessee has entered into international transactions with its AEs, which constitute only 6.24% of its total operating cost. The assessee contends that transfer pricing provisions u/s Chapter X apply only to international transactions and not to the transactions carried out with unrelated parties.
39. However, the TPO made TP adjustment on the entire operating cost of the assessee without restricting the same to the value of international transactions.
40. Aggrieved assessee filed objections before the Ld. DRP
41. Before the Ld. DRP, the assessee submitted that the TP adjustment, if any, should be restricted only to the value of international transactions and not to be extended for the transactions carried out with the non-AE transactions. It was submitted that applying adjustment on entire turnover distorts the intent of TP provisions. The assessee also relied on its own case for earlier years and other judicial precedents.
41.1 However, The Ld. DRP rejected the contention of the assessee and upheld the action of the TPO in not granting proportionate adjustment.
42. Aggrieved assessee preferred an appeal before us.
43. The Ld. AR before us submitted that it is a settled legal position that TP adjustment should be restricted only to international transactions carried out with the AE. It was contended that Chapter X applies only to AE transactions and not to transactions with unrelated parties. The Ld. AR relied on the decision of the Tribunal in assessee’s own case in M/s. Toyota Industries Engine India Pvt. Ltd. vs DCIT (IT(TP)A Nos. 355 & 2127/Bang/2016). It was further submitted that in earlier years, including AY 2010-11, 2011-12, 2015-16 and 2016-17, directions were issued to restrict adjustment to AE transactions only. The Ld. AR also pointed out that the TPO himself has granted proportionate adjustment in AY 2013-14 and AY 2018-19.
44. The Ld. DR, on the contrary, vehemently supported the orders of the TPO and DRP.
45. We have considered the rival submissions and perused the materials on record. The undisputed position is that the international transactions constitute only 6.24% of the total operating cost of the assessee. It is a settled principle that transfer pricing provisions under Chapter X are applicable only to international transactions entered into with AEs.
45.1 In our considered view, any adjustment made at entity level cannot be applied to transactions with unrelated parties, as the same would go beyond the scope of Chapter X of the Act. The purpose of transfer pricing provisions is to determine arm’s length price of international transactions and not to disturb the profits arising from non-AE transactions.
45.2 We also note that in assessee’s own case for earlier years, as well as in subsequent years, the authorities have accepted the principle of restricting TP adjustment to AE transactions alone. The TPO himself has granted such proportionate adjustment in certain years in his (the TPO) order in AY 2013-14 and 2018-19. In the absence of any change in facts, a consistent view needs to be followed. Accordingly, we direct the AO/TPO to restrict the TP adjustment, if any, only to the value of international transactions entered into by the assessee with its AEs.
46. Ground Nos. 16, 17 and 18 are interconnected and pertain to the disallowance made u/s 143(1) of the Act.
47. The relevant facts are that the return of income of the assessee was processed u/s 143(1) of the Act wherein adjustments aggregating to ₹77,78,48,41,731 on account of GST collected by assessee and ₹7,84,12,553 u/s 43B were made. The notice u/s 143(2) was issued on 28.06.2022, whereas intimation u/s 143(1) was issued subsequently on 22.09.2022. The CPC/AO processed the return u/s 143(1) and made prima facie adjustments despite the fact that scrutiny proceedings had already been initiated by issuance of notice u/s 143(2) of the Act.
48. Aggrieved assessee filed objections before the Ld. DRP.
49. Before the Ld. DRP, the assessee submitted that once notice u/s 143(2) of the Act has been issued, the Department cannot resort to processing the return of income u/s 143(1) of the Act. It was contended that the adjustments made u/s 143(1) of the Act are without jurisdiction and void ab initio. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Gujarat Electricity Board.
49.1 However, the Ld. DRP rejected the contention of the assessee by holding that the issue relating to adjustments made u/s 143(1) is not maintainable before the DRP, and accordingly declined to adjudicate the same.
50. Aggrieved assessee preferred an appeal before us.
51. The Ld. AR before us reiterated that issuance of notice u/s 143(2) of the Act sets the assessment in motion under regular assessment proceedings and thereafter recourse to section 143(1) of the Act for specified adjustment is not permissible. It was submitted that in the present case, notice under section 143(2) of the Act was issued prior to 143(1) of the Act intimations, and therefore the entire adjustment is without jurisdiction. Reliance was placed on the judgment of the Hon’ble Supreme Court in CIT vs. Gujarat Electricity Board.
52. The Ld. DR, on the other hand, vehemently supported the orders of the lower authorities and submitted that processing u/s 143(1) of the Act is a statutory requirement and the adjustments made are valid. It was contended that the issuance of notice u/s 143(2) does not automatically invalidate the intimation u/s 143(1) of the Act.
53. We have heard the rival submissions and perused the materials available on record. The undisputed factual position is that notice u/s 143(2) of the Act was issued on 28.06.2022, whereas intimation u/s 143(1) was issued subsequently on 22.09.2022. It is a settled legal position that once a notice u/s 143(2) is issued, the assessment proceedings are set in motion under the regular assessment mechanism and thereafter recourse to summary processing u/s 143(1) is not permissible. The Hon’ble Supreme Court in the case of Commissioner of Income-tax vs. Gujarat Electricity Board reported in [2003] 129 Taxman 65 (SC)/[2003] 260 ITR 84 (SC)/[2003] 181 CTR 28 (SC) dated [12-112002] affirming the view of the Hon’ble Gujarat High Court in Gujarat Poly-Avx Electronics Ltd. vs. DCIT [222 ITR 140], has held that once notice u/s 143(2) is issued, proceedings u/s 143(1) cannot thereafter be resorted to. The relevant para is reproduced below:
“. Even otherwise, the view taken by the Gujarat High Court seems to be correct on principle. There is no dispute that section 143(1)(a) of the Act enacts a summary procedure for quick collection of tax and quick refunds. Under the scheme if there is a serious objection to any of the orders made by the Assessing Officer determining the income, it is open to the assessee to ask for rectification under section 154. Apart therefrom, the provisions of section 143(1)(a)( i) indicate that the intimation sent under section 143(1)(a) shall be without prejudice to the provisions of sub-section (2). The Legislature, therefore, intended that, where the summary procedure under sub-section (1) has been adopted, there should be scope available for the revenue, either suo motu or at the instance of the assessee to make a regular assessment under sub-section (2) of section 143. The converse is not available; a regular assessment proceeding having been commenced under section 143(2), there is no need for a summary proceeding under section 143(1)(a). “
54. In the present case, since the notice u/s 143(2) of the Act precedes the intimation issued u/s 143(1) of the Act, the impugned adjustments made u/s 143(1) are without jurisdiction and cannot be sustained. The sequence of events itself vitiates the adjustments. Accordingly, the adjustments made u/s 143(1) are directed to be deleted. Hence, this ground of appeal of the assessee is hereby allowed.
55. Ground No. 20 raised by assessee relates to granting of TCS credit
56. At the outset, we note that the assessee at the time of hearing the appeal did not press this ground of appeal. Accordingly, the same is dismissed as not pressed.
57. Ground No. 21 raised by assessee relates to MAT Credit
58. At the outset, we note that the assessee at the time of hearing did not press this ground of appeal. Accordingly, the same is dismissed as not pressed.
59. Ground No. 22 raised by assessee relates to levy of interest u/s 234A, 234B and 234C of the Act.
60. At the outset, we note that this ground relates to levy of interest u/s 234A, 234B and 234C of the Act. The same being consequential and mandatory in nature, no separate adjudication is called for. The AO is directed to recompute the interest, if any, while giving effect to this order.
61. In the result, the appeal of assessee is partly allowed for statistical purposes.
Order pronounced in court on 6th day of May, 2026
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