Parent Company ESOP Cross-Charge Is Employee Compensation Deductible Under Section 37(1): ITAT Ahmedabad

Linde Engineering India Private Ltd. Vs DCIT (ITAT Ahmedabad)

Summary: The ITAT Ahmedabad considered the assessee’s challenge to adjustments made while processing its return under Section 143(1), the addition of Rs.2,92,09,322 under Section 41(1), and the disallowance of Rs.51,68,730 towards Employee Stock Option Plan (ESOP) expenses. The assessee had filed its return for Assessment Year 2021-22 declaring total income of Rs.191,58,60,950. The return was subsequently selected for scrutiny and notice under Section 143(2) was issued on 28.06.2022. CPC processed the return under Section 143(1), making aggregate adjustments of Rs.9,50,34,695 relating to bonus/incentive, leave encashment and Section 41(1).

The Assessing Officer subsequently completed assessment under Section 143(3), adopting the income determined under Section 143(1) as the starting point and making a further addition of Rs.51,68,730 towards ESOP expenses. The CIT(A) confirmed the action of the Assessing Officer.

Before the Tribunal, the assessee argued that once scrutiny proceedings under Section 143(2) had commenced, the CPC could not process the return under Section 143(1), and that the Section 143(1) adjustments should have been independently examined in the scrutiny assessment. It also contended that the Section 143(1) intimation was time-barred and that the Rs.2,92,09,322 relating to old liabilities written back had already been credited to the Profit and Loss Account and offered to tax. Regarding ESOP expenses, the assessee submitted that the expenditure represented employee compensation and was allowable under Section 37(1).

The Tribunal rejected the challenge to the Section 143(1) processing. It held that, for Assessment Year 2021-22, the applicable provisions permitted processing of the return under Section 143(1) after issuance of notice under Section 143(2). It also held that the Assessing Officer was not required to revisit CPC adjustments under Section 143(1) in the Section 143(3) assessment merely because scrutiny proceedings were undertaken. The Tribunal further held that the Section 143(1) intimation was issued within the prescribed period and that the relevant adjustments were not matters dealt with in the Section 143(3) assessment.

Accordingly, Ground Nos. 1 and 2 were dismissed.

On the ESOP issue, however, the Tribunal found that the shares under the ESOP scheme were issued by Linde Plc, the foreign parent company, and not by the assessee. The assessee merely incurred the cost attributable to stock options exercised by its employees under the cross-charge arrangement. The Tribunal held that the expenditure was in the nature of employee compensation incurred for business purposes and did not relate to raising share capital or acquisition of any capital asset by the assessee. It therefore held the Rs.51,68,730 disallowance to be unsustainable and directed the Assessing Officer to delete it.

The appeal was consequently partly allowed.

Background and Assessment Proceedings

The assessee filed its return of income under Section 139(1) declaring total income of Rs.191,58,60,950 for Assessment Year 2021-22. The return was filed on 08.03.2022 and was subsequently selected for scrutiny. Notice under Section 143(2) was issued on 28.06.2022.

Thereafter, the Central Processing Centre processed the return under Section 143(1). The record considered by the Tribunal showed adjustments aggregating to Rs.9,50,34,695, increasing the income determined under Section 143(1) to Rs.201,08,95,650.

The Assessing Officer subsequently completed assessment under Section 143(3). In the final computation, the Assessing Officer took the income computed under Section 143(1) as Rs.201,08,95,650 and made a further addition of Rs.51,68,730 on account of ESOP expenses, resulting in total income of Rs.201,60,64,380.

Challenge to Section 143(1) Adjustments

Assessee’s Submissions

The assessee challenged the adoption of Rs.201,08,95,650 as the starting point of computation instead of the returned income of Rs.191,58,60,950. It submitted that this resulted in an effective addition of Rs.9,50,34,695 without independent examination, proper reasons, show-cause notice and opportunity to explain.

The assessee also contended that the intimation under Section 143(1) merged with the scrutiny assessment under Section 143(3), requiring the Assessing Officer to independently examine the adjustments made by CPC. It further argued that the Section 143(1) intimation was time-barred.

Reliance was placed on the Ahmedabad Bench decision in Lesso Buildtech India Pvt. Ltd. vs. DCIT, on the Gujarat High Court decision in Gujarat Poly-Avx Electronics Ltd. Vs. DCIT, 222 ITR 140 (Guj.), and on the Supreme Court decision in CIT Vs. Gujarat Electricity Board, [260 ITR 84 (SC)].

Revenue’s Submissions

The Ld. DR supported the orders of the lower authorities. It was submitted that the assessee had appealed against the Section 143(3) assessment order and that the Assessing Officer had acted in accordance with the scheme of assessment proceedings under Section 143(3).

Tribunal’s Findings on Section 143(1) Processing

The Tribunal examined the final computation in the assessment order and noted that the Assessing Officer had separately identified the total income as per the return under Section 139, the income computed under the Section 143(1) intimation and the further ESOP addition.

The Tribunal observed that the Assessing Officer had not made a further adjustment to the CPC computation while making the ESOP addition in the Section 143(3) assessment. It held that assessment under Section 143(3) is an independent assessment and may involve point-wise scrutiny or complete scrutiny of new issues.

The Tribunal held that the Assessing Officer was expected to apply independent mind to each disallowance or addition proposed in the Section 143(3) proceedings after affording reasonable opportunity to the assessee. In the present case, the Assessing Officer had examined the ESOP issue.

Processing Under Section 143(1) After Notice Under Section 143(2)

The Tribunal examined the amendments made to Section 143(1) and Section 143(1D) by the Finance Acts of 2012, 2016, 2017 and 2021.

It specifically considered the provision of Section 143(1D) applicable to the assessment year under consideration. The Tribunal observed that the provision stating that processing of a return would not be necessary where notice under Section 143(2) had been issued did not apply to returns furnished for Assessment Year 2017-18 onwards.

Since the present appeal concerned Assessment Year 2021-22, the Tribunal held that the return could be processed under Section 143(1) after issuance of notice under Section 143(2).

The Tribunal therefore held that the case laws relied upon by the assessee concerning the earlier statutory framework were not applicable to the assessment year under consideration.

Section 143(1) Intimation Was Held to Be Within Time

The Tribunal examined the chronology relating to the return and its processing. It recorded that the assessee filed the return on 08.03.2022 and that the return was processed on 21.10.2022.

The assessee had contended that the intimation was digitally signed on 15.07.2023. The Tribunal, after examining the material in the paper-book, found that the date relied upon by the assessee related to the refund status and not the date of processing of the return.

The Tribunal noted that the record showed the return had been processed on 21.10.2022 and that the assessee was issued a refund of Rs.7.83 crores on 16.08.2023. It therefore held that the processing under Section 143(1) and the intimation were within the time prescribed under the Act.

Nature of Adjustments Made by CPC

Particulars	Amount Claimed in ITR	Amount Mentioned in Form 3CD	Adjustment Made
Inconsistency in sum payable to employee as bonus or commission	Rs.4,81,82,142	Rs.0	Rs.4,81,82,142
Inconsistency in amount payable towards leave encashment	Rs.1,76,43,231	Rs.0	Rs.1,76,43,231
Inconsistency in profit chargeable to tax under Section 41	Rs.0	Rs.2,92,09,322	Rs.2,92,09,322
Total			Rs.9,50,34,695

The Tribunal recorded that the CPC adjustments related to three items: disallowance of incentive/bonus paid to employees, disallowance of leave encashment paid to employees and addition under Section 41(1).

It held that these adjustments were made under Section 143(1) and were not the subject matter of the Section 143(3) order. The Tribunal observed that the assessee may choose to appeal against the Section 143(1) order as per the provisions referred to in the order.

Consequently, Ground Nos. 1 and 2 raised by the assessee were dismissed.

ESOP Expense Disallowance of Rs.51,68,730

Facts Relating to ESOP Expenditure

The assessee was a subsidiary of Linde Plc, the ultimate parent company of the Linde Group. Linde Plc had introduced a Long-Term Incentive Plan for eligible employees across the Linde Group under which stock options of Linde Plc were granted to selected employees of group entities worldwide.

During the relevant year, the assessee debited Rs.3,70,34,438 towards ESOP expenses in its Statement of Profit and Loss. While computing taxable income, however, the assessee suo motu disallowed the accounting expenditure and claimed deduction of Rs.51,68,730, representing the actual liability crystallised on exercise of stock options by employees.

The assessee furnished supporting documents, including the return of income, Long-Term Incentive Award Cross Charge Agreement and documents explaining the ESOP mechanism and accounting treatment.

Assessee’s Submissions on ESOP Expenses

The assessee submitted that the ESOP expenditure was not connected with issue of share capital of the assessee because the shares were issued by Linde Plc and not by the assessee. It contended that it merely reimbursed the parent company for the proportionate cost attributable to stock options exercised by its employees under the cross-charge arrangement.

The assessee submitted that the expenditure represented employee compensation incurred wholly and exclusively for business purposes and was allowable under Section 37(1). Reliance was placed on CIT v. Biocon Ltd., 121 taxmann.com 351 (Karnataka High Court) and decisions of Coordinate Benches of the Tribunal.

Revenue’s Submissions on ESOP Expenses

The Ld. DR relied upon the orders of the lower authorities and submitted that the expenditure was directly linked with the issue of shares under the ESOP scheme and was therefore capital in nature.

Tribunal Deletes ESOP Disallowance

The Tribunal considered the rival submissions and held that the Assessing Officer had disallowed the ESOP claim on the premise that the expenditure was connected with issue of shares and was therefore capital in nature.

However, the Tribunal found that the shares under the ESOP scheme were issued by Linde Plc, the foreign parent company, and not by the assessee. The assessee had merely incurred the cost attributable to stock options exercised by its employees under the cross-charge arrangement.

The Tribunal held that the expenditure was in the nature of employee compensation incurred for the purpose of business and did not relate to raising of share capital or acquisition of any capital asset by the assessee.

The Tribunal also held that the reliance placed by the Assessing Officer on decisions concerning expenditure incurred for issue of share capital was misplaced, as the present case did not involve issue of shares by the assessee company.

Relying on the decision referred to in the order in CIT v. Biocon Ltd., the Tribunal held that ESOP expenditure represented employee compensation allowable under Section 37(1). It further held that the expenditure had been incurred wholly and exclusively for the purposes of business and that no material had been brought on record to establish that the assessee derived any capital advantage from the expenditure.

Accordingly, the Tribunal held that the disallowance of Rs.51,68,730 made by the Assessing Officer and confirmed by the CIT(A) was not sustainable and directed the Assessing Officer to delete the disallowance.

Ground No. 3 was allowed.

Final Decision

The ITAT Ahmedabad dismissed the assessee’s challenges to the Section 143(1) adjustments and the addition under Section 41(1). The Tribunal held that, for Assessment Year 2021-22, there was no bar on processing the return under Section 143(1) after issuance of notice under Section 143(2), and the Assessing Officer was not required to revisit the CPC adjustments in the Section 143(3) proceedings.

The Tribunal also held that the Section 143(1) processing was within the prescribed time.

However, the Tribunal allowed the assessee’s ground concerning ESOP expenses and directed deletion of the Rs.51,68,730 disallowance under Section 37(1).

Accordingly, the appeal of the assessee was partly allowed.

Order pronounced in the open Court on 17.07.2026.

Cases Discussed

• Lesso Buildtech India Pvt. Ltd. vs. DCIT, ITA No. 1698/AHD/ 2024 – Ahmedabad ITAT
• Tata Teleservices Ltd. Vs. CBDT in WP/12304/2015 – Delhi High Court
• Gujarat Poly-Avx Electronics Ltd. Vs. DCIT, 222 ITR 140 (Guj.) – Gujarat High Court
• CIT Vs. Gujarat Electricity Board, [260 ITR 84 (SC)] – Supreme Court
• CIT v. Biocon Ltd., 121 taxmann.com 351 (Karnataka High Court) – Karnataka High Court
• Commissioner of Income Tax v. Amratlal Bhogilal & Co. (dtd. 28.04.1958) – Supreme Court
• Kunhayammed v. State of Kerala (dtd. 19.07.2000) – Supreme Court

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The present appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi [“Ld. CIT(A)”], order dated 17.10.2025, pertaining to Assessment Year 2021-22.

2. The assessee has raised the following grounds of appeal:

“Ground No.1: Error in computation of assessed income due to wrong consideration of starting point of computation in impugned Assessment Order resulting into erroneous addition to the total income without providing any cogent reason, without any show cause and an opportunity to explain.

1.1 On the facts and in the circumstances of the case and in law, the Ld. AO has grossly erred in considering starting point of computation in Assessment order as income computed under Section 143(1) of INR 201,08,95,650 as against the total income as per the return of income filed under Section 139(1) of INR 191,58,60,950 thereby making an erroneous addition to the total income of the Appellant Company by INR 9,50,34,695 without any cogent reason, without any show cause and without any opportunity to explain thus, in clear violation of principal of natural justice.

1.2 On the facts and in the circumstances of the case and in law, the Ld. AO and the Ld. CIT(A) has erred in not considering the submission of the Appellant that the intimation under Section 143(1) of the Act merges into the Assessment Order passed under Section 143(3) of the Act and the Assessing Officer has to re-examine the correctness of the disallowances/adjustment made in the intimation issued under Section 143(1) of the Act

1.3 On the facts and in the circumstances of the case and in law, the Ld. AO and the Ld. CIT(A) has erred in not appreciating the submission of the Appellant that the intimation under Section 143(1) of the Act is time barred hence the underlying adjustments made in the said intimation does not survive

1.4 The Appellant Company prays that the continuation of the error committed while processing return under Section 143(1) of the Act in the Assessment Order is erroneous, unjustified, unlawful, unwarranted, and hence the same should be deleted.

2. Ground no. 2: Addition of Rs. 2,92,09,322 under Section 41(1) of the Act

2.1 On the facts and the circumstances of the case and in law, the Ld. AO has erred continuing and further the LD. CIT(A) has erred in confirming the addition of Rs. 2,92,09,322 to the total income of the Appellant Company under Section 41(1) of the Act which was made while processing return of income without appreciating and ignoring the fact that the amount of Rs 2,92,09.322 is pertaining to ‘old liabilities no longer payable written back which is already credited to Profit and loss Account and forming part of Profit before tax and making additions of the same had led to the double taxation of the income.

2.2 The Appellant prays that such addition is erroneous, unjustified, unlawful, unwarranted, and hence the same should be deleted.

3 Ground no. 3: Disallowance of Employee Stock Option Plan (ESOP) expenses of Rs. 51,68,730/-

3.1 On the facts and in the circumstances of the case and in law, the Learned AO has grossly erred, in making and further the Ld.CIT(A) has erred in confirming the disallowance of ESOP expenses of Rs. 51,68,730 while computing the total income of the Appellant Company on the ground that said expenditure is in connection with share capital of the company and it is capital in nature which cannot be allowed as revenue expenditure.

3.2 The Ld. AO and the Ld. CIT(A) has failed to appreciate that the ESOP expenses is incurred wholly and exclusively for the purpose of business of the Appellant Company and is in the nature of revenue expenditure and thereby, duly allowable under section 37(1) of the Act.

3.3 The Appellant prays that disallowance of ESOPs expenses claimed by the Appellant Company is erroneous, unjustified, unlawful, unwarranted, and hence the same should be deleted.

All the above grounds are independent and without prejudice to one another.

The Appellant craves leave to add to, alter, amend, modify or withdraw all or any of the above ground(s) of appeal either at the time of the hearing or before the hearing of this appeal”

3. The brief facts of the case are that assessee company filed its return of income under section 139(1) of the Income-tax Act, 1961 [“the Act”] declaring total income of Rs. 191,58,60,950. The case was selected for scrutiny and notice under section 143(2) of the Act was issued on 28.06.2022. Subsequently, the Central Processing Centre (“CPC”) processed the return under section 143(1) of the Act and made adjustments aggregating to Rs. 9,50,34,695 on account of alleged discrepancies between the particulars furnished in the return of income and Form 3CD. The intimation under section 143(1) was digitally signed on 15.07.2023. Thereafter, the Assessing Officer completed the assessment under section 143(3) of the Act by adopting the income determined under section 143(1) as the starting point of computation instead of the income originally returned by the assessee. In addition, the Ld. AO made disallowance of ESOP expenditure of Rs. 51,68,730. The Ld. CIT(A) confirmed the action of the Assessing Officer.

4. Aggrieved by the additions and disallowances sustained by the Ld. CIT(A), the assessee is in further appeal before this Tribunal.

Ground No. 1-Wrong Starting Point of Computation / Continuation of Section 143(1) Adjustment

5. The assessee has challenged the action of the Assessing Officer in adopting the income computed under section 143(1) of the Act amounting to Rs. 201,08,95,650/- as the starting point of computation, instead of the returned income of Rs. 191,58,60,950/- declared under section 139(1) of the Act, resulting in an effective addition of Rs.9,50,34,695/-. After considering the rival submissions and perusing the material available on record, it is observed that the scrutiny proceedings had already commenced upon issuance of notice under section 143(2) on 28.06.2022.

5.1 The Ld. Sr. Counsel argued that once scrutiny assessment proceedings are initiated, the Assessing Officer is duty bound to independently examine the return of income and determine the total income in accordance with law. The adjustments made while processing the return under section 143(1) cannot be mechanically carried forward into the assessment order without independent application of mind and without granting an opportunity of being heard to the assessee. It was argued that it is a settled legal position of law that an intimation issued under section 143(1) merges with the regular assessment order passed under section 143(3). Therefore, the Assessing Officer was required to independently adjudicate the issue instead of merely adopting the computation made by CPC. The assessee has relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Lesso Buildtech India Pvt. Ltd. vs. DCIT, wherein it was held that issuance of intimation under section 143(1) after initiation of scrutiny proceedings under section 143(2) is not sustainable. The record further reveals that no specific show-cause notice was issued by the Assessing Officer before continuing the adjustment of Rs. 9,50,34,695/-.** Thus, the addition was sustained without providing adequate opportunity to the assessee, which is contrary to the principles of natural justice.

6. The Ld. CIT(A) also failed to deal with the specific contentions of the assessee regarding:

1. Merger of intimation under section 143(1) with assessment under section 143(3);
2. Illegality of mechanically continuing CPC adjustments in scrutiny assessment; and
3. Invalidity and time-barred nature of the intimation under section 143(1).

7. We have heard the rival submissions and perused the material available on record. The principal grievance of the assessee is that while completing the assessment u/s 143(3) of the Act, the Assessing Officer adopted the income determined in the intimation issued u/s 143(1) amounting to Rs.201,08,95,650/- as the starting point of computation instead of the total income originally returned by the assessee u/s 139(1) at Rs.191,58,60,950/-. Consequently, the adjustment of Rs.9,50,34,695/-made by CPC while processing the return stood mechanically incorporated in the assessment order without any independent examination.

7.1 The relevant chronology of events, which has a bearing on the issue under consideration, is as under:-

• The assessee filed its return of income on 08.03.2022 declaring total income of Rs.191,58,60,950/- for the AY 2021-22.
• The case was selected for scrutiny and notice u/s 143(2) was issued on 28.06.2022.
• Thereafter, CPC processed the return under section 143(1) on 21.10.2022 and the intimation was digitally signed on 15.07.2023 making adjustments aggregating to Rs.9,50,34,695/-, enhancing the taxable income to Rs. 201,08,95,650/-
• Subsequently, the Assessing Officer completed the assessment under section 143(3) by adopting the income determined under section 143(1) as the opening figure for computation.
• The Assessing Officer made addition of Rs.51,68,730/- on account of ESOP expenses to the taxable income in the order passed under Section 143(3) of the Act.

7.2 Further, we find that in response to the communications by the Revenue (CPC), the assessee had responded to the proposed adjustments before CPC and explained that the amounts relating to bonus and leave encashment were allowable u/s 43B since the liabilities outstanding as on 01.04.2020 were actually discharged during the relevant previous year. In respect of the addition under section 41(1), it was submitted that the amount had already been credited to the Profit and Loss Account and offered to tax in the returned income.

The record shows that the adjustment made u/s 143(1) comprised the following items:

Particulars	Amount claimed in ITR	Amount mentioned in Form 3CD	Adjustments made
There is inconsistency in any sum payable to an employee as bonus or commission for services rendered claimed in return and audit report	4,81,82,142	0	4,81,82,142
There is inconsistency in any sum payable towards leave encashment claimed in return and audit report	1,76,43,231	0	1,76,43,231
There is inconsistency in the amount of profit chargeable to tax under section 41 specified in return & in audit report	0	2,92,09,322	2,92,09,322
			9,50,34,695

7.3 The fact emerges out from the record is that:-

• The total income, as per the ITR filed under 139(1) – Rs.191,58,60,950/-
• Income computed as per intimation u/s 143(1) – Rs.201,08,95,650/-

(Total adjustments – Rs. 9,50,34,695/-)

• Total income computed as per order u/s 143(3) – Rs.201,60,64,380/-

(Addition of Rs.51,68,730/- on account of ESOP)

Before us, the assessee has raised the grounds of erroneous addition to the total income of Rs.9,50,34,695/-, non-merger of 143(1) into assessment order passed under Section 143(3) and failure to reexamine the correctness of disallowances/adjustments made in the intimation issued u/s 143(1), time-barring of intimation u/s 143(1) along with addition of Rs.2,92,09,322/- u/s 41(1) and disallowance of ESOP expenses of Rs.51,68,730/-.

7.4 The Ld. Senior Advocate, Shri S.N. Soparkar argued that the Assessing Officer passed the order u/s 143(3) of the Act considering starting point of computation in the assessment order as income as “income computed as per intimation u/s 143(1) of the Act as against the total income as per the return of income filed u/s 139(1) of the Act and continued with the disallowance made while processing the return of income u/s 143(1) of the Act. The Ld. Sr. Counsel argued that Assessing Officer erred in adopting the computation u/s 143(1) as the basis for assessment instead of the return filed u/s 139(1). The Ld. Sr. Counsel thus submitted that this had resulted in an unjustified addition made without reasons, notice, or opportunity to explain, in violation of natural justice. The Ld. Sr. Counsel further submitted that the intimation u/s 143(1) stands merged with the scrutiny assessment u/s 143(3), requiring the Assessing Officer to independently verify any earlier adjustments. The authorities failed to consider this settled legal position. It was also submitted by the Ld. Sr. Counsel that the intimation u/s 143(1) was time-barred, and therefore, the adjustments contained therein had no legal effect and could not be carried forward into the scrutiny assessment. Reliance was placed on the decision of the Ahmedabad ITAT in the case of Lesso Buildtech India Pvt. Ltd. vs. DCIT (ITA No. 1698/AHD/ 2024) wherein it was held that Intimation u/s 143(1) of the Act cannot be issued after issuance of notice u/s 143(2) of the Act

8. On the other hand, Ld. DR supported the orders of the authorities below. The Ld. DR submitted that the assessee has filed an appeal against order passed u/s 143(3) of the Act. The Ld. DR further submitted that the assessee has failed to raise any appeal against the said ground and also the intimation merges in the scrutiny order before the Ld. CIT(A). The Ld. DR argued that the plea of the Ld. AR cannot be accepted as the Assessing Officer has passed an order as per the scheme of assessment proceedings u/s 143(3) of the Act.

9. Heard the arguments of both the parties and perused the material available on record. On this issue, we go straight to page No. 5, para-5, of the assessment order wherein the ‘Final Computation of the Taxable Income’ mentioned as under:

“5. Final computation of taxable income:

SI No.	Description	Amount (in INR)
1	Total Income as per ITR filed u/s 139	191,58,60,950/-
2	Income computed as per intimation u/s 143(1)	201,08,95,650/-
	Add: addition as discussed above in Para 4	51,68,730/-
	Total Income	201,60,64,380/-

From the above, we find that the Assessing Officer has not tinkered with the adjustments made by the CPC u/s 143(1) and made further addition of the ESOP expenses which have been a part of the proceedings u/s 143(3) of the Act. The above table also reflects that the Assessing Officer has duly considered the total income, as per the ITR, filed by the assessee u/s 143(3). The assessment u/s 143(3) is an independent assessment and it could be a point-wise scrutiny or a complete scrutiny of the new issues. It does not make necessary for the Assessing Officer to reexamine the adjustments made by the CPC and take a call. The Assessing Officer is expected to apply his/her independent mind to every disallowance or addition which he/she proposes and arrive at his/her own satisfaction after affording reasonable opportunity to the assessee. In the present case, the Assessing Officer has clearly examined the issue of ESOPs and obligatory upon the Assessing Officer to examine the disallowances computed by the CPC.

9.1 With regard to the grounds that the Revenue cannot process the return u/s 143(1) once the notice u/s 143(2) has been issued, the Ld. Sr. Counsel argued that once proceedings u/s 143(2) of the Act have commenced, the Assessing Officer has no power to pass order u/s 143(1) of the Act. The Ld. Sr. Counsel relied on the judgment of the Hon’ble High Court of Gujarat in the case of Gujarat Poly-Avx Electronics Ltd. Vs. DCIT, 222 ITR 140 (Guj.), wherein it was held that “after issuance of notice under s. 143(2) of the Act, it is not open for the AO to make adjustment or to pass order under s.143(1) of the Act but he has to make assessment in accordance with law, i.e., under s. 143(3) of the Act’. The Ld. Sr. Counsel has also relied upon the judgment of Hon’ble Apex Court in the case of CIT Vs. Gujarat Electricity Board, [260 ITR 84 (SC)], wherein it was held as under:-

“5. 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). “

6. In the result, we see no infirmity in the judgment of the High Court The appeals are dismissed.”

9.2 We have gone through the provisions of Section 143(1) over various timelines. The Finance Act, 2012 reads as under:-

“Section – 143 Assessment

67Assessment68

69[(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; or

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

[b] the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a);

(c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and interest, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest;

(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e) the amount of refund due to the assessee in pursuance of the determination under clause

(c) shall be granted to the assessee:

Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax or interest is payable by, or no refund is due to, him:

Provided further that no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the return is made.

Explanation.—For the purposes of this sub-section,—

(a) “an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return,—

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

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

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

(b) the acknowledgement of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a).

(1A) For the purposes of processing of returns under sub-section (1), the Board may make a scheme for centralised processing of returns with a view to expeditiously determining the tax payable by, or the refund due to, the assessee as required under the said sub-section.

(2B) Save as otherwise expressly provided, for the purpose of giving effect to the scheme?Oa made under sub-section (1A), the Central Government may, by notification in the Official Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no direction shall be issued after the 31st day of March, Z(2012].

(1C) Every notification issued under sub-section (1B), along with the scheme made under sub-section (1A), shall, as soon as may be after the notification is issued, be laid before each House of Parliament]

(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2).

(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall,—

(i) where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, serve on the assessee a notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him, on a date to be specified therein to produce, or cause to be produced, any evidence or particulars specified therein or on which the assessee may rely, in support of such claim:

Provided that no notice under this clause shall be served on the assessee on or after the 1st day of June, 2003;

(ii) notwithstanding anything contained in clause (i), if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return:

74*[Provided that no notice under clause (ii) shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.]]

75*(3) On the day specified in the notice,—

(i) issued under clause (i) of sub-section (2), or as soon afterwards as may be, after hearing such evidence and after taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss accordingly, and determine the sum payable by the assessee on the basis of such assessment;

(ii) issued under clause (ii) of sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:

Provided that in the case of a—

(a) 77[research association] referred to in clause (21) of section 10;

(b) news agency referred to in clause (22B) of section 10;

(c) association or institution referred to in clause (23A) of section 10;

(d) institution referred to in clause (23B) of section 10;

(e) fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10,

which is required to furnish the return of income under sub-section (4C) of section 139, no order making an assessment of the total income or loss of such =[research association], news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, shall be made by the Assessing Officer, without giving effect to the provisions of section 10, unless—

(i) the Assessing Officer has intimated the Central Government or the prescribed authority the contravention of the provisions of clause (21) or clause (22B) or clause (23A) or clause

(23B) or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, by such zz[research association], news agency, association or institution or fund or trust or university or other educational institution or hospital or other medical institution, where in his view such contravention has taken place; and

(ii) the approval granted to such zz[research association] or other association Nor fund or trust] or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded :1

Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university, college or other institution was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommend to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assessing Officer:

Provided also that notwithstanding anything contained in the first and the second provisos, no effect shall be given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in such previous year, whether or not the approval granted to such trust or institution or notification issued in respect of such trust or institution has been withdrawn or rescinded.

80****(4) Where a regular assessment under sub-section (3) of this section or section 144 is made,—

(a) any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment;

(b) if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly.

(5) El-Omitted by the Finance Act, 1999, w.e.f: 1-6-1999.1]

9.3 The Finance Act, 2016 reads as under :-

“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;42*[or]

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

Following sub-clauses (iii) to (vi) shall be inserted after sub-clause (ii) of clause (a) of sub-section (1) of section 143 by the Finance Act, 2016, w.e.f. 1-4-2017 :

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

(v) disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-1E, 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 is 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;

(b) the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a);

(c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and interest, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest;

(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax or interest is payable by, or no refund is due to, him:

Provided further that no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the return is made.

Explanation.—For the purposes of this sub-section,—

(a) “an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return,—

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

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

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

(b) the acknowledgement of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a).

(1A) For the purposes of processing of returns under sub-section (1), the Board may make a scheme for centralised processing of returns with a view to expeditiously determining the tax payable by, or the refund due to, the assessee as required under the said sub-section.

(1B) Save as otherwise expressly provided, for the purpose of giving effect to the scheme made under sub-section (1A), the Central Government may, by notification in the Official Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no direction shall be issued after the 31st day of March, 2012.

(1C) Every notification issued under sub-section (1B), along with the scheme made under sub-section (1A), shall, as soon as may be after the notification is issued, be laid before each House of Parliament

(1D)Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2).

Following sub-section (1D) shall be substituted for the existing sub­section (1D) of section 143 by the Finance Act, 2016, w.e.f. 1-4-2017 :

(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary before the expiry of the period specified in the second proviso to sub-section (1), where a notice has been issued to the assessee under sub-section (2):

Provided that such return shall be processed before the issuance of an order under sub-section (3).

43*(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if; considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.]

(3)44 On the day specified in the notice,—

(i) issued under clause (i) of sub-section (2), or as soon afterwards as may be, after hearing such evidence and after taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss accordingly, and determine the sum payable by the assessee on the basis of such assessment;

(ii) issued under clause (ii) of sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:

Provided that in the case of a—

(a) research association referred to in clause (21) of section 10;

(b) news agency referred to in clause (22B) of section 10;

(c) association or institution referred to in clause (23A) of section 10;

(d) institution referred to in clause (23B) of section 10;

(e) fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10,

which is required to furnish the return of income under sub-section (4C) of section 139, no order making an assessment of the total income or loss of such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, shall be made by the Assessing Officer, without giving effect to the provisions of section 10, unless—

(i) the Assessing Officer has intimated the Central Government or the prescribed authority the contravention of the provisions of clause (21) or clause (22B) or clause (23A) or clause (23B) or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, by such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, where in his view such contravention has taken place; and

(ii) the approval granted to such research association or other association or fund or trust or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded :

Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university or college was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommend to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assessing Officer:

Provided also that notwithstanding anything contained in the first and the second provisos, no effect shall be given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in such previous year, whether or not the approval granted to such trust or institution or notification issued in respect of such trust or institution has been withdrawn or rescinded.

(4) Where a regular assessment under sub-section (3) of section 144 is made,—

(a) any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment;

(b) if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly.

(5) [Omitted by the Finance Act, 1999, w.e.f: 1-6-1999.]”

9.4 The Finance Act, 2017 reads as under :-

“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; 131-***1

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

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

(v) disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-1E, 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 is 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;]

(b) the tax Wand interest], if any, shall be computed on the basis of the total income computed under clause (a);

(c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax Wand interest], if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax Wor interest];

(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax Wor interest] is payable by, or no refund due to, him:

Provided further that no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the return is made.

Explanation.—For the purposes of this sub-section,—

(a) “an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return,—

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

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

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

(b) the acknowledgement of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a).

(1A) For the purposes of processing of returns under sub-section (1), the Board may make a scheme for centralised processing of returns with a view to expeditiously determining the tax payable by, or the refund due to, the assessee as required under the said sub-section.

(1B) Save as otherwise expressly provided, for the purpose of giving effect to the scheme made under sub-section (1A), the Central Government may, by notification in the Official Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no direction shall be issued after the 31st day of March, 2012.

(1C) Every notification issued under sub-section (1B), along with the scheme made under sub-section (1A), shall, as soon as may be after the notification is issued, be laid before each House of Parliament 17

17(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2):

Provided that the provisions of this sub-section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017.]

18(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if; considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished]

(3)19On the day specified in the notice issued under] sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:

Provided that in the case of a—

(a) research association referred to in clause (21) of section 10;

(b) news agency referred to in clause (22B) of section 10;

(c) association or institution referred to in clause (23A) of section 10;

(d) institution referred to in clause (23B) of section 10;

(e) fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10,

which is required to furnish the return of income under sub-section (4C) of section 139, no order making an assessment of the total income or loss of such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, shall be made by the Assessing Officer, without giving effect to the provisions of section 10, unless—

(i) the Assessing Officer has intimated the Central Government or the prescribed authority the contravention of the provisions of clause (21) or clause (22B) or clause (23A) or clause (23B) or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, by such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, where in his view such contravention has taken place; and

(ii) the approval granted to such research association or other association or fund or trust or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded :

Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university or college was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university or college, recommend to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university or college and the Assessing Officer:

Provided also that notwithstanding anything contained in the first and the second provisos, no effect shall be given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in such previous year, whether or not the approval granted to such trust or institution or notification issued in respect of such trust or institution has been withdrawn or rescinded.

(4) Where a regular assessment under sub-section (3) of section 144 is made,—

(a) any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment;

(b) if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly.

(5) [Omitted by the Finance Act, 1999, w.e.f: 1-6-1999.]

9.5 The Finance Act, 2021, relevant to the assessment year in questionbefore us which tangibly had no difference in the verbatim from the Finance Act 2017, reads as under :-

“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 sub­section (1) of section 139;

(iv) disallowance of expenditure u[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 o[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 is 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;

(b) the tax, interest and fee, if any, shall be computed on the basis of the total income computed under clause (a);

(c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax, interest and fee, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, ENany relief allowable under section 89,] any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax, interest or fee;

(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax, interest or fee is payable by, or no refund is due to, him:

Provided further that no intimation under this sub-section shall be sent after the expiry of ENnine months] from the end of the financial year in which the return is made.

Explanation.—For the purposes of this sub-section,—

(a) “an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return,—

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

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

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

(b) the acknowledgement of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a).

(1A) For the purposes of processing of returns under sub-section (1), the Board may make a scheme for centralised processing of returns with a view to expeditiously determining the tax payable by, or the refund due to, the assessee as required under the said sub-section.

(1B) Save as otherwise expressly provided, for the purpose of giving effect to the scheme made under sub-section (1A), the Central Government may, by notification in the Official Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no direction shall be issued after the 31st day of March, 2012.

(1C) Every notification issued under sub-section (1B), along with the scheme made under sub-section (1A), shall, as soon as may be after the notification is issued, be laid before each House of Parliament.

(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2):

Provided that the provisions of this sub-section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017.

(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if; considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be served on the assessee after the expiry of 86[three] months from the end of the financial year in which the return is furnished.

(3) On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material that he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:

Provided that in the case of a—

(a) research association referred to in clause (21) of section 10;

(b) news agency referred to in clause (22B) of section 10;

(c) association or institution referred to in clause (23A) of section 10;

(d) institution referred to in clause (23B) of section 10;

(e) fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10,

which is required to furnish the return of income under sub-section (4C) of section 139, no order making an assessment of the total income or loss of such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, shall be made by the Assessing Officer, without giving effect to the provisions of section 10, unless—

(i) the Assessing Officer has intimated the Central Government or the prescribed authority the contravention of the provisions of clause (21) or clause (22B) or clause (23A) or clause (23B) or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, by such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, where in his view such contravention has taken place; and

(ii) the approval granted to such research association or other association or fund or trust or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded :

Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university or college was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university or college, recommend to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university or college and the Assessing Officer:

Provided also that notwithstanding anything contained in the first and the second provisos, no effect shall be given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in such previous year, whether or not the approval granted to such trust or institution or notification issued in respect of such trust or institution has been withdrawn or rescinded.

(4) Where a regular assessment under sub-section (3) of section 144 is made,—

(a) any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment;

(b) if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly.

(5) [Omitted by the Finance Act, 1999, w.e.f: 1-6-1999.]

10. In view of the above statutory provisions, we find that the provision which states that where notice u/s 143(2) has been issued, processing of the return u/s 143(1) shall not be necessary has undergone an amendment and the said provision was not applicable to the returns furnished for the assessment year commencing from 01.04.2017 onwards. Therefore, in our considered view, there is no bar in processing the return u/s 143(1) after issuance of notice u/s 143(2) of the Act in the present case.

10.1 Further, we have gone through the judicial decisions relied upon by the Ld. Sr. Counsel and find that those decisions were rendered in the context of the provisions of law prevailing prior to the amendment made by the Finance Act, 2017. Therefore, the said judicial decisions cannot be applied to the facts of the present case.

10.2 The assessee has also challenged the validity of the intimation u/s 143(1) on the ground that the same was time barred. In this regard, we have considered the relevant provisions and the chronology of events. The return of income was filed on 08.03.2022 and the same was processed by CPC on 21.10.2022. The assessee has contended that the intimation was digitally signed on 15.07.2023 and therefore the same was time barred. However, from the material placed on record, we find that the date 15.07.2023 relied upon by the assessee pertains to the refund status and not the date of processing of the return. The record shows that the return was processed on 21.10.2022 and the assessee was issued refund of Rs.7.83 crores on 16.08.2023. Therefore, in our considered view, the intimation issued u/s 143(1) was within the time prescribed under the Act.

10.3 In view of the above discussion, we hold that the return could validly be processed u/s 143(1) after issuance of notice u/s 143(2) in respect of AY 2021-22 and the intimation issued by CPC was within the prescribed time. Accordingly, Ground Nos. 1 and 2 raised by the assessee are dismissed.

11. Ground No. 3 – Disallowance of ESOP Expenses of Rs.51,68,730/-

11.1 The assessee submitted that the ESOP expenditure represents employee compensation and is allowable u/s 37(1) of the Act. It was submitted that the shares are issued by Linde Plc, the foreign parent company, and not by the assessee. Therefore, the expenditure is not connected with raising of share capital of the assessee company. The assessee merely reimburses the parent company for the proportionate cost attributable to stock options exercised by its employees under the cross-charge arrangement.

11.2 The assessee further submitted that the ESOP expense was incurred wholly and exclusively for the purpose of business and is in the nature of revenue expenditure. It was contended that the expenditure is incurred as part of employee compensation and is allowable under section 37(1) of the Act.

11.3 The assessee relied upon the decision of the Hon’ble Karnataka High Court in the case of CIT v. Biocon Ltd., 121 taxmann.com 351 (Karnataka High Court) and decisions of the Coordinate Benches of the Tribunal, wherein ESOP expenditure has been held to be allowable as business expenditure under section 37(1) of the Act.

11.4 The Ld. DR, on the other hand, supported the orders of the lower authorities and submitted that the expenditure is in connection with issue of shares and therefore capital in nature. It was argued that the expenditure is directly related to share capital and cannot be allowed as revenue expenditure under section 37(1) of the Act.

11.5 Before us, the Ld. AR submitted that the lower authorities erred in treating the ESOP expenditure as capital in nature. It was submitted that the ESOP expenditure is incurred for employee compensation and the expenditure represents the cost of providing stock options to employees. It was further submitted that the shares are issued by Linde Plc and the assessee only bears the proportionate cost attributable to the exercise of options by its employees. The assessee submitted that the expenditure is incurred wholly and exclusively for the purpose of business and is allowable under section 37(1) of the Act. It was further contended that the expenditure is not related to the issue of share capital of the assessee company and does not result in acquisition of any capital asset. The assessee also submitted that the ESOP expenditure is an actual liability arising on exercise of options by employees. It was submitted that the expense is part of employee compensation and is incurred in lieu of cash payment to employees. It was contended that the expenditure is allowable under section 37(1) and reliance was placed on the decision of the Hon’ble Karnataka High Court in the case of CIT v. Biocon Ltd., 121 taxmann.com 351 (Karnataka High Court).

11.6 The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that the expenditure is directly linked with issue of shares under the ESOP scheme and is therefore capital in nature. Accordingly, it was submitted that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) should be upheld.

12. We have considered the rival submissions and perused the material available on record. The Assessing Officer has disallowed the claim on the premise that the ESOP expenditure is connected with issue of shares and hence capital in nature. However, it is undisputed fact that the shares under the ESOP scheme are issued by Linde Plc, the foreign parent company, and not by the assessee. The assessee has merely incurred the cost attributable to stock options exercised by its employees under the cross-charge arrangement. The expenditure is in the nature of employee compensation incurred for the purpose of business and does not relate to raising of share capital or acquisition of any capital asset by the assessee.

12.1 The reliance placed by the Assessing Officer on the decisions relating to expenditure incurred for issue of share capital is misplaced, as the present case does not involve issue of shares by the assessee company. The Hon’ble Karnataka High Court in the case of CIT v. Biocon Ltd. has held that ESOP expenditure represents employee compensation and is allowable as deduction under section 37(1) of the Act. The Coordinate Benches have also consistently taken the view that ESOP cost cross-charged by a foreign parent company to its Indian subsidiary in respect of employees of the subsidiary is allowable as business expenditure.

12.2 In the present case, the expenditure has been incurred wholly and exclusively for the purposes of business and no material has been brought on record to establish that the assessee derived any capital advantage from such expenditure. Accordingly, we hold that the disallowance of Rs.51,68,730/- made by the Assessing Officer and confirmed by the Ld. CIT(A) is not sustainable. The Assessing Officer is directed to delete the said disallowance.

Ground No. 3 raised by the assessee is allowed.

13. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open Court on 17.07.2026.