How To Deal with Section 143(1) Notice/Intimation for Tax Audit Report Clause 16(D)

Article explains on How To Deal with Notice / Intimation Issued U/S. 143(1) Regarding Adjustment of Income Reported in Point No. 16(D) Of Form No. 3CD Of Tax Audit Report.

INTRODUCTION : Recently, few days earlier, large no. of notices U/s. 143(1) of the Income Tax At, 1961 (mainly for assessment year 2021-22) were issued by the Income Tax Department. These notices were mainly regarding income reported by the tax auditor in clause 16(d) of form no. 3CD of tax audit report. The crux of the notices were that the income has been reported by the auditor in above clause 16(d) but the same has not been included in the Income Tax return.

On issuance of the notices, generally in most of the cases responses were submitted that the above income has already been shown duly in the respective schedules of the return. In some cases returns were also revised. But despite that in large no. of cases, intimation U/s. 143(1) has been issued after making adjustment i.e., addition for income reported in above clause 16(d). Consequently, additional demand for tax, interest etc. has been raised in those cases.

In this article, an attempt has been made for determining the root cause behind issuance of above notices despite version of large no. of assesses that the income reported in above clause 16(d) has already been included in their Income Tax returns. An attempt has also been made to discuss the available probable remedies for resolution of the above problem.

AN ANALYSIS OF CLAUSE 16(d) OF TAX AUDIT FORM 3CD : The wordings of the above clause 16(d) are – “16. Amounts not credited to the profit and loss account, being – (d) any other item of income ;”. The income reported in the above clause are mainly (i) salary / remuneration from other concerns (ii) rental income (iii) remuneration / interest / profit share from partnership firm etc. (vi) other interest etc. other source income (v) agricultural income (vi) other exempt income etc. The above list is only illustrative list. There may be other items of income reported in the above clause.

The above incomes are mainly those incomes which are not related to the business (of whose accounts are being audited) but have been recorded in the books of account of the business under audit. Since they are not related to the above business they are not credited to the profit and loss account but are credited directly to the capital account.

There may be persons who are carrying business in their individual capacity but are also partner in partnership firm and are also receiving interest / remuneration / profit share etc. from the partnership firms. The taxable part of above income from the partnership firm is chargeable in the hands of the partner under business income head but such income are also generally credited in the book of account of individual business directly in capital account and not in the profit and loss account. It is so because though they are chargeable as business income but they are not an income related to the individual business of whose books of accounts are being audited. The share of profit in partnership firm is exempt in the hands of partner. The same is generally reported in above clause 16(d). The taxable part of interest / remuneration is chargeable in the hands of partner U/s. 28(v), therefore, the same is reportable under clause 16(a) of tax audit report and not under clause 16(d).

Therefore, generally such type of incomes – (i) which are not related to business under audit ; and (ii) as such have not been credited to the profit and loss account of such business ;  (iii) but have been credited directly to the capital account, are reported in above clause 16(d). There may be divergence of opinion on the issue that whether such non business income are reportable in above clause 16(d) or only those income which are related to business under audit are reportable under above clause 16(d). This issue has been thoroughly discussed in later paras of the present article.

GENERAL GREVIANCE IN THE MATTER : In most of the cases, the general grievance is that the income reported in above clause 16(d) have been duly included in the Income Tax return under respective schedules i.e., (i) salary and remuneration from other concerns – reported in schedule “Income from salary” (ii) rental income – reported in schedule “Income from house property” (iii) taxable part of partnership interest / remuneration etc. – reported in schedule “Profits and gains from business” (v) interest and other source income etc. – reported in schedule “Income from other sources” (vi) agricultural income, share in profit from partnership firm, other exempt income etc. – reported in schedule “Exempt Income”.  Despite that the notices were issued that the above income is not included in the Income Tax return and later on, adjustment i.e., addition has also been made despite explanation.

Ideally, when the problem aroused in large no. of cases, the Income Tax Department should have suo moto considered that how it is possible that in large no. of cases the income reported in above clause 16(d) has not been shown in the return. Further, if at that stage, the department could not consider so, then there was next opportunity available with the department. When in large no. of cases, it was responded that the above income has been duly included in the respective schedules in the return (which was easily verifiable), at that time the department should have verified the above explanation and should have dropped the notices issued. But at that stage also the needed action was not taken and adjustment was made mechanically in almost all the cases. This is highly unjustified.

NATURE AND PROBABLE ROOT CAUSE OF PROBLEM : On analysis of the problem, it appears that generally the present problem is not a legal problem. It is also not a matter involving any tax evasion etc. The problem appears to be a problem relating to computer system of the Income Tax Department or a problem relating to any validation rule / schema / computer procedure etc. prepared by the department. The departmental computer system could not find income reported in clause 16(d) despite reporting of the same in the return. The root cause behind that may be the difference in manner and place of reporting income by the assessee and difference in manner and place of searching above income by the departmental computer system in the return.

On study of the notices / intimations in many cases, it can be observed that it is mentioned that “there is inconsistency in amount mentioned in return at Sl. No. 5(d) of Part A OI Any other item of income and Tax audit report”. The Schedule OI is basically schedule of the return wherein the additions etc. reported by the auditor in tax audit report are to be mentioned. The point no. 5(a) to (e) of Schedule OI are exactly same as point no. 16(a) to (e) of tax audit report form No. 3CD. This language in the notice has been used where income reported in above clause 16(d) has not been mentioned in above point 5(a) of Schedule OI of return.

Now, it is further observed that in cases where the above clause 16(d) income has been reported in above point no. 5(d) schedule OI, it has mentioned in above notices / intimations that In Part A OI, Sl. No. 5e Total amount not credited to p&l account is not mentioned at sl no. Any other item of addition under section 28 to 44DA abd / or 24 others of schedule BP”.

On study of return filing utility provided at the Income Tax department e filing portal, it is further observed that any amount mentioned in point no. 5(d) Schedule OI is automatically carried by the utility to the above point no. 23 of Schedule BP i.e., “Any other item of addition under section 28 to 44DA”.

Thus, it appears that as per the Departmental computer system, validation rules, return filing schema, procedure etc., the income reported in above clause 16(d) should have been first mentioned in above Point 5(d) Schedule OI of the return and thereafter it should have been mentioned in point no. 23 of Schedule BP of the return.

In many cases, where income tax return was prepared by using above return preparation utility available at departmental e filing portal, it is observed that no such notices U/s. 143(1) for mismatch regarding clause 16(d) were received.

In many cases, it is also experienced that, where on issuance of notices U/s. 143(1), the returns were revised using departmental return preparation utility or in the manner in which the departmental utility works, the proceedings U/s. 143(1) were not continued.

Thus, from the above analysis, it may be concluded that the departmental computer system first tries to find the income reported in clause 16(d) at point no 5(d) Schedule OI of return. If the income is not found there then it shows mismatch between tax audit report and income tax return. If clause 16(d) income is found reported in point no. 5 (d) Schedule OI, then in second step, the departmental computer system tries to find the above income in point no. 23 of Schedule BP of the return. If the income is found there then department may become satisfied regarding inclusion of clause 16(d) income in the return. Otherwise, it may again show mismatch between tax audit report and income tax return.

Thus, from the above analysis it may be concluded that the root cause of the mismatch may be that the departmental computer system could not recognise the income reported in clause 16(d), in the return where the same was directly shown in the relevant schedule i.e., Income from salary etc. However, it has recognised the above income in those cases where the income has been included in the return as per the above discussed path i.e., first include income in point 5(d) Schedule OI and then carry the same to point no. 23 Schedule BP.

WHETHER ONLY BUSINESS INOME IS REPORTABLE IN CLAUSE 16(b) FORM NO. 3CD : The observations in the preceding para give rise to an alternate opinion that in clause 16(d) of form 3CD only those income are required to be reported which are chargeable U/s.28 to section 44DA (which are related to business income only) but have not been credited to the profit and loss account of business (though might have been credited to the capital account). Consequently, the income chargeable under non business heads e.g., income from salary, income from house property, income from other sources, exempt income etc. are not required to be reported in clause 16(d) of form 3CD (even though they have been recorded in the books of account of business under audit). It is also being argued that the department may also be of the view that only business income which have not been credited to the profit and loss account are reportable under clause 16(d). Therefore, the above notices / Intimations have been issued in such manner.

It is not clear that whether the department is of the above alternate view or not or the same is mere guess in this regard. However, the author is of the opinion that this view may not have any legal basis. Because nowhere in any provisions, rules, circular etc. it has been clearly mentioned that only business income are reportable under clause 16(d). In such a situation, the auditor should remain very careful while taking any view on the above matter. Whether or not other non business income are to be reported in above clause 16(b), is a matter of difference of opinion. Divergent views are there on this issue. In such a situation, the auditor has to exercise his own professional judgement before deciding that whether to report other non business income in above clause 16(d) or not.

Before restricting to the view that non business income included in capital account are not reportable under clause 16(b) one should consider language and reporting points of tax audit form no. 3CB and 3CD also.

The language of form no. 3CB indicates that the tax audit is not in respect of any particular business but it indicates that it is in respect of the assessee. The first para of form No. 3CB is “I / We have examined the balance sheet as on, …… and the profit and loss account / income and expenditure account for the period beginning from ……. to ending on …….. attached herewith of …………. (Name), ………………….. (Address),  ……………………… (Permanent Account No.).”

In the above form, the name, address and PAN of the assessee is required to be written and not of the business of the assessee. Further, PAN exclusively relates to the assessee only and not to any business carried by the assessee. Thus, from the above language one can conclude that if the audit is of the assessee and not of his particular business, then all the incomes (even non business incomes) which have been recorded in the books of account of business under audit may be within ambit of audit.

Apart from the above, there are so many clauses in the tax audit form no. 3CD which specifically requires the auditor to give information / report regarding capital gain, income from other sources and other non business income. For example,(i) clause 17 – it specifically requires information regarding compliance with section 50C (Capital gain) in relation to transfer of any land, building etc.), clause 28, clause 29 specifically ask about income chargeable U/s. 56 under head Income from other sources. Similarly clause 31 ask about violation of provisions of section 269SS, 269T, 269S etc. which are not at all exclusively related to the business income. The reporting is to be made even if the violation is made regarding non business transactions (recorded in books of business). Further, in clause 33 various deductions like under section 80C, 80D, 80TTA etc. are to be reported. These deductions are not exclusively related to the business income. They are available in case of non business income like salary, interest also. This is an illustrative list of some clauses of form no. 3CD. There may be other similar clauses also requiring reporting not based exclusively on business incomes etc.

Thus, while deciding on reporting under clause 16(d) one should not take restricted view in mechanical manner, that it is related only to business income and not to non business income recorded in books of account of business. He should carefully take professional view.

IS REVISION OF TAX AUDIT REPORT IS PROPER SOLUTION : In many cases, tax audit reports are being revised wherein the income reported in clause 16(b) have been removed and thereafter application U/s. 154 has been made for reprocessing of the return.

In view of the author, this step may not be proper. It is so firstly, the concept that the non business income is not reportable in clause 16(d) may not be correct and any revision of tax audit report on that basis may also not be correct.

Secondly, the audit report is not an ordinary piece of paper. It is a reliable document which is prepared very carefully. If such documents are revised casually and in large nos. then it may loose its reliability in the eyes of the government, authorities and ordinary public. So its frequent and casual revision should be avoided. It should be revised only in exceptional circumstances and when it is actually required and where revision is the ultimate and only last option available.

It is also mentionable that if the auditor fails to discharge his professional duty then legally there is no option available with him to save himself. But if due to reporting by auditor any temporary problem arises in the case of the assessee, then assessee has various remedies available with him to come out of the problem e.g., he may file rectification application U/s. 154, may file grievance application, may file appeal, may file complaint, may give representation to the authorities and has many more other options. Therefore, to resolve temporary problems of the assessee, the auditor should not go for frequent / casual revision of his audit report.

REMEDIES AVAILABLE TO RESOLVE THE PROBLEM : Now, in the present condition, in those cases where adjustment has been made U/s. 143(1) and addition has been made for income reported in clause 16(d), the first remedy available is to file application U/s. 154 of the Act. Second remedy available is of filing of appeal. Both the remedies have been discussed in detail in the subsequent paras.

MANNER OF FILING APPLICATION UNDER SECTION 154 : The application is to be filed online on e filing portal of the Income Tax Department. The application is not to be filed in descriptive manner. For filing application U/s. 154, the assessee will have to prepare rectified income tax return which will have to be attached with the application U/s. 154. The rectified return will have to be prepared in the same manner in which the original return / revised return is prepared. For filing of original return / revised return json file is prepared through computer software and then the same is uploaded on the efiling portal. The rectified return to be attached with rectification application U/s. 154 will also have to be prepared in the form of json file through computer software through which the original return / revised return was prepared. The json file of rectified return will have to be uploaded on the e filing portal, alongwith the rectification application. The rectified return json file will have to be filed under option “RETURN DATA CORRECTION”. A short description for reason for filing application U/s. 154 or for filing rectified return may also be given at the place provided at the e filing portal for the same. In the reason it may be mentioned that “the clause 16(d) income was included in Schedule OI etc. of original / revised return earlier. But since the same has not been recognised by departmental computer system, the same has been reported in descriptive manner”.

HOW TO PREPARE RECTIFIED JSON FILE FOR APPLICATION U/S. 154 : In view of above analysis, the rectified return json file may be prepared in the following manner :

(i) Income reported in clause 16(d) tax audit report may be first mentioned in point No. 5(d) Schedule OI of return.

(ii) Thereafter, secondly it may be added in point No. 23 of Schedule BP in return.

(iii) Now, in third step, considering the nature of income, the same may be deducted in point no. 3 or 5 or 32 of Schedule BP itself as mentioned below :

(a) The income chargeable under other heads may be deducted in point no. 3 of Schedule BP and then again included in the respective schedule of salary, other source etc. ;

(b) the exempt income (including agricultural income) may be deducted in point no. 5(c) of Schedule BP and then again included in Schedule EI (Exempt Income) ;

(c) the point no. 32 of Schedule BP is residual clause. The income which is not chargeable under other head or which is not exempt but is of separate nature, may be deducted in point no. 32 of Schedule BP.

(iv) The other contents of the rectified return may be kept same as were in the original return / revised return.

(v) It is also mentionable here that in the rectified return, the type of return will be mentioned as original if the last return was original return. Similarly, it will be mentioned as revised return if the last return filed was revised return. The nature of return may not required to be changed in rectified return because it is merely in the nature of replacement of last filed return with some corrections.

RECTIFIED RETURN IN CASE OF PARTNER OF A FIRM : In case of a partner, the following rectifications may be made in the rectified return under section 154 :

(a) the exempt share in profit in case of partner in partnership firm reported in clause 16(d) may be first deducted in point no. 5(a) of Schedule BP and then again may be included in Schedule EI (Exempt Income) ;

(b) the non taxable portion of interest, remuneration to the partner from partnership firm (i.e., not allowed to firm U/s. 40(b) and not taxable in hands of partner) may be first added in point no. 23 Schedule BP and then may be deducted in residual point 32 Schedule BP (as there is no corresponding relevant point in Schedule BP for this item).

(c) the chargeable portion of interest, remuneration etc. to the partner from partnership firm (i.e., allowed to the firm U/s. 40(b) and taxable in hands of partner) is not required to be reported in clause 16(d) of Form 3CD. It is taxable U/s. 28(v) thus reportable only in clause 16(a) of Form 3CD. It is also mentionable in point No. 5(a) of Schedule OI and thereafter mentionable in point no. 24 of Schedule BP.

ONE DOUBT AND LOGICAL WAY TO REMOVE DOUBT : There is one relevant doubt that is as per the language of Schedule BP point no. 3, 5 etc. only those amounts which are included in the net profit as per profit and loss account are to be deducted through these points. Since in the above solution, the amounts which have been suggested to be deducted in point no 3, 5 etc. are not included in net profit as per profit and loss account, then in such circumstances, the above deduction in point no. 3, 5 etc. will be correct or not. In this regard, the author is of the opinion that though originally the above amounts are not included in net profit as per profit and loss account, but when the above amounts are first added in point no. 23 of Schedule BP, it may be logically considered that the above amount has been deemed to be credited to the net profit as per profit and loss account by addition through point no. 23.

FILING OF UPDATED RETURN U/S. 139(8A) : The second remedy is to file updated return U/s. 139(8A) considering eligibility to file the same and availability of time limit to file the same. In updated return also the income reported under clause 16(d) may be mentioned firstly in point no. 5(d) Schedule OI and then in point no. 23 of Schedule BP and then in relevant point no. 3 or 5 or 32 of Schedule 32 and then in relevant applicable schedule e.g., Other sources, Salary etc. Till date of writing of this article, the functionality of filing of updated return U/s. 139(8A) is not fully and smoothly available on e filing portal of Income Tax Department. Therefore, any practical difficulty that may arise in filing of updated return in present type of cases can not be ascertained presently. The same may be ascertained only on full and smooth running of the facility. Either application U/s.154 i.e., rectified return or updated return U/s. 139(8A) should be filed. In case both options are exercised, the updated return may prevail over all other earlier returns / any rectifications thereof. However, in the opinion of the author, in the normal situation, filing of rectified return U/s. 154 may be more convenient and proper instead of filing of updated return U/s. 139(8A).

FILING OF APPEAL AGAINST INTIMATION U/S. 143(1) : The third remedy is to file an appeal against Intimation U/s. 143(1). This is to be filed within 30 days from date of receipt of the Intimation. Both remedies may be exercised simultaneously. For filing of appeal, it is not necessary to wait for result of application U/s. 154. Similarly, filing of appeal is no bar against filing rectification application.

It is also possible that firstly application U/s. 154 is filed and if the matter is not resolved U/s. 154 then appeal is filed against Order U/s. 154. However, it is the opinion of the author that appeal against Intimation U/s. 143(1) may be more effective than appeal against Order U/s. 154 because the main grievance of the assessee has aroused from Intimation U/s. 143(1). Considering this technical difficulties regarding maintainability of appeal against Order U/s. 154 may arise in such cases.

For filing of appeal, it is not necessary to pay 20% of demand. The payment of 20% of demand is a separate and independent matter. The same is required to be paid for obtaining stay against the balance 80% of demand. If stay is not obtained, then the Income Tax Department may proceed to recover the entire demand.

COMMON REMEDY FOR ALL AFFECTED ASSESSEES : Since it is a general problem, the organizations of tax payers, tax professionals may make representation before the CBDT and other authorities to examine the matter and drop the proceedings in pending cases and to issue revised / rectified intimation U/s. 143(1) by cancelling the adjustments made.

NOTICE / INTIMATION FOR OTHER REASONS : There may be some other type of cases also where the income has been reported under clause 16(d), despite the same being credited in the profit and loss account. Similarly, the income reportable under other clause of section 16(d) might have been wrongly reported under clause 16(d). In those type of cases, the above pattern of preparing rectified return U/s. 154 etc. may not be applicable. In those type of cases, suitable remedies may have to be adopted according to the nature of the problem.

CONCLUSION : Thus, the above mentioned remedies may be exercised to get rid of the problem that might have occurred due to merely technical reasons. In the subsequent years, the above care should be taken to avoid initiation of any such type of proceedings against assessee.

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