SODEXO INDIA SERVICES PVT. LTD,MUMBAI vs. DCIT CIR-13(2) (2) , MUMBAI

This appeal has been preferred by the assessee against the order dated 08.10.2021 passed by the Ld. Commissioner of Income Tax (Appeals) [National Faceless Appeal Centre], for assessment year 2019-20 raising following grounds :

Sodexo India Services Pvt. Ltd. 2 I. ADDITION FOR DEEMED INCOME UNDER SECTION 2(24)(x) READ WITH SECTION 36 (1) (va) Rs. 40,23,613/-: 1.1. The learned Commissioner of Income-tax (Appeals) [CIT (Appeals)] erred in upholding the addition made by the learned Assessing Officer, for a sum of Rs.40,23,613/- in respect of Employees' contributions Provident Fund, ESIC and Labour Welfare Fund by invoking the provisions of Section 2(24)(x) read with Section 36 (1) (va) of the Act for alleged delay in payment thereof. 1.2. The learned CIT(Appeals) and the learned Assessing Officer failed to appreciate the explanations furnished by the appellant and the law laid down by various courts including the jurisdictional Bombay High Court, in this behalf. 1.3. The learned CIT(Appeals) failed to appreciate that the amendment brough in by the Finance Act, 2021, in this behalf, is to be applied prospectively from Assessment Year 2021-2022 and cannot be applied for assessments relating to the earlier years retrospectively. 1.4. The learned CIT(Appeals) failed to consider and appreciate the submissions made and explanations offered by the appellant.

4.2 In this context, it is pertinent to mention that while only prima facie arithmetical adjustments could be made earlier, the amended provisions empower adjustments to be made inter alia on the basis of the remarks indicated in the tax audit report and in the case of incorrect claim apparent from any information in the return. Post-amendment, scope of adjustments under section 143(1) has been widened and enlarged. It provides that total income shall be computed after making adjustments inter alia on account of an incorrect claim, if such incorrect claim is apparent from any information in the return; disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return and also 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. 4.3 In this case, adjustment u/s 143(1) has been made on the basis of information contained in the tax audit report. The audit report indicates details of contribution received from employees for various funds as referred to in section 36(1)(v)(a). It gives the details of the due date of payment and actual date of payment to the concerned authorities. It is crystal clear from the chart that employee's contribution to Provident fund and ESI have been paid beyond the due date specified, which has attracted the provisions of sec 36(1) (v)(a) r.w.s. 2(24)(x) leading to disallowance of the sum to the extent not credited to the employee's account on or Sodexo India Services Pvt. Ltd. 4 before the due date stipulated in the respective PF Act and ESI Act. Therefore, in view of the remarks in the audit report, adjustments can be made in terms of section 143(1). This is also in the nature of incorrect claim which is apparent from the information contained in the tax audit report. In view of the above discussion, I find that the adjustment has correctly been made under section 143(1) of the Income Tax Act. Hence, no relief can be given to the appellant in respect of the above adjustment made under section 143(1) of the Income Tax Act.

“4. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal position.

Sodexo India Services Pvt. Ltd. 9 The answer must be emphatically in negative. It is important to bear in mind the fact that intimation under section 143(1) is an appealable order, and when consideration of objections raised by the assessee is an integral part of the process of finalizing the intimation under section 143(1) unless the reasons for such rejection are known, a meaningful appellate exercise can hardly be carried out. When the first appellate authority has no clue about the reasons which prevailed with the Assessing Officer- CPC, in rejecting the submissions of the assessee, because no such reasons are indicated by the Assessing Officer CPC anyway, it is difficult to understand on what basis the first appellate authority sits in judgment over correctness or otherwise of such a rejection of submissions. Whether the statute specifically provides for it or not, in our considered view, the need for disposal of objections by way of a speaking order has to be read into it as the Assessing Officer CPC, while disposing of the objections raised by the assessee, is performing a quasi-judicial function, and the soul of a quasijudicial decision making is in the reasoning for coming to the decision taken by the quasi-judicial officer. While on this aspect of the matter, we may usefully refer to the observations made by the Hon’ble Supreme Court, in the case of Union Public Service Commission v. Bibhu Prasad Sarangi and Ors., [2021] 4 SCC 516. While these observations are in the context of the judicial officers, these observations will be equally applicable to the decisions by the quasi-judicial officers like us as indeed the Assessing Officer CPC. In the inimitable words of Hon’ble Justice Chandrachud, Hon’ble Supreme Court has made the following observations: ….. Reasons constitute the soul of a judicial decision. Without them, one is left with a shell. The shell provides neither solace nor satisfaction to the litigant. We are constrained to make these observations since what we have encountered in this case is no longer an isolated aberration. This has become a recurring phenomenon.

Sodexo India Services Pvt. Ltd. 10 ………How judges communicate in their judgments is a defining characteristic of the judicial process. While it is important to keep an eye on the statistics on disposal, there is a higher value involved. The quality of justice brings legitimacy to the judiciary 7. These observations of Their Lordships apply equally, and in fact with much greater vigour, to the quasi-judicial functionaries as well. Viewed thus, reasons in a quasi-judicial order constitute the soul of the quasi- judicial decision. A quasi-judicial order, without giving reasons for arriving at such a decision, is contrary to the way the functioning of the quasi-judicial authorities is envisaged. A quasi-judicial order, as a rejection of the objections against the proposed adjustments under section 143(1) inherently is, can hardly meet any judicial approval when it is devoid of the cogent and specific reasons, and when it is in a standard template text format with clear indications that there has not been any application of mind as even the inapplicable portion of the template text, i.e whether there was no response or whether the response is unacceptable, has not been removed from the reasons assigned for going ahead with the proposed adjustment under section 143(1). In any event, there is no dispute that the precise and proximate reasons for disallowance in all these cases admittedly are the inputs based on the tax audit report. The question then arises about the status and significance of the tax audit report. Can the observations in a tax audit report, by themselves, be justifications enough for any disallowance of expenditure under the Act? As we deal with this question, we are alive to the fact section 143(1)(a)(iv) specifically an adjustment in respect of “disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return”. It does proceed on the basis that when a tax auditor indicates a disallowance in the tax audit report, for this indication alone, the expense must be disallowed while processing under section Sodexo India Services Pvt. Ltd. 11 143(1) by the CPC. It is nevertheless important to bear in mind the fact that a tax audit report is prepared by an independent professional. The fact that the tax auditor is appointed by the assessee himself does not dilute the independence of the tax auditor. The fact remains that the tax auditor is a third party, and his opinions cannot bind the auditee in any manner. As a matter of fact, no matter how highly placed an auditor is, and even within the Government mechanism and with respect to CAG audits, the audit observations are seldom taken an accepted position by the auditee- even when the auditor is appointed by the auditee himself. These are mere opinions and at best these opinions flag the issues which are required to be considered by the stakeholders. On such fine point of law, as the nuances about the manner in which Hon’ble Courts have interpreted the legal provisions of the Income Tax Act in one way or the other, these audit reports are inherently even less relevant- more so when the related audit report requires reporting of a factual position rather than express an opinion about legal implication of that position. In the light of this ground reality, an auditee being presumed to have accepted, and concurred with, the audit observations, just because the appointment of auditor is done by the assessee himself, is too unrealistic and incompatible with the very conceptual foundation of independence of an auditor. On the one hand, the position of the auditor is treated so subservient to the assessee that the views expressed by the auditor are treated as a reflection of the stand of the assessee, and, on the other hand, the views of the auditor are treated as so sacrosanct that these views, by themselves, are taken as justification enough for a disallowance under the scheme of the Act. There is no meeting ground in this inherently contradictory approach. Elevating the status of a tax auditor to such a level that when he gives an opinion which is not in harmony with the law laid down by the Hon’ble Courts above- as indeed in this case, the law, on the face of it, requires such audit opinion to be Sodexo India Services Pvt. Ltd. 12 implemented by forcing the disallowance under section 143(1), does seem incongruous. Learned Departmental Representative’s contentions in this regard that the observations made in the tax audit report, in the light of the specific provisions of Section 143(1)(a)(iv), must prevail- more so when the tax auditor is appointed by the assessee himself, is clearly unsustainable in law. While Section 143(1)(a)(iv) does provide for a disallowance based purely on the “indication” in the tax audit report, inasmuch as it permits “disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return”, and it is for the Hon’ble Constitutional Courts above to take a call on the vires of this provision, we are nevertheless required to interpret this provision in a manner to give it a sensible and workable interpretation. When the opinion expressed by the tax auditor is contrary to the correct legal position, the tax audit report has to make way for the correct legal position. The reason is simple. Under Article 141 of the Constitution of India, the law laid down by the Hon’ble Supreme Court unquestionably binds all of us, and the Hon’ble Supreme Court has, in numerous cases- including, for example, in the case of East India Commercial Co. Ltd. v. Collector of Customs [1963] 3 SCR 338, speaking through Hon’ble Justice Subba Rao observed, inter alia, as follows: …………Under article 215, every High Court shall be a Court of record and shall have all the powers of such a Court including the power to punish for contempt of itself. Under article 226, it has a plenary power to issue orders or writs for the enforcement of the fundamental rights and for any other purpose to any person or authority, including in appropriate cases any Government, within its territorial jurisdiction. Under article 227 it has jurisdiction over all Courts and Tribunals throughout the territories in relation to which it exercises jurisdiction. It would be anomalous to suggest that a Tribunal over which the High Sodexo India Services Pvt. Ltd. 13 Court has superintendence can ignore the law declared by that Court and start proceedings in direct violation of it. If a Tribunal can do so, all the subordinate Courts can equally do so, for there is no specific provision, just like in the case of the Supreme Court, making the law declared by the High Court binding on subordinate courts. It is implicit in the power of supervision conferred on a superior Tribunal that all the Tribunals subject to its supervision should conform to the law laid down by it. Such obedience would also be conducive to their smooth working: otherwise, there would be confusion in the administration of law and respect for law would irretrievably suffer 8. When the law enacted by the legislature has been construed in a particular manner by the Hon’ble jurisdictional High Court, it cannot be open to anyone in the jurisdiction of that Hon’ble High Court to read it in any other manner than as read by the Hon’ble jurisdictional High Court. The views expressed by the tax auditor, in such a situation, cannot be reason enough to disregard the binding views of the Hon’ble jurisdictional High Court. To that extent, the provisions of Section 143(1)(a)(iv) must be read down. What essentially follows is that the adjustments under section 143(1)(a) in respect of “disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return” is to be read as, for example, subject to the rider “except in a situation in which the audit report has taken a stand contrary to the law laid down by Hon’ble Courts above”. That is where the quasi-judicial exercise of dealing with the objections of the assessee, against proposed adjustments under section 143(1), assumes critical importance in the processing of returns. It is also important to bear in mind the fact that what constitutes jurisdictional High Court will essentially depend upon the location of the jurisdictional Assessing Officer. While dealing with jurisdiction for the appeals, Rule 11(i) of the Central Processing of Returns Scheme 2011 states that Sodexo India Services Pvt. Ltd. 14 “Where a return is processed at the Centre, the appeal proceedings relating to the processing of the return shall lie with Commissioner of Income-tax (Appeals) [CIT(A)] having jurisdiction over the jurisdictional Assessing Officer”. Then situs of the CPC or the Assessing Office CPC is thus irrelevant for the purpose of ascertaining the jurisdictional High Court. Therefore, in the present case, whether the CPC is within the jurisdiction of Hon’ble Bombay High Court or not, as long as the regular Assessing Officer of the assessee and the assessee are located in the jurisdiction of Hon’ble Bombay High Court, the jurisdictional High Court, for all matters pertaining to the assessee, will be Hon’ble Bombay High Court. In our considered view, it cannot be open to the Assessing Officer CPC to take a view contrary to the view taken by the Hon’ble jurisdictional High Court- more so when his attention was specifically invited to the binding judicial precedents in this regard. For this reason also, the inputs in question in the tax audit report can not be reason enough to make the impugned disallowance. The assessee must succeed for this reason as well.

Order pronounced in the open Court on 05/05/2022.