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Facts
The assessee, Rail Vikas Nigam Limited, filed its return of income, which was processed under Section 143(1) of the Income Tax Act, 1961, with two additions: a large contingent liability (Rs. 26,54,02,75,354/-) and a disallowance under Section 80M. The subsequent assessment order under Section 143(3) merely adopted the income determined under Section 143(1). The CIT(A) dismissed the assessee's appeal on the technical ground that the appeal should have been filed against the intimation under Section 143(1) and not the assessment order under Section 143(3).
Held
The ITAT held that the contingent liability was an inadvertent clerical error by the tax auditor in Form 3CD and was never debited to the assessee's profit and loss account, nor was any deduction claimed. The CIT(A) erred in dismissing the appeal on technical grounds and in not appreciating the facts on record. The ITAT also noted that the Assessing Officer failed to follow the mandatory procedures under Section 144B by not issuing a show cause notice or draft assessment order. The ITAT directed the Assessing Officer to delete the additions.
Key Issues
Whether the CIT(A) was justified in dismissing the appeal on technical grounds, and whether an addition based on an inadvertent clerical error in Form 3CD, not claimed by the assessee in its profit and loss account, is sustainable, especially when mandatory procedures under Section 144B were not followed.
Sections Cited
143(1), 143(2), 142(1), 194C, 37, 80M, 143(3), 144B, 144B(1)(xvi)(b), 154, 251
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Income Tax Appellate Tribunal, DELHI BENCH ‘F’: NEW DELHI
Order
: 09.10.2024 O R D E R
PER S.RIFAUR RAHMAN,AM:
This appeal has been filed by the assessee against the order of ld. Commissioner of Income Tax (Appeals), Delhi/National Faceless Appeal Centre (NFAC) [“ld. CIT(A)”, for short] dated 12.02.2024 for the Assessment Year 2021-22.
Brief facts of the case are, assessee filed its return of income for the assessment year 2021-22 declaring total income of Rs.646,21,76,710/- on 28.02.2022. The return of income was processed under section 143 (1) of the Income-tax Act, 1961 (for short ‘the Act’) and the total income was computed at Rs.3317,74,52,060/-. The case was selected for scrutiny to verify the issue of receipt under section 194C of the Act and low net profit. Accordingly, notices u/s 143(2) & 142(1) dated 28.06.2022 were issued and served on the assessee. In response, ld. AR for the assessee attended and submitted relevant information as called for.
The assessee is a public sector construction company and 78.21% of equity shares are held by the President of India and operates through Ministry of Railway (MoR), Government of India. It implements various types of railway infrastructure projects assigned by MoR includes doubling (3rd/4th lines) gauge conversion, new lines railway electrification and major bridges.
It is relevant to note that the assessee has filed its return of income on 28.02.2022 and the case was selected for scrutiny on 28.06.2022 and subsequently, notice u/s 142 (1) dated 12.09.2022 was issued to the assessee and assessee submitted relevant information relating to various informations called for in questionnaire of notice u/s 142(1) of the Act on 26.08.2022.
5. It is relevant to note that intimation u/s 143 (1) was passed on 22.09.2022 with the total assessed income at Rs.3317,74,52,060/- by the CPC by making the following addition :- (i) A sum of Rs.26,54,02,75,354/- towards the additional amount of any liability of a contingent nature which has been allegedly debited to the profit and loss account to the extent disallowable under section 37 of the IT Act, as mentioned in paragraph 21 (g) of Form 3CD. (ii) Rs.17,50,00,000/- towards disallowance of deduction under 80M of the IT Act in respect of inter-corporate dividends (Page 263 of the paper book).
Subsequently, the assessment order u/s 143(3) was passed on 28.12.2022 without making any adjustment in the regular assessment and determined the taxable income as per the intimation passed u/s 143 (1) of the Act.
Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A) against the assessment order and filed detailed submissions. After considering detailed submissions of the assessee, ld. CIT (A) dismissed the appeal filed by the assessee and held that the addition of Rs.26,54,02,75,345/- was made by the CPC under section 143 (1) of the Act while processing the return of income. He opined that assessee should have filed an appeal against the intimation order passed u/s 143(1) of the Act in which the contested addition was made, he dismissed the appeal without going into the merits of the case.
1. The Commissioner of Income Tax (Appeals) /National Faceless Appeal Centre erred in law and on the facts and circumstances in upholding the assessment order dated 28.12.2022 in relation to the disputed item under challenge and agitated in this appeal. Merits 2. The Commissioner of Income Tax (Appeals) /National Faceless Appeal Centre erred in law and on the facts and circumstances of the case in allowing the addition of Rs. 26,54,02,75,345/- on account of disallowance under Section 37 of the IT Act without taking cognizance of the fact that Rs. 26,54,02,75,345/- was never debited to the profit and loss account for AY 2021-22 by the Appellant. 3. The Commissioner of Income Tax (Appeals) /National Faceless Appeal Centre erred in law and on the facts and circumstances of the case in not appreciating that while Rs. 26,54,02,75,345/- was incorrectly reported by the auditor of the Appellant as liability of a contingent nature under Paragraph 21 (g) of the Form 3CD and shown as a note to the financial statements, the said amount was not debited to the profit and loss account of Appellant. 4. The Commissioner of Income Tax (Appeals)/ National Faceless Appeal Centre erred in law and on the facts and circumstances of the case in passing the Impugned Order without considering that taxes can only be collected as per authority of law and not on account of any inadvertent mistakes in the tax-audit report that ought to rectified or deleted. Principles of Natural Justice 5. The Commissioner of Income Tax (Appeals) /National Faceless Appeal Centre erred in law and on the facts and circumstances of the case in not considering the submissions made by the Appellant before passing the Impugned Order. 6. The Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre erred in law and on the facts and circumstances of the case in passing the Impugned Order without considering the documents substantiating that Rs.26,54,02,75,345/- was inadvertently reported by the tax auditor in Form 3CD and not debited by the Appellant to the profit and loss account which goes against the principles of natural justice.
7. The Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre erred in law and on the facts and circumstances of the case in not appreciating that the assessment order was issued by the Assessment Unit without issuing a show cause notice and a draft assessment order, which goes against the statutory procedure and principles of natural justice.
The Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre erred in law and on the facts and circumstances of the case in not appreciating that Section 144B of the IT Act mandatorily provides for the issuance of a show cause notice and draft assessment order by the National Faceless Assessment Centre before issuing a final assessment order.
The Appellant craves leave to add to and/or amend and/or delete and/or modify and/or alter the aforesaid grounds of appeal
as and when the occasion demands.
10. All the aforesaid grounds of appeal are independent, in the alternative and without prejudice to one another.”
9. At the time of hearing, ld. AR for the assessee submitted that the amount of Rs.26,54,02,75,345/- was inadvertently included under the head of contingent liability at Paragraph 21(g) of Form 3CD filed for FY 2020-21 by the statutory auditor of the assessee, without the amount being debited to the assessee’s profit and loss account for FY 2020-2021. This error was fully attributable to the tax auditors who had mistakenly stated the amount in paragraph 21(g) of Form 3CD filed for the financial year 2020- 21 (page 74, SI. no 2 of the paper book). It has been explicitly stated in Note no. 37 of the audited financial statements (page 53, SI. No. 1 of the paper book) that the claims against the assessee were not recognised as debt. Ld. AR further submitted that the tax auditor re-checked the working on the request of the assessee and issued a signed clarification that Rs.26,54,02,75,345/- was inadvertently mentioned in paragraph 21(g) of Form 3CA-CD and had not been debited to the profit and loss account of the assessee. This error could not be timely rectified as the time limit for revision of the tax audit report had lapsed. He submitted that it is a settled principle of law that taxes can be collected as per the authority of law and not on account of any inadvertent mistakes in the tax audit report that ought to be rectified or deleted. Reliance is placed on the following judgments: • M/s Sonata Realty Private Limited v. ACIT, CC - 38, umbai 2017 (5) TMI 154 - ITAT, SI. No. 5 of case law compendium).
• Mrityunjay Kumar Singh v. Income Tax Officer, SI. No. 6 of the case law compendium).
Ld. AR further submitted that it is also well settled that an assessee cannot be taxed on an amount on which tax is not legally imposable, even if an assessee may have chosen the wrong channel for the redressal of grievance. Reliance is placed on the decision of the Jodhpur Bench of the Hon’ble Tribunal in the case of Akbar Mohammad Prop. M/s Mohd. Rafique Associates v. The ACIT, CPC, Bangalore, 2022 (2) TMI 479 - ITAT Jodhpur (SI. No. 1 of the case law compendium). The findings in the case of Akbar Mohammad (supra) have been upheld by various benches of the ITAT in Muwahhid Educational Foundation v. The Commissioner Of Income Tax, NFAC Delhi, 2023 (2) TMI 919 - ITAT Bangalore, (Sl. No. 2 of the case law compendium), Madhya Pradesh Gramin Bank (formerly known as Narmada Jhabua Gramin Bank) v. ACIT, CPC-TDS Ghaziabad, 2022 (11) TMI 771 - ITAT INDORE (Sl. No. 3 of the case law compendium), and Shivganga Drillers Private Ltd. v. CPC, Income Tax, Indore Bangalore, 2022 (5) TMI 1427 - ITAT Indore (SI. no. 4 of the case law compendium).
Ld. AR further stated that in the instant case, there is no basis to pay tax on the addition of Rs. 26,54,02,75,345/- as this amount has not been debited from the profit and loss statement by the assessee. He submitted that the assessee had inadvertently mentioned the amount in paragraph 21(g) of Form 3CD. Thus, the AO and the CIT(A) erred in affirming the addition of the said amount simply because it did not appeal against the intimation issued by the CPC under Section 143(1) of the IT Act.
As regards violation of section 144B of the Act, ld. AR for the assessee submitted that that Section 144B(l)(xvi)(b) of the Act mandatorily provides for the issuance of a prior show cause notice and draft assessment order before issuing a final assessment order. Since in the present case no show cause notice as well as draft assessment order has been issued, there is a clear violation of the mandatory procedure stipulated in Section 144B of the Act.
13. Ld. AR further submitted that the finding of the CIT(A) that issuing the show cause notice and draft assessment order under Section 144B does not arise as the addition was not part of the Assessment Order is erroneous. The Assessing Officer and the CPC had assessed the total income of the Appellant as Rs. 33,17,74,52,060/-, which included the amount of Rs.26,54,02,75,345/-. Therefore, as the AO had taken complete cognizance of the disallowance under Section 37 of the IT Act, the Assessment Order issued by the AO is bad in law. Reliance in this regard is placed on the following judgments: Pooja Singla Builders & Engineers (P) Ltd. v. National • Faceless Assessment Centre [2022] 440 ITR 413 (Del) (page 42, SI. No. 7 of the paper book) • Sribasta Kumar Swain v. Union of India, [2022] 440 ITR 545 (Ori.) (page 46, SI. No. 8 of the paper book) • Akashganga Infraventures India Ltd. v. National Faceless Assessment Centre, Delhi [2021] 130 taxmann.com 401 (Delhi) (page 49, SI. No. 9 of the paper book) • Floral Realcon (P.) Ltd. v. National Faceless Assessment Centre /2021] 132 taxmann.com 8 (Delhi) (page 52, SI. No. 10 of the paper book) • Interglobe Aviation Enterprises Private Limited v. National Faceless Assessment Centre, Delhi [2023] 450 ITR 126 (Del) (page 54, SI. No. 11 of the paper book) • Novelty Merchants Private Limited v. National Faceless Assessment Centre, Delhi 2021(9) TMI 714 (page 57, SI. No. 12 of the paper book)
• Magadh Sugar & Energy Limited v. Assessment unit, Income Tax Department, 2022 (11) TMI 1214 - Calcutta High Court, (page 59, SI. No. 13 of the paper book) P.T. Lee Chengalvaraya Naicker Trust v. Income Tax Officer [2022] 143 Taxmann.com 252 (Madras) (page 64, SI. No. 14 of the paper book) Saawariya Impex (P) Ltd. v. National E Assessment Centre, Delhi [2021] 131 taxmann.com 57 (Delhi), (page 76, SI. No. 15 of the paper book) Sams Facilities Management (P) Ltd. v. National Faceless Assessment Centre [2021] 130 taxmann.com 376 (Delhi), (page 79, SI. No. 16 of the paper book) 14. Ld. AR further submitted that it is pertinent to highlight that the during the assessment proceedings the AO did not request clarifications regarding the amount mentioned as contingent liability in Form 3CD (pages 116, 117-119, and 121-124 of the paper book, SI. nos. 4, 5, and 7). As the Assessment Order under Section 143(3) of the IT Act was passed by the AO after the intimation by CPC, the AO ought to have followed the procedure provided under Section 144B of the IT Act. If such a notice would have been issued, the assessee would have had the opportunity to provide the clarification and bring the facts on record before the AO. Therefore, the justification for non-application of the procedure laid down under Section 144B of the IT Act is invalid.
At the time of hearing, a query was raised by the Bench to submit a clarification from the tax auditor and also the details of outstanding contingent liability which are pending as on that date of balance sheet which assessee has not claimed in the profit & loss account, however by clerical mistake of the auditor, the same was wrongly mentioned in auditor’s report in Form 3CD. The assessee has submitted detailed clarification from the auditors and details of pending contingent liability which is placed on record dated 09.08.2024.
On the other hand, ld. DR for the Revenue brought to our notice page 74 of the paper book which is the auditor’s report in Form 3CD and he brought to our notice page 70 of the paper book which is the auditor’s report in Form 3CD. He also brought to our notice page 74 of the paper book wherein auditors have specifically disclosed the contingent liability. He submitted that it clearly shows that assessee has made the claim in its profit & loss account. Accordingly, order u/s 143(1) of the Act was passed by making relevant adjustment which is as per law. He submitted that it is a mistake if at all made in intimation u/s 143 (1) of the Act, assessee should have challenged against that order, which is also an appealable order. The assessee has filed the present appeal against the assessment order passed u/s 143(3) wherein Assessing Officer has not made any fresh addition, merely computed the tax payable on the basis of taxable income determined u/s 143(1) of the Act. He submitted that merely because Assessing Officer has considered the taxable income based on intimation order u/s 143 (1) of the Act, it does not merge with the regular assessment order u/s 143(3) of the Act. In this regard, he relied on the decision of ITAT, Pune Bench in the case of Amdocs Development Centre India LLP in dated 19.04.2023 and ITAT, Bangalore Bench in the case of M/s. Areca Trust vs. CIT(A) in ITA No.433/Bang/2023 dated 26.07.2023. By relying on the above decisions, he submitted that the concept of merger was not accepted by the respective Tribunals, accordingly, he relied on the same decisions.
Considered the rival submissions and material placed on record. We observed from the record that the case of the assessee was selected for scrutiny on 28.06.2022 by issue of a notice u/s 143(2) of the Act and auditor has issued the audit certificates on 28.02.2022 wherein he has mentioned the details of contingent liability at Sl.No.21(a) of the auditor report which was filed by the auditor on 28.02.2022 wherein it was mentioned that the assessee has claims pending under adjudication in arbitration invoked by the contractor and cases pending in court. As per the statements submitted before us, we observed that this is wrongly mentioned by the auditor as the same was debited to the profit & loss account whereas it is relating to pending contingent liability as on the date.
18. Based on the return of income filed by the assessee on 28.02.2022 where the assessee has not made the abovesaid disallowance considering the fact that the assessee has not debited the same in its profit & loss account. Since the auditor has wrongly specified the details of contingent liability at point 21(a) of the auditor’s report in Form 3CD, this lead to the understanding that the assessee had claimed the contingent liability u/s 37 of the Act during the year. The CPC by noticing the abovesaid information available in Form 3CD proceeded to make the addition of the same in the intimation order u/s 143(1) of the Act and the intimation was passed on 22.09.2022. Subsequently on 28.12.2022, regular assessment order was also passed u/s 143(3) of the Act without making any addition in regular assessment.
Aggrieved with the above order, assessee filed an appeal before the ld. CIT(A) and also submitted a signed clarification of the tax auditor with regard to above clerical mistake recorded in From 3CD. The ld. CIT(A) dismissed the appeal filed by the assessee and held that the grievance of the assessee lies in the intimation order passed u/s 143(1) of the Act and it should have filed an appeal against the intimation order passed u/s 143(1) and not against the regular assessment passed u/s 143 (3) of the Act. After considering the facts on record, we observed that ld. CIT (A) has not appreciated the proper facts on record. In this case, intimation was passed on 22.09.2022 and subsequently regular assessment u/s 143(3) of the Act was also passed on 28.12.2022 and he completely overlooked the fact that the tax auditor has made wrong declaration in his auditor’s report and the relevant clarification was also filed before him certifying that assessee is not actually debited abovesaid contingent liability in its profit & loss account. In our considered view, ld. CIT (A) has co-terminus power to make the proper assessment of the income as per section 251 of the Act. Instead of appreciating the facts on record that assessee has not actually claimed any expenditure in its profit & loss account and proper clarification was also placed on record, he simply dismissed the appeal on the technical ground that the assessee should have preferred the appeal against the intimation order u/s 143 (1) of the Act.
After appreciating the facts on record, in our considered view, there is a mistake apparent on record which clearly shows that the tax auditor has wrongly mentioned the details of contingent liability in its tax audit report and in actual assessee has not debited the abovesaid contingent liability in its profit & loss account. Assessee has filed clarification from the tax auditor and also filed the details of project-wise contingent liability outstanding as on the date of Balance Sheet. For the sake of clarity, the clarification of the tax auditor is reproduced below :-
At the time of hearing, ld. DR for the Revenue vehemently argued that the intimation order does mot merge with the regular assessment when the Assessing Officer taxes the taxable income based on the intimation order u/s 143(1) of the Act. In this regard, he relied on the decision of the ITAT, Pune Bench and Bangalore Bench. We considered the facts of those decisions and present facts on record, in our considered view, for the simple reason that assessment u/s 143(1) of the Act was processed on 22.09.2022 without giving any opportunity to the assessee and even the assessment was completed u/s 143(3) of the Act on 28.12.2022 without following the procedure laid down u/s 144B of the Act may be for the reason that there is no addition proposed u/s 143(3) of the Act. There was absolutely no time for the assessee to file a rectification application u/s 154 of the Act and also the case was selected for scrutiny even before the intimation u/s 143(1) of the Act was passed.
It is well-settled law that assessee cannot be taxed at an amount which is not legally imposable. As per the facts on record, assessee chose to address the grievance against wrong order, however we noticed that the intimation u/s 143(1) of the Act was passed after selection of the case for regular assessment and the assessee was not given opportunity before making such addition. We also noticed that after passing of the intimation order u/s 143(1) of the Act within three months, the regular assessment u/s 143(3) was also passed. As per the Second Proviso to Section 143(1) of the Act, no intimation under this sub-section shall be sent after the expiry of one year (9 months as applicable at that point of time) from the end of financial year. Since, in the present case, intimation was passed on 22.09.2022 assessee could have filed rectification application u/s 154 of the Act and the same has to be disposed off within 6 months from the date of reference. In the given case, the regular assessment itself was passed on 28.12.2022. That means assessee could have raised this issue before the Assessing Officer in the regular assessment itself. Since this is a peculiar case wherein the addition was proposed based on the apparent mistake on record, which was not appreciated by the authorities.
Considering these facts on record with the moto of our institution “Impartial, Easy & Speedy Justice”, in our considered view, ld. CIT (A) even though having co-terminus power had failed to appreciate the real facts on record and we do not want to toe the same line of argument of ld. DR & CIT (A), particularly when we noticed that the assessee has not made any claim of the contingent liability in its profit & loss account and merely based on the mistake of the tax auditor, who wrongly mentioned at Col.21(a) of the tax audit report for such mistake the assessee cannot be penalized. In our view, there is no point in dismissing this appeal and directing the assessee to file a fresh appeal against the intimation order u/s 143(1), we noticed that the Assessing Officer without making any verification has completed the assessment u/s 143(3) of the Act considering the total taxable income as per intimation u/s 143(1) of the Act. In order to achieve the speedy justice, we are inclined to direct the Assessing Officer to delete the additions made in the gross taxable income u/s 143(1) of the Act which was borrowed by the Assessing Officer to compute the assessment u/s 143(3) of the Act to determine the taxable income for the year under consideration. Accordingly, we allow the grounds raised
by the assessee.
24. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on this 9th day of October, 2024.