ITAT allows issue of CPC adjustment made in intimation u/s 143(1) to be examined in proceedings u/s 143(3)
In a recent judgment, the ITAT Bangalore has allowed issue of CPC adjustment made in intimation u/s 143(1) to be examined in proceedings u/s 143(3) observing that the object for making the adjustment in the intimation under section 143(1) of the Act or framing the assessment under section 143(3) of the Act is to determine the income and tax liability correctly as per the provisions of law.
ABCAUS Case Law Citation:
4467 (2025) (03) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the AO’s in making addition on account of TP adjustment and not adjudicating issue of adjustment made by CPC vide intimation issued u/s 143(1) of the Income Tax Act, 1961 (the Act).
The appellant assessee was a private limited company and during the year under consideration, the assessee provided Software development and IT Enable services to the associated enterprises along with other international transactions.
The assessee was selected for complete scrutiny under CASS to examine the various issues. During the scrutiny assessment reference under section 92CA(1) of the Act was made, for the computation of Arm’s length price in relation to international transactions.
The TPO in his order passed under section 92CA(3) of the Act proposed upward adjustment. The DRP granted partial relief to the assessee and the AO passed final assessment order u/s 143(3) r.w.s. 144(13) of the Act. However, no effect was given by the AO in the final assessment order to comply with the revised direction of the DRP and revised effect giving order by the TPO.
On appeal by the assessee the Tribunal partly allowed the grounds of appeal with respect to TP adjustment as per revised DRP directions.
One of the issued raised by the assessee before the Tribunal was non adjudication on the issue of additions made by the CPC vide its intimation passed u/s 143(1) of the Act.
The assessee in its return of income claimed deduction on account of payment of bonus. The claim of the assessee was disallowed by the CPC in the intimation order under section 143(1) of the Act on account of difference in ITR and Tax audit report.
The assessee during the assessment proceeding furnished the copy of ITR and computation and asserted that the claim was made as per the provision of Act. However, the AO without considering the assessee claim finalized the draft assessment order by the taking the income assessed by the CPC in the intimation under section 143(1) of the Act and thereafter proposed further addition on account of TP adjustment as well as other addition proposed by the AO.
The aggrieved assessee preferred to file an objection before the DRP and made detailed submission regarding the allowability of the claim. The assessee submitted that order under section 143(1) of the Act gets merged with the assessment order u/s 143(3) of the Act. Therefore, the AO should have deleted the wrong disallowances made in the intimation generated under section 143(1) of the Act. However, the DRP dismissed the objection filed by the assessee holding that the DRP can only consider issues arising from the draft assessment order under section 144C(1) of the Act, not adjustments made by the CPC in the intimation order u/s 143(1) of the Act. The DRP relied upon a judgment of Co-ordinate Bench which held that appeals against intimation order under section 143(1) of the Act should be filed separately. Once a regular assessment is completed under section 143(3) or 144 of the Act, the tax paid under 143(1) is considered part of that assessment, but this does not mean a merger of the two orders.
Before the Tribunal, the assessee submitted that there was no appeal preferred against the adjustment made under section 143(1) of the Act as the case of the assessee was picked up under scrutiny. Therefore, the assessee was of the view that the issue arising from the intimation under section 143(1) of the Act can be agitated in the proceedings under section 143(3) of the Act. It was further submitted that there was only calculation error in the intimation generated under section 143(1) of the Act and accordingly he prayed direction to the AO for necessary verification as per the provisions of law.
On the other hand, the Revenue contended that the issue arising from the intimation generated under section 143(1) of the Act cannot be agitated in the proceedings under section 143(3) of the Act. As per the Revenue, the assessee can either move an application under section 154 of the Act or make an appeal to the CIT-A under section 246(1) of the Act.
The Tribunal observed that the main controversy was whether the adjustment made in the intimation order under section 143(1) of the Act can be agitated in the proceedings under section 143(3) of the Act or in the appeal proceeding arising out of assessment order under section 143(3) of the Act.
The Tribunal observed that section 143(1) of the Act deals with prima facie adjustments made during the processing of an income tax return before assessment and the taxpayer is notified of any adjustments via an intimation under section 143(1) of the Act, and they are given an opportunity to respond before any demand is raised.
However, the Tribunal opined that an intimation under Section 143(1) is not an assessment. It is merely a preliminary check of the return filed by the taxpayer and is done through an automated process. In contrast, the Scrutiny Assessment under Section 143(3) is a detailed examination of the income tax return by the AO to verify its correctness and ensure there is no understatement of income, overstatement of deductions, or tax evasion. To assess the correctness of income, deductions, exemptions, and tax liability, the AO issues several notices to the assessee in the form of questionnaire, show cause etc. The assessee is required to provide supporting documents, explanations, and evidence as demanded by the AO. This may include books of accounts, bank statements, invoices, agreements, etc. After examining all details, the AO may either accept the return as filed, or Make additions/disallowances, leading to higher tax liability.
The Tribunal opined that there is no ambiguity to the fact that the intimation under section 143(1) of the Act is not an assessment order. But any adjustment made under section 143(1) of the Act can be challenged either by filing rectification application under section 154 of the Act or by way of filing appeal before the CIT(A) under section 246 of the Act. Thus, as per the provisions of law the right course of action for the assessee is either to file rectification application under section 154 of the Act or appeal under section 246 of the Act. The assessee is required to choose the right course of action diligently which depends upon different facts and circumstances.
At the same time the Tribunal observed that the object for making the adjustment in the intimation under section 143(1) of the Act or framing the assessment under section 143(3) of the Act is to determine the income and tax liability correctly as per the provisions of law.
The Tribunal noted that as per case law relied upon by the Revenue, the assessee in the said case has preferred an appeal before the CIT(A) against the adjustment made under section 143(1) of the Act which was subsequently withdrawn by the assessee as the case of the assessee was picked up under scrutiny. In this background the Co-ordinate Bench of the Tribunal, had denied accepting the issue raised in the intimation under section 143(1) of the Act. It is because, once the assessee has withdrawn the appeal filed before the lCIT(A), the issue arises from the intimation under section 143(1) of the Act reached to the finality. However, the facts of the case on hand were different in as much as the assessee has not filed any appeal before the learned CIT(A) under the bona fide belief that the matter may picked up under scrutiny. Furthermore, the assessee had brought to the notice of the NFAC about the adjustment made under section 143(1) of the Act which can be verified from the details.
The Tribunal further noted that Jodhpur Bench of ITAT in a case where the assessee had not filed appeal against the CPC intimation u/s 143(1) had held that although, the assessee might have chosen a wrong channel for redressal of his grievance, all the same, it is incumbent upon the Tax authorities to burden the assessee only with correct amount of tax and not to unjustly benefit at the cost of tax payer. The Bench had restored the issue to the file of the Assessing officer with a direction to pass appropriate orders deleting the addition / disallowance after duly considering the settled judicial position.
In view of the above, the Tribunal, in the interest of justice and fair play accepted the issue arising from intimation under section 143(1) of the Act in the proceedings arising under the provisions of section 143(3) r.w.s. 144C of the Act.
Since, the impugned issue raised under section 143(1) of the Act had not been looked into by the lower authorities, therefore the issue was set aside to the file of the AO for fresh adjudication as per the provisions of law.
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