Reporting in Clause 16(d) of Form 3CD – No adjustment by CPC for non business income if declared in return separately – ITAT clarifies the provision
Reporting income falling under the head other than “business income” under clause 16(d) of Audit Report (Form 3CD) has triggered CPC intimations for adjustments u/s 143(1)(a). Going by the wordings of said clause 16(d), auditors have little choice than reporting income under the heads, “income from other sources” and “income from house property”, “income claimed exempt” under the said clause. Further in clause 16(d), there is no option to specify the reasons or justifications for the same.
Interestingly, the Guidance Note on Tax Audit u/s 44AB issued by the ICAI does not give any guidance on this issue. The relevant clause 28.10 of the guidance Note is reproduced hereunder:
“Sub-clause (d) covers any other items which the tax auditor considers as an income of the assessee based on his verification of records and other documents and information gathered, but which has not been credited to the profit and loss account. In giving the details under sub-clauses (c) and (d), due regard should be given to AS-9 -Revenue Recognition/Ind AS 18 Revenue, as applicable.”
However, in a recent judgment, the Hon’ble Income Tax Appellate Tribunal (ITAT) Allahabad had an occasion to deal with this issue. While deleting the adjustments made by the CPC, the ITAT directed that copy of its order to be sent to Chairman, CBDT for taking appropriate measures to avoid the hardship, harassment and suffering of honest tax payers in future..
ABCAUS Neutral Case Law Citation:
ABCAUS 3694 (2023) (04) ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) CIT(A) National Faceless Appeal Centre (NFAC) in confirming the adjustments made by the Central Processing Unit (CPC) Bengaluru u/s 143(1)(a) of the Income Tax Act, 1961 (the Act).
The return of income of the appellant assessee was processed under section 143(1)(a) of the Act by the CPC making adjustment/addition based on clause 16(d) of Auditors Report in Form 3CD being any other item of income not credited to the profit and loss account.
The case of the assessee was that the impugned additions had been made merely on the basis of disclosure made by the Tax Auditor in Clause No. 16(d) to his tax audit report furnished in Form 3CB alongwith Form 3CD despite the income under question had been duly declared by the appellant under the head “income from house property” and “income from other sources” in his return of income.
It was further submitted that apart from the above exempt interest had been specifically reported in the return of income under the head exempt income but the CPC had made the adjustment and addition on account of these exempt incomes also.
It as contended that adjustment had been made mechanically and resulted double taxation of certain incomes as well as the taxation of exempt income which was highly wrong.
The ITAT opined that without any doubt clause 16(d) of the Tax audit report describes any other item of income which is entirely different from the business income falling within the scope of section 28 as clearly mentioned in Clause 16(a) of Form-3CD.
The ITAT opined that the Tax Auditor reported this income under Clause 16(d) of Form 3CB however, the nature of income was non business income.
The ITAT went on to say that it was a mistake on the part of the Tax Auditor in reporting the income not forming part of business income of the assessee in Clause 16(d) and it would not ipso-facto lead to addition or adjustment in the business income particularly when the assessee already declared the said income or claimed it exempt.
The ITAT observed that adjustment made by the CPC firstly resulted in double taxation of the income already declared by the assessee under the head income from house property and income from other sources and secondly it has also resulted the taxation of the exempt income.
The ITAT stated that the CIT(A) had simply confirmed the adjustments made by the CPC by referring to the ICAI guidance note on the tax audit u/s 44AB of the Act and ignoring relevant and crucial facts.
The ITAT that the impugned order had been passed by the CIT(A) mechanically without application of mind which making the assessee suffer financial loss on account of appeal fee, litigation expenditure as well as mental agony and suffering.
Accordingly, the ITAT directed the deletion of the additions made by the CPC.
Download Full Judgment Click Here >>
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