Month: January

ISSUE FOR CONSIDERATION

Under section 2(24)(x) of the Income-tax Act, 1961, any sum received by an employer from his employees as contributions to any provident fund, superannuation fund, ESIC fund or any other employees’ welfare fund is in the first place taxable as income of the employer. The employer can thereafter claim a deduction of such amount from his income under section 36(1)(va) or section 57(ia), if the amount is credited by him to the employee’s account on or before the due date. For this purpose, “due date” has been defined as the date by which the employer is required to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order, notification, or any standing order, award, contract of service, or otherwise.

Various High Courts, including the Bombay High Court in the case of CIT vs. Ghatge Patil Transports 368 ITR 749, had interpreted this provision to be on par with section 43B, which applies with respect to employer’s contribution to these welfare funds, and held that so long as such employees’ contributions were paid before the due date of filing the income tax return under section 139(1), as required by section 43B, such employees’ contributions were also allowable as a deduction even where the deposits were made outside the time limits provided by the respective welfare statutes.

On 12th October, 2022, this controversy as applicable to assessments up to AY 2020-21, is resolved by the Supreme Court in the case of Checkmate Services (P) Ltd vs. CIT 448 ITR 518, where the Supreme Court held that there was a marked difference between employer’s contribution and employee’s contribution held in trust by the employer and that for the purposes of section 36(1)(va), the payment had to be made before the due date applicable under the relevant Act applies to the contribution for an effective claim under the Income-tax Act.

An Explanation 2 to section 36(1)(va) has also been inserted by the Finance Act, 2021 with effect from A.Y. 2021-22, clarifying for removal of doubts, that the provisions of section 43B shall not apply and shall be deemed to never have applied for the purposes of determining the “due date” under section 36(1)(va). In spite of the amendment, interpreting the language of the amendment, the benches of the Tribunal have taken a view, prior to 12th October, 2022, that such amendment applied prospectively from A.Y. 2021-22, and not to earlier years and with that the disallowance where made was deleted.

In the meanwhile, prior to the Supreme Court judgment in Checkmate Services’ case (supra), even for assessment years prior to A.Y. 2021-22, adjustments were being made, by the AO(CPC), under section 143(1)(a) in respect of the payments made after the due date under the respective Act but before the due date of filing of the return of income, based on disclosures of payments made in the tax audit report furnished under section 44AB. In fact, in some of the cases, it has been held that no disallowance was possible while issuing an intimation u/s 143(1) simply on the basis of the tax audit report.

While processing the return of income, section 143(1)(a) permits adjustments of, amongst others:

(i) …………………………….;

(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;

(iii) ………;

(iv) Disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;

(v) ……………..

Till Checkmate Services decision (supra), the benches of the Tribunal had generally been taking a view that such an adjustment leading to the disallowance of the claim was not permissible u/s 143(1)(a), since the question of allowance or otherwise was a debatable one, in view of the various High Courts and Tribunal decisions.

The issues have arisen recently before the Tribunal, as to whether, (a) taking into account the subsequent Supreme Court decision in Checkmate Services (supra), such adjustments made u/s 143(1)(a) prior to the Supreme Court decision in Checkmate Services case, for disallowing the employees’ contribution u/s 36(1)(va) where payments were made by the employer after the due date under the respective Acts but before the due date of filing of the return of income, could have been validly made (b) will the ratio of the decision would apply only where the order is passed u/s143(3) and will not apply to the cases of the adjustment being made in issuing intimation u/s143(1) which will continue to be not permissible and (c) the adjustment will be possible based on the reporting by the tax auditor. While the Pune, Panaji, Chennai and Bangalore benches of the Tribunal have held that such adjustment u/s 143(1) by AO(CPC) for disallowing the claim was valid, the Mumbai bench of the Tribunal has held that such an adjustment could have been made u/s 143(3) only prior to the Supreme Court decision in Checkmate Services case. Further, the Pune bench of the Tribunal held that the adjustment in issuing the intimation by disallowing the claim based on the tax audit report was permissible for the AO, many other benches including the Mumbai and Hyderabad held that such an adjustment simply based on such a report was not permissible. Once again the Mumbai bench has observed that the ratio of the decision in Checkmate’s case was applicable only for disallowance of the claim where an assessment was completed u/s143(3), the Pune bench has not made any such distinction in upholding the disallowance made while issuing the intimation u/s143(1).

CEMETILE INDUSTRIES’ CASE

The issue came up before the Pune bench of the Tribunal in the case of Cemetile Industries vs. ITO 220 TTJ (Pune) 801, and many assessees. The assessment years involved in these cases were from A.Y. 2017-18 to AY 2020-21.

In this lead case, relating to A.Y. 2018-19, the tax audit report filed by the assessee highlighted the due dates of payment to the relevant funds under the respective Acts relating to employees’ share, and the dates by which the amounts were deposited by the assessee after such due dates but before the filing of the return u/s 139(1). The assessee was of the view that such payments before the due date as per section 139(1) amounted to sufficient compliance in terms of section 43B and were not disallowable in issuing the intimation u/s143(1).

The return of the assessee was processed u/s 143(1), making disallowance u/s 36(1)(va) of Rs 3,40,347, on the ground that the amount received by the assessee from its employees as a contribution to Employees Provident Fund, ESIC, etc was not credited to the employees’ accounts on or before the due date prescribed under the respective Acts. The assessee applied for rectification under section 154, which was rejected. The Commissioner (Appeals) also rejected the assessee’s appeal.

Before the Tribunal, the Department contended that the disallowance was called for because of the per se late deposit of the employees’ share beyond the due date under the respective Act, and that section 43B was of no assistance in view of the decision of the Supreme Court.

The Tribunal analysed the provisions of sections 2(24)(x) and 36(1)(va). It observed that it was axiomatic that the deposit of the employees’ share of the relevant funds before the due dates under the respective Acts was sine qua non for claiming the deduction and if the contribution of the employees to the relevant funds was not deposited by the employer before the due date under the respective Acts, then the deduction u/s 36(1)(va) was lost notwithstanding the fact that the share of the employees had been deposited by the due date of filing the return of income as per section 43B.

The Tribunal referring to the assessee’s reliance on section 43B for claiming deduction noted that the main provision of section 43B, providing for the deduction of employer’s contribution to such funds only on an actual payment basis, had been relaxed by the proviso so as to enable the deduction even if the payment was made before the due date of furnishing the return of income u/s 139(1) for that year. The assessee’s claim was that the deduction became available in the light of section 36(1)(va) r.w.s. 43B on depositing the employees’ share in the relevant funds before the due date under section 139(1). The tribunal observed that the said position was earlier accepted by some of the High Courts, holding that the deduction was to be allowed once the assessee deposited the employees’ share in the relevant funds before the date of filing of return under section 139(1) even though the payments were made outside of the time provided under the respective Acts. The courts had allowed the deduction on the analogy of treating the employee’s share as having the same character as that of the employer’s share, becoming deductible under section 36(1)(va) read in the light of section 43B(b).

The tribunal thereafter took note of the Supreme Court’s decision, in Checkmate Services P Ltd & Ors vs. CIT & Ors, 448 ITR 518, and observed that the apex court had threadbare considered the issue and had drawn a distinction between the parameters for allowing deduction of employer’s share and employee’s share for contribution in the relevant funds. It had been held by the court that the contribution by the employees to the relevant funds was the employer’s income u/s 2(24)(x), but the deduction for the same could be allowed only if such amount was deposited in the employee’s account in the relevant funds before the date stipulated under the respective Acts. Thereby, the tribunal noted that the earlier view taken by some of the High Courts in allowing deduction even where the amount was deposited in the employee’s account before the time allowed under section 139(1), got overturned by the apex court. The tribunal observed that the net effect of this Supreme Court judgment was that the deduction under section 36(1)(va) could be allowed only if the employee’s share in the relevant funds was deposited by the employer before the due date stipulated in the respective Acts and further that the due date under section 139(1) was alien for the purpose of deduction of such contribution.

The tribunal noted that the enunciation of law by the Supreme Court was always declaratory having effect and application ab initio, being from the date of insertion of the provision unless a judgment was categorically made prospectively applicable; the judgment would apply equally to the disallowance under section 36(1)(va) in all earlier years as well as for the assessments completed under section 143(3). It was however pointed out by the assessee that the appeals before the tribunal involved disallowance made under section 143(1) and as such no prima facie adjustment could be made in the intimation issued under section 143(1), unless the case was covered within the specific four corners of the provision, and it was stressed that the action of the AO in making the disallowance did not fall in any of the clauses of section 143(1).

The Tribunal then noted that the assessees as well as the Department were in agreement that the case of payment and its disallowance could be considered only as falling under either clause (ii) or under clause (iv) of section 143(1).

The Tribunal then noted that none of the first three clauses of explanation (a), was attracted to the facts of the case before it.

The Tribunal then proceeded to examine the provisions of clause (iv) of section 143(1)(a), which provided for disallowance of expenditure or increase in income indicated in the audit report but not taken into account in computing the total income in the return. The words “or increase in income” in the above provision were inserted with effect from the assessment year 2021-22 by the Finance Act 2021 and therefore did not apply to the assessment years in the cases before the tribunal.

The Tribunal, therefore, went on to ascertain if the disallowance made under section 36(1)(va) in the intimation under section 143(1)(a) could be construed as a disallowance of expenditure indicated in the audit report not taken into account in computing the total income in the return. The tribunal thereafter went on to examine the reporting of such payments in clause 20(b) of the tax audit report. It noted that the due date for payment had been reported (in one case as 15th July, 2017), and the actual date for payment had been reported as a later date (in that case as 20th July, 2017). Therefore, according to the tribunal, it was manifest that the audit report clearly pointed out that as against the due date of payment of the employee’s share in the relevant funds of 15th July, 2017 for deduction under section 36(1)(va), the actual payment was delayed and deposited on 20th July, 2017.

The tribunal noted that for disallowance under sub-clause (iv) of section 143(1)(a), the legislature had used the expression ‘indicated in the audit report’. According to the tribunal, the word ‘indicated’ was wider in amplitude than the word ‘reported’, which enveloped both direct and indirect reporting. Even if there was some indication of disallowance in the audit report, which was short of direct reporting of the disallowance, according to the tribunal, the case got covered within the purview of the provision warranting the disallowance. However, the tribunal expressed the view that the indication must be clear and not vague. As per the tribunal, if the indication gave a clear picture of the violation of a provision, there could be no escape from disallowance.

Examining the facts of the case, the tribunal observed that it was clear from the mandate of section 36(1)(va) that the employee’s share in the relevant funds must be deposited before the due date under the respective Acts. If the audit report mentioned the due date of payment and also the actual date of payment with specific reference in clause 20(b) – Details of contributions received from employees for various funds as referred to in section 36(1)(va), it was an apparent indication of the disallowance of expenditure under section 36(1)(va) in the audit report in a case where the actual date of payment was beyond the due date. The tribunal observed that though the audit report clearly indicated that there was a delay in the deposit of the employees’ share in the relevant funds, which was in contravention of the prescription of section 36(1)(va), the assessee chose not to offer the disallowance in computing the total income in the return, which rightly called for the disallowance in terms of section 143(1)(a).

The tribunal rejected the assessee’s argument that this was a case of increase in income, which was applicable only from the A.Y. 2021-22 and not for the relevant assessment year, on the ground that the two limbs, “disallowance of expenditure” and “increase in income” were independent of each other, and that the indication in the audit report for “increase in income” should be qua some item of income, and not increase of income because of the disallowance of expenditure. If this argument were to be accepted that even a disallowance of expenditure amounted to an increase in income, then the amendment with effect from the A.Y. 2021-22 would be redundant. According to the tribunal, interpretation had to be given to the statutory provisions in such a manner that no part of the Act was rendered nugatory.

Looking at the provisions of the tax audit report, the tribunal observed that the column giving details of the amounts received from employees indicates an increase in income if the assessee does not take the sum in computing total income, while the columns giving details of due date for payment and the actual date of payment indicate disallowance of expenditure suo moto disallowance in computing total income. In the case, before it the AO did not make adjustments for non-offering of the sums received from employees but made the adjustment for disallowance of expenditure with the remarks that “amount debited to the profit and loss account to the extent of disallowance under section 36 due to non-fulfillment of conditions specified in relevant clauses”. Therefore, according to the tribunal, it was evident that it was a case of disallowance of expenditure and not an increase in income. Further, the entire challenge by the assessee throughout had been to the disallowance of expenditure made by the AO. The assessee’s argument all along before the appellate authorities had been that the shelter of section 43B was available and disallowance could not be made because such payment was made before the due date under section 139(1).

The tribunal also rejected the assessee’s argument that the assessee did not claim any deduction in the profit and loss account of the amount under consideration and hence no deduction could have been made, holding that the deduction made from the salary had been claimed as a deduction by way of gross salary, which had been debited to the profit and loss account.

The Tribunal, therefore, upheld the adjustment made under section 143(1)(a) by disallowance of late deposit of employees’ share to the relevant funds prescribed under the respective Acts.

A similar view has also been taken by the Chennai, Bangalore and Panaji benches of the tribunal, in the cases of Electrical India vs. Addl DIT 220 TTJ (Chennai) 813, Legacy Global Projects (P) Ltd vs. ADIT 144 taxmann.com 4 (Bang), and Gurunath Yashwant Amathe vs. ADIT TS-7318-ITAT-2022(PANAJI)-O [ITA No 64/PAN/2022 dated 5th December, 2022].

P R PACKAGING SERVICE’S CASE

The issue came up again recently before the Mumbai bench of the tribunal in the case of P R Packaging Service vs. ACIT, TS-961-ITAT-2022(Mum) [ITA No 2376/Mum/2022 dated 7th December, 2022].

The assessee for the assessment year 2019-20 had remitted the employees’ contribution to the provident fund beyond the due date prescribed under the Provident Fund Act but had remitted the same before the due date of filing the return of income under section 139(1). The fact of remittance made by the assessee with delay had been reported by the tax auditor in the tax audit report. Such amount was disallowed under section 143(1), while processing the return of income.

The Tribunal, on perusal of the tax audit report, noted the tax auditor had merely mentioned the due date for remittance of provident fund as per the provident fund Act and the actual date of payment made by the assessee. According to the tribunal, the tax auditor had not even contemplated disallowance of the employees’ contribution to the provident fund wherever it was paid beyond the due date prescribed under the provident fund Act. It was merely a recording of facts and a mere statement made by the tax auditor in his audit report.

The CPC Bangalore had taken up this data from the tax audit report and sought to disallow the amount of delayed payment while processing the return under section 143(1), apparently by applying the provisions of section 143(1)(a)(iv).

Analysing the provisions of section 143(1)(a)(iv), the tribunal observed that it was very clear that this clause would come into operation when the tax auditor had suggested a disallowance of expense, but such disallowance had not been carried out by the assessee while filing the return of income. As per the tribunal, the tax auditor had not stated that the employees’ contribution to the provident fund was disallowable wherever it was remitted beyond the due date under that Act. Hence, according to the tribunal, CPC Bangalore was not correct in disallowing the employees’ contribution to the provident fund while processing the return under section 143(1), as it did not fall within the ambit of prima facie adjustments.

The tribunal further relied to a great extent upon the observations of the Mumbai bench of the tribunal in the case of Kalpesh Synthetics Pvt Ltd vs. DCIT 195 ITD 142, where the tribunal had examined in detail the scope of the adjustments permissible under section 143(1)(a), and in particular, the disallowance under section 36(1)(va) in such situations where the payments were made before the due date under section 139(1), and whether the reporting in the tax audit report could be the basis of such disallowance.

The tribunal observed that it was conscious of the recent Supreme Court decision in Checkmate Services (supra), where the issue had been decided on merits. It however observed that such a decision was rendered in the context where the assessment was framed under section 143(3), and not under section 143(1)(a).

Therefore, the tribunal deleted the addition made with respect to employees’ contribution to the provident fund made under section 143(1)(a).

OBSERVATIONS

Adjustment should be possible u/s143(1)(a) while issuing any intimation under s.143(1) after 12th October 2022 in respect of the amounts remaining to be paid by the due dates prescribed under the respective Acts for payment of the welfare dues contributed by the employees even though paid by the due dates of the filing of the return of income .under s. 139(1) of the Income-tax Act. After the Supreme Court decision in the case of Checkmate Services (supra), there should be no debate that the delayed payment of employee contributions to such funds after due dates under the respective Acts is disallowable under section 36(1)(va), even if such payment is made before the due date under section 139(1). In that view of the matter, the observation of the Mumbai bench of the Tribunal that the ratio of the decision of the apex court was applicable only to the assessments made under s. 143(3), in our respectful opinion, requires reconsideration.

The issue however continues to be relevant where such adjustment is made under section 143(1)(a), before the decision of the Supreme Court, at which point of time the matter was debatable, given the decisions of various High Courts.

Can an adjustment by way of a disallowance which was debatable at the relevant point of time that it was made, be held to be permissible under s.143(1), because of a subsequent Supreme Court decision which settles the debate on the disallowance? In other words, has the disallowability of the expenditure to be seen as per the legal position taken by the Courts as prevailing at the time of making the adjustment, or at the point of time when the appeal against the adjustment is being decided? Can it be held that the issue was never debatable in as much as the law declared subsequently by the decision of the apex court was always the law and, therefore, any adjustment if made before the decision should be considered in consonance with the law.

The Supreme Court, in the case of DCIT vs. Raghuvir Synthetics Ltd 394 ITR 1, has held that the decision of the jurisdictional High Court is binding, the issue is therefore not debatable in relation to assessees within that jurisdiction and therefore held that the adjustment could be made u/s 143(1)(a) (as it stood for AY 1994-95, when the law permitted adjustment of prima facie disallowances) in respect of such assessees. This would therefore indicate that at the time of making the adjustment, the law prevalent in the relevant High Court jurisdiction on the date of making the adjustment has to be considered.

However, the fact remains that on a ruling given by the Supreme Court on the issue, overruling the relevant High Court decision, the legal position is as if the relevant High Court ruling had never been in existence. In Southern Industrial Corporation vs. CIT 258 ITR 481, the Madras High Court held that when a statutory provision is interpreted by the Apex Court in a manner different from the interpretation made in the earlier decisions by a smaller Bench, ( or by the lower court) the order which does not conform to the law laid down by the larger Bench in the later decision, the later decision would constitute the law of the land and is to be regarded as the law as it always was, unless declared by the Court itself to be prospective in operation. Besides, it is also well settled law that a decision of the Supreme Court on an issue can form the basis for rectification of a mistake apparent from the record under section 154. This being the position, can an adjustment be held to be invalid based on a then prevalent decision of the jurisdictional High Court, which has ceased to exist after the Supreme Court ruling?

The enunciation of law by the Supreme Court is always declaratory having effect and application ab initio, being from the date of insertion of the provision, unless a judgement is categorically made prospectively applicable; the judgement as observed by the Pune bench would apply equally to the disallowance under section 36(1)(va) in all earlier years as well as for the assessments completed under section 143(3).

The better view of the matter, though unfair to the assessee who did not have the benefit of the Supreme Court ruling when he filed his return, seems to be that of the Pune, Chennai, Panaji and Bangalore benches of the Tribunal, that such subsequent Supreme Court decision validates the prior adjustment made, as the Supreme Court enunciates the law as it always stood. The appellate authorities should not be precluded from extending its powers to give effect to the subsequent decision of the apex court in adjudicating the appeal before them.

It is possible to hold that the appeals before the tribunal involved disallowance made under section 143(1) and as such no prima facie adjustment could be made in the intimation issued under section 143(1), unless the case was covered within the specific four corners of the provision and that the action of the AO in making the disallowance did not fall in any of the clauses of section 143(1). To meet such a contention, an alternative way of confirming the abovementioned better view and putting the said view beyond doubt is by rectifying or revising or reassessing the income wherever otherwise permissible in law and is within the prescribed time or by the appellate authorities exercising its enhancement powers while adjudicating the appeal.

The other issue is whether any disallowance of expenditure under sub-clause (iv) of clause (a) of sub-section (1) of s.143 on the basis of the words “indicated in the audit report” would include a conclusion drawn from facts given in the audit report, or would cover only express disallowance identified by the auditor in the tax audit report and whether the tax audit report observations can at all be the basis for adjustment u/s 143(1). The observations of the Mumbai bench of the Tribunal, in Kalpesh Synthetics case (supra) in this regard are summarized as under:

• The precise and proximate reason for disallowance is the inputs based on the tax audit report.
• Can the observations in a tax audit report, by themselves, be justification enough for any disallowance of expenditure under the Act?
• Section 143(1)(a)(iv) specifically calls for 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 suggest 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 143(1) by the CPC.
• The tax auditor is an independent person though appointed by the assessee.
• The fact remains that the tax auditor is a third party, and his opinions cannot bind the auditee in any manner.
• The audit observations are seldom taken as an accepted position by the auditee.
• They are mere opinions and at best these opinions flag the issues which are required to be considered by the stakeholders.
• On such a fine point of law, considering the conflicting views of the courts, these audit reports are inherently even less relevant.
• Audit report requires reporting of a factual position rather than expressing an opinion about the legal implication of that position.
• Assuming the finality of the observations by an auditee with, the audit observations, is too unrealistic and incompatible with the very conceptual foundation of independence of an auditor.
• Elevating the status of the observations of a tax auditor to a level above that of the Hon’ble Courts seems incongruous and is clearly unsustainable in law.
• It is for the Hon’ble Constitutional Courts to take a call on the vires of this provision, and the tribunal is nevertheless required to interpret the 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.
• Under Article 141 of the Constitution of India, the law laid down by the Hon’ble Supreme Court unquestionably binds all. East India Commercial Co. Ltd. vs. Collector of Customs 1962 taxmann.com 5
• On a combined reading of articles 215, 226, and 227 It would be anomalous to suggest that a Tribunal over which the High Court has superintendence can ignore the law declared by that Court and start proceedings in direct violation of it.
• It is implicit that all the Tribunals subject to courts’ supervision should conform to the law laid down by it.
• The views expressed by the tax auditor, cannot be reason enough to disregard the binding views of the 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”.
• 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.
• What a tax auditor states in his report are his opinion and his opinion cannot bind the auditee at all. It is not even an expression of opinion about the allowability of deduction or otherwise; it is just a factual report about the fact of payments and the fact of the due date as per the Explanation to section 36(1)(va).
• It cannot, therefore, be said that the reporting of payment beyond this due date in the tax audit report constituted “disallowance of expenditure indicated in the audit report but not taking into account in the computation of total income in the return” as is sine qua non for disallowance of section 143(1)(a)(iv).
• When the due date under Explanation to section 36(1)(va) is judicially held to be not decisive for determining the disallowance in the computation of total income, there is no good reason to proceed on the basis that the payments having been made after this due date is “indicative” of the disallowance of expenditure in question.
• While preparing the tax audit report, the auditor is expected to report the information as per the provisions of the Act, and the tax auditor has done that, but that information ceases to be relevant because, in terms of the law laid down by Hon’ble Courts, the said disallowance does not come into play when the payment is made well before the due date of filing the income tax return under section 139(1).

In contrast, it is important to reiterate in a summarized manner the observations of the Pune bench of the Tribunal in the context of the reporting of such payments in clause 20(b) of the tax audit report.

• Where an auditor reported that the due date for payment was 15th July, 2017 and the actual date for payment had been reported as a later date (in that case as 20th July, 2017, it was manifest that the audit report clearly pointed out that as against the due date of payment of the employee’s share in the relevant funds of 15th July, 2017 for deduction under section 36(1)(va), the actual payment was delayed and deposited on 20th July, 2017.
• That for disallowance under sub-clause (iv) of section 143(1)(a), the legislature had used the expression ‘indicated in the audit report’ and the word ‘indicated’ was wider in amplitude than the word ‘reported’, which enveloped both direct and indirect reporting.
• Even if there was some indication of disallowance in the audit report, which was short of direct reporting of the disallowance, the case got covered within the purview of the provision warranting the disallowance.
• However, the indication must be clear and not vague. If the indication gave a clear picture of the violation of a provision, there could be no escape from disallowance.
• If the audit report mentioned the due date of payment and also the actual date of payment with specific reference in clause 20(b) – Details of contributions received from employees for various funds as referred to in section 36(1)(va), it was an apparent indication of the disallowance of expenditure under section 36(1)(va) in the audit report in a case where the actual date of payment was beyond the due date.
• Though the audit report clearly indicated that there was a delay in the deposit of the employees’ share in the relevant funds, which was in contravention of the prescription of section 36(1)(va), the assessee chose not to offer the disallowance in computing the total income in the return, which rightly called for the disallowance in terms of section 143(1)(a).

Sub-clause(iv) in express words requires an AO(CPC) to disallow the amount of expenditure that is indicated in the tax audit report and is not taken into account in computing the total income in the return. Without questioning the wisdom of the law passed by the legislature, we wish to limit our views to understanding what is truly stated by the legislature by understanding the legal import of the words ‘indicated in the tax audit report’. Does the term require that for the disallowance to happen an auditor should expressly state that the amount referred to in his report is disallowable by expressing his opinion or the requirement of the tax audit report is to report by identifying the amount and thereafter it is for the AO to disallow the same? A comprehensive reading of the sub-clause(iv), in our opinion, indicates an action on the part of the AO to act by first ascertaining whether the assessee has taken into account the tax audit report in computing the total income in the return and if not only thereafter to apply the sub-clause and proceed to adjust the returned income. In our opinion, the auditor is not required to give his opinion on whether the amount reported is disallowable or not and which is rightful for the reason that the power of the AO to assess the final income is not taken away by entrusting the same to the auditor. There is no automatic disallowance possible. The role of the auditor is therefore limited to indicating the subject matter of the audit under the respective clause of the tax audit report. The dictionary meaning of the term ‘indicate’ is to point out; show, be a sign of, give a reading or state briefly. In the context of the placement, it is very difficult to hold that the term is recommendatory, more so, where the authority to disallow is strictly resting with the AO. The sum and substance of the views are that the term ‘indicated’ is limited to reporting of the quantum and is not even recommendatory of the disallowance. In other words, the reporting by the tax auditor is not a compulsion for the assessee or the AO to disallow the amount and it is only when the assessee had not suo moto disallowed the amount, the AO will use his power to act on such information.

ISSUE FOR CONSIDERATION
It is usual to come across cases where an assessee, in filing the return of income, fails to make a claim for relief on account of a rebate or deduction or exemption and also overlooks the filing of the revised return within the time prescribed u/s 139(5). His attempt to remedy the mistake by staking a claim for relief before the A.O. or the CIT(A) afresh is usually dismissed by the authority. At times, even the appellate Tribunal or the courts have not appreciated the bypassing of the statutory remedy entrusted u/s 139(5), more so after the decision of the Supreme Court in the case of Goetze (India) Ltd., 284 ITR 323 was delivered, a decision interpreted by the authorities and at times by the Courts to have laid down the law that requires an assessee to stake a fresh claim, not made while filing the return of income, only by revising the return within the prescribed time.

Several Benches of the Tribunal and the Courts, after due consideration of the said decision of the Apex Court, have permitted the assessee to stake a fresh claim, which claim was not made while filing the return of income or by revising the same in time, either by filing an application during the course of the assessment or, at the least, while adjudicating the appeal. At a time when it appeared that the law was reasonably settled on the subject, the recent decision of the Kerala High Court has warned the assessee that the last word on the subject has not yet been said. It held that the claim for relief, not made vide a return, revised or otherwise, could not be made before the A.O. or even before the appellate authorities.

RAGHAVAN NAIR’S CASE
The issue recently came up for the consideration of the Kerala High Court in the case of Raghavan Nair, 402 ITR 400. The assessee had received a certain sum of money during F.Y. 2014-15 pertaining to A.Y. 2015-16 by way of compensation for land acquired from him for a Government project. The assessee offered the receipt for taxation in filing the return of income under the head capital gains. During the course of the scrutiny assessment, the assessee claimed that the compensation received was not taxable in the light of section 96 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. The assessee requested for the relief vide a letter which was denied by the A.O., against which the assessee filed a writ petition before the Court.

The Court noted that the assessee, when he was made to understand that he had no liability to pay tax on capital gains, could not file a revised return since the time for filing the revised return had expired by the time he came to know that there was no such liability to pay tax.

At the hearing, the Court held that it was the duty of the A.O. to refrain from assessing an income even if the same had been included by mistake by the assessee in his return of income filed. The Court held that the decision of the Supreme Court was not applicable to the facts of the case by explaining the implication of the decision of the Apex Court as: ‘The question that arose in Goetze (India) Ltd.’s case (Supra) was whether an assessee could make a claim for deduction other than by filing a revised return. As noted above, the question in the case on hand is whether the A.O. is precluded from considering an objection as to his authority to make an assessment u/s 143 merely for the reason that the petitioner has included in his return an amount which is exempted from payment of tax and that he could not file a revised return to rectify the said mistake in the return. The decision of the Apex Court in the Goetze case has, therefore, no application to the facts of the present case.’

The High Court held that this was a clear case where the A.O. had penalised the assessee for having paid tax on an income which was not exigible to tax. It noted that in the light of the mandate under article 265 of the Constitution, no tax should be levied or collected except by authority of law. The Court relied on the observations of the Apex Court in the case of Shelly Products 129 Taxman 271:

‘We cannot lose sight of the fact that the failure or inability of the Revenue to frame a fresh assessment should not place the assessee in a more disadvantageous position than in what he would have been if a fresh assessment was made. In a case where an assessee chooses to deposit by way of abundant caution advance tax or self-assessment tax which is in excess of his liability on the basis of the return furnished, or there is any arithmetical error or inaccuracy, it is open to him to claim refund of the excess tax paid in the course of the assessment proceeding. He can certainly make such a claim also before the authority concerned calculating the refund. Similarly, if he has by mistake or inadvertence or on account of ignorance, included in his income any amount which is exempted from payment of Income-Tax, or is not income within the contemplation of law, he may likewise bring this to the notice of the assessing authority, which if satisfied, may grant him relief and refund the tax paid in excess, if any. Such matters can be brought to the notice of the authority concerned in a case when refund is due and payable, and the authority, on being satisfied, shall grant appropriate relief. In cases governed by section 240 of the Act, an obligation is cast upon the Revenue to refund the amount to the assessee without his having to make any claim in that behalf. In appropriate cases, therefore, it is open to the assessee to bring facts to the notice of the authority concerned on the basis of the return furnished, which may have a bearing on the quantum of the refund, such as those the assessee could have urged u/s 237 of the Act. The authority, for the limited purpose of calculating the amount to be refunded u/s 240 of the Act, may take all such facts into consideration and calculate the amount to be refunded. So viewed, an assessee will not be placed in a more disadvantageous position than what he would have been, had an assessment been made in accordance with law.’

Accordingly, the Court held that the A.O. should not have taxed the income that was not liable to tax even where the assessee had offered such an income for taxation and had not filed the revised return of income.

PARAGON BIOMEDICAL INDIA (P) LTD.’S CASE
The issue recently again came before the Kerala High Court in the case of Paragon Biomedical India (P) Ltd. 438 ITR 227 (Ker). In this case, the assessee had claimed a deduction u/s 10B which was disallowed by the A.O. In the appeal to the CIT(A), the assessee modified the claim for deduction from section 10B to section 10A, which was allowed by the CIT(A). On appeal by the Revenue, the Tribunal held that the CIT(A) was justified in allowing the alternative claim of deduction u/s 10A and confirmed the order of the Commissioner (Appeals) that permitted the assessee to claim the deduction under a different provision of law than the one that was applied for while filing the return of income.

On further appeal, the High Court, however, reversed the order of the Tribunal and held the order to be contrary to the principles laid down by the Apex Court in the cases of Goetze (India) Ltd. (Supra) and Ramakrishna Deo 35 ITR 312. In the light of the said decisions, the High Court termed the orders of the CIT(A) and the Tribunal as both illegal and untenable. The Court, in deciding the case, found that the decisions in the cases of National Thermal Power Co. Ltd. 229 ITR 383 (SC) and Goetze did not conflict with each other, as NTPC’s decision did not in any way relate to the power of the A.O. to entertain a claim for deduction otherwise than by filing a revised return.

OBSERVATIONS
Article 265 of the Constitution of India provides that any retention of tax collected, which is not otherwise payable, would be illegal and unconstitutional. Retaining the mandate of the Constitution, the Board vide Circular 14(XL-35) dated 11th July, 1955 reiterated that the taxing authority cannot collect or retain tax that is not authorised by law and further that it was the duty of the assessing authority to ensure that a relief allowable to an assessee in law shall be allowed to him even where such a claim is not made by him in filing the return of income.

An A.O. has been vested with the power to assess the total income and in doing so he has wide powers to bring to tax any income, whether or not disclosed in the return of income. He also has the powers to rectify any mistakes. The Board has invested in him the power to grant the reliefs and rebates that an assessee is entitled to but has failed to claim while filing the return of income. [CBDT Circular No. 14 dated 11th July, 1955]. This Circular is relied upon by the Courts to hold that an A.O. is duty-bound to grant such reliefs and rebates that an assessee is entitled to, based on the records available, even where not claimed by the assessee in filing the return of income or otherwise.

Section 139(5) provides for filing of a revised return of income in cases where the return furnished contains any omission or any wrong statement within the prescribed time independent of the powers and the duties of the A.O. It was a largely settled understanding that an assessee could make a claim for a relief or rebate, during the course of assessment, by filing a petition without filing a revised return of income even after the time of filing such return has expired. The Apex Court, however, in one of the decisions (Goetze), held that a rebate or a relief can be claimed by an assessee only by filing of a revised return of income. This decision has posed various challenges, some of which are:

• Whether an A.O. can entertain a petition outside of the revised return and allow a relief claimed by the assessee.
• Whether an A.O. is duty-bound to allow a relief even where not claimed in the return filed by the assessee where no petition or revised return is filed.
• Whether an A.O. is bound to allow such a relief where the material for such relief is available on his records though no petition or revised return is filed.
• Whether an A.O. is required to allow a petition for a modified claim for relief, which was otherwise claimed differently in the return of income filed, without insisting on the revised return of income.
• Whether an appellate authority, being CIT(A) or the Tribunal, can entertain a petition for a relief not claimed or allowed in any of the above situations.

Section 143, as noted above, has invested the A.O. with wide powers in assessing the total income and bringing to tax the true or real income of the assessee, whether or not disclosed in the return of income, even where no return has been filed by an assessee. Sections 250(5) and 251(1) have invested a CIT(A) with powers that are consistently held by the Courts to be coterminus with the powers of an A.O.; he can do everything that an A.O. could have done and has all those powers which an A.O. has, besides the power of enhancement of an income that has not been brought to tax by the A.O. in the course of adjudicating an appeal, subject to a limitation in respect of the new source of income. The appellate Tribunal is vested with powers u/s 254(1) that are held to be wide enough to include entertaining a claim for the first time, subject to certain limitations.

By now it is the settled position in law that the appellate authorities have the power to entertain a new or a fresh claim for relief made by the assessee for the first time before them subject to providing an opportunity to the A.O. to put up his case. This is clear from the reference to the following important decisions:

The Supreme Court in the case of Jute Corporation of India Ltd., 187 ITR 688 dealt with a case where the assessee, during the pendency of its appeal before the AAC, raised an additional ground claiming deduction of certain amount on account of liability of disputed purchase tax, not claimed while filing the return of income. The AAC permitted the assessee to raise the additional ground and after hearing the ITO, accepted the assessee’s claim and allowed the deduction. However, the Tribunal held that the AAC had no jurisdiction to entertain the additional ground or to grant relief to the assessee on a ground which had not been raised before the ITO. On appeal to the Supreme Court, the Court, following its decision in the case of Kanpur Coal Syndicate, 53 ITR 225, delivered by a Bench of three judges and dissenting from its later decision in the case of Gurjaragraveurs (P) Ltd., 111 ITR 1 delivered by a Bench of two judges, held as under:

‘The Act does not contain any express provision debarring an assessee from raising an additional ground in appeal and there is no provision in the Act placing restriction on the power of the appellate authority in entertaining an additional ground in appeal. In the absence of any statutory provision, the general principle relating to the amplitude of the appellate authority’s power being coterminous with that of the initial authority should normally be applicable. If the tax liability of the assessee is admitted and if the ITO is afforded an opportunity of hearing by the appellate authority in allowing the assessee’s claim for deduction on the settled view of law, there appears to be no good reason to curtail the powers of the appellate authority u/s 251(1)(a). Even otherwise an appellate authority while hearing an appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it, subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appeared to be no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO.’

The Supreme Court in the case of Nirbheram Deluram, 91 Taxman 181 (SC) held that the first appellant authority could modify an assessment on a ground not raised before an A.O. following Jute Corporation of India Ltd.’s case (Supra) which had held that the first appellate authority could permit an additional ground not raised before the A.O.

The Kerala High Court, in the case of V. Subhramoniya Iyer, 113 ITR 685, held that the first appellate authority had the power to substitute the order of an A.O. with his own order and the Gujarat High Court in the case of Ahmedabad Crucible Co., 206 ITR 574 held that the powers of the first appellate authority extended beyond the subject matter of assessment, which powers were held to include the power to make an addition on a ground not considered by the A.O.

The Supreme Court in the National Thermal Power Corporation case (Supra) confirmed the judicial view that in cases where a non-taxable receipt was taxed or a permissible deduction was denied, there was no reason why the assessee should be prevented from raising the claim before the second appellate authority for the first time, so long as the relevant facts were on record pertaining to the claim. This condition of the availability of the evidence on records is also waived where the fresh issue relates to the moot question of law or goes to the root of the appeal. Even otherwise, the courts are liberal in upholding the powers of the second appellate authorities generally to entertain a lawful claim.

This understanding and the contours of law are not sought to be disturbed even by the decision of the Apex Court delivered in the Goetze case, which rather confirmed that the said decision was independent of the powers of the appellate authorities. In fact, the appellate authorities regularly entertained a fresh claim by relying on the said decision. It is this settled position of law, even post-Goetze, that is sought to be disturbed by the recent Kerala High Court decision in the case of Paragon Biomedical (Supra) when holding that the claim made before the A.O., outside the revised return of income, was not entertainable. Even when the CIT(A) entertained and allowed such a claim, the said claim was found to be not permissible in law by the Court.

And even prior to the decision of the Kerala High Court, the Madras High Court in the case of Shriram Investments Ltd. (TCA No. 344 of 2005) and the Chennai Bench of the Tribunal in the case of Litostroj, 54 SOT 37 (URO) following the said Madras High Court decision, had held that relief could have been claimed only by filing a revised return of income.

We are of the considered opinion that the position in law settled by the series of Supreme Court decisions permitting the assessee to raise a new or a fresh claim before the appellate authorities is nowhere unsettled by the decision in Paragon Biomedical and a few other cases. In fact, had these decisions of the Supreme Court been cited before the High Court, the decision of the Court would surely have been otherwise. The case before the Kerala High Court was not represented by the assessee before the Court and the representative of the Revenue seems to have failed to bring these cases to the notice of the Court. [Please see Pruthvi Stock Brokers Ltd., 23 taxmann.com 23 (Bom); Kotak Mahindra Bank Ltd., 130 taxmann.com 352 (Kar); Ajay G. Piramal Foundation, 228 Taxman 332 (Del).]

The real issue of the assessee’s power to claim a relief or a rebate outside of a revised return of income, under a petition to the A.O. during the course of assessment, appears to have been soft-pedalled by the Courts either by holding that the A.O. was duty-bound, under the Circular No. 14 of 1955, to allow the relief on his own based on records available, as was done in the cases of Sesa Goa Ltd., 117 taxmann.com 548 (Bom) or CMS Securitas, 82 taxmann.com 319 (Mum) or Perlos, ITA No. 1037/Madras/2013, to name a few, and alternatively by holding that the claim for relief, made outside the revised return before the A.O. was not a new or a fresh claim but was a modified claim based on a mistaken provision of law or the quantum or the failure to claim a relief for which the reports and other material were available on record, as was held in the cases of Malayala Manorama, 409 ITR 358 (Ker), Ramco Engineering, 332 ITR 306 (P&H), Influence, 55 taxmann.com 192 (Del), Shri Balaji Sago Agro, 53 SOT 15 (Mad), Perlos, ITA No. 1037/Madras/2013 and also in Raghavan Nair (Supra), 402 ITR 400 by the same Kerala High Court. [Please also see Sam Global, 360 ITR 682 (Del), Jai Parabolic, 306 ITR 42 (Del), Natraj Stationery, 312 ITR 22 (Del) and Rose Services, 326 ITR 100 (Del).]

A fresh claim for relief is different from a revised claim for relief. In cases where a claim has been made while filing the return of income and is modified or is enhanced or is made under a different provision of the law, the case can be classified as a case of a revised claim, and not a fresh claim. The outcome can be different in cases where the evidence in support of the fresh claim is available on record, from cases where such evidence is not available on record.

The issue of an assessee’s right to claim a relief or a rebate, outside the revised return of income post Goetze, has been addressed directly in the case of CMS Securitas Ltd., 82 taxmann.com 319 by the Mumbai Bench of the Tribunal in favour of the assessee, while the Chennai Bench of the Tribunal in the case of Litostroj, 54 SOT 37 (URO), following an unreported decision of the Madras High Court in the case of Shriram Investments Ltd. [T.C. (A) No. 344 of 2005, dated 16th June, 2011] restored the matter to the file of the A.O. to verify the facts, instead of upholding the power of the CIT(A) to entertain a fresh claim.

In Goetze the question raised in the appeal by the assessee related to whether the assessee could make a claim for deduction other than by filing a revised return by way of a letter before the A.O. The deduction was disallowed by the A.O. on the ground that there was no provision under the Act to make an amendment in the return of income by an application at the assessment stage without revising the return. In the appeal, the assessee had relied upon the decision in the case of National Thermal Power Co. Ltd. (Supra) to contend that it was open to the assessee to raise the points of law even before the appellate Tribunal. The Court noted that the said decision dealt with the power of the Tribunal to entertain a claim where the facts relating to the law were available on record, and that it did not in any way relate to the power of the A.O. to entertain a claim for deduction otherwise than by filing a revised return; and that the NTPC decision could not be relied upon to allow the claim before the A.O. outside the revised return of income. The appeal of the assessee was dismissed by clarifying that the issue in the case was limited to the power of the assessing authority and did not impinge on the power of the appellate Tribunal u/s 254.

The better view therefore is that the appellate authority certainly has the right to consider a fresh or revised claim made by the assessee in appeal, and certainly so in respect of a claim made for which the relevant facts are already on record.

Besides the issue under consideration w.r.t. section 139(5), the issues regularly arise where a fresh claim is sought to be made while filing the return in response to a notice u/s 153A / 153C, abated or not, or section 148, or where such a claim is sought to be made in a revision application u/s 264 or by filing rectification u/s 154 or on application u/s 119(2)(b).

A fresh claim was held to be permissible in the return filed in response to notice u/s 153A / 153C in case of abated assessment [JSW Steel Ltd., 422 ITR 71 (Bom), B.G. Shirke Construction Technology (P) Ltd., 79 taxmann.com 306 (Bom)] and where assessment was unabated and incriminating documents were found for that year [Sheth Developers (P) Ltd., 210 Taxman 208 (Mag)(Bom), Neeraj Jindal, 393 ITR 1 (Del), Kirit Dahyabhai Patel, 80 taxmann.com 162 (Guj), Shrikant Mohta, 414 ITR 270 (Cal)]. In contrast, the courts in a few other cases have held that the assessee is not permitted to stake such a fresh claim that was not made in the return filed u/s 139.

In the context of the return of income filed in response to a notice u/s 148, it was held that a fresh claim was not permissible in the cases of Caixa Economica De Goa, 210 ITR 719 (Bom), Satyamangalam Agricultural Producer’s Co-operative Marketing Society Ltd.,357 ITR 347 (Mad) and K. Sudhakar S. Shanbhag, 241 ITR 865 (Bom).

In contrast, a fresh claim was held to be permissible in filing a revision application u/s 264. [Vijay Gupta, 386 ITR 643 (Del), Assam Roofing Ltd., 43 taxmann.com 316 (Gau), S.R. Koshti, 276 ITR 165 (Guj), Sharp Tools, 421 ITR 90 (Mad), Shri Hingulambika Co-operative Housing Society Ltd. 81 taxmann.com 157 (Kar), Agarwal Yuva Mandal, 395 ITR 502 (Ker), EBR Enterprises, 415 ITR 139 (Bom), Kewal Krishan Jain, 42 taxmann.com 84 (P&H).]

In the cases of Curewel (India) Ltd., 269 Taxman 397 (Del) it was held permissible to place a fresh claim while an assessment is being made afresh in pursuance of an order setting aside the original order of assessment. But see also Saheli Synthetics (P) Ltd., 302 ITR 126 (Guj).

In filing an application for rectification u/s 154, it was held permissible to file a fresh claim [Nagaraj & Co. (P) Ltd., 425 ITR 412 (Mad), Anchor Pressings (P) Ltd., 161 ITR 159 (SC), Gujarat State Seeds Corpn. Ltd., 370 ITR 666 (Guj) and NHPC Ltd., 399 ITR 275 (P&H).]

An assessee who has missed making a claim in the return of income, may explore the possibility of filing an application to the CBDT u/s 119(2)(b) for permitting the filing of a revised return of income after the expiry of the time u/s 139(5). [Mrs. Leena R. Phadnis,387 ITR 721 (Bom), Mahalakshmi Co-operative Bank Ltd., 358 ITR 23 (Kar) and Labh Singh, 111 taxmann.com 53 (HP).]