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The Apex Body of the Income Tax department viz. the CBDT in its very recent Press Release dated 5.9.2023, has highlighted the commitment of the Income Tax Department to process the Income Tax Returns (ITRs) in a speedy and efficient manner and has informed that as of now more than 6 crore ITRs of AY 2023-24 have been processed resulting in processing of over 88% of the verified ITRs. The Press Release has also remarked that more than 2.45 crore refunds for AY 2023-24 have already been issued. The Press Release further stated that in line with the Department’s efforts to provide seamless and expeditious taxpayer services, average processing time of ITRs (after verification) has been reduced to 10 days for returns filed for AY 2023-24 compared to 82 days for AY 2019-20 and 16 days for AY 2022- 23. All these sincere endeavours of the CBDT and the Income tax department definitely deserve a whole-hearted applause and recognition.
Yet there are real-life testimonies of cases where the phenomenon of issuance of mechanical summary assessment/intimation orders u/s 143(1), raising exorbitant income tax demands, has also been witnessed by many taxpayers and tax practitioners. Infact the CBDT’s Press Release itself acknowledged that in cases of around 12 lakhs verified returns, further information has been sought by the department from the respective return filers, in respect of some red flags being raised by the much talked about Artificial Intelligence (AI) and Machine Learning (ML) based tools being deployed by the CPC Bengaluru, in the automated processing of the ITRs.
The most glaring and recent, real-life instance of such mechanical Intimation Order u/s 143(1)(a), being churned out by the CPC, by automated processing, using AI/ML tools is the very recent case of ‘Indus Towers Ltd v. DCIT, New Delhi & ANR. in W.P.(C) 11037/2023, dated 21.08.2023. In this case, the Intimation Order u/s 143(1)(a) was passed by CPC on July 26, 2023, making the addition of not in some lakhs or crores but the huge and exorbitant addition of Rs.12,284 crores and raising an income tax demand of Rs.3,573 crores.
In this case the assessee has filed its return for AY 2022-23 declaring income of Rs.8,166 Crores. In computing the income, the petitioner took into consideration the relevant Income Computation and Disclosure Standards [ICDS] issued under Section 145(2) of the Income Tax Act, 1961.
At present there are five operative subclauses in clause (a) of subsection (1) of section 143 of the Income Tax Act, which provide for the processing of return of income on summary assessment basis by making adjustments by way of disallowance or addition in the returned income of taxpayers on account of any arithmetical error or any incorrect claim, or disallowance of any loss/specified deductions in case of a belated return, or disallowance of any expenditure or increase in income, indicated in the audit report but not taken into account in computing the total income in the return.
Out of the five sub clauses in section 143(1)(a), sub clause (iv) in respect of disallowance indicated in Tax Audit Report, is being used more frequently by the CPC in raising demands, in the Intimation Orders.
Ironically, the Tax Audit Report is very seldom being relied upon by the assessing authorities in allowing a particular claim of the assessee in cases where assessee contends that no adverse reporting has been done by the Tax Auditor in respect of that claim but conversely in making any disallowance, the tax audit reports are considered as a sufficient and self-contained sacrosanct record of the assessee, by the assessing authorities.
The problem becomes more serious and vital when the mere reporting clauses of the Tax Audit Reports are misinterpreted as ‘Disallowance making clauses’ and that too, with only selective picking of incomplete and factually misunderstood figures.
Reporting Clause 13 in the Form 3CD Annexure of the Tax Audit Report, mandates reporting by the Tax Auditor, of all variations between the profits/(loss) as per accounting standards/IND AS and ICDS and the adjustments to be made in profit and loss for compliance with the ICDS.
It is pertinent to mention here that these adjustments to profits are both plus (increase in profits) and minus (decrease in profits).
Now, in the present case, the assessee received an Intimation via e-mail on 29.5.2023, seeking clarification on alleged incorrect claim under Section 143(1)(a)(ii) regarding disallowance of expenditure and deduction indicated in return in schedule BP not taken into account while computing the total income.
In this case, the assessee attempted to file a response on Jun 5, 2023 which could not be uploaded on the designated e-filing portal, as the appropriate tab was inoperable. The CPC’s email did not provide the breakup of the amount of Rs.214 Cr. which was under objection; The assessee lodged a grievance on the same day with Revenue’s Help Desk which was responded to on Jun 08, 2023, however, the problem remained unresolved.
The AI/ML based Intimation Order u/s 143(1), made certain adjustments while enhancing the income, and considered only an "increase in profit" without accounting for the corresponding "decrease in profit". Consequently, the additions, amounting to Rs. 63,69,25,11,841/- and Rs. 59,14,49,73,823/-, cumulatively, had been made by taking into account the gross increase in profit instead of the net increase in profit. Further, the credit for prepaid taxes, to the extent of Rs.1,59,88,058/-, had also not been allowed.
In sum, an upward adjustment of Rs.12,284 crores had been made by the AI/ML based Intimation Order and a huge and exorbitant income tax demand amounting to Rs.3,573 crores, inclusive of interest levied under Section 234B/C of the Act.
Left with no other alternative, the assessee approached the hon’ble Delhi High Court and filed the captioned writ petition asking for the stay of the subject Intimation Order u/s 143(1)(a).
Interestingly, during the course of the writ proceedings, the standing counsel of the Revenue contended that in issuing Intimation Order u/s 143(1)(a) of the Income Tax Act, there is no requirement to issue any show cause notice to the assessee.
Such a contention itself speaks volumes about the gravity of the situation, so much so that an exorbitant addition of Rs 12,284 crores with the corresponding demand of Rs 3,573 crores had been incorrectly made by misinterpreting the figure in the Tax Audit Report by some automated algorithm, deployed in processing of the Intimation Order u/s 143(1), and that too without giving the assessee any appropriate opportunity of being heard.
Fortunately, the hon’ble Delhi High Court has stayed the operation of the subject erroneous and mechanical Intimation Order u/s 143(1). The hon’ble Delhi High Court has held that there is a requirement to consider the response of the petitioner, in terms of the proviso appended to Section 143(1)(a) of the Act. The hon’ble High Court has also remarked that “if an assessee is served with intimation by an AO, he should be in a position to respond to it, failing which the AO cannot consider it, which is the requirement of the provision”.
The hon’ble High Court has also noted that although the intimation email dated 29.05.2023 adverted to a disallowance amounting to Rs.214.74 crores, but the addition, as stated above, was substantially more. Therefore, whether this intimation would suffice is another aspect that the standing counsel of the revenue, will have to answer on the next hearing date on Oct 16, 2023.
Recently several media reports have claimed that CPC Bengaluru has issued around 22,000 Intimation Notices u/s 143(1)(a) and Defective Notices u/s 139(9) to HNIs, salaried employees, charitable trusts, HUFs and partnership firms, seeking explanations for alleged discrepancies between Form 16, Form 26AS, AIS/TIS and returned incomes, and as red flagged by AI and ML tools.
No doubt, any fraudulent or excess deduction claims in ITRs ought to be scrutinized and dealt with appropriately, but in many cases deduction claims/TDS/TCS credit claims are completely legitimate, and even then, Intimation Orders u/s 143(1)(a) have been issued mechanically by the Income tax Department.
Another real life example of such mechanical Intimation Order passed by the CPC is in respect of alleged discrepancy between foreign assets declared in ITR vis-à-vis the corresponding TCS claim of the assessee.
The Schedule FA (Foreign Assets) in ITR Form 2 & 3, mandates reporting of only those foreign assets including foreign stocks that are held by the return filer in the corresponding calendar year. For instance, in the Schedule FA in ITR for FY 2022-23, the foreign assets acquired and held by the return filer between the period January 2022 till December 2022 (Calendar Year 2022) were required to be reported and those acquired between the period January 2023 and March 2023 were not required to be reported. But corresponding TCS u/s 206C(1G) is required to be collected by the authorised dealer on foreign remittances under LRS for acquiring foreign stocks made between January 2023 till March 2023, in the FY 2022-23 itself. So, this TCS will have to be claimed by the return filer in its ITR for FY 2022-23 only.
Now several taxpayers have received Income Tax Intimation Notices u/s 143(1) or even u/s Defective Return Notices u/s 139(9), contending discrepancy in TCS claims and Reporting of corresponding Foreign Assets, and on such ground. are denying TCS claim in absence of corresponding income.
Naturally, such factually misconceived and erroneous notices churned out by automated AI & ML tools are a cause of grave concern.
Automation and standardisation in scrutinising tax returns return is welcome. But in cases like these, logical manual intervention is also required. It's high time to make suitable amendments in section 143(1)(a), or at least it's mechanical implementation by AI/ML based tools. AI needs to be made naturally intelligent and the machine learning tools need to learn better for generating better and accurate results with fewer hassles to honest taxpayers. The concerned authorities must be sensitised that in cases where such discrepancies are being flagged mechanically, they should take due cognizance of the factual and lawful replies and submissions of the taxpayers.
After all, AI & ML based 143(1) Intimations, Do Require Human Touch & Vetting!!
[This Article has also been published in Taxmann with the Citation [2023] 154 taxmann.com 273 (Article).
