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Executive Summary: In this insightful Article, penned by our founder Director Sh. Mayank Mohanka, FCA, the critical and practically relevant issue of mechanical processing of ITRs by the Income Tax Department u/s 143(1) of the Income Tax Act, in some instances, has been discussed and analysed in detail, with the help of real-life practical case studies.
The author Sh. Mayank Mohanka, FCA writes as under:
Time to Make Artificial Intelligence-Intelligent & Machine Learning-Learn!!
Well, no need to worry Friends, I am not going to discuss the general theoretical and cliché debate of ‘Man vs. Machine’ here. But the topic of my interest is the critical and significant issue of mechanical ‘Summary Assessment/ Intimation Orders’ u/s 143(1) of the Income Tax Act, being churned out by the income tax department, using artificial intelligence (AI) and machine learning (ML) techniques, and as duly evidenced by some real-life practical case studies, which I am going to deliberate upon, in this taxalogue.
The due date for tax audit and return filing in respect of non transfer pricing cases for FY 2021-22, has already elapsed, and as per official data, almost 6.5 crore returns have been filed, uptill now, for the AY 2022-23.
It is really commendable that in many cases, the returned incomes have been accepted by the income tax department and refunds due, if any, have also been very timely processed. I have myself witnessed ITRs filed on 31.10.2022 being timely processed and refund intimations issued on 4.11.2022 itself, and so the CPC Bengaluru definitely deserves a whole-hearted applause for its sincere efforts.
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.
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.
It is pertinent to mention here that the sixth clause providing for addition of income appearing in Form 26AS which has not been included in the return of income, has fortunately been made inoperative w.e.f. AY 2018-19 onwards, in the aftermath of several High Courts on PAN India basis, taking a strong objection to such mechanical approach of making an addition.
However, the remaining five subclauses in section 143(1)(a) still remain in the Legislature, causing a cause of concern and undue hardships to the taxpayers in several cases.
A few of such real-life practical case studies pertaining to some mechanical summary assessment/intimation orders u/s 143(1)(a) of the Income Tax Act, being issued by CPC Bengaluru, very recently for AYs 2021-22 and 2022-23, are being discussed and analysed here as under:
1. Disallowance in Intimation Order u/s 143(1)(a)(iv) indicated in Tax Audit Report
In my humble experience, 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 there is merely a presentational difference in reporting in the tax audit report and the computation of income of the assessee, with no actual difference in the returned income of the assessee, justifying any further disallowance or addition by the CPC.
This particular case study pertains to a reputed public ltd company (the assessee) which has received an Intimation cum Demand Order u/s 143(1)(a)(iv), for the AY 2021-22, containing the below error description:
Error Description: There is inconsistency in the amount of profit chargeable to tax under section 41 as specified in return and in audit report.
Reporting Clause 25 in the Tax Audit Report mandates reporting by the Tax Auditor, of any amount of profit chargeable to tax u/s 41 and computation thereof in respect of any trading liabilities written back in the books of accounts. It is pertinent to mention here that this reporting clause 25 in the tax audit report simply requires the Tax Auditor to report any amount of profit chargeable to tax u/s 41 and it does not require that only those amounts need to be reported in this clause which have not been credited by the assessee in its Profit & Loss account.
So, the Tax Auditor, bound by his reporting responsibility has to report all such amounts chargeable to tax u/s 41, irrespective of the fact that whether such amounts have already been credited by the taxpayer in its P&L a/c or not.
In this case also the assessee has duly credited the said amount of trading liability written back in its books in its audited P&L a/c and has duly recorded and disclosed this amount as a separate line item in Part A of the Schedule P & L in its return of income for the subject financial year.
Since this amount has already been included by the assessee as part of its Profits and the same has already been recorded as a separate line item in the P&L Schedule of the ITR, so the assessee has not reported this item again in clause no 14 of Other Information (OI) Schedule of the ITR.
The assessee has duly filed its repeated online responses to the same query contained in the earlier preliminary notice proposing the said adjustment, categorically stating and evidencing the aforesaid facts that the amount mentioned in the Tax Audit Report in respect of write back of liability u/s 41 has already been taken into account in its computation of income in its ITR and has been offered for income tax in the Return of Income and as such this adjustment is resulting in double taxation.
However, no consideration or cognizance, whatsoever, was being taken by the CPC to these repeated replies of the assessee and the assessee was being handed over with this final Intimation cum Demand Order u/s 143(1)(a)(iv), raising therein an exorbitant income tax demand clearly resulting in double taxation.
The techniques of artificial intelligence and machine learning being deployed by CPC in the processing of the returns are supposed to take care of such misinformed and factually misconceived processing of returns.
In this particular case, only the comparison between reporting in clause no 25 of the tax audit report and clause no 14 of OI Schedule of the ITR has been done by the so called technology of AI & ML. Had such technology really been intelligent enough ensuring fair, correct and lawful processing of ITRs then it would have scanned and recognised the said line item in the P&L Schedule of the very same ITR of the assessee and this addition resulting in double taxation would not have been made by the CPC.
2. Intimation Order for Incorrect Claim u/s 143(1)(a)(ii)
This is a case study pertaining to a well-established and old charitable trust which in its return of income for the AY 2021-22, has inadvertently ticked the exemption clause in serial no. 4 (iv) of Part B-TI, pertaining to exemption as per clause (2) of Explanation to section 11(1), instead of the correct applicable exemption clause in serial no. 4(vi) in respect of exemption as per section 11(2) of the Income Tax Act.
Exemption clause (2) of Explanation to section 11(1) is in respect of that income of the trust which could not be applied for charitable purpose during the subject financial year on account of its non receipt in the said financial year and Rule 17 of the Income Tax Rules prescribes electronic filing of Form 9A before furnishing of return, in order to claim this exemption.
Exemption under section 11(2) is in respect of that income of the trust which could not be applied for charitable purpose in the subject financial year and for which the charitable trust has to file an electronic undertaking in the prescribed Form 10 for applying the said shortfall towards its charitable objectives in subsequent five years.
Consequently, the Trust has received an Intimation cum Demand Order u/s 143(1)(a)(ii) of the Act. with the Error Description: The Trust or Institution is registered u/s 12A/12AA/12AB and is claiming exemption u/s 11, but the trust or institution has not e-filed Form 9A within the due date. Hence exemption claimed in Sr. no. 4iv of Part B-TI is not allowable. Amount deemed to have been applied during the previous year as per clause (2) of Explanation to section 11(1) is not allowable in accordance with the said provisions r/w Rule 17 of Income Tax Rules.
This charitable trust has been consistently claiming exemption u/s 11(2) only and not as per clause (2) of Explanation to section 11(1), and has duly e-filed the stipulated undertaking in Form 10 before filing of its return of income. Also, in the corresponding Tax Audit Report in Form 10B, being filed by the Tax Auditors, well within the due date, before filing of its return of income, this fact of claiming of exemption by this trust u/s 11(2) has been duly and fully stated and disclosed.
In its return of income also, the full details of the said electronic undertaking in prescribed Form 10 and the Tax Audit Report in prescribed Form 10B including the name, membership no of the auditors and the date of signing of such audit report were duly filled up by this trust in the specified columns.
But unfortunately, at the time of filing its return of income, just in one column in Part B-TI, this trust has inadvertently ticked the wrong exemption clause in serial no. 4(iv) instead of correct exemption clause in serial no. 4(vi), probably due to some scrolling glitch, but no red flag/error was being shown by the income tax portal, while uploading of its return and this small typo error/glitch eventually turned out to be so fatal for this trust that its entire exemption u/s 11 has been disallowed in the Intimation Order u/s 143(1)(a)(ii).
It is also noteworthy to mention here that as this trust didn’t realise the occurrence of the above error in its return, it could not revise its return within the short available time-limit of filing its revised return. The pre-adjustment show-cause notice u/s 143(1) only came when the time limit for filing the revised return has already elapsed.
However, the trust has duly submitted its online response to the proposed adjustment notice, uploaded in its registered e-filing account, duly stating and evidencing the entitlement of its fully lawful exemption claim u/s 11(2), supported by prescribed Form 10 and audit report in Form 10B in the limited word limit of 250 characters of the said notice response window. But the trust did not receive any further query, correspondence or rebuttal in respect of its said response and was simply bestowed upon with the final Intimation cum demand order u/s 143(1)(a)(ii) of the Act, after a period of 6 months, raising therein huge and exorbitant demand.
No doubt, the importance and criticality of filing the return of income correctly and carefully can’t be undermined and underscored but still such bonafide small mistakes of taxpayers should not be met with such a drastic and grave penal consequence of raising of huge and exorbitant demands.
In this case, even if the Trust has inadvertently ticked upon the wrong serial number in ITR Form, and that this mistake should have been avoided, but then also Form 10 and Form 10B have also been filed by it and the corresponding details of the said forms including the filing date and acknowledgement number have also been duly filled in by the Trust in the specified columns of the very same ITR. So, the artificial intelligence and machine learning techniques being deployed by CPC, should have recognised and considered these facts and the Trust’s consistent history of claiming exemption u/s 11(2) also, before arriving at such a drastic conclusion of denying the entire exemption to the Trust.
The more worrisome fact is the total non consideration and non cognizance of the repeated replies of the Trust by the CPC clearly submitting that an inadvertent error has taken place in filling one particular field in the ITR form but that does not alter the actual and true nature of the deeming application of income u/s 11(2) and the correct applicable Forms 10 and 10B have already been filed by the Trust and that Form 9A is not applicable to it.
Conclusion:
Summary Assessment u/s 143(1) of the Income Tax Act, was being introduced as a tax-payer friendly provision to ensure smoother and better processing of ITRs and faster refunds in cases warranting only limited level of scrutiny and examination by the CPC.
However, presently in my humble view, summary assessment u/s 143(1) is turning out to be more burdensome and costly in terms of compliance vis-a-vis regular assessment u/s 143(3). In regular assessment, the assessee at least has an opportunity to explain and clarify the assessment query. But Intimation Orders u/s 143(1) are just one-sided mechanical instruments of raising incorrect demands, even in cases of a mere presentational difference in Tax Audit Report and ITR. All sorts of debatable issues are also being covered without giving taxpayer any opportunity to clarify its position or stand.
The repeated clarificatory responses of the taxpayers and the Rectification Application u/s 154 of the Act filed in response to such faulty intimation orders u/s 143(1)(a) are also usually rejected by the CPC and no reasons are being assigned for such rejection.
Time to Make Artificial Intelligence- Intelligent & Machine Learning- Learn.
So, it's high time to make suitable amendments in section 143(1), or at least it's mechanical implementation by CPC and to take suitable measures to make the artificial intelligence, intelligent enough and the machine learning to learn not to raise such faulty and unlawful demands or in cases where such discrepancies are being flagged then to take due cognizance of the factual and lawful replies and submissions of the taxpayers.
This Article has also been published by Taxmann with the citation [2022] 145 taxmann.com 120 (Article).
