Return filing has now become a technical exercise and knowledge of the legal provisions does not suffice to survive in tax practice. This is for the reason that the returns which are processed in CPC sometimes either bully the taxpayers or puzzle the tax counsels. There are numerous instances where the returns are stated as defective in one communication from CPC and after a week or so we get yet another communication saying that the defect was rectified perhaps suo motu by the CPC. All this is done in-house in CPC without any response from the taxpayer. This has become a perennial irritant for the tax counsels in the recent years.
A relook at the processing of returns under section 143(1) in the last 3 decades commencing from the decision in the case of Khatau Jhankar Ltd. v. K.S. Pathania [1992] 61 Taxman 157/196 ITR 55 (Bom.) to the current scenario, there has been frequent amendments to the legal provisions which reflected that both the government and the tax administration are not yet sure about dealing with the returns filed by the taxpayers when it is not subjected to any enquiry or scrutiny assessment. There was a time that the income tax return filed acknowledgment was treated as deemed intimation under section 143(1) to be used by the taxpayers for evidencing the tax compliance to various stakeholders such as banks, provident fund authorities and other local authorities.
When the return is filed by the taxpayers, with CPC in place the issue of intimation under section 143(1) has come to stay. This is independent of the dismal diligence displayed by the CPC while processing the return. The recent amendment to section 143(1) relates to the insertion of third proviso by stating that from the assessment year 2018-19 onwards no prima facie adjustments shall be made on the basis of income appearing in Form 26AS or Form 16A or Form 16, even though it is not included in computing the total income by the assessee in the return so filed.
Recently the Bombay High Court in Sham Anand Salunkhe v. Pr. CIT [2019] 104 taxmann.com 108/263 Taxman 190 dealt with the issue of preferring a revision under section 264 by the taxpayer who claimed that the period of limitation would commence not from the date of order under section 143(1) but from the date of its communication or knowledge to him, whichever is earlier.
Sham Anand Salunkhe's case
2. The assessee, a partner who retired on 23.05.2005, included Rs. 51.96 lakhs as income by way of his share in goodwill of the firm for the assessment year 2007-08. The return was accepted under section 143(1) vide intimation dated 24.03.2009. The assessee filed a petition for revision under section 264 in September, 2017 and claimed that the said amount of Rs. 51.96 lakhs must be excluded from the total income and he was eligible for refund of the tax paid earlier.
The assessee in the revision application claimed that the intimation under section 143(1) was not served previously and he "realized for the first time on 12th and 13th May, 2017, on receipt of notice under section 245 of the Income-tax Act, regarding incorrect acceptance of the income-tax return filed by him for the assessment year 2007-08. It was submitted that limitation for filing present application/representation would run from the date of his awareness of the limitation, i.e., from 12th May, 2017, and, therefore, present application/representation was within limitation". The assessee claimed that the time limit for filing revision petition under section 264 must be reckoned from 12th May, 2017, being the date on which he came to know of the intimation issued under section 143(1).
The Commissioner dismissed the revision petition by observing as under:
"Your petition under section 264 is carefully considered. As per the provisions of section 264 the application for revision must be made within one year from the date on which the order in question was communicated to the assessee, or the date on which he otherwise came to know of it, whichever is earlier. As per our records, in your case intimation under section 143(1) was served on 29.03.2009, a copy of which is enclosed to this letter. Therefore, as revision petition is not filed in time, the same is not maintainable under provisions of section 264. Therefore, the revision petition is disposed of as dismissed."
Claims and counter claims
3. The assessee filed a writ before the Court and submitted that intimation under section 143(1) was not served previously and CIT was not correct in holding that the revision application was barred by time limitation. The assessee claimed that the amount received from the firm towards goodwill was offered to income-tax erroneously and the CIT in exercise of his revisional jurisdiction must have granted the relief as prayed for by the assessee.
Section 264(3) says "the application must be made within one year from the date on which the order in question was communicated to him or the date on which he otherwise came to know of it, whichever was earlier".
The Revenue opposed the revision application being admitted on the reasoning that the intimation was served on the petitioner-assessee and there was no reason for the petitioner to wait for several years for filing the revision application.
Factual analysis of the case
4. The facts of the case related to assessment year 2007-08 when e-filing of return and processing of such return by CPC was not in vogue.
Section 143(1) before amendment by the Finance Act, 2008 was as under:
Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142 —
| "(i) | if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under section 156 and all the provisions of this Act shall apply accordingly; and | |
| (ii) | if any refund is due on the basis of such return, it shall be granted to the assessee and an intimation to this effect shall be sent to the assessee: | |
| Provided that except as otherwise provided in this sub-section, the acknowledgment of the return shall be deemed to be an intimation under this sub-section where either no sum is payable by the assessee or no refund is due to him: | ||
| Provided further that no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the return is made: | ||
| Provided also that where the return made is in respect of the income first assessable in the assessment year commencing on the 1st day of April, 1999, such intimation may be sent at any time upto the 31st day of March, 2002". |
Perusal of the legal provision given above says that the acknowledgment of the return shall be deemed to be the intimation where there is no sum payable by the assessee or no refund is due to him.
In this case, the assessee had not received any intimation and the tax due/payable did not come to his knowledge till the notice under section 245 was issued in May, 2017.
Decision of the Court
5. The Court limited its decision on the writ filed by the assessee as a consequence of the time limitation cited by the Commissioner for rejecting the revision application. It took note of section 264(3) which provides for a time limit of one year from the date of order communicated to the assessee or from the date he came to know of it.
The limitation would commence not from the date of order but from the date of its communication or knowledge to the assessee, whichever is earlier. The court held that since notice under section 143(2) was not served to the assessee the scrutiny assessment of the case became time barred in the year 2010. It held that the knowledge that the Department had not proposed to take the case for scrutiny assessment, could be attributed to the petitioner. The assessee if had any dispute with the Department in accepting the return as it was he must have sought revision under section 264 within the time limit prescribed in law. The assessee took more than 7 years to plead ignorance/innocence of the assessment of the return filed by him. The Court accordingly held that the taxpayer had acted beyond time given by law and, hence, the rejection of revision application by the Commissioner was justified.
Conclusion
6. The Finance Act, 1994 wanted to tax capital gain from transfer of goodwill, regardless of whether it was self-generated or acquired by the transferor-assessee. It substituted clause (a) of section 55(2) to cover goodwill of business. The Finance Act, 2016 has plugged in the loophole which till then spared transfer of goodwill of profession and it was remedied by including the same in section 55(2)(a). In this case the facts relate to assessment year 2007-08 when the transfer of goodwill was chargeable to tax. Where the assessee received his share of goodwill either the firm who had paid tax on the goodwill or the recipient assessee must have offered the same to tax. The revision under section 264 for excluding the share of goodwill from taxation seemed to be incorrect. If the CIT thought that on merits the goodwill was chargeable to tax, he could have given disposal of the revision petition on merits instead of citing time limitation.
Also, the decision of the Court on writ filed by the taxpayer was limited to time limitation. The court did not take note of section 143 as it stood at the relevant time. The Department ought to have served an intimation under section 143(1) when there was tax due or refund due to the assessee. The fact that the Department gave a notice under section 245 intimating the arrears of tax from the assessee showed that there was tax arrear for the assessment year 2007-08. When there was a tax arrear there had to an intimation under section 143(1) and which must have been served on the assessee. The assessee came to know of the arrears of tax only recently and taking note of the same had sought revision under section 264 within time from the date of such knowledge of the tax due from him.
There was yet another legal concept of unjust enrichment. When the assessee was not aware of any tax due or completion of assessment from the Department, it was but natural for him to claim the legitimate tax refund regardless of the time limitation. The court could have remanded the case to CIT to consider the case on merits instead of factoring in time limitation.
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