The Hindu Business Line : Return of prima facie adjustments

The lawmakers are known to change tax laws at regular intervals and the old decided cases become relevant because of the reincarnation of the statutory provisions. This change however keeps the subject of taxation, dynamic and interesting. Budget 2008 saw the reintroduction of “prima facie adjustment”, a well-known provision which was in the statute book about nine years ago.

Some history

Where the return of income furnished by the assessee contained apparent errors which were not in accordance with the statutory provision, the income-tax authority could change the income and that power was vested in him by the statute.

The Finance Act, 1999 substituted Section 143(1) which estopped the assessing officer (AO) from altering the income figure admitted by the assessee. Section 143(2) was correspondingly amended to provide for alteration of income by issue of a notice popularly known as “limited scrutiny” notice.

The Finance Act, 2003 put the brakes on “limited scrutiny” by inserting a sunset clause in Section 143 (2) effective from June 1, 2003. Hence, after this date and till now, an assessing authority cannot alter the income returned by the assessee whatever be the nature or validity of the deduction or claim in the return filed. The only option available to the AO is rectification of order under Section 154 which could be made only after the assessment.

The proposal

Now in Budget 2008, Section 143 (1) has been substituted, whereby the AO can process the return by adjusting the total income or loss by rectifying any arithmetical error in the return and disallowing any incorrect claim which is apparent from the return furnished by the assessee.

Thereafter, an intimation has to be sent to the assessee specifying the tax payable or the refund due. Explanation 1 to Section 143(1) says what is an incorrect claim apparent from any information in the return.

They are (i) an item in the return which is inconsistent with another entry in the same return, (ii) information required to substantiate an entry, not furnished in the return; and (iii) a deduction which exceeds statutory limit.

Prior to June 1, 1999, an intimation had to be sent to the assessee whether or not any adjustment has been made to the income admitted by the assessee. Even where there was no tax due/ refundable, an intimation had to be sent.

The Finance Act, 1999 provided that the acknowledgement of the return shall be a deemed intimation where no tax is payable or refund is due to the assessee. In Budget 2008, the acknowledgement would continue to hold the deemed intimation status if the tax is not due or refundable to the assessee. The status quo in respect of such cases, however, is continued.

Scope of provision

For making prima facie adjustments, the Explanation to the provision will provide the limit and scope of adjustments that could be made by the AO. An Explanation is meant to clear up any ambiguity in the provision and it must be read in harmony with the section.

Hence, the Explanation to Section 143(1) must be read in such a manner that it curtails the scope for adjustments. It is expected that the AOs would follow the Explanation in its true letter and spirit. Else, it may open a Pandora’s Box in respect of those adjustments, which led to major litigation in the past.

(The author is an Erode-based chartered accountant.)

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