For mere mismatch in income as per ITR and Form 26AS Return does not become invalid

Fact and Issue of the case

The fact of the case are the assessee is a foreign corporation. A return was filed declaring a total income of Rs.474,37,58,130, including royalties of Rs.1,96,93,72,012 and fees for technical services of Rs.2,77,43,86,118. On the said income, the assessee calculated a tax burden of Rs.51,30,37,442. A total of Rs.52,64,80,317 was withheld in taxes. A refund of Rs.1,34,42,875 was sought by the assessee. The Centralized Processing Centre (CPC) in Bengaluru processed the return, which revealed a discrepancy between the income stated in the return, which was Rs.474.37 crore, and the income shown in Form No. 26AS, which was Rs.4,78,61,86,673. A notice dated 15.11.2017 issued under Explanation (a) of section 139(9) takes notice of the error in the income tax return. On the same, the assessee responded.

Observation of the court

The court heard both perspectives and combed over the necessary documentation. The final result of the proceedings is that the assessee’s refund of Rs.1.34 crore due under the return of income was obliterated, with the return being deemed faulty and void as if it had never been made and the CIT(A) dismissing the appeal. Without a doubt, the assessee declared an income of Rs.474.37 crore in its return, with a Form 26AS figure of Rs.478.61 crores.

The assessee provided three reasons for the disparity between the two figures, namely, conversion rates for recording transactions, reimbursements, and reversals. In the case of the first reason the Income Tax Rules, 1962 states that the rate of exchange used to calculate the value in INR of any income accruing or arising to the assessee in foreign currency shall be the “telegraphic transfer buying rate” of such currency on the “specified date.” The term’specified date’ which provides, in relation to ‘Income from other sources payable in foreign currency and from which tax has been deducted, the assessee claims that it converted foreign currency income into Indian rupees on the basis of the SBI TT Buying rate on the date of credit to its account or the date of payment, whichever is earlier, but that the foreign currency was converted into Indian rupees at a rate different from the SBI TT Buying rate by the Indian entities.

The second reason for discrepancies in the assessee’s calculations is ‘Reimbursements.’ The Indian entity paid the assessee a sum of money and deducted tax from it. The assessee claims that the receipt is in the nature of a reimbursement and so not tax deductible. If the amount is indeed in the nature of reimbursement, tax deducted at source on the amount would result in a refund without the amount being included in total income.

The assessee’s third justification is that some entries have been reversed. According to the assessee’s response to the DCIT (CPC), Bengaluru, a case was established that it did not fail to include any income in the total income. Rather, the disparity resulted from the conversion of invoice values from foreign currencies to Indian rupees, or from specific amounts on which tax was deducted by Indian corporations but were not taxable in their hands due to reimbursement or reversal of some invoice values. The three causes mentioned above will almost certainly result in a discrepancy between the amount of income reported by the assessee in its return and the amount shown on Form No. 26AS. In theory, though, such a difference would not be taxable income in the United States.

The AO in the current case has used to a discrepancy between the income figures reported and those on Form 26AS. In the first section of Section 139(9), it states that “a return of income shall be considered deficient unless the following conditions are met.”The annexures, statements, and columns in the return of income relating to computation of income taxable under each item of income, computation of gross total income, and total income have been duly filled . A quick scan reveals the nature of the problem, which is not properly completing out the annexures, statements, and attachments.

A detailed examination of the provision in conjunction with the Memorandum reveals that the Parliament intended to limit the scope of adjustments and hence exclude cases of such a mismatch. The third proviso has the effect of resolving such a genuine mismatch by using assessment under section 143(3) of the Act and issuing a notice.

There are two conceivable outcomes when a return of income is declared non est, as if it was never filed. The assessee, knowing that it has taxable income, files a new return, and knowing that the assessee has taxable income, issues a notice requesting the assessee to make a return of income. Despite the fact that the assessee has taxable income but has not filed a return, under this provision, just as it is for the assessee with taxable income to file a return of income.

In the first scenario, the assessee would have submitted a new return with income of Rs.474.37 crore, and have declared the return invalid on the same grounds, trapping the proceedings in a vicious cycle that would end in a deadlock. In the second scenario, the AO should have requesting the assessee to file a return of income, knowing full well that the assessee had income liable to tax and that the preceding return was declared as never filed by him.

This would have resulted in the assessee filing a return and the AO calculating the assessee’s accurate total income as required by law after making an assessment under the Act. In this case, however, the AO failed to send a notice and pushed the proceedings to a halt, leaving the assessee with no clear legal recourse. With no other choice, the assessee filed an appeal against the order made under the Act, the grounds that an order made under section 139(9) is not covered by the list of appealable orders set out in section 246A of the Act.

The assessee, who has been dragged into a quagmire by the DCIT (CPC), Bengaluru, the assessee cannot be left helpless. It goes without saying that the ultimate goal of any legislation is to benefit society as a whole. In the administration of justice, no technicality can be allowed to act as a speed bump. In the case of taxes, if an assessee is entitled to a particular relief, the authorities cannot limit it by creating circumstances that lead to its denial. An examination of the various sections of section 246A(1) reveals that an order under section 139(9) is not covered therein.

Section 246A, clause (a), allows for an appeal to the CIT(A) against, among other things, “an order against the assessee if the assessee rejects his liability to be assessed under this Act.” It is important to note that such an order is handled separately in the provision from an intimation under section 143(1) or an order of assessment under section 143. (3). The term ‘order’ does not precede or follow the word ‘assessment’ in the phrase ‘an order against the assessee if the assessee rejects his liability.’ In the circumstances of this case, any order made under the Act against the assessee, including an order made under section 139(9), has the effect of establishing liability under the Act, which he rejects.

‘If any person satisfies the Assessing Officer that the amount of tax paid or considered as paid by him or on his behalf for any assessment year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of the excess. First, because of the difference between the figure of income reported in the return and that in Form 26AS, the AO could not have classified the return as invalid of the Act.

If he did so on the wrong basis, he should have issued a notice under the Act allowing the assessee to file its return, allowing for a regular assessment to determine the proper amount of income and the resulting tax/refund. In this matter, the assessee has been denied any legal avenue to collect the refund by the DCIT (CPC), Bengaluru .