In a significant ruling on the limits of automated tax processing, the Lucknow Bench of the Income Tax Appellate Tribunal (ITAT) has held that adjustments made under section 143(1) of the Income-tax Act, 1961, based solely on disclosures in Form 3CD, cannot be sustained without factual verification by the Assessing Officer (AO).
The Tribunal partly allowed the appeal filed by Surya International Pvt. Ltd. and remanded the matter to the AO for fresh examination for Assessment Year (AY) 2020-21.
Case Details
Case: Surya International Pvt. Ltd. vs. Central Processing Centre (CPC)
Forum: ITAT, Lucknow Bench
Assessment Year: 2020-21
Appeal Result: Partly allowed for statistical purposes
The dispute arose from prima facie adjustments made by the CPC under section 143(1) on the basis of entries reported in the tax audit report (Form 3CD), which were upheld by the CIT(A) without directing factual verification.
Issue 1: Bank Guarantee Treated as Income
CPC’s Adjustment
The CPC treated a bank guarantee amounting to ₹1.75 crore, disclosed in Form 3CD as a contingent liability, as taxable income while processing the return under section 143(1).
Tribunal’s Observations
The ITAT noted that:
A bank guarantee is inherently a contingent obligation, not income per se
Mere disclosure in Form 3CD does not automatically result in taxability
The assessee had contended that the disclosure was likely due to an inadvertent audit error
The Tribunal held that such an issue cannot be conclusively determined at the CPC stage and requires verification of:
The nature of the bank guarantee
Accounting treatment followed by the assessee
Whether the amount relates to the relevant assessment year
Accordingly, the matter was restored to the AO for examination on merits.
Issue 2: Disallowance of Electricity Expenses Under Section 40A(3)
CPC’s Adjustment
The CPC disallowed ₹3.18 lakh towards electricity expenses under section 40A(3) on the ground that the payments were made in cash.
ITAT’s Findings
The Tribunal observed that:
Disallowance under section 40A(3) requires examination of:
- Reasons for cash payment
- Availability of banking facilities
- Applicability of exceptions under Rule 6DD
These are fact-dependent issues that cannot be decided through automated processing under section 143(1)
The ITAT therefore held that the disallowance required proper verification by the AO after giving the assessee an opportunity to explain the circumstances of the cash payments.
Tribunal’s Legal Position
The ITAT reaffirmed that:
Section 143(1) adjustments are limited in scope and meant only for apparent and undisputed issues
Form 3CD disclosures are not conclusive evidence for making additions without inquiry
Where an issue requires verification of facts or application of judgment, it must be examined in regular assessment proceedings
Final Directions of the ITAT
The Tribunal:
Set aside the order of the CIT(A)
Remanded both issues to the Assessing Officer for de novo adjudication
Directed the AO to:
- Verify the facts independently
- Consider the assessee’s explanations and supporting evidence
- Provide a reasonable opportunity of being heard
- Pass a fresh order in accordance with law
As a result, the appeal was partly allowed for statistical purposes.
What CPC Can vs Can’t Adjust u/s 143(1)
The ITAT reiterated that section 143(1) permits only limited, prima facie adjustments. Issues requiring factual examination fall outside CPC’s scope.
CPC Adjustment Scope Under Section 143(1)
CPC processing is not a substitute for assessment. Where an issue requires fact-finding or application of mind, the matter must be examined by the Assessing Officer, not finalized through automated adjustments.
| Particulars | CPC Can Adjust | CPC Can’t Adjust |
| Nature of Issue | Apparent, arithmetical or undisputed errors | Issues involving facts, interpretation, or explanation |
| Mathematical Errors | ✔ Arithmetical mistakes in return | ✘ Issues requiring reconciliation or evidence |
| Incorrect Claims Apparent on Record | ✔ Claims inconsistent with return data | ✘ Claims requiring verification of books or agreements |
| Mismatch of Income | ✔ Difference between return and Form 26AS/AIS (prima facie) | ✘ Issues requiring explanation or reconciliation |
| Form 3CD Disclosures | ✔ Flagging apparent inconsistencies | ✘ Treating disclosures as conclusive income or disallowance |
| Contingent Liabilities | ✘ Cannot treat as income | ✘ Requires examination of nature and accounting treatment |
| Section 40A(3) Disallowance | ✘ Cannot be mechanically applied | ✘ Requires Rule 6DD, business exigency and banking facility check |
| Year-wise Linkage | ✘ Not permissible | ✘ Requires assessment-level verification |
| Opportunity of Hearing | ✘ No detailed hearing at CPC stage | ✔ Mandatory before final adverse decision |
Form 3CD Compliance Checklist (Prevent CPC Adjustments)
This checklist is especially relevant for tax audit cases subject to CPC processing under section 143(1):
1. Auditor Disclosures – Accuracy First ✅
☐ Ensure Form 3CD disclosures strictly match books of account
☐ Avoid descriptive errors (e.g., mislabeling contingent items as income)
☐ Cross-verify clauses relating to:
- Contingent liabilities
- Advances, guarantees, and securities
- Disallowable expenses
2. Contingent Liabilities & Guarantees 🏦
☐ Clearly classify bank guarantees as contingent liabilities
☐ Ensure no income recognition entry exists in books
☐ Maintain supporting agreements and bank documents
☐ Verify year-wise linkage to avoid CPC misinterpretation
3. Section 40A(3) Payments 💸
☐ Identify cash payments exceeding prescribed limits
☐ Document:
- Business exigency
- Non-availability of banking facilities
- Applicability of Rule 6DD exceptions
☐ Ensure Form 3CD remarks are explanatory, not conclusory
4. Consistency Between Return & Audit Report 🔍
☐ Ensure consistency between:
- ITR
- Form 3CD
- Financial statements
☐ Reconcile all disclosures likely to be picked up by CPC algorithms
5. CPC Risk-Mitigation Practices 🚨
☐ Avoid ambiguous auditor remarks
☐ Use precise language in Form 3CD clauses
☐ Anticipate CPC flags and keep explanations ready
☐ Respond promptly to CPC intimations under section 143(1)(a)
6. Post-Adjustment Safeguards ⚖️
☐ If CPC makes an incorrect adjustment:
- File rectification under section 154, or
- Raise issue before CIT(A)/ITAT
☐ Emphasise that issue requires AO-level verification
Legal Takeaway from ITAT Ruling
The ITAT reaffirmed that:
- Form 3CD disclosures are not conclusive
- Automated adjustments cannot decide factual issues
- Additions based purely on audit remarks without verification are unsustainable
- Matters involving contingent liabilities or section 40A(3) must be examined by the AO
Why This Ruling Matters
This decision reinforces judicial discipline over automated tax adjustments and protects taxpayers from additions made without factual inquiry. It reiterates that while technology may streamline processing, assessment of disputed or explanatory matters must remain with the Assessing Officer.
Source: TaxGuru