Processing Return Under Section 143(1) Post Section 143(2)

Processing Return Under Section 143(1) Post Section 143(2) Notice Is Valid and ESOP Cross-Charge Expenses Are Allowable Business Deductions

Issue

Validity of Section 143(1) Processing Post Section 143(2) Notice & Doctrine of Merger: Whether processing a tax return under Section 143(1) after issuing a notice under Section 143(2) is valid, whether such adjustments automatically merge into the Section 143(3) assessment order, and whether the intimation was barred by limitation.
Allowability of ESOP Cross-Charge Expense: Whether the cost reimbursed by an Indian subsidiary to its foreign parent company towards stock options exercised by the subsidiary’s employees under a cross-charge arrangement qualifies as an allowable revenue deduction under Section 37(1).

Facts

The assessee-company, an Indian subsidiary of Linde Plc, filed its return of income for AY 2021-22, which was selected for scrutiny, and a notice under Section 143(2) was issued.
Section 143(1) Adjustments: Subsequently, the Central Processing Centre (CPC) processed the return under Section 143(1) vide intimation dated 21.10.2022, making adjustments/disallowances regarding bonus/incentive, leave encashment, and income under Section 41(1).
Section 143(3) Assessment Order: The Assessing Officer (AO) completed the scrutiny assessment under Section 143(3) by making a separate addition for ESOP expenses, without re-examining or disturbing the adjustments previously made by the CPC under Section 143(1).
The assessee contended that processing under Section 143(1) after a Section 143(2) notice was invalid, that Section 143(1) adjustments merged into the Section 143(3) order, and that the intimation was time-barred.
ESOP Expenditure: Under Linde Plc’s Long-Term Incentive Plan, stock options of the foreign parent were granted to the employees of the Indian subsidiary. During the year, the assessee debited ~Rs. 3.70 crores as ESOP expense in its P&L account, suo motu disallowed the book expense, and claimed a tax deduction only for ~Rs. 51.69 lakhs representing actual liability crystallised upon exercise of options by employees. The AO disallowed this claim, holding it to be capital in nature.

Decision

Section 143(1) Processing and Validity [In favour of Revenue]:
- As per Section 143(1D) (as substituted by the Finance Act, 2017), processing of returns under Section 143(1) is not barred after the issuance of a Section 143(2) notice for AY 2017-18 onwards. The phrase “shall not be necessary” grants discretion to the AO.
- Section 143(3) assessment is an independent proceeding. The AO is not required to re-examine or duplicate the CPC’s adjustments unless proposed directly in scrutiny.
- The doctrine of merger does not apply universally. Since Section 143(1A) adjustments were not the subject matter of the Section 143(3) order, they did not merge into it. The assessee retains the right to appeal the Section 143(1) intimation separately under Section 246A.
- The intimation dated 21.10.2022 was issued well within the statutory period of limitation under the proviso to Section 143(1).
Allowability of ESOP Expenditure [In favour of Assessee]:
- The shares were issued by the foreign parent company (Linde Plc) and not by the assessee; therefore, the cost borne by the assessee under the cross-charge arrangement did not alter or increase the assessee’s share capital or yield any capital asset.
- The expenditure represents employee compensation incurred wholly and exclusively for the purposes of the assessee’s business and is fully deductible as revenue expenditure under Section 37(1).

Key Takeaways

Post-2017 Processing Rules: Issuance of a scrutiny notice under Section 143(2) does not halt or invalidate the summary processing and adjustment of returns under Section 143(1).
No Automatic Merger: CPC adjustments made under Section 143(1) remain distinct and independent unless explicitly modified or incorporated into the Section 143(3) assessment order.
Taxability of Parent ESOP Cross-Charges: Reimbursed ESOP costs paid to a foreign parent entity for options granted to local employees are legitimate business/employee costs and qualify for revenue expense deduction.

IN THE ITAT AHMEDABAD BENCH ‘D’

Linde Engineering India (P.) Ltd.

Deputy Commissioner of Income-tax

Dr. B.R.R. Kumar, Vice President
and Ms. Suchitra Kamble, Judicial Member

IT Appeal No. 2606 (Ahd.) of 2025
[Assessment year 2021-22]

JULY 17, 2026

S.N. Soparkar, Sr. Adv. for the Appellant. Sher Singh, CIT. DR for the Respondent.

ORDER

Dr. B.R.R. Kumar, Vice-President. – The present appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi [“Ld. CIT(A)”], order dated 17.10.2025, pertaining to Assessment Year 2021-22.

2. The assessee has raised the following grounds of appeal:

“Ground No.1: Error in computation of assessed income due to wrong consideration of starting point of computation in impugned Assessment Order resulting into erroneous addition to the total income without providing any cogent reason, without any show cause and an opportunity to explain.

1.1 On the facts and in the circumstances of the case and in law, the Ld. AO has grossly erred in considering starting point of computation in Assessment order as income computed under Section 143(1) of INR 201,08,95,650 as against the total income as per the return of income filed under Section 139(1) of INR 191,58,60,950 thereby making an erroneous addition to the total income of the Appellant Company by INR 9,50,34,695 without any cogent reason, without any show cause and without any opportunity to explain thus, in clear violation of principal of natural justice.

1.2 On the facts and in the circumstances of the case and in law, the Ld. AO and the Ld. CIT(A) has erred in not considering the submission of the Appellant that the intimation under Section 143(1) of the Act merges into the Assessment Order passed under Section 143(3) of the Act and the Assessing Officer has to re-examine the correctness of the disallowances/adjustment made in the intimation issued under Section 143(1) of the Act.

1.3 On the facts and in the circumstances of the case and in law, the Ld. AO and the Ld. CIT(A) has erred in not appreciating the submission of the Appellant that the intimation under Section 143(1) of the Act is time barred hence the underlying adjustments made in the said intimation does not survive

1.4 The Appellant Company prays that the continuation of the error committed while processing return under Section 143(1) of the Act in the Assessment Order is erroneous, unjustified, unlawful, unwarranted, and hence the same should be deleted.

2. Ground no. 2: Addition of Rs. 2,92,09,322 under Section 41(1) of the Act

2.1 On the facts and the circumstances of the case and in law, the Ld. AO has erred continuing and further the LD. CIT(A) has erred in confirming the addition of Rs. 2,92,09,322 to the total income of the Appellant Company under Section 41(1) of the Act which was made while processing return of income without appreciating and ignoring the fact that the amount of Rs 2,92,09.322 is pertaining to ‘old liabilities no longer payable written back which is already credited to Profit and loss Account and forming part of Profit before tax and making additions of the same had led to the double taxation of the income.

2.2 The Appellant prays that such addition is erroneous, unjustified, unlawful, unwarranted, and hence the same should be deleted.

3 Ground no. 3: Disallowance of Employee Stock Option Plan (ESOP’) expenses of Rs. 51,68,730/-

3.1 On the facts and in the circumstances of the case and in law, the Learned AO has grossly erred, in making and further the Ld.CIT(A) has erred in confirming the disallowance of ESOP expenses of Rs. 51,68,730 while computing the total income of the Appellant Company on the ground that said expenditure is in connection with share capital of the company and it is capital in nature which cannot be allowed as revenue expenditure.

3.2 The Ld. AO and the Ld. CIT(A) has failed to appreciate that the ESOP expenses is incurred wholly and exclusively for the purpose of business of the Appellant Company and is in the nature of revenue expenditure and thereby, duly allowable under section 37(1) of the Act.

3.3 The Appellant prays that disallowance of ESOPs expenses claimed by the Appellant Company is erroneous, unjustified, unlawful, unwarranted, and hence the same should be deleted.

All the above grounds are independent and without prejudice to one another.

The Appellant craves leave to add to, alter, amend, modify or withdraw all or any of the above ground(s) of appeal either at the time of the hearing or before the hearing of this appeal.”

3. The brief facts of the case are that assessee company filed its return of income under section 139(1) of the Income-tax Act, 1961 [“the Act”] declaring total income of Rs. 191,58,60,950. The case was selected for scrutiny and notice under section 143(2) of the Act was issued on 28.06.2022. Subsequently, the Central Processing Centre (“CPC”) processed the return under section 143(1) of the Act and made adjustments aggregating to Rs. 9,50,34,695 on account of alleged discrepancies between the particulars furnished in the return of income and Form 3CD. The intimation under section 143(1) was digitally signed on 15.07.2023. Thereafter, the Assessing Officer completed the assessment under section 143(3) of the Act by adopting the income determined under section 143(1) as the starting point of computation instead of the income originally returned by the assessee. In addition, the Ld. AO made disallowance of ESOP expenditure of Rs. 51,68,730. The Ld. CIT(A) confirmed the action of the Assessing Officer.

4. Aggrieved by the additions and disallowances sustained by the Ld. CIT(A), the assessee is in further appeal before this Tribunal.

Ground No. 1- Wrong Starting Point of Computation/Continuation of Section 143(1) Adjustment

5. The assessee has challenged the action of the Assessing Officer in adopting the income computed under section 143(1) of the Act amounting to Rs. 201,08,95,650/- as the starting point of computation, instead of the returned income of Rs. 191,58,60,950/- declared under section 139(1) of the Act, resulting in an effective addition of Rs.9,50,34,695/-. After considering the rival submissions and perusing the material available on record, it is observed that the scrutiny proceedings had already commenced upon issuance of notice under section 143(2) on 28.06.2022.

5.1 The Ld. Sr. Counsel argued that once scrutiny assessment proceedings are initiated, the Assessing Officer is duty bound to independently examine the return of income and determine the total income in accordance with law. The adjustments made while processing the return under section 143(1) cannot be mechanically carried forward into the assessment order without independent application of mind and without granting an opportunity of being heard to the assessee. It was argued that it is a settled legal position of law that an intimation issued under section 143(1) merges with the regular assessment order passed under section 143(3). Therefore, the Assessing Officer was required to independently adjudicate the issue instead of merely adopting the computation made by CPC. The assessee has relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Lesso Buildtech India Pvt. Ltd. v. DCIT [ITA No. 1698(AHD) OF 2024, dated 3-4–2025], wherein it was held that issuance of intimation under section 143(1) after initiation of scrutiny proceedings under section 143(2) is not sustainable. The record further reveals that no specific show-cause notice was issued by the Assessing Officer before continuing the adjustment of Rs. 9,50,34,695/-. Thus, the addition was sustained without providing adequate opportunity to the assessee, which is contrary to the principles of natural justice.

6. The Ld. CIT(A) also failed to deal with the specific contentions of the assessee regarding:

Merger of intimation under section 143(1) with assessment under section 143(3);

ii.

Illegality of mechanically continuing CPC adjustments in scrutiny assessment; and

iii.

Invalidity and time-barred nature of the intimation under section 143(1).

7. We have heard the rival submissions and perused the material available on record. The principal grievance of the assessee is that while completing the assessment u/s 143(3) of the Act, the Assessing Officer adopted the income determined in the intimation issued u/s 143(1) amounting to Rs.201,08,95,650/- as the starting point of computation instead of the total income originally returned by the assessee u/s 139(1) at Rs.191,58,60,950/-. Consequently, the adjustment of Rs.9,50,34,695/- made by CPC while processing the return stood mechanically incorporated in the assessment order without any independent examination.

7.1 The relevant chronology of events, which has a bearing on the issue under consideration, is as under:-

•

The assessee filed its return of income on 08.03.2022 declaring total income of Rs.191,58,60,950/- for the AY 2021-22.

•

The case was selected for scrutiny and notice u/s 143(2) was issued on 28.06.2022.

•

Thereafter, CPC processed the return under section 143(1) on 21.10.2022 and the intimation was digitally signed on 15.07.2023 making adjustments aggregating to Rs.9,50,34,695/-, enhancing the taxable income to Rs. 201,08,95,650/-

•

Subsequently, the Assessing Officer completed the assessment under section 143(3) by adopting the income determined under section 143(1) as the opening figure for computation.

•

The Assessing Officer made addition of Rs.51,68,730/- on account of ESOP expenses to the taxable income in the order passed under Section 143(3) of the Act.

7.2 Further, we find that in response to the communications by the Revenue (CPC), the assessee had responded to the proposed adjustments before CPC and explained that the amounts relating to bonus and leave encashment were allowable u/s 43B since the liabilities outstanding as on 01.04.2020 were actually discharged during the relevant previous year. In respect of the addition under section 41(1), it was submitted that the amount had already been credited to the Profit and Loss Account and offered to tax in the returned income.

The record shows that the adjustment made u/s 143(1) comprised the following items:

Particulars	Amount claimed in ITR	Amount mentioned in Form 3CD	Adjustments made
There is inconsistency in any sum payable to an employee as bonus or commission for services rendered claimed in return and audit report	4,81,82,142	0	4,81,82,142
There is inconsistency in any sum payable towards leave encashment claimed in return and audit report	1,76,43,231	0	1,76,43,231
There is inconsistency in the amount of profit chargeable to tax under section 41 specified in return & in audit report	0	2,92,09,322	2,92,09,322
			9,50,34,695

7.3 The fact emerges out from the record is that:-

•	The total income, as per the ITR filed under 139(1)	–	Rs.191,58,60,950/-
•	Income computed as per intimation u/s 143(1) (Total adjustments – Rs. 9,50,34,695/-)	–	Rs.201,08,95,650/-
•	Total income computed as per order u/s 143(3) (Addition of Rs.51,68,730/- on account of ESOP)	–	Rs.201,60,64,380/-

Before us, the assessee has raised the grounds of erroneous addition to the total income of Rs.9,50,34,695/-, non-merger of 143(1) into assessment order passed under Section 143(3) and failure to reexamine the correctness of disallowances/adjustments made in the intimation issued u/s 143(1), time-barring of intimation u/s 143(1) along with addition of Rs.2,92,09,322/- u/s 41(1) and disallowance of ESOP expenses of Rs.51,68,730/-.

7.4 The Ld. Senior Advocate, Shri S.N. Soparkar argued that the Assessing Officer passed the order u/s 143(3) of the Act considering starting point of computation in the assessment order as income as “income computed as per intimation u/s 143(1) of the Act as against the total income as per the return of income filed u/s 139(1) of the Act and continued with the disallowance made while processing the return of income u/s 143(1) of the Act. The Ld. Sr. Counsel argued that Assessing Officer erred in adopting the computation u/s 143(1) as the basis for assessment instead of the return filed u/s 139(1). The Ld. Sr. Counsel thus submitted that this had resulted in an unjustified addition made without reasons, notice, or opportunity to explain, in violation of natural justice. The Ld. Sr. Counsel further submitted that the intimation u/s 143(1) stands merged with the scrutiny assessment u/s 143(3), requiring the Assessing Officer to independently verify any earlier adjustments. The authorities failed to consider this settled legal position. It was also submitted by the Ld. Sr. Counsel that the intimation u/s 143(1) was time-barred, and therefore, the adjustments contained therein had no legal effect and could not be carried forward into the scrutiny assessment. Reliance was placed on the decision of the Ahmedabad ITAT in the case of Lesso Buildtech India Pvt. Ltd. (supra) wherein it was held that Intimation u/s 143(1) of the Act cannot be issued after issuance of notice u/s 143(2) of the Act.

8. On the other hand, Ld. DR supported the orders of the authorities below. The Ld. DR submitted that the assessee has filed an appeal against order passed u/s 143(3) of the Act. The Ld. DR further submitted that the assessee has failed to raise any appeal against the said ground and also the intimation merges in the scrutiny order before the Ld. CIT(A). The Ld. DR argued that the plea of the Ld. AR cannot be accepted as the Assessing Officer has passed an order as per the scheme of assessment proceedings u/s 143(3) of the Act.

9. Heard the arguments of both the parties and perused the material available on record. On this issue, we go straight to page No. 5, para-5, of the assessment order wherein the ‘Final Computation of the Taxable Income’ mentioned as under:

“5. Final computation of taxable income:

Sl No.	Description	Amount (in INR)
1	Total Income as per ITR filed u/s 139	191,58,60,950/-
2	Income computed as per intimation u/s 143(1)	201,08,95,650/-
	Add: addition as discussed above in Para 4	51,68,730/-
	Total Income	201,60,64,380/-

From the above, we find that the Assessing Officer has not tinkered with the adjustments made by the CPC u/s 143(1) and made further addition of the ESOP expenses which have been a part of the proceedings u/s 143(3) of the Act. The above table also reflects that the Assessing Officer has duly considered the total income, as per the ITR, filed by the assessee u/s 143(3). The assessment u/s 143(3) is an independent assessment and it could be a point-wise scrutiny or a complete scrutiny of the new issues. It does not make necessary for the Assessing Officer to reexamine the adjustments made by the CPC and take a call. The Assessing Officer is expected to apply his/her independent mind to every disallowance or addition which he/she proposes and arrive at his/her own satisfaction after affording reasonable opportunity to the assessee. In the present case, the Assessing Officer has clearly examined the issue of ESOPs and obligatory upon the Assessing Officer to examine the disallowances computed by the CPC.

9.1 With regard to the grounds that the Revenue cannot process the return u/s 143(1) once the notice u/s 143(2) has been issued, the Ld. Sr. Counsel argued that once proceedings u/s 143(2) of the Act have commenced, the Assessing Officer has no power to pass order u/s 143(1) of the Act. The Ld. Sr. Counsel relied on the judgment of the Hon’ble High Court of Gujarat in the case of Gujarat Poly-Avx Electronics Ltd. v. DCIT 222 ITR 140 (Gujarat), wherein it was held that “after issuance of notice under s. 143(2) of the Act, it is not open for the AO to make adjustment or to pass order under s. 143(1) of the Act but he has to make assessment in accordance with law, i.e., under s. 143(3) of the Act”. The Ld. Sr. Counsel has also relied upon the judgment of Hon’ble Apex Court in the case of CIT v. Gujarat Electricity Board [2003] 260 ITR 84 (SC), wherein it was held as under:-

“5. Even otherwise, the view taken by the Gujarat High Court seems to be correct on principle. There is no dispute that Section 143(1)(a) of the Act enacts a summary procedure for quick collection of tax and quick refunds. Under the scheme if there is a serious objection to any of the orders made by the Assessing Officer determining the income, it is open to the assessee to ask for rectification under Section 154. Apart therefrom, the provisions of Section 143(1)(a)(i) indicate that the intimation sent under Section 143(1)(a) shall be without prejudice to the provisions of Sub-section (2). The Legislature, therefore, intended that, where the summary procedure under Sub-section (1) has been adopted, there should be scope available for the Revenue, either suo motu or at the instance of the assessee to make a regular assessment under Sub-section (2) of Section 143. The converse is not available; a regular assessment proceeding having been commenced under Section 143(2), there is no need for a summary proceeding under Section 143(1)(a).

6. In the result, we see no infirmity in the judgment of the High Court. The appeals are dismissed.”

9.2 We have gone through the provisions of Section 143(1) over various timelines. The Finance Act, 2012 reads as under:-

“Section – 143 Assessment.

⁶⁷ [Assessment⁶⁸ .

⁶⁹143. ⁷⁰[(1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—

(a)

the total income or loss shall be computed after making the following adjustments, namely:—

(i)

any arithmetical error in the return; or

(ii)

an incorrect claim, if such incorrect claim is apparent from any information in the return;

(b)

the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a);

(c)

the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and interest, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest;

(d)

an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e)

the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax or interest is payable by, 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.

Explanation. —For the purposes of this sub-section,—

(a)

“an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return,—

(i)

of an item, which is inconsistent with another entry of the same or some other item in such return;

(ii)

in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or

(iii)

in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;

(b)

the acknowledgement of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a).

(1A)

For the purposes of processing of returns under sub-section (1), the Board may make a scheme for centralised processing of returns with a view to expeditiously determining the tax payable by, or the refund due to, the assessee as required under the said sub-section.

(1B)

Save as otherwise expressly provided, for the purpose of giving effect to the scheme^70a made under sub-section (1A), the Central Government may, by notification^70a in the Official Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no direction shall be issued after the 31st day of March, ⁷¹[2012].

(1C)

Every notification issued under sub-section (1B), along with the scheme made under sub-section (1A), shall, as soon as may be after the notification is issued, be laid before each House of Parliament.]

^71a[(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2).]

⁷²[(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall,—

(i)

where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, serve on the assessee a notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him, on a date to be specified therein to produce, or cause to be produced, any evidence or particulars specified therein or on which the assessee may rely, in support of such claim:

⁷³[Provided that no notice under this clause shall be served on the assessee on or after the 1st day of June, 2003;]

(ii)

notwithstanding anything contained in clause (i), if he considers it necessary or expedient^73a to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return:

⁷⁴[Provided that no notice under clause (ii) shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.]]

⁷⁵[(3) On the day specified in the notice,—

(i)

issued under clause (i) of sub-section (2), or as soon afterwards as may be, after hearing such evidence and after taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss accordingly, and determine the sum payable by the assessee on the basis of such assessment;

(ii)

issued under clause (ii) of sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:]

⁷⁶[Provided that in the case of a—

(a)

⁷⁷[research association] referred to in clause (21) of section 10;

(b)

news agency referred to in clause (22B) of section 10;

(c)

association or institution referred to in clause (23A) of section 10;

(d)

institution referred to in clause (23B) of section 10;

(e)

fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10,

which is required to furnish the return of income under sub-section (4C) of section 139, no order making an assessment of the total income or loss of such ⁷⁷[research association], news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, shall be made by the Assessing Officer, without giving effect to the provisions of section 10, unless—

(i)

the Assessing Officer has intimated the Central Government or the prescribed authority the contravention of the provisions of clause (21) or clause (22B) or clause (23A) or clause

(23B) or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, by such ⁷⁷[research association], news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, where in his view such contravention has taken place; and

(ii)

the approval granted to such ⁷⁷[research association] or other association ⁷⁸[or fund or trust] or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded :]

⁷⁹ [Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university, college or other institution was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommend to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assessing Officer:]

^79a Provided also that notwithstanding anything contained in the first and the second proviso, no effect shall be given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in such previous year, whether or not the approval granted to such trust or institution or notification issued in respect of such trust or institution has been withdrawn or rescinded.]

⁸⁰[(4) Where a regular assessment under sub-section (3) of this section or section 144 is made,—

(a)

any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment ;

(b)

if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly.

(5) ⁸¹[Omitted by the Finance Act, 1999, w.e.f. 1-6-1999.]]

9.3 The Finance Act, 2016 reads as under :-

“143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—

(a)

the total income or loss shall be computed after making the following adjustments, namely:—

(i)

any arithmetical error in the return; ⁴²[or]

(ii)

an incorrect claim, if such incorrect claim is apparent from any information in the return;

Following sub-clauses (iii) to (vi) shall be inserted after sub-clause (ii) of clause (a) of sub-section (1) of section 143 by the Finance Act, 2016, w.e.f. 1-4-2017 :

(iii)

disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;

(iv)

disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;

(v)

disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-IE, if the return is furnished beyond the due date specified under sub-section (1) of section 139; or

(vi)

addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:

Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made;

(b)

the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a);

(c)

(d)

an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e)

the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

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.

Explanation. —For the purposes of this sub-section,—

(a)

“an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return,—

(i)

of an item, which is inconsistent with another entry of the same or some other item in such return;

(ii)

in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or

(iii)

in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;

(b)

(1A)

(1B)

Save as otherwise expressly provided, for the purpose of giving effect to the scheme made under sub-section (1A), the Central Government may, by notification in the Official Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no direction shall be issued after the 31st day of March, 2012.

(1C)

(1D)

Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2).

Following sub-section (1D) shall be substituted for the existing subsection (1D) of section 143 by the Finance Act, 2016, w.e.f. 1-4-2017:

(1D)

Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary before the expiry of the period specified in the second proviso to sub-section (1), where a notice has been issued to the assessee under sub-section (2):

Provided that such return shall be processed before the issuance of an order under sub-section (3).

⁴³[(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.]

(3)⁴⁴On the day specified in the notice,—

(i)

(ii)

Provided that in the case of a—

(a)

research association referred to in clause (21) of section 10;

(b)

news agency referred to in clause (22B) of section 10;

(c)

association or institution referred to in clause (23A) of section 10;

(d)

institution referred to in clause (23B) of section 10;

(e)

which is required to furnish the return of income under sub-section (4C) of section 139, no order making an assessment of the total income or loss of such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, shall be made by the Assessing Officer, without giving effect to the provisions of section 10, unless—

(i)

the Assessing Officer has intimated the Central Government or the prescribed authority the contravention of the provisions of clause (21) or clause (22B) or clause (23A) or clause (23B) or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, by such research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, where in his view such contravention has taken place; and

(ii)

the approval granted to such research association or other association or fund or trust or institution or university or other educational institution or hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded:

Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university, college or other institution was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommend to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assessing Officer:

Provided also that notwithstanding anything contained in the first and the second provisos, no effect shall be given by the Assessing Officer to the provisions of clause (23C) of section 10 in the case of a trust or institution for a previous year, if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in such previous year, whether or not the approval granted to such trust or institution or notification issued in respect of such trust or institution has been withdrawn or rescinded.

(4) Where a regular assessment under sub-section (3) of this section or section 144 is made,—

(a)

any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment;

(b)

(5) [Omitted by the Finance Act, 1999, w.e.f. 1-6-1999.]”

9.4 The Finance Act, 2017 reads as under :-

“Assessment.

143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—

(a)

the total income or loss shall be computed after making the following adjustments, namely:—

(i)

any arithmetical error in the return; ¹³[***]

(ii)

an incorrect claim, if such incorrect claim is apparent from any information in the return;

¹⁴[(iii)

disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;

(iv)

disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;

(v)

(vi)

addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:

(b)

the tax ¹⁵[and interest], if any, shall be computed on the basis of the total income computed under clause (a);

(c)

the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax ¹⁵ [and interest], if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax ¹⁶ [or interest];

(d)

an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e)

the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax ¹⁶[or interest] is payable by, 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.

Explanation. —For the purposes of this sub-section,—

(a)

“an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return,—

(i)

of an item, which is inconsistent with another entry of the same or some other item in such return;

(ii)

in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or

(iii)

in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;

(b)

(1A)

(1B)

(1C)

¹⁷[(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2):

Provided that the provisions of this sub-section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017.]

¹⁸[(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.]

(3) ¹⁹[On the day specified in the notice issued under] sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:

Provided that in the case of a—

(a)

research association referred to in clause (21) of section 10;

(b)

news agency referred to in clause (22B) of section 10;

(c)

association or institution referred to in clause (23A) of section 10;

(d)

institution referred to in clause (23B) of section 10;

(e)

(i)

(ii)

(4) Where a regular assessment under sub-section (3) of this section or section 144 is made,—

(a)

any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment;

(b)

(5) [Omitted by the Finance Act, 1999, w.e.f. 1-6-1999.]

9.5 The Finance Act, 2021, relevant to the assessment year in question before us which tangibly had no difference in the verbatim from the Finance Act 2017, reads as under :-

“Assessment.

143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—

(a)

the total income or loss shall be computed after making the following adjustments, namely:—

(i)

any arithmetical error in the return;

(ii)

an incorrect claim, if such incorrect claim is apparent from any information in the return;

(iii)

disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under subsection (1) of section 139;

(iv)

disallowance of expenditure ⁸² [or increase in income] indicated in the audit report but not taken into account in computing the total income in the return;

(v)

disallowance of deduction claimed under ⁸³[section 10AA or under any of the provisions of Chapter VI-A under the heading “C.—Deductions in respect of certain incomes”, if] the return is furnished beyond the due date specified under sub-section (1) of section 139; or

(vi)

addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:

Provided also that no adjustment shall be made under sub-clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018;

(b)

the tax, interest and fee, if any, shall be computed on the basis of the total income computed under clause (a);

(c)

the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax, interest and fee, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, 84[any relief allowable under section 89,] any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax, interest or fee;

(d)

an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e)

the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax, interest or fee is payable by, or no refund is due to, him:

Provided further that no intimation under this sub-section shall be sent after the expiry of ⁸⁵ [nine months] from the end of the financial year in which the return is made.

Explanation. —For the purposes of this sub-section,—

(a)

“an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return,—

(i)

of an item, which is inconsistent with another entry of the same or some other item in such return;

(ii)

in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or

(iii)

in respect of a deduction, where such deduction exceeds specijied statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;

(b)

(1A)

(1B)

(1C)

(1D)

Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2):

Provided that the provisions of this sub-section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017.

(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be served on the assessee after the expiry of 86[three] months from the end of the financial year in which the return is furnished.

(3) On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:

Provided that in the case of a—

(a)

research association referred to in clause (21) of section 10;

(b)

news agency referred to in clause (22B) of section 10;

(c)

association or institution referred to in clause (23A) of section 10;

(d)

institution referred to in clause (23B) of section 10;

(e)

(i)

(ii)

(3A) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of making assessment of total income or loss of the assessee under sub-section (3) ⁸⁷[or section 144] so as to impart greater efficiency, transparency and accountability by—

(a)

eliminating the interface between the Assessing Officer and the assessee in the course of proceedings to the extent technologically feasible;

(b)

optimising utilisation of the resources through economies of scale and functional specialisation;

(c)

introducing a team-based assessment with dynamic jurisdiction.

(3B) The Central Government may, for the purpose of giving effect to the scheme made under sub-section (3A), by notification in the Official Gazette, direct that any of the provisions of this Act relating to assessment of total income or loss shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notification:

Provided that no direction shall be issued after the 31st day of March, ⁸⁸[2021].

(3C) Every notification issued under sub-section (3A) and sub-section (3B) shall, as soon as may be after the notification is issued, be laid before each House of Parliament.

⁸⁹[(3D) Nothing contained in sub-section (3A) and sub-section (3B) shall apply to the assessment made under sub-section (3) or under section 144, as the case may be, on or after the 1st day of April, 2021.]

(4) Where a regular assessment under sub-section (3) of this section or section 144 is made,—

(a)

any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment ;

(b)

(5) [Omitted by the Finance Act, 1999, w.e.f. 1-6-1999.]

9.6 To clarify, the provisions of 143(1D) as inserted by Finance Act, 2012 reads as under:-

^71a[(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2).]

The provisions of 143(1D) as inserted by Finance Act, 2016 reads as under:-

“(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2).

Following sub-section (1D) shall be substituted for the existing subsection (1D) of section 143 by the Finance Act, 2016, w.e.f. 1-4-2017:

(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary before the expiry of the period specified in the second proviso to sub-section (1), where a notice has been issued to the assessee under sub-section (2):

Provided that such return shall be processed before the issuance of an order under sub-section (3).”

And the provisions of 143(1D) as inserted by Finance Act, 2017 applicable to the assessment year in question before us reads as under:-

” ¹⁷[(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2):

Provided that the provisions of this sub-section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017.]”

9.7 From the plain reading of this provision, it can be interpreted that the “processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2)” is not applicable to the returns furnished for the AY 2017-18 onwards. The appeal before us pertains to the AY 2021-22, hence the return can be processed u/s 143(1), after issue of notice u/s 143(2) of the Act. It also makes clear that as per Section 143(2) no notice shall be served on the assessee after expiry of three months from the end of the financial year in which the return has been furnished.

Thus, we find that, with the substitution of provisions, the case-laws relied upon by the Ld. Counsel are not applicable to the instant case as it involves AY 2021-22.

9.8 Further, we find that Hon’ble High Court of Delhi in the case of Tata Teleservices Ltd. v. CBDT (Delhi)/[2016] 386 ITR 30 (Delhi) in WP/12304/2015 dealt at length about the interpretation of Section 143(1D), as inserted by Finance Act, 2012, which reads as under:-

“(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section -2”.

The Memorandum to the Finance Bill, 2012 gives the following explanation for insertion of the above provision:

Processing of return of income where scrutiny notice issued Under the existing provisions every return of income is to be processed under subsection (1) of Section 143 and refund, if any, due is to be issued to the taxpayer. Some returns of income are also selected for scrutiny which may lead to raising a demand for taxes although refunds may have been issued earlier at the time of processing.

It is therefore proposed to amend the provisions of the income-tax Act to provide that processing of return will not be necessary in a case where notice under sub-section (2) of Section 143 has already been issued for scrutiny of the return.

This amendment will take effect from the 1st day of July, 2012.”

The Hon’ble Court held that it is evident that Section 143 (1D) in the manner it is worded gives a discretion to the AO to decide whether the return of income has to be processed where a notice has been issued under Section 143 (2) of the Act. It is significant that sub-section (1D) was inserted in Section 143 subsequent to the insertion of sub-section (1A) which provides for centralised processing of returns. Under the Scheme framed by the CBDT in 2011 in terms of Section 143(1A), there is a computerized random selection of returns which might be taken up for scrutiny. Thus, the discretion regarding picking up a return for scrutiny is no longer left with the AO. Section 143(1D), however, continues the element of discretion in the AO when it states that the processing of return “shall not be necessary”. In other words, it does not expressly state that the return shall not be processed where a notice has been issued to the Assessee under Section 143(2) of the Act. While dealing with the pre-empting efforts by the CBDT by way of instructions given to the Field Authorities not to process the returns and issue refunds once the notice u/s 143(2) has been issued, the Hon’ble Court has come down heavily and held in unequivocal wording that if the legislative intent was that the return would not be processed at all once a notice is issued under Section 143 (2) of the Act, then the legislature ought to have used express language and not the expression “shall not be necessary”. The Hon’ble Court held that it will be a matter the discretion of the concerned AO whether he should process the return or not.

9.9 We clarify that there is no general rule that all assessment orders merge into one another. The doctrine of merger is issue-specific and proceeding-specific. There is nothing like one assessee, one assessment year, one assessment order. The issues not touched upon in different assessments will continue to have relevance for provisions such as rectification, revision or appeal depending on the statute and the judicial precedence in the respective orders. The Income Tax demand notices are raised out of 143(1), 143(3), 148, 153A and 153C assessments. The assessee has a right to redressal by way of rectification, revision or appeal in each case. The orders under Sections 143(1), 143(3), 147/148, 153A, and 153C are distinct statutory orders, though they may relate to the same assessment year. They do not automatically merge into each other in every respect. In case of 143(3), the additions / disallowances made in u/s 143(1) would not get automatic merger but only to the extent of issues examined. In case the issues involved in 143(1) do not overlap with the issues examined during the proceedings u/s 143(3), they separately operate in different arenas. Similarly, the issues taken up in 153A & 153C generally supersedes the 143(3) orders and becomes operative for the relevant assessment year independently. Then, orders are passed under different sections leading to issue of demand notices, that does not mean the earlier or the later orders legally disappear and merged for every purpose. An intimation u/s 143(1) is a separate operative order so as the assessment order passed subsequently u/s 143(3). Similarly, if a reassessment u/s 148 has been undertaken based on specific information, that also do not merge with the earlier 143(3) order, but operate separately for that year. Further, if an assessment is made u/s 153A or 153C based on the seized material in consequence to a search and seizure operation, the assessment becomes operative per se on stand-alone basis for that assessment year and the legal remedies are available for each order. We further clarify that there cannot be two orders u/s 143(3), 148, 153A, 153C for the same assessment year. The operative assessment order for determining assessee’s total income and the doctrine of merger applies only to the matters actually dealt and decided in the later proceedings. This concept is reflected in decisions holding that a reassessment is a reassessment of the original assessment and that, once validly made, it becomes the effective assessment for that year. At the same time, the Supreme Court has clarified that the doctrine of merger is not automatic or all-encompassing; it depends on the scope of the later proceedings. Commissioner of Income Tax v. Amritlal Bhogilal & Co. (dtd. 28.04.1958) and Kunhayammed v. State of Kerala (dtd. 19.07.2000). Doctrine of merger is not a doctrine of universal or unlimite application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The precise legal consequence of “merger” also depends on the context as to whether the issue concerns same in the order issued under Section 143(1), 143(3), 153A, 153C, 154, 263, 250, 254 based on jurisdiction, limitation, appeal, penalty, any other provision or overlapping or telescoping of the issues. Each context has its own body of case.

9.10 Thus, owing to the entire conspectus of series of amendments in Section 143(1)/143(1D), change of procedure in issue of refunds, insertions of the provisions for enabling the Centralized Processing Centre (CPC) for processing of the returns, the issue of wider/complete or limited scrutiny pointing into the examination of specific issues, following the judgement of the Hon’ble High Court of Delhi which took into consideration the amendments made in the Act, we hold that there is no bar on processing the return u/s 143(1) of the Act after issuing of the notice u/s 143(2) of the Act and it is not incumbent upon the Assessing Officer to revisit the adjustments made by the CPC u/s 143(1) of the Act. We hold that the intimation order dated 21.10.2022 issued to the assessee by the CPC against the ITR (Original) filed by the assessee on 08.03.2022 is within 9 months from the end of the financial year in which the return is made [proviso to Section 143(1)]. It is a matter of fact that the assessee was issued refund of Rs.7.83 crores on 16.08.2023 which was determined after the processing of return on 21.10.2022. We have gone through page No. 350 of the paperbook which clearly mentions that ITR filed on 08.03.2022, which was everified on 08.03.2022. The response to the notice u/s 143(1A) adjustments was dated 05.05.2022 and the return was processed on 21.10.2022. It clearly mentions “download intimation order”. Further, it clearly mentions “processed with refund due” 21.10.2022. The arguments of the Ld. Counsel that the intimation was issued on 15.07.2023 is factually wrong as email & SMS issued pertained to the “refund status” and ultimately the refund was issued on 16.08.2023. Thus, the arguments of the Ld. Counsel cannot be accepted as the page No. 350 of the paper-book clearly shows “download intimation order” and after that the details mentions thereof pertained to the refund but not of processing. Hence, we have no hesitation to hold that the processing u/s 143(1) and intimation issued was within the time limit prescribed in the Act.

9.11 The CPC made adjustments on account of three items namely:-

Disallowance of incentive/bonus paid to the employees,

ii.

Disallowance of Leave Encashment paid to employee,

iii.

Addition u/s 41(1) of the Act.

These adjustments were made u/s 143(1A) of the Act and not a subject matter of the order u/s 143(3) of the Act. The assessee may choose to appeal against the order u/s 143(1), as per the provisions of Section 245A of the Act.

In view of the above, Ground Nos. 1 & 2 raised by the assessee are dismissed.

10. The Assessing Officer has made only one disallowance i.e. Rs.51,68,730/- on account of ESOPs in the order passed u/s 143(3) which is being dealt with in this order.

Ground No. 3 – Disallowance of ESOP Expenses of Rs. 51,68,730/-

11. The relevant facts for adjudication of this issue are that the assessee is a subsidiary of Linde Plc, the ultimate parent company of the Linde Group. Linde Plc has introduced a Long-Term Incentive Plan (LTIP) for eligible employees across the Linde Group, under which stock options of Linde Plc are granted to selected employees of its group entities worldwide.

11.1 During the year under consideration, the assessee debited an amount of Rs.3,70,34,438/- towards ESOP expenses in its Statement of Profit and Loss. However, while computing its taxable income, the assessee suo motu disallowed the said accounting expenditure and claimed deduction only to the extent of Rs.51,68,730/-, representing the actual liability crystallised on exercise of stock options by the employees.

11.2 The assessee furnished relevant supporting documents before the lower authorities, including the return of income, Long-Term Incentive Award Cross Charge Agreement and documents explaining the ESOP mechanism and accounting treatment.

11.3 During the assessment proceedings, the Assessing Officer disallowed the deduction claimed by the assessee on the ground that the expenditure was related to issue of shares and was capital in nature. The Assessing Officer observed that since the shares were issued by the parent company and the cost was borne by the assessee under the arrangement, the expenditure could not be allowed as revenue expenditure. Accordingly, the deduction claimed of Rs.51,68,730/- was disallowed and added to the total income.

11.4 The Ld. CIT(A) confirmed the disallowance made by the Assessing Officer.

11.5 Before us, the Ld. AR submitted that the lower authorities erred in treating the ESOP expenditure as capital in nature. It was submitted that the expenditure has no connection with the issue of share capital of the assessee company, as the shares are issued by Linde Plc, the foreign parent company, and not by the assessee. The Ld. AR also submitted that the assessee merely reimburses the parent company for the proportionate cost attributable to stock options exercised by its employees under the cross-charge arrangement. The expenditure represents employee compensation incurred wholly and exclusively for the purpose of business and is allowable under section 37(1) of the Act. The Ld. AR further submitted that the assessee has consistently followed a prudent approach by disallowing the ESOP expense recognised in the books under Ind AS and claiming deduction only when the liability crystallises upon exercise of options by employees. It was contended that denial of deduction would result in economic double taxation since the employees are taxed on the corresponding perquisite value while the assessee is denied deduction of the related expenditure. Reliance was placed on the decision of the Hon’ble Karnataka High Court in the case of CIT v. Biocon Ltd. 430 ITR 151 (Karnataka) and various decisions of the Coordinate Benches of the Tribunal, wherein it has been held that ESOP expenditure incurred for employee compensation is allowable as business expenditure under section 37(1) of the Act.

11.6 The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that the expenditure is directly linked with issue of shares under the ESOP scheme and is therefore capital in nature. Accordingly, it was submitted that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) should be upheld.

12. We have considered the rival submissions and perused the material available on record. The Assessing Officer has disallowed the claim on the premise that the ESOP expenditure is connected with issue of shares and hence capital in nature. However, it is undisputed fact that the shares under the ESOP scheme are issued by Linde Plc, the foreign parent company, and not by the assessee. The assessee has merely incurred the cost attributable to stock options exercised by its employees under the cross-charge arrangement. The expenditure is in the nature of employee compensation incurred for the purpose of business and does not relate to raising of share capital or acquisition of any capital asset by the assessee.

12.1 The reliance placed by the Assessing Officer on the decisions relating to expenditure incurred for issue of share capital is misplaced, as the present case does not involve issue of shares by the assessee company. The Hon’ble Karnataka High Court in the case of Biocon Ltd. (Supra) has held that ESOP expenditure represents employee compensation and is allowable as deduction under section 37(1) of the Act. The Coordinate Benches have also consistently taken the view that ESOP cost cross-charged by a foreign parent company to its Indian subsidiary in respect of employees of the subsidiary is allowable as business expenditure.

12.2 In the present case, the expenditure has been incurred wholly and exclusively for the purposes of business and no material has been brought on record to establish that the assessee derived any capital advantage from such expenditure. Accordingly, we hold that the disallowance of Rs.51,68,730/- made by the Assessing Officer and confirmed by the Ld. CIT(A) is not sustainable. The Assessing Officer is directed to delete the said disallowance.

Ground No. 3 raised by the assessee is allowed.

13. In the result, the appeal of the assessee is partly allowed.