CPC has jurisdiction for audit-based adjustments, but double

CPC has jurisdiction for audit-based adjustments, but double disallowance under section 14A is legally impermissible.

Issue

Whether the Central Processing Centre (CPC) has the jurisdiction under section 143(1)(a)(iv) to make an adjustment based on disallowances quantified in a tax audit report but omitted by the assessee in their returned income, and whether a section 14A disallowance can include expenses already disallowed under section 37(1), resulting in double disallowance.

Facts

The assessee, engaged in the biscuits and confectionery business, reported specific expenditure disallowances in Clause 21(h) of Form 3CD (Tax Audit Report) for Assessment Years 2021-22 and 2022-23.
The reported amount comprised both direct expenses and indirect expenses.
The assessee contended that it had already voluntarily disallowed the direct expenses under section 37(1) while computing its total income, and had additionally offered a disallowance of Rs. 1,00,000 under section 14A for indirect expenses.
For A.Y. 2022-23, the CPC directly made a high-value disallowance under section 14A during processing, overriding the assessee’s online response.
For A.Y. 2021-22, the CPC initially omitted the disallowance in the section 143(1) intimation but later added a section 14A disallowance of approximately Rs. 4.26 crores via a subsequent rectification order under section 154.
This rectification order under section 154 was passed without properly considering the assessee’s reply or granting an effective opportunity of being heard.
The assessee appealed against the adjustments, arguing that adding the direct expenses under section 14A again amounted to an impermissible double disallowance.

Decision

On Jurisdiction: Held, yes; the CPC has valid jurisdiction under section 143(1)(a)(iv) to propose and make adjustments if a quantified disallowance in the tax audit report is missing from the return of income, even if the assessee disputes it.
On Rectification Procedure: Held, yes; the rectification order passed under section 154 for A.Y. 2021-22 was invalid because the revenue failed to properly consider the assessee’s reply and provide an effective opportunity as required under section 154(3).
On Double Disallowance: Held, yes; since the assessee proved via supporting computations that the direct expenses were already disallowed under section 37, including them again under section 14A would cause an illegal double disallowance.
On Quantum of Disallowance: Held, yes; for the remaining indirect expenditure, a reasonable disallowance of Rs. 1,00,000 meets the ends of justice. The total section 14A disallowance for both years was restricted to the Rs. 1,00,000 originally offered by the assessee.

Key Takeaways

CPC’s Broad Processing Scope: An adjustment made by the CPC during original processing under section 143(1) cannot be declared void or ultra vires simply because the assessee raises a dispute, provided due notice was issued.
Prohibition on Double Jeopardy in Tax: The revenue cannot disallow the same business expenditure under two different sections (section 37 and section 14A), as double disallowance violates basic principles of income computation.
Natural Justice in Rectification: Any modification of an assessment to an assessee’s detriment via section 154 requires strict compliance with natural justice; a failure to actively consider the assessee’s written response vitiates the rectification order.

IN THE ITAT MUMBAI BENCH ‘C’

Parle Biscuits (P.) Ltd.

Dy Commissioner of Income-tax, Central Circle 5(4)^*

ANIKESH BANERJEE, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal Nos. 1050 and 1051 (Mum) of 2026
[Assessment years 2021-22 and 2022-23]

MAY 12, 2026

Ketan Ved for the Applicant. R.A. Dhyani, CIT DR and V.S. Mahajan, Sr. DR for the Respondent.

ORDER

Makarand Vasant Mahadeokar, Accountant Member.- These two appeals by the assessee are directed against separate orders passed by the Office of learned Commissioner of Income Tax (Appeals), Addl./JCIT(A)-1, Vadodara [hereinafter referred to as “CIT(A)”] under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”]. For A.Y. 2021-22, the impugned appellate order is dated 07.11.2025, arising out of the rectification order passed by CPC under section 154 read with section 143(1) dated 18.10.2024. For A.Y. 2022-23, the impugned appellate order is dated 07.11.2025, arising out of the intimation issued by CPC under section 143(1) dated 29.07.2023. Since common issues are involved, both the appeals are heard together and are being disposed of by this consolidated order.

Brief Facts of the Case

2. The assessee is a private limited company engaged in the business of manufacturing and trading of biscuits and confectionery products through its own as well as contract manufacturing units.

3. For both the years under consideration, the assessee filed its return of income declaring substantial taxable income, which was processed by the Centralized Processing Centre (CPC) under section 143(1) of the Act. In the case of A.Y. 2021-22, the matter further culminated in a rectification order passed under section 154 read with section 143(1), whereas for A.Y. 2022-23, the controversy arises from the original intimation issued under section 143(1).

3.1 In both the years, while processing the return of income, the CPC made adjustments primarily on the ground that there existed inconsistencies between the figures reported in the return of income and those reflected in the tax audit report. Based on such alleged inconsistencies, adjustments were made to the total income, inter alia, by way of disallowance under section 14A of the Act and certain other items relating to profit reconciliation and employee-related expenses. The adjustments resulted in enhancement of income and consequential tax demand.

4. The assessee preferred appeal before CIT(A). The assessee challenged before the learned CIT(A) the jurisdiction of CPC to make adjustments under section 143(1) and to invoke rectification under section 154, particularly in respect of disallowance under section 14A and also the disallowance on merit. The learned CIT(A) held that the adjustments carried out by CPC while processing the return under section 143(1) were based on inconsistencies apparent from the return of income visa-vis the tax audit report and, therefore, fell within the scope of section 143(1)(a)(iv) of the Act. In so far as A.Y. 2021-22 is concerned, the learned CIT(A) further held that the rectification carried out under section 154 was also valid, observing that the processing under section 143(1) is a system-driven mechanism and that the corrections were made on the basis of apparent discrepancies emerging from the record. However, on the issue of disallowance under section 14A, the learned CIT(A) found merit in the contention of the assessee to the extent that the assessee had already made a suomotu disallowance in the return of income. Accordingly, upon verification of the computation of income and audit report, the learned CIT(A) restricted the disallowance under section 14A to the extent of the balance amount after reducing the disallowance already made by the assessee and thus granted partial relief.

5. Aggrieved by the orders of CIT(A), the assessee is in appeal before us raising following grounds of appeal:

In ITA No. 1050/Mum/2026 for A.Y. 2021-22

1. Adjustment made under section 143(1)(a)(iv) of the Act is void, bad in law, ultra vires and contrary to the provisions of law and facts

1.1 The learned CIT(A) erred in confirming the adjustments made by the learned Assistant Director of Income-tax, CPC, Bengaluru (ADIT) in the rectification order passed under section 154 of the Act read with section 143(1) of the Act without appreciating the fact that no adjustment can be made on debatable issue while issuing the intimation under section 143(1)(a) and rectification thereof under section 154 of the Act.

1.2 The learned CIT(A) erred in not appreciating that suo-moto rectification was made without providing an opportunity of being heard under section 154(3) of the Act.

1.3 The learned CIT(A) erred in not appreciating the submissions by the appellant in the correct perspective.

2. Disallowance of expenses under section 14A of the Act

2.1 The learned CIT(A) erred in confirming the additional disallowance of INR 1,43,34,800 under section 14A of the Act as expenses incurred in respect of tax-free income.

2.2 The learned CIT(A) erred in not appreciating that the impugned rectification order disallowing expenses under section 14A of the Act on a legal issue which is subject matter of debate is outside the scope of section 154 read with section 143(1) of the Act.

2.3 The learned CIT(A) erred in not considering the decision of Hon’ble Mumbai Tribunal in the appellant’s own case for AYs 2008-09 to 201112.

3. Levy of interest under section 234A of the Act

3.1 The learned CIT(A) erred in confirming the incorrect levy of interest under section 234A of the Act.

4. Excess levy of interest under section 234B of the Act

4.1 The learned CIT(A) erred in confirming the incorrect computation of interest under section 234B of the Act.

5. General

5.1 Each one of the above grounds of appeal is without prejudice to the other.

5.2 The appellant reserves the right to amend, alter or add to the grounds of appeal.

In ITA No. 1050/Mum/2026 for A.Y. 2022-23

1. Adjustment made under section 143(1)(a)(iv) of the Act is void, bad in law, ultra vires and contrary to the provisions of law and facts

1.1 The learned CIT(A) erred in confirming the adjustments made by the learned Assistant Director of Income-tax, CPC, Bengaluru (ADIT) in the intimation passed under section 143(1) of the Act without appreciating the fact that no adjustment can be made on debatable issue while issuing the intimation under section 143(1)(a) of the Act.

1.2 The learned CIT(A) erred in not appreciating the submissions by the appellant in the correct perspective.

2. Disallowance of expenses under section 14A of the Act

2.1 The learned CIT(A) erred in confirming the additional disallowance of INR 1,41,15,302 under section 14A of the Act as expenses incurred in respect of tax-free income.

2.2 The learned CIT(A) erred in not appreciating that the impugned intimation disallowing expenses under section 14A of the Act on a legal issue which is subject matter of debate is outside the scope of section 143(1) of the Act.

2.3 The learned CIT(A) erred in not considering the decision of Hon’ble Mumbai Tribunal in the appellant’s own case for AYs 2008-09 to 201112.

3. Levy of interest under section 234A of the Act

3.1 The learned CIT(A) erred in confirming the incorrect levy of interest by the learned ADIT of INR 6,29,42,244 under section 234A of the Act.

4. Excess levy of interest under section 234B of the Act

4.1 The learned CIT(A) erred in confirming the incorrect computation of interest by the learned ADIT of INR 1,21,39,614 under section 234B of the Act.

5. General

5.1 Each one of the above grounds of appeal is without prejudice to the other.

5.2 The appellant reserves the right to amend, alter or add to the grounds of appeal.

6. The learned Authorised Representative (AR), reiterating the facts challenged the adjustments carried out by CPC under section 143(1) and the subsequent rectification under section 154. The learned AR submitted that the assessee had filed its return of income for A.Y. 2021-22 on 15.03.2022 declaring total income of Rs. 14,90,40,39,780/-. The said return was processed by the CPC under section 143(1) of the Act vide intimation dated 23.12.2022, wherein the total income was computed at Rs. 14,96,86,44,590/- after making adjustments, inter alia, on account of amount of profit chargeable to tax under section 41 of Rs. 6,12,43,292/-, adjustment in respect of leave encashment of Rs. 2,31,931/-, and adjustment in respect of bonus/commission payable to employees amounting to Rs. 31,29,581/-.

6.1 It was further submitted that against the aforesaid intimation, the assessee had preferred an appeal before the appellate authority and had also filed rectification applications under section 154 of the Act pointing out mistakes apparent from record. The details of such rectification applications were placed on record, including application dated 19.01.2023 against the intimation under section 143(1), and subsequent applications dated 14.04.2023, 18.04.2023, 29.08.2023 and 10.07.2024 seeking reprocessing of the return. However, it was contended that the CPC failed to grant appropriate relief on the issues raised. Instead, the Deputy Director of Income-tax, CPC, passed a rectification order dated 18.10.2024 under section 154 of the Act, whereby an additional disallowance under section 14A amounting to Rs. 4,25,73,518/- was made and the earlier adjustments were retained, resulting in enhancement of total income.

6.2 The AR submitted that the adjustments made by CPC are beyond the scope of section 143(1)(a)(iv), which permits only prima facie adjustments based on apparent errors. It was contended that the issue of disallowance under section 14A is highly debatable and requires examination of facts, and therefore cannot be subject matter of adjustment under section 143(1). It was further contended that the power under section 143(1) is limited only to obvious and self-evident disallowances and cannot extend to issues involving interpretation or verification. The AR also contended that the rectification under section 154 is also invalid since the issue is not a “mistake apparent from record” but a debatable issue.

6.3 The AR strongly contended that the rectification order under section 154 was passed in violation of section 154(3) and principles of natural justice. It was submitted that no opportunity of being heard was granted before enhancing the disallowance in rectification proceedings and the response filed by the assessee during the original 143(1) proceedings was not considered while passing the rectification order.

6.4 The AR submitted detailed reconciliation of disallowance under section 14A and explained that the total disallowance as per tax audit report (Clause 21(h) of Form 3CD) amounted to Rs. 4,26,73,518/-, which included:

Direct expenses of Rs. 2,83,38,718/- relating to taxable income (dividend and capital gains), already disallowed under section 37; and

ii.

Indirect expenses of Rs. 1,43,34,800/-.

The direct expenses of Rs. 2,83,38,718/- had already been disallowed in the return of income under section 37, and therefore cannot again be disallowed under section 14A.

Out of the indirect expenses, the assessee had already made a further disallowance of Rs. 1,00,000/- under section 14A based on Tribunal orders in assessee’s own case. Accordingly, the AR submitted that any further disallowance would result in double disallowance, which is impermissible in law.

6.5 On failure of CPC to consider response of the assessee, it was submitted that during the original processing under section 143(1), the assessee had filed a detailed response explaining the reconciliation of section 14A disallowance. The CPC had accepted the explanation at that stage and did not make disallowance under section 14A, however, in the subsequent rectification proceedings, the CPC ignored the earlier response and made fresh disallowance without any fresh notice or opportunity, which is arbitrary and unsustainable.

6.6 The learned AR further submitted that observations in the tax audit report are merely opinions of an independent professional and cannot bind the assessee, and that such observations by themselves cannot justify disallowance under section 143(1)(a)(iv), particularly when the same are contrary to the settled legal position. Accordingly, it was contended that the adjustment made by CPC solely on the basis of tax audit report is unsustainable in law.

6.7 The AR relied on several judicial precedents to contend that debatable issues cannot be subject matter of adjustment under section 143(1) including:

Bajaj Auto Finance Ltd. v. CIT 404 ITR 564 (Bombay)

ii.

Khatau Junkar Ltd. v. K.S. Pathania 196 ITR 55 (Bombay)

iii.

Kalpesh Synthetics (P.) Ltd. v. Dy. CIT 195 ITD 142/96 ITR(T) 690 (Mumbai – Trib.)

6.8 The AR thus submitted that the issue of disallowance under section 14A being debatable, the adjustment is beyond jurisdiction.

6.9 On the merits of the disallowance relating to partial confirmation of disallowance by the learned CIT(A), the learned AR submitted that out of the total amount reported in Clause 21(h) of Form 3CD, a sum of Rs. 2,83,38,718/- representing direct expenses had already been disallowed by the assessee under section 37 of the Act while computing the total income and the CIT(A) has given relief to that extent. The learned AR further submitted that in so far as the balance disallowance of Rs. 1,43,34,800/- is concerned, the assessee had, on a conservative basis, already disallowed a sum of Rs. 1,00,000/- towards administrative expenses under section 14A, following the consistent view taken by the co-ordinate benches in assessee’s own case for A.Ys. 2008-09 to 2011-12. It was submitted that the Hon’ble Tribunal, in those years, after considering the nature of investments and expenditure, had held that over and above PMS fees and depository charges, a further disallowance of Rs. 1,00,000/- would meet the ends of justice. It was further contended that during the year, the assessee had earned dividend income and capital gains which were duly offered to tax, and also earned tax-free interest income from bonds. However, such interest income is directly credited to the bank account and no specific expenditure can be said to have been incurred for earning the same. In these circumstances, the learned AR submitted that no further disallowance beyond Rs. 1,00,000/- is warranted under section 14A of the Act.

6.10 Accordingly, it was submitted that the partial confirmation of disallowance by the learned CIT(A) is unsustainable and the disallowance under section 14A be restricted to the amount already disallowed by the assessee in the return of income.

7. Relating to the A.Y. 2022-23, the learned Authorised Representative submitted that the assessee filed its original return of income on 28.12.2022 declaring total income of Rs. 1,75,17,28,510/- and thereafter filed a revised return on 31.12.2022 declaring total income of Rs. 1,74,36,63,176/-. The revised return was processed by CPC under section 143(1) and an intimation dated 29.07.2023 was issued, wherein an adjustment of Rs. 2,09,39,865/- was made on account of disallowance under section 14A of the Act. The learned AR submitted that prior to making the said adjustment, the CPC had issued a communication dated 28.12.2022 proposing adjustment under section 143(1)(a)(iv) on account of alleged inconsistency between the return and the tax audit report. In response thereto, the assessee filed an online reply explaining that the disallowance of Rs. 2,10,39,865/- reported in Clause 21(h) of Form 3CD comprised of:

Direct expenses of Rs. 68,24,563/-, which pertained to taxable income in the nature of dividend and capital gains and had already been disallowed under section 37 while computing total income; and

ii.

Indirect expenses of Rs. 1,41,15,302/-, out of which the assessee had already disallowed a sum of Rs. 1,00,000/-under section 14A on a reasonable basis following the decisions of the Tribunal in assessee’s own case for A.Ys. 2008-09 to 2011-12.

7.1 It was submitted that despite the aforesaid detailed response, the CPC proceeded to make disallowance of Rs. 2,09,39,865/- under section 14A in the intimation dated 29.07.2023 without considering the explanation furnished by the assessee.

7.2 The learned AR further contended that the amount of Rs. 68,24,563/- had already been disallowed under section 37 and therefore its inclusion again under section 14A results in double disallowance. In respect of the balance indirect expenses of Rs. 1,41,15,302/-, it was submitted that the assessee had already made a reasonable disallowance of Rs. 1,00,000/- consistent with the earlier years, wherein the Tribunal had held that such disallowance would meet the ends of justice. It was also submitted that during the year the assessee had earned dividend and capital gains income which were offered to tax, and also earned tax-free interest income from bonds which was directly credited to the bank account, and no specific expenditure could be attributed to such income. Accordingly, it was contended that no further disallowance under section 14A was warranted beyond Rs. 1,00,000/- already disallowed by the assessee.

7.3 The learned AR thus submitted that the adjustment made under section 143(1)(a) is without jurisdiction as well as on merits unsustainable, and the disallowance under section 14A ought to be restricted to the amount already offered by the assessee.

8. The learned Departmental Representative, on the other hand, strongly relied upon the order of the learned CIT(A) and submitted that the adjustment made by the CPC is in accordance with law. It was contended that the disallowance under section 14A has been made on the basis of the figures reported by the tax auditor in Clause 21(h) of Form 3CD, which forms part of the return of income. It was further submitted that the learned CIT(A), after due verification, has already granted partial relief by restricting the disallowance to the extent not already disallowed by the assessee, and therefore no further interference is called for. Accordingly, the learned DR supported the findings of the learned CIT(A) and prayed for dismissal of the grounds raised by the assessee.

9. We have heard the rival submissions and perused the material placed before us. We have also considered the statutory scheme of section 143(1)(a), the relevant extract of the Guidance Note on Tax Audit under section 44AB issued by ICAI, and the judicial precedents relied upon by the assessee. The first controversy which arises for our consideration is whether the adjustment proposed and made by the CPC under section 143(1)(a)(iv) on the basis of Clause 21(h) of Form 3CD can be said to be without jurisdiction merely because the assessee disputed the disallowance in its response. The second controversy, which is confined to A.Y. 2021-22, is whether the subsequent rectification order passed under section 154 read with section 143(1) is sustainable when the same was passed without properly considering the assessee’s reply and without granting effective opportunity before enhancing the liability.

9.1 Section 143(1)(a), as applicable to the years under consideration, empowers the processing authority to compute the total income or loss after making certain specified adjustments. Clause (iv) specifically provides for adjustment in respect of “disallowance of expenditure or increase in income indicated in the audit report but not taken into account in computing the total income in the return.” The proviso thereto mandates that no such adjustment shall be made unless an intimation is given to the assessee, either in writing or in electronic mode, and the second proviso further mandates that the response received from the assessee, if any, shall be considered before making such adjustment. The relevant statutory portion reads as under:

“(iv) disallowance of expenditure or increase in income indicated in the audit report but not taken into account 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:]”

9.2 Thus, after the statutory insertion of clause (iv) w.e.f. 01.04.2027, there is a clear legislative departure from the earlier narrow concept of prima facie adjustment which was considered in the older line of authorities rendered in the context of the preamended section 143(1)(a).

9.3 The present provision expressly takes within its sweep a disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return. Therefore, where the tax audit report itself contains a quantified disallowance, and the assessee has not correspondingly taken such amount into account while computing the returned income, the case prima facie falls within the text of section 143(1)(a)(iv). The statute does not require that the CPC must, at the stage of processing, conduct a detailed assessment equivalent to section 143(3). What is required is that a proposed adjustment must be intimated to the assessee and the reply of the assessee must be considered before the adjustment is made.

9.4 In the present case, it is not in dispute that, for both years, the proposed adjustment was founded on the figure reported in Clause 21(h) of Form 3CD relating to disallowance under section 14A. It is also not in dispute that the CPC issued communication proposing adjustment and the assessee filed response thereto. For A.Y. 2022-23, the communication proposing adjustment under section 143(1)(a)(iv) was issued on 28.12.2022 and the assessee responded online explaining that the disallowance of Rs. 2,10,39,865/- as per Clause 21(h) comprised direct expenses of Rs. 68,24,563/- and indirect expenses of Rs. 1,42,15,302/-, and that Rs. 1,00,000/- had already been disallowed under section 14A on the basis of the Tribunal orders in assessee’s own case. For A.Y. 2021-22 also, the assessee had filed a response to the proposed adjustment, wherein it was explained that the amount of Rs. 4,26,73,518/- as per Clause 21(h) comprised Rs. 2,83,38,718/- of direct expenses and Rs. 1,43,34,800/- of indirect expenses, and that Rs. 1,00,000/- had already been disallowed under section 14A. These facts establish that the first and second provisos to section 143(1)(a) stood substantially complied with at the stage of processing the return.

9.5 We are, therefore, unable to accept the assessee’s broad proposition that merely because the issue concerns section 14A, the CPC had no jurisdiction at all to invoke section 143(1)(a)(iv). The jurisdictional trigger under clause (iv) is not the final correctness of disallowance on merits, but the existence of a disallowance of expenditure indicated in the audit report which has not been taken into account in computing the total income in the return. Once such figure is indicated in Form 3CD and the assessee’s computation does not fully take it into account, the CPC is not denuded of jurisdiction to propose and make an adjustment, subject, of course, to consideration of assessee’s response and subject further to appellate correction on merits.

9.6 The ICAI Guidance Note on Tax Audit under section 44AB also supports the position that Clause 21(h) is a reporting clause relating to section 14A. The Guidance Note states that “Clause 21(h)” deals with “Amount of deduction inadmissible in terms of section 14A in respect of the expenditure incurred in relation to income which does not form part of the total income.” It further explains that under section 14A no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of total income, and that under sub-section (2) the Assessing Officer shall determine such expenditure in accordance with the prescribed method only when, having regard to the accounts, he is not satisfied with the correctness of the claim of the assessee. The Guidance Note further clarifies that Rule 8D is to be adopted by the Assessing Officer when he is not satisfied with the amount determined by the assessee and that Rule 8D does not mandate that the assessee should necessarily compute the disallowance as per the method prescribed thereunder.

9.7 The above Guidance Note is relevant in two distinct ways. First, it shows that the reporting in Clause 21(h) is not alien to the statutory scheme and is specifically intended to disclose the amount considered inadmissible under section 14A. Therefore, if the amount so indicated is not taken into account in the computation, CPC can validly invoke section 143(1)(a)(iv). Secondly, the same Guidance Note also makes it clear that Rule 8D cannot be applied mechanically on merits unless the statutory condition of dissatisfaction, having regard to the accounts, is satisfied. This second aspect goes to the quantum and sustainability of disallowance on merits and not to the initial jurisdiction of CPC to issue an intimation under section 143(1)(a)(iv).

9.8 We have also considered the reliance placed by the assessee on the decision of the co-ordinate bench in Kalpesh Synthetics (P.) Ltd. (supra). In that case, the adjustment was made on the basis of the tax auditor’s reporting regarding delay in deposit of employees’ contribution to PF/ESI. The Tribunal deleted the adjustment because, in the light of binding jurisdictional High Court decisions then applicable, such payment, if made before the due date of filing return under section 139(1), was allowable, and therefore the mere reporting of the due date under the respective welfare statute could not be treated as an indication of disallowance. The headnote itself records that “due date under Explanation to section 36(1)(va) as mentioned in tax audit report was judicially held to be not decisive by High Court for determining disallowance in computation of total income” and that the High Courts had held that disallowance would not arise when payment was made before due date under section 139(1).

9.9 The ratio of Kalpesh Synthetics (P.) Ltd. (supra) is, therefore, fact-specific. It was a case where the tax auditor reported a factual due date under another statute, but the legal consequence of that factual reporting had already been settled by binding High Court decisions in favour of the assessee. The Co-ordinate Bench itself observed that “the due date. has not been found to be decisive in the light of the law laid down by Hon’ble Courts above” and therefore reporting of payment beyond that date could not constitute “disallowance of expenditure indicated in the audit report” for the purpose of section 143(1)(a)(iv).

9.10 . In fact, the very same decision in Kalpesh Synthetics (P.) Ltd. (supra) recognises the enlarged scope of section 143(1)(a) after the statutory amendments. The Co-ordinate Bench observed that there is “a significant paradigm shift in the processing of income tax returns under section 143(1)” and that decisions rendered in the context of old section 143(1)(a), including Khatau Junkar Ltd. (supra), cease to be relevant to that extent. The Co-ordinate Bench further held that the scope of permissible adjustments is now much broader and that, so long as an adjustment fits within section 143(1)(a)(i) to (v), subject to compliance with the first and second provisos, such adjustment is permissible. Thus, far from laying down that no adjustment can ever be made on the basis of the tax audit report, the decision supports the proposition that the present statutory scheme permits such adjustment where the case falls within clause (iv), subject to safeguards.

9.11 The assessee has also relied on the observations in Kalpesh Synthetics (P.) Ltd. (supra) that “what a tax auditor states in his report are his opinion and his opinion cannot bind the auditee at all.” The said observation cannot be read in isolation or divorced from the facts of that case. The Co-ordinate Bench was dealing with a situation where the audit report was sought to override binding jurisdictional High Court law. The Co-ordinate Bench observed that when the law enacted by the legislature has been construed by the jurisdictional High Court, the views expressed by the tax auditor cannot be reason enough to disregard the binding view of the High Court, and that adjustments under section 143(1)(a)(iv) must be read subject to a situation where the audit report has taken a stand contrary to law laid down by the Courts.

9.12 In the present case, the assessee has not shown any binding jurisdictional High Court decision which holds that no disallowance under section 14A can be made in the facts similar to the present case, or that the amount reported in Clause 21(h) can never be acted upon under section 143(1)(a)(iv). Therefore, the said observations do not invalidate the jurisdiction of CPC in the present case.

9.13 The reliance placed on Rajkot Engineering Association v. Union of India 162 ITR 28/(Gujarat) also does not carry the assessee’s case on jurisdiction any further. In that decision, while upholding the validity of section 44AB, the Hon’ble Gujarat High Court noticed that a reporting auditor’s certificate is a written confirmation of accuracy of facts whereas a report includes opinion, and that an auditor’s report may involve inquiry, examination or review. The extracted portion states that “A certificate is a written confirmation of the accuracy of the facts stated therein and does not involve any estimate or opinion. A report, on the other hand, is a formal statement usually made after an inquiry, examination or review of specified matters under report and includes the reporting auditor’s opinion thereon.” The said decision only explains the nature of tax audit reporting and does not deal with the specific statutory power subsequently enacted in section 143(1)(a)(iv). Therefore, while the audit report may not be conclusive on merits and while the assessee is always entitled to explain or rebut the reporting, the existence of such report cannot be ignored when the statute itself specifically permits adjustment of expenditure indicated in the audit report but not taken into account in computing total income.

9.14 We also distinguish the older decisions relied upon by the assessee such as Bajaj Auto Finance Ltd., (supra) KhatauJunkar Ltd., (supra) Modern Fibotex India Ltd. v. Dy. CIT [1995] 212 ITR 496 (Calcutta), CIT v. GVK Industries Ltd. (Telangana) and similar authorities. These decisions broadly lay down that debatable issues or issues requiring further enquiry cannot be adjusted under the earlier summary scheme or on facts where the adjustment itself was not clearly covered by the statutory language. However, after insertion of clause (iv), Parliament has expressly identified audit report-based disallowance as a permissible class of adjustment. The principle that debatable issues cannot be summarily adjudicated remains relevant while deciding the correctness or quantum of the disallowance on merits, but it cannot be stretched to hold that CPC lacks jurisdiction even to act upon a specific disallowance indicated in Form 3CD after issuing notice and considering the assessee’s response.

9.15 Before adverting to the above conclusion, it is necessary to delineate the precise legal position regarding the role of the tax auditor vis-a-vis the operation of section 143(1)(a)(iv).

9.16 The amount reported by the auditor in Clause 21(h) of Form 3CD is essentially a professional disclosure based on examination of records and, where required, on management representations, as recognised in the ICAI Guidance Note. The auditor does not exercise any adjudicatory function under the Act and is neither required nor empowered to determine the correct quantum of disallowance in accordance with law. At best, the auditor is expected to exercise his professional expertise to evaluate, verify and report the basis on which the assessee has arrived at such disallowance, if any, and to appropriately disclose any divergence or qualification. Such reporting remains in the realm of professional opinion and cannot assume the character of a binding determination of taxable income.

9.17 More importantly, even in cases where the tax auditor proceeds to quantify disallowance by adopting Rule 8D, such computation cannot be equated with the statutory determination contemplated under section 14A(2). In the present case, the auditor has not discharged even the basic expected functions, inasmuch as there is nothing on record to indicate that he has examined or evaluated the correctness of the disallowance, if any, computed by the assessee having regard to its accounts, nor has he taken into consideration the binding judicial precedents governing the issue. Instead, the quantification appears to have been made in a mechanical manner by straightaway applying Rule 8D.

9.18 It is well settled that the invocation of Rule 8D is not automatic and is conditional upon the Assessing Officer recording a clear dissatisfaction with the correctness of the assessee’s claim having regard to the accounts, which is a jurisdictional requirement to be fulfilled by the Assessing Officer alone. The auditor, by the very nature of his function, neither records nor is competent to record such statutory satisfaction. Therefore, any quantification made in the audit report based on Rule 8D, particularly in the absence of independent evaluation of the assessee’s claim and without due regard to judicial precedents, remains merely indicative in nature and cannot be elevated to the status of a conclusive or binding determination under section 14A of the Act.

9.19 At the same time, the scheme of section 143(1)(a)(iv), as amended, specifically contemplates a situation where the CPC may make an adjustment based on “disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return.” Thus, while the auditor’s quantification is not conclusive or determinative of the assessee’s tax liability, the statute nevertheless recognises such reporting as a valid input for triggering an adjustment at the stage of processing, subject to issuance of intimation and due consideration of the assessee’s response.

9.20 Accordingly, the auditor’s quantification, even if it proceeds on a mechanical application of Rule 8D without recording dissatisfaction as contemplated under section 14A(2), does not attain finality in law. However, its presence in the audit report cannot be disregarded for the limited statutory purpose of section 143(1)(a)(iv). It operates only as a trigger for prima facie adjustment and cannot substitute or foreclose a proper adjudication of the issue in accordance with the provisions of the Act.

10. We, therefore, hold that for A.Y. 2022-23, the adjustment made by CPC under section 143(1)(a)(iv) cannot be held to be void, bad in law or ultra vires merely on the ground that the assessee disputed the disallowance. The CPC had issued the proposed adjustment communication dated 28.12.2022, the assessee filed its online response, and the adjustment was made on the basis of Clause 21(h) of Form 3CD. The remedy of the assessee lies in contesting the quantum and merits of disallowance before the appellate authority, which the assessee has in fact done. Accordingly, Ground No. 1 and sub-grounds 1.1 and 1.2 for A.Y. 2022-23 are dismissed.

10.1 For A.Y. 2021-22, however, the position has an additional dimension. In the original intimation dated 23.12.2022, the CPC did not make the impugned section 14A disallowance after considering the assessee’s response. Thereafter, the matter was reopened by way of rectification proceedings under section 154, and the rectification order dated 18.10.2024 was passed making disallowance under section 14A. The assessee had specifically contended that the response filed earlier and the explanation furnished in the rectification proceedings were not considered and that no effective opportunity under section 154(3) was granted before enhancing the liability.

10.2 Section 154(3) embodies a clear statutory rule that where rectification has the effect of enhancing an assessment or otherwise increasing the liability of the assessee, no such amendment shall be made unless the authority concerned has given notice to the assessee of its intention and has allowed a reasonable opportunity of being heard. In the present case, the rectification under section 154 resulted in enhancement of liability by making a fresh disallowance under section 14A. Such exercise could not have been undertaken in a mechanical manner without dealing with the assessee’s explanation, more particularly when the assessee had already placed on record a reconciliation of the amount reported in Form 3CD.

10.3 Even though we have held that the CPC had jurisdiction under section 143(1)(a)(iv) to make an adjustment based on the tax audit report, the power under section 154 stands on a different footing. Section 154 is not a substitute for review, nor can it be used to revisit an issue without considering the assessee’s response where the rectification enhances the liability. The defect in the present rectification order is not merely technical. The assessee’s explanation went to the root of the matter, namely whether the amount reported in Clause 21(h) had already been partly disallowed under section 37 and whether only Rs. 1,00,000/- was required to be disallowed under section 14A as per the consistent view of the Co-ordinate Benches in earlier years. Failure to consider such explanation vitiates the rectification order.

10.4 Accordingly, for A.Y. 2021-22, we uphold the legal position that an adjustment under section 143(1)(a)(iv), if otherwise made at the stage of original processing after issuing notice and considering response, would be within jurisdiction. However, the rectification order passed under section 154 read with section 143(1) dated 18.10.2024, in so far as it makes the impugned disallowance under section 14A without properly considering the assessee’s reply and without effective opportunity as contemplated under section 154(3), is held to be invalid. Ground No. 1.1 is rejected to the extent it challenges the general jurisdiction of CPC under section 143(1)(a)(iv), but Ground No. 1.2 is allowed to the extent it challenges the suomotu rectification under section 154 without due consideration of the assessee’s reply. Ground No. 1.3 is consequential.

10.5 Having so held, we clarify that the above conclusion is confined to the jurisdictional challenge. The quantum and sustainability of disallowance under section 14A, including the assessee’s plea that no dissatisfaction was recorded before applying Rule 8D and that the disallowance deserves to be restricted to Rs. 1,00,000/- following the Co-ordinate Bench’s orders in assessee’s own case for earlier years, is considered separately while adjudicating Ground No. 2.

11. We now proceed to adjudicate Ground No. 2 raised by the assessee for both the assessment years, which pertains to the disallowance under section 14A of the Act as confirmed by the learned CIT(A).

12. We have carefully considered the rival submissions and perused the material placed on record. The core grievance of the assessee is that the disallowance made under section 14A, even as partly sustained by the learned CIT(A), is excessive and contrary to the settled legal position, particularly in view of the fact that (i) part of the expenditure has already been disallowed under section 37, and (ii) no satisfaction has been recorded before invoking the mechanism of Rule 8D.

12.1 From the facts on record, it is evident that the disallowance reported in Clause 21(h) of Form 3CD comprised two components, namely direct expenses relatable to taxable income and indirect expenses. The assessee has demonstrated, with supporting computation, that the direct expenses forming part of the reported amount were already disallowed under section 37 while computing the total income. This factual position has not been controverted by the Revenue. Therefore, inclusion of such amount again in the computation under section 14A would clearly result in double disallowance, which is impermissible in law.

12.2 In so far as the balance indirect expenditure is concerned, the assessee has consistently taken a position that a reasonable disallowance of Rs. 1,00,000/- would meet the ends of justice. This position is not ad hoc but is based on the orders of the coordinate benches in assessee’s own case for A.Ys. 2008-09 to 2011-12, wherein the Co-ordinate Bench, after examining the nature of investments, PMS fees and depository charges, held that over and above such specific expenses, a further disallowance of Rs. 1,00,000/- would be appropriate.

12.3 At this stage, it is relevant to examine the statutory scheme of section 14A. Sub-section (2) of section 14A provides that the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income in accordance with the prescribed method, only if he is not satisfied with the correctness of the claim of the assessee having regard to the accounts. Thus, recording of dissatisfaction is a sine qua non before invoking Rule 8D.

12.4 In the present case, the disallowance has been made in a summary manner under section 143(1), and thereafter partially sustained by the learned CIT(A), without there being any finding that the claim of the assessee, as reflected in its books of account, is incorrect or unsatisfactory. There is no discussion, either in the processing or in the appellate order, demonstrating application of mind to the accounts of the assessee so as to record dissatisfaction as contemplated under section 14A(2). In the absence of such satisfaction, the mechanical adoption of the figure reported in the tax audit report or any enhanced figure cannot be sustained.

12.5 Further, it is also not in dispute that during the year, the assessee had earned dividend and capital gains income which were offered to tax, and also earned tax-free interest income which was directly credited to the bank account. The assessee has explained that no specific expenditure is attributable to such exempt income and, on a conservative basis, it has already disallowed Rs. 1,00,000/- towards administrative expenses. This explanation finds support from the earlier orders of the Coordinate Bench in assessee’s own case, which have not been shown to have been reversed or modified by any higher forum.

12.6 We also find merit in the submission of the assessee that the quantification in the tax audit report cannot be adopted mechanically for the purpose of section 14A disallowance. As noted earlier, the Guidance Note itself recognises that such reporting is based on examination and estimation and does not substitute the statutory requirement of satisfaction under section 14A(2).

12.7 In view of the foregoing discussion, we are of the considered view that:

the disallowance under section 14A, to the extent it includes expenditure already disallowed under section 37, is unsustainable;

ii.

the further disallowance made without recording satisfaction as required under section 14A(2) cannot be upheld; and

iii.

the consistent view taken by the Co-ordinate Bench in assessee’s own case for earlier years, restricting the disallowance to Rs. 1,00,000/-, deserves to be followed in the absence of any distinguishing facts.

12.8 Accordingly, we direct that the disallowance under section 14A for both the assessment years under consideration be restricted to Rs. 1,00,000/- as already offered by the assessee.

Ground No. 2 raised by the assessee for both the years is partly allowed in the above terms.

13. In the result, the appeals of the assessee for both the assessment years are partly allowed in the manner indicated hereinabove.