ITAT Rules Doctrine of Merger not applicable to Income Retained by CPC from Intimation u/s 143(1)(a) of Income Tax Act [Read Order]

The Kolkata Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that the doctrine of merger did not apply to the income retained by the CPC in its intimation under Section 143(1)(a) of the Income Tax Act,1961.

MSTC Ltd.,the appellant-assessee,operated in e-commerce and trading, providing services for various commodities and conducting e-auctions for assets. For the Assessment Year ( AY ) 2021-22, the company filed its return on January 17, 2022, reporting a loss of ₹36,282,050 and claiming a refund of ₹144,150,124 based on Tax Deducted at Source ( TDS ) and Advance Tax payments. However, an intimation issued on September 22, 2022, computed total income at ₹2,231,477,950, resulting in a demand of ₹81,859,786.

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The assessee filed an appeal with the Commissioner of Income Tax (Appeals) [CIT(A)] on October 18, 2022, along with rectification petitions under Section 154 of the Act. The case was selected for scrutiny due to a low Profit Before Depreciation, Interest, and Tax ( PBDIT ) ratio reported in the audit.

In the assessment order, the Assessing Officer ( AO ) noted a higher PBDIT than reported, disallowed gratuity and leave encashment expenses totaling ₹1,81,64,316, and 30% of TDS-related expenses. The AO concluded that no adverse inference was warranted, finalizing the assessment at ₹2,231,477,950.

The CIT(A) reviewed and dismissed the assessee's appeal, prompting the current appeal before the tribunal, which will consider the grounds raised against the CIT(A)'s decision and the AO's assessment.

The tribunal evaluated the assessee’s reliance on the doctrine of merger, particularly focusing on whether the Section 143(3) assessment nullified the prior CPC adjustment.It noted that the doctrine of merger generally applies when an order under review is modified, reversed, or affirmed by a superior forum, thereby making the latter order operative.

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Citing precedents, including Gojer Bros. (P) Ltd. v. Ratan Lal Singh (1974) and Kunhayammed v. State of Kerala (2000), the ITAT concluded that the doctrine of merger did not apply because the AO’s Section 143(3) order did not modify or override the CPC addition but instead retained it without adjustment. Consequently, the initial CPC intimation remained in effect.

The two member bench comprising Sonjoy Sarma ( Judicial Member ) and Rakesh Mishra ( Accountant Member ) dismissed the appeal and stated that the assessee might pursue other avenues for relief regarding the addition made in the CPC intimation under section 143(1)(a).

In conclusion, the appeal was dismissed.

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