Business Audit Defense

Section 143(1) Intimation: This is an automated notice processed by the CPC (Centralised Processing Centre). It compares your return with TDS/Form 26AS data and identifies arithmetic mistakes, mismatches, or disallowances. Common issues: TDS credit mismatch, standard deduction not accounted, wrong assessment year, or MAT minimum tax adjustment. You can respond online with corrections or accept the intimation. Time limit: 9 months from end of financial year in which return was filed. Section 143(2) Scrutiny Notice: Issued by the Assessing Officer (AO) personally — this means the case has been selected for detailed scrutiny. AO can call for any document — financial statements, ledgers, invoices, bank statements. Selection criteria: random selection, risk-based parameters (income above threshold, international transactions), or suo motu selection by AO. Must be issued within 6 months of the end of the financial year in which the return was filed. This is more serious and requires comprehensive preparation. Failure to respond to 143(2) within 30 days can lead to ex-parte assessment where AO estimates income independently (often unfavourably).

Section 56(2)(viib) (commonly called "angel tax") applies when a closely held company issues shares at a price exceeding the Fair Market Value (FMV). The excess (issue price minus FMV) is taxed as "Income from Other Sources" in the hands of the company. Example: Startup raises ₹10 crore at ₹100/share when FMV (computed as per DCF or NAV method under Rule 11UA) is ₹30/share. Excess = ₹70 × number of shares × 30% tax = significant burden. DPIIT-registered startups are exempt from angel tax subject to conditions: total investment ≤ ₹25 crore from residents; cannot invest in land, building, jewellery, vehicles > ₹10 lakhs. Non-DPIIT startups can seek CBDT approval or challenge the FMV computed by AO. From Budget 2023, FMV determination options have been expanded. For foreign investors, Section 56(2)(viib) was extended to non-resident investors from October 2023, causing significant concern for Indian startups raising from foreign angels/VCs — this has been a hotly contested issue. Recent updates: CBDT issued circular in 2024 providing safe harbour for certain categories. If you receive a notice under 56(2)(viib), immediate action is required — the response strategy involves demonstrating genuine FMV through DCF (Discounted Cash Flow) valuation or challenging the AO's computation.

DRP (Dispute Resolution Panel) is exclusively available for: (1) Cases with TP adjustments (international transactions or specified domestic transactions); (2) Foreign companies (non-resident companies with PE in India). When a draft assessment order proposes TP additions, the company can choose between: CIT(A) route — file regular appeal after final assessment order (appeals order typically takes 1-3 years); DRP route — file objections within 30 days of draft order. DRP must issue directions within 9 months of filing objections (much faster). Advantages of DRP: Faster disposal (9 months vs years for CIT(A)); 3-Commissioner panel (more balanced than single CIT(A)); ITAT appeal still open against DRP directions; can suspend demand collection during DRP proceedings. Disadvantage: If DRP directions are adverse, AO passes final order incorporating those directions — next appeal is directly to ITAT (skip CIT(A) level). Which to choose: For TP disputes where you have strong factual/legal arguments and want faster resolution — DRP is better. For domestic tax issues mixed with TP — CIT(A) gives more flexibility. DRP has recently shown more taxpayer-friendly outcomes in comparable selection disputes and method selection TP cases.

Reopening under Section 147/148 has significantly changed: For AY 2021-22 onwards (Finance Act 2021 amendment): Reopening up to 3 years (if income escaped assessment > ₹50 lakhs) or 10 years (for cases where AO has evidence of income in India from assets outside India, or income earned from benami transactions). Old law (before AY 2021-22): Up to 4 years (regular) or 6 years (if escaped income > ₹1 lakh). Procedure for reopening (from 2021): Before issuing 148 notice, AO must send 148A notice with reasons for reopening. Assessee gets 15–30 days to respond. AO must pass order under 148A(d) allowing or rejecting reopening. Only then is 148 notice issued. This 148A procedure gives taxpayers an early opportunity to challenge the reopening itself (before assessment restarts), which is a significant taxpayer protection. Grounds to challenge 148A notice: No "new/tangible information" — AO cannot reopen merely based on information already available when original assessment was done; Change of opinion is not permissible; Income cannot be considered "escaped" if proper disclosure was made; Time limitation — notice beyond permitted period is invalid. High Courts have struck down many 148 notices on these grounds.

Section 14A disallows expenditure incurred in relation to income that is not includible in total income (exempt income) — such as dividend income (now taxable above ₹10 lakhs but was exempt), Section 10(38) LTCG exempt income (before 2018), PPF interest, tax-free bonds interest. If you earn exempt income, the AO can disallow proportionate expenses under Section 14A — even if you haven't claimed any expenditure against that income. Rule 8D (effective from AY 2008-09) provides the formula: Disallowance = Direct expenses + (Average investment × Net interest expenditure ÷ Total assets) + 0.5% of average value of investments. Companies holding shares, mutual funds, or other securities earning exempt income face this issue. Defense strategies: (1) If no expenditure was actually incurred for earning exempt income, 14A = ₹0 (companies like holding companies that have no borrowed funds and no business expenses); (2) Challenge Rule 8D applicability if AO invokes it without recording satisfaction about incorrectness of your self-computation; (3) ITAT has consistently held that Rule 8D cannot be applied mechanically — AO must first examine books to verify whether any expense was incurred. High/Supreme Court cases in taxpayer's favour: Many companies with clean balance sheets have successfully reduced 14A disallowances. Strategic planning: Ensure loan proceeds are not invested in tax-free securities — this directly triggers large 14A additions.