2017 (2) TMI 171 - AT - Income Tax

Rectification of mistake - eligibility for the benefit of exemption u/s 10(35) upon the dividend income received from mutual funds - whether claim can be denied to the assessee, if the claim of such benefit was not made in the original return, but made through petition u/s 154 only when its need arose as a result of re-computing of income by the AO? - Held that - AO had himself granted the benefit of exemption and that too u/s 154. Thus, the AO was very much aware of this fact that dividend income of the assessee is eligible for the benefit of exemption u/s 10(35). In our considered view, not granting similar relief by the AO in the year before us, under these circumstances, constitutes a mistake apparent on records. Further, courts have time and again held that if technical considerations are pitted against the substantive justice, it is the latter which prevails. Moreover, article 265 of the Constitution of our country clearly stipulates that no tax can be collected except with the authority of law. Thus, main object of the income tax proceedings is to enable the AO to compute the taxable income and tax payable thereon in accordance with law. The role assigned to the AO by the legislature is quite onerous. Therefore, the AO should not take undue advantage of ignorance of the assessee and should follow a fair approach by allowing legitimate claims of the assessee so that only that amount of tax is recovered from the assessee which is due as per law. The impugned income has been received by the assessee from Kotak Mutual Fund which is duly eligible for the benefit of exemption u/s 10(35). No doubts were raised by the Ld. DR also in this regard before us. Under these circumstances, in our considered opinion, the AO should have granted benefit of exemption to the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Entitlement to exemption on dividend income from mutual funds under Section 10(35) of the Income Tax Act, 1961.
2. Rectification of the assessment order under Section 154 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Entitlement to Exemption on Dividend Income from Mutual Funds Under Section 10(35):

The assessee contended that the dividend income of ?48,90,114/- received from mutual funds should be exempt under Section 10(35) of the Income Tax Act, 1961. Initially, the Assessing Officer (AO) treated the interest on fixed deposits, interest received on loans, and income from mutual funds as 'Income from other sources' and did not reduce these from development expenses. This decision was upheld by the Tribunal, which did not adjudicate the issue of exemption under Section 10(35) as it was not raised before the lower authorities. The assessee argued that similar exemption was granted for the assessment year 2005-06 under Section 154, and the same benefit should be extended for the assessment year in question.

2. Rectification of the Assessment Order Under Section 154:

The assessee filed an application under Section 154 for rectification, pointing out that the dividend income should be exempt under Section 10(35). The AO rejected this application, stating that the taxability of the income had attained finality based on the Tribunal's order and that Section 154 could only rectify mistakes apparent on record, not debatable issues. The CIT(A) upheld the AO's decision, leading the assessee to appeal before the Tribunal.

Tribunal's Analysis and Decision:

The Tribunal analyzed the facts and legal position, noting that the original return filed by the assessee set off the entire income, including the dividend income, against development expenses. The AO, however, taxed the income as 'Income from other sources' without granting exemption under Section 10(35). The Tribunal observed that the issue of exemption arose only when the AO recomputed the income, and the AO should have allowed the exemption as per law. The Tribunal highlighted that the AO had granted similar relief under Section 154 for the assessment year 2005-06, indicating awareness of the assessee's eligibility for exemption under Section 10(35).

The Tribunal emphasized that the AO's role is to assess income in accordance with the law and not take undue advantage of the assessee's ignorance. It cited Article 265 of the Constitution, which mandates that no tax can be collected without the authority of law. The Tribunal concluded that not granting the exemption constituted a mistake apparent on record and directed the AO to grant the benefit of exemption under Section 10(35) for the impugned dividend income.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal directing the AO to grant the benefit of exemption under Section 10(35) for the dividend income received from mutual funds. The Tribunal underscored the importance of assessing income in accordance with the law and ensuring that only the lawful amount of tax is recovered from the assessee. The decision emphasized fairness and objectivity in the assessment process, enhancing taxpayer confidence in the income tax department.