2022 (11) TMI 188 - AT - Income Tax

Rectification of the mistake committed in the return of income - Assessment of the returned loss - taxable income whilst processing us 143(1) of the Act - Deduction of remuneration partner from the presumptive income - Non maintaining the books of accounts - as argued notice under section 139(9) had been served upon the assessee within the due time - demand is arising on the assessee owing to the fact that at the time of filing return of income, the assessee inadvertently made certain errors as a result of which the remuneration and interest paid to partners was not allowed to the assessee - mistake committed by the assessee at the time of filing return of income was that though the assessee was not required to maintain the books of accounts since the return was filed under section 44AD of the Act, however in the return form the assessee had made inadvertently stated yes in the option asking whether the books of accounts are required to be maintained or not by the assessee. HELD THAT - We observe that in the instant set of facts, the demand is arising on the assessee owing to the fact that at the time of filing return of income, the assessee inadvertently made certain errors as a result of which the remuneration and interest paid to partners was not allowed to the assessee. It is not the claim of the Department that the assessee was not eligible to be assessed to tax under section 44AD of the Act or that the interest and remuneration paid to partners did not find support from the terms of the partnership deed, however, the Ld. DR has suggested that the assessee is open to pursuing alternate remedy under section 154 of the Act. High Court in the case of Devendra Pai 2021 (12) TMI 1218 - KARNATAKA HIGH COURT held that AO not supposed to take advantage of assessee s ignorance to collect tax more than legitimate tax. Keeping in view of the above principles, and in the interest of justice, we are hereby restoring the file to the assessing officer to grant a fresh opportunity of hearing to the assessee, and if the assessee is able to substantiate its claim as stated before us, then an opportunity may be granted for the assessee to rectify the inadvertent mistake made by the assessee in filing the return of income, which could not be rectified since notice under section 139(9) of the Act could not be served on the assessee within time so as to enable the assessee to rectify the mistake which had been done in the return of income. Appeal of the assessee is allowed for statistical purposes

Summary

Issues:
1. Assessment of returned loss as taxable income under section 143(1) of the Act.
2. Disallowance of interest and remuneration paid to partners under section 44AD(2) read with section 40(b) of the I.T. Act, 1961.
3. Jurisdictional issue regarding adjustment confirmed by the CPC under section 143(1) of the Act.
4. Opportunity for the assessee to rectify mistakes in the return of income due to delayed notice under section 139(9) of the Act.

Issue 1: Assessment of returned loss as taxable income under section 143(1) of the Act:
The case involved an appeal by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-3, Rajkot, confirming the assessment of the returned loss as taxable income under section 143(1) of the Act for the assessment year 2014-15. The assessee had initially declared a loss but was assessed at a taxable income. The contention was based on the inadvertent error made by the assessee while filing the return of income under section 44AD of the Act, which led to the disallowance of certain deductions. The Ld. CIT(Appeals) dismissed the appeal, stating that the assessee had the opportunity to rectify the mistake but failed to do so within the given timeline. However, the ITAT observed that the delay in serving the notice under section 139(9) prevented the assessee from rectifying the error. Citing precedents emphasizing natural justice and the duty of tax authorities, the ITAT allowed the appeal, granting the assessee a fresh opportunity to rectify the mistake.

Issue 2: Disallowance of interest and remuneration paid to partners under section 44AD(2) read with section 40(b) of the I.T. Act, 1961:
The assessee, a partnership firm engaged in retail trading, claimed interest and remuneration paid to partners as deductions under section 44AD(2) read with section 40(b) of the I.T. Act, 1961. However, these deductions were disallowed during the assessment process. The Ld. CIT(Appeals) upheld the disallowance, stating that the opportunity to rectify the error was available to the assessee within the given timeline. The ITAT noted that the disallowance was due to the inadvertent mistake made by the assessee, compounded by the delayed notice under section 139(9). Relying on principles of natural justice and precedents emphasizing the duty of tax authorities to assist taxpayers in claiming reliefs, the ITAT allowed the appeal, granting the assessee a fresh opportunity to substantiate the claim for deductions.

Issue 3: Jurisdictional issue regarding adjustment confirmed by the CPC under section 143(1) of the Act:
The case raised a jurisdictional issue concerning the adjustment confirmed by the CPC under section 143(1) of the Act. The assessee contended that the adjustment made by the CPC, disallowing certain deductions, was beyond the jurisdiction vested under section 143(1) of the Act. The Ld. CIT(Appeals) dismissed the appeal, stating that the assessee had the opportunity to rectify the error within the given timeline. However, the ITAT observed that the delay in serving the notice under section 139(9) deprived the assessee of the chance to rectify the mistake. Citing principles of natural justice and the duty of tax authorities to assist taxpayers, the ITAT allowed the appeal, granting the assessee a fresh opportunity to address the jurisdictional issue.

Issue 4: Opportunity for the assessee to rectify mistakes in the return of income due to delayed notice under section 139(9) of the Act:
One of the key issues in the case was the opportunity for the assessee to rectify mistakes in the return of income due to the delayed notice under section 139(9) of the Act. The assessee had inadvertently made errors while filing the return, leading to the disallowance of certain deductions. The Ld. CIT(Appeals) held that the assessee had the chance to rectify the mistake within the specified timeline. However, the ITAT noted that the delayed notice under section 139(9) prevented the assessee from rectifying the error in time. Relying on precedents emphasizing natural justice and the duty of tax authorities to assist taxpayers, the ITAT allowed the appeal, granting the assessee a fresh opportunity to rectify the mistakes due to the delayed notice.

This detailed analysis of the judgment highlights the issues involved, the contentions of the parties, the decisions of the authorities, and the ultimate ruling by the ITAT, emphasizing the legal principles and precedents applied in reaching the decision.