Inadvertent mistake committed while filing return cannot take away rights of assessee

J. Doshi & Co. Vs ITO (ITAT Rajkot)

ITAT Rajkot held that department cannot take away rights of the assessee just by inadvertent mistake committed by the assessee at the time of return filing.

Facts- The assessee’s claim of interest and remuneration paid to partners was disallowed on the mistake committed by the assessee. The mistake committed was that 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. As a follow-up step, the assessee was required to enter the details of the profit and loss account and balance sheet in the return of income. However, the contention of the assessee is that since the notice under section 139(9) of the Act was not served on the assessee within time, he was unable to revise / rectify the mistake committed by it in the return of income within the due permissible time.
CIT(A) dismissed the assessee’s appeal. Being aggrieved, the present appeal is filed.

Conclusion- 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. We also note that the DR has not challenged the fact that notice under section 139(9) of the Act had not been served upon the assessee within the due time.

In the case of Kongu Educational Trust Vs DCIT (ITAT Chennai) in ITA No.113/Chny/2022, the assessee was denied deduction u/s. 10(23C)(iiiad) of the Act in an intimation issued by CPC, Bengaluru on 30-03-2018. The reason for denial of deduction was that the assessee has filed return of income under wrong provisions. The ITAT allowed the assessee’s appeal and held that keeping in the principle of natural justice as well as CBDT Circular No.14 of 1955 dated 11.04.1955 which has taken a view that the officers of the department must not take advantage of ignorance of the assessee about his rights and it is their duty to assist the tax payer in every reasonable way particularly in the matter of claiming and securing reliefs.

FULL TEXT OF THE ORDER OF ITAT RAJKOT

This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-3, Rajkot in Appeal no. CIT(A)- 3/10015/17-18 vide order dated 03/02/2020 passed for the assessment year 2014-15.

2. The assessee has taken the following grounds of appeal:-

“1. That the learned CIT(A)-3 Rajkot has grievously erred in confirming the assessment of the returned loss of Rs.-22699/- at a taxable income of Rs. 1,38,279/- whilst processing us 143(1) of the Act.

2. That the learned CIT(A)-3 Rajkot has erred in not allowing claim of interest and remuneration paid to partners amounting to 1,60,978/- which was to be allowed u/s 44AD(2) read with section 40(b) of the I.T. Act, 1961.

3. That the learned CIT(A)-3 has grievously erred in confirming that the adjustment so done confirmed by the CPC is beyond the jurisdiction vested us 143(1) of the Act.

4. That the appellant craves for leave to add, amend and or modify the grounds of appeal.”

3. The brief facts of the case is that the assessee is a partnership firm is engaged in the business of retail trading of iron bars and is being assessed to tax at Rajkot. For the impugned assessment year, the assessee filed its physical return of income on 28-08-2014 followed by an e-filing on 21-3- 2016 declaring loss of ~ 22,699/-. The assessee had declared income under section 44AD of the Act showing net profit of ~ 1,38,279/-calculated at 8% of total turnover of ~ 17,28,483/- after claiming interest and remuneration to partners of ~ 1,10,978/- and ~ 50,000 respectively and accordingly net loss was declared at ~ 22,699/-. The assessee thereafter received notice under section 139(9) of the Act directing the assessee to rectify the defect as indicated in the said notice within 15 days of receipt thereof. The said notice was however received by the assessee on 23-02-20 17 at which point in time, the time allowed to remove the defect had expired. The same notice was again received by the assessee by way of email on 23-04-2017, but the assessee was unable to the e-file any responses since the time for rectifying the mistake had already expired. The assessee thereafter received intimation under section 143(1) of the Act dated 27-03-2017 vide which the CPC did not allow the interest and remuneration paid to partners and assessed the return loss at in income of ~ 1,38,280/-. The 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. As a follow-up step, the assessee was required to enter the details of the profit and loss account and balance sheet in the return of income. However, the contention of the assessee is that since the notice under section 139(9) of the Act was not served on the assessee within time, he was unable to revise / rectify the mistake committed by it in the return of income within the due permissible time.

4. In appeal, Ld. CIT(Appeals) dismissed the assessee’s appeal with the following observations:

“5.0 I have carefully considered the submission of the appellant and perused facts of the case in A.O’s order. In this the assessee claims to have filed return of income u/s 139(1) on 2 8/08/2014 in the ask center. It is contended that notice u/s 139(9) dated 3 0/1 2/2016 was received on 23/02/2017, asked the assessee to remove the defect within 16 days. It is contended that the same notice was received again by the assessee through e-mail by 23/04/2017. But by that time the return had been processed u/s 143(1) on 2 7/03/2017 and hence CPC portal did not accept removal of defect request.

In the said intimation the assessee has not been allowed deduction in the interest and remuneration to the partners from income declared u/s 44 AD. It is contended that the assessee had inadvertently mentioned in the return of income that he was maintaining books of accounts and it was for this reason that notice u/s 139(9) had been served on the although income declared by the assessee was u/s44AD.

It is contended that since the notice u/s 139(9) was served belatedly, the appellant’s attempts to file response were not successful and his return by then had been processed.

The assessee has contended that the interest to partner and remuneration are duly authorized by the partnership deed and intimation u/s 143(1) deserves to be rectified since the opportunity u/s 139(9) could not be utilized by the assessee.

Having considered facts and circumstances of the case, I find that the assessee has acknowledged that notice u/s 139(9) was received by 23/02/2017 and it is also uncontroverted that the processing had taken place on 27/03/2017. That means the assessee could very well have removed the defect between 23/02/2017 and 27/03/2017. However, the assessee did not utilizes this opportunity to remove the defect and as such there is no fault on part of CPC in the impugned intimation. Therefore no interference can be made in the said intimation.

In my considered view, the proper course of action for assessee would be to file rectification application u/s 154 before the Assessing Officer. The present appeal is therefore dismissed.”

5. Before us, counsel for the assessee submitted that it is filing its return of income under section 44AD of the Act, and it is not required to maintain the books of accounts. Further, as per the terms of the Partnership Deed, the assessee firm is eligible to claim interest and remuneration paid to the partners in terms of the said partnership deed. Accordingly, it was only on account of an inadvertent mistake in the at the time of filing return of income that the interest and remuneration paid to partners has been disallowed, which was a legally tenable claim of the assessee. Further, had the notice under section 139(9) of the Act had been served upon the assessee within the due time, the assessee would have been able to rectify the mistake which had inadvertently made at the time of filing the return of income. In response, the Ld. DR submitted that Ld. CIT(Appeals) itself in the appellate order has given the option to the assessee to file application under section 154 of the Act and accordingly pursue an alternative remedy.

6. We have heard the rival contentions and perused the material on record. 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. We also note that the DR has not challenged the fact that notice under section 139(9) of the Act had not been served upon the assessee within the due time. In the case of Kongu Educational Trust Vs DCIT (ITAT Chennai) in ITA No.113/Chny/2022, the assessee was denied deduction u/s. 10(23C)(iiiad) of the Act in an intimation issued by CPC, Bengaluru on 30-03-2018. The reason for denial of deduction was that the assessee has filed return of income under wrong provisions. The ITAT allowed the assessee’s appeal and held that keeping in the principle of natural justice as well as CBDT Circular No.14 of 1955 dated 11.04.1955 which has taken a view that the officers of the department must not take advantage of ignorance of the assessee about his rights and it is their duty to assist the tax payer in every reasonable way particularly in the matter of claiming and securing reliefs.

Again, the High Court in the case of Devendra Pai [2022] 135 taxmann.com 196 (Karnataka) 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.

7. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 31-10-2022