Mutual fund dividend income wrongly taxed at 10% u/s115BBDA; rectification allowed u/s154, adjustment deleted.

The dominant issue was whether s.115BBDA could be applied, via rectification under s.154, to dividend income received from mutual funds. The ITAT held that s.115BBDA imposes a special tax rate only on dividend from domestic companies exceeding the statutory threshold, with exemption linked to s.10(34), whereas mutual fund dividend falls under s.10(35); documentary evidence substantiated the nature of the receipts. Accordingly, treating mutual fund dividend as taxable under s.115BBDA was a patent mistake apparent from the record, and the refusal to rectify (without addressing the taxpayer's contention) was unsustainable; the adjustment taxing such income at 10% was directed to be deleted and the appeal was allowed.

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Issues Involved:
The appeal filed by the assessee against the order passed by the Commissioner of Income Tax(Appeals) upholding the rejection by the Centralized Processing Centre (CPC) of the rectification application made under section 154 of the Act for the Assessment Year 2018-19.

Rectification Application Dispute:
The assessee challenged the addition of Rs. 50,65,550 treated as dividend income under section 10(34) of the IT Act, contending that the income was from mutual funds exempt under section 10(35) of the Act. The initial intimation under section 143(1) accepted the income as exempt, but a subsequent rectification order incorrectly added the amount to the income. The Tribunal found a clear mistake in the CPC's order, as the rectification did not correct the income returned by the assessee, leading to a computational error.

Violation of Natural Justice:
The CPC's order, without providing an opportunity of hearing to the assessee, and the absence of a notice prior to the computation of income under section 154 of the Act were deemed as a gross violation of natural justice principles. The Tribunal held that the order was unsustainable in law due to these procedural irregularities.

Rectification Application for Exempt Income:
The assessee sought rectification of the order, highlighting that the dividend income from mutual funds was exempt under section 10(35) and not subject to tax at a special rate under section 115BBDA. The Tribunal agreed with the assessee's contention, emphasizing that the provisions of the Act exempted such income from taxation, and the rejection of the rectification application was unjustified.

Legal Findings and Decision:
The Tribunal allowed the assessee's rectification application, directing the deletion of the addition made to her income from dividend income earned from mutual funds. The order rejecting the rectification application was set aside, and the CPC/AO was instructed to delete the adjustment made to the income taxed at the special rate. Consequently, the grounds of appeal of the assessee were upheld, and the appeal was allowed on 6th December, 2023, at Ahmedabad.

This summary provides a detailed overview of the legal judgment, outlining the issues involved, the disputes regarding the rectification application, the violation of natural justice, the application for exempt income, and the final legal findings and decision of the Tribunal.

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