AO must consider both undisclosed income and losses from seized documents, cannot selectively pick favorable portions only

ITAT Rajkot allowed the assessee's miscellaneous application under Section 254(2) for mistake apparent from record. The tribunal held that when AO relies on seized documents to add undisclosed income, he must also consider undisclosed losses from the same material and allow set-off. The AO cannot selectively pick favorable portions while ignoring beneficial parts of seized documents. The tribunal directed that seized material must be read as a whole, applying "apple to apple comparison" principle. Either both undisclosed income and losses should be considered or both ignored. The AO was directed to allow set-off of undisclosed losses against undisclosed income.

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Issues Involved:

1. Mistake apparent from the record under Section 254(2) of the Income-tax Act, 1961.
2. Set-off of brought forward business losses against undisclosed income.
3. Consideration of Supreme Court and jurisdictional High Court decisions in rectification applications.
4. Principle of equity and justice in assessing undisclosed income and losses.
5. Obligation of tax authorities to assist taxpayers in claiming legitimate reliefs.

Detailed Analysis:

1. Mistake Apparent from the Record:

The assessee filed two Miscellaneous Applications under Section 254(2) of the Income-tax Act, 1961, claiming a mistake apparent from the record in the Tribunal's order dated 12.06.2024. The Tribunal consolidated these applications for assessment years 2016-17 and 2017-18. The primary contention was that the Tribunal failed to consider the binding decision of the Supreme Court in CIT vs. Shelly Products, which mandates that excess tax deposited should be refunded to the assessee as its retention would breach Article 265 of the Constitution. The Tribunal acknowledged that non-consideration of a Supreme Court decision constitutes a mistake apparent from the record, warranting rectification.

2. Set-off of Brought Forward Business Losses:

The assessee argued that the set-off of brought forward business losses from AY 2015-16 against undisclosed income for AYs 2016-17 and 2017-18 was not allowed by the CIT(A) and the Tribunal. The Tribunal initially dismissed the set-off claim, stating that losses not returned in the response to notice under Section 153A are not eligible for set-off. However, the Tribunal later recognized that both undisclosed income and losses were part of the seized material during the search and seizure operation, and thus should be considered together. The principle of equity demands that if undisclosed income is taxed, undisclosed losses should also be acknowledged for set-off.

3. Consideration of Supreme Court and High Court Decisions:

The Tribunal's failure to consider the Supreme Court's decision in CIT vs. Shelly Products and the jurisdictional High Court's decision was identified as a mistake apparent from the record. The Tribunal emphasized that judicial decisions act retrospectively and must be applied to ensure justice. The non-consideration of these decisions was rectified, allowing the set-off of undisclosed losses against undisclosed income.

4. Principle of Equity and Justice:

The Tribunal underscored the principle of equity and justice, stating that tax authorities should not selectively apply parts of the seized material to the disadvantage of the assessee. Both undisclosed income and losses should be considered to ensure a fair assessment. The Tribunal criticized the assessing officer's approach of taxing undisclosed income while ignoring undisclosed losses, which contradicts the principles of equity and justice.

5. Obligation of Tax Authorities:

The Tribunal reiterated the obligation of tax authorities to assist taxpayers in claiming legitimate reliefs. It cited the CBDT's Circular No. 114 XL-35 of 1955, emphasizing that officers should guide taxpayers in claiming refunds and reliefs. The Tribunal highlighted that tax authorities should not take advantage of an assessee's ignorance and must ensure that only legitimate taxes are collected.

Conclusion:

The Tribunal allowed both Miscellaneous Applications, directing the assessing officer to set off the undisclosed losses from AY 2015-16 against the undisclosed income for AYs 2016-17 and 2017-18. The decision reinforced the importance of considering judicial precedents, ensuring equity and justice, and the duty of tax authorities to assist taxpayers in securing rightful reliefs.

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