2025 (4) TMI 875 - AT - Income Tax

Double Taxation Blocked: Rectification Order Prevents Repeated Taxation of Recovered Bad Debts Under Section 154

Dombivali Nagari Sahakari Bank Ltd. Versus Income Tax Officer, Ward 3 (1), Mumbai

The Tribunal addressed tax assessment issues involving double taxation of recovered bad debts. The key ruling set aside the CIT(A)'s order, recognizing a ... Rectification u/s 154 - adjustment made u/s. 143(1) which is on account of income deemed u/s. 41 - HELD THAT:- Pending this application, assessee preferred an appeal before CIT(A), challenging the adjustment made u/s. 143(1) which is on account of income deemed u/s. 41. The amount of adjustment was picked up from Part A-O of the return wherein the information is reported from the tax audit report, in clause 25 of Form No.3CD. In this clause, assessee had reported amount of recovery of bad debts which has been picked up while processing the return taking it as income u/s.41(4) giving rise to an upward adjustment. Assessee at the outset pointed out that subsequently CPC, Bengaluru has passed an order u/s.154 whereby the mistake apparent from record has been rectified accepting the claim of the assessee, thereby total income reported in the return was accepted. Copy of the said order is placed on record for ready reference. From the perusal of the order passed u/s.154, it is noted that the grievance of the assessee, by way of the present appeal before the Tribunal has been addressed. Fact of this was brought to the knowledge of CIT(A), however, the appeal was dismissed. Since CIT(A) did not take cognisance of the order u/s 154 rectifying the mistake, under the compelling reasons, assessee had to come up in appeal before the Tribunal to get the first appellate order set aside so as to avoid conflict on passing of effect giving order. We find that the issue raised by the assessee, in the present appeal has been addressed by rectification order passed u/s.154. In order to avoid any conflict which may arise on account passing of effect giving order, ground no. 1 raised by the assessee is allowed 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:(a) Whether the addition of Rs. 52,16,56,993/- as 'written off bad debts recovered' made in the intimation under section 143(1) of the Income-tax Act, 1961, constitutes a mistake apparent from the record, given that the said amount was already credited to the Profit and Loss Account for the previous financial year and included in the computation of taxable income reported by the assessee;(b) Whether the failure of the Deputy Director of Income Tax, CPC Bangalore, to rectify the intimation under section 154 of the Act, thereby taxing the same income twice, is legally sustainable;(c) Whether the Commissioner of Income Tax (Appeals) erred in confirming the order under section 154 without considering the subsequent rectification order dated 06.07.2023 passed by the Deputy Director of Income Tax, CPC Bangalore, which effectively rectified the first intimation;(d) Whether the failure to recompute and revise the deduction claimed under section 36(1)(viia) of the Act, consequent to the upward revision of business income, constitutes an error warranting interference.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Whether the addition of Rs. 52,16,56,993/- as income in the intimation under section 143(1) and failure to rectify it under section 154 amounted to double taxation of the same incomeRelevant legal framework and precedents: Section 143(1) of the Income-tax Act provides for processing of returns and issuance of intimation, which can include adjustments based on available data. Section 154 allows rectification of mistakes apparent from the record. The principle against double taxation is well-established in tax jurisprudence, preventing the same income from being taxed more than once.Court's interpretation and reasoning: The Tribunal noted that the amount of Rs. 52,16,56,993/- related to recovery of bad debts was already credited to the Profit and Loss Account for the financial year 2020-21 and was included in the net profit before tax. This formed the starting point for computation of income for the assessment year 2021-22. Therefore, treating the same amount as income again in the intimation under section 143(1) resulted in double taxation, which is impermissible under the Act.Key evidence and findings: The amount was reported in clause 25 of Form No.3CD (tax audit report), which was part of Part A-O of the return. The subsequent rectification order under section 154 dated 06.07.2023 accepted the assessee's claim and corrected the mistake apparent from the record by not including this amount again in the taxable income.Application of law to facts: The Tribunal found that the addition made in the intimation under section 143(1) was a mistake apparent from the record since the income was already accounted for in the previous year's profit and loss account. The failure to rectify this mistake initially under section 154 was an error that was subsequently corrected by the rectification order dated 06.07.2023.Treatment of competing arguments: The Revenue contended that the addition was justified and the rectification was not warranted. However, the Tribunal emphasized that the rectification order passed by the Deputy Director of Income Tax CPC Bangalore recognized the mistake and corrected it, which was not considered by the Commissioner of Income Tax (Appeals).Conclusions: The Tribunal allowed the ground raised by the assessee that the addition of Rs. 52,16,56,993/- was a mistake apparent from the record and should be rectified to avoid double taxation. The failure of the CIT(A) to consider the rectification order was an error.Issue (c): Whether the CIT(A) erred in confirming the order under section 154 without considering the subsequent rectification orderRelevant legal framework: The appellate authority is required to consider all relevant facts and documents placed before it, including subsequent developments such as rectification orders passed under section 154.Court's interpretation and reasoning: The Tribunal noted that the rectification order dated 06.07.2023 effectively addressed the grievance of the assessee by accepting the claim and computing the assessed income as per the return filed. Despite the assessee bringing this fact to the notice of the CIT(A), the appellate order did not take cognizance of this rectification.Key evidence and findings: The rectification order was placed on record and was part of the submissions before the CIT(A). The failure to consider this order led to dismissal of the appeal by the CIT(A), resulting in conflicting orders.Application of law to facts: The Tribunal emphasized the importance of avoiding conflicting orders and recognized that the rectification order had resolved the issue raised. Therefore, the appellate order confirming the section 154 order without considering the rectification order was set aside.Treatment of competing arguments: The Revenue did not dispute the existence or validity of the rectification order but relied on the confirmation by CIT(A). The Tribunal prioritized the rectification order as it corrected the mistake apparent from the record.Conclusions: The Tribunal set aside the order of the CIT(A) on this ground to avoid conflict and to give effect to the rectification order.Issue (d): Whether failure to recompute deduction under section 36(1)(viia) consequent to upward revision of business income was erroneousRelevant legal framework: Section 36(1)(viia) allows deduction for provisions for bad and doubtful debts, which is computed based on income under the head 'Profits and Gains of Business or Profession.' An upward revision of business income would logically impact the deduction allowable.Court's interpretation and reasoning: The assessee argued that once the income was revised upwards by the addition of Rs. 52,16,56,993/-, the deduction under section 36(1)(viia) should also be recomputed accordingly. The Tribunal noted this contention but found that since the rectification order under section 154 dated 06.07.2023 restored the income to the returned figure, the issue of recomputation of deduction became moot.Key evidence and findings: The rectification order negated the upward revision of income, thereby negating the need for recomputation of deduction under section 36(1)(viia).Application of law to facts: Since the rectification order restored the income to the returned figure, the deduction claimed under section 36(1)(viia) remains as originally computed and allowed.Treatment of competing arguments: The Revenue did not specifically address this ground in detail, as the rectification order resolved the primary issue of income computation.Conclusions: No interference was warranted on this ground given the rectification order's effect.3. SIGNIFICANT HOLDINGSThe Tribunal held: 'We find that the issue raised by the assessee, in the present appeal has been addressed by rectification order passed u/s.154, dated 06.07.2023. In order to avoid any conflict which may arise on account passing of effect giving order, ground no. 1 raised by the assessee is allowed by setting aside the order of ld. CIT(A).'Core principles established include:The addition of income already accounted for in prior year's profit and loss account cannot be treated as fresh income for the current year, to avoid double taxation.A rectification order under section 154 correcting a mistake apparent from the record must be given due cognizance by appellate authorities.Failure to consider subsequent rectification orders by appellate authorities can lead to conflicting orders and is an error warranting setting aside of such appellate orders.Deductions under section 36(1)(viia) are linked to the income computed under business profits and must be recomputed if there is a genuine revision in income; however, if income is restored to original figures, recomputation is unnecessary.Final determinations:The appeal by the assessee was allowed by setting aside the order of the CIT(A), thereby upholding the rectification order dated 06.07.2023 which corrected the mistake apparent from the record regarding the addition of Rs. 52,16,56,993/-. The issue of recomputation of deduction under section 36(1)(viia) did not require intervention due to restoration of income to the returned figure.