2025 (8) TMI 841 - AT - Income Tax

Double Addition of Income Tax Provision Corrected Under Section 154; Refund and Interest Granted

The ITAT Ahmedabad allowed the assessee's appeal, holding that the double addition of income tax provision in the revised return constituted a mistake ... Rectification of mistake u/s 154 - assessee filed its original return of income declaring total income but subsequently, it filed a revised return in response to notice u/s 139(9) - Assessee filed a rectification application u/s 154 pointing out two mistakes apparent from record that TDS credit was short allowed aagainst actual available credit and income tax provision was already debited to Profit & Loss Account, and the same was again disallowed while computing income, resulting in double addition and overstatement of total income Assessee filed an appeal before CIT(A), contending that the error in overstatement of income due to double addition of tax provision is apparent from record and rectifiable under section 154 - CIT(A), however, held that the rectification of income was not allowable since the mistake had occurred in the revised return filed by the assessee itself, and not in the order passed by the AO HELD THAT:- The mistake committed by the assessee is purely arithmetical and manifest on the face of the return, specifically traceable from the figures disclosed in the ITR-6, the audited profit and loss account, and the computational statements forming part of ITR and the paper book. It leads to taxation of an amount which was never actually earned nor intended to be offered as income and thus offends the fundamental principle of taxing only real income. The error arises from internal inconsistency within the return itself and does not involve any debatable interpretation or require appreciation of new evidence. Consequently, this is not a case warranting resort to section 119(2)(b) or condonation by the CBDT. It falls squarely within the ambit of a mistake apparent from the record, rectifiable under section 154 of the Act. AO ought to have allowed rectification by excluding the amount from the taxable income. CIT(A) erred in law and on facts in rejecting the appeal on the ground of non-maintainability and in misdirecting the assessee to seek relief under section 119(2)(b), which is wholly inapplicable in the present factual context. AO is directed to rectify the computation of total income under section 154 by excluding the amount of Rs. 7,40,474/-, being the income tax provision that was erroneously added twice, and to recompute the assessee’s total income in accordance with law. Consequential relief, including refund and interest, if any, shall also be granted in accordance with the provisions of the Act. Appeal filed by the assessee is allowed. 1. ISSUES PRESENTED and CONSIDERED Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] were justified in rejecting the rectification of an apparent mistake under section 154 of the Income Tax Act, 1961, relating to double addition of income tax provision in the computation of total income. Whether a mistake arising from the assessee's own revised return, specifically an arithmetical and factual error apparent from the record, is rectifiable under section 154 or requires remedy under section 119(2)(b) of the Act. The scope and applicability of section 154 in correcting mistakes apparent from record, including those originating from the return filed by the assessee. The legal principle regarding taxation of only real income and the obligation of tax authorities to rectify errors leading to over-assessment. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Rectification of Apparent Mistake under Section 154 - Double Addition of Income Tax Provision Relevant Legal Framework and Precedents: Section 154 of the Income Tax Act empowers the Assessing Officer to rectify mistakes apparent from the record. Judicial precedents establish that mistakes which are arithmetical or clerical and evident on the face of the record qualify for rectification under this provision. The Hon'ble Supreme Court has held that relief under section 154 is available even when an amount is included in income due to inadvertence or error, provided the mistake is apparent. Court's Interpretation and Reasoning: The Court examined the audited Profit & Loss Account and the Income Tax Return (ITR-6) filed by the assessee. It was found that the net profit after tax was Rs. 21,87,300, which already accounted for the income tax expense of Rs. 7,40,475. However, the computation in the return showed a profit before tax of Rs. 29,27,774, which included the tax provision erroneously. Further, the same amount of Rs. 7,40,475 was again added back in the computation, resulting in double addition. The Court held that this internal inconsistency in the return itself was a classic case of an arithmetical and clerical mistake apparent from record, requiring rectification under section 154. The mistake was evident from the return and the audited accounts without need for further inquiry. Key Evidence and Findings: Audited Profit & Loss Account showing net profit after tax as Rs. 21,87,300 inclusive of tax expense. Schedule BP of ITR-6 showing inflated profit before tax including tax provision. Double addition of the tax provision in the computation of income. Application of Law to Facts: The Court applied the principle that rectification under section 154 is available for mistakes apparent on the record, including those arising from the return filed by the assessee. The double addition was an arithmetical error traceable from the return itself and not requiring external evidence or interpretation. Treatment of Competing Arguments: The CIT(A) and AO had rejected rectification on the ground that the mistake originated from the revised return and not from the AO's order, and that remedy lay under section 119(2)(b). The Court rejected this view, holding that the return and computation form part of the record and mistakes therein are rectifiable under section 154. The Court distinguished section 119(2)(b) as applicable only to delayed or belated claims requiring condonation, not to correction of mistakes apparent from record. Conclusions: The Court concluded that the Assessing Officer ought to have allowed rectification of the double addition of income tax provision under section 154. The CIT(A) erred in dismissing the appeal and directing the assessee to seek relief under section 119(2)(b), which was inapplicable. Issue 2: Scope of Section 154 in Relation to Mistakes Originating from the Assessee's Return Relevant Legal Framework and Precedents: Section 154 allows rectification of mistakes apparent from record, which includes the return filed by the assessee as it forms part of the record considered by the AO in processing the return under section 143(1). Judicial authorities have recognized that errors in the return, if apparent and arithmetical, are amenable to correction under section 154. Court's Interpretation and Reasoning: The Court emphasized that the return and accompanying computation are integral to the record of the AO. Therefore, mistakes arising therein, such as clerical or arithmetical errors, are rectifiable under section 154. The Court rejected the CIT(A)'s view that only mistakes in the AO's order are rectifiable and that errors in the return require remedy under section 119(2)(b). Key Evidence and Findings: Return filed under section 139(9) and revised return forming part of record. Acceptance of TDS credit by the Department based on the return. Application of Law to Facts: The Court applied the statutory scheme, noting that the AO's order under section 143(1) is based on the return and computation filed by the assessee. Hence, mistakes in the return are also mistakes in the record and rectifiable under section 154. Treatment of Competing Arguments: The CIT(A) held that the mistake could not be rectified under section 154 as it originated from the assessee's revised return and not from the AO's order, and that section 119(2)(b) was the proper remedy. The Court disagreed, clarifying the distinction between rectification of mistakes apparent from record and condonation of delayed claims. Conclusions: The Court held that section 154 applies to mistakes originating from the return itself and that rectification cannot be denied merely because the error was introduced by the assessee's own filing. Issue 3: Principle of Taxation on Real Income and Obligation to Correct Over-assessment Relevant Legal Framework and Precedents: The fundamental principle of income tax law is that tax must be levied only on real income, correctly computed. Authorities have a duty to ensure that the income assessed is not inflated due to errors or mistakes, whether committed by the assessee or the Department. Court's Interpretation and Reasoning: The Court reiterated that the principle of real income is fundamental and that taxing an inflated or fictitious income due to double addition violates this principle. The Court held that the authorities are bound in law to rectify such errors to prevent unjust taxation. Key Evidence and Findings: Double addition of income tax provision leading to overstatement of income by Rs. 7,40,475. Audited accounts reflecting correct profit after tax. Application of Law to Facts: The Court applied the principle that taxing income higher than the real income due to arithmetical or clerical mistakes is impermissible and must be corrected by the tax authorities. Treatment of Competing Arguments: The Revenue did not dispute the factual nature of the error and left the matter to the Court's discretion. The Court found no justification for denying relief based on the principle of real income. Conclusions: The Court concluded that the Assessing Officer and CIT(A) failed in their duty to ensure correct computation of income and must rectify the over-assessment arising from double addition. Issue 4: Applicability of Section 119(2)(b) for Correction of Mistakes Apparent from Record Relevant Legal Framework and Precedents: Section 119(2)(b) empowers the Board to condone delayed or belated claims or applications. It is not intended for correction of mistakes apparent from record but for cases where claims are made after expiry of due dates. Court's Interpretation and Reasoning: The Court clarified that section 119(2)(b) is not a substitute for rectification under section 154. The present case involves a mistake apparent from record and not a delayed claim. Therefore, referral to section 119(2)(b) was misplaced. Key Evidence and Findings: CIT(A)'s direction to seek relief under section 119(2)(b) despite the mistake being apparent and arithmetical. Application of Law to Facts: The Court applied the statutory scheme and judicial precedents to hold that correction of mistakes apparent from record must be done under section 154 and not under section 119(2)(b). Treatment of Competing Arguments: The assessee contended that section 119(2)(b) is inapplicable and that the error is rectifiable under section 154. The Court agreed with this position. Conclusions: The Court held that the CIT(A) erred in directing the assessee to seek relief under section 119(2)(b) and that the proper remedy is rectification under section 154. Final Conclusion and Directions The appeal is allowed. The Assessing Officer is directed to rectify the computation of total income under section 154 by excluding the double addition of Rs. 7,40,474 (income tax provision) and recompute the total income accordingly. Consequential relief including refund and interest, if any, shall be granted in accordance with the provisions of the Income Tax Act.