2024 (9) TMI 1735 - AT - Income Tax

Addition to the returned income in assessment u/s 143(1) on the basis of particulars contained in the tax audit report ( TAR ) uploaded in the on line portal in form 3 CB / CD by the tax auditor - HELD THAT - We are of the opinion that on account of inadvertent error in reporting by the tax auditor in form 3 CD this addition has been made while framing the assessment order u/s 143(1) by CPC Bangalore which is system oriented. Also apart from the tax auditor there was error on the part of the assessee also because the assessee has approved the uploaded TAR by his digital signature at a subsequent date thereby validating the contents of the TAR (uploaded by the CA). Moreover when this error has already come to light it was incumbent on the part of the assessee and his auditor to have revised the TAR by filing a revised report at a subsequent date which has also not been done in the instant case. Technically this matter should go back to the first appellate authority to take a decision on merits of the case but considering the technical defects existing in the TAR itself we are of the opinion that the matter needs verification by the assessing officer at the ground level with respect to the audited accounts uploaded for the year under appeal in consultation with the figures contained in the return in ITR - 5 supported by books of accounts vis a vis the contents of the TAR existing in the portal and all these enquiry and verification can only be done by the AO. Thus remand the matter back to the files of the AO for fresh adjudication on merits of the case. Appeal of the assessee allowed for statistical purposes.

Summary

Two core legal issues arise for consideration in this appeal: first, whether the delay in filing the appeal before the first appellate authority can be condoned despite the substantial lapse of approximately 440 days beyond the prescribed 30-day period; and second, whether the addition of Rs. 54,17,992/- to the returned income by the CPC under section 143(1) of the Income Tax Act, 1961, on the basis of particulars in the tax audit report (TAR) was justified or constituted double taxation due to incorrect reporting by the tax auditor.

The first issue concerns the procedural question of condonation of delay in filing the appeal under section 250 of the Income Tax Act. The relevant legal framework includes the principles governing limitation and condonation of delay, as well as judicial precedents on the liability of a litigant for the default of his advocate. The Court referred to the authoritative Supreme Court decision in Rafiq and another v. Munshilal and another (AIR 1981 SC 1400), which established that a litigant should not suffer injustice due to the negligence or default of his chosen counsel. The Court emphasized that under the adversarial legal system, a party entrusts his advocate with the responsibility to act diligently, and it is not incumbent upon the party to monitor the advocate's conduct or court proceedings. The Court observed that the explanation tendered by the advocate, involving misplacement and forgetfulness by his staff, amounted to professional negligence. However, the Court held that such negligence should not prejudice the assessee, who had done all in his power to participate effectively in the proceedings. Accordingly, applying the principle that an innocent party must not be made to suffer for the inaction of his agent, the Court condoned the delay in filing the appeal before the first appellate authority.

The second issue relates to the substantive question of whether the addition of Rs. 54,17,992/- to the returned income was justified. The legal framework here involves the provisions of section 143(1) of the Income Tax Act, which empowers the Central Processing Centre (CPC) to process returns and make adjustments based on data submitted, including tax audit reports in Form 3CB/3CD. The tax audit report is required to disclose particulars such as amounts credited or not credited to the profit and loss account, which assist in the automated processing of returns. The Court noted that the assessee is a partnership firm engaged in automobile dealership, with a returned income of Rs. 3,54,460/-, whereas the CPC's assessment under section 143(1) showed income of Rs. 57,72,460/-, reflecting an addition of Rs. 54,17,992/- primarily on account of certain income heads reported in the tax audit report.

The assessee contended that the amounts added back were already credited to the profit and loss account and reflected in the audited accounts, and thus should not have been added again. The error arose because the tax auditor incorrectly reported these amounts under clause 16(d) of Form 3CD, which pertains to "Amounts not credited to the profit and loss account," whereas the amounts were in fact credited. This misreporting caused the CPC's system, which is programmed to automatically process the TAR data, to double count these incomes, resulting in an inflated assessment. The Court acknowledged the inadvertent error on the part of the tax auditor but also observed that the assessee had digitally signed and thereby approved the uploaded TAR, validating its contents. Further, the assessee failed to file a revised tax audit report after discovering the error, which could have rectified the issue at the source.

Given these facts, the Court held that while the addition was based on incorrect data, the technical nature of the error and the involvement of both the auditor and the assessee in validating the TAR necessitated a detailed verification at the ground level. The Court reasoned that such verification, involving examination of the audited accounts, books of accounts, and the return filed in ITR-5, could only be effectively conducted by the Assessing Officer (AO). The Court therefore remanded the matter to the AO for fresh adjudication on merits, directing the AO to examine the accounts and TAR in consultation and to provide the assessee with adequate opportunity of hearing. This approach was adopted in the interest of justice and to avoid unnecessary litigation.

In addressing the competing arguments, the Court balanced the procedural fairness owed to the assessee against the need for accuracy in tax assessments. While the Department relied on the correctness of the CPC's automated processing and the first appellate authority's order, the Court recognized the systemic limitations of such automated assessments when based on erroneous audit reports. Simultaneously, the Court underscored the responsibility of the assessee to ensure correctness of documents digitally certified by him and the duty to rectify errors by filing revised reports. This nuanced stance ensured that neither party's position was accepted uncritically, and the case was directed to be re-examined on its factual and evidentiary merits.

Significant holdings of the Court include the following:

"A litigant cannot be made to suffer injustice merely because of the default of his chosen Advocate."

"The party having done everything in his power to effectively participate in the proceedings can rest assured that he has neither to go to the High Court to inquire as to what is happening in the High Court with regard to his appeal nor is he to act as a watchdog of the advocate that the latter appears in the matter when it is listed."

"We condone the delay in filing of this appeal before the first appellate authority, due to the default committed by his appointed lawyer."

"On account of inadvertent error in reporting by the tax auditor in form 3 CD this addition has been made while framing the assessment order u/s 143(1) by CPC, Bangalore, which is system oriented."

"The matter needs verification by the assessing officer at the ground level with respect to the audited accounts uploaded for the year under appeal, in consultation with the figures contained in the return in ITR - 5, supported by books of accounts vis a vis the contents of the TAR existing in the portal."

"In the interest of justice, and to avoid unnecessary litigation, we think fit to remand the matter back to the files of the AO, for fresh adjudication on merits of the case in light of our discussion contained in this order, after allowing adequate opportunity of hearing to the assessee."

Accordingly, the Court allowed the appeal for statistical purposes by condoning the delay and remanding the substantive issue of addition to the AO for fresh adjudication.