2025 (5) TMI 626 - HC - Income Tax

Validity of demand notice issued u/s 156 - addition made by the AO u/s 69 and 69A - HELD THAT - As huge amount of demand has been made against the Petitioner by reflecting wrong figures. Cursory glance at computation sheet transpires without any ambiguity in mind that the figures have been reflected with erroneous perception. In such view of the matter the notice of demand under Section 156 of the Income Tax Act (Annexure-4) needs modification by undertaking fresh computation of tax liability. Petitioner furnished copy of appellate order passed under Section 250 by the National Faceless Appeal Centre (NFAC) wherein as allowed in favour of the Petitioner by taking cognizance of the fact that it has been granted exemption under Section 10(26AAB) of the Income Tax Act. In the said appellate order it has been observed that the source of deposit in the bank is the market fee received from the Odisha State Civil Supplies Corporation Limited. Observing thus the Appellate Authority found no merit in the addition made by the AO under Sections 69 and 69A of the IT Act and accordingly deleted the additions. Regard being had to such Appellate Order for the subsequent period 2018-19 granting exemption u/s 10(26AAB) and being conscious of the fact that there occurred error in computation of tax liability it is therefore felt expedient to show indulgence in the order of the Assessing Authority. This Court has no other option but to set aside the demand raised along with Computation Sheet under Annexures-2 3 and also the notice of demand.

Summary

The core legal questions considered by the Court in this matter include:

1. Whether the notice of demand issued under Section 156 of the Income Tax Act, 1961 (hereinafter "the IT Act") for the Assessment Year 2017-18 was valid and justified given the alleged errors in computation of tax liability.

2. Whether the Petitioner, a Regulated Market Committee established under the Odisha Agriculture Produce Market Act, 1956, is entitled to exemption from income tax under the relevant notifications and provisions, specifically Section 10(26AAB) of the IT Act.

3. Whether the assessment order treating a sum of Rs. 4,77,79,805/- as unexplained income under Section 69A was legally sustainable.

4. The impact of the appellate order passed under Section 250 of the IT Act for the subsequent Assessment Year 2018-19, which granted exemption to the Petitioner, on the present assessment year 2017-18.

5. Whether the Assessing Authority should be directed to recompute the tax liability after considering the exemption and rectifying the apparent errors.

Issue-wise Detailed Analysis

1. Validity and correctness of the notice of demand under Section 156 of the IT Act

The legal framework governing this issue includes Section 156 of the IT Act, which empowers the Income Tax Department to issue a notice of demand for recovery of tax assessed or reassessed. The notice must be based on a valid and accurate assessment order.

The Court noted from the computation sheet annexed to the assessment order that there were glaring discrepancies and erroneous figures. For example, the amount under "Income from other sources" was shown as Rs. 4,77,79,805/-, which was then inexplicably doubled to Rs. 9,55,59,610/- at a later stage in the computation, culminating in a demand exceeding Rs. 20 crores. Such anomalies indicated a mistake apparent on the face of the record.

The Court observed that the Department conceded the presence of an apparent error in the computation sheet. The Petitioner also filed an online application for rectification of mistakes. The Court emphasized that such errors rendered the notice of demand unsustainable in its present form.

Accordingly, the Court concluded that the notice of demand under Section 156 needed to be set aside and the Assessing Authority directed to recompute the tax liability correctly.

2. Entitlement of the Petitioner to exemption under Section 10(26AAB) of the IT Act and related notifications

The Petitioner claimed exemption from income tax based on a Government of India notification dated 16.06.1970 and a subsequent letter dated 30.07.1970 issued by the Deputy Agricultural Marketing Adviser, Ministry of Agriculture, which exempted Regulated Market Committees from payment of income tax.

The Court relied on the appellate order dated 28.07.2023 passed under Section 250 of the IT Act for the Assessment Year 2018-19, where the National Faceless Appeal Centre allowed the Petitioner's appeal by recognizing the exemption under Section 10(26AAB). The appellate authority found that the source of deposits in the Petitioner's bank account was market fees received from the Odisha State Civil Supplies Corporation Limited, a fact which negated the addition made under Sections 69 and 69A treating the amount as unexplained income.

The Court reasoned that the exemption granted for the subsequent year was directly applicable to the present assessment year 2017-18, as the facts and nature of income remained consistent.

This interpretation was consistent with the principle that exemption once granted under a statutory provision and recognized by appellate authorities should be uniformly applied to similar facts unless there is a change in circumstances.

3. Legality of treating the amount as unexplained income under Section 69A

Section 69A of the IT Act permits the Assessing Officer to treat any sum found credited in the books of account as income if the assessee fails to explain the nature and source of such sum satisfactorily.

In the present case, the Assessing Authority treated the amount of Rs. 4,77,79,805/- as unexplained income, leading to the demand. However, the Petitioner had explained that the amount represented market fees collected from a government corporation, which was exempt from tax.

The appellate order for the subsequent year corroborated this explanation and found no merit in the addition under Section 69A. The Court found that the Assessing Authority had failed to appreciate the exemption and the source of income, thereby committing an error.

Thus, the treatment of the amount as unexplained income was not legally sustainable.

4. Impact of the appellate order for Assessment Year 2018-19 on the present year 2017-18

The appellate order passed under Section 250 for the subsequent year was a significant precedent. The Court held that the principles and findings in that order were applicable in toto to the present assessment year, as the nature of income and exemption status remained unchanged.

The Court emphasized that the Assessing Authority should take judicial notice of such appellate orders and apply the same reasoning to avoid inconsistent and unjust outcomes.

5. Direction for fresh computation and reassessment

Given the admitted errors in the computation sheet and the established exemption status, the Court found it appropriate to set aside the demand and the assessment order dated 11.03.2025.

The Court directed the Assessing Authority to pass a fresh order within four weeks, undertaking a proper computation of tax liability after considering the exemption under Section 10(26AAB) and the appellate order for the subsequent year.

The Court also noted that the Petitioner should furnish relevant documents to the Assessing Officer to substantiate its claim.

Significant Holdings

"Bare perusal of computation sheet made available... reveals that huge amount of demand has been made against the Petitioner by reflecting wrong figures... Without any ambiguity in mind that the figures have been reflected with erroneous perception."

"The appeal was allowed in favour of the Petitioner by taking cognizance of the fact that it has been granted exemption under Section 10(26AAB) of the Income Tax Act... The Appellate Authority found no merit in the addition made by the Assessing Officer under Sections 69 and 69A of the IT Act and, accordingly, deleted the additions."

"It is, therefore, felt expedient to show indulgence in the order of the Assessing Authority... The Assessing Authority shall pass appropriate order afresh by undertaking the computation of tax liability taking into consideration the appellate order dated 28.07.2023."

The Court established the principle that an erroneous computation leading to an inflated demand notice must be corrected by reassessment, especially when the assessee is entitled to statutory exemption recognized in appellate proceedings for subsequent years. The Court underscored the necessity for the Assessing Authority to apply consistent principles and to consider exemption notifications and appellate findings to avoid unjust taxation.

Ultimately, the Court set aside the demand and directed reassessment with proper consideration of exemption and rectification of computational errors, thereby safeguarding the Petitioner's rights under the IT Act and ensuring adherence to principles of natural justice and statutory compliance.