2025 (5) TMI 1085 - AT - Income Tax

CPC power to change the option of taxing the assessee at special rate or that of the normal rate - scope of 143(1)(a) adjustment - whether even though the assessee has submitted that they have not availed the benefit of section 115BAA of the Act while filling the ITR. Even though while processing the ITR CPC can change that option from No to Yes or not? - HELD THAT - CPC has no power to change the option of taxing the assessee at special rate or that of the normal rate and thus that adjustment was beyond the power given u/s 143(1)(a) of the Act. The fact that the assessee has applied for that in earlier year and now the same is straight away cannot be made applied when the CPC for the past two year already considered the ITR filled by the assessee under normal provision of the Act. The matter the CPC is taking up cannot be subjected to processing of ITR u/s. 143(1)(a) of the Act. We support of our view from the decision in the case of JKs Employees Welfare Fund 1992 (3) TMI 41 - RAJASTHAN HIGH COURT As is evident from the record that while filling the ITR about the applicability of section 115BAA of the Act the assessee submitted as No and the ld. CPC made to Yes . This action of the CPC is beyond the scope as he held in above case by our jurisdictional High Court in the above case and thus once that is beyond the scope of 143(1)(a) adjustment that mistake being apparent on record the same is rectifiable u/s 154 of the Act and therefore we direct the AO to give effect to that application filed by the assessee. Appeal filed by the assessee is allowed.

Summary

The core legal questions considered in this appeal are as follows:

1. Whether the delay of 81 days in filing the appeal by the assessee can be condoned given that the impugned order was not served on the email ID mentioned in the Form 35 filed by the assessee.

2. Whether the order passed by the learned CIT(A) is vitiated for violation of principles of natural justice by not affording the assessee adequate opportunity of hearing and deciding the appeal in undue haste.

3. Whether the rectification order passed under Section 154 of the Income Tax Act by the CPC, which disallowed the deduction under Section 10AA and altered the taxation option under Section 115BAA from "No" to "Yes", is sustainable in law.

4. Whether the CPC had jurisdiction under Section 143(1)(a) of the Income Tax Act to change the assessee's option regarding taxation under Section 115BAA from "No" to "Yes" during automated processing of the return.

5. The legal effect of the assessee having claimed deduction under Section 10AA and paid tax at normal rates in earlier assessment years despite having filed Form 10IC, which triggers applicability of Section 115BBA/115BAA concessional tax regime.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing Appeal

Legal Framework and Precedents: The Supreme Court's decision in Collector, Land Acquisition vs. Mst. Katiji establishes that delay caused by sufficient cause, including non-receipt of order, can be condoned.

Court's Reasoning: The Tribunal noted the assessee was not served the impugned order on the email ID mentioned in Form 35, which constitutes sufficient cause beyond the assessee's control.

Conclusion: The delay of 81 days in filing the appeal was condoned in the interest of justice.

2. Alleged Violation of Natural Justice by CIT(A)

Legal Framework: Principles of natural justice require that a party must be given adequate opportunity to present its case before an adverse order is passed. Audi alteram partem is a settled principle.

Facts and Court's Interpretation: The CIT(A) issued only one notice with a short deadline and passed the order within 15 days of the due date without considering detailed submissions or evidence from the assessee. Moreover, the notice was sent to an email ID different from that mentioned in Form 35.

Competing Arguments: The assessee argued this amounted to denial of effective hearing, while the Revenue did not dispute facts but urged the bench to decide in the interest of justice.

Conclusion: The Tribunal found the CIT(A)'s order was passed in undue haste, violating natural justice principles, and failed to apply mind to the facts and submissions.

3. Validity of Rectification Order under Section 154 Disallowing Deduction under Section 10AA and Altering Taxation Option under Section 115BAA

Legal Framework: Section 154 allows rectification of "mistake apparent from the record." The Supreme Court in Assistant Commissioner of Income-tax vs. Saurashtra Kutch Stock Exchange Ltd. held that a mistake apparent on record is a patent, manifest, and self-evident error not requiring elaborate reasoning.

Court's Reasoning: The CPC's automated processing changed the assessee's option regarding taxation under Section 115BAA from "No" to "Yes" despite the assessee clearly selecting "No" in the return and Form 56F. This led to disallowance of deduction under Section 10AA and a consequent demand.

The Tribunal held this alteration was a mechanical error, verifiable from the record, and squarely fits within the scope of "mistake apparent from record" under Section 154. The CPC's rejection of rectification on the ground of no mistake apparent was unsustainable.

Competing Arguments: The CIT(A) dismissed the appeal stating the issue was controversial and not a mistake apparent on record, relying on a Supreme Court review petition holding that an error requiring long-drawn reasoning is not rectifiable under Section 154.

Conclusion: The Tribunal disagreed with CIT(A), holding the error was manifest and did not require complex reasoning. The rectification order disallowing deduction and altering taxation option was liable to be set aside.

4. Jurisdiction of CPC under Section 143(1)(a) to Alter Taxation Option under Section 115BAA

Legal Framework: Section 143(1)(a) permits the Assessing Officer to make adjustments for arithmetical errors, incorrect claims apparent from the return, disallowance of loss claimed beyond due date, and certain other specified grounds. The provisos require intimation and consider responses before adjustments.

Relevant Precedents: The jurisdictional High Court in JKs Employees Welfare Fund vs. ITO held that the power of the AO under Section 143(1)(a) is limited to prima facie inadmissible claims that are apparent from the return and does not extend to altering the tax regime opted by the assessee.

Court's Interpretation: The Tribunal found that the CPC's alteration of the taxation option from "No" to "Yes" was beyond the scope of Section 143(1)(a) as it was not an arithmetical error or an incorrect claim apparent from the return but a substantive change in tax regime. The CPC cannot change the option exercised by the assessee.

Application to Facts: The assessee had consistently opted "No" for Section 115BAA in the return and supporting documents, but CPC changed it to "Yes." This was held to be beyond CPC's power under Section 143(1)(a).

Conclusion: The Tribunal held the CPC's action was beyond statutory authority and directed the Assessing Officer to give effect to the assessee's original option.

5. Effect of Filing Form 10IC and Claiming Deduction under Section 10AA in Earlier Years

Legal Framework: Section 115BAA provides concessional tax rates to domestic companies opting for it, but disallows certain deductions including under Section 10AA. The proviso to Section 115BAA(1) states that if conditions are not satisfied in any previous year, the option becomes invalid for that year and subsequent years.

Facts: The assessee inadvertently filed Form 10IC for AY 2020-21, which triggers applicability of Section 115BBA/115BAA. However, the assessee paid tax at normal rates and claimed deduction under Section 10AA for AY 2020-21, AY 2021-22, and AY 2022-23. The returns were processed accordingly, and the deduction was allowed in earlier years.

Court's Reasoning: Since the assessee claimed deduction under Section 10AA and paid tax at normal rates in AY 2020-21 and subsequent years, the proviso to Section 115BAA(1) applies, rendering the option under Section 115BAA invalid from AY 2020-21 onwards. Therefore, the assessee was entitled to claim deduction under Section 10AA in AY 2023-24 as well.

Competing Arguments: The Revenue contended the CPC's adjustment was justified, but the Tribunal found that the CPC's change was arbitrary and inconsistent with prior years' treatment.

Conclusion: The Tribunal held that the assessee's claim under Section 10AA was legitimate and ought to have been allowed, and the CPC's disallowance was erroneous.

Additional Observations: The Tribunal noted the CIT(A) failed to exercise quasi-judicial functions properly by dismissing the appeal as "controversial" without examining the facts or evidence, which amounted to abdication of appellate responsibility and violation of natural justice.

Significant Holdings:

"The delay of 81 days in filing the appeal by the assessee is condoned in view of the decision of Hon'ble Supreme Court in the case of Collector, Land Acquisition vs. Mst. Katiji and Others, as the assessee is prevented by sufficient cause."

"A patent, manifest and self-evident error which does not require elaborate discussion of evidence or argument to establish it, can be said to be an error apparent on the face of the record and can be corrected while exercising certiorari jurisdiction."

"The CPC has no power under Section 143(1)(a) of the Act to change the option of taxing the assessee at special rate or that of the normal rate and thus that adjustment was beyond the power given u/s 143(1)(a) of the Act."

"The impugned error arising from the automated processing of return under Section 143(1), which led to the denial of deduction and incorrect alteration of the tax regime, clearly falls within the ambit of 'mistake apparent from the record', as contemplated under Section 154 of the Income-tax Act, 1961."

"Merely branding a matter as controversial does not absolve the appellate authority from its statutory duty of adjudication. Avoiding such adjudication and passing a non-speaking, mechanical order amounts to abdication of appellate responsibility."

"The actions of the CPC and the confirmation by the Ld. CIT(A) are erroneous, lack legal sustainability, and are prejudicial to the interest of justice and deserve to be set aside and the deduction u/s 10AA as claimed deserves to be allowed."

Final Determinations:

- The delay in filing the appeal was condoned due to non-service of the order on the correct email ID.

- The CIT(A) erred in dismissing the appeal without affording adequate opportunity and without proper application of mind.

- The CPC's rectification order rejecting the claim under Section 10AA and altering the taxation option was a mistake apparent on record and liable to be rectified under Section 154.

- The CPC exceeded its jurisdiction under Section 143(1)(a) by changing the assessee's tax option from "No" to "Yes."

- The assessee's claim for deduction under Section 10AA for AY 2023-24 was valid based on prior years' treatment and the proviso to Section 115BAA(1) rendering the concessional tax option invalid.

- The appeal was allowed, and the Assessing Officer was directed to give effect to the rectification request and allow the deduction under Section 10AA.