2025 (5) TMI 1875 - AT - Income Tax

Confirming Income Processed u/s 143(1) against the returned Income - HELD THAT - We find that CPC vide original intimation order made certain addition and subsequently on an application filed by the assessee u/s 154 rectified the earlier intimation and accepted the income returned by the assessee and also issued a rectified order on 12.04.2022. When the appeal was listed for hearing the assessee could not appear before CIT(A) and consequently the appeal was dismissed for want of prosecution resulting in confirmation of original intimation passed by CPC since CIT(A) was ignorant of the fact that CPC has already passed a rectification order accepting the income returned by the assessee. We find force in the arguments of assessee that the order passed by CIT(A) needs to be set-aside. As in the light of rectification order passed by CPC wherein income returned by the assessee was accepted we deem it appropriate to set-aside the order passed by CIT(A). Thus effective ground of appeal raised by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the addition of Rs. 9,17,592/- made by the CPC under section 143(1) of the Income Tax Act, 1961, by disallowing the loss claimed from the partnership firm and treating it as income, was justified?

(b) Whether the intimation under section 143(1) with variation in income without prior communication of proposed variation by the CPC is valid in law?

(c) Whether the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] confirming the addition and passing an ex-parte order was just and fair, especially when the rectification order by CPC accepting the returned income was not brought to the CIT(A)'s notice?

(d) Whether the rectification order passed by the CPC under section 154, which accepted the income returned by the assessee, should prevail over the subsequent appellate order confirming the original addition?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of Addition of Rs. 9,17,592/- by CPC under Section 143(1)

Legal Framework and Precedents: Section 143(1) of the Income Tax Act provides for summary assessment or processing of the return of income by the CPC. The processing can result in an intimation under section 143(1) confirming the returned income or indicating a variation. The loss claimed from a partnership firm is generally allowable if properly declared and supported.

Court's Interpretation and Reasoning: The CPC initially disallowed the loss claimed from the partnership firm Saraswati Vilas Hospital and added back the loss amount as income under the head "business and profession". This resulted in an increased income from Rs. 5,85,800/- to Rs. 15,03,394/-. However, upon rectification application filed by the assessee under section 154, the CPC accepted the return filed by the assessee and rectified the intimation accordingly.

Key Evidence and Findings: The assessee had declared income from medical profession and other sources and claimed a loss from the partnership firm. The CPC's initial addition was a mechanical error, which was corrected by the rectification order dated 12.04.2022.

Application of Law to Facts: Since the rectification order accepted the returned income inclusive of the loss claimed, the initial addition was not sustainable. The rectification under section 154 is a statutory remedy to correct mistakes apparent from the record.

Treatment of Competing Arguments: The Revenue relied on the original intimation order, while the assessee emphasized the rectification order accepting the loss. The Tribunal found merit in the assessee's argument, given the rectification order's precedence.

Conclusion: The addition of Rs. 9,17,592/- was erroneous and rightly deleted by the rectification order.

Issue (b): Validity of Intimation under Section 143(1) without Prior Communication of Proposed Variation

Legal Framework and Precedents: It is a settled principle that the CPC should communicate proposed variations before processing the final intimation under section 143(1), allowing the assessee an opportunity to respond.

Court's Interpretation and Reasoning: The assessee contended that the intimation with variation was bad in law as CPC did not intimate the proposed variation before processing the final intimation. However, this issue became academic as the rectification order corrected the variation.

Key Evidence and Findings: The record did not show any prior communication of proposed variation by CPC before issuing the intimation dated 15.12.2021.

Application of Law to Facts: Although the procedural lapse was alleged, the rectification order rectified the error, accepting the returned income.

Treatment of Competing Arguments: The Revenue did not dispute the rectification but relied on the original intimation. The Tribunal gave precedence to rectification.

Conclusion: The procedural lapse, if any, was cured by the rectification order accepting the returned income.

Issue (c): Fairness and Validity of CIT(A) Order Confirming Addition and Passing Ex-Parte Order

Legal Framework and Precedents: Principles of natural justice require that an assessee be heard before passing an adverse order. An ex-parte order is justified only if the assessee fails to appear despite due notice.

Court's Interpretation and Reasoning: The CIT(A) passed an ex-parte order confirming the addition made in the original intimation since the assessee failed to appear for hearings on 18.10.2024 and 07.11.2024. However, the CIT(A) was unaware that CPC had already passed a rectification order accepting the returned income.

Key Evidence and Findings: Notices issued by CIT(A) were not seen by the assessee, leading to non-appearance. The rectification order was not communicated to CIT(A) by the assessee.

Application of Law to Facts: The Tribunal found that the CIT(A) order was passed without knowledge of the rectification order, which materially affected the outcome. The failure to inform CIT(A) of the rectification order was a procedural lapse on the part of the assessee but did not justify confirming the addition.

Treatment of Competing Arguments: The Revenue argued that the CIT(A) order was valid as the assessee did not appear. The assessee argued that the order was unjust as the rectification order had already accepted the returned income.

Conclusion: The CIT(A) order was set aside due to ignorance of the rectification order and procedural unfairness.

Issue (d): Precedence of Rectification Order over Subsequent Appellate Order

Legal Framework and Precedents: Rectification under section 154 is intended to correct mistakes apparent from the record. An appellate order passed without knowledge of rectification may be set aside to avoid miscarriage of justice.

Court's Interpretation and Reasoning: The Tribunal held that the rectification order dated 12.04.2022 passed by the CPC accepting the returned income is binding and must prevail over the CIT(A) order passed ex-parte without knowledge of rectification.

Key Evidence and Findings: The rectification order was a formal acceptance of the returned income and deletion of the addition. The CIT(A) order was passed subsequently without awareness of this fact.

Application of Law to Facts: The Tribunal applied the principle of natural justice and procedural fairness, setting aside the CIT(A) order and allowing the appeal.

Treatment of Competing Arguments: The Revenue did not contest the rectification order's validity but relied on the appellate order. The Tribunal prioritized the rectification order.

Conclusion: The rectification order prevails and the CIT(A) order is set aside.

3. SIGNIFICANT HOLDINGS

"Considering the totality of the