MY COLLECTION OF BLUNDERS

[Harish Chander Bhatia]

MY COLLECTION OF BLUNDERS

BRILLIANT MISTAKES BY ASSESSING OFFICERS

FEW ACKNOWLEDGED FACTS BY THE DEPARTMENT

I have the opportunity to access the Direct tax committee report , in which it is admitted by the CBDT that mistake committed in assessments or rectifications to tunes of crores of rupees and no action against the erring officers. A MUST READ for all concerned to get amazed how such follies occurs in high profiles cases and NO re-checking done at any stage and orders are issued causing lot of embarrassments to the higher authorities and explanation at ministerial level, and the department remained audacious .

The readers will be just shocked to read the circuitous reply of the concerned CITs, and in all the cases the concerned CITs admitted to be a bonafide mistake and officers have been told be careful in future. It would have been a very happy moment if the taxpayers would have let off and treated like this. let us NOT Dream.

However, one thing very important to mention is that had these mistakes committed by any assessee, the department would have left no stone unturned to hack the assessee to any extreme level and had derived pleasure on such traumatic proceeding against the taxpayers. But when it is committed by the departments itself or by its officers, NO problem, they have enough powers to let them off after all they are beloved members of their family, who are an important source to keep their garden green even in autumn.

123. As seen from the Ministry's replies in respect of all the below mentioned cases the irregularities had occurred despite the fact that in most of the cases, the assessments were completed under scrutiny assessment.

The following are the examples of the egregious mistakes:-

I. Arithmetical errors in computation of income and tax

Charge: CIT X, Mumbai, Maharashtra; AY: 2007-08

102. Audit had pointed out that in the case of Maharashtra State Electricity Distribution Company, while computing the revised income in March 2010, the Assessing Officer (AO) erroneously computed considering the total income as per assessment order of December 2009 at Rs. 495.1 crore instead of correct income of Rs. 2161.5 crore. The mistake involved short levy of tax of Rs. 746 crore including interest. The Department accepted the observation (November 2010). The Ministry in its reply dated 22 February 2012 has accepted the observation and taken remedial action in May 2011.

103. When the Committee desired to know the circumstances under which this omission took place, the Ministry in its reply stated as under:

"It has been reported by the Commissioner of Income Tax-X, Mumbai that the Assessing Officer, in a hurry to complete the assessment within time prescribed by the Statute, had made a bonafide mistake. However, The CIT has called for the explanation of the Officer".

104. On being asked as to whether any responsibility had been fixed against the erring officials, the Ministry informed that an explanation of the officer had been called for.

105. When specifically asked about the mechanism in place to avoid recurrence of such negligence by the AOs, the Ministry submitted as follows:

"During a financial year on an average about 4 to 5 lakh scrutiny assessments  are completed by the AOs. Out of these assessments, mistakes are found in   comparably low number of cases. These mistakes occur due to the work  pressure on the AOs to complete the assessment after due enquiries and    affording reasonable opportunity to the assessee within the statutory time limits. However, as per Instruction No 9 of 2006 of the CBDT, whenever an audit objection is accepted, the CIT is supposed to call for the explanation of the AO and examine the issue further for taking appropriate corrective action. In addition,  the work of the AO is subject to review and inspection by senior officers. The Internal Audit also conducts regular Audit to detect mistakes of the AOs. Based    upon experience of the past, a comprehensive check list for Internal Audit was prepared and circulated amongst the field formation for guidance while  completing assessments. It is envisaged to have an electronic database of audit objections and the officers so as to enable the Department to identify the officers  requiring further capacity building enhancing their skill sets. It is also submitted  that as the level of computerization increases the incidence of such mistakes will decrease".

II. Irregularities in allowing depreciation/business losses/ capital losses

A. Charge: CIT X Mumbai, Maharashtra; AY: 2007-08

106. Audit has observed that Central Bank of India, was allowed carry forward of long term capital loss of Rs. 3323.9 crore against the available long term capital loss of Rs. 2190.2 crore only. The mistake resulted in excess carry forward of long term capital loss of Rs. 1133.7crore involving potential tax effect of Rs. 127.2 crore. The Department issued notice under section 154 of the Income Tax Act (April 2010) for rectification of the error.

107. When asked about the reasons for this irregularity, the Ministry in its reply stated as under:

"The CIT has reported that the AO had inadvertently allowed the brought forward losses claimed in the return of income without verifying the past records. The Board had directed the CIT on 25.01.2012 to call for the explanation of the AO for further necessary action".

B. Charge: CIT X Mumbai, Maharashtra; AY: 2007-08

108. Audit scrutiny revealed that Reliance Communications Ltd(RCL),was allowed set off of brought forward business losses of Rs. 244.9 crore and unabsorbed depreciation of Rs. 2615.9 crore pertaining to Reliance Infocom Limited (RIC), which was merged with RCL on 31 March 2006. The carried forward losses and unabsorbed depreciation of RIC included the loss for the AYs 2000-01 to 2003-04 pertaining to basic telecom undertaking of Reliance Telecom Ltd (RTL) which was merged with RIC on 6 March 2003. Cross verification of case records of RIC and RTL by Audit has revealed that the carried forward loss from RTL to RIC and subsequently from RIC to the assessee required to be reduced by Rs. 233.2 crore. Omission involved potential tax effect of Rs. 78.5 crore. The Department rectified the mistake (January 2011).

109. Explaining the circumstances under which the AO allowed the set off of the entire amount of brought forward business loss and unabsorbed depreciation without cross verification of rectification order, the Ministry submitted as follows:

"The Commissioner of Income Tax has reported that the said companies were assessed with different AOs and there was a communication gap amongst them which led to the mistake. The Board has again advised the officers to carefully undertake the required cross verifications while completing the assessments in such cases".

110. Regarding fixing responsibility on the erring Assessing Officer, the Ministry stated that explanation of the Assessing Officer has been called for by the CIT for further necessary action.

C. Charge: CIT-LTU, Bangalore, Karnataka, AY: 2006-07

111. Audit further pointed out that Canara Bank had claimed and was allowed unabsorbed depreciation/ loss of Rs. 126.3 crore relating to AY 2005-06 against positive income of Rs. 1158.6 crore in the scrutiny assessment completed in December 2008 in the assessment as well as in the order giving effect to CIT(A) passed on 30 July 2009. The omission to disallow the loss resulted in under assessment of income of Rs. 126.3 crore involving a tax effect of Rs. 54.5 crore including interest. The Department rectified the mistake under section 154 of the Income Tax Act (February 2011). The Ministry in its reply dated 21 March 2012 has accepted the case.

112. Explaining the reasons for the above, the Ministry stated as follows :

"The CIT has reported that it was a bonafide mistake where the AO has omitted to refer the assessment order for the A.Y.2005-06 passed in the month of December 2008 while giving effect to the order of CIT (A) for the AY. 2006-07. On being pointed out by audit in their objection dt.27.10.2010 the same was rectified on 25/2/2011".

D. Charge: CIT-IV, Hyderabad, Andhra Pradesh, AY: 2005-06

113. Audit had observed that Lanco Kondapalli Power (P) Limited was allowed 100 per cent deduction of Rs. 108.4crore under section 80IA before setting off of the unabsorbed depreciation of Rs. 55.1 crore and thereby incorrect set off and carry forward of unabsorbed depreciation of Rs. 55.1 crore involving potential tax effect of Rs. 20.2 crore. The Department rectified the mistake under section 154 of the Income Tax Act (July 2010).

114. On being asked that under what circumstances this omission had taken place, the Ministry stated as follows :

"The assessment order which was the subject of the audit para, was passed on the date of limitation i.e., 31-12-2007. The CIT has reported that it is purely a legal issue relating to the methodology of computation of Total Income and had taken place due to the heavy work load of time barring assessments to be completed by the said date. The CIT has reported that it was a bonafide mistake by the Assessing Officer. Further, there is no loss of revenue since the assessment was completed by computing the tax under sec. 115JB correctly. The above mistake was corrected by passing an order under sec.154 of the IT Act, 1961 on 06-07-2010".

115. When the Committee wanted to know why the Internal Audit Party (IAP) of the Department had not pointed out the mistake, the Ministry in its written submissions stated that the file was audited by the IAP before the Audit by the Revenue Audit Party i.e. 21-08-2008. However, it appears that this issue had missed the attention of the IAP possibly since the IAP had gone by the MAT income.

III. Income not/under assessed under normal provisions

Charge: CIT LTU, Mumbai, Maharashtra; AY: 2007-08

116. Audit found that Deposit Insurance & Credit Guarantee Corporation adjusted interest of Rs. 76.8 crore and Rs. 36.7 crore allowed in October 2006 on refunds of Rs. 133.9 crore and Rs. 58.2 crore relating to AYs 1990-91 and 1991-92 respectively against the demand of AY 2004-05. Interest on refunds forming part of income, was not offered to tax in AY 2007-08. The mistake resulted in income of Rs. 113.5 crore escaping assessment involving short levy of Rs. 58.1 crore including interest. The Department rectified the mistake (April 2011).

117. To a pointed query as to why the Assessing Officer had not verified such a big amount of interest at the time of completing scrutiny assessment of AY 2007-08 in October 2009. In response, the Ministry replied as under:

"The CIT has reported that it was a bonafide mistake on the part of the AO. The refunds for A.Y. 1990-91 and 1991-92 were issued after adjusting against the demand for the A-Yr 2004-05 on 30/10/2006. Subsequently, the case was transferred from ACIT-1(1), Mumbai to ACIT-LTU, Mumbai w.e.f. 15/06/2008. The case records for the same were transferred on 30/07/2008 as per the transfer memo in which only pending actions were reported. The new AO who received the files on transfer was not aware of such refund as it was prior to transfer of jurisdiction. The mistake had taken place inadvertently because of this communication gap".

IV. Mistakes in assessment while giving effect to appellate orders

A. Charge: CIT-V, Delhi, AY: 2004-05

118. Audit had observed that while giving effect to the appellate order passed in March 2007 in the case of Power Grid Corporation of India Ltd. under section 250, loss under normal provisions was computed at Rs. 858.3 crore instead of the correct amount of Rs. 1002.1 crore . This mistake resulted in under-assessment of loss by Rs. 143.8 crore involving potential tax effect of Rs. 51.6 crore. The Department rectified the mistake under section 154 of the Income Tax Act (December 2010).

119. While accepting the mistake, the Ministry submitted the following reasons thereof:

"The Ministry has accepted the mistake. The CIT has reported that the assessment u/s 143(3) was made on 29.11.2006 under normal provisions of Act at a loss of Rs. 930,21,57,144/-. The CIT(A) vide his order dt.14.03.2007 gave relief of Rs. 71,90,00,000/- under different heads to the assessee. However, while giving appeal effect, inadvertently the amount of Rs. 71,90,00,000/- was decreased from the loss assessed instead of increasing the same. Subsequently, mistake was rectified vide order u/s 154 dt.06.12.2010 and revised loss quantified at Rs. 1002,11,57,144/-".

B. Charge: CIT-I, Jodhpur, Rajasthan; AYs: 2002-03 & 2003-04

120. Audit scrutiny had also revealed that Jodhpur Vidyut Vitran Nigam Ltd. revised the returned loss in December 2006 for AYs 2002-03 and 2003-04 at Rs. 62.6 crore and Rs. 22.9 crore respectively. However, while giving effect to the appellate order of December 2009, the assessing officer adopted loss of Rs. 85.2 crore and Rs. 78.1 crore initially returned by assessee instead of adopting loss as declared by the assessee in the revised return for both the assessment years respectively. Thus, over computation of loss aggregating Rs. 77.9 crore for two assessment years involved potential tax effect of Rs. 28.4 crore. The Ministry in its reply dated 02 May 2012 had accepted the case.

121. On being asked about the circumstances under which Assessing Officer had adopted loss initially returned by the assessee instead of adopting loss as declared in the revised return, the Ministry stated as under :

"This case involved multiple litigation and complexities. The brief facts of the case are that the original return of Income (ROI) was filed declaring loss of Rs. 78.11 crore which was claimed to be carried forward as unabsorbed depreciation. The Revenue Audit raised an objection against the summary assessment order in this case. Remedial action was taken and re-assessment was done to rectify the mistake. During this period the assessee filed a revised computation of Income and not a revised return. Against the reassessment the assessee went in appeal. After, the CIT(Appeal) confirmed the reassessment, the assessee company filed appeal before Income Tax Appellate Tribunal (ITAT) and also an application before the Authority for Advance rulings(AAR) placing on record Additional evidence which was hitherto not available either to the AO or the CIT(Appeal). Both the ITAT & AAR have set aside the issues and restored the matter to the AO for re-examining the facts and completing the assessment. While giving effect to the orders of the appellate Authority, the AO had adopted the figure as given in the return and not as per the revised computation of Income submitted by the Assessee, by oversight. This mistake has hence been rectified. There has been no loss of Revenue. The Assessee Company is state PSU. The CIT after considering all the facts has opined that this is a bonafide mistake. However, a caution to the AO has been issued to be careful in future".

122. On the issue of fixing responsibility on the officials concerned for not adopting correct figures of loss based on revised return, the Ministry has submitted that as it was a case of bonafide mistake through inadvertence the CIT had cautioned the Assessing Officer to be careful.