2025 (5) TMI 1426 - HC - Income Tax

Suo moto intimation u/s 154 - enhanced the chargeable income by disallowing certain deductions claimed u/s 36 (1) (va) without affording the petitioner any opportunity of being heard - HELD THAT - The impugned order was passed after affording the petitioner an opportunity of being heard and therefore the grounds on which the earlier decision had been set aside stood addressed. While appeal before the CIT(A) was pending it had also filed a rectification application before the CPC against the intimation enhancing its income - The petitioner succeeded in this application and by an order dated 18.05.2023 the Deputy Director of Income Tax CPC passed a rectification order rectifying the intimation u/s 143 (1) (a) by restoring the returned income to Rs. 28, 63, 160/-. Clearly the CPC cannot continue to rectify and re-rectify the intimation under Section 143 (1) (a) repeatedly. This aspect has not been considered by the ACIT while passing the impugned order. We set aside the impugned order and remand the matter to the ACIT to consider the matter afresh. ACIT shall also examine whether it can re-rectify the intimation after the same has already been rectified by the CPC.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Assistant Director of Income Tax (CPC) was justified in suo moto rectifying the intimation under Section 154 of the Income Tax Act, 1961, enhancing the petitioner's income without affording an opportunity of hearing?

- Whether the rectification order passed without notice to the petitioner was valid and sustainable?

- Whether the Assistant Commissioner of Income Tax (ACIT) was competent to pass the impugned order under Section 154 of the Act enhancing the income after the Commissioner of Income Tax (Appeals) [CIT(A)] had set aside the earlier rectification order?

- Whether the Central Processing Centre (CPC) could repeatedly rectify and re-rectify the intimation under Section 143(1)(a) of the Act, especially after having restored the income to the originally declared figure?

- Whether the impugned order dated 05.03.2025 under Section 154 of the Act requires interference or remand for reconsideration in light of the rectification already made by the CPC?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Validity of Suo Moto Rectification Without Notice

Relevant legal framework and precedents: Section 154 of the Income Tax Act, 1961 empowers the tax authorities to rectify any mistake apparent from the record. However, the principles of natural justice require that when a rectification affects the assessee's rights adversely, an opportunity of hearing must be afforded. The appellate order of the CIT(A) set aside the initial rectification order on the ground that no notice was issued to the petitioner prior to rectification, thereby violating procedural fairness.

Court's interpretation and reasoning: The Court acknowledged that the initial rectification order dated 05.07.2021 was passed without affording any opportunity of hearing, which was rightly challenged by the petitioner before the CIT(A). The CIT(A) correctly set aside the rectification order on this procedural ground.

Application of law to facts: The Court found that the petitioner's challenge before the CIT(A) was limited to the absence of notice and opportunity of hearing. The subsequent impugned order dated 05.03.2025 under Section 154 was passed after affording the petitioner an opportunity of hearing, thereby addressing the procedural infirmity that led to the setting aside of the earlier order.

Treatment of competing arguments: The petitioner contended that the rectification itself was not justified, but the Court limited its analysis to the procedural aspect, noting that the impugned order was passed after hearing, thus curing the earlier defect.

Conclusion: The Court found no merit in the contention that the ACIT could not proceed with rectification after the CIT(A) had set aside the earlier order, since the impugned order remedied the procedural lapse.

Issue 3 & 4: Competence to Pass Subsequent Rectification and Re-rectification by CPC

Relevant legal framework and precedents: Section 154 permits rectification of mistakes apparent from the record, but repeated rectifications on the same issue, especially after a rectification order has been passed and accepted, raise questions of propriety and jurisdiction. The CPC functions as a central authority for processing returns and intimation under Section 143(1)(a), and its rectification powers are circumscribed by the Act and judicial principles against abuse of process.

Court's interpretation and reasoning: The Court noted that while the ACIT passed the impugned order enhancing the income, the petitioner had filed a rectification application before the CPC during the pendency of the appeal before the CIT(A). The CPC, by order dated 18.05.2023, restored the income to the originally declared figure, effectively rectifying the intimation in favour of the petitioner.

The Court emphasized that the CPC cannot continue to rectify and re-rectify the intimation repeatedly, as this would lead to uncertainty and abuse of the rectification process. The ACIT failed to consider this crucial fact while passing the impugned order.

Key evidence and findings: The rectification order dated 18.05.2023 by the Deputy Director of Income Tax, CPC, reinstating the original income declared by the petitioner, was a significant fact not brought to the ACIT's notice.

Application of law to facts: The Court held that the ACIT must consider whether it is permissible to re-rectify the intimation after the CPC had already rectified it in favour of the petitioner, to avoid multiple conflicting rectifications.

Treatment of competing arguments: The Revenue contended that the ACIT was unaware of the CPC's rectification and thus the matter should be remanded for fresh consideration. The Court accepted this submission and ordered remand.

Conclusion: The Court concluded that the impugned order dated 05.03.2025 could not stand without considering the prior rectification by the CPC and remanded the matter to the ACIT for fresh consideration.

3. SIGNIFICANT HOLDINGS

- "The petitioner's challenge before the CIT(A) was on the ground that the rectification was carried out without issuance of any notice and without affording the petitioner any opportunity to be heard. The impugned order was passed after affording the petitioner an opportunity of being heard, and therefore, the grounds on which the earlier decision had been set aside, stood addressed."

- "Clearly, the CPC cannot continue to rectify and re-rectify the intimation under Section 143 (1) (a) repeatedly. This aspect has not been considered by the ACIT while passing the impugned order."

- "In view of the above, we set aside the impugned order dated 05.03.2025 and remand the matter to the ACIT to consider the matter afresh. The ACIT shall also examine whether it can re-rectify the intimation after the same has already been rectified by the CPC."

Core principles established include the necessity of affording an opportunity of hearing before rectification under Section 154 that adversely affects the assessee, and