AO Cannot Tax Non-Existent Income Due to Consultant’s Error: ITAT Deletes Addition
Issue
Whether the Assessing Officer (AO) is justified in making an addition of income originally declared under Section 44AD due to a tax consultant’s error, even after the assessee voluntarily rectifies the mistake, declares a significantly higher income from other heads, and pays the due taxes on the same.
Facts
Original Return: The assessee filed an original return declaring a total income of Rs. 2,75,320/-. This included Rs. 2,55,016/- offered as presumptive business income under Section 44AD.
The Error: The assessee later discovered that his tax consultant had wrongly included the income of another person (Rs. 2,55,016/-) in his return. The assessee did not actually possess this business income.
Correction: To rectify this, the assessee filed a revised computation declaring his correct and actual income of Rs. 10,25,100/- (comprising remuneration from a partnership firm, interest, and other sources). He also paid the self-assessment tax on this higher amount.
AO’s Action: The AO assessed the new, higher income of Rs. 10,25,100/- but also added back the erroneous Section 44AD income of Rs. 2,55,016/- from the original return. The total assessed income was determined at Rs. 12,80,120/-.
CIT(A) Ruling: The Commissioner (Appeals) upheld the AO’s addition.
Decision
Delay Condoned: The ITAT condoned a delay of 215 days in filing the appeal, accepting the assessee’s affidavit.
Appeal Allowed: The Tribunal ruled in favor of the assessee and deleted the addition of Rs. 2,55,016/-.
Misuse of Authority: The Bench criticized the lower authorities, labeling the case as an “example of misuse of authority.” The Tribunal observed that the AO punished the assessee for a bona fide mistake instead of assessing the true income.
Bona Fide Conduct: The Tribunal noted that the assessee had voluntarily offered income nearly five times higher than the original return and paid taxes on it. This sufficiently demonstrated the assessee’s honesty.
Duty of Authorities: The ITAT reiterated the legal principle that tax authorities must charge only legitimate taxes and assist taxpayers in assessing their correct income, rather than penalizing them for inadvertent errors made by consultants.
Key Takeaways
Real Income Theory: Tax is levied on real income, not on erroneous entries. If an assessee can prove an entry in the return was a mistake (especially a consultant’s error), it cannot be taxed.
Role of Tax Officers: The Assessing Officer’s duty is quasi-judicial; they must assist the taxpayer in determining the correct tax liability and not take advantage of the assessee’s ignorance or mistakes.
Bona Fides Matter: When an assessee voluntarily revises their return to show a higher income and pays tax on it, it establishes credibility and bona fide intent, which weighs heavily against penal additions for prior clerical errors.
Source :- 1762249867-x4RwM5-1-TO