Rectification under Section 154(3): ITAT Kolkata Sends Back ₹85.06 Lakh Addition and Other Disallowances to AO
Background of the Dispute
The Kolkata Bench of the Income Tax Appellate Tribunal in the case of Basanti Mata Agri Product Private Limited Vs ACIT (ITAT Kolkata) examined whether an Assessing Officer can, in the garb of rectification under Section 154, enhance the assessee’s income without first issuing a notice as mandated under Section 154(3) of the Income Tax Act 1961.
The assessee, a company engaged in the business of running a cold storage facility, had filed its return of income for Assessment Year 2017-18 on 21.09.2017, declaring nil taxable income. An assessment was completed under Section 143(3) on 13.11.2019, where substantial additions were made, including:
- An addition of ₹85,06,000 under
Section 68for alleged unexplained cash credits (cash deposits), and - Certain disallowances, including machinery-maintenance expenses and donations/subscriptions.
Subsequently, the assessee filed a rectification application under Section 154. Acting on this, the Assessing Officer (AO) passed a rectification order under Section 154 read with Section 143(3) on 03.12.2019, recomputing the total income but maintaining or confirming the following:
Section 68addition of ₹85,06,000 towards unexplained cash credit;- Disallowance of machinery maintenance expenses to the extent of ₹1,15,770, representing one-third of total machinery maintenance of ₹3,47,309;
- Disallowance of ₹98,551 under the head “Donation & Subscription”.
The assessee challenged this rectification order before the first appellate authority and, being unsuccessful there, carried the matter to the Tribunal.
Grounds Raised by the Assessee
Before the Tribunal, the assessee contested the order primarily on the following grounds (paraphrased):
Donation & Subscription – ₹98,551
- The assessee argued that the addition of ₹98,551 towards Donation & Subscription was sustained or enhanced in the rectification order dated 03.12.2019 without issuing any notice for enhancement of income as required under
Section 154(3). - It was contended that such action was arbitrary, contrary to law, and ought to be deleted.
- The assessee argued that the addition of ₹98,551 towards Donation & Subscription was sustained or enhanced in the rectification order dated 03.12.2019 without issuing any notice for enhancement of income as required under
Machinery Maintenance – ₹1,15,770
- Disallowance of one-third of machinery-maintenance expenditure (₹1,15,770 out of total ₹3,47,309) on an estimated basis was argued to be unjustified, excessive, and not supported by proper reasoning.
Cash Credit under
Section 68– ₹85,06,000- The assessee contended that the addition of ₹85,06,000 under
Section 68was treated as a “mistake apparent from the record” in the rectification proceeding, even though no books of account were produced or verified during the initial assessment. - On this basis, the assessee asserted that the addition itself was unfounded, erroneous and liable to be removed.
- The assessee contended that the addition of ₹85,06,000 under
Right to Modify Grounds
- The assessee also reserved the right to amend, modify, add or withdraw grounds at any time up to or during hearing.
Assessment and Rectification Proceedings
Original Assessment under Section 143(3)
The AO completed the scrutiny assessment under Section 143(3) and made additions, chiefly:
- ₹85,06,000 under
Section 68for alleged unexplained cash deposits; - Disallowances on account of machinery maintenance expenses;
- Disallowances of donations and subscriptions claimed in the Profit & Loss Account.
The result was that, despite the assessee having filed a nil-return, its income was substantially enhanced due to the above additions.