Mistaken Self-Disallowance u/S.36 in Income tax Return Can Be Rectified: ITAT Orders Fresh Review [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) observed an inadvertent self-disallowance made by a taxpayer in the return of income cannot be treated as final if it does not reflect the correct tax liability, thereby inadvertent disallowances under Section 36 of the Income Tax Act, 1961 cannot be rejected solely on procedural grounds. Thus, the Tribunal ordered a fresh examination of disputed issues.

The appeal was filed by Sapphire Fintech Private Limited against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [CIT(A)], for the Assessment Year 2014-15, upholding the AssessingOfficer (AO)’s order.

The case arose from scrutiny assessment proceedings under the Income Tax Act, 1961, wherein the AO disallowed interest expenditure of ₹7.21 lakh on loans treated as non-genuine in earlier years, declined to allow correction of an inadvertent self-disallowance of ₹9 lakh made in the return of income under Section 36 of the Income Tax Act, 1961 and did not permit set-off of brought forward losses and unabsorbed depreciation. These disallowances were upheld at the first appellate stage, leading to the present appeal before the Tribunal.

Counsel for the appellant contended that the disallowance of interest expenditure was premature as the issue regarding the genuineness of the underlying loans had already been restored to the AO for fresh adjudication by the Tribunal in the appellant’s own case for earlier assessment years. Subsequently submitted that the denial of set-off of brought forward losses and unabsorbed depreciation was purely consequential and dependent on the outcome of pending proceedings for earlier years.

Further, the appellant admitted that the disallowance of ₹9 lakh was made inadvertently while filing the return of income and that the correction was sought during assessment proceedings even after the time limit for revising the return had expired.

Representatives of the Revenue submitted that the interest expenditure was rightly disallowed as the loans were held to be non-genuine in earlier assessment years, and that the set-off of brought forward losses was consequential to additions confirmed in prior years. Additionally, since the revision of return is time-barred, the AO was correct in refusing to entertain the claim of ₹9 lakh made during assessment proceedings.

The Bench comprising Sandeep Singh Karhail, Judicial Member and Prabhash Shankar, Accountant Member held that since the issue of the genuineness of loans had already been restored for de novo adjudication in earlier years, the disallowance of interest expenditure for the year under consideration could not be sustained without fresh examination. Accordingly, the issue was restored to the AO for re-consideration.

On the issue of the inadvertent disallowance of ₹9 lakh, the Tribunal affirmed that appellate authorities are empowered to entertain fresh claims. The Tribunal clarified that assessment proceedings are meant to assess the correct tax liability and noted that the nature of the ad hoc disallowance required proper examination. The matter was therefore remanded to the AO for fresh adjudication.

In issue to the set-off of brought forward losses and unabsorbed depreciation, the Tribunal held that the claim was consequential and dependent on the outcome of pending proceedings for earlier assessment years. In the interest of justice, the Tribunal directed the AO to allow the set-off in accordance with law after considering the final outcome of prior years.

Accordingly, the appeal was allowed for statistical purposes.

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