Income tax – defects in returns filed by FII – AO declares them invalid as defects found in returns not listed out in relevant Section – Types of defects enumerated in Sec 139(9) are only inclusive, and not exhaustive – defect memo to be issued – AO’s decision to invalidate defective returns not sustainable: ITAT
Defects in income tax returns are a common phenomenon. And these defects can be attributed to various reasons, 
including an oversight. To cure such defects, the two relevant provisions which apply are Sec 292B and Sec 139(9). These provisions are there in the I-T Act to assist the assessee to rectify the defects so that the return is not declared invalid. Sec 139(9) lists out in details various types of defects which can be cured. But what happens when a particular type of defect is not found in the list? Does it render the return invalid and non est? NO is the Tribunal’s answer. In an interesting defect-focussed decision the Tribunal has held that the list provided under Sec 139(9) is not exhaustive. The Legislature has provided an inclusive list which brings under its sweep many other types of defects which are not mentioned there.
Answering to the plea of the assessee’s counsel who argued that filing return in a wrong form is not a serious deficiency as long as the facts are correctly disclosed, the Tribunal has observed that if the assessee’s plea is accepted it would result in a chaos as the I-T Act prescribes different types of Forms for different classes of taxpayers, and if all the assessees begin filing returns in their choice Forms, it would defeat the very reason for providing different Forms as per the Act.
Facts of the case
The assessee is a Foreign Institutional Investor (FII) having sub-account called A/C Morgan Stanley India Investment Fund Inc. It filed its original return on 30.6.1997 showing income of Rs.20,52,94,830. Thereafter a revised return was filed on 17.11.1998 with a total income of Rs.20,52,99,620. This total income was by way of dividend and interest only. Apart from that the assessee had also suffered loss under the head ‘Capital gain’ which was claimed for set off against the income in the succeeding years. On examination of this return the A.O. found that its verification was not done in accordance with law.
The AO further noted that verification was done on the same wrong pattern in respect of original return filed on 30.6.1997 also. By Considering Rule 12 it was opined that the verification was not done properly inasmuch as neither the name of the natural person verifying return nor the name of father/husband of such person signing the return was mentioned. Even at the bottom only ‘S.B. Billimoria’ & Co.’ was written but the name of the person signing the verification was not written. On being show caused the assessee tendered its reply dated 18.1.2000, which has been reproduced in the assessment order. The main thrust of the assessee was that there was no defect in the return because it was signed by Mr. N B Bugwadia as partner of the firm M/s. S.B. Billimoria & Co., Chartered Accountants which was empowered through its partner to sign and submit the returns of income under a duly executed Power of Attorney, a copy of which was enclosed with the return of income. It was further submitted that even if the defect was there, it may be taken as corrected in view of Section 292B of the Act. It was also argued that the relevant substantive provision was contained in section 140(c) for signing the return and hence Rule 12 may be considered in that light only. Without prejudice to these arguments it was contended that at the most return may be treated as defective within the meaning of section 139(9). With a view to rectify the so called defect and to avoid unnecessary controversy, the assessee filed one more return along with that letter. The Assessing Officer did not concur with the submissions advanced on behalf of the assessee and came to hold that the return filed by the assessee was invalid and to be treated as non-est. In that view of the matter the claim for capital loss made in the return was not examined.
The CIT(A) dismissed the assessee’s appeal on the ground that the Power of Attorney appeared to have been issued by the Morgan Stanley Asset Management Inc. USA and signed by some person on behalf of Morgan Stanley Asset Mgt. Inc., but the said signature was not notarized by any authority of that country. Further since the assessee had filed photocopy of the Power of Attorney, the learned CIT(A) held that it was not in fulfillment of the requirement of section 140. He, therefore, upheld the action of the A.O. treating the return as non-est and not allowing the carry forward of loss under the head ‘Capital gain’.
Finally the issue went to the Tribunal which has observed that,
- Jurisdiction of CIT(A): It is a settled legal position that the powers of the CIT(A) are co-terminus with that of the A.O. as has been held in several judgments. It shows that anything which can be done by the AO, can also be done by the first appellate authority. The power of enhancement is rather a step forward, which shows that what the AO could have done but omitted to do, now can be done by the CIT(A) while disposing of the appeal.
- Rule of Consistency: Though the principle of consistency is applicable but the rule of res judiciata does not extend to the income tax matters.
- Sec 140: Only the returns of individuals and companies can be signed by a valid power of attorney (PoA) holders in the specified circumstances and the other categories of the assessee are not entitled to this privilege.
- When the AR was confronted how it is being claimed that section 140(c), which is applicable only to corporate assessees, be applied here as against the assessee being an AOP, he stated that the correct status of the assessee is company but inadvertently the return was filed wrongly in Form No. 3 and further by mistake Code No. 7 was mentioned against the column status. But the AR also argued that a mistake which was neither pointed out by the AO nor by the CIT(A) cannot be pointed out by the Tribunal.
- It is settled law that the Tribunal has jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of the Appellate Assistant Commissioner so long as these grounds are in respect of the subject matter of the entire tax proceedings. Here is a case in which there is no question of any additional ground on an altogether different issue, but the consideration of the same issue from a different angle.
- Sec 139(9): Explanation to section 139(9) enumerating defects in the return cannot be considered as exhaustive in the sense that if a particular defect is not covered in it, that will make the return as invalid. Even if there are some other defects or irregularities, apart from those mentioned in the Explanation, which are merely in the nature of non-compliance of certain formalities or some irregularities, those will still be considered as impliedly included in section 139(9) and the return not fulfilling such requirements will become defective and not invalid.
- Sec 292B: A mere irregularity here or there in the return of income cannot come in the way of its validity. If the return is not signed by a person authorized to sign as per law, then the returns will be defective and not invalid.
- A return filed in wrong Form cannot be considered as valid. The Income-tax Rules, 1962 prescribe different types of return forms in which returns are to be filed by the specified class of assessee. These return forms are created by keeping into consideration the distinct requirements of a particular classes of assessees and further the mode and manner of information which the Department wants in respect thereof. It is not permissible to file return in the wrong form. It the contention of the ld. AR is accepted that anyone can file return in any Form, then the different form prescribed for filing the return of individual, HUF, firm, companies, etc. will become meaningless. Such a practice would result in chaos and the very purpose of prescribing different forms of returns in respect of different classes of assessees would be defeated. At the same time it is equally true that if a return is not filed in the prescribed form the said return cannot be declared as invalid and no-est. But it will become defective and require modification at the instance of the Assessing Officer when such defect is pointed out.
- When a defective return is filed, the AO is obliged to give chance to the assessee to rectify the defect within the specified period. It is only on the failure to remove the defect within the said specified or extended period that the defective return is converted into invalid return.
- Section 292B helps the assessee only to the extent of saving the return from being declared as ‘Invalid’. It does not render the defective or irregular return as valid. If a return is successfully brought within the sweep of section 292B, then it will not be declared as invalid, but will become defective and the case will come back to be governed by section 139(9). In such a situation the AO will allow an opportunity to the assessee to rectify the defect as per the prescription of this sub-section and the assessee will be under obligation to remove the defect.
Finally the Tribunal restores the matter to the file of the Assessing Officer with the direction to first verify the correct status of the assessee. If the assessee turns out to be AOP as mentioned in returns filed by it then a defect memo should be issued enabling the assesse to rectify the defect by getting it signed and verified by the member or principal officer thereof as per section 140(e). If however the correct status is found to be company then again we hold that the signing by the partner as ‘S.B.Billimoria’ in the verification part of the return and non-filing of original power of Attorney will constitute defects in the return. In that case also he will issue a defect memo and afford an opportunity to the assessee to get the return signed by the partner in his own name under a valid Power of Attorney to be annexed in original along with the return.
While finalizing the assessment he will also examine the aspect of the notarization of the power of Attorney in the given case. If the assessee fails to remove these defects within the prescribed time limit u/s.139(9), then the A.O. will be right in treating the return as invalid in which case there will be no question of allowing any carry forward of the loss under the head ‘Capital gain’. If, however, the assessee succeeds in rectifying the defects within the prescribed time or as further time granted by him under sub-section (9), then the Assessing Officer shall examine the claim of capital loss on merits. If such a claim is found to be correct then be will allow the carry forward of such loss for the reason that removal of defects shall validate the original and revised return filed by the assessee in time.
thanks for providing relevant para of case law on defective filling return of income sec139