ITR Filed without Regular Balance Sheet and Profit & Loss Account is Defective, not invalid; AO holds Responsibility for Notifying Defects: Supreme Court [Read Judgement]

The Supreme Court has asserted that Income Tax Returns ( ITRs ) filed without a regular balance sheet and profit and loss account may be deemed defective but are certainly not invalid. The decision, delivered by the bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan, overturned the previous decision of the Kerala High Court and upheld the order of the Income Tax Appellate Tribunal ( ITAT ). “A return filed without the regular balance sheet and profit and loss account may be a defective one but certainly not invalid. A defective return cannot be regarded as an invalid return. The assessing officer has the discretion to intimate the assessee about the defect(s) and it is only when the defect(s) are not rectified within the specified period that the assessing officer may treat the return as an invalid return” stated the bench. The case in question involves Mangalam Publications, a prominent media entity engaged in publishing newspapers, weeklies, and periodicals in multiple languages under the brand name "Mangalam." For the assessment year 1990-91, the assessee initially filed a return of income on 22.10.1991, reporting a loss of Rs.5,99,390.00. Subsequently, a revised computation was submitted, indicating an income of Rs.5,63,920.00. The absence of the books of accounts was linked to the income tax department's confiscation of the records during a search and seizure operation in 1995. When the case reached the ITAT, it concluded that the reassessment carried out by the assessing officer lacked fresh material and could not be justified based on the balance sheet submitted to the South Indian Bank, previously deemed unreliable by the Commissioner of Income Tax (Appeals). Despite the original assessments completed under Section 143(3) of the Income Tax Act, 1961, the Tribunal deemed the reassessments, falling within the proviso to Section 147, as time-barred and without jurisdiction. However, the Kerala High Court disagreed, challenging the Tribunal's finding that the assessee had fully disclosed all material facts necessary for the original assessments. The High Court set aside the Tribunal's order and remanded the appeals back for reconsideration, asserting that there was no material before the Tribunal to support the conclusion of full and true disclosure by the assessee. Adverting to Section 139 (9) of the Income Tax Act, the respondents submitted that, it is not mandatory for the assessing officer to treat a return as invalid even if the return is defective under any of the sub-clauses of Section 139 (9). It is the discretion of the assessing officer to issue notice. Since no notice was issued, the return and the assessment made thereon would be valid, the counsel added. The appellant's counsel countered, highlighting the reassessment's reliance on a balance sheet obtained from the South Indian Bank, prepared on a provisional and estimated basis due to the absence of seized account books. Non furnishing of details under Section 139 (9) (f) cannot lead to any inference that material facts had not been disclosed so as to justify reopening of assessments that too eight to ten years after expiry of the relevant assessment years, viciously contended by the appellant’s counsel. The bench emphasised that unless the assessing officer exercises its discretion, considering the returns as defective cannot be justified. Importantly, throughout the three assessment years, the assessing officer did not declare any of the returns as defective. Ultimately, the apex court endorsed the Tribunal's conclusion that the reassessments for the three assessment years were not justified. It criticised the High Court for overturning these findings and, consequently, set aside the High Court's order, restoring the Tribunal's decision in favour of Mangalam Publications. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates