Invalid versus defective return ITAT, MUMBAI BENCHES ‘L’ MUMBAI

Invalid versus defective return



The signing of return by an unauthorized person cannot invalidate the return, but would make the return defective; when a defective return is filed, the Assessing Officer 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 to 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 Assessing Officer 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, if the defect is cured as per section 139(9), then such return becomes valid; if the assessee fails to remove such defect, then the defective return is converted into invalid return





ITAT, MUMBAI BENCHES ‘L’ MUMBAI

Morgan Stanley Asset Management Inc.

v.

DCIT

ITA No. 1833/Mum/2004

August 11, 2009

RELEVANT EXTRACTS:

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13. The entire focus in the present appeal is to decide whether the returns filed by the assessee were valid or invalid or defective. Whereas the AO, on observing that the return was not properly verified in as much as it was not signed by the right person, declared it to be invalid and non-est. He further intimated the assessee vide para 5 of his communication dated 11.1.2000 that the act of wrong verification is not a rectifiable defect u/s 139(9) which provides that removal of any defect of a valid return of income. Since your Return of Income is not valid, it cannot be rectified u/s 139(9). It may be pointed out that the explanation to section 139(9) which enumerates various rectifiable defects does not include invalid rectification.’ On the contrary the stand of the assessee ab initio was that primarily the return was valid and if it was to be considered as not valid, then section 292B will come to its rescue, which will assist in making good the deficiency in the verification part of the return. It is further noted that in all the three returns filed by the assessee, original as well as revised, the signatures are done by some partner of M/s S.B. Billimoria & Co. not in his own name but as `s.b.billimoria’ in his handwriting. Further the assessee has contended before the AO that Rule 12 should not be considered but the substantive provision contained in section 140(c) will be applicable, which permits the verification of the return of income by a valid power of attorney. The A.O. held the return as invalid because it was not properly verified. The ld. CIT(A) followed the suit and upheld the action of the AO but on the ground that POA was not properly notarized and further its original was required to be filed as against the copy of POA filed by the assessee.



14. There is no dispute on the fact that the assessee executed a power of attorney in favour of the M/s S.B. Billimoria & Co. Chartered Accountants, a copy of which is available in the paper book. It authorized the said CA firm to file the return on its behalf through its partner. It is further noted that assessee did file its returns through M/s S.B. Billimoria & Co. Chartered Accountants signed by Sh. N.B. Bugwadia, its partner. But the said partner, instead of signing his own name, put initials as `s.b.billimoria’.

15. Section 140 has marginal note : “Return by whom to be signed”. Clause (a) is applicable in the case of an individual. It states that the return shall be signed by the individual himself, but where he is absent from India, by the individual himself or by some person duly authorized by him in this behalf. Sub-clause (iii) deals with a particular situation where such individual is mentally incapacitated. Sub-clause (iv) states that where, for any other reason, it is not possible for the individual to sign the return, then it shall be signed by any person duly authorized by him in this behalf. There is a proviso attached to this clause which states that in a case referred to in sub-clause (ii) or sub-clause (iv), if the person signing the return holds a valid power of attorney from the individual to do so, then it shall be attached to the return. Thus it is noted that if due to one reason or the other individual cannot personally sign the return, then an option has been given to get it signed by a valid power of attorney holder and further such POA should be attached to the return. Clause (b) of section 140 deals with the signing of the return of HUF. According to this clause the return shall be signed by the karta, and where the karta is absent from India or is mentally incapacitated from attending to his affairs , then by any other adult member of such family. The option given as per clause (a) for getting the return signed by a valid power of attorney holder is not available to HUF. The return has to be signed either by the karta himself or alternatively by any adult member in case the karta is not in position to sign under the specified circumstances. Thus it can be seen that the karta of HUF is not empowered to execute a power of attorney in favour of any one empowering such person to file the return on his behalf. Then comes clause (c) of section 140, on which the assessee has relied before the AO as applicable on it. It provides that in the case of a company, the return u/s.139 shall be signed and verified by the managing director thereof, or where for any unavoidable reason such managing director is not able to sign and verify the return, or where there is no managing director, then by any director thereof. The first proviso to clause (c) states that : “where a company is not resident in India, the return may be signed and verified by a person who holds a valid power of attorney from such company to do so, which shall be attached to the return”. Clause (cc) of section 140 applying to a firm provides that the return shall be signed by the managing partner thereof, or where for any unavoidable reasons such managing partner is not able to sign and verify the return, or where there is no managing partner as such, by any partner thereof, not being a minor. Under this clause also there is no provision for the signing of the return by the holder of a valid power of attorney. Clause (e) states that incase of any other association, the return shall be signed and verified, by any member of the association or the principal officer thereof.

16. On going through various clauses of section 140, it is seen that whereas clause (a) and (c) contain the provision for the signing of the return by a valid power of attorney holder, other clauses do not have such provision. Thus there is a clear line of demarcation between the classes of assessees, who , in certain circumstances, can get their returns signed and verified by a the holder of valid POA, in which case such POA is required to be attached to the return and on the other hand the classes of assessees who do not enjoy such privilege. It is not permissible to a non-privileged assesse to issue POA and get his return filed through the holder of a POA. It is true that in common parlance if a person can do some work personally, he can get it done through his Power of attorney holder also. But we are dealing with section 140, in which separate categories of assesses have been made and the said general rule has been made applicable only to some of them and not all. It is obvious that the intention of the legislature is not to extend this general rule to all the classes of the assesses. If that had been the situation, then there was no need of inserting proviso to clauses (a) and (c) only but a general provision would have been attached as extending to all the classes of assessees. From the language of section 140, it can be easily noticed that only the returns of individuals and companies can be signed by a valid power of attorney holders in the specified circumstances and the other categories of the assessee are not entitled to this privilege.

17. Adverting to the facts of the instant case it is found that the assessee has claimed before the AO that section 140(c) was applicable in its case and that is the reason for which the return was got signed from a valid power of attorney holder. On the perusal of the original return of income filed by the assessee, copy of which is available in the paper book, it transpires that Return Form No. 3 has been used and against the Column No. 5 `Status’ code 07 has been mentioned. Form No. 3, at the relevant time, was applicable `For Non-corporate assessees not claiming exemption u/s 11 and not having income from business or profession’. Further Code No. 07 stands for `Association of persons (AOP). The revised return filed by the assessee on 17.11.1998 is again in Form No. 3 mentioning its Status Code as 07. The third return is also on the same lines. When this position was confronted to the ld. AR and sought explanation as to 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.

30. In view of these judicial precedents it becomes obvious that 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.

32. A bare perusal of this section reveals that no return of income etc. shall become `invalid’ or deemed to be invalid merely by reason of any mistake, defect or omission in such return if it is in substance and effect in conformity with the intent and purpose of the Act. The intent and purpose of the Act is to make assessment at correct figure. If there is some technical defect in the return which does not affect the overall taxability of the income, section 292B comes into play to take care of such technical defect by considering it as not invalid return of income provided such return is in substance and effect in conformity with the Act.

35. The Hon’ble Delhi High Court in Bharat Nidhi Ltd. v. CIT (2008) 306 ITR 230 (Del) considered the case of company in which the return was signed by its Secretary as against section140(c) requiring the signing of return by the managing director of the company. It has been held in this case that the signing of the return by an unauthorized person is a curable defect as per section 292B and would not make the return as invalid. It was further observed that since the assessee filed a correct return before the completion of assessment, the requirement of the proper signing stood complied with and hence the defect in the return removed. Similar view has been expressed in the case of Hind Samachar Ltd. v. Union of India & Ors. (2008) 217 CTR 637 (P&H) by holding that a return which is signed and verified by a person other than the one authorized under the Act, has to be treated as defective and is amenable to provisions of section 292B and 139(9). On going through the above judicial pronouncements it is vivid that the signing of return by an unauthorized person cannot invalidate the return, but would make the return defective.

39. Adverting to the facts of the instant case we find that the whole controversy rotates around the fact that, a partner of M/s. S.B.Billimoria & Co. signed the return but instead of his signature he put up `S.B.Billimoria’ in his own handwriting. The ld. AR claimed that it is a regular practice and such a signing cannot be termed as defect and the return be declared as valid. We are not convinced with this submission. The purpose of the verification of the return is that it should be obvious from the return that who has signed it. The return has to be signed by a natural person in his own name. Apart from that it is necessary to indicate the father’s name of the person signing and verifying the return so that the person signing may be easily identified. The return should itself speak for these particulars without needing to discover them from some external source. The assessee has relied on some bank certificate to indicate that Shri N.B.Bugwadia has signed the return as `s.b.billimoria. If the return is signed by natural person but as some artificial person, then the particulars required for verification of the natural person will not come up, which obviously goes against the intent and purpose of verification part of the return.

40. There is no dispute on the fact that when a valid Power of Attorney is executed in favour of someone, the return can be filed, if permitted by law, on the basis of such Attorney by the person who has been so authorized and such Power of Attorney should be attached along with the return of income. There is no quarrel on the fact that a Power of Attorney was executed on 23.6.1994, copy of which is available at page 57 of the paper book in which M/s. S.B. Billimoria & Co. Chartered Accountants have been empowered inter alia to sign and submit the return “acting through their partners”. It is further noted that the original return as well as two revised returns were filed indicating appropriately that it was signed by Power of Attorney holder - M/s. S.B. Billimoria & Co., Chartered Accountants, a copy of which was attached along with the return. However, the mistake occurred when a partner of M/s.S.B.Billimoria & Co., instead of putting his own signature signed the name of S.B.Billimoria at the space required for verification. Naturally the non-signing of the return by the partner in own name did not make the return as valid. But the question is as to whether this defect is of such an enormity as to make the return as invalid and non-est.

41. In our considered opinion this defect, in the given circumstances, can be held as technical only covered within the meaning of section 292B for the reason that but for such defect the return is in substance and effect in conformity with the intent and purpose of this Act. The view point of the Assessing Officer is that the verification can be done by a natural person and not an artificial person is not correct in entirety. It is simple and plain that an artificial person cannot sign in a natural way. When any of its representatives sign the document, it is considered as duly signed by the artificial person. Like in the instant case whereas M/s. S.B. Billimoria & Co., Chartered Accountants was appointed as Power of Attorney for filing the return etc., it was only some partner of M/s. S.B. Billimoria & Co. who could have signed the return for and on behalf of this firm. Even though there is irregularity in the signature but still it cannot be said that such verification is not done by a natural person. The learned A.R. has placed on record a copy of the recent judgment passed by the Hon’ble Bombay High Court dated 27.4.2009 in Prime Securities Limited Vs. ACIT in which the return was held to be valid after considering section 292B. In this case some observations of the Hon’ble Supreme Court on page 13 have been recorded to the effect that if a statute requires personal signature of a person, which includes a mark, the signature or the mark must be that of the man himself. In this judgment, the Hon’ble Bombay High Court, taking assistance from section 292B, decided the issue in assessee’s favour on the ground that the defect in the original return was cured while filing a fresh return which would relate back to the date of original return filed.

42. Now we will examine another irregularity in the return to see if the return has been invalidated by such mistake or it is only defective. On being pointed out about the filing of the return in Form No.3 by the assessee with the Status Code as 07, the ld.AR came out with the explanation that the correct status is that of the corporate assessee and also submitted that the defect about the filing of return in wrong form was brought to the notice of the A.O. in relation to the return for assessment year 2000-2001 and the Assessing Officer while passing order u/s.154 in respect of wrong charging of interest u/s.234A, recorded the status as non-resident company. It was further claimed by the ld. AR that the filing of return in the wrong form did not make the return as defective or invalid. In his opinion so long as the correct particulars of income are forthcoming from the return, it shall be valid, notwithstanding the fact that it is filed in wrong form. We are unable to agree with the ld. AR on this point. Firstly the correct status of the assessee in the year in question is still in dispute. The mere fact that the Assessing Officer in passing order u/s.154 has mentioned the status of the assessee as a non-resident company and that too in relation to the assessment year 2000-2001 cannot be considered as the admission of this status even in relation to the year in question.

43. The next contention raised is that a return filed in wrong Form be considered as valid. We are unable to accept this view point. The Income-tax Rules, 1962 prescribe different types of return forms in which returns are to be filed by the specified class of assessees. For example Form No. 1 is a return form for companies other than those claiming exemption u/s 11. Then Form No. 2 is return form for assessees other than companies whose income include income under the head `Profits and gains of business or profession.’ Form No. 2B is return of income for block assessment. Form No. 3 is return of income for assessees other than companies whose total income does not include `Profits and gains of business or profession’. These return forms are created by keeping into consideration the distinct requirements of a particular classes of assesses 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. If 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. An individual will file his return in Form applicable to the company and vice versa and claim that its return be declared as valid. We are not agreeable with this contention as 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 non-est. But it will become defective and require modification at the instance of the Assessing Officer when such defect is pointed out.

44. 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. If the defect is cured as per section 139(9), then such return becomes valid. If the assessee fails to remove such defect, then the defective return is converted into invalid return. Hence it is clear that section 292B saves the return from being declared invalid, but it does not per se cures the defect. The defect has to be removed by the assessee on being brought to his notice by the A.O. In the case of Nicholas Applegate (supra) , relied on behalf of the assessee, the defect was removed and a correct return was filed before the completion of assessment, that is why it was held to be valid. However in the instant case the AO has opined that only the defects enumerated in Explanation to section 139(9) are liable to be considered for treating the return as defective and not any other defect, such as wrong verification. It is further seen that the AO held the return to be invalid on the sole ground that the return was not properly signed and verified. He did not proceed further to examine whether it was a case of an AOP or a company. The assessee also filed one return after the other in Form No. 3 in the same wrong manner by getting it signed from one of the partners of M/S S.B. Billimoria & Co. not in his own name individually but as `s.b.billimoria’. So the instant case is still roaming in the domain of section 292B and has not been brought within the purview of section 139(9) by the AO, enabling to reach a positive conclusion as to whether the return is valid or invalid, which, in turn, is dependent on the assessee succeeding or failing to remove the defect.

45. The ld. CIT(A) has dealt with a significant aspect of the case. He opined that the return was invalid because the assessee had filed only a photocopy of the Power of Attorney and not its original. The ld. AR has contended before us that there is no requirement of furnishing the original POA and the filing of its copy along with the return was the compliance of the statutory requirement. In order to decide this controversy we need to go back to the proviso to section 140(c) as per which where the return is signed and verified by a person who holds valid Power of Attorney from a company to do so, such Power of Attorney shall be attached to the return. From here it can be seen that there is statutory requirement of filing original Power of Attorney along with the return of income and copy of that does not substitute the requirement of filing such Power of Attorney in original. The legislature is not oblivious of the distinction between the copy and the original of the documents. Where ever it considered that there is a substantive compliance of the provision on filing a copy of the document, it made a specific mention of that. Fulfillment of requirement on filing copies of original documents can be found in various sections of the Act, such as section 184(2) which requires the filing of a certified copy of the instrument of partnership ; section 80U(2) which requires every individual claiming a deduction to furnish a copy of the certificate issued by the medical authority ; Explanation 1 to section 54E(1A) etc. As against that, the requirement of filing copy of the POA is conspicuously absent in section 140(c). This clause of section 140 warrants the attachment of the power of attorney to the return. So it is patent that the non-qualification of the words `power of attorney’ with the words `a copy of’ clear the intention that only the filing of the original POA is the fulfillment of the requirement of section and not its copy.

46. The learned A.R. has produced before us the Power of Attorney in original. Since the learned CIT(A) has not given any opportunity to the assessee to file the original and declared the return as invalid on that count, in our considered opinion, the return without the original Power of Attorney cannot be treated as invalid and non-est, without providing opportunity to the assessee to file such Power of Attorney in original, moreso when the original power is in existence. We, therefore, hold that the filing of the copy instead of the original Power of attorney, in the given circumstances, is only an irregularity and cannot invalidate the return.



47. Now we are back to square one that the assessee filed its three returns in Form which is not applicable to the corporate assessee and claimed the status as an AOP. Before the AO the submission was made that the provisions of section 140(c) are applicable, which are relevant for corporate assessee. If however we go by the status of the assessee as mentioned in the returns of income, that is found to be that of an AOP and in that case clause (e) of section 140 shall apply for the signing and verification of the return. In the given circumstances it is not clear as to what is the correct status of the assessee. In our considered opinion, it is of paramount importance to first determine the correct status of the assessee only then the application of the correct clause of section 140, requiring signing and verification of the return by the assessee, can be considered.

48. There is another important dimension of the case. The assessee filed the return at a positive income at more than Rs. 20.00 crores and simultaneously claimed carry forward for the loss suffered by it under the head `Capital gains’. Section 80 states that `Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139, shall be carried forward and set off ….’ Further section 139(3) provides that if any person has sustained a loss in any previous year under the head `Profits and gains of business or profession’ or under the head `Capital gains’ and claims that the loss or any part thereof should be carried forward then he may furnish the return within the time allowed u/s 139(1) and all the provisions of this sub-section shall apply as if it were a return under sub-section (1). A conjoint reading of sections 80 and 139(9) brings to fore that in order to carry forward loss under the heads `Profits and gains of business or profession’ or `Capital gain’ it is sine qua non that the return claiming carry forward of loss must be filed within the time prescribed u/s 139(1). If the return is filed beyond the due date as specified under sub-section (1), then such loss cannot be allowed to be carried forward.

49. The sole reason behind the AO treating the return as invalid is that such a return will be deemed as if never filed and the right to carry forward the loss under the head `capital gains’ shall come to naught. Now when we are restoring the matter to the AO, we want to make it clear that he will issue defect memo to the assessee calling upon it to remove the defects in the return and if the assessee succeeds in removing the defects, the correct return now filed shall date back to the original return as has been held in the case of Prime Securities Limited Vs. ACIT (supra) and Nicholas Applegate (supra) provided the defect is removed within the time period allowed by the AO. It will be treated as if it is original return for all purposes.



50. Under these circumstances we deem it proper to set aside the impugned order and restore 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 assessee 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 he 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.



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