PATANJALI CHIKITSALAYA AND STORE ,MUMBAI vs. ITO WARD 24(3)(1), MUMBAI

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ITA 97/MUM/2026Status: DisposedITAT Mumbai07 October 2026AY 2018-197 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal held that an incorrect reporting in Form 3CD or return of income is not conclusive when factual evidence demonstrates otherwise. Revenue authorities are duty-bound to assess true taxable income and not capitalize on inadvertent errors. The assessee consistently maintained that payments were made to resident individuals/entities. The details of PANs and addresses provided prima facie indicate resident taxpayers. Section 40(a)(i) applies to payments to non-residents, while Section 40(a)(ia) governs payments to residents without TDS, with a statutory disallowance limited to 30%. The Assessing Officer did not conduct independent factual verification. Therefore, the Tribunal set aside the CIT(A)'s order and restored the matter to the Assessing Officer for limited factual verification. The Assessing Officer is directed to verify the residency of payees. If they are residents, Section 40(a)(i) disallowance will not apply. The applicability of Section 40(a)(ia) should be examined, with disallowance restricted to 30% if warranted. The benefit of the second proviso to Section 40(a)(ia) should be extended if payees declared the income. The assessee must furnish necessary documents. The grounds raised by the assessee are allowed for statistical purposes.

What were the facts?

The assessee, Patanjali Chikitsalaya And Store, filed its return of income for Assessment Year 2018-19 reporting Nil income. The case was selected for limited scrutiny under the E-assessment Scheme on the issue of TDS default. The Tax Audit Report (Form 3CD) inadvertently reported an amount of ₹14,74,100/- as inadmissible payment to non-residents under Section 40(a)(i) on which tax was not deducted. The Assessing Officer disallowed the entire amount. The assessee appealed to the CIT(A), arguing that the payments were made to resident landlords and the reporting in Form 3CD was a bonafide clerical error. The CIT(A) upheld the disallowance, relying on the Tax Audit Report and the Assessing Officer's findings. The assessee then filed an appeal before the ITAT, Mumbai.

What were the issues?

1. Whether the Learned CIT(A) erred in confirming the amount paid to residents as amount paid to non-residents, thereby disallowing the entire sum of ₹14,74,100/- under Section 40(a)(i) of the Income-tax Act, 1961. 2. Whether the Learned CIT(A) erred in upholding the observation made by the Assessing Officer. 3. Whether the Learned CIT(A) erred in confirming the whole amount as non-deductible expenditure instead of thirty percent of such amount on which TDS liability has not been discharged by the appellant. Assessee's contentions: The assessee argued that no payments were made to non-residents and Section 40(a)(i) is inapplicable. The reporting in Form 3CD was an inadvertent clerical error. If TDS was not deducted on rent paid to residents, the disallowance should be under Section 40(a)(ia), limited to 30% of the expenditure, not 100% under Section 40(a)(i). The assessee relied on the details of rent paid to resident landlords, including PANs and Aadhaar numbers. Revenue's contentions: The Revenue relied on the orders of the authorities below and the remand report, contending that the tax audit report carries statutory sanctity and the burden was on the assessee to prove the residential status and chargeability of payees.

Which sections of the Income-tax Act were involved?

Section 40(a)(i),Section 40(a)(ia),Section 194I,Section 195,Section 201(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI

Before: SAKTIJIT DEY & SHRI GIRISH AGRAWAL

For Respondent: Shri Ajay Soneji, Sr. DR
Pronounced: 07.10.2026

INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI BENCH: C BEFORE SAKTIJIT DEY, VICE PRESIDENT AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA 97/MUM/2026 (िनधा�रण वष�/Assessment Year: 2018-19) Patanjali Chikitsalaya And Store ITO Ward 24(3)(1) Panchsheel Enclave 5 Main Road, Piramal Chamber Ranchi-834001, Lalbaug Parel Vs. Jharkhand Mumbai-400012, Maharashtra अपीलाथ� Appellant ��थ� Respondent

Permanent Account Number of Assessee: AASFP2450K

अपीलाथ� �ारा/Appellant represented by: Shri Manshi Rastogi, Advocate ��थ� �ारा/Respondent represented by: Shri Ajay Soneji, Sr. DR

सुनवाई की तारीख / Date of conclusion of hearing: 09.07.2026 घोषणा की तारीख / Date of pronouncement: 07.10.2026 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by assessee is against the order of the ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide Order No. ITBA/NFAC/S/250/2025-26/1080627077(1) dated 11.09.2025 passed against the assessment order by National e-Assessment Centre, Delhi, u/s. 143(3) r.w. sections 143(3A) and 143(3B) of the Income-tax Act, 1961 (‘the Act’) dated 06.11.2020, for Assessment Year 2018-19.

2.

Assessee has raised the following grounds of appeal: “i) For that the Learned CIT(A) erred in confirming the amount paid to residents as amount paid to non-residents.

ii) For that the Learned CIT(A) erred in upholding the observation made by the Assessing Officer. iii) For that the learned the Learned CIT(A) erred in confirming the whole amount as non-deductible expenditure instead of thirty percent of such a mount on which TDS liability has not been discharged by the appellant.”

3.

At the outset, it is observed that there is a delay of 37 days in filing the present appeal before the Tribunal. Assessee has filed a petition supported by an affidavit explaining the reasons for the delay. Having heard both sides and after perusing the contents of the affidavit filed for condonation of delay, we are satisfied that there was sufficient cause for the delay in filing the appeal and there was no deliberate inaction or mala fide intent on the part of assessee. Accordingly, the delay of 37 days in filing the appeal is condoned and the appeal is admitted for adjudication on merits.

4.

Brief facts of the case are that assessee is a partnership firm engaged in the retail sale of Patanjali products and providing Ayurvedic medical consultancy. Return of income was filed on 26.10.2018, reporting Nil income. Case was selected for Limited Scrutiny under E- assessment Scheme, 2019 on the issue of "Default in TDS & Disallowance for such default". In the Tax Audit Report (Form 3CD) submitted by assessee, an amount of ₹14,74,100/- was inadvertently reported in clause 21(b)(i) [incorrectly referenced as 24(b)(i) by assessee in Form 35] as inadmissible payment to non-residents u/s 40(a)(i) of the Act on which tax was not deducted at source.

4.1. During assessment proceedings, ld. Assessing Officer issued notice u/s 142(1) directing assessee to show cause why the impugned amount of ₹14,74,100/- should not be disallowed u/s 40(a)(i). Assessee submitted that no payments were ever made to any non-resident and that the rent and maintenance expenses totalling ₹14,74,100/- were actually paid to five landlords who are all residents of India. However, ld. Assessing Officer observed that assessee had failed to do TDS on these payments and failed to furnish documentary evidence/PAN copies during assessment. Consequently, ld. Assessing Officer completed the impugned assessment disallowing the entire sum of ₹14,74,100/- u/s 40(a)(i).

5.

Aggrieved, assessee preferred an appeal before ld. CIT(A), before whom furnished details, PANs, lease agreements and ITRs of the payees to demonstrate that all payees were Indian residents and that the reporting in clause 21(b)(i) of Form 3CD instead of clause 21(b)(ii) was a bonafide inadvertent clerical error. A remand report was called for from ld. Assessing Officer. Ld. Assessing Officer submitted remand reports dated 11.11.2024 and 14.11.2024 objecting to the additional evidence under Rule 46A and maintaining that assessee failed to conclusively substantiate ownership and residential status under section 6 during assessment. Ld. CIT(A) concurred with ld. Assessing Officer and dismissed the appeal, holding that assessee could not displace the admission made in Form 3CD with cogent evidence and confirmed 100% disallowance u/s 40(a)(i).

6.

Before us, ld. Counsel for assessee submitted that assessee never made any payment to non-residents and section 40(a)(i) is completely inapplicable to the facts of the case. Ld. Counsel drew our attention to the statement showing details of rent paid during the relevant financial year to the following parties:

Name of Amount Sr. Aadhaar No. PAN Status Recipient (₹)

Jamal M 1 515251419221 AHEPK8370J Resident 2,80,000 Khan

Khozema 2 Asgarali 716670632488 APFPC6174F Resident 4,34,100 Chirag

Ruksana 3 Firozali Not available ACAPV8394A Resident 3,96,000 Virani

Yasmeen 4 Ahmad Not available ADXPA2369L Resident 2,04,000 Khan

Registered under Mangal MCS Act, 1960. 5 Orchid — Resident 1,60,000 Maharashtra, CHS Ltd. Mumbai. Total 14,74,100

6.1. Ld. Counsel submitted that the tax auditor made an inadvertent reporting mistake in Form 3CD by entering the details of non-deduction of tax in the sub-clause meant for non-residents. It was contended that a procedural reporting mistake in the audit report cannot alter the factual character of payments made to resident citizens. It was further submitted that if at all any disallowance was attracted for non-deduction of TDS on rent paid to residents u/s 194I, the same falls under section 40(a)(ia) which restricts the disallowance to 30% of the expenditure and not 100% as done u/s 40(a)(i).

7.

Per contra, ld. Sr. DR heavily relied upon the orders of authorities below and the remand report, contending that the tax audit report carries statutory sanctity and the burden was on assessee to prove the residential status and chargeability of payees.

8.

We have heard the rival contentions, perused the material available on record and considered the judicial precedents cited. The primary controversy is whether the sum of ₹14,74,100/- paid as rent is disallowable u/s 40(a)(i) as payment to non-residents, or whether it pertains to resident payees attracting section 40(a)(ia). It is a settled position of law that an entry or incorrect reporting in Form 3CD or return of income is not conclusive of tax liability when factual evidence demonstrates otherwise. The Revenue authorities are duty-bound to assess the true taxable income of an assessee in accordance with law rather than capitalizing on inadvertent reporting errors. In the instant case, assessee has consistently maintained that payments were made towards rent to resident individuals/entities in India. The details of PANs and addresses of the payees placed on record indicate prima facie that the payees are resident taxpayers. Section 40(a)(i) applies strictly to payments made to non-residents where tax is deductible u/s 195. If payments are made to residents without TDS, the governing provision is section 40(a)(ia) under which disallowance is statutorily restricted to 30% of the sum.

8.1. However, we note that ld. Assessing Officer proceeded primarily on the reporting in Form 3CD and did not carry out an independent factual verification of whether the payees are indeed residents, whether TDS was required to be deducted u/s 194I, or whether the payees have included these rental receipts in their respective returns of income and paid tax thereon (in terms of the second proviso to section 40(a)(ia) r.w.s. 201(1) of the Act). Therefore, in the interest of justice and fair play, we find it fit to set aside the order of ld. CIT(A) and restore the matter to the file of ld. Assessing Officer strictly for the limited purpose of factual verification. Ld. Assessing Officer is directed to verify whether the recipients listed in the table above are residents in India for the relevant assessment year. If it is established that the payees are residents, no disallowance shall be made u/s 40(a)(i). Ld. Assessing Officer is also directed to examine the applicability of section 40(a)(ia). If disallowance is warranted under section 40(a)(ia), it shall be restricted to 30% of the expenses where TDS was not deducted. Further, verify if any payee has declared the rental income in their respective income-tax return, in which case, benefit of the second proviso to section 40(a)(ia) shall be extended accordingly. Needless to say, assessee is directed to furnish all necessary documents before ld. Assessing Officer to substantiate its claim. Grounds raised by the assessee are allowed for statistical purposes.

9.

In the result, appeal filed by the assessee is allowed for statistical purposes.

Order is pronounced in the open court on 07 October, 2026

Sd/- Sd/- (Saktijit Dey) (Girish Agrawal) Vice President Accountant Member Dated: 07 October, 2026 MP, Sr.P.S.

Copy to : 1 The Appellant 2 The Respondent 3 DR, ITAT, Mumbai 4 Guard File 5 CIT BY ORDER, ABHINAV ANANT Digitally signed by ABHINAV ANANT GAVANDE GAVANDE Date: 2026.10.15 15:23:11 +05'30' (Dy./Asstt.Registrar) ITAT, Mumbai

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