Landmark Judgements of Supreme Court on Section 154 [Rectification of mistake]
SLP dismissed against order of High Court where it was held that since recomputation of turnover of assessee would not be confined to arithmetical or adding figures, rather explanation and answers would be required, said determination could not be undertaken under section 154
Business income - Computation of (Rectification of mistaks) - dabateables questions Tribunal computed brokerage of assessee by applying rate of 0.6 per cent on total turnover and same attained finality - Assessee through application under section 154 sought recomputation of said turnover. High Court by impugned order held that said determination would not be confined to arithmetical or adding figures, rather explanation and answers would be required, therefore, recomputation could not be undertaken under section 154. Special Leave Petition filed against impugned order was to be dismissed. [In favour of revenue] - [JRD Stock Brokers (P) Ltd. v. CIT, Delhi (2015) 230 Taxman 272 : 56 taxmann.com 15 (SC)]
Subsequent Decision of Supreme Court Subsequent decision of the Supreme Court resolving conflict of opinion does not obliterate decision taken prior to it - Section 154 cannot be invoked to rectify the same
Assessee, engaged in business of manufacture of potassium chlorate, received power subsidy for two years, which it initially offered as revenue receipt in its returns of income - However, thereafter, it sought revision of assessment orders contending that subsidy amount was a capital receipt and, hence, not liable to be taxed - Commissioner allowed revision petitions - Subsequently, in case of Sahney Steel & Press Works Ltd. v. CIT (1997) 228 ITR 253 : 94 Taxman 368 (SC), Supreme Court held that incentive subsidy admissible to that company was a revenue receipt and, hence, it was liable to be taxed under section 28 - Following said judgment, Commissioner passed order of rectification on ground that power tariff subsidy given to assessee was admissible only after commencement of production and, consequently, it constituted operational subsidies and not capital subsidies. In each case one has to examine nature of subsidy and this exercise cannot be undertaken under section 154. On facts, when Commissioner, while passing orders under section 264, had taken view that subsidy in question was a capital receipt not taxable under Act, he was not justified in invoking section 154 and holding subsidy in question to be revenue in nature based on judgment of Supreme Court in case of Sahney Steel & Press Works Ltd. (supra) (Related Assessment years : 1993-94 and 1994-95) - [Mepco Industries Ltd., Madurai v. CIT (2010) 1 SCC 434 / (2009) 319 ITR 208 : 227 CTR 313 : 185 Taxman 409 (SC)]
Once proceedings are concluded, thereafter interest under section 234B cannot be levied by way of rectification of an order passed by Settlement Commission
Settlement Commission can not reopen its concluded proceedings by invoking section 154 so as to levy interest under section 234B. The proceedings before the Settlement Commission are similar to arbitration proceedings. These contemplate assessment by settlement and not by way of regular assessment or assessment under section 143(1) or under section 143(3) or under section 144. In that sense, it is a Code by itself. It does not begin with the filing of the return but by filing the application for settlement. Under the Act, procedure for assessment falls in Chapter XIV (in which section 154 falls) which is different from procedure for settlement in Chapter XIX-A in which sections 245C and 245D fall. Provision for levy of interest for default in payment of advance tax under section 234B falls in Chapter XVII which deals with collection and recovery of tax which is incidental to the liability to pay advance tax under section 207 (which is also in Chapter XVII) and to the computation of total income in the manner indicated under Chapter XIX-A videsections 245C(1B) and 245C(1C), read with the provisos to section 245C(1) on the additional income-tax payable on the undisclosed income. Further, if one examines the provisions of sections 245C(1B) and 245C(1C), one finds that various situations are taken into account while computing the additional amount of tax payable, viz., if the applicant has not filed his returns; if he has filed returns but orders of assessment are not passed or if the proceedings are pending for re-assessment under section 147 (again in Chapter XIV) or by way of an appeal or revision in connection with such reassessment and the applicant has not furnished his return of total income in which case tax has to be calculated on the aggregate of total income as assessed in the earlier proceedings for assessment under section 143 or under section 144 or under section 147 [see section 245C(1B)]. The point to be noted is that in computation of additional income-tax payable by the assessee, there is no mention of section 154. On the contrary, under section 245-I the order of the Settlement Commission is made final and conclusive on matters mentioned in the application for settlement, except in the two cases of fraud and misrepresentation in which case the matter can be reopened by way of review or recall. Like the Tribunal, the Settlement Commission is a quasi-judicial body. Under section 254(2), the Tribunal is given the power to rectify but no such power is given to the Settlement Commission. Thus, Settlement Commission cannot reopen its concluded proceedings by invoking section 154. Lastly, one must keep in mind the difference between review/recall of the order and rectification under section 154. The Schedule of Chapter XIX-A does not contemplate invocation of section 154, otherwise there would be no finality to the assessment by settlement which is different from an assessment under Chapter XIV where there is an appeal, revision, etc. Settlement of liability and not determination of liability is the object of Chapter XIX-A. – [Brij Lal and Others v. CIT, Jalandhar (2010) 328 ITR 477 : 46 DTR 153 (2011) 235 CTR 417 : 194 Taxman 566 (SC)]
Rectification of mistake – Law in force when order was sought to be revised was made – Change of opinion
The assessee claimed the power subsidy as capital receipt. Assessee’s claim was not accepted by the Assessing Officer. However, under section 264, the CIT held that power subsidy was a capital receipt, as per order dt. 30.04.1997. Subsequent to revision order, a Supreme Court judgment in Sahney Steel & Press Works Ltd. was delivered on 19.09.1997 holding that incentive subsidy linked to production was a revenue receipt. There upon the CIT made rectification under section 154 of his revision order passed under section 264 and consequently held that power subsidy was a revenue receipt. Assessee filed a writ petition before the High Court which was dismissed by the High Court. The Supreme Court held that the judgment in Sahney Steel Works was delivered after passing the revision order on 30.03.1997 by the CIT and that each case has to be examined in light of the facts of the case to determine the applicability of its decision in Sahney Steel’s case. The rectification made under section 154 was held to be not valid. The High Court’s order was set aside and assessee’s appeal was allowed. – [Metro Industries Ltd. v. CIT (2010) 216 Taxation 113 (SC)]
Assessee, engaged in business of manufacture of potassium chlorate, received power subsidy for two years, which it initially offered as revenue receipt in its returns of income - However, thereafter, it sought revision of assessment orders contending that subsidy amount was a capital receipt and, hence, not liable to be taxed - Commissioner allowed revision petitions - Subsequently, in case of Sahney Steel & Press Works Ltd. v. CIT (1997) 228 ITR 253 : 94 Taxman 368 (SC), Supreme Court held that incentive subsidy admissible to that company was a revenue receipt and, hence, it was liable to be taxed under section 28 - Following said judgment, Commissioner passed order of rectification on ground that power tariff subsidy given to assessee was admissible only after commencement of production and, consequently, it constituted operational subsidies and not capital subsidies - In each case one has to examine nature of subsidy and this exercise cannot be undertaken under section154 - On facts, when Commissioner, while passing orders under section 264, had taken view that subsidy in question was a capital receipt not taxable under Act, he was not justified in invoking section 154 and holding subsidy in question to be revenue in nature based on judgment of Supreme Court in case of Sahney Steel & Press Works Ltd. (supra)
The assessee was engaged in the business of manufacture of potassium chlorate in its factory located in the Union Territory of Pondicherry. It received power subsidy for two years, which it initially offered as revenue receipt in its returns of income. Thereafter, it filed petitions under section 264 pleading that the subsidy amount was a capital receipt and, hence, was not liable to be taxed. The revision petitions were allowed by the Commissioner. Subsequent to the said order, the Supreme Court in the case of Sahney Steel & Press Works Ltd. v. CIT (1997) 228 ITR 253 : 94 Taxman 368 (SC) held that incentive subsidy, admissible to Sahney Steel & Press Works Ltd., was a revenue receipt and, hence, it was liable to be taxed under section 28. Following the decision in Sahney Steel & Press Works Ltd.'scase (supra), the Commissioner passed an order of rectification holding that power tariff subsidy given to the assessee was admissible only after commencement of production and, consequently, it constituted operational subsidies and not capital subsidies. Aggrieved by the said order, the assessee filed writ petitions before the High Court, which affirmed the Commissioner's view. On appeal to the Supreme Court :
Held : The judgment of Sahney Steel & Press Works Ltd.’ (supra ) was based on a detailed examination of the Subsidy Scheme formulated by the Government of Andhra Pradesh. It stated that incentives would not be available unless and until production had commenced. In that case, the Court found that incentives were given by refund of sales tax and by subsidy on power consumed for production. In short, on the facts and circumstances of that case, the Court came to the conclusion that incentives were production incentives in the sense that the assessee was entitled to incentives only after entering into production. It was also clarified that the scheme was not to make any payment directly or indirectly for setting up the industries.
The only ground on which rectification was sought to be made by the Commissioner was that power tariff subsidy given to the assessee was admissible only after commencement of production. Consequently, according to the Commissioner, power tariff subsidy constituted operational subsidies and not capital subsidies and, in the circumstances, he applied the ratio of Sahney Steel & Press Works Ltd. (supra) to rectify its earlier order. The instant case involved change of opinion. In this connection, it must be noted that the Government grants different types of subsidies to the entrepreneurs. The subsidy in Sahney Steel & Press Works Ltd.’scase (supra) was an incentive subsidy linked to production. In Sahney Steel & Press Works Ltd.'scase (supra) the Court had categorically stated that the scheme in hand was an incentive scheme and it was not a scheme for setting up the industries. In the said case, the salient features of the scheme were examined and it was noticed that the scheme formulated by the Government of Andhra Pradesh was admissible only after the commencement of production.
In income-tax matters, one has to examine the nature of the item in question, which would depend on the facts of each case. Therefore, in each case, one has to examine the nature of subsidy. The exercise cannot be undertaken under section 154. There was one more reason why section 154 was not invokable by the department in the instant case. Originally, the Commissioner, while passing orders under section 264, had taken the view that the subsidy in question was a capital receipt not taxable under the Act. After the judgment of the Supreme Court in Sahney Steel & Press Works Ltd.’scase (supra), the Commissioner had taken the view that the subsidy in question was a revenue receipt. Therefore, the instant case was a classic illustration of change of opinion. The decision on debatable point of law cannot be treated as ‘mistake apparent from record’. Accordingly, the appeal was to be allowed. (Related Assessment years : 1993-94 and 1994-95) – [Mepco Industries Ltd. v. CIT (2009) 319 ITR 208 : 185 Taxman 409 (SC)]
Revision of orders prejudicial to interests of revenue - Initiation of a proceeding under section 263 cannot be held to have become bad in law only because an order of rectification was passed under section 154
The assessee-company filed its return for the assessment year 1992-93 declaring its income at Rs. 26.66 lakhs. The order of assessment was completed under section 143(3) determining the assessable income as Rs. 35.40 lakhs. The Commissioner invoked its jurisdiction under section 263 and set aside the order of assessment. He excluded Rs. 27.63 lakhs towards transport receipts and Rs. 1.42 lakhs towards interest from the assessee's total income in the light of the provisions of sections 80HHC and 80-I. He directed the Assessing Officer to make a fresh assessment order. The assessee filed an appeal to the Tribunal. The assessee contended that rectification proceedings were initiated after the assessment was completed, but the Assessing Officer made no modification/amendment in regard to the purported exclusion of income under sections 80HH and 80-I on account of non-inclusion of transport receipts and interest on the total income and, thus, subsequently the Commissioner had no authority to initiate any proceedings under section 263 thereof or otherwise. The Tribunal held that the order passed under section154 having been made upon due consideration of the explanation of the assessee for the proposed rectification on the point of excess deduction under sections 80HH and 80-I, the Commissioner lacked jurisdiction to make any order under section 263 thereof. The High Court rejected application under section 256(2) observing that no substantial question of law arose out of order.
Held : The scope and ambit of a proceeding for rectification of an order under section154 and a proceeding for revision under section 263 are distinct and different. Order of rectification can be passed on certain contingencies. It does not confer a power of review. If an order of assessment is rectified by the Assessing Officer in terms of section154, the same itself may be a subject-matter of a proceeding under section 263. The power of revision under section 263 is exercised by a higher authority. It is a special provision. The revisional jurisdiction is vested in the Commissioner. An order thereunder can be passed if it is found that the order of assessment is prejudicial to the revenue. In such a proceeding, he may not only pass an appropriate order in exercise of the said jurisdiction; but in order to enable him to do it, he may make such inquiry as he deems necessary in this behalf. When an order is passed by a higher authority, the lower authority is bound thereby keeping in view the principles of judicial discipline.
When different jurisdictions are conferred upon different authorities to be exercised on different conditions, both may not be held to be overlapping with each other. Jurisdiction under section 154 is only to be exercised by him when there is an error apparent on the face of the record. It does not confer any power of review. An order of assessment may or may not be rectified. If an order of rectification is passed by the assessing authority, the rectified order shall be given effect to. However, only because an order of assessment has undergone rectification at the hands of the Assessing Officer, the same would not mean that revisional authority shall be denuded of exercising its revisional jurisdiction. Such an interpretation would run counter to the scheme of the Act.
Power of review and/or rectification is not akin to an administrative power. An administrative function and judicial function operate in two different places. Whereas a judicial function must be exercised by the authority invested therewith in terms of the provisions of the statute and on the basis of the materials on record; an administrative order may although, inter alia, have to be passed by a statutory authority but the same must be confined within the four corners of the statute. There may, however, be an element of discretion. Order by a judicial functionary is subject to appeal or revision. An administrative order may or may not be. An order of assessment is subject to exercise of an order of a revisional jurisdiction under section 263. Doctrine of merger in such a case will have no application.
Initiation of a proceeding under section 263 cannot be held to have become bad in law only because an order of rectification was passed. No such hard and fast rule can be laid down. Each case is required to be considered on its own facts. In a given situation, the High Court may be held to be entitled to set aside both orders and remit the matter for consideration of the matter afresh. But it would not be correct to contend that only because a proceeding for rectification was initiated subsequently, the revisional jurisdiction could not have been invoked under any circumstances whatsoever. If such a proceeding was initiated the contesting parties could bring the same to the notice of the Commissioner so as to enable him to take into consideration the subsequent events also. It goes without saying that if and when the Commissioner takes up for consideration a subsequent event, the assessee would be entitled to make its submission also in regard thereto. Therefore, the impugned judgment was to be set aside. (Related Assessment year : 1992-93) - [CIT, Bhopal v. Ralson Industries Ltd. (2007) 288 ITR 322 : 158 Taxman 160 (SC)]
A question on which there is difference among two judges of High Court can not be rectified by invoking provisions of section 154
The assessee, a scheduled bank, was required to buy and sell Government securities. During the assessment years 1979-80 and 1980-81, it deducted the interest paid for broken periods and this was originally allowed. Later, the assessing authority invoked the provisions of section154 and cancelled such allowance for the reason that income by way of interest from purchase and sale of securities should be computed under the head 'Interest on securities' and the provisions of sections 18 to 20 did not permit such deduction. On appeal, the Tribunal held that a debatable issue was involved and that the assessing authority was, therefore, not justified in invoking the machinery for rectification under section 154. It held, even on the principal question, in favour of the assessee. On reference, there being difference of opinion between two Judges of the High Court the matter was placed before the third Judge who passed order in favour of the assessee both in regard to the invocation of section154 and also on merits. On appeal to the Supreme Court :
Held : Having regard to the difference of opinion among the Judges of the High Court on the principal question, it was clear that there was a debatable question and error on the face of the record which could not be corrected by invocation of the provisions of section 154. (Related Assessment years : 1979-80 and 1980-81) – [CIT v. South India Bank Ltd. (2001) 249 ITR 304 : 116 Taxman 364 (SC)]
Any question of law did arise out of Tribunal’s order of allowing investment allowance under section 32A to assessee, engaged in contract work, on excavator and Assessing Officer could not verify which machinery was used for contract work in proceedings under section 154
The assessee-firm was engaged in the business of manufacture and supply of RCC spun pipes and PSC concrete pipes. The assessee also undertook the work of laying of RCC pipes and PSC concrete pipes. For the assessment years 1987-88 and 1988-89, the assessee was allowed investment allowance in a total sum of Rs. 10,22,341. The assessee claimed set off of unabsorbed allowance against income for the assessment year 1989-90. The said unabsorbed allowance was set off against the income for the assessment year 1989-90. The said claim was accepted by the Asses-sing Officer while framing the assessment. But later, he initiated action under section154 proposing to withdraw the unabsorbed investment allowance relying on the judgment of the Supreme Court in the case of CIT v. N.C. Budharaja & Co. (1993) 204 ITR 412 (SC). Accordingly, he passed the consequential order modifying the assessment made for the assessment year 1989-90 by withdrawing the set off of unabsorbed investment allowance of the earlier years. On appeal, the Commissioner (Appeals) found that the judgment in N.C. Budharaja & Co.'scase (supra) was not applicable to the facts of the case. On further appeal to the Tribunal, the Tribunal held that the ITO in exercise of the power under section 154 could only rectify the mistakes which were apparent from the record and he could not go deep into the subject and, therefore, upheld the order of the Commissioner (Appeals). The Tribunal also refused/rejected the petition filed by the revenue under section 256(1).
The High Court also upheld the view expressed by the Tribunal that the Assessing Officer should not have rectified the assessment order under section154 and rejected the revenue’s application under section 154. On appeal to the Supreme Court :
Held : After hearing the parties, the Supreme Court directed the Tribunal to state the case and refer the following question of law to the High Court : whether the Tribunal was right in holding that the investment allowance was allowable to the assessee under section 32A and the Assessing Officer could not verify which machinery was used for contract work in proceedings under section 154 ? Accordingly, the appeal was allowed, the order of the High Court was set aside and the application under section 256(2) was allowed.- [CIT v. Bhooratnam & Co. (2000) 245 ITR 5 : (2001) 116 Taxman 8 (SC)]
Reference to documents outside the records is not permissible - Reference to documents outside the record and the law is impermissible when applying the provisions of section 154.
The Assessing Officer rectified the original assessment under section 154 and withdrew excess depreciation allowed earlier and made variation in unabsorbed depreciation. On appeal, the Commissioner (Appeals) cancelled the rectificatory order on the ground that the mistake to be rectified had to be apparent from the record, it had to be obvious and not something on which there might conceivably be two points of view. The Tribunal and the High Court upheld the view and the latter further opined that these were questions of fact. On appeal :
Held : The question did not raise a pure question of fact. To that extent the High Court was in error in coming to the conclusion that there was no occasion for rectification. Under the provisions of section 154, there has to be a mistake apparent from the record. In other words, a look at the record must show that there has been an error, and that error may be rectified. The revenue had not been able to satisfy that it showed any apparent error from the record. Reference to documents outside the record and the law is impermissible when applying the provisions of section 154. The appeal was, accordingly, to be dismissed. [In favour of assessee]. – [CIT v Keshri Metal (P) Ltd. (1999) 237 ITR 165 : 104 Taxman 360 (SC)].
Weighted deduction in respect of ‘Export Sales Commission’, ‘ECGC Charges’ and ‘Foreign Dealers Visiting Expenses’, was not originally allowed but it was allowed by Assessing Officer on application under section 154 – Rectification is not possible where question involved is debatable – Whether point which is not examined on fact or in law can not be dealt with as mistake apparent on record – Therefore, allowance of weighted deduction in instant case by way of rectification was unjustified
Rectification under section 154 can only be made when glaring mistake of fact or law has been committed by the officer passing the order and it becomes apparent from the record. Rectification is not possible if the question is debatable. Moreover, the point which is not examined on fact or in law cannot be dealt with as mistake apparent on the record. The dispute in the instant case raised a mixed question of fact and law. Hence, the Tribunal was in error in upholding the Assessing Officer’s order allowing the assessee’s claim for weighted deduction by way of rectification order under section 154. – [CIT v. Hero Cycles (P) Ltd. (1997) 228 ITR 463 : 94 Taxman 271 (SC)]
Word ‘order’ in expression ‘from the date of the order sought to be amended’ in section 154(7) includes amended or rectified order - Therefore, where original assessment was subsequently rectified, a second application for rectification made within four years from date of rectificatory order was valid
Original assessment in the assessee's case was completed by the assessment order dated 21.09.1979. The assessee filed rectification application under section 154 claiming extra shift allowance and rectification order was passed on 12.07.1982. Again, against this rectification order the assessee filed another application under section 154 on 04.07.1986 contending that as against 10 per cent of depreciation available to the assessee only 5 per cent was allowed. The Assessing Officer dismissed the application on the ground that the application was beyond time and the same was confirmed by the first appellate authority. The Tribunal, however, allowed the application holding that the application was within four years of the fresh order of assessment, i.e., the first rectification order. The High Court held that that the period of four years was to be calculated from the date of original order of assessment and not from the date of rectification order and, therefore, the application was barred by limitation. On appeal to Supreme Court:
Held : The word ‘order’ in the expression ‘from the date of the order sought to be amended’ in section 154(7) as it stood at the relevant assessment year had not been qualified in any way and it did not necessarily mean the original order. It could be any order including the amended or rectified order. Therefore, the Tribunal was correct in holding that the second rectification application was well within limitation. – [Hind Wire Industries Ltd. v. CIT (1995) 212 ITR 639 : 80 Taxman 79 (SC)]
Assessee-company did not claim rebate under section 84 either before ITO or before AAC – Assessee’s subsequent application under section 154 praying for rectification of assessment order by grant of relief under section 84, even though there was no material on record to support its claim, was rightly rejected by ITO - When record of super profits tax assessment did not contain sufficient material pertaining to assessee’s claim under section 84, then it could not be said that ITO committed a mistake apparent from record in omitting to grant relief under section 84
In the present case, the assessee sought to invoke the jurisdiction of the ITO to rectify the assessment order. If the record did not contain any material, as to whether the assessee satisfied the requirements of section 84 it could not be said that the ITO had committed a mistake in omitting to grant relief under section 84. There had to be material to support the claim to relief under section 84, and unless such material could be referred to no grievance could be made if the ITO refused to rectify the assessment and refused relief under section 84.
If the record of the super profits tax assessment contained material pertaining to the claim under section 84 such material could be considered by the ITO for the purpose of granting relief under section 84 in the income-tax assessment. That did not suffice, however, to entitle the assessee to relief. There were a number of conditions which had to be satisfied before relief could be granted under section 84. All that data was evidently not contained in the super profits tax assessment record at the time when the income-tax assessment was completed. When that was the position, it could hardly be said that in omitting to grant relief under section 84 when making the assessment order the ITO committed a mistake apparent from the record. Accordingly, the High Court rightly dismissed the assessee’s writ petition.
It was held that the jurisdiction of the Income-tax Officer under section 154 of the Act for rectifying a mistake is wider than what was provided under Order 47, rule 1, of the Code of Civil Procedure and where there are materials to support the claim of the assessee which are found in the records, the Income-tax Officer is duty bound to rectify the mistake. The Supreme Court in the above case, held that the obligation imposed on the Income-tax Officer to grant relief is wider and the relief to the assessee cannot be refused merely because the assessee had omitted to claim the relief. But, where there are materials to show that the relief was available to the assessee, but the Income-tax Officer has failed to grant the relief, then the court can compel the Officer to grant the relief.” – [Anchor Pressings (P) Ltd. v. CIT (1986) 161 ITR 159 : 27 Taxman 295 (SC)]
Mistake apparent on the record must be an obvious and patent mistake – It should not require a long drawn process of reasoning where there may be conceivably two opinions – ITO was incompetent to pass orders under section 154 of the Act to rectify the assessment. [Indian Income-tax Act, 1922, Section 17(1)]
The Honourable Supreme Court analysed the provisions of section 17(1) of the 1922 Act, wherein, a person being a non resident would be taxable at the maximum rate plus super tax. However, section 17(1) can apply only to a ‘person’ as defined in section 2(9) of the 1922 Act. The expression person was defined to include only a HUF and a local authority. A firm was not considered a person as defined and hence the provisions of section 17(1) of the 1922 Act could not apply to the assessee firm. However, the provisions of section 2(31) of the Act defined a person to include a firm. Whether the definition contained in section 2(31) of the Act is an amendment of the law or merely declaratory of the law that was in force earlier was kept open by the Supreme Court. The Supreme Court held that since the application of the provisions of section 17(1) of the 1922 Act to the assessee was not free from doubt and there could be two opinions, the ITO was not justified in his view that there could be no two opinions. The Supreme Court further held that the ITO cannot go into the scope of the provisions of the Act in proceedings under section 154 of the Act as a mistake apparent on the record must be an obvious and patent mistake and not something which requires a long drawn process of reasoning where there may be conceivably two opinions. Hence, a decision on a debatable point of law is not a mistake apparent from the record. (Related Assessment years : 1958-59,1960-61 to 1962-63) – [T. S. Balaram ITO v. Volkart Bros (1971) 82 ITR 50 (SC)]