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January 18, 2021

Mistake should be apparent on the record to rectify it under Section 154 – SC

by CA Shivam Jaiswal in Income Tax

Mistake should be apparent on the record to rectify it under Section 154 – SC

Every taxpayer has to furnish the details of his income to the Income-tax Department. These details are to be furnished by filing up his return of income. Once the return of income is filed up by the taxpayer, the next step is the processing of the return of income by the Income Tax Department. The Income Tax Department examines the return of income for its correctness. The process of examining the return of income by the Income-Tax department is called as “Assessment”. Sometimes there may be a mistake in any order passed by the Assessing Officer. In such a situation, mistake which is apparent from the record can be rectified under section 154.

With a view to rectifying any mistake apparent from the record, an income-tax authority may:

  • Amend any order passed under any provisions of the Income-tax Act
  • Amend any intimation or deemed intimation sent under section 143(1)
  • Amend any intimation sent under section 200A(1)[section 200A deals with processing of statements of tax deducted at source i.e. TDS return]
  • amend any intimation under section 206CB

Let us refer to the case of T. S. Balaram ITO v. Volkart Bros (1971), where the issue under consideration was whether it was within the powers of the AO to make rectification under section 154 to the original assessment orders and whether the mistake sought to be rectified was an obvious and patent mistake or not.

Facts of the Case:

  • The assessee was a firm registered under both the Indian Income-tax Act, 1922 as well as the Income-tax Act, 1961.
  • The assessee firm had two partners who were assessed in India as non-residents.
  • The assessment of the firm for the relevant assessment years was made on slab rates applicable to registered firms based on the respective Finance Acts.
  • However, in the individual assessment of the partners who were non-residents, their respective shares in the income of the firm were included and assessed at the maximum rate of tax.
  • The assessee received a notice from the tax authorities stating that in the assessment for AY 1958-59 and 1960-61 to 1962-63, there were mistakes apparent on record as the assessee firm was not charged to tax at the maximum rate under section 17(1) of the 1922 Act.
  • The tax authorities sought to rectify the assessment and enhance the tax under section 154.
  • The assessee contended that there was no mistake either apparent or otherwise and the AO had no power to invoke jurisdiction under section 154.
  • However, the AO went ahead and rectified the assessment by applying the provisions of section 17(1) of the 1922 Act and thereby raised a fresh notice of demand.

Proceedings of the High Court (HC)

  • The assessee challenged the validity of the rectification orders passed under section 154 of the Act by way of a writ.
  • The High court held that there was no obvious or patent mistake in the assessment orders and the original assessments were prima facie in accordance with law and the ITO was incompetent to pass the impugned orders.
  • Aggrieved with the order of the HC, assessee petitioned before the Supreme Court

Observations of the Supreme Court (SC)

  • In the decision of Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Triumale [1960], which was rendered in respect of scope of powers of a High Court under Article 226 of the Constitution, it was held that an error which has to be established by a long-drawn process of reasoning on points, where there may conceivably be two opinions cannot be said to be an error apparent from the face of the record.
  • Further, the decision of Sidhramappa Andannappa Manvi v. CIT [1952] (Bom) (HC), it was held that a decision on a debatable point of law is not a mistake apparent from record.
  • SC 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) could 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.
  • SC 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.
  • SC 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 was not a mistake apparent from the record.

Therefore, to carry on rectification under Section 154, the mistake should be 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.

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