INCOME TAX REVIEW

To err is human and Income Tax authorities are no exception to it. Section 154 empowers an Income Tax Authority to rectify a mistake apparent from record. All authorities referred to in section 116; i.e., the Central Board of Direct Taxes, the Directors General of Income-tax or the Chief Commissioners of Income Tax, Directors of Income-tax or the Commissioners of Income Tax or Commissioners of Income Tax (Appeals), Additional Directors of Income Tax or Additional Commissioners of Income Tax or Additional Commissioner of Income Tax (Appeals), Joint Directors of Income Tax or Joint Commissioners of Income Tax, Deputy Directors of Income Tax or Deputy Commissioners of Income Tax or Deputy Commissioners of Income Tax (Appeals), Assistant Directors of Income Tax or Assistant Commissioners of Income Tax, Income Tax Officers, Tax Recovery Officers and Inspectors of Income-tax have power u/s. 154 to rectify mistakes apparent from record. In the case of T. S. Balaram, ITO vs. Volkart Brothers 82 ITR 50, the Hon’ble Supreme Court has at page 53 held that :

… A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. … "

A mistake that can be rectified u/s. 154 should be an apparent or glaring mistake, which does not require a long drawn process of reasoning. A mistake of calculation of total income or a mistake of calculating tax and interest would be a mistake apparent from record. However, the issue as to whether interest u/s. 234A, 234B or 234C can be levied in absence of any specific direction in the assessment order cannot be considered to be a mistake apparent from record as two views have been expressed by the Courts on the said issue. Some of the instances where rectification is often required are listed hereunder :

1. Mistake in calculation of taxes and interest payable u/ss. 234A, 234B and 234C – in case of companies, department is of the view that MAT credit does not amount to taxes paid. Hence, department calculates interest u/ss. 234A, 234B and 234C without giving MAT Credit.
    

2. Mistake in calculation of interest on refund due u/s. 244A – interest is usually calculated by the department up to the date of order. However, there is usually considerable delay from the date of order to the date on which the refund vouchers are despatched. Assessees are entitled to interest u/s. 244A up to the date when the refund is granted. Accordingly, if there is a delay in signing the refund voucher or in posting it, assessee would be entitled to additional interest up to the date till the refund is granted.
    

3. Proper credit for taxes paid, TDS and TCS – Clerical mistakes do happen when certain challans for Advance Tax or TDS or TCS are not considered.
    

4. Depreciation is generally not allowed on expenses considered to be capital expenditure.
    

5. Addition on account of closing stock would lead to corresponding change in opening stock of subsequent year. Where an addition is made on account of closing stock, an application for rectification should be made that the opening stock of the subsequent year should consequentially be increased and the income of the said year be reduced to that extent.
    

6. Deductions u/ss. 80HHC, 80IA, 80IB, etc. need to be correspondingly increased on account of increase in total income due to additions and disallow-ances made in the assessment order.
    

7. Specific directions are often not given for carry forward of speculation loss computed in case of companies as per the provisions of Explanation to section 73.
    

8. Where deductions under Chapter VI-A are restricted on account of the gross total income being less than the deduction available under Chapter VI-A, on additions and disallowances being made, deductions under Chapter VI-A are allowed on the basis of returned income and are not correspondingly increased in view of the increase in gross total income.

An error u/s. 154 may be an error of fact or law. An error of fact is where some of the mistakes committed above might have been committed. An error of law may be said to have been committed where a wrong section is applied or a provision which is prospective in nature is applied restrospectively. Accordingly, if an Assessing Officer applies the provisions of section 40(ia) which is applicable from assessment year 2004-05 to an earlier assessment year, an error of law would be said to have been committed. However, where the issue as to whether the law is applicable retrospectively or prospectively itself is the subject of dispute, there cannot be a mistake apparent from record if the Assessing Officer applies the provisions of the section retrospectively.

Sub-section (3) to section 154 provides that where an amendment sought to be made u/s. 154 would have the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, no order shall be passed without giving an opportunity to the assessee of being heard. Further, where an order is passed enhancing the assessment or reducing the refund, the Assessing Officer is required to serve a notice of demand to the assessee.

Sub-section (4) to section 154 specifies that an order shall be passed in writing. Further, an appeal would lie against an order passed u/s. 154. In case where the order is passed by an Assessing Officer, the appeal would lie with the Commissioner of Income Tax (Appeals) [Section 246A(1)(c)]. Where an order u/s. 154 is passed by the Commissioner of Income Tax (Appeals) or the Commissioner, an appeal against the said order would lie before the Income Tax Appellate Tribunal [Section 253(1)(a)/253(1)(c)]. Even a letter refusing to carry out rectification would be an order u/s. 154 and an appeal would lie against such letter refusing to carry out rectification.

4th April, 2005

To

Income Tax Officer,
Ward – 102(2),
Mumbai.

Dear Sir,

We are in receipt of your Honour’s order u/s. 143(3) for the above assessment year. On going through the said order, it is found that your Honour has committed the following errors which are apparent from record :

1. Addition on account of interest paid to Ms. VSM – Rs. 15,000/-

   On page 2 of the order, your honour has made an addition of Rs. 15,000/- on the alleged ground that interest of Rs. 15,000/- paid to Ms. VSM and duly confirmed by her has not reflected by us in our books of account. In this connection, we submit that interest paid to Ms. VSM has been duly reflected by us in our books of account. In this connection, we draw your honour’s attention to our letter dated 15th March, 2005. Your Honour would appreciate that in the said letter we had clarified that the amount paid to Ms. VSM was debited by us to bill dis-counting charges amounting to Rs. 10,000/-. Further, as bill discounting charges was paid in advance for the period subsequent to 31st March, 2001, part of the said expenses were transferred to prepaid expenses account. Your Honour would appreciate from Schedule "J" to the profit and loss account that a sum of Rs. 10,000/- has been shown as discounting charges. Further, your Honour would appreciate from Schedule "H" to the Balance Sheet that a sum of Rs. 5,000/- has been shown as prepaid expenses. As the entire amount of Rs. 15,000/- paid to Ms. VSM has been duly accounted for in our accounts, the addition of Rs. 15,000/- has been erroneously made by your Honour. We have therefore to request your Honour to kindly rectify your order and delete the addition of Rs. 15,000/- as made by your Honour and oblige.
    

2. Addition on account of TDS outstanding – Rs. 15,000/-

   On page 2 of the order, your honour has made an addition of Rs. 15,000/- on account of TDS outstanding and not paid. At the outset, we would like to draw your Honour’s attention that TDS outstanding was on account of TDS deducted from interest paid from resident Indian concerns. Your honour has added/disallowed the said amount u/s. 40(a)(ia). Your Honour would appreciate that the provisions of section 40(a)(ia) have been inserted by the Finance Act, 2004 w.e.f. 1-4-2005. As the provisions of section 40(a)(ia) are prospective and not retrospective, no disallowance could be made on account of TDS amount outstanding and payable as at 31st March, 2001. As the addition/disallowance has been made under a mistake of law which is evident from record, we have to request your Honour to kindly delete the addition of Rs. 15,000/- and oblige.
    

3. Not allowing depreciation on revenue expenditure considered to be capital in nature

   In paragraph 5 on page 7 of the order, your Honour has disallowed a sum of
   Rs. 2,75,000/- out of repairs and maintenance expenses considering the same to be capital expenditure. A perusal of your Honour’s order reveals that though your Honour has considered the expenditure to be capital expenditure, no depreciation has been allowed by your Honour on the said amount. Your Honour would appreciate that we had not claimed depreciation on the said amount on the ground that the expenditure under consideration was a revenue expenditure. However, as your Honour is considering the expenditure to be capital in nature and has disallowed the same, we have to request your Honour to kindly allow depreciation on the amount of Rs. 2,75,000/- @ 25% and oblige.
    

4. Direction to carry forward loss considered to be speculation loss

   Your Honour has in paragraph 14 of the assessment order, considered the loss suffered by us on purchase and sale of shares as speculation loss and have accordingly not allowed set off of the said loss against the other income. However, we find that there is no specific direction to carry forward the said loss to the subsequent years. As the error in not specifying that the loss is to be carried forward is an error apparent from record, we have to request your Honour to kindly rectify your order and give a specific direction for carrying forward the said loss of Rs. 1,00,000/- and oblige.
    

5. Increase in deduction u/s. 80HHC

   We draw your Honour’s attention to our computation of income wherein we had computed the deduction u/s. 80HHC on the basis of business income computed by us. However, in view of the various additions and disallowances made by your Honour, business income has substantially increased. Your Honour would appreciate that the profits of the business for the purpose of section 80HHC is the profits computed under the head "Income from business or profession". As the said profits have increased on account of various additions and disallowances made by your Honour, we would be entitled to additional deduction u/s. 80HHC. In view of the above, we have to request your Honour to kindly rectify your Honour’s order and grant us additional deduction u/s. 80HHC and oblige.

   As the above errors are apparent from record, we have to request your Honour to kindly rectify your order u/s. 143(3) and make necessary amendments to the order and oblige.

Thanking you,