Rectification of Mistake – Queries and their Answers [Section 154]

Section 154 is in itself a complete code governing the filing of rectification petitions with the intent to cure the mistake/error/omission apparent from record. ‘Any mistake apparent from record’ must be the one which is apparent from the face of record and cannot be the one which can be drawn by perceptive capabilities or engineered reasoning.

Section 154 of the Income-tax Act basically deals with the correction of any error that may or may not have occurred in the income-tax records of any assessee. Section 154 of the Income-tax Act, 1961 (herein after referred to as ‘the Act’), pertains to rectification of mistakes in the income-tax records or an order passed by the Assessing Officer. Any order can be rectified to correct any mistake apparent from record.

Query 1 :  What errors can be corrected by filing a rectification ?

The Income Tax Department allows a rectification request when there is a mistake in Income Tax Return. The following errors can be rectified by filing a rectification request -

Answer :   (i)    Mistakes apparent from the record : The key requirement is that the error must be apparent from the face of the record, meaning it should be something that can be recognized at a glance without extensive investigation. This ensures that the rectification process remains straightforward and efficient, correcting only errors that are indisputable.

    (ii)  Clear and obvious mistake of fact or law : Orders under Section 154 of the Income Tax Act can be rectified when there is a clear and obvious mistake of fact or law that is readily apparent from the record. The rectification process allows for corrections in cases where the error is so evident that it can be identified without the need for extended analysis or debate.

                (iii)  Clerical errors : Mistakes that qualify for rectification typically include clerical errors, arithmetical mistakes, or oversights in applying established legal principles. For example, if there has been a simple miscalculation, typographical error, or failure to apply a clearly defined rule of law.

                (iv)    Error due to overlooking of compulsory provisions of law.

                (v)   Obvious omission: There is an obvious omission or clerical oversight that affects the accuracy of the order.

Query 2 :     What is meant by rectifiable mistakes ?

Answer :    The rectification mechanism serves as a corrective tool to address undeniable errors that are easily identifiable and do not require further investigation or extensive interpretation.

(i)    Glaring mistake:

For an error to be rectifiable under this section, it must be a glaring mistake, i.e., the mistake is so clear that it does not require a detailed inquiry or debate to recognize it.

(ii)   Mistakes that do not require re-examining of issues:

Rectification is meant to correct obvious and uncontested mistakes, i.e., mistakes that do not require re-examining of issues or where there are no differences in opinion.

(iii)  Mistakes that do not require prolonged argument:

Orders can be rectified when they do not require prolonged argument or re-evaluation of the matter.

All mistakes whether of fact or law can be rectified. A glaring and obvious mistake of law can be rectified as much as a mistake of fact apparent from the record

Section 214, read with section 154 of the Income-tax Act, 1961 [Corresponding to section 18A(5), read with section 35 of the Indian Income-tax Act, 1922] - ITO while passing assessment order, gave respondent/assessee-company credit, representing interest at 2 per cent on tax paid in advance under section 18A of 1922 Act. On 24.05.1953, Amendment Act came into force which was retrospectively applicable from 01.05.1952. Effect of amendment was that assessee was entitled to get interest at 2 per cent not on whole of advance amount of tax paid by him as before but only on difference between payment made and amount at which assessee was assessed to tax. After Amendment Act was passed, ITO exercised his power under section 35 and purported to rectify mistake apparent from record in regard to excess credit allowed by him to assessee. Since as a result of Amendment Act, subsequently inserted proviso formed part of section 18A(5) of Principal Act from 01.04.1952, conclusion was inescapable that order passed by ITO in original assessment became inconsistent with said proviso and must be deemed to suffer from mistake apparent from record. Therefore, ITO was justified in exercising his power under section 35 and rectifying said mistake. [In favour of revenue] (Related Assessment year : 1952-53) – [M.K. Venkatachalam, ITO v. Bombay Dyeing & Manufacturing Co. Ltd. (1958) 34 ITR 143 (SC)]

 

Query 3 :    What is the “mistake” envisaged in Section 154 of the Income Tax Act, 1961?

Answer :   In taxation law, the word “mistake” holds unique significance. Defining a “mistake” precisely is challenging, as it often involves subjective judgment. What one person considers a mistake may not appear so to another. However, a well-informed and judicious mind, upon reviewing the records, can detect such errors. Thus, the word "mistake" encompasses errors that can be identified through careful examination of the relevant records.

As far as Section 154 of the Income Tax Act is concerned, a mistake refers to an inadvertent error made in the application of existing facts and law, where something unintended has occurred. These mistakes are typically simple, obvious errors like clerical or arithmetical mistakes or the misapplication of clear legal provisions, which can be corrected without debate or interpretation.

Mistakes arising from conscious decisions, deliberate interpretations, or logical reasoning fall outside the scope of Section 154.

 

Under provision of section 154, income-tax officials cannot in guise of rectification, review or recall earlier order on strength of subsequent declaration of law by Supreme Court. Wrong application of law is not a mistake apparent from records and, therefore, it cannot be a mistake within meaning of section 154. (Related Assessment years : 1989-90 to 1994-95) – [Smriti Properties (P) Ltd. v. Settlement Commission (2005) 278 ITR 275 : 199 CTR 261 : 149 Taxman 386/ (Cal.)]

Mistake should be apparent only from records

It was held that, “Any apparent error can be rectified within the period prescribed in section 37. An apparent error must be from the records of the case and not error discovered from other sources. Any error discovered as a result of investigation of other records or other sources will not constitute an apparent error on the face of the record which alone confers jurisdiction on the officer concerned to rectify any order” – [EM. Viswanathan Chettiar v. Agrl. ITO (1983) 142 ITR 244 (Karn.)]

                   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 Hon’ble 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 an 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)]

Query 4 :  What is the “meaning of Record” envisaged in Section 154 of the Income Tax Act, 1961 ?

Answer :   The “record” does not refer solely to the assessment order but includes all proceedings on which the assessment order is based. The word “record” refers to the documents and information that the income tax authorities are obligated to examine when addressing mistakes in orders, as specified under Section 154(1). This section does not impose, either explicitly or by implication, any restriction on the scope of the authority's review to the specific order being rectified. Instead, the authorities are empowered to examine the entire record, which may include all related documents and materials relevant to the rectification of the mistake. This broadens the scope of rectification, permitting tax authorities to correct mistakes not just within the confines of the original order, but by considering all relevant materials within the record. This ensures that justice is done and administrative errors are effectively corrected.

If the tax authorities find that the basis on which the rectification application is made pertains to earlier years, due to an initial error in calculating the written-down value, it cannot be said that this is not a mistake apparent from the record. Such a mistake should still be considered as rectifying an error from the record, not something outside of it.

             ‘Record’ for purpose of section 154(1) is record available to authorities at time of initiation of proceedings for rectification and not merely record of original proceeding sought to be rectified

Section 154 opens with the words ‘with a view to rectifying any mistake apparent from the record. . . .’ The term ‘record’ is not defined in the section or in the definition section of the Act. For determining the true scope of this provision and the meaning to be properly assigned to the term ‘record’ it is necessary to keep in view the object of the provision and the nature of the power conferred on the authorities under that provision. These are the criteria which the Supreme Court adopted while considering the scope and effect of section 263 and the meaning to be assigned to the word ‘record’ used in that provision.

The object with which power is conferred by section 154 is as stated in the marginal heading ‘rectification of mistake’. The principal condition for exercising the power under section 154 is the existence of a mistake in the record. The mistake is not to be a mistake which requires in-depth probing to discover but is a mistake which is ‘apparent’ from the record. The power conferred by this provision is only to enable the authorities to rectify the ‘apparent’ mistakes in the record. The record referred to is the record which the authorities are required to examine for the purpose of rectifying mistakes in the orders mentioned in sub-clauses (a),(b) and (c) of section 154(1). The section does not either expressly or implicitly require that the authorities exercising power under this provision should limit their attention only to the order sought to be rectified.

For assessment year 1973-74, assessment was completed without setting off unabsorbed depreciation against capital gains and by allowing same to be carried forward. In assessment year 1974-75, unabsorbed depreciation was deducted from total income of assesse. Thereafter assessment order for assessment year 1973-74 was rectified and unabsorbed depreciation was set off against capital gains of that year. Consequent to this rectification order Assessing Officer rejected assessment order for 1974-75 also. The mistake in not allowing unabsorbed depreciation as a deduction from capital gains in 1973-74 was clearly a mistake apparent from record as under section 71(2) that amount was required to be set off against capital gain and that had not been done in original order. It was permissible for Assessing Officer to rectify mistakes apparent in assessment order for year 1974-75 after assessment order for year 1973-74 was rectified and as a consequence of which there was no unabsorbed depreciation available for being adjusted in assessment year 1974-75. (Related Assessment years : 1973-74 and 1974-75) – [CIT v. M. R. M. Plantations (P) Ltd. (1999) 240 ITR 660 : 102 Taxman 1 (Mad.)]

Query 5 :   Whether any form prescribed for making application under section 154

Answer :  There is no form prescribed under Income-tax Rules for rectification application under section 154 of Income-tax, Act-1961.

Query 6 :  Can Assessing Officer rectify the order, against which an appeal is pending?

Answer :  Section 154(1A) of the Income Tax Act imposes a clear restriction on the power to rectify orders in situations where the matter in question has already been “considered and decided” through the process of an appeal or revision.

The crucial aspect is the use of the phrase “considered and decided.” This indicates that the provision applies only to cases where the appellate or revisional authority has already concluded the matter and rendered a decision on the issue. In other words, once a matter has been fully adjudicated, it becomes final and is no longer open to rectification under Section 154.

Importantly, the phrase “considered and decided” cannot be interpreted to include cases that are still pending in appeal or revision. Matters that are yet to be finalized, or where the appellate authority has not yet arrived at a decision, do not fall within the ambit of this restriction. Therefore, Section 154(1A) applies exclusively to matters where the appellate or revisional decision has been conclusively made, reinforcing the finality of such decisions and preventing further rectification of the same issues.

Section 154(1A) places an embargo on power of rectification of assessment order in cases where matter had been considered and decided in appeal or revision; however, there is no embargo on power of amendment if an appeal or revision is merely pending since such pending appeal/revision does not assume character of a sub-judice matter

Assessee filed an appeal before the Commissioner (Appeals) on the ground that the Assessing Officer did not give credit of advance tax of Rs. 16.80 crores. The assessee also made an application under section 154 to the Assistant Commissioner for rectification. The assessee stated that by a mistake apparent on record, the credit of payment of advance tax of Rs.16.80 crores had not been given and the assessee was entitled to a refund. The Assistant Commissioner rejected the rectification application stating that assessee did not inform that an appeal was filed on the same issue for which rectification was sought. Since the assessee was agitating on similar ground before the appellate authority, it was not proper on the part of the Assistant Commissioner, following the doctrine of judicial discipline, to adjudicate on the same issue pending before the appellate authority; therefore, rectification application assumed character of a matter being sub-judice. On writ petition before the High Court :

Held : Section 154(1) empowers the Authority to rectify and carry out amendments. The specified Authorities can amend any order passed by it under the provisions of the Act, any intimation or deemed intimation specified in section 143(1), any intimation under sub-section (1) of section 200A and any intimation under sub-section (1) of section 206CB. Section 154(2) empowers the Authority to make an amendment on its own motion and to make such amendment for rectifying any such mistake which has been brought to its notice by the assessee, or the other Authorities.

Section 154(1A) provides that where any matter has been considered and decided in any proceeding by way of appeal or revision, contained in any law for the time being in force, such order shall not be amended. Section 154(1A), thus, places an embargo on the power of rectification in the cases where the matter has been considered and decided in appeal or revision. It is of importance that the legislature has used the phrase ‘considered and decided’ in the past tense. The phrase ‘considered and decided’ cannot be read as ‘pending consideration in appeal or revision’. To do so would be adding and changing the plain language of the statute. By modifying and adding the words in this manner, which is not permissible, the Assistant Commissioner has divested himself of the power of amendment. In view of the plain language of section 154, there is no embargo on the power of amendment if an appeal or revision is merely pending. The rejection of the rectification application on this ground was unwarranted. The appeal is still pending. The Assistant Commissioner has failed to exercise the jurisdiction vested in him and, thus, the impugned order will have to be set aside and the application will have to be decided.

The Writ Petition succeeds. The impugned order is to be quashed and set aside. The rectification application filed by the petitioner under section 154 stands restored to the file of Assistant Commissioner to be disposed of on its own merits. [In favour of assessee, matter remanded] (Related Assessment year : 2015-16) – [Piramal Investment Opportunities Fund v. ACIT (2019) 267 Taxman 297 : 111 taxmann.com 5 (Bom.)]

Query 7 :  Can order passed u/s 154 be revised u/s 263?

Answer :   Yes, When an order of assessment has been rectified under Section 154, it may still become the subject of a revision proceeding under Section 263. The rectification does not insulate the order from further review by a higher authority. The Commissioner has the discretion to conduct inquiries as deemed necessary to ascertain whether the rectified order aligns with the law and the interests of the Revenue. This may involve examining the basis of the original assessment as well as any rectifications made.

Assessing Officer can not rectify the order on the issue which has been decided by appellate/ revisional authority

Where appeal is filed relating to a matter and same was considered or decided or to be treated to have been considered or decided by appellate authority, it is no longer open for assessing authority to reopen or reagitate or rectify said issue of matter. Penalty levied on assessee-firm under section 271(1)(c) was confirmed in appeal. Subsequently ITO sought to rectify order of assessment and penalty under section 154, stating that there was an error apparent as by mistake he did not notice that section 271(2) was applicable and penalty imposed under section 271(1)(c) would have been higher than the amount imposed. It was not open to the ITO to pass an order of rectification. - [P. Das & Co. v. DCIT (1996) 217 ITR 28 : 87 Taxman 28 (Gauhati)]

 Query 8 :  Can order be rectified on the basis of subsequent declaration of law by the                                          Supreme  Court ?

Answer :    (i)  Interpretation of Law : No

Under the provisions of Section 154 of the Income Tax Act, income-tax authorities cannot, under the pretext of rectification, review or recall an earlier order based on a subsequent declaration of law by the Supreme Court.

The scope of Section 154 is narrowly confined to correcting errors that are apparent from the record - meaning the mistake must have existed at the time the original order was passed and must have been evident from the materials on record. It refers to a clear and undeniable error that could have been easily identified without extensive reasoning or re-examination.

A mistake that involves a subsequent change in the interpretation of the law cannot be classified as a mistake apparent from the record. Rectification under Section 154 is not a tool for revisiting an earlier order based on a later judicial pronouncement. The legal principles governing the case at the time of the original order remain relevant, and tax authorities cannot retroactively apply new interpretations to alter an already finalized order through rectification.

(ii)    Explaining Correct position of Law: Yes

If the Supreme Court decision is aimed at clarifying/explaining the legal position of Law, the order made earlier can be rectified under section 154 (CBDT Circular No. 68 dated 17.11.1997).

     CBDT Circular : No. 68 [F. No. 245/17/71-A & PAC], dated 17.11.1971.

Subject : Mistakes apparent from records - Whether can be treated as such on the basis of subsequent decision of Supreme Court

1.   The Board are advised that a mistake arising as a result of a subsequent interpretation of law by the Supreme Court would constitute ‘a mistake apparent from the records’ and rectificatory action under section 35/154 of the 1922 Act/the 1961 Act would be in order. It has, therefore, been decided that where an asses­see moves an application under section 154 pointing out that in the light of a later decision of the Supreme Court pronouncing the correct legal position, a mistake has occurred in any of the completed assessments in his case, the application shall be acted upon, provided the same has been filed within time and is other­wise in order. Where any such applications have already been rejected and the assessee files fresh applications within the statutory time limit, the same may also be treated on par with the applications which may either be pending or received after the issue of this circular.

2.    The Board desire that any appeals or references pending on the point at issue may please be withdrawn.

 Query 9 :    Which types of orders are not eligible for rectification?

Answer :     (i)   The issue that was not initially examined:

An issue that was not initially examined, whether on factual or legal grounds, cannot be considered a “mistake apparent on the record” under Section 154. Such omissions or oversights may require an appeal, but they do not meet the threshold for correction under the narrow scope of Section 154.

(ii)     Interpretation of a legal provision:

When the alleged mistake involves the interpretation of a legal provision - such as determining the correct application of a particular section of the Act, or resolving ambiguities in the language of the law - it is no longer a simple, obvious mistake. In such cases, the issue becomes debatable or open to different legal interpretations. Since interpretation or construction of law inherently involves subjective judgment and potentially varying perspectives, it cannot be considered a mistake that is “apparent” from the face of the record.

(iii)    Issue that requires a lengthy process of reasoning: An error that requires a lengthy process of reasoning or involves points where two differing opinions are possible cannot be considered an “error apparent on the face of the record.” The concept of an error apparent on the face of the record is intended to address mistakes that are straightforward, indisputable, and clearly evident from the existing material. These errors are so obvious that they can be identified without the need for extensive debate or in-depth legal analysis.

(iv)    Debatable issue:

A mistake that involves a deeper examination of complex legal or factual points and might lead to multiple, potentially valid interpretations or opinions is not considered “apparent” but rather debatable. Such issues fall beyond the scope of Section 154.

(v)     Issue with two or more plausible views:

Mistakes that involve questions where two or more plausible views could be taken fall beyond the limited scope of correcting simple, evident mistakes.

(vi)    Omission to claim a deduction/exemption:

In cases where the assessee omits to claim a deduction in its return of income, this cannot be considered a mistake apparent from the record. It reflects a deliberate action or failure by the assessee, and it would require the Assessing Officer to revisit and reassess the merits of the claim.

Query 10 :  Can Assessing Officer has the power to rectify the order u/s 154 and to restore                                   the original order?

Answer :     (i)   When the power is exercised without application of mind : No

An order passed under Section 154, which allows for the rectification of mistakes apparent from the record, requires adherence to procedural fairness and application of mind, including giving the assessee a reasonable opportunity to present their case. By bypassing this essential procedural safeguard, the Assessing Officer’s decision becomes legally unsustainable. Such a flawed exercise of power makes the order vulnerable on the grounds of violating due process.

Section 90 of the Finance (No. 2) Act, 1998, read with section 154 of the Income-tax Act, 1961 - Kar Vivad Smadhan Scheme - Assessee-company filed its return of income. Assessing Officer made prima facie adjustments under section 143(1)(a) and enhanced tax liabilities. Against order assessee filed application for rectification as well as appeal before Commissioner. Since tax was not paid in compliance with section 249, appeal was not disposed of. However, Assessing Officer partially accepting assessee’s application reduced liability. On 30.12.1998 assessee filed an application for revision under section 264 which was still pending. Assessee declared income under KVSS on 31.12.1998. Before designated authority, i.e., Commissioner could pass an order to Assessing Officer in exercise of his power under section 154 deleted addition which was made by him. Designated Authority held that since income as returned by assessee was accepted, no dispute existed on date of declaration and said issue would not come under KVSS. Assessing Officer having already exercised power under section 154, reducing liabilities of assessee, it concluded matter as to prima facie adjustments and he could not subsequently apply his mind again to delete adjustments to make assessee’s declaration under KVSS infructuous on ground that no dispute was pending. Therefore, subsequent exercise of jurisdiction under section 154 by Assessing Officer on his own was only with a view to prevent assessee from receiving benefits of KVSS and such order suffered from malice which was required to be quashed. Basic concept of tax arrears as well as conditions which makes a person eligible to make a declaration of tax arrears have direct relevance to date of declaration and arrears are not confined to disputed tax arrears only and, therefore, even if existing tax liability which includes both admitted as well as disputed liability is reduced to admitted liability as a result of subsequent order, it does not take case outside purview of Scheme though it may affect quantum of tax arrears. As a result order of both Assessing Officer and designated Authority required to be quashed. – [CIT v. Shaily Engg. Plastics Ltd. (2002) 258 ITR 437 (SC)/[2003] 179 CTR 14 : 126 Taxman 177 (SC)]

(ii)  When assessee failed to present any material evidence : Yes

The issuance of a subsequent rectification order that restores the original order is permissible in instances where the assessee has failed to present any material evidence to support their case.

In the context of rectification under the Income Tax Act, tax authorities have the discretion to revisit and amend previous orders. This is particularly relevant when the initial order was made based on the available evidence at that time. If the assessee subsequently does not provide any new or compelling material to substantiate their claims or arguments, the tax authority may find it appropriate to reinstate the original order.

The rationale behind this permissibility lies in the principle that rectification should serve to correct errors and ensure fairness in the assessment process. If the assessee has not furnished sufficient evidence to justify a departure from the original order, there is a valid basis for restoring that order. In such cases, tax officials can reasonably conclude that the previous determination remains valid, as no new facts or evidence have emerged to warrant a change.

In absence of any material to show that interest income was business income, such income could not be treated as business income of assessee in order to allow set off of brought forward business loss from earlier years against said interest income

Assessee was engaged in business of share trading. During relevant years, it earned certain interest income which was declared as ‘income from other sources’. The Assessing Officer completed the assessment accepting the return of income. Subsequently, the assessee filed an application under section 154 contending that interest income was to be taxed as business income, which was eligible for set off against business loss. The Assessing Officer allowed rectification application. Subsequently, the Assessing Officer passed another rectification order under section 154, holding that interest income was liable to be taxed as ‘income from other sources’. The Commissioner (Appeals) as well as the Tribunal confirmed the subsequent rectification order holding that in absence of any material on record, showing interest income as business income, order so passed was to be confirmed.    The assessee filed instant appeal submitting that issue was a complex one and, thus, the Assessing Officer could not exercise power of rectification available under section 154.

Held : The question for determination in the instant case was whether the income offered by the assessee arising out of interest which the assessee himself had disclosed as an income from other sources could be permitted to be set off against the carry forward business losses. If the contention is that this question which arose for consideration was a very complex question, which could not have been considered under section 154, then the initial prayer of the assessee could not also have been considered under section 154. The assessee cannot be permitted to have two standards for the selfsame issue. If he chooses to raise the jurisdictional sword, then he shall be perished by the same sword. The submission that the Assessing Officer was satisfied, after verifying all records, when he passed first order under section 154 is altogether unmeritorious. Thus, such submission advanced by the assessee is rejected.

The question is whether the judgment of the Tribunal is perverse. The Tribunal has recorded reasons and the correctness of those reasons was not disputed. The assessee submitted that all the records had already been verified by the Assessing Officer while initially exercising jurisdiction under section 154, but it does not deny that the alleged records were not once again produced either before the Commissioner (Appeals) or before the Tribunal. Therefore, the Tribunal was correct in taking the view that they did. The appeal is, therefore, dismissed. - [Trade Apartment Ltd. v. CIT (2015) 231 Taxman 578 : 57 taxmann.com 161 (Cal.)]

Revisional jurisdiction vested in the Commissioner is a special provision aimed at safeguarding the interests of the Revenue. In exercising this power, the Commissioner is not limited to merely confirming or rejecting the rectified order; he may issue directions, including modifying the order or setting it aside for a fresh assessment, depending on the findings from the inquiry

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 section 154 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 section 154 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 section 154, 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 v. Ralson Industries Ltd. (2007) 288 ITR 322 : 207 CTR 201 : 158 Taxman 160 (SC)]

Query 11 :   What is the time limit for making application under section 154? & What is the time limit for the disposing off the application under section 154?

Answer :      (i)      Time limit for disposal of application:

 After receiving a rectification application from the assessee, the tax authority should dispose of the application within six months, commencing from the date the application was made, either by (a) accepting the claim or (b) refusing the claim [Section 154(8) & Instruction No. 2/2016 dated 15.02.2016].

(ii)      Time limits for passing an order under Section 154:

§  Provisions of Section 154(7): The time limit for seeking rectification under Section 154 is four years after the end of the financial year in which the original order was made.

 

§  When the taxpayer becomes aware of the demand at a later stage: In cases where the taxpayer becomes aware of the demand only at the stage of refund adjustment, the Assessing Officer is required to act on the rectification application, even if the four-year time limit under Section 154(7) has expired [CBDT Circular No. 4/2012, dated 20.06.2012].

As per Section 154(8) of the Act where an application for amendment is made by the taxpayer with a view to rectify any mistake apparent from record, the Assessing Officer shall pass an order, within a period of six months from the end of the month in which such an application is received, by either making an amendment or refusing to allow the claim.

Section 154(4) of the Act provides that rectification order shall be passed in writing by the Assessing Officers.

CBDT Instruction No. 2/2016 dated 15.02.2016  

Subject : Passing rectification order under section 154 Income-tax Act, 1961 - regarding

       Instances have come to the notice of the Board that in some cases rectification order under section 154 of the Income-tax Act, 1961 (‘Act’) is being passed by the Assessing Officer on AST System without giving copy of the order to the taxpayer concerned. This is causing grievance to the taxpayers as they remain unaware of such orders and consequentially, are unable to pursue the matter further, either in appeal or rectification, if required.

2.   Sub-section (4) of section 154 of the Act mandates that rectification order shall be passed in writing by the Income-tax authorities. Therefore, on consideration of the matter, the Board hereby directs that all rectification applications must be disposed of after passing an order in writing, to be duly served upon the taxpayer concerned and not by merely making necessary rectification on the AST System.

3.    The contents of this Instruction may be brought to the notice of all for necessary compliance.

 (Rohit Garg)

Deputy Secretary to the Government of India

 

CBDT Circular No. 4 of 2012, dated 20.06.2012

Subject : Section 119 of the Income-tax Act, 1961 - Income-tax authorities - Instructions to subordinate authorities - Authorization of AOs in certain cases to rectify/reconcile disputed arrear demand

The Board has been apprised that in certain cases the assessees have disputed the figures of arrear demands shown as outstanding against them in the records of the Assessing Officer. The Assessing Officers have expressed their inability to correct/reconcile such disputed arrear demand on the ground that the period of limitation of four years as provided under sub-section (7) of section 154 of the Act has expired.

Further, in some cases, the Assessing Officers have uploaded such disputed arrear demand on the Financial Accounting System (FAS) portal of Centralized Processing Center (CPC), Bengaluru which has resulted in adjustment of refund arising out of processing of Returns against such arrear demand which has been disputed by such assessees on the grounds that either such demand has already been paid or has been reduced/ eliminated in the appeals, etc. The arrear demands, in these cases also were not corrected / reconciled for the reason that the period of limitation of four years has elapsed.

2.  The Board, in consideration of genuine hardship faced by the abovementioned class of cases, in exercise of powers vested under section 119(2)(b) of the Act, hereby authorize the Assessing Officers to make appropriate corrections in the figures of such disputed arrear demands after due verification/reconciliation and after examining the same on merits, whether by way of rectification or otherwise, irrespective of the fact that the period of limitation of four years as provided under section 154(7) of the Act has elapsed.

3.  In view of the above the following has been decided: -

(a)  In the category of cases where based on the figure of arrear demand uploaded by the Assessing Officer but disputed by the assessee, the Centralized Processing Center (CPC), Bengaluru has already adjusted any refund arising out of processing of return, the jurisdictional Assessing Officer shall verify the claim of the assessee on merits. After due verification of any such claim on merits, the Assessing Officer shall issue refund of the excess amount, if any, so adjusted by CPC due to inaccurate figures of arrear demand uploaded by the Assessing Officer. The Assessing Officer, in appropriate cases, will also upload amended figure of arrear demand on the Financial Accounting System (FAS) portal of Centralized Processing Center (CPC), Bengaluru wherever there is balance outstanding arrear demand still remaining after aforesaid correction/ reconciliation.

(b)  In other cases, where the assessee disputes and requests for correction of the figures of arrear demand, whether uploaded on CPC or not uploaded and still lying in the records of the Assessing Officer, the jurisdictional Assessing Officer shall verify the claim of the assessee on merits and after due verification of such claim, will make suitable correction in the figure of arrear demand in his records and upload the correct figure of arrear demand on CPC portal.

4.   It is specifically clarified that these instructions would apply only to the cases where the figures of arrear demand is to be reconciled/ corrected - whether such arrear demand has been uploaded by the Assessing Officer on to Financial Accounting System (FAS) of CPC or it is still in the records of the Assessing Officer.

This may be brought to the notice of all the officers of your CCA region.

 

CBDT Circular No. 71, dated 20.12.1971

Board’s authorisation for taking action under section 154 beyond time limit specified under section 154(7) in cases of protective assessments requiring to be cancelled - Order under section 119(2)(b)

CBDT Circular No. 71, dated 20.12.1971

Subject : Board’s authorisation for taking action under section 154 beyond time limit specified under section 154(7) in cases of protective assessments requiring to be cancelled - Order under section 119(2)(b)

1. Where the same income was assessed, as a protective measure, in the hands or more than one assessee or as the income of more than one assessment year, and one or more of these protective assessments needs to be cancelled as a result of some of the relevant assessments having become final and conclusive, it has been the practice of the Income-tax Department to cancel the redundant assessments under section 154, treating these as involving mistakes apparent from the records. This is being done by the Income-tax Officers either suo motu or on applications made by assessees. Sometimes, it is not possible to take action under section 154 in such cases because of the operation of the time limit laid down in sub-section (7) of section 154. Since the operation of this time limit causes genuine hardship to the affected assessees, the Central Board of Direct Taxes, in exercise of the powers vested in them under clause (b) of sub-section (2) of section 119, hereby authorises the Income-tax Officer to take action under section 154, or to admit or dispose of on merits applications under section 154 filed by assessees seeking relief, for cancelling such protective assessments as have become redundant by waiving, if necessary, the time limit fixed under subsection (7) of section 154.

2. Every case of the relaxation of the time limit on the authority of this order shall be reported by the Income-tax Officer to the Inspecting Assistant Commissioner, in whose jurisdiction he is functioning within one month of the passing of such order.

 

Query 12 :  If the Assessing Officer has imposed a penalty and the assessment order is later annulled during appellate proceedings, can the Assessing Officer withdraw or cancel the penalty order under Section 154?

Answer :    Yes. The cancellation of order of levy of penalty falls within purview of Section 154 (Circular No. 81 dated 26.03.1972)

Circular No. 81, dated 26.03.1972 [Suparaerseded] 26 March 1972

Subject : Penalties based on cancelled/annulled assessments - Authorisation by the Board for taking action in respect of such penalties under section 154 beyond the time limit specified under section 154(7) - Order under section 119(2)(a)/(b)

I am directed to invite a reference to the Board’s Circular No. 71 [F. No. 245/25/ 71-A & PAC], dated 26.03.1972 and to say that the CBDT have passed a revised order of date in supersession of their earlier order dated 28.02.1972, a copy of which was sent with the Board’s above-noted Circular dated 26.03.1972. A copy of this revised order is attached herewith. This may be brought to the notice of ITOs/AACs/IACs in your charge.

Circular No. 87 [F. No. 245/25/71-A & PAC], dated 19.06.1972 in supersession of Circular No. 81 [F.No. 245/25/71-A & PAC], dated 26.03.1972.

ANNEX - ORDER REFERRED TO IN CLARIFICATION

1. The Board’s Order F. No. 245/25/71-A & PAC, dated 28.02.1972 under section 119(2)(a)/(b) is hereby superseded and substituted by the following order :

2.  It has been brought to the notice of the CBDT that sometimes the income-tax assessment, on the basis of which an order of penalty has been passed, is itself either cancelled or annulled and yet the order of penalty survives. Where such a penalty order has not been made subject of appeal or where it has been confirmed on appeal by the Appellate Assistant Commissioner or on revision petition by the Commissioner/Additional Commissioner, there will be justification for cancellation of the penalty order by the income-tax authority concerned under section 154; if the penalty order of the ITO/AAC/IAC is final, the respective authority will be entitled to cancel it, but if the latest position is as per appellate order of AAC or revision order of CIT/Addl. CIT, the competent authority to act under section 154 will be the AAC or the Commissioner/Additional Commissioner having regard to the provisions of section 154(1A).

3.  In the above context it has been pointed out that action under section 154 by the aforesaid authorities in the types of cases mentioned above cannot sometimes be taken because of expiry of time limit under section 154(7). To obviate genuine hardship in such cases, the Board in exercise of the powers vested in them by section 119(2)(a)/(b), hereby authorise the ITOs/AACs/IACs/Addl. CITs/CITs to take action under section 154 suo motu or to admit applications under section 154 filed by the assessees seeking cancellation of penalty orders of the type mentioned above, waiving for this purpose, as may be necessary, the time limit prescribed under section 154(7). It is clarified that this order will not apply to:

(a)  penalties which stand confirmed by the Income-tax Appellate Tribunal/High Court/Supreme Court ;

(b)  penalties based on assessments which have been set aside for being framed de novo ; and

(c)  penalties in respect of assessments for which appeals are still pending.

Query 13 :  While making the assessment for the assessment year 2001-02, which is the first year of assessment, the Assessing Officer allowed full deduction in respect of preliminary expenses incurred before the commencement of business in computing the taxable income for this year. Now, after two years, he has issued a notice under section 154, proposing to add-back 4/5th of the expenditure saying that only 1/5th of the expenditure is allowable in terms of section 35D of the Income-tax Act. Is the Assessing Officer correct in his approach ?

Answer :     Yes. The full deduction was not correct in view of the provisions contained  in section 35D.

 

Query 14 :  Whether Non consideration of Jurisdictional Court ruling is a ‘mistake apparent from record’ and can be Rectifiable under section 154?

Answer :    Yes, Non consideration of Jurisdictional Court ruling is a ‘mistake apparent from record’ and Rectifiable under section 154

Assessee, club filed return of income declaring Nil income and shown gross income of Rs. 9.94 Cr including interest income of Rs. 39.33 Lac which was claimed as not taxable on principle of mutuality; During assessment, Revenue rejected Assessee’s claim of exemption on interest income of Rs. 39.33 Lac and held that the same is taxable; CIT(A) relied on jurisdictional High Court judgment in Assessee’s own case for Assessment year 1997-98 and remitted back to Revenue with a direction to ascertain as to whether interest income was utilized to achieve its primary objects and consider as to whether ‘principle of mutuality’ will apply or not; Subsequently, a filed rectification application under Section 154 was filed by the Revenue on the premise that the jurisdictional High Court judgment categorically excludes the interest income from FDs from the principle of mutuality; Consequently, CIT(A) relied on Supreme Court judgment in ACIT v. Saurashtra Kutch Stock Exchange Ltd. (2008) 305 ITR 227 (SC) and allowed Revenue’s miscellaneous application under Section 154 and held that non-consideration of a ratio decidendi or decision of jurisdictional High Court would amount to mistake apparent on record;

Chennai ITAT dismisses Assessee’s appeal, holds that non-consideration of decision of jurisdictional Court is a mistake apparent on record and rectifiable under Section 154; Relies on Supreme Court judgment in Saurashtra Kutch and holds that CIT(A) rightly exercised its power to rectify the order under Section 154 and restricted the Assessee’s claim of exemption on interest income on FDs considering the judicial dictum laid down by the High Court in Assessee’s own case for Assessment year 1996-97 which relied on Supreme Court judgment in Bangalore Club v. CIT (2013) 350 ITR 509 (SC) to hold that interest income earned by a trust cannot be exempted from taxation on the principle of mutuality; ITAT observes that an exception to claim exemption on interest income has been made that it has been specifically utilised for the primary object, however, Assessee fails to demonstrate during the assessment that investment in form of FDs were made with a definite idea to utilise it in any specific project despite being aware of the jurisdictional High Court judgment; Observes that CIT(A) allowed Assessee’s claim of exemption on interest income since the said jurisdictional High Court judgment was not placed before it and neither any additional evidence was filed by the Assessee to claim the benefit of application of interest income on the basis of exemption laid down in the said judgment; Thus, dismisses Assessee’s appeal. [In favour of revenue] (Related Assessment years : 2016-17 & 2017-18) – [Madras Gymkhana Club v. ITO [TS-683-ITAT-2024(CHNY)] - Date of Judgement : 21.08.2024 (ITAT Chennai)]

Query 15 :  Whether, Section 24(b), 80C & 80D deduction can be denied for not claiming in Income Tax Return?

Answer :     Section 24(b), 80C & 80D deduction can not be denied for not claiming in Income Tax Return

In the original return of income for the assessment year 2014-15, the appellant did not claim deductions of Rs. 1,50,000 under section 24(b) for interest on housing loan, Rs. 1,00,000 under section 80C, and Rs. 29,136 under section 80D. Subsequently, the appellant filed a rectification petition under section 154 of the Act, seeking to rectify this omission. The appellant provided evidence supporting the deductions claimed, including Form No. 16 showing deductions under the respective sections and certificates from Axis Bank. The certificates corroborated the payments made for interest on housing loan and principal repayment, among other relevant deductions.

The appellant’s argument emphasized that the failure to claim deductions in the original return should not be a reason to reject the claims. Referring to Circular No. 14 of 1955 dated 11.04.1955 issued by the CBDT in which stated that the officers of the department must not take advantage of the ignorance of the assessee about his rights and it is their duty to assist the tax payer in every reasonable way particularly in the matter of claiming and securing relief. the appellant asserted that the revenue authorities must assist taxpayers in securing legitimate deductions and reliefs.

On the other hand, ld. DR vehemently argued and mentioned that assessee is not eligible for any of the deduction as it was not claimed during the filing of the return. Therefore, the claim before the ld. AO cannot be sustained without filing the revised return. He respectfully relied on the decision rendered by the Hon’ble Supreme Court in the case of Goetz (India) Ltd. v. CIT (2006) 284 ITR 3231 (SC).

The appellant’s counsel cited several cases where appellate authorities were held to have the power to entertain additional grounds or claims for deductions. The judgments of the Delhi High Court in CIT v. Jai Parabolic Springs Ltd. (2008) 306 ITR 42 : 172 TAXMAN 258 (Del.) and Taylor Instrument Co. (India) Ltd. v. CIT (1992) 64 Taxman 129 (Del.) were relied upon to argue that appellate authorities can admit new grounds or evidence in the interests of justice. The ITAT Kolkata considered the submissions of both parties and examined relevant legal provisions held that the failure to claim deductions in the original return should not automatically lead to their rejection. The ITAT referred to the Circular No. 14 of 1955 dated 11.04.1955 and the principle of assisting taxpayers in securing rightful reliefs.

 

The ITAT observed that appellate authorities possess the power to consider unclaimed deductions, provided that the claim is bona fide and supported by relevant evidence. It distinguished between the powers of assessing authorities and appellate authorities in this context.

Here, two issues are formulated, weather the unclaimed deduction can be claim before the assessing authority without filing the revised return and weather the power of the appellate authority can allow the claim of duction which was not claimed in the return of income. We adjudicate the second issue. In our opinion the appellate authority has coterminous power to accept the deduction which was not claimed in ITR. So, the entire claim under section 80C is eligible claim of deduction. During the hearing the assessee had submitted all relevant documents which are also considered by the appellate authority. We accept the claim of assessee related to deduction under section 24(b), 80C & 80D of the Act. Accordingly, we set aside the order of the ld CIT(A) with a direction to allow the deduction, claimed by the assessee. [In favour of assessee] (Related Assessment year : 2014-15) - [Sandip Chattopadhyay v. ITO - ITA No. 125/Kol/2023 - Date of Judgement : 28.07.2023 (ITAT Kolkata)]

Query 16 :  Whether Reassessment proceedings initiated during pendency of rectification proceedings is unsustainable ?

Answer :      No, Reassessment proceedings initiated during pendency of rectification proceedings is not sustainable.

Supreme Court allows Assessee’s appeal against the judgment of Punjab and Haryana High Court, holds the reassessment proceedings to be invalid as the Assessee was also subject to rectification proceedings which were not withdrawn by the Revenue; High Court had upheld the validity of reassessment proceedings for Assessment year 1995-96 on the basis that the rectification proceedings were time barred and also dismissed Assessee’s review petition; Pursuant to initiation of reassessment proceedings, the  reassessment order was passed by the Revenue which was set aside by ITAT due to parallel pendency of rectification proceedings whereas High Court remanded the matter back to ITAT by observing that rectification proceedings were time-barred as per Section 154(7), therefore, invalid and held reassessment proceedings as maintainable; On Assessee’s appeal, Supreme Court notes that when reassessment notice was issued, the notice under Section 154 was already issued for disallowing Section 80HHC deduction since the Assessee claimed bad debts with respect to non-materialized exports; Supreme Court opines, “...the High Court has committed serious error in observing and holding that the notice under Section 154 was invalid as the same was beyond the period of limitation as prescribed/provided under Section 154(7) of the Act. It is required to be noted that the proceedings under Section 154 of the Act were not the subject matter before the High Court.”; Further observes that in the absence of any specific withdrawal of the proceedings under Section 154, the proceedings can be said to be pending, thus, it was not permissible on the part of the Revenue to initiate the reassessment proceedings; Supreme Court quashes the High Court judgment and restores the ITAT order. (Related Assessment year : 1995-96) – [S.M. Overseas (P) Ltd. v. CIT [TS-942-SC-2022] – Date of Judgement : 07.12.2022 (SC)]

 

Query 17 :   Whether Revenue bound to give advance tax credit inadvertently left unclaimed in Income Tax Return ?

Answer :    Yes, claim for credit of advance tax reflecting in Form 26AS although not made in the original return of income under Section 139(1) or revised return of income under Section 139(5) is a mistake apparent on record and falls within the scope of rectification order under Section 154. Thus, Revenue is bound to give advance tax credit inadvertently left unclaimed in Income Tax Return

Mumbai ITAT holds that claim for credit of advance tax reflecting in Form 26AS although not made in the original return of income under Section 139(1) or revised return of income under Section 139(5) is a mistake apparent on record and falls within the scope of rectification order under Section 154; Observes that Section 219 also mandates that the credit of advance tax shall be given to the Assessee in the regular assessment, accordingly, Assessee’s inadvertence to claim credit for the advance tax while filing its return of income or filing revised return of income does not absolve the Assessing Officer from its statutory duty to grant the credit in regular assessment, particularly when the challan payments of advance tax are duly reflected in Form 26AS which forms part of the record of Revenue; Assessee-Company engaged in the business of providing freight forwarding and supply chain services to global customers filed return of income declaring total income of Rs. 18.58 Cr which was subjected to assessment wherein income was assessed at Rs. 38.23 Cr and certain additions were made which was affirmed by CIT(A); ITAT partly allowed Assessee’s appeal; Subsequently at the time of giving effect to ITAT order, Assessee filed a rectification application under Section 154 and claimed credit of advance tax of Rs. 1.10 Cr although not claimed in the original return of income which was rejected by Assessing Officer on the premise that claim of advance tax credit is made after a lapse of almost 3 years of completion of assessment; CIT(A) dismissed Assessee’s appeal against rejection of rectification application under Section 154; ITAT observes that it is an undisputed fact that claim of the Assessee is limited to the grant of advance tax credit paid during the year although not claimed in the return of income and does not pertain to fresh claim of any deduction/allowance which needs to verified with documentation; Observes that challan payments of advance tax made twice during the year under consideration are duly reflected in Form 26AS; Thus, holds that Assessing Officer erred in not rectifying this apparent mistake when the same was pointed out by Assessee vide rectification application under Section 154; Allows Assessee's appeal by directing Assessing Officer to grant the credit of advance tax of Rs. 1.10 Cr paid by the Assessee and sets aside the CIT(A) order. [In favour of assessee] (Related Assessment year : 2013–14) – [Damco India (P) Ltd. v. Commissioner of Income Tax (Appeals),  National Faceless Appeal Centre, Delhi [TS-474-ITAT-2023(Mum)] – Date of Judgement : 10.08.2023 (ITAT Mumbai)]