2011 (7) TMI 97 - HC - Income Tax

Rectification of mistakes - Deduction u/s 80M - the actual expenditure made should be deducted and not a notional one based on average calculation - there was no material available on record to assess the actual expenditure made by the assessee and in the notice under Section 154 of the Act there is no particular of expenditure indicated which allegedly escaped the notice of the Assessing Officer - Provided further that no such rectification as has the effect of enhancing the assessment penalty fees or other dues shall be made unless reasonable opportunity of being heard has been given to the dealer or other person likely to be affected by such enhancement - Held that there was no scope of rectification in the case on the ground of error apparent on the face of the record as the Assessing Officer even in his rectified order could not find out the actual expenditure for obtaining the dividend and calculated the same on the notional basis which is not permissible - in the present case the Assessing Officer exceeded his authority in invoking Section 154 of the Act and the Tribunal below committed substantial error of law in affirming the unauthorised act of the Assessing Officer - Decided in favour of the assessee

Summary

Issues Involved:
1. Scope of Section 154 of the Income-tax Act, 1961 for rectification of mistakes.
2. Deduction under Section 80M of the Income-tax Act, 1961 and whether it should be based on actual or notional expenditure.
3. Authority of the Assessing Officer to invoke Section 154 in the given circumstances.

Issue-wise Detailed Analysis:

1. Scope of Section 154 of the Income-tax Act, 1961 for Rectification of Mistakes:
The primary issue was whether the Assessing Officer (AO) could rectify the assessment order under Section 154 of the Income-tax Act, 1961. The court emphasized that Section 154 allows rectification only for mistakes apparent on the face of the record. A mistake that requires a long-drawn process of reasoning or involves two opinions is not considered apparent. The court concluded that the AO exceeded his authority under Section 154, as the rectification was based on notional expenses rather than actual expenses. The court cited the Supreme Court's decision in Deva Metal Powder (P) Ltd Vs. Commissioner Trade Tax, Uttar Pradesh, which clarified that rectification should not involve a revision or review of the order but should correct only patent errors.

2. Deduction under Section 80M of the Income-tax Act, 1961:
The court analyzed whether the deduction under Section 80M should be based on actual or notional expenditure. It was noted that the AO had reduced the deduction by calculating proportionate management expenses on a notional basis, which was not permissible. The court referred to the Supreme Court's decision in Distributors (Baroda) P. Ltd., which stated that the deduction under Section 80M should be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act, not the full amount received. The court emphasized that only actual expenditure incurred in earning the dividend should be deducted, not a notional expense.

3. Authority of the Assessing Officer to Invoke Section 154:
The court examined whether the AO had the authority to invoke Section 154 in the given circumstances. It was found that there was no material on record to assess the actual expenditure incurred by the assessee in earning the dividend. The AO's rectification was based on notional expenses, which was contrary to the law laid down by the Division Bench of the Calcutta High Court in CIT Vs. United Collieries Ltd. The court concluded that the AO's action was unauthorized and that the Tribunal erred in affirming this action.

Conclusion:
The court set aside the orders of the Tribunal and the AO, allowing the appeal. It answered both formulated questions against the Revenue, stating that the AO's rectification under Section 154 was not justified, and the Tribunal's rejection of the appellant's contention was arbitrary and unreasonable. The court highlighted that rectification should be based on actual expenditure, not notional, and emphasized the limited scope of Section 154 for correcting only apparent mistakes.