1986 (6) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the rectification order under section 154 of the Income-tax Act, 1961.
2. Limitation period for rectification under section 154.
3. Whether the rectification involved a debatable issue.

Issue-wise Detailed Analysis:

1. Validity of the Rectification Order under Section 154:
The Tribunal held that the Income-tax Officer (ITO) was not justified in rectifying the order under section 154 of the Income-tax Act, 1961. The rectification involved a highly debatable issue, which is not permissible under section 154. The Tribunal noted that the entire dividend had been declared out of the current year's profits, and this finding had not been disturbed by any higher authority. The Tribunal accepted the contention that the loss carried forward could not be conveniently included within the amount on which income-tax is not payable or any allowance.

2. Limitation Period for Rectification under Section 154:
The Tribunal and the Appellate Assistant Commissioner found that the rectification was barred by time. The original assessment was made on February 17, 1959, and the reassessment on September 27, 1962. The period of four years prescribed under section 154(7) of the Act of 1961 had expired, and the ITO had no right to initiate rectification of his earlier order. The learned advocate for the Revenue contended that the mistake occurred in the order passed on June 29, 1967, and the rectification was within four years from this date. However, the Tribunal upheld that the rectification was time-barred.

3. Whether the Rectification Involved a Debatable Issue:
The Tribunal held that the issue of whether the loss carried forward should increase the sum out of which dividends were declared was a debatable issue. The relevant portions of section 16 of the Indian Income-tax Act, 1922, were considered, and it was noted that the losses carried over from previous years were neither profits nor gains of the company not included in its total income, nor income on which income-tax was not payable, nor an allowance made in computing the profits and gains of the company. The Tribunal cited the Supreme Court decision in Volkart Brothers [1971] 82 ITR 50, which held that a debatable issue could not be rectified under section 154.

Conclusion:
The Tribunal dismissed the appeal of the Revenue and held that the rectification order under section 154 was invalid as it was barred by limitation and involved a debatable issue. The court answered question No. 2 in the affirmative, in favor of the assessee, and declined to answer question No. 1. The reference was disposed of with no order as to costs.