2018 (11) TMI 1933 - AT - Income Tax

Validity of rectification proceedings u/s 154 - assessment of income declared in survey u/s 133A - AO made addition on account of declaration of excess stock in the course of survey - AR submitted that the AO has carried out the exercise of rectification on the premise that the entire amount admitted in the course of survey ought to have been offered to tax without making all sorts of claims of expenditure thereon; whereas the only expenditure that increased was restricted to the partners salary - HELD THAT - The contention of Revenue that the claim of expenditure by way of partners salary on application of the provisions of Section 40(b) of the Act is not an allowable claim, merely because additional income admitted is reduced, is devoid merit as the assessee firm is entitled to compute salary in accordance with the provisions of section 40(b) of the Act. It is settled position of law that the scope of rectification u/s 154 is restricted to mistakes apparent from the record, like mathematical or typographical errors, and not something that has to be established by way of a long drawn out process of reasoning on which there are two opinions as in the case on hand, where both the AOs involved hold different views. As considering the principles laid down in the case of T. S. Balaram, ITO Vs. Volkart Brothers 1971 (8) TMI 3 - SUPREME COURT we are of the considered opinion that the rectification carried out by the AO in the case on hand does not fall within the scope on ambit of mistake apparent from the record. We, therefore, hold that the exercise undertaken by the AO is not in accordance with law, since the issue in question being a debatable one, with conflicting opinions of two AO s, the second AO could not to have resorted to proceedings u/s 154 of the Act and consequently set aside the impugned orders of the authorities below. The original order of assessment passed u/s 143(3) of the Act vide order dated 26.03.2014 for Assessment Year 2012-13 determining the assessee s income is accordingly restored.

Summary

Issues Involved:
1. Validity of rectification proceedings under Section 154 of the Income Tax Act.
2. Justification of the addition of Rs. 13,40,040/- on account of excess stock.
3. Allowability of partners’ salary as an expenditure.
4. Applicability of Section 115BBE of the Income Tax Act.
5. Liability to pay interest under Sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Validity of Rectification Proceedings under Section 154:
The primary issue raised was the validity of the rectification proceedings initiated by the AO under Section 154. The assessee argued that the rectification was not warranted as there was no "mistake apparent from the record." The AO had initially accepted the income declared by the assessee, including the additional income of Rs. 16,61,954/-. However, a subsequent AO initiated rectification proceedings, enhancing the assessed income by Rs. 13,40,040/- for excess stock declared during a survey. The Tribunal held that the scope of rectification under Section 154 is limited to obvious and patent mistakes, not debatable issues requiring a long-drawn process of reasoning. Since the issue involved conflicting opinions of two AOs, it was deemed debatable and not suitable for rectification under Section 154.

2. Justification of the Addition of Rs. 13,40,040/-:
The AO's rectification added Rs. 13,40,040/- to the assessee's income, arguing that the entire additional income declared during the survey should have been offered to tax without any claims for expenditure. The assessee contended that the additional income was already included in the returned income, and the only change was the partners’ salary. The Tribunal found that the additional income was indeed included in the assessee's profit and loss account and upheld the assessee's claim.

3. Allowability of Partners’ Salary as an Expenditure:
The Revenue argued that the partners' salary claimed by the assessee was not permissible. The assessee demonstrated that the salary was computed in accordance with Section 40(b) of the Act and was included in the returned income. The Tribunal agreed with the assessee, noting that the claim was allowable under the provisions of the Act and that the issue was debatable, thus not suitable for rectification under Section 154.

4. Applicability of Section 115BBE:
The Revenue alternatively argued that under Section 115BBE, which bars any claim of expenditure for additions under Sections 68, 69, 69A, 69B, and 69C, the assessee's claim was not permissible. The assessee countered that Section 115BBE was applicable from Assessment Year 2013-14 onwards and not for the year under consideration (Assessment Year 2012-13). The Tribunal concurred with the assessee, ruling that Section 115BBE did not apply to the assessment year in question.

5. Liability to Pay Interest under Sections 234B and 234C:
The assessee denied liability to pay interest under Sections 234B and 234C, arguing that there was no additional tax liability. The Tribunal did not specifically address this issue in detail, as the primary issue of rectification under Section 154 was decided in favor of the assessee, thereby restoring the original assessment order.

Conclusion:
The Tribunal held that the rectification order under Section 154 was not justified as the issue was debatable and involved conflicting opinions. The original assessment order determining the assessee’s income at Rs. 10,53,220/- was restored, and the assessee's appeal was allowed. The decision emphasized the limited scope of rectification under Section 154 to clear and obvious mistakes, not debatable issues.