2009 (8) TMI 41 - HC - Income Tax

Specific Reserve - Deduction u/s 36(1)(viii) Retrospective effect of the amendment for calculated 40% of profit held that - during the assessment years in question, the entire total income of the assessee had to be taken into consideration. The assessee was not permitted to bifurcate his income into two heads i.e. one from long term finance investments and the other from other categories of business. This meant that his entire income, which obviously included losses, would have to be taken into account and on this 40% deduction was to be allowed regarding rectification u/s 154 held that - AO committed an error apparent by not taking the income/loss derived from other businesses while computing the total income. It is only after the amendment was brought about in the year 1996 that the assessee has been held entitled to deduction of 40% only on the income derived from long term financing business. This mistake can be rectified u/s 154

Summary

Issues:
1. Interpretation of Section 36(1)(viii) for calculating deduction on income from long term finance.
2. Application of Section 154 for rectifying errors in income tax assessment.

Analysis:
1. The judgment involved the interpretation of Section 36(1)(viii) of the Income Tax Act, 1961, for calculating deductions on income derived from long term finance. The appellant, engaged in long term industrial finance, claimed a 40% deduction on income from this specific business, excluding losses from other activities. The Income Tax Officer initially accepted these deductions. However, a notice under Section 154 was issued, stating that the appellant had not considered losses from other businesses while claiming deductions. The Department argued that total income, including losses, should be considered for calculating the deduction. The court held that prior to the 1996 amendment, the deduction was permissible from the total income, requiring consideration of all income sources, including losses. The amendment clarified that the deduction should be based on profits from long term finance only. The court concluded that the error in not considering losses from other businesses was apparent on the record, justifying rectification under Section 154.

2. The second issue addressed the application of Section 154 for rectifying errors in income tax assessment. The appellant argued that the Section only allows rectification of errors apparent on the face of the record, and in this case, there were two possible interpretations of the Section. However, the court emphasized that an error apparent on the record must be a glaring mistake. In this case, the failure to consider losses from other businesses while calculating the deduction was deemed an error apparent on the face of the record. The court held that the revenue was entitled to rectify this error under Section 154. Consequently, both questions were decided in favor of the revenue, rejecting the appeals filed by the assessee.

In conclusion, the judgment clarified the interpretation of Section 36(1)(viii) for calculating deductions on income from long term finance and affirmed the application of Section 154 for rectifying errors in income tax assessments. The court's decision favored the revenue, emphasizing the importance of considering total income, including losses, while determining deductions and rectifying errors apparent on the face of the record.