2022 (5) TMI 46 - AT - Income Tax

Rectification of mistake u/s 154 - excess interest expenses allowed - AO revealed that partnership deed had not authorized any payment of interest to any partner however the Assessee had claimed deduction being interest paid to the partners in its computation of income/ P L account - HELD THAT - The Hon ble Apex Court in the case of TS Balaram Vs. Volkart Brothers 1971 (8) TMI 3 - SUPREME COURT clearly held that a mistake apparent on the record must be an obvious and patent mistake and not something which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record. A decision on a debatable point of law is not a mistake apparent from the record. Coming to the instant case it is not in dispute that the AO has passed the order u/s 154 of the Act on a debatable issue which cannot be construed rectification of any mistake apparent from the recordand by virtue of provisions of section 154 of the Act the AO is not empowered to do so hence respectfully following the aforesaid dictum of the Hon ble Apex Court we are inclined to quash the order passed by the ld. AO u/s 154 of the Act itself. Ordered accordingly. Consequently the impugned order is set aside. In the result the appeal filed by the Assessee is allowed.

Summary

Issues:
Challenge to order u/s 154 of the Income-tax Act, 1961 for the assessment year 2013-14 regarding disallowance of interest paid to partners.

Analysis:
1. The Assessee filed an appeal against the order dated 28.09.2018 passed by the Ld. Commissioner of Income-tax (Appeals)-10, New Delhi, upholding the order passed by the AO u/s 154 of the Act for the assessment year 2013-14. The AO disallowed the claim of interest paid to partners amounting to Rs. 13,47,480/- as it was not authorized by the partnership deed, invoking section 40(b)(ii) of the Act.

2. The Assessee failed to respond adequately during the assessment proceedings despite notices issued by the AO. The Assessee later submitted a supplementary partnership deed dated 11.09.2012 to rectify the issue of interest payment to partners. However, the Ld. Commissioner did not admit the additional evidence under Rule 46A of the IT Rules and confirmed the disallowance of interest payment.

3. The Assessee contended that the disallowance was a debatable issue and not a clear mistake warranting rectification u/s 154 of the Act. The Tribunal referred to the decision in TS Balaram Vs. Volkart Brothers 82 ITR 50 (SC) stating that a decision on a debatable point of law is not a mistake apparent from the record.

4. The Tribunal held that the AO's order u/s 154 on a debatable issue did not qualify as a mistake apparent on the face of the record. Citing the Supreme Court's ruling, the Tribunal concluded that the AO lacked the authority to rectify such debatable issues under section 154 of the Act. Therefore, the Tribunal quashed the order passed by the AO u/s 154 and allowed the Assessee's appeal, setting aside the impugned order.

5. The Tribunal emphasized that a debatable point of law does not constitute a mistake apparent from the record, and the AO cannot rectify such issues under section 154. As a result, the appeal filed by the Assessee was allowed, and the impugned order was set aside.