2022 (11) TMI 386 - HC - Income Tax

Rectification of mistake u/s 154 - Reopening of assessment u/s 147 - Disallowance of write off of the bad debt - objection raised by the Audit Party on the sequence of set-off of losses - HELD THAT - There was no mistake apparent in the computation of income in the assessment order dated 21st December 2019 within the meaning of Section 154 of the Act which could have been a subject matter of rectification. No find merit in the submission of the learned counsel for the Petitioner that the rectification order dated 15th February 2021 effectively resulted in re-assessment of income and not rectification. She states that in the facts of this case even a reassessment on the basis of the audit objection was not permissible. Upon a perusal of the counter-affidavit it is borne out that the objection raised by the Audit Party on the sequence of set-off of losses is an opinion on law and that the AO had passed the rectification order only on the basis of the direction of the Audit Officer. The AO himself was not of the independent opinion that the original assessment order passed by him on 21st December 2019 was erroneous in law. As it would be instructive to refer to the decision of the Supreme Court in M/s Indian Eastern Newspaper Society New Delhi. 1979 (8) TMI 1 - SUPREME COURT wherein the Court held that an audit opinion by itself with respect to application or interpretation of law cannot be treated by the Income Tax Officer as information for reopening the assessment. In the facts of the present case there was no new or fresh material before the AO except the opinion of the Audit Party. Since it is settled law that mere change of opinion cannot form the basis for initiating reassessment proceedings as per the decision of the Supreme Court in CIT Vs. Kelvinator of India Ltd. 2010 (1) TMI 11 - SUPREME COURT no reassessment could also have been permissible in the facts of the present case. It is also not apparent from record if the AO agreed with the objection of the Audit Party. Infact the contents of the counter affidavit evidences that the AO was satisfied with the initial computation and has acted only upon the direction of the Audit Party while passing the impugned order. Lastly as regards the objection of the counsel for the Petitioner that the impugned rectification order is barred under Section 5 of the Act of 2020 we find that the bar of the said provision is not attracted in the facts of his case. She contends that the provisions of the Act of 2020 have an overriding effect on the provisions of the Act of 1961 insofar as the determination of the tax arrears under Section 5 of the Act of 2020 is to be made on the basis of the facts as they existed on the date of the filing of the application and the Revenue was precluded from undertaking any rectification after receipt of the Forms 1 and 2. The right of the Revenue to initiate any further proceedings with respect to the calculation of the disputed tax arrears are foreclosed after Form 3 has been issued by the Designated Authority under Section 5(1) of the Act of 2020 determining the full and final settlement of tax arrears. The Form 3 has admittedly not been issued in the present matter and therefore the rigour of Section 5(3) of the Act of 2020 is not attracted in the facts of this case. Further in the facts of this case as per record the rectification proceeding was initiated consequent to an audit objection dated 31st August 2020 even though the rectification order finally came to be passed on 15th February 2021 and therefore we are unable to agree with the contention of the Petitioner that the rectification proceedings were initiated only upon receipt of the application of the assessee on 28th December 2020 under the Act of 2020. Since we have held that the rectification order itself was incorrect and as held above we have set aside the impugned rectification order dated 15th February 2021. We also set aside the consequential order of the Respondent rejecting the Petitioner s application for settlement under the DTVSV Scheme on the ground that the tax liability was not ascertained and restore the application to the file of the AO as on 28th December 2020. We direct the Respondent to determine the amount payable by the assessee in accordance with the provisions of the Act of 2020 and grant a Certificate to the assessee containing particulars of tax arrears and amount payable in accordance with law within a period of two weeks.

Summary

Issues Involved:
1. Quashing of the rectification order dated 15th February 2021.
2. Direction to reconsider the application for settlement of disputed tax under the Direct Tax Vivad Se Vishwas Act, 2020 (DTVSV Scheme).
3. Legality of the modification of the assessment order dated 21st December 2019.
4. Validity of the rectification under Section 154 of the Income Tax Act, 1961.
5. Impact of audit objections on the assessment order.
6. Application of the Circular No. 26 (LXXVI-3) dated 7th July 1955.
7. Reassessment based on audit objections.
8. Bar under Section 5 of the Act of 2020.

Issue-wise Detailed Analysis:

1. Quashing of the rectification order dated 15th February 2021:
The court held that the rectification order dated 15th February 2021 was incorrect. The rectification was based on an audit objection that was not a mistake apparent on the record but a debatable issue of law. The court found that the original assessment order dated 21st December 2019 did not contain any apparent mistake that warranted rectification under Section 154 of the Income Tax Act, 1961.

2. Direction to reconsider the application for settlement of disputed tax under the DTVSV Scheme:
The court directed the Respondent to reconsider the application for settlement of disputed tax under the DTVSV Scheme. The court set aside the consequential order rejecting the Petitioner's application for settlement under the DTVSV Scheme and restored the application to the file of the AO as on 28th December 2020. The Respondent was directed to determine the amount payable by the assessee in accordance with the provisions of the Act of 2020 and grant a Certificate to the assessee within two weeks.

3. Legality of the modification of the assessment order dated 21st December 2019:
The court found that the modification of the assessment order dated 21st December 2019 was solely based on the audit objection and not on any independent opinion of the AO. The court noted that both the original and modified computations were permissible under the Act of 1961, but the modification resulted in an increased tax liability due to a change in the rate at which the tax was calculated.

4. Validity of the rectification under Section 154 of the Income Tax Act, 1961:
The court held that the rectification under Section 154 was not valid as it was based on a debatable issue rather than an apparent mistake. The court cited the Supreme Court's decision in T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay v. M/s Volkart Brothers, Bombay, which held that a mistake apparent on the record must be obvious and not something that requires a long-drawn process of reasoning.

5. Impact of audit objections on the assessment order:
The court found that the audit objection was an opinion on the law and not a mistake apparent from the record. The court referred to the Supreme Court's decision in M/s Indian & Eastern Newspaper Society, which held that an audit opinion on a point of law cannot be regarded as 'information' for reopening the assessment.

6. Application of the Circular No. 26 (LXXVI-3) dated 7th July 1955:
The court noted that the Circular No. 26 (LXXVI-3) allowed the assessee to select a sequence of set-off that was more beneficial to it. The audit objection was raised in ignorance of this Circular, which was relevant to the sequence of set-off of losses.

7. Reassessment based on audit objections:
The court held that reassessment based on the audit objection was not permissible. The court cited the Supreme Court's decision in CIT Vs. Kelvinator of India Ltd., which held that mere change of opinion cannot form the basis for initiating reassessment proceedings.

8. Bar under Section 5 of the Act of 2020:
The court found that the bar under Section 5 of the Act of 2020 was not attracted in this case as the Form 3 had not been issued. The rectification proceedings were initiated consequent to an audit objection dated 31st August 2020, and not upon receipt of the application of the assessee on 28th December 2020 under the Act of 2020.

Conclusion:
The writ petition was disposed of with directions to set aside the rectification order dated 15th February 2021 and the consequential order rejecting the Petitioner's application for settlement under the DTVSV Scheme. The Respondent was directed to determine the amount payable by the assessee and grant a Certificate in accordance with the provisions of the Act of 2020 within two weeks.