2023 (8) TMI 508 - AT - Income Tax

Validity of rectification order passed u/s 154 - incorrect carry forward and set off of losses for the AY 2007-08 and 2008-09 against the income for the year under consideration - mistake apparent from the record or not? - scope of debatable issue - AO vide order passed u/s 154 treated the interest income received by the assessee as income from other sources and set off the brought forward losses against the business income after reducing the aforesaid interest income. HELD THAT - AO passed the rectification order u/s 154 by re-characterising the interest income and treating the same as income from other sources instead of income from the business as claimed by the assessee. CIT(A) also rejected the submission of the assessee on the basis that the assessee has not submitted any evidence to prove that the interest receipts do have a business nexus. During the hearing, submissions filed by the assessee before the AO during the rectification proceedings, wherein it was submitted that the interest income is earned from the business activity of the assessee firm. Thus, from the above, it is evident that the AO and learned CIT(A) disagreed with the submissions of the assessee in the rectification proceedings and seeks to examine the issue regarding characterisation of the interest income. Accordingly, issue of whether the interest income is income from other sources is a debatable issue and cannot be said to be covered under the ambit of the expression mistake apparent from the record . Hon'ble Supreme Court in T.S. Balram, ITO v/s Volkart Brothers 1971 (8) TMI 3 - SUPREME COURT held that for initiating proceedings under section 154 of the Act, the mistake apparent from record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. In view of the above, as is evident from the facts available on record, the issue of interest income on which rectification under section 154 of the Act was done by the AO in the present case is open to divergent views, and the same requires long drawn process of examination - rectification order passed u/s 154 of the Act on this issue clearly falls beyond the ambit of the expression mistake apparent from the record . Decided in favour of assessee.

Summary

Issues:
The appeal against the order passed under section 250 of the Income Tax Act, 1961 by the Commissioner of Income Tax (Appeals) for the assessment year 2010-11.

Rectification Order Dispute:
The only dispute raised by the assessee is against the rectification order passed by the Assessing Officer under section 154 of the Act, which was upheld by the Commissioner of Income Tax (Appeals).

The assessee, a partnership firm engaged in manufacturing, filed its return of income declaring a total income of Rs. nil. The Assessing Officer computed the total income at Rs. nil after setting off brought forward business loss for the assessment years 2007-08 and 2008-09. Subsequently, the Assessing Officer treated interest income received by the assessee as income from other sources and set off the losses against the business income, resulting in the assessment of total income at Rs. 10,18,211.

The Commissioner of Income Tax (Appeals) dismissed the appeal, stating that no evidence was submitted by the assessee to prove the business nexus of the interest receipts. The Commissioner upheld the rectification order, emphasizing that the interest income was correctly treated as income from other sources.

Judgment:
The Tribunal found that the Assessing Officer re-characterized the interest income as income from other sources instead of business income claimed by the assessee. The Tribunal noted that the issue of whether the interest income should be categorized as income from other sources was debatable and not a clear "mistake apparent from the record."

Referring to the Supreme Court decision in T.S. Balram, ITO v/s Volkart Brothers, the Tribunal emphasized that for rectification under section 154, the mistake must be obvious and patent, not requiring a long process of reasoning with differing opinions. As the interest income issue allowed for divergent views and required a detailed examination, the rectification order was deemed beyond the scope of a "mistake apparent from the record."

Therefore, the Tribunal set aside the order passed by the Commissioner of Income Tax (Appeals) upholding the rectification order and allowed the grounds raised by the assessee.

Result:
The appeal by the assessee against the rectification order was allowed by the Tribunal.