1989 (3) TMI 160 - AT - Income Tax

Summary

Issues Involved:
1. Whether the CIT(A) erred in quashing the orders under section 154 of the Income-tax Act, 1961, passed by the Income-tax Officer for the assessment years 1977-78 and 1978-79.

Detailed Analysis:

Issue 1: Quashing of Orders under Section 154

Background:
The primary issue revolves around the rectification orders passed by the Income-tax Officer (ITO) under section 154 of the Income-tax Act for the assessment years 1977-78 and 1978-79. The ITO had initially allowed relief under section 80M on the gross dividends received by the assessee. However, following the amendment of section 80AA with retrospective effect from 1-4-1968, the ITO sought to rectify the original assessments by deducting expenses attributable to earning the dividends from the gross amount, thereby reducing the relief under section 80M.

CIT(A) Decision:
The assessee appealed against the rectification orders, arguing that the rectifications were unjustified. The CIT(A) agreed with the assessee, stating that the ITO could not apply a formula to estimate expenses attributable to earning the income in a rectification order. The CIT(A) relied on the Supreme Court decision in T.S. Balaram, ITO v. Volkart Bros., which held that a rectification under section 154 could not be made if the matter was debatable. Consequently, the CIT(A) quashed the rectification orders for both years.

Department's Argument:
The department contended that the CIT(A) erred in his decision. It argued that relief under section 80M should be computed on the net dividend income, not the gross amount, as clarified by the retrospective amendment of section 80AA. Therefore, the original relief granted on the gross amount constituted a mistake apparent from the record, rectifiable under section 154.

Assessee's Argument:
The assessee maintained that the original assessments were made on the footing that no expenses were incurred for earning the dividends, and thus, there was no mistake apparent from the record. The method applied by the ITO to estimate the expenses was open to challenge and debate, making it unsuitable for rectification under section 154.

Tribunal's Analysis:
The Tribunal considered the contentions of both parties and reviewed the facts on record. It noted that the original assessments included the entire gross dividends in the total income, implying no expenses were deducted for earning the dividends. Therefore, it could not be said that there was a mistake apparent from the record. Additionally, the Tribunal agreed with the assessee that the method adopted by the ITO to estimate expenses was neither free from doubt nor from challenge and debate. Consequently, the Tribunal upheld the CIT(A)'s order and dismissed the department's appeals.

Separate Opinion by Shri S.K. Jain, J.M.:
Shri S.K. Jain expressed his inability to agree with the majority decision. He argued that the ITO had jurisdiction to rectify the mistake under section 154, as the allowance of relief on the gross dividends was a mistake apparent from the record following the retrospective amendment of section 80AA. He emphasized the distinction between detecting a mistake and amending the order in consequence of rectification. According to him, once a mistake is detected, the amendment does not need to be free from debate. He cited the Bombay High Court's decision in Blue Star Engg. Co. (Bombay) (P.) Ltd. v. CIT to support his view. He also disagreed with the Tribunal's earlier decisions, arguing that they did not spell out the correct law and needed reconsideration. He proposed remitting the case to the CIT(A) for a decision on the merits.

Third Member Decision by Shri Ch. G. Krishnamurthy, President:
The Third Member, Shri Ch. G. Krishnamurthy, agreed with the Judicial Member, Shri S.K. Jain. He noted that the rectification orders were within the period of limitation and that the power of rectification was traceable to section 154, not the amending Act. He emphasized that the mistake in the original orders was apparent from the record in light of section 80AA. He concluded that the ITO was justified in rectifying the assessments and that the CIT(A) should decide the quantum of allowable expenditure on the merits.

Conclusion:
The majority opinion upheld the CIT(A)'s decision to quash the rectification orders, agreeing that the method used to estimate expenses was debatable and not suitable for rectification under section 154. However, the dissenting opinion, supported by the Third Member, held that the ITO had the jurisdiction to rectify the mistake and remitted the case to the CIT(A) for a decision on the merits.