1982 (2) TMI 127 - AT - Income Tax

Issues Involved:
1. Period of limitation under the first proviso to section 40A(3) of the Income-tax Act, 1961.
2. Validity of the ITO's rectification order dated 8-2-1978 under section 154.
3. Applicability of section 154(7) versus the first proviso to section 40A(3) for rectification.

Issue-wise Detailed Analysis:

1. Period of Limitation under the First Proviso to Section 40A(3):
The primary issue revolves around the period of limitation for rectifying a mistake under the first proviso to section 40A(3) of the Income-tax Act, 1961. The assessment year in question is 1971-72, with the accounting year ending on 31-3-1971. The assessee made payments on 27-5-1971, exceeding Rs. 2,500 in cash, which contravened section 40A(3). The ITO issued a notice under section 154 on 21-9-1976 and passed a combined order under section 154 and section 147 on 28-2-1977, intending to disallow Rs. 12,685. However, the ITO failed to add this amount to the total income. The ITO issued another notice under section 154 on 11-10-1977 and 28-1-1978 and passed an order on 8-2-1978 to rectify the omission. The assessee contended that this rectification was beyond the period of limitation specified in the first proviso to section 40A(3), which should have been completed by 31-3-1977.

2. Validity of the ITO's Rectification Order Dated 8-2-1978 under Section 154:
The ITO's rectification order dated 8-2-1978 was challenged by the assessee on the grounds of it being time-barred. The assessee argued that the rectification should have been completed by 31-3-1977, as per the first proviso to section 40A(3). The AAC initially accepted the assessee's plea and set aside the ITO's order dated 8-2-1978. However, the AAC later dismissed the assessee's appeal, agreeing with the ITO's stance that the rectification was within the period of limitation specified in section 154(7). The Tribunal was divided on this issue, with the Judicial Member considering the rectification within time, while the Accountant Member viewed it as time-barred.

3. Applicability of Section 154(7) versus the First Proviso to Section 40A(3) for Rectification:
The Tribunal had to decide whether the rectification should be governed by the general provisions of section 154(7) or the special provisions of the first proviso to section 40A(3). The Judicial Member opined that the order dated 28-2-1977 provided a fresh starting point for limitation under section 154, making the rectification on 8-2-1978 within the period of limitation. Conversely, the Accountant Member argued that the period of limitation under the first proviso to section 40A(3) was absolute, and any rectification had to be completed by 31-3-1977. The Accountant Member supported his view with various High Court decisions and legal commentaries.

Conclusion:
The third member, after considering the arguments and legal provisions, concluded that the period of limitation under the first proviso to section 40A(3) is a special provision that overrides the general provisions of section 154(7). The rectification had to be completed within four years from the end of the assessment year next following the accounting year in which the payment was made, i.e., by 31-3-1977. Since the actual amendment was carried out only on 8-2-1978, it was clearly barred by limitation. Consequently, the ITO's order dated 8-2-1978 was held to be invalid in law.

Final Decision:
The case was referred back to the Bench for disposal in accordance with the opinion that the rectification order dated 8-2-1978 was invalid due to being passed beyond the period of limitation specified in the first proviso to section 40A(3).

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