2006 (7) TMI 267 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the order under section 154 of the Income-tax Act, 1961.
2. Rejection of the assessee's petition regarding the issue of shares worth Rs. 53 lakhs against outstanding interest.
3. Determination of whether there was a mistake apparent from the record warranting deduction under section 43B.

Issue-wise Detailed Analysis:

1. Validity of the order under section 154 of the Income-tax Act, 1961:
The assessee challenged the first appellate order, asserting that the order under section 154 was bad in law, violative of principles of natural justice, and void ab initio. The assessee had moved an application under section 154 to rectify an oversight in not claiming a deduction for interest paid by converting it into shares. The Assessing Officer (AO) rejected this application, stating that no such claim was made in the return of income or during the proceedings under section 154. The first appellate authority upheld this rejection. The Tribunal considered whether the application under section 154 was maintainable and whether the AO's order was consistent with the provisions of the Income-tax Act.

2. Rejection of the assessee's petition regarding the issue of shares worth Rs. 53 lakhs against outstanding interest:
The assessee-company issued shares worth Rs. 53 lakhs to financial institutions against outstanding interest due to them, but due to oversight, did not claim this interest as a deduction under section 43B in its return of income. The AO rejected the petition on the grounds that no such claim was made in the return or during the subsequent proceedings. The Tribunal examined whether the lower authorities were justified in rejecting the application under section 154 and whether the materials available on record supported the assessee's claim for deduction.

3. Determination of whether there was a mistake apparent from the record warranting deduction under section 43B:
The Tribunal noted that the assessee had sufficient materials on record, including the Balance Sheet and a Note in Schedule-1, indicating the conversion of Rs. 53 lakhs into equity shares as per the Scheme sanctioned by BIFR. Despite this, the AO did not allow the deduction, leading to the question of whether this constituted a mistake apparent from the record. The Tribunal referred to various judicial precedents and CBDT Circular No. 669, which clarified that applications under section 154 could be entertained if the sums were paid on or before the due dates but omitted to be furnished with the return. The Tribunal concluded that the AO's failure to allow the deduction was a mistake apparent from the record and directed the AO to rectify this mistake under section 154.

Conclusion:
The Tribunal held that the assessee was entitled to the deduction under section 43B for the interest converted into shares, and the AO's failure to allow this deduction constituted a mistake apparent from the record. The Tribunal set aside the orders of the lower authorities and directed the AO to allow the application under section 154 on its merits. The appeal was allowed in favor of the assessee.