1978 (12) TMI 91 - AT - Income Tax

Summary

Issues:
- Rectification of deduction allowed by ITO
- Notice requirement under s. 154(3)
- Mistake apparent from record for rectification under s. 154

Analysis:
The judgment by the Appellate Tribunal ITAT MADRAS-A involved the rectification of a deduction allowed by the Income Tax Officer (ITO) to the estate of late A. Rathnavel Gounder. The appellant had borrowed funds from M/s V.D. Mehta Co., which were then advanced to M/s Khadder Kodi Beedi Co. Initially, the ITO allowed the interest payment as a deduction, but later withdrew it citing that the interest was not related to the appellant's business. The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, leading the appellant to appeal to the Tribunal. The appellant argued that the rectification order lacked a notice under s. 154(3) and that the mistake rectified was not apparent from the record.

The Tribunal considered the appellant's contentions and the departmental representative's arguments. The ITO had pointed out discrepancies in the utilization of borrowed funds, leading to the rectification order. However, the appellant clarified that the funds were indeed used for the business, and the interest should be deductible against receipts from M/s Khadder Kodi Beedi Co. The Tribunal emphasized that a mistake apparent from the record must be obvious and not a matter of debate. Since the issue of whether the borrowed funds were used for business purposes was debatable, the rectification order was deemed unsustainable.

The Tribunal highlighted the significance of issuing a notice under s. 154(3) before rectifying an assessment. It noted that the notice requirement was not merely procedural but formed the foundation for exercising rectification jurisdiction. Citing a previous case, it emphasized that failure to issue a notice rendered the rectification order legally unsustainable. Ultimately, the Tribunal allowed both appeals, ruling in favor of the appellant due to the lack of a clear and indisputable mistake warranting rectification.