2002 (5) TMI 20 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Income tax Officer was justified in passing order under section 154 of the Income-tax Act, 1961? - Rectification Of Mistakes, Representative Assessee, Trustee - Tribunal was right in holding that since such an issue was not raised by the assessee-trust during the assessment proceedings by stating that the income in question was not taxable, it could not be raised now in the rectification proceedings. - For the reasons that we have given hereinabove, we hold that the Income tax Officer was justified in passing the rectification order under section 154 of the said Act.

Summary

Issues Involved:
1. Justification of the Income-tax Officer's order under section 154 of the Income-tax Act, 1961.
2. Applicability of the correct rate of tax to the share income of each beneficiary.
3. Consideration of the Central Board of Direct Taxes (CBDT) circular.
4. Accumulation of income and its taxability.
5. Debatable issues in rectification proceedings.

Detailed Analysis:

1. Justification of the Income-tax Officer's Order under Section 154:
The core issue was whether the Income-tax Officer (ITO) was justified in passing an order under section 154 of the Income-tax Act, 1961, to rectify a mistake in the assessment of the assessee family trust for the assessment year 1980-81. The ITO noticed that the income falling to the share of each beneficiary was taxed at the rate applicable to the share of each beneficiary instead of the individual rate of tax calculated separately and applicable to the total income of each beneficiary. The ITO issued a notice under section 154, proposing rectification of this mistake.

2. Applicability of the Correct Rate of Tax:
The ITO argued that the correct rate of tax should be applied to the total income of each beneficiary, including their share of the trust income. The Tribunal upheld this view, stating that the provisions of section 161 of the Act were clear and unambiguous, and the mistake in calculating the rate of tax could be rectified under section 154. The Tribunal restored the rectification order, emphasizing that the total income of the beneficiary, including other income, should be considered for tax rate purposes.

3. Consideration of the CBDT Circular:
The assessee contended that the CBDT circular dated February 24, 1967, should prevent the rectification. The circular directed that once the Department chose to tax either the trustee or the beneficiary, it could not assess the other simultaneously. However, the Tribunal found this circular irrelevant to the rectification issue, as it did not pertain to correcting a mistake in the original assessment but to the choice of taxing either the trustee or the beneficiary.

4. Accumulation of Income and Its Taxability:
The assessee argued that since the income was to be accumulated for nineteen years and not paid to the beneficiaries immediately, it should not be taxed. The Tribunal rejected this argument, stating that the income accrued each year and was credited to the beneficiaries' accounts, even though the payment was deferred. This argument was not raised during the original assessment, and therefore, could not be considered in the rectification proceedings.

5. Debatable Issues in Rectification Proceedings:
The assessee claimed that the issue was debatable and could not be rectified under section 154, which only allows for correction of apparent mistakes. The Tribunal held that the mistake in applying the correct tax rate was obvious and not debatable. The Tribunal referred to various judicial decisions, including those of the Supreme Court, to support the view that a glaring and obvious mistake of law could be rectified under section 154.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the ITO was justified in passing the rectification order under section 154. The Court concluded that the mistake in applying the correct rate of tax was apparent from the record and could be rectified. The question referred to the High Court was answered in the affirmative, against the assessee and in favor of the Revenue.