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2012 (9) TMI 46 - AT - Income TaxRevision u/s 263 / rectification u/s 154 - unascertained liability as shown in P/L A/C in view of the provisions of Explanation(c) to Sec 115JB - Held that - As the order u/s 263 was passed the law was that provision for bad and doubtful debts cannot be added to the profit as per profit and loss account while computing book profit u/s 115JB . The retrospective amendment to the provisions of Sec.115JB cannot give power to the ACIT to rectify his order u/s 263 , which as on the date when the order u/s 263 was passed was in accordance with law - What could not have been done in the order u/s 263 as on the date when it was passed cannot be done by exercise of powers of rectification u/s 154, thus the impugned order of CIT rectifying his order u/s 263 by exercising powers u/s 154 cannot be sustained - in favour of assessee.
Issues:
1. Rectification of order u/s 154 of the IT Act by CIT-III. 2. Addition of provision for bad and doubtful debts to book profits under Sec.115JB. 3. Retrospective amendment and its impact on rectification powers of CIT. Issue 1: Rectification of order u/s 154 of the IT Act by CIT-III The case involved an appeal by the assessee against the order passed by CIT-III under section 154 of the IT Act, rectifying his earlier order under section 263 of the IT Act, 1961. The CIT had issued a show cause notice to the assessee regarding the provision for bad and doubtful debts in the profit and loss account, which he believed should have been added to the book profits under Explanation(c) to Sec.115JB of the Act. The assessee contested this rectification, arguing that the provision for bad and doubtful debts did not constitute an unascertained liability, citing a Supreme Court decision to support their position. Issue 2: Addition of provision for bad and doubtful debts to book profits under Sec.115JB The CIT, after considering the submissions of the assessee, agreed that the provision for bad and doubtful debts should not be added to the net profit as shown in the profit and loss account. However, he directed the AO to consider adding the amount under clause-(b) of Explanation to Sec.115JB of the Act, which pertains to amounts carried to reserves. Subsequently, the CIT proposed to rectify his order based on a retrospective amendment to the law, adding the sum of provision for bad and doubtful debts to the profit and loss account for computation of book profits under Sec.115JB. The assessee argued that the rectification was not a mistake apparent from the record, as the law at the time of the original order did not include the amendment. Issue 3: Retrospective amendment and its impact on rectification powers of CIT In the appeal before the Tribunal, the assessee relied on a Supreme Court decision to support their argument that the rectification based on a retrospective amendment was not justified. The Tribunal, in line with the argument presented, held that the retrospective amendment to the provisions of Sec.115JB of the Act did not empower the CIT to rectify his order under section 263 of the Act. The Tribunal emphasized that what could not have been done in the original order under section 263 could not be rectified through section 154. Consequently, the Tribunal quashed the order of the CIT and allowed the appeal of the assessee. In conclusion, the Tribunal ruled in favor of the assessee, highlighting that the rectification based on a retrospective amendment was not valid, as the original order under section 263 was in accordance with the law at the time it was passed.
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