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2021 (8) TMI 566 - AT - Income TaxRectification of mistake u/s 154 - Merger of mistake in the order passed by the AO into the order passed by the CIT(A) and subsequent orders - Excess deduction u/s.36(1)(viia) - HELD THAT - We find that this is a concept being expounded by the Ld.CIT(A) that if a mistake has occurred in an order, the same is said to have merged in all the subsequent orders for that assessment year. In this regard, assessee pleaded that the AO, when he passed the order u/s.143(3) r.w.s. 147 has never proposed to correct the earlier error. As reopened for a specific reason. Even in the body of the order AO did not consider this issue of earlier mistake and in the computation, he only started with the income as per the last assessment order dated 13/10/2010. Hence, Ld. Counsel pleaded that by no stretch of imagination, it can be said that the AO while making the reassessment was proposing a correction. Hence, the earlier mistake cannot get merged with this reassessment order. We find that Ld.CIT(A) has passed a cryptic order on this issue. On what principle, he found that the mistake got merged in this order, needs due elaboration in light of the submissions of the Ld. Counsel of the assessee above. The aspects also need actual verification of assessment records. It is settled law that Ld. CIT(A) needs to pass a speaking order. Hence, we remit this issue to the file of Ld. CIT(A). The Ld.CIT(A) shall elaborate how the mistake can be said to have got merged in the reassessment order giving the jurisdiction u/s 154 with reference to a mistake, which actually occurred much earlier. At what stage, the proposal to correct the error was mooted. CIT(A) shall give the assessee proper opportunity of being heard and also examining the reassessment and other records. Thereafter, he shall pass an order as per law. As regards that assessee pleading on merits. We find that in a proceeding u/s. 154, the merits of the issue cannot be adjudicated. Moreover, in the order of Tribunal referred by assessee in grounds of appeal the matter was remitted to the file of AO. In the result, this appeal filed by the assessee stands allowed for statistical purpose. Disallowances u/s 14A - HELD THAT - It is apparent that said decision of Hon ble Supreme Court in Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT does not give a carte blanche to withdraw the relief granted u/s 14A. Or in other words that it mandates that without considering these aspects disallowances has to be done. There is no doubt that Hon ble Supreme Court held that relief granted from disallowances u/s 14A on the plank that the investment being stock in trade cannot be upheld. Hence, no relief can be granted to assessee on this account. But, it is still deserved relief on the other issue for own interest free funds for the purpose of u/s 8D(ii) and restricting the disallowances with that extent exempt income. These cannot be said to be a subject matter of rectification u/s 154. Hence,upon careful consideration, we hold that the disallowance is not coming under the realm for rectification of mistake u/s 154 and the AO order u/s 154 cannot be presumed to have considered these aspects. We agree with the submissions of the assessee that order passed by the AO is not sustainable as the issue was debatable and it was not liable for rectification of mistake u/s .154. Hence, we hold that order passed to withdraw the relief granted u/s 14A earlier is bereft of jurisdiction. Hence, we set aside the order of Ld.CIT(A) and decide the issue in favour of the assessee.
Issues Involved:
1. Jurisdiction under Section 154 of the Income-tax Act. 2. Deduction under Section 36(1)(viia) of the Income-tax Act. 3. Disallowance under Section 14A read with Rule 8D of the Income-tax Act. Issue-wise Detailed Analysis: 1. Jurisdiction under Section 154 of the Income-tax Act: The primary jurisdictional issue revolves around whether the rectification under Section 154 was beyond the limitation period specified in Section 154(7). The assessee argued that the rectification was time-barred and that the issue was highly legal and debatable, which cannot be addressed under Section 154. The CIT(A) upheld the jurisdiction, noting that the notice for rectification was issued within the four-year limitation period from the end of the financial year in which the order sought to be rectified was passed. The CIT(A) also held that the mistake in the deduction under Section 36(1)(viia) continued in the reassessment order, thereby merging the earlier order with the reassessment order. The Tribunal found the CIT(A)'s order cryptic and remitted the issue back to the CIT(A) for a detailed speaking order, emphasizing the need to verify the assessment records and provide a proper opportunity for the assessee to be heard. 2. Deduction under Section 36(1)(viia) of the Income-tax Act: On the merits, the CIT(A) held that the deduction under Section 36(1)(viia) should be restricted to the provision made in the books during the current year. The CIT(A) noted that the excess deduction allowed in the earlier order was a mistake apparent from the record and rectifiable under Section 154. The Tribunal agreed that the merits of the issue cannot be adjudicated in a proceeding under Section 154 and noted that the matter was previously remitted to the AO by the Tribunal. The Tribunal remitted the issue back to the CIT(A) for a detailed examination and to pass an order as per law. 3. Disallowance under Section 14A read with Rule 8D of the Income-tax Act: For AY 2008-09, the issue was whether the disallowance under Section 14A was automatic following the Supreme Court's decision in Maxopp Investments Ltd. The CIT(A) upheld the AO's rectification under Section 154, stating that once an issue is decided by the Supreme Court, it is no longer debatable. The CIT(A) also noted that the assessee had sufficient interest-free funds exceeding the investments yielding exempt income, thus no disallowance under Rule 8D(2)(ii) was warranted, subject to AO's verification. However, the CIT(A) upheld the disallowance under Rule 8D(2)(iii) for the exempt income earned from tax-free bonds and dividends, noting that the assessee's claim that all securities were stock-in-trade was factually incorrect. The Tribunal found that the AO's rectification under Section 154 was not sustainable as the issue was debatable and not liable for rectification. The Tribunal held that the decision in Maxopp Investment Ltd. did not overrule the proposition that disallowance under Rule 8D(ii) is not required if interest-free funds are sufficient. The Tribunal set aside the CIT(A)'s order, deciding the issue in favor of the assessee, and held that the AO's order under Section 154 was bereft of jurisdiction. Conclusion: The appeals for both assessment years were allowed for statistical purposes. The Tribunal remitted the jurisdictional issue back to the CIT(A) for a detailed examination and speaking order, while the merits of the disallowance under Section 14A were decided in favor of the assessee, noting the debatable nature of the issue and the lack of jurisdiction for rectification under Section 154.
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