M/S. KOTHARI & BROTHERS, ,HUBBALLI vs. INCOME TAX OFFICER, WARD-2(2), HUBBALLI

Per Jason P Boaz, Accountant Member

2.1 The assessee firm, a dealer in clothes and garments, filed its return of income for Assessment Year 2012-13 on 17.09.2012 declaring income of Rs.10,53,220/-. A survey u/s 133A of the Income Tax Act, 1961 (in short ‘the Act’) was conducted at the business premises on 26.03.2012, in the course of which the assessee declared additional income of Rs.16,61,954/-; on account of (i) excess stock of Rs.13,40,040/- and cash of Rs.3,21,914/- in addition to its regular income for the year under consideration. The case of the assessee for Assessment Year 2012-13 was taken up for scrutiny and after calling for details and examination thereof, the assessing officer (‘AO’) concluded the order of assessment u/s 143(3) of the Act vide order dated 26.03.2014 accepting the returned income of Rs.10,53,220, after observing that that the assessee had shown the additional income of Rs.16,61,954/- it had voluntarily declared in the survey on 26.03.2012 in the return of income filed for Assessment Year 2012-13.

2.2. Subsequently, the ‘AO’ (viz., a new incumbent) initiated rectification proceedings for Assessment Year 2012-13 by issue of notice u/s 154 of the Act dated 09.03.2016 putting the assessee on notice that he sought to enhance its assessed income for Assessment Year 2012-13. The assessee vide its reply dated 16.03.2016 objected to the proposed rectification and also put forth submissions that there was no mistake apparent from the record as suggested by the AO and therefore no rectification is to be made. The AO brushed aside the submissions/reply put forth by the AO and passed the rectification u/s 154 of the Act vide order dated 17.03.2016 enhancing the assessee’s assessed income to Rs.23,93,260/-; in view of an addition of Rs.13,40,040/- on account of declaration of excess stock in the course of survey.

2.3 On appeal, the CIT(A) – Hubli vide the impugned order dated 31.08.2017 dismissed the assessee’s appeal for Assessment Year 2012-13.

1. The orders of the CIT (A) in so far as they are against the appellant are opposed to law, equity and weight of evidence, probabilities, facts and circumstances of the appellant's case.

2. The appellant denies to be assessed to total income at Rs.23,93,260/- as against returned income of Rs.10,53,220/- on the facts and circumstances of the case. 3. The learned CIT(A) was not justified in appreciating that the provisions of section 154 cannot be invoked to make disallowances and additions which are debatable in nature, when the mandate of section 154 was restricted to errors apparent from record on the facts and circumstances of the case. 4. The learned CIT(A) was not justified in appreciating that the changes made by the AO under section 154 of the Act, does not fall within the meaning of mistake apparent from record, on the facts and circumstances of the case. 5. The learned CIT(A) was not justified in appreciating that the additions to income as arrived in the assessment order, were debatable issues and they could not be made under the provisions of section 154 of the Act, on the facts and circumstances of the case. 6. The learned CIT(A) was not justified in appreciating that the appellant has already offered the additional stock as income and the workings were available with the authorities below, on the facts and circumstances of the case. 7. The learned CIT(A) was not justified in appreciating that the income offered by the appellant was after considering the additional stock and cash in the original return of income and no further additions was required to be made, on the facts and circumstances of the case. 8. The learned CIT(A) was not justified in appreciating that the expenditure of partners salary, etc was an allowable expenditure and the claim made was in accordance with law, on the facts and circumstances of the case. 9. Without prejudice, the partners have offered the salary in their individual hands and the addition of the income in the hands of the appellant amounts to double taxation, which is not permissible on the facts and circumstances of the case.

10. Without further prejudice and not conceding that the appellant has accounted the additional income correctly in its books by claiming salary expenditure, the addition in confirmed in the hands of the appellant, the partners salary was to be deleted on the facts and circumstances of the case.

11. The appellant denies the liability to pay interest U/s 234B and 234C of the Act in view of the fact that there is no liability to additional tax as determined by the learned assessing officer. Without prejudice the rate, period and on what quantum the interest has been levied is not discernable from the order and hence deserves to be cancelled on the facts and circumstances of the case. 12. The Appellant craves leave to add, alter, modify, delete or substitute any of the grounds urged above and to file a paper book at the time of hearing of the appeal. 13. In view of the above and other grounds that may be urged at the time of hearing the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.

4. Ground Nos. 1, 2, 12 and 13 being general in nature, no adjudication is called for thereon.

5.1.1 The learned AR for the assessee, at the outset of proceedings; submitted that the primary issue raised before the Tribunal was in respect of the validity of rectification proceedings u/s 154 of the Act undertaken by the AO. The learned AR submitted that the AO has carried out the exercise of rectification on the premise that the entire amount of Rs.16,61,954/- admitted in the course of survey ought to have been offered to tax without making all sorts of claims of expenditure thereon; whereas the only expenditure that increased was restricted to the partners’ salary.

5.1.2 According to the learned AR, in the order of assessment for Assessment Year 2012-13 passed u/s 143(3) of the Act vide order dated 26.03.2014, at para 4 thereof, the AO has rendered a finding that the assessee has offered additional income of Rs.16,61,954/- as per voluntary declaration made in the course of survey proceedings on 26.03.2012 and also observed that while filing the return of income for the assessment year in question assessee has shown Rs.16,61,954/- in its return. In this regard, the learned AR referred to the assessee’s profit and loss account (copy placed at Page 6 of Paper Book) and work sheet (copy placed at Page 13 of Paper Book) to demonstrate that additional incomes declared amounting to Rs.16,61,954/- were considered in arriving at the profits of the assessee firm and were thus in accordance with the sworn statement given by assessee u/s 131 of the Act on 29.03.2012. The learned AR also put forth submissions that the partners’ salary was the only change in expenditure and the same were referred to at Pages 6 and 13 of the Paper Book to demonstrate that the claim of expenditure was in accordance with the provisions of Section 40(b) of the Act and disallowance thereof, if any, could be made in excess of the limits prescribed. It is contended that all these papers were available before the AO’s both in assessment and rectificatory proceedings. The learned AR also drew attention of the Bench to computation of income of the partners (copies at Pages 16 to 20 of Paper Book) to submit that the partners have offered the salary to tax in their individual hands. In view of the above, the learned AR contends that the rectification order u/s 154 of the Act dated 17.03.2016 was not warranted and ought to be set aside and the income as per the order of assessment dated 26.03.2014 restored.

5.1.3 In support of the assessee’s plea, the learned AR placed reliance on the following judicial pronouncements:

(i) T. S. Balaram, ITO Vs. Volkart Brothers (1971) 82 ITR 50 (SC). (ii) K. S. Venkatesh Vs. DCIT (2015) 63 taxman.com 343 (Karnataka); which followed the aforesaid decision of the Hon’ble Apex Court (supra).

According to the learned AR, the rectification undertaken by the AO is in respect of debatable issues with regard to the computation of partners’ salary and also as to whether the claim made was allowable in respect of complete incomes as arrived before computing salary; which itself is sufficient to establish that the rectification carried out was debatable. In view of the above, the learned AR prayed that since there could be no application of section 154 of the Act for rectifying the order of assessment, the order u/s 154 of the Act dated 17.03.2016 be set aside as it is bad in law.

5.2 Per contra, the learned DR for Revenue prayed that the orders of the authorities below be upheld. According to the learned DR, the addition of Rs.13,40,040/- made by the AO on account of undisclosed stock in the rectification order u/s 154 of the Act dated 17.03.2016 was in fact accepted by the assessee in the course of survey proceedings. It is the assessee who has resorted to claiming all sorts of expenditure which is not permissible and therefore the AO was justified in carrying out the rectification vide order dated 17.03.2016. In the alternate, the learned DR further contended that the claim of expenditure made by the assessee was not permissible in view of Section 115BBE of the Act, which bars any claim of expenditure in case of additions u/s 68, 69, 69A, 69B and 69C of the Act.

5.3.1 In rejoinder, the learned AR submitted that the alternate claim of Revenue is untenable as section 115BBE of the Act was inserted by Finance Act, 2012 w.e.f. 01.04.2013 and hence operative only from Assessment Year 2013-14 onwards and not for Assessment Year 2012-13 i.e., the year under consideration.

5.4.1 We have considered the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The primary issue for consideration is whether rectification is permissible u/s 154 of the Act in the facts and circumstances of the case on hand. The undisputed facts on record are that a survey u/s 133A of the Act was carried out at the business premises on 26.03.2012. In the course of survey proceedings, the assessee vide sworn statement admitted to additional income of Rs.16,61,954/- . The case was taken up for scrutiny in the year under consideration i.e., Assessment Year 2012-13. The AO, after calling for and examining the details so filed and while concluding the order of assessment u/s 143(3) of the Act on 26.12.2014, rendered a finding at para 4 of the order of assessment that the assessee has shown the additional income of Rs.16,61,954/- in its return of income for Assessment Year 2012-13 which it declared in the course of survey proceedings. For the sake of clarity, the said para 4 of the order of assessment is extracted hereunder:

“04. During the course of survey u/s 133A conducted in assessee’s premises on 26.03.2012, assessee has voluntarily declared an additional income of Rs.16,61,954/-. While filing the return of income for the assessment year in question assessee has shown Rs. 16,61,954/- in his return”

5.4.2 Revenue is of the view that the additional income admitted ought to have been separately offered to tax and hence the rectification was justified. In our considered view, the contention of Revenue that the claim of expenditure by way of partners’ salary on application of the provisions of Section 40(b) of the Act is not an allowable claim, merely because additional income admitted is reduced, is devoid merit as the assessee firm is entitled to compute salary in accordance with the provisions of section 40(b) of the Act. It is settled position of law that the scope of rectification u/s 154 of the Act is restricted to mistakes apparent from the record, like mathematical or typographical errors, and not something that has to be established by way of a long drawn out process of reasoning on which there are two opinions as in the case on hand, where both the AOs involved hold different views. In this regard, the Hon’ble Apex Court in the case of T. S. Balaram, ITO Vs., Volkart Brothers (1971) 82 ITR 50 (SC) held as under:

“From what has been said above, it is clear that the question whether section 17(1) of the Indian Income-tax Act, 1922, was applicable to the case of the first respondent is not free from doubt. Therefore, the Income-tax Officer was not justified in thinking that on that question there can be no two opinions. It was not open to the Income-tax Officer to go into the true scope of the relevant provisions of the Act in a proceeding under section 154 of the Income-tax Act, 1961. A mistake apparent on the record must be an obvious and patent mistake and not ,something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. As seen earlier, the High Court of Bombay opined that the original assessments were in accordance with law though in our opinion the High Court was not justified in going into that question. In Satyanarayan Laxminarayan Hegde and ors. v. Millikarjun Bhavanappa Tirumale [1960] 1 SCR 890, this Court while spelling out the scope of the power of a High Court under Article 226 of the Constitution ruled that an error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record. A decision on a debatable point of law is not a mistake apparent from the record—see Sidhramappa AndannappaManvi v. Commissioner of Income-tax [1952] 21 ITR 333 (Bom.). The power of the officers mentioned in Section 154 of the Income Tax Act, 1961 to correct “any mistake apparent from the record” is undoubtedly not more than that of the High Court to entertain a writ petition on the basis of an “error apparent on the face of the record”. In this case it is not necessary for us to spell out the distinction between the expressions “error apparent on the face of the record” and “mistake apparent from the record”. But suffice it to say that the Income Tax Officer was wholly wrong in holding that there was a mistake apparent from the record of the assessments of the first respondent.”

5.4.3 In view of the factual and legal matrix of the case on hand, as discussed above, and respectfully following the principles laid down by the Hon’ble Apex Court in the case of T. S. Balaram, ITO Vs. Volkart Brothers (supra), we are of the considered opinion that the rectification carried out by the AO vide order dated 17.03.2016 in the case on hand does not fall within the scope on ambit of mistake apparent from the record. We, therefore, hold that the exercise undertaken by the AO is not in accordance with law, since the issue in question being a debatable one, with conflicting opinions of two AO’s, the second AO could not to have resorted to proceedings u/s 154 of the Act and consequently set aside the impugned orders of the authorities below. The original order of assessment passed u/s 143(3) of the Act vide order dated 26.03.2014 for Assessment Year 2012-13 determining the assessee’s income at Rs.10,53,220/- is accordingly restored.

Pronounced in the open court on this 14th day of November, 2018.