Rectification Power Clarified: Supreme Court Limits Section 154 (of Income Tax Act, 1961) to Obvious Errors

Case Name:

Commissioner of Income Tax Vs. Younus Kunju, Younus Cashew Industries (High Court of Kerala)

ITA. No. 64 of 2015

Date: 11th January 2018

Key Takeaways:

• Section 154 (of Income Tax Act, 1961): This section is not a power of review but is meant for rectifying obvious errors.
• Error Definition: An error must be manifest or self-evident to be corrected under Section 154 (of Income Tax Act, 1961).
• Judicial Interpretation: The court emphasized that what constitutes an error apparent on the face of the record can vary and must be determined on a case-by-case basis.

Issue

Can Section 154 (of Income Tax Act, 1961) be used to rectify errors that are not immediately obvious or require detailed examination?

Facts

• Younus Kunju, an income tax assessee, had his income assessed for the year 1985-86.
• The assessment was revised multiple times due to appeals and orders from the Income Tax Settlement Commission.
• The Assessing Officer (AO) attempted to rectify what he considered errors in the assessment, including interest calculations, under Section 154 (of Income Tax Act, 1961).
• The Tribunal initially dismissed the appeal but later allowed it, leading to the Department challenging the Tribunal’s decision.

Arguments

• Department’s Argument: The Tribunal erred in setting aside the AO’s order, as the mistakes were patent and related to interest calculations.
• Assessee’s Argument: The Settlement Commission’s order should be final, and any further interest levied by the AO was unjustified.

Key Legal Precedents

• Kalabharati Advertising v. Hemant Vimalnath Narichania: The Supreme Court noted that review is a statutory creature and cannot be exercised without express provision.
• CIT v. Ralson Industries Ltd.: Differentiated between rectification under Section 154 (of Income Tax Act, 1961) and review, emphasizing that Section 154 (of Income Tax Act, 1961) is not a power of review.

Judgement

The court ruled in favor of the Revenue, stating that Section 154 (of Income Tax Act, 1961) could be used to correct obvious errors, such as arithmetical mistakes in interest calculations. The court set aside the Tribunal’s order and restored the CIT(A)'s order, emphasizing that Section 154 (of Income Tax Act, 1961) is not for reviewing decisions but for correcting clear errors.

FAQs

Q1: What is Section 154 (of Income Tax Act, 1961)?

A1: It allows for the rectification of mistakes apparent from the record, but not for reviewing decisions.

Q2: What constitutes an error apparent on the face of the record?

A2: An error that is manifest or self-evident and does not require detailed examination or argument.

Q3: Can the AO levy interest after the Settlement Commission’s order?

A3: The court found that the AO could correct arithmetical errors in interest calculations under Section 154 (of Income Tax Act, 1961).

1. Complex and convoluted are the facts. So we will set them out a little more elaborately, as pleaded by the assessee.

2. Youns kunju of Youns Cashew Industries, Kollam, is an income tax assessee. For the assessment year 1985-86, he filed the Return of Income on 31.09.1986, declaring a total income of Rs.93,960/-. The Assessment Officer (“AO”) completed the assessment on 28.03.1988 under section 143(3) (of Income Tax Act, 1961) (“the Act”). He arrived at a total income of Rs.47,43,890/- and demanded, through Annexure A, tax of Rs.1,39,71595/-, which included interest, too.

3. On appeal, the Commissioner of Income Tax (“CIT(A)”), through his order dt.24.11.1988, set aside the Annexure A order. Under section 143(3) (of Income Tax Act, 1961), read with sections 250 & 144 A, the CIT(A) arrived at a total income of Rs.62,48,680/-. Meanwhile, on 28.08.1989, the assessee applied under section

245C of the Act before the Additional Bench of the Income Tax Settlement Commission, Chennai. On 29.06.1993 the Settlement Commission passed an order under section 245D(4) (of Income Tax Act, 1961); it was given effect to by the AO through his proceedings, dated 23.08.1993. He redetermined the total income at Rs.15,52,220/-.

4. As the record reveals, the Settlement Commission issued another order under section 245D (of Income Tax Act, 1961) on 28.04.1994. The AO gave effect to this order, too. On 22.7.1994, again he revised the total income to be Rs.17,06,020/-. But, soon thereafter, the AO noticed what is said to be an error and rectified it.

5. The assessee, then, requested the AO to rectify the assessment for 1985-86 by allowing him to set off and to carry forward the loss relating to the firm, M/s. Hotel Shah & Co, for the assessment year 1983-84. Through an order, dt.23.05.1995, the AO rejected the assessee’s plea because the loss relating to the assessment year 1983-84 could not be set off: The firm's

status was fixed as an unregistered firm (URF), and section 77(2)(a) (of Income Tax Act, 1961) prohibits set off and adjustment of a partner's loss from a URF—Shah & Co.

6. Aggrieved, the assessee appealed to CIT (A)-I, Kochi.

The CIT(A), through an order dated 12.11.2002 in ITA No.

T003/95-96, allowed the appeal and directed the AO to modify

the assessment for the AY 85-86: to set off the enhanced share

of loss.

7. The AO, through his proceedings dated 27.02.2003, in

turn, modified his order dated 21.06.1994. He allowed an

amount of Rs.2,54,698/- as loss carried forward form M/s. Hotel

Shah & Co for the AY 1983-84. The AO revised it on

14.08.2003, based on the assessee’s request to include his wife’s

share of loss.

8. In the proceedings dated 14.08.2003, the AO omitted to

charge interest under sections 220(2) (of Income Tax Act, 1961) and 245D (6A). To rectify

that supposed mistake, the AO revised the order through

proceedings in No.46-007-PZ-3152/Cir.1/KLM, dated

18.07.2006. He charged Rs.8,57,347/- and Rs.79,355/- as

interest under sections 220 (of Income Tax Act, 1961) (2) and 245D (6A) of the Act

respectively.

9. Once again, the AO, in his proceedings dated

18.07.2006, erroneously calculated interest from April 1988 to

April 1991. Two months later, through Annexure C, he rectified

the mistake and charged interest under section 220(2) (of Income Tax Act, 1961) from

April 1991 to June 1993: the interest was quantified at

Rs.3,49,935/-.

10. Again aggrieved, the assessee appealed to the CIT(A),

Trivandrum, against the AO’s order, dated 18.07.2006. But the

appeal yielded nothing, as it was dismissed through Annexure D

order, dt.08.12.2006.

11. On the issues of charging interest under section 220(2) (of Income Tax Act, 1961)

and disallowing interest under section 244(1A) (of Income Tax Act, 1961), the

assessee appealed before the Income Tax Appellate Tribunal

(“Tribunal’). The Tribunal, through Annexure E order,

dismissed the appeal as not maintainable. When Tribunal’s order

was challenged, this Court, through Annexure F judgment, set

aside the order and remanded the matter to the Tribunal, to be

disposed of on merits.

12. On remand, through Annexure G order, the Tribunal

allowed the assessee’s appeal and cancelled the AO’s

rectification order under section 154 (of Income Tax Act, 1961). This time, the

Department came before us assailing the Tribunal’s Annexure G

order.

Submissions:

The Department’s:

13. Sri P. K. Ravindranatha Menon, the learned Senior

Counsel for the Revenue, has submitted that the Tribunal has

erred in setting aside the AO’s order as incorrect. According to

him, the Tribunal misdirected itself by observing that 'the

mistake apparent from record must be an obvious and patent

mistake but not something which can be established by a long

drawn process of reasoning. It negates section 154 (of Income Tax Act, 1961).

He has also contended that the Tribunal ought to have examined

the issue in the light of Calcutta High Court’s decision in

Hindustan Lever Ltd v. CIT.

14. Sri Menon has also submitted that the rectification

order has not involved a long-drawn process of reasoning on a

point on which there may conceivably be two opinions. On the

contrary, the rectification, he contended, resulted from the AO’s

correcting an arithmetical mistake in charging interest. In other

words, Sri Menon asserted that the mistakes noticed by the AO

were patent, and they relate to levy of interest under sections

220 (2) and 245D (6A), and also withdrawal of interest under

section 244(1A) (of Income Tax Act, 1961).

The Assessee’s:

15. Sri Arun Raj, the learned counsel for the assesse, has

contended that once the Settlement Commission passes an order

under section 245D(1) (of Income Tax Act, 1961), the regular assessment under

section 143(3) (of Income Tax Act, 1961) or 144 of the Act ceases to exist. He has

contended that the very Department has admitted that the

demand earlier raised by it was not valid.

16. According to Sri Arun Raj, any further levy of interest

under section 220(2) (of Income Tax Act, 1961) amounts to a double levy of

interest because the Department has already levied interest under

sections 245D (2C) and 245D (6A) of the Act. The learned

counsel has also contended that the Settlement Commission

already considered the assessee’s incomes returned and

disclosed. So, there is no room for any further assessment under

section 143(3) (of Income Tax Act, 1961). In other words, section 245D(4) (of Income Tax Act, 1961) of the

Act is comprehensive, and there is no question of the assessment

under section 245D(4) (of Income Tax Act, 1961) relating back to the date of regular

assessment under section 143(3) (of Income Tax Act, 1961), 144, or 147 of the Act.

17. In the alternative, Sri Arun Raj has submitted that if at

all interest under section 220(2) (of Income Tax Act, 1961) has to be levied, it must be

done only by the Settlement Commission, for it exercises

exclusive jurisdiction once it admits a case under section 245-I (of Income Tax Act, 1961)

of the Act. In other words, the AO is not empowered to levy

interest u/s. 220(2) (of Income Tax Act, 1961) regarding a matter decided by the Settlement

Commission.

18. Heard Sri P. K. Ravindranatha Menon, the learned

Senior Counsel for the Revenue, and Sri Arun Raj, the learned

counsel for the respondent-assessee, besides perusing the record.

The Substantial Questions of Law:

1. Is the supposed mistake in calculating the interest apparent

from the record, and can it be corrected under section 154 (of Income Tax Act, 1961) of the

Income Tax Act?

2. Are the findings of the Tribunal, in the facts and

circumstances, perverse, illogical, and beyond section 154 (of Income Tax Act, 1961),

1961?

3. Has the Tribunal justified itself in interfering with what is

said to be an order of rectification?

Discussion:

19. The original assessment for the AY 1985-86 was

completed in March 1988. On appeal, the CIT(A) set it aside in

November 1988. The reassessment was completed in March

1991. But in the meanwhile, in August 1989, the assesse

approached the Additional Bench of the Income Tax Settlement

Commission, Chennai, invoking section 245C (of Income Tax Act, 1961).

20. In June 1993, the Settlement Commission passed an

order under section 245(4) (of Income Tax Act, 1961); the AO gave effect to it

through his proceedings on 26.06.1994. But he revised those

proceedings on 14-08-2003. It was to adopt the assessee’s

correct share of income from a partnership firm; it resulted in a

refund of Rs.8,90,706/-.

21. But once again the AO found certain mistakes in the

revised proceedings. So, on 09.06.2005, he issued notice under

section 154 (of Income Tax Act, 1961), to rectify those mistakes: (a) to charge

interest under section 220(2) (of Income Tax Act, 1961); to levy interest under section

245D (6A); (c) to withdraw interest earlier charged under

section 244(1A) (of Income Tax Act, 1961). Later, he did pass an order revising

the tax.

22. On appeal, the CIT(A) justified the AO’s action.

Skipping the later incidental developments, we may straight

come to the proceedings before the Income Tax Appellate

Tribunal (“Tribunal”). First, the Tribunal dismissed the appeal

as not maintainable; later, on remand from this Court, it decided

on merits: it allowed the assessee’s appeal.

Statutory Scheme:

23. The pivotal point that urges our attention and

resolution is this: Has the AO been justified in invoking section

154 of the Act?

24. Before amendment by Act 23 of 2012, section 154 (of Income Tax Act, 1961)

empowered an income tax authority “to rectifying any mistake

apparent from the record.” The authority can correct the mistake

either on his own or on being pointed out by the assessee. If the

intended correction is to result in increasing the assessee’s

liability, he should be put on notice and heard. If the correction

reduces the assessee’s burden, the authority should refund the

reduced amount to the assessee. Subject to section 155 (of Income Tax Act, 1961) or sub-

section (4) of section 186 (of Income Tax Act, 1961), the correction must be effected in

four years from the financial year in which the original order

was passed.

25. Analogous to section 154 (of Income Tax Act, 1961) is the terse section

37 of the Rajasthan Sales Tax Act: “With a view to rectifying

any mistake apparent from the record, any officer appointed or

any authority constituted under the Act may rectify suo motu or

otherwise any order passed by him.” Interpreting this provision,

the Supreme Court in CTO v. Makkad Plastic Agencies2 has held that this power of correction is neither a power of review nor is a

power of revision, but is only a power to rectify a mistake

apparent on the face of the record. Rectification implies the

correction of an error or a removal of defects or imperfections. It

implies an error, mistake, or defect which after rectification is

made right.

26. Quoting with approval its earlier decision in

Kalabharati Advertising v. Hemant Vimalnath Narichania3

, the

Supreme Court has further observed that review is a creature of

the statute, and an order of review could be passed only when an

express power of review is provided in the statute. In the

absence of any statutory provision for review, “exercise of

power of review under the garb of clarification/ modification/

correction is not permissible.”

27. In fact, the very section 154 (of Income Tax Act, 1961) came to be

interpreted by the Supreme Court in CIT v. Ralson Industries

Ltd.4

The Court observed that the powers of rectification under

section 154 (of Income Tax Act, 1961) and section 263 (of Income Tax Act, 1961) are different. Section 154 (of Income Tax Act, 1961)

is not a power of review. An error being apparent on the face of

record, according to the Supreme Court, is sine qua non.

What is an error apparent on the face of record?

28. It needs no repetition that a judgmental error is not a

reviewable error, nor can it be termed an error on the face of

record. Error in reasoning or, for that matter, in applying law to

facts is an appealable error. And that power of appeal is the

creation of a statute. An error apparent on the face of record, on

the other hand, an error that strikes one “on mere looking at the

record and would not require any long-drawn process of

reasoning on points where there may conceivably be two

opinions.”

29. The Courts have considered on numerous occasions

what an error apparent on the face of record is. In Satyanarayan

Laxminarayan Hegde v. Malikarjun Bhavanappa Tirumule5

the

Supreme Court has held thus:

"An error which has to be established by a long-drawn process of

reasoning on points where there may conceivably be two opinions

can hardly be said to be an error apparent on the face of the record.

Where an alleged error is far from self-evident and if it can be

established, it has to be established, by lengthy and complicated

arguments, such an error cannot be cured by a writ of certiorari

according to the rule governing the powers of the superior Court to

issue such a writ."

30. No error can be said to be apparent on the face of the

record if it is not manifest or self-evident and requires an

examination or argument to establish it. But there might be cases

in which it may not work because an error of law might be

considered by one Judge as apparent, patent, and self- evident;

but might not be so considered by another Judge. Therefore, we

ought to conclude that the legal contours of an error apparent on

the face of the record cannot be exactly identified. In other

words, an element of indefiniteness is inherent in its very nature

and must be left to be determined judicially on the facts of each

case.6

Addition and Deletion of Interest

31. Section 220 (of Income Tax Act, 1961) concerns the situations when

tax is payable and when the assessee is deemed to be in default.

Sub Section (1) mandates that “any amount, otherwise than by

way of advance tax, specified as payable in a notice of demand

6 Hari Vishnu Kamath v. Syed Ahmad Ishaque, (1955) 1 SCR 1104

under Section 156 (of Income Tax Act, 1961) shall be paid within thirty days of the service

of the notice at the place and to the person mentioned in the

notice.” Sub-Section (2), which matters now, reads thus:

Section 220(2) (of Income Tax Act, 1961). If the amount specified in any notice of demand

under section 156 (of Income Tax Act, 1961) is not paid within the period limited under sub-

section (1), the assessee shall be liable to pay simple interest at one

and one- half per cent for every month or part of a month

comprised in the period commencing from the day immediately

following the end of the period mentioned in sub- section (1) and

ending with the day on which the amount is paid:

Provided that, where as a result of an order under section

154, or section 155 (of Income Tax Act, 1961), or section 250 (of Income Tax Act, 1961), or section 254 (of Income Tax Act, 1961), or section 260 (of Income Tax Act, 1961),

or section 262 (of Income Tax Act, 1961), or section 264 (of Income Tax Act, 1961) or an order of the Settlement

Commission under sub- section (4) of section 245D (of Income Tax Act, 1961)], the amount on

which interest was payable under this section had been reduced, the

interest shall be reduced accordingly and the excess interest paid, if

any, shall be refunded:

32. As seen from the proviso to sub-section (2) of Section

220, evidently, there can be variation in charging interest, and

such variation can be effected through correction under Section

154 of the Act. Therefore, we fail to countenance the assessee's

contention that Section 154 (of Income Tax Act, 1961) is unavailable for

rectifying the mistakes committed under Section 220 (of Income Tax Act, 1961).

33. Even otherwise, miscalculation of interest is, at best, an

arithmetical error and it needs no elaborate cogitation or

adjudication, long drawn or otherwise, to hold that there was an

error committed.

34. Section 244 (of Income Tax Act, 1961) deals with interest on refund where no

claim is needed. The provision to the extent necessary reads

thus:

(1) Where a refund is due to the assessee in pursuance of an order

referred to in section 240 (of Income Tax Act, 1961) and the Assessing Officer does not grant

the refund within a period of three months from the end of the

month in which such order is passed, the Central Government shall

pay to the assessee simple interest at fifteen per cent per annum on

the amount of refund due from the date immediately following the

expiry of the period of three months aforesaid to the date on which

the refund is granted.

(1A) Where the whole or any part of the refund referred to in sub-

section (1) is due to the assessee, as a result of any amount having

been paid by him after the 31st day of March, 1975, in pursuance

of any order of assessment or penalty and such amount or any part

thereof having been found in appeal or other proceeding under this

Act to be in excess of the amount which such assessee is liable to

pay as tax or penalty, as the case may be, under this Act, the

Central Government shall pay to such assessee simple interest at

the rate specified in sub-section (1) on the amount so found to be

in excess from the date on which such amount was paid to the date

on which the refund is granted :

Provided that where the amount so found to be in excess

was paid in instalments, such interest shall be payable on the

amount of each such instalment or any part of such instalment,

which was in excess, from the date on which such instalment was

paid to the date on which the refund is granted:

Provided further that no interest under this sub-section shall

be payable for a period of one month from the date of the passing

of the order in appeal or other proceeding:

Provided also that where any interest is payable to an assessee

under this sub-section, no interest under sub-section (1) shall be

payable to him in respect of the amount so found to be in excess.

35. As to correcting a mistake committed by an authority

in calculating interest on refund, it is always open for the

authorities to rectify that mistake. Again, in our reckoning, the

reasons assigned to our interpretation of Section 220 (of Income Tax Act, 1961) apply here,

too.

36. Under these circumstances, the order impugned cannot

be sustained.

We, therefore, answer the substantial questions of law in

revenue's favour, set aside the impugned order dated 8.12.2006,

and restore the CIT (A)’s order, dated 5.9.2014.

SD/- ANTONY DOMINIC

ACTING CHIEF JUSTICE

SD/- DAMA SESHADRI NAIDU

JUDGE

The last paragraph of the judgment dated 11.1.2018 in ITA

No.64/2015 is corrected and substituted as “We, therefore,

answer the substantial questions of law in revenue's favour,

set aside the impugned order dated 5.9.2014 and restore the

CIT(A)'S order dated 8.12.2016.

Vide order dated 5.4.2018 in I.A.No.781/2018 in ITA

No.64/2015.

Sd/- Registrar Judicial