Ramakrishna Reddy Makireddy Vs ACIT (ITAT Hyderabad)
Debatable Section 54F/54EC Claim Cannot Be Decided Through Rectification: ITAT Quashes Order
The Income Tax Appellate Tribunal, Hyderabad Bench, held that the Assessing Officer could not use section 154 rectification proceedings to adjudicate a debatable claim under section 54F or section 54EC. The Tribunal found that deciding the deduction required examination of facts and statutory conditions, taking the dispute beyond the limited scope of correcting a mistake apparent from the record.
It further held that an earlier Tribunal direction for fresh consideration did not enlarge the Assessing Officer’s statutory jurisdiction or cure the invalid assumption of rectification powers. Consequently, the Tribunal quashed the subsequent order passed under section 154 read with section 254 and allowed the assessee’s appeal.
Background of the Case
The appeal concerned assessment year 2007-08. The Assessing Officer passed an order dated 30 March 2023 under section 154 read with section 254, determining the assessee’s total income at ₹66,49,669.
The assessee challenged that order before the Additional/Joint Commissioner of Income Tax (Appeals)-1, Ahmedabad. The first appellate authority upheld the Assessing Officer’s action and dismissed the appeal through an order dated 18 November 2025.
Before the Tribunal, the assessee raised a legal objection concerning the validity of the original rectification order dated 24 March 2014. That objection went to the foundation of the later proceedings.
Assessee’s Challenge to Rectification Jurisdiction
The assessee argued that the original rectification proceedings involved the admissibility of a deduction under section 54F or section 54EC.
According to the assessee, this was a debatable issue requiring factual examination and interpretation of the relevant provisions. It therefore could not be resolved through section 154, which permits correction only of mistakes apparent from the record.
The representative referred to the Tribunal’s earlier order in ITA No. 316/Hyd/2017, dated 7 April 2021. In that round, the assessee had challenged the disallowance of the deduction, and the Tribunal had restored the issue to the Assessing Officer for de novo consideration.
The assessee contended that the original rectification order was without jurisdiction and that the consequential order dated 30 March 2023 could not survive. The Revenue supported the orders of the lower authorities.
Limited Scope of Section 154
The Bench, comprising Judicial Member Ravish Sood and Accountant Member Madhusudan Sawdia, explained that section 154 confers a limited rectification power.
A mistake capable of correction must be obvious and patent. It cannot be one established only through detailed reasoning on a question admitting more than one possible opinion.
The Tribunal relied on the Supreme Court’s decision in T.S. Balaram, ITO v. Volkart Brothers, 82 ITR 50, which distinguishes an apparent mistake from a debatable point of law.
Accordingly, rectification cannot be used to reconsider a claim requiring detailed factual inquiry or to replace one possible legal view with another.
Deduction Dispute Required Substantive Examination
Applying that principle, the Tribunal found that the deduction issue was not merely an arithmetical or patent error.
Determining eligibility under section 54F or section 54EC required examination of the nature of the capital asset transferred, the investment made, the applicable statutory conditions and the facts supporting the claim.
The controversy therefore involved applying the relevant provisions to the assessee’s circumstances. Such an exercise could not ordinarily be undertaken through the narrow rectification jurisdiction.
The Tribunal emphasised that the power under section 154 is not equivalent to assessment or reassessment power. It does not authorise a fresh adjudication of substantive disputes under the description of correcting an apparent mistake.
Earlier Remand Did Not Cure the Defect
The Tribunal also examined the effect of its earlier direction restoring the deduction issue for fresh consideration.
It clarified that a remand alone does not establish that the original proceedings lacked jurisdiction. However, the nature of the controversy recorded in the earlier order showed that eligibility for deduction required substantive examination.
More importantly, the subsequent proceedings could not independently validate the original invocation of section 154 if the subject matter fell outside that provision.
A direction for de novo consideration does not confer a rectification power that the statute itself withholds. The later order therefore remained dependent on the validity of the original proceedings.
Decision and Conclusion
The Tribunal held that the original order dated 24 March 2014, insofar as it adjudicated the debatable deduction issue, exceeded the jurisdiction available under section 154.
Since the subsequent order dated 30 March 2023 was founded on those invalid proceedings, it could not be sustained. The Tribunal set aside the first appellate authority’s order and quashed the order under section 154 read with section 254.
The appeal was allowed on the legal ground. The remaining grounds became academic and were not separately adjudicated. The ruling concerns the limits of rectification jurisdiction; it does not independently determine the assessee’s substantive eligibility under section 54F or section 54EC.
Cases Discussed
- T.S. Balaram, ITO Vs Volkart Brothers, (1971) 82 ITR 50 (SC) — followed; the cited TaxGuru URL is a discussion, not a dedicated report of this judgment.
- Ramakrishna Reddy Makireddy — ITA No. 316/Hyd/2017, order dated 07.04.2021 — earlier proceedings in the same matter, referred to for remand history.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT HYDERABAD
This appeal is filed by Shri Ramakrishna Reddy Makireddy (“the assessee”), feeling aggrieved by the order passed by the Learned Addl./JCIT (A)-1, Ahmedabad (“Ld. First Appellate Authority ”) dated 18.11.2025 for the A.Y. 2007-08.
2. The assessee has raised the following grounds of appeal:
| S. No. | Grounds of Appeal | Tax effect |
|---|---|---|
| 1 | The order of the Ld. CIT (A) u/s 250 of the Act dt. 18/11/2025 for the AY 2007-08 is erroneous both on facts and in law to the extent the order is prejudicial to the interests of the appellant. | General ground |
| 2 | The Ld. CIT(A) ought to have considered the fact that the AO has erred in invoking Section 154 in order to re-examine an issue which is debatable and that therefore the action of the AO is not as per law and void ab initio. | Technical ground |
| 3 | The Ld. CIT(A) ought to have considered that the AO has grossly erred in invoking the section 154 to rectify the order, without there being any apparent mistakes amenable for rectification. | Technical ground |
| 4 | The Ld. CIT(A) failed to appreciate that the appellant’s return was processed u/s 143(1) and subsequently assessed u/s 143(3), wherein the claim of deduction was allowed after due verification, as there was no mistake apparent from the record, invocation of section 154 was unjustified, illegal, and bad in law. | Technical ground |
| 5 | The Ld. CIT(A) failed to consider the fact that the AO ought to have fairly appreciated the law position on section 154, that no debatable issue can be touched upon u/s 154 of the Act. | Technical ground |
| 6 | The Ld. CIT(A) failed to consider that the AO has not followed the directions of the Hon’ble ITAT at para 4 of its order in ITA No. 316/Hyd/2017, wherein remit the entire matter back to the file of the Ld. AO for de novo consideration, while passing the order u/s 154 r.w.s 254 dt. 30.03.2023, which is bad in law. | Technical ground |
| 7 | The Ld. CIT(A) ought to have appreciated that deposit amount has been utilised for construction of house property and same should be allowable as deduction under capital gain. | Technical ground |
| 8 | The Ld. CIT(A) ought to have appreciated the fact that the assessee is eligible for claim of deduction under section 54F of the Act, since the appellant invested capital gains to the extent of Rs. 26,66,000/- in construction of flat within three years from the sale of original property. | Technical ground |
| 9 | The Ld. CIT(A) failed to consider that the order of the AO u/s 154 r.w.s 254 dt. 30.03.2023 is not sustainable in view of the fact that the evidences submitted by the appellant for examination could not come under the purview of the provisions of section 154 of the Act and hence deserved to be cancelled the order passed by the AO on 30.03.2023. | Technical ground |
| 10 | The Ld. CIT(A) ought to have considered that as per the directions of the Hon’ble ITAT in its order dt. 07.04.2021, the entire issue involved with regard to the deduction u/s 54EC/54/54F is a debatable issue and cannot be considered u/s 154 of the Act and thus the order passed u/s 154 r.w.s 254 dt. 30.03.2023 is not sustainable. | Technical ground |
| 11 | Appellant may, add or alter or amend or modify or substitute or delete and/or rescind all or any of the grounds of appeal at any time before or at the time of hearing of the appeal. | General ground |
3. The brief facts of the case are that the Assessing Officer (“AO”) passed the impugned assessment order under section 154 read with section 254 of the Income Tax Act, 1961 (“the Act”), dated 30.03.2023, determining the total income of the assessee at Rs. 66,49,669/-.
4. Aggrieved by the said assessment order, the assessee preferred an appeal before the Ld. First Appellate Authority, who upheld the order passed by the AO and dismissed the appeal of the assessee.
5. Aggrieved by the impugned order of the Ld. First Appellate Authority, the assessee is in appeal before this Tribunal. At the outset, the Learned Authorized Representative (“Ld. AR”) raised a legal ground challenging the validity of the original rectification order passed by the AO under section 154 of the Act dated 24.03.2014. The Ld. AR submitted that the AO had wrongly invoked the provisions of section 154 of the Act for deciding a debatable issue relating to the admissibility of deduction under section 54F or section 54EC of the Act. He submitted that the scope of rectification under section 154 of the Act is confined to mistakes apparent from the record and that a debatable issue requiring examination and interpretation of the provisions of law cannot be decided by invoking the said provision. The Ld. AR further invited our attention to para nos. 2 to 4 of the order of this Tribunal passed in the first round of litigation in ITA No. 316/Hyd/2017 dated 07.04.2021. Referring to para no. 2 of the said order, the Ld. AR submitted that the assessee had specifically challenged the disallowance of deduction claimed under section 54F/54EC of the Act. He further invited our attention to para no. 4 of the said order, wherein this Tribunal had restored the issue to the file of the AO for de novo consideration. The Ld. AR submitted that the very fact that the issue relating to the admissibility of deduction under section 54F or section 54EC of the Act required fresh examination establishes that the issue was debatable in nature and could not have been the subject matter of rectification under section 154 of the Act. Accordingly, he contended that the original rectification order dated 24.03.2014 was passed without jurisdiction and was liable to be quashed. Consequently, the subsequent order dated 30.03.2023 passed under section 154 read with section 254 of the Act, being consequential to the original invalid rectification order, is also liable to be quashed.
6. Per contra, the Learned Departmental Representative (“Ld. DR”) relied upon the orders of the lower authorities and supported the validity of the impugned order passed by the AO.
7. We have heard the rival submissions and perused the material available on record. We find that the principal issue arising for our consideration is whether the original rectification order passed by the AO under section 154 of the Act dated 24.03.2014, involving the admissibility of deduction under section 54F or section 54EC of the Act, was within the permissible scope of rectification contemplated under section 154 of the Act and, consequently, whether the subsequent order dated 30.03.2023 passed under section 154 read with section 254 of the Act can be sustained in law. In this regard, we have carefully gone through para nos. 2 to 4 of the order of this Tribunal passed in the first round of litigation in ITA No. 316/Hyd/2017 dated 07.04.2021. On perusal of para no. 2 of the said order, we find that the assessee had specifically raised a ground challenging the disallowance of deduction claimed under section 54F/54EC of the Act. We further find from para no. 4 of the said order that this Tribunal had restored the issue to the file of the AO for de novo consideration. Thus, the issue involved in the original rectification proceedings related to the admissibility of deduction under section 54F or section 54EC of the Act, which required examination of the relevant facts and the applicability of the respective statutory provisions.
8. We further find that the provisions of section 154 of the Act empower the income-tax authority to rectify only a mistake apparent from the record. The scope of the said provision is limited and does not extend to reconsideration of issues which are debatable in nature or which require detailed examination of facts and interpretation of law. A mistake apparent from the record must be an obvious and patent mistake and not one which can be established only by a long-drawn process of reasoning on a point on which two opinions are possible. In this regard, the Hon’ble Supreme Court in the case of T.S. Balaram, ITO Vs. Volkart Brothers, 82 ITR 50 has held that a mistake apparent from 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. The Hon’ble Supreme Court further held that a decision on a debatable point of law is not a mistake apparent from the record.
9. Applying the aforesaid settled legal principle to the facts of the present case, we find that the issue relating to the admissibility of deduction under section 54F or section 54EC of the Act cannot be regarded as a mere arithmetical or patent mistake apparent from the record. The determination of eligibility for deduction under either of the said provisions requires examination of the nature of the capital asset transferred, the investment made by the assessee, the relevant statutory conditions and the facts relating to the claim of deduction. Such determination necessarily involves consideration of the relevant facts and application of the statutory provisions to those facts. We further find that, in the first round of litigation, this Tribunal had considered the dispute relating to the deduction claimed by the assessee and restored the issue to the file of the AO for de novo consideration. Though the mere restoration of an issue for fresh consideration may not, by itself, establish that the original proceedings were without jurisdiction, the nature of the controversy recorded in para nos. 2 to 4 of the earlier order demonstrates that the dispute involved examination of the eligibility of the assessee for deduction under section 54F or section 54EC of the Act. In our considered opinion, such an issue, involving examination of facts and determination of the applicable statutory provision, cannot ordinarily be resolved by exercising the limited power of rectification under section 154 of the Act. We are of the considered opinion that the AO, while exercising jurisdiction under section 154 of the Act, cannot undertake a fresh examination of a debatable claim or substitute one possible view with another under the guise of rectification of a mistake apparent from the record. The power conferred under section 154 of the Act is not equivalent to the power of assessment or reassessment and cannot be exercised for adjudicating issues requiring detailed consideration of facts and law.
10. In the present case, the dispute regarding the admissibility of deduction under section 54F or section 54EC of the Act was not a patent mistake capable of rectification under section 154 of the Act. Rather, it was a substantive issue requiring adjudication after examination of the relevant facts and statutory conditions. Therefore, in our considered opinion, the AO exceeded the limited jurisdiction conferred under section 154 of the Act while passing the original rectification order dated 24.03.2014.
11. We further find that the subsequent order dated 30.03.2023 was passed under section 154 read with section 254 of the Act pursuant to the directions issued by this Tribunal in the first round of litigation. However, the subsequent proceedings cannot independently validate the original assumption of jurisdiction under section 154 of the Act if the subject matter of the original rectification proceedings was itself beyond the scope of the said provision. The restoration of an issue for de novo consideration does not enlarge the statutory jurisdiction of the AO or confer authority to rectify a debatable issue which otherwise falls outside the scope of section 154 of the Act.
12. In view of the foregoing discussion, we are of the considered opinion that the original rectification order dated 24.03.2014, insofar as it adjudicated the debatable issue relating to the admissibility of deduction under section 54F or section 54EC of the Act, was passed beyond the scope of jurisdiction conferred under section 154 of the Act and, therefore, cannot be sustained in law. Consequently, the subsequent order dated 30.03.2023 passed under section 154 read with section 254 of the Act, being founded upon the original invalid rectification proceedings, is also liable to be quashed. Accordingly, we set aside the impugned order of the Ld. First Appellate Authority and quash the order passed by the AO under section 154 read with section 254 of the Act dated 30.03.2023. The legal ground raised by the assessee is accordingly allowed.
13. Since we have quashed the impugned order on the aforesaid legal ground, the other grounds raised by the assessee have become academic in nature and do not require separate adjudication.
14. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the Open Court on 16th October, 2026.
