Rectification of Mistake | Section 154 | Income Tax | Some Issues

In Income Tax Act there are various section which are frequently being used by the assesse and assessing officer in their day to day working but still assesse and department is not consensus on various points of various section. Section 154 titled as ‘RECTFICATION OF MISTAKE‘ is also one of those section of the Income Tax act.

There are various points in section 154 which are contentious, A few of them are listed as under:

1. What is mistake apparent from records?

2. What types of orders can be rectified?

3. Who can pass such rectification order?

4. What is the time limit for making an application and from which point of time this time limit be counted?

5. What will be the fate of the application if no action is taken by the assessing officer within 6 months as stipulated in section 154(8)? Whether application is considered as DEEMED RECTIFICATION ORDER?

These are the questions which are being faced by each assesse in general but very difficult to get answer at one place. Considering the above questions in back of the mind, It was thought fit to analyse the above contentious issues at one place.

MISTAKE APPARENT FROM RECORDS: – There are two limbs which is required to be fulfilled to make an order rectifiable: These are cumulative satisfaction of conditions and absence of one satisfaction is sufficient for disqualification of order

1. Mistake

2. Apparent from records

Though both the words are not defined in the income Tax act but there are numerous judgement including Apex Court of the land which has explained the sentence in a very nicely drafted Para in the case of Satyanarayan Laxminarayan Hegde v. Malikarjun Bhavanappa Tirumul AIR 1960 SC 137:

“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.”

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.”

After reading various court decision an illustrative list of mistakes which can be rectified are as under:

1. Any Arithmetical, Clerical error

2. Misreading of any provision of law

3. Application of wrong provision of law

4. Non-allowance of tax credit on the ground that same is not reflecting in 26AS whereas section 205 clearly enforce Bar Against direct demand on Assessee.

5. Non-following of jurisdictional high court judgment.

As per Taxmann’s Direct Taxes Manual Vol. 3, the meaning of the word “Record” under Section 154 is the “record of the case comprising the entire proceedings including documents and materials produced by the parties and taken on record by the authorities which were available at the time of passing of the order which is the subject-matter of the proceedings for rectification”

One interesting point is that whether deduction/exemption not claimed or short claimed but available on the face of the records, whether assessing officer can allow such deduction or exemption as mistake apparent from records. For example, the assesse had claimed deduction u/s 80G @ 50% for donation made to PM relief fund for COVID-19 but there is sufficient evidence in the records which suggest that assesse is entitle for absolute deduction u/s 80G @ 100%. Whether such mistake is rectifiable and assessing officer can suo motu rectify the mistake as apparent from records and allow deduction @ 100% u/s 80G of the Act.

Such mistake or omission is mistake apparent from records and Assessing officer can pass rectification order despite supreme court judgment in Goetz Ltd case in which supreme court has held that fresh deduction/ exemption cannot be claimed, if not claimed in the return of Income because there is lot of difference between fresh claim and revision of claim. For this purpose, one can rely on the old circular of CBDT 14 (XL-35) dated April 11, 1955 and article 265 of the constitution of India which are as under.

“265. Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law”

Article 265 of the Constitution of India lays down that no tax shall be levied except by authority of law. Hence only legitimate tax can be recovered and even a concession by a tax-payer does not give authority to the tax collector to recover more than what is due from him under the law.

On other side, Circular No: 14 (XL-35) dated April 11, 1955 issued by CBDT talks about rights of the assesse which states that:

“Officers of the Department must not take advantage of ignorance of an assesse as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessee on whom it is imposed by law, officers should

(a) Draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b) Freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.”

One interesting ratio has also been emerged from the Ld. Andhra High Court judgement in Seshvatram (B V K) V CIT (1994) 210 ITR 633 AP] that Subsequent interpretation of law by Supreme Court would constitute as Mistake Apparent from Record. Hence any decision of dispute on law point settled by the Supreme Court can be taken as base for rectification subsequently also.

RECTIFIABLE ORDERS AND AUTHORITY FOR RECTIFICATION: – Rectification order can be passed by any Income Tax authority for ORDER WHICH HAS BEEN PASSED BY IT. There is apprehension in the mind of various peoples that only order passed by income Tax Officer can be rectified but Income Tax Authority includes Commissioner(Appeal) as well hence rectification application can be made to commissioner (Appeal) also for order passed by him. Apart from routine order like assessment order or appeal order, Intimation u/s 143(1)(a), Intimation for TDS or TCS processing can also be rectified. An order can be rectified for n number of times within the overall stipulated time limit. It means that one can make application for rectification application for rectified order also and so on.

TIME LIMIT FOR RECTIFICATION: As per section 154(7) of the Act, Rectification order can be passed within 4 years from the end of the financial year in which the order sought to be amended has been passed. Here various question crept in the curious mind Whether four years shall be counted from original order or rectified order. Whether making application for rectification is sufficient or order should be passed within stipulated period of 4 years.

As we discussed that rectification application can be made for n number of times for rectified order also and according to this discussion there will be no end for time period and rectification can be made at the fag end of every four years either by AO or assessee.

Though supreme court has held in the case of Hind Wire Industries Ltd v. CIT  1995 AIR 1133 that 4 years shall be counted from the last order and not from the original order but Ld. Mumbai Tribunal has nicely interpreted the decision of supreme court in the case of Ashu Engg. & plastics P Ltd v/s DCIT (Appeal no 3453/Mumbai/2010) and held that “In view of the above discussions, the hyper technical plea of the learned Departmental Representative is only fit to be rejected. Learned Departmental Representative as indeed the authorities below have also relied on in the case of Hind Wire Industries Ltd v. CIT but then it is a case in which the subject matter of first rectification was the same as the subject matter of second rectification was sought. In the present case, however, subject matter of two rectification proceedings is altogether different and, therefore, the ratio of Hon’ble Supreme Court’s judgment in the case of Hind Wire Industries Ltd v. CIT does not come into play. We are of the considered view that the ratio laid down in the case of Hind Wire Industries Ltd v. CIT remains confined to a case where subject matter of second rectification is the same as the first rectification and it was only in such a situation that the time limit of second rectification proceedings gets extended by the fact of first rectification proceedings. In a situation in which the subject matter of second rectification proceedings is wholly unrelated to the subject matter of first rectification proceedings as is the situation in the present case, the time limit for second rectification proceedings remains unaffected by the first rectification proceedings.”

Likewise the Hon’ble Bombay High Court the In the case of CIT vs. Sakseria Cotton Mills Ltd., 124 ITR 570(Bom), held that time limit under section 154(7) is to be computed with reference to the date on which order dealing with the subject matter of such rectification was passed and as long as subsequent order did not deal with the same issue, mere passing of the later order does not extend the time limit under section 154(7).

In the case of Kothari Industrial Corporation Ltd v Agricultural Income Tax Officer(1998) 230 ITR 307(Kar), Hon’ble Karnataka High Court had an occasion to deal with the same issue. One of the questions before their Lordships in this case was where an order of an authority is rectified, whether the original order merges with the order of rectification, and whether, in the event of second rectification, the period of limitation for such subsequent rectification should be reckoned from the date of the original order or the date of the order of first rectification. Their Lordships concluded that “if the subject matter of subsequent rectification is not the subject matter of first rectification”, the period of limitation will have to be calculated from the date of original order” In view of these discussions, it is clear that the legal position is that the time limit for rectification of mistake under section 154(7) is to be considered from the date of the original order or in subsequent rectification order only if the said rectification order dealing with the same which is sought to be rectified.

Hence time period of 4 years shall be counted as under:

• If subject matter of rectification is same as earlier rectified order than latest rectified order.
• If subject matter of rectification is different from previous rectified order than date of original order.

Now other point which crept in the mind that order should be passed within four year or it is sufficient that application has been made by the assessee within four years’ time limit.

Though the wordings of section 154(7) suggest that rectification order should be passed within four years of time period but looking to the beneficiary provisions to the interest of assesse, Various high courts and supreme court has held that it will be sufficient that application is made within 4 years of time period even though order is passed thereafter. Passing of rectification order after b4 years would not nullify the order if application is made within time period.

The Hon’ble High Court of Allahabad in the case of Vithalji Madhavji vs. TIO 71 ITR 204 (All) wherein the Hon’ble High Court held that where the assessee was unable to get rectification in his favour and also applied within time but the ITO omitted to carry out the rectification the High Court directed the ITO to make rectification beyond limitation.

The Hon’ble Supreme Court in the case of Shree Ayyanar Spinning & Weaving Mills Ltd. vs. CIT 301 ITR 434 wherein the Hon’ble Supreme Court has held that in case an application for rectification was made within 4 years it is the Tribunal who took its own time to dispose off the application under section 254(2) and the order passed by the Tribunal on the application after expiry of 4 year period cannot be held to be time barred.

DEEEMD RECTIFICATION ORDER:  As per section 154(8) of the Act, An Income Tax authority shall pass an order within a period of 6 months from the end of the month in which the application is received by it:

1. Making the amendment; or

2. Refusing to allow the claim.

Language of the section itself suggest that an income tax authority shall pass an order within 6 months but question arise is whether if Income tax Authority has not acted upon than application can be considered as deemed rectification or not. This question is very important in particle terms also because rectification application is seldom considered within 6 months.

People who generally advocate for deemed rectification order put their strength on the similar language of section 12AA and 154(8). It is generally argued that language of both the section are the same and in section 12AA, If order is not passed within time period than registration of trust is considered as deemed registration. Language of the section 154(8) also contains the word “SHALL” hence it is mandatory for the Income Tax Authority to pass an order within 6 months either of acceptance or rejection.

Person of this thought of school also derived strength in their arguments from the circulars issued by CBDT which states that Income Tax Authority should strictly adhere time period of 6 months stipulated in section 154(8) of the Act. Relevant portion of circulars is as under:

CIRCULAR NO. 14/2001 Issued by CBDT:

Considering the absence of any specific time-limits regarding disposal of application for rectification under section 154, and with a view to ensure time-bound disposal of rectification applications, the Act has inserted a new sub-section (8) in section 154 to provide that where an application for amendment under this section is made by an assessee on or after 1st June 2001 to an income-tax authority referred to in the said section, the authority shall pass an order within six months from the end of the month in which the application is received by it, either making the amendment or refusing to allow the claim. The overall time-limit of four years provided in the section for passing any rectification order shall, however, continue to apply. In other words, the period of six months mentioned in the new sub-section (8) cannot extend, under any circumstances, beyond the overall time-limit of four years from the end of the financial year in which the order sought to be rectified was passed.

Like with Instruction no 2/2016 dated 15/02/2016 issued by CBDT has once again states that:

1. Sub-section (8) of section 154 of the Income-tax Act, 1961 (‘Act’) stipulates that where application for amendment is made by assessee/deductor/collector with a view to rectify any mistake apparent from record, the income-tax authority concerned shall pass an order, within a period of six months from the end of the month in which such an application is received, by either making amendment or refusing to allow the claim. It has been brought to the notice of the Board that the said time limit of six months has not been observed in deciding some applications. In such cases, the authorities often take a view that since no action was taken within the prescribed time-frame, application of the taxpayer is deemed to have lapsed, thereby not requiring any action.

2. The matter has been examined by the Board. In this regard, the undersigned is directed to convey that the aforesaid time-limit of six months is to be strictly followed by Assessing Officer while disposing applications filed by the assessee/deductor/collector under section 154 of the Act.The supervisory officers should monitor the adherence of prescribed time limit and suitable admin action may be initiated in cases where failure to adhere to the prescribed time frame is noticed.

Whereas department generally argue that though language of the section 12AA and 154(8) is similar but both the section are altogether different and cannot be taken on equal footing. Though trust is given deemed registration if application is not acted but simply registration does not grant exemption to the trust. It is argued that the provisions of section 12AA are only administrative approval for registration and actual claims of the assessee is subsequently determined in the assessment proceedings after filing of return in respective assessment years. Just because the Trust got registration under section 12AA, it does not mean that the claims made are automatically allowed and there are provisions under the Act to examine the claims of the said Trust even though there is a registration of the Trust under the Act. The registration of Trust may not deprive the Department in examination the claims separately, but those principles are invoked for the purpose of section 154, there will be unintended benefits granted to various assessees by simply not applying the mind by the A.O. in time as prescribed under the statute. Mere making of an application is not sufficient unless until it is judged whether mistake is apparent from records. Department further argue that when overall limit of 4 years is available than sub limit of 6 months does not vitiate the overall limit of 4 years. Time period of 6 months is only indicative and model time limit for the Income Tax Authorities.

The said issue has been considered by the Mumbai tribunal in the case of Desai Investment P Ltd (045 DTR 0075 2010) The Ld. Mumbai tribunal has held that Once a petition has been filed, It requires application of mind primarily to decide whether there is mistake apparent from records under the provision of the Act than only the question of allowing or rejecting the issue will come into picture. In view of this deemed allowance of application does not or should not arise and AO or other authorities under the Act have to pass an order either allowing or rejecting the claim even if it belated.

CONCLUSION: After going through various literature and case law available on this contentious issue, It can be concluded that mistake should be apparent from facts which can be established without arguments. Such type of mistake from records can be rectified by the Authority who had passed such order. It is sufficient that application for rectification is made within 4 years than order can be passed by the income Tax Authorities after 4 years also. If an order is being rectified by the assessing officer himself than such rectification can be passed within 4 years only. Though non consideration of application within 6 months does not entitled an application as deemed rectification order as overall time limit of 4 year is still available with the Income Tax Authorities but if your issue is not debatable and mistake is apparent from records like non-allowance of tax credit, wrong calculation of tax and interest etc. than we can claim that non-passing of order is deemed rectification order as such type of mistake is obvious apparent from records and assesse should not be penalised for non-adherence of time period by Authorities. I am of the considered opinion that if an assesse has regularly reminded the authorities for rectification even for debatable issue which has been decided in favour of the case of the other assesse than also there is fair chance that issue of deemed rectification order is sail through in the court of Law on facts.