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2025 (5) TMI 363 - HC - Income TaxRectification u/s 154 - Scope of powers of the Appellate Commissioner u/s 251 - whether the application is indeed filed for rectification of error apparent on the face of record and is not appeal in disguise? - Whether the Appellant/Assessee was precluded from pursuing the remedy under Section 154 merely because an Appeal u/s 246A was filed subsequently before the Appellate Commissioner against the same assessment order against which the Appellant/Assessee had earlier filed application u/s 154 of the Act? HELD THAT - We are of the view that while powers are vested with the AO to pass the Order rectifying the Assessment Order u/s 154 even if appellate or revisional proceedings are pending it would also not preclude the Appellate Commissioner to enhance the tax liability in respect of the issue which was the subject matter of the Assessment. Thus it can be concluded as follows - (i) In case no appeal is pending before the Appellate Commissioner u/s 246A of the Act and if an order of rectification is passed u/s 154 of the Act the remedy that is available to the Respondent/Income Tax Department is to invoke the power of revision under Section 263 of the Act if such an Order is erroneous and prejudicial to the interests of the Revenue. (ii) However if an appeal is pending before the Appellate Commissioner the Appellate Commissioner has wide powers to enhance the tax liability in respect of those aspects which was the subject matter of the Assessment Order although it was not raised before the Appellate Commissioner in view of the language in Section 251(1)(a) of the Act. Admittedly in the Assessment Order the claim for adjusting the unabsorbed depreciation against the income arising from capital gains was the subject matter of assessment. Therefore it has to be held that the Appellate Commissioner was justified in re-looking the same irrespective of the Order passed under Section 154 of the Act. Income Tax Department is not required to involve the machinery u/s 263 of the Act by the Jurisdictional Commissioner for holding that the consequential Assessment Order passed was erroneous and prejudicial to the interest of the Respondent/Income Tax Department. Therefore we answer the 4th Substantial Question of Law as above by holding that the powers of the Appellate Commissioner under Section 251 of the Act are wide enough to include and to look into issues which was the subject matter of the Assessment Orders and Orders passed under Section 154 of the Act. Set off the unabsorbed depreciation against the profits arising from the long term capital gains - HELD THAT - As per sub-clause (i) to subsection (2) to Section 32 of the Act as it stood between 01.04.2001 to 31.03.2002 the unabsorbed depreciation could be set of against the profit and gains from business or any profession carried on by an Assessee which is assessable for that Assessment Year. If the unabsorbed depreciation cannot be set off against profit and gains of the business or any profession of an Assessee assessable for that AY then such amount can be set off from the income under any other head if any assessable for that Assessment Year. This is clear from a reading of Section 32(2)(ii) of the Act. Thus it is clear that Section 32(2) of the Act as it stood between 01.04.2001 and 31.03.2002 contemplated setting off the unabsorbed depreciation against profits and gains if any not only from any business or profession carried on by an Assessee for that Assessment Year but also from any other head if any assessable for that assessment year. Unabsorbed depreciation was available for being set off against income from profit and gains from business or any profession of that Assessment Year and if the same is not feasible against any other income from that Assessment Year. Substantial Question of Law decided in favour of the Appellant/Assessee. MAT computation u/s 115JB - As matter has to be remitted back to the original authority to re-do the assessment by clearly examining the computation by comparing the income tax payable in both circumstances viz. under the normal method of computation and under Section 115JB of the Act in terms of the book profit. As computation of the profit and loss account of the Appellant/Assessee which has been filed along with the Typed Set of Documents indicates that the Appellant/Assessee had a net income of Rs.115, 29, 30, 526.54. However the net profit before tax arrived at Rs.111, 73, 63, 748.04. The income that was declared in the Return of Income that was filed under Section 139(1) of the Act on 31.10.2002 by the Appellant/Assessee was confined to a fraction of the same for a tune of Rs.1, 28, 39, 356/-. It is evident that the computation given by the Appellant/Assessee made under Section 115JB of the Act is erroneous. The Appellant/Assessee has not disclosed the correct book profit for the purpose of Section 115JB of the Act. Since the dispute pertains to the Assessment Year 2002-2003 it is expected that the Assessing Officer will complete the assessment within a period of six months from the date of receipt of a copy of this order. Needless to state the appellant shall be heard before final orders are passed. Income Tax Appellate Tribunal is right in holding that the provision for deferred tax liability as per AS 22 issued by the Institute of Chartered Accountants of India is an unascertained liability under Explanation (c) to sub-section (2) of Section 115JB for the purpose of computing minimum alternate tax despite the standard being mandated by Section 211(3C) of the Companies Act 1956.
1. ISSUES PRESENTED and CONSIDERED
The Court considered the following core legal questions: (i) Whether the Income Tax Appellate Tribunal was correct in not admitting a fresh ground raised for the first time before it when it involved a pre-question of law and no additional investigation into facts; (ii) Whether unabsorbed depreciation can be set off against long-term capital gains for the relevant assessment year; (iii) Whether the Income Tax Appellate Tribunal was correct in holding that the provision for deferred tax liability as per Accounting Standard 22 (AS 22) constitutes an unascertained liability under Explanation (c) to sub-section (2) of Section 115JB of the Income Tax Act for computing minimum alternate tax, despite AS 22 being mandated by Section 211(3C) of the Companies Act, 1956; (iv) Whether the appellant was precluded from pursuing remedy under Section 154 of the Income Tax Act merely because an appeal under Section 246A was filed subsequently before the Appellate Commissioner against the same assessment order for which the appellant had earlier filed an application under Section 154. 2. ISSUE-WISE DETAILED ANALYSIS Issue (iv): Whether remedy under Section 154 is precluded by filing an appeal under Section 246A Relevant legal framework and precedents: Section 154 of the Income Tax Act empowers the income-tax authority to rectify any mistake apparent from the record in an order passed by it. Sub-section (1A) restricts amendment of an order under Section 154 if the matter has been considered and decided in appeal or revision. Section 246A deals with appeals to the Commissioner (Appeals). Section 251(1)(a) confers wide powers on the Commissioner (Appeals) to confirm, reduce, enhance or annul the assessment, even on matters not raised by the appellant, subject to reasonable opportunity of hearing. Precedents cited include CIT vs. Hero Cycles (P) Ltd, CIT vs. Shri Eklingji Trust, Yogendra Prasad Santhosh Kumar vs. CIT(A), and the Supreme Court decision in Commissioner of Income Tax vs. Rai Bahadur Hardutroy Motilal Chamaria. Court's interpretation and reasoning: The Court observed that an application under Section 154 is confined to rectifying errors apparent on the face of the record and is not a substitute for an appeal. The filing of an appeal under Section 246A does not preclude the Assessing Officer from passing an order under Section 154 before the appellate authority passes its order. However, once the appellate or revisional authority passes an order on the matter, the original authority cannot pass a rectification order on that issue. The Court emphasized that the original order merges with the appellate or revisional order once passed, preventing any contradictory rectification thereafter. The Court rejected the Department's contention that the pendency of appeal precludes any rectification under Section 154. It held that Section 154(1A) only restricts rectification on matters already considered and decided by appellate or revisional authorities. The Court also highlighted the wide powers of the Commissioner (Appeals) under Section 251(1)(a) to revisit and enhance assessment even on issues not raised by the assessee, provided a reasonable opportunity is given. Key evidence and findings: The appellant filed an application under Section 154 on 06.05.2005 and an appeal under Section 246A on 12.05.2005 against the same assessment order dated 28.03.2005. The Assessing Officer passed the rectification order on 25.08.2005, preceding the appellate order dated 15.11.2006. Application of law to facts: Since the rectification order preceded the appellate order, the Assessing Officer was entitled to rectify the mistake apparent on record. The appellate authority was justified in revisiting the issue and enhancing the assessment. The remedy for the Department against the rectification order was to invoke revision under Section 263, not to contend that the rectification was barred by the appeal. Treatment of competing arguments: The appellant argued that the rectification order should prevail and the appellate authority should have treated the issue as not pressed. The Department argued that the appellant was forum shopping and that the rectification was barred once the appeal was filed. The Court rejected the Department's argument and upheld the appellant's right to pursue both remedies concurrently until the appellate order is passed. Conclusion: The Court answered the fourth substantial question of law in favor of the appellant, holding that filing an appeal under Section 246A does not preclude the appellant from pursuing rectification under Section 154 before the appellate authority passes its order. Issue (ii): Whether unabsorbed depreciation can be set off against long-term capital gains Relevant legal framework and precedents: Section 32 of the Income Tax Act deals with depreciation allowance. Section 32(2), as amended by the Finance Act, 2000 (effective 01.04.2001), allowed unabsorbed depreciation to be set off against profits and gains of any business or profession assessable for that year, and if not fully set off, then against income under any other head. However, the Finance Act, 2001 amended Section 32(2) effective 01.04.2002, restricting the set off of unabsorbed depreciation only against profits and gains from business or profession, disallowing set off against income under other heads including capital gains. Precedents cited include CIT vs. Hickson and Dadajee (P) Ltd, CIT vs. Pioneer Asia Packing (P) Ltd, CIT vs. S & S Power Switchgear Ltd, and Bond Safety Beits (Dissolved) vs. DCIT. Court's interpretation and reasoning: The Court held that the relevant provision is Section 32(2) as it stood between 01.04.2001 and 31.03.2002, applicable to the assessment year 2002-2003. During this period, unabsorbed depreciation could be set off against income from any head, including capital gains, if not fully set off against business income. The amendment effective 01.04.2002 applies only to subsequent assessment years. The Court noted that the appellant had unabsorbed depreciation from Assessment Year 1999-2000 and sought to set it off against long-term capital gains arising from sale of land to its subsidiary. The Assessing Officer initially disallowed this set off but later allowed it in a rectification order under Section 154. The Appellate Commissioner disallowed the claim, and the Tribunal upheld this disallowance. The Court found that the Tribunal erred in not recognizing the entitlement of the appellant to set off unabsorbed depreciation against capital gains for the assessment year in question. Key evidence and findings: The appellant's revised return declared business income and capital gains. The sale of land to the subsidiary was initially claimed exempt under Section 47A but later withdrawn as the subsidiary converted the land into stock-in-trade. The unabsorbed depreciation amount was Rs.4,24,88,948/- from Assessment Year 1999-2000. The appellant sought to set off a portion of this against capital gains. Application of law to facts: The Court applied the unamended Section 32(2) to the facts and held that the appellant was entitled to set off unabsorbed depreciation against capital gains for the assessment year 2002-2003. The Court remitted the matter to the Assessing Officer for fresh computation considering this principle and the correct book profits under Section 115JB. Treatment of competing arguments: The Department argued that the amended Section 32(2) effective from 01.04.2002 disallowed set off against capital gains and that the appellant was not entitled to such set off. The appellant relied on pre-amendment law and relevant Supreme Court precedents. The Court sided with the appellant, emphasizing the non-retrospective nature of amendments. Conclusion: The Court answered the second substantial question of law in favor of the appellant, holding that unabsorbed depreciation could be set off against long-term capital gains for the assessment year 2002-2003. Issue (i): Admission of fresh ground before the Tribunal No arguments were advanced by either party on this issue during the hearing. The Court refrained from answering this substantial question of law. Issue (iii): Treatment of deferred tax liability as unascertained liability for minimum alternate tax (MAT) computation The appellant did not press this question of law. The Court answered it against the appellant in light of the amendment to Section 115JB by the Finance Act, 2000, effective 01.04.2001. 3. SIGNIFICANT HOLDINGS "An application under Section 154 of the Income Tax Act is confined only to rectify an error apparent on the face of record and is not intended to be used as a substitute for an appeal. Under no circumstances can an application under Section 154 be allowed to be transformed into an appeal in disguise." "Section 154(1A) restricts rectification of an order only in respect of matters that have been considered and decided by way of appeal or revision. The pendency of an appeal under Section 246A does not preclude the Assessing Officer from passing an order under Section 154 before the appellate authority passes its order." "The Commissioner (Appeals) under Section 251(1)(a) has wide powers to confirm, reduce, enhance or annul the assessment, including matters not raised by the assessee, subject to reasonable opportunity of hearing." "The amendment to Section 32(2) of the Income Tax Act by the Finance Act, 2001, effective 01.04.2002, restricting set off of unabsorbed depreciation only against business income and not against income under other heads including capital gains, is not retrospective. For the assessment year 2002-2003, the pre-amended provision applies." "The unabsorbed depreciation allowance as per Section 32(2) of the Act as it stood between 01.04.2001 and 31.03.2002 could be set off against profits and gains from business or profession and, if not fully set off, then against income under any other head, including capital gains." "The matter is remitted to the Assessing Officer to recompute the assessment for the assessment year 2002-2003 considering the entitlement to set off unabsorbed depreciation against long-term capital gains." Final determinations:
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