2025 (6) TMI 315 - AT - Income Tax

Validity of order passed u/s 154 - addition on account of investment in purchase of mutual fund to the income of the assessee thereby revising the income - HELD THAT - In the instant case in hand from the perusal of impugned order passed u/s 154 of the IT Act it is apparent that the concerned authority i.e. the Assessing Officer neither issued notice of hearing to the assessee nor provided any opportunity of hearing to the assessee before making the amendment in the order passed under section 143(3) r.w.s. 147 of the IT Act. Therefore we find force in the arguments of assessee that the order u/s 154 was passed without providing any opportunity of hearing to the assessee hence the order passed u/s 154 is bad in law and accordingly deserves to be set-aside. Considering the totality of the facts of the case and on the basis of material available on record we are of the considered opinion that the investment in the impugned mutual fund was made by wife of the assessee namely from the receipt of redemption of other mutual funds and the name of the assessee was appearing only as a second holder and not as the primary holder. Secondly the impugned order u/s 154 of the IT Act was passed without issuing any notice to the assessee and also passed without providing any opportunity of hearing to the assessee accordingly it is bad in law and cannot be sustained. Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the addition of Rs. 5,30,000/- made by the Assessing Officer (AO) by way of an order under section 154 of the Income Tax Act (IT Act) to the income of the assessee on account of unexplained investment in mutual funds was justified and sustainable?

(b) Whether the impugned order passed under section 154 of the IT Act, which enhanced the income by Rs. 5,30,000/-, was a valid rectification order or an impermissible reassessment in disguise?

(c) Whether the AO complied with the mandatory procedural requirement of providing the assessee a reasonable opportunity of hearing before passing the rectification order under section 154(3) of the IT Act?

(d) Whether the investment in the mutual funds was rightly attributed to the assessee or was it made by the wife of the assessee, who was the first holder of the mutual funds?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Legitimacy and correctness of addition under section 154 of the IT Act

The relevant legal framework includes section 154 of the IT Act, which permits rectification of "mistake apparent from the record" by the income-tax authority. The scope of section 154 is limited to correcting errors that are evident on the face of the record and does not permit re-opening or re-assessment of issues already decided.

The Tribunal noted that the AO, in the original reassessment order dated 23.03.2015 passed under section 143(3) read with section 147, had made no addition on account of the Rs. 5,30,000/- investment in mutual funds, although other income such as interest and short-term capital gains were added. Subsequently, on 11.09.2017, the AO passed an order under section 154 to add Rs. 5,30,000/- to the income, stating that this amount was discussed but inadvertently omitted from the computation of total income in the earlier order. The Commissioner of Income Tax (Appeals)/NFAC had upheld this addition, holding that it was a curable error within the meaning of section 154.

The Tribunal examined whether the omission of adding Rs. 5,30,000/- was a "mistake apparent from record" or a substantive issue requiring fresh adjudication. It found that the reassessment order had deliberately refrained from making this addition after considering the submissions and documents furnished by the assessee, including the source of funds. Therefore, the subsequent addition under section 154 was not a mere clerical or arithmetical error but effectively a fresh addition enhancing the tax liability.

Precedents on the scope of section 154 emphasize that it cannot be used to re-open issues or revisit decisions already taken after due consideration. The Tribunal held that the order under section 154 was not a genuine rectification but amounted to an impermissible reassessment, which is beyond the scope of section 154.

Issue (c): Violation of principles of natural justice in passing order under section 154

Section 154(3) of the IT Act mandates that where an amendment under section 154 has the effect of enhancing assessment or increasing liability, the AO must give notice to the assessee and allow a reasonable opportunity of being heard before passing such order.

The Tribunal found that the AO passed the order under section 154 without issuing any notice or providing any hearing opportunity to the assessee. This procedural lapse was highlighted by the assessee's counsel and accepted by the Tribunal as a violation of the statutory mandate and principles of natural justice.

The absence of notice and hearing rendered the order under section 154 bad in law and unsustainable. The Tribunal relied on the plain language of section 154(3) and established legal principles that no order enhancing liability can be passed without hearing the affected party.

Issue (d): Attribution of mutual fund investment to the assessee or his wife

The assessee contended that the investment in the mutual funds was made by his wife, who was the first holder, and he was only the second holder. The source of funds for the mutual fund purchase was the redemption proceeds of other mutual funds held by the wife. Complete details of the redemption were furnished to the AO during reassessment proceedings and again before the Tribunal.

The Tribunal examined the documentary evidence, including a chart showing redemption of four mutual funds by the wife amounting to Rs. 5,97,117/- in March 2006, prior to the purchase of the impugned mutual funds in April 2006. This demonstrated that sufficient funds were available with the wife to make the investments.

Given this evidence, the Tribunal accepted the assessee's submission that the investment was rightly attributable to the wife and not the assessee. The AO's initial decision in the reassessment order not to make any addition on this account was therefore found to be justified.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The order u/s 154 of the IT Act was passed without providing any opportunity of hearing to the assessee, hence the order passed u/s 154 of the IT Act is bad in law and accordingly deserves to be set-aside."

"Considering the totality of the facts of the case and on the basis of material available on record, we are of the considered opinion that the investment in the impugned mutual fund was made by wife of the assessee namely, Mrs. Minni Narang from the receipt of redemption of other mutual funds and the name of the assessee was appearing only as a second holder and not as the primary holder."

"The addition of Rs. 5,30,000/- made by the AO in the rectification order is not a curable error under section 154 but a substantive issue which was rightly not added in the original reassessment order."

"The impugned order passed u/s 154 of the IT Act is set aside and the AO is directed to delete the addition of Rs. 5,30,000/- made in the hands of the assessee."

The Tribunal thus established the core principles that:

• Section 154 is confined to rectification of mistakes apparent from the record and cannot be used to re-open or re-decide issues already adjudicated.
• An order enhancing tax liability under section 154 must be preceded by notice and opportunity of hearing to the assessee as mandated by section 154(3).
• Proper attribution of investment and income based on documentary evidence is crucial; mere appearances of names as holders do not justify addition without substantive proof.

Accordingly, the appeal was allowed, and the addition of Rs. 5,30,000/- was deleted, reversing the order of the CIT(A)/NFAC and the AO's order under section 154.