WHETHER THE COMMISSIONER OF INCOME TAX IS EMPOWERED TO RECTIFY HIS OWN ORDER BASED ON SUBSEQUENT SUPREME COURT ORDER

[Mr. M. GOVINDARAJAN]

 Section 154 of the Income Tax Act, 1961 (‘Act’ for short) deals with the rectification of order.  In ‘Deva Metal Powders (P) Limited V. Commissioner, Trade Tax, Uttar Pradesh’ – 2007 -TMI - 48122 - SUPREME COURT OF INDIA the Supreme Court held that a ‘rectifiable mistake’ must exist and the same must be apparent from the record.   It must be a patent mistake, which is obvious and whose discovery is not dependant on elaborate arguments.

In ‘Commissioner of Central Excise, Calcutta V. A.S.C. U. Limited’ – 2002 -TMI - 46469 - SUPREME COURT OF INDIA the Supreme Court held that a ‘rectifiable mistake’ is a mistake which is obvious and not something which has to be established by a long drawn process of reasoning or where two opinions are possible.   Decision on debatable point of law cannot be treated as ‘mistake apparent from the record’.

In ‘Jiyajeerao Cotton Mills Limited V. Income Tax Officer, Calcutta and others’ – 1979 -TMI - 36150 - CALCUTTA High Court the appellant derived profits from three industries, one of which qualified for special rebate under Part I of Schedule I to the Finance Act, 1965, for the assessment years 1966-67. In granting this special rebate, the Income Tax Officer computed the profits attributable to that industry without deducting development rebate granted to the appellant. The Income Tax Officer sought to rectify the mistake under Sec. 154 of the Act by recomputing the profits by deducting the developmental rebate.  The appellant filed a writ petition for setting aside the notice of rectification.  The High Court held that since there was conflict of opinion on computation of profits of priority industry for granting tax relief which conflict was resolved by subsequent decision of the Supreme Court did not obliterate the conflict of opinion prior to it. The High Court held that under Sec. 154 of the Act, the rectification was not permissible on debatable issue.

In ‘Kil Kotagiri Tea and Coffee Estates Limited V. Income Tax Appellate Tribunal and others’ – 1988 -TMI - 24824 - KERALA High Court the assessee claimed interest on advance tax paid by it in excess but beyond the due dates.  The claim of the assessee was rejected by the Department.   The Commissioner of Income Tax upheld the claim of the assessee.  The Tribunal held that belated payments were not to be taken into account as advance tax for purpose of Section 214 of the Act and therefore interest was not admissible for such belated payments.  The Tribunal took the said decision relying on the judgment of Kerala High Court in ‘A. Sethumadhavan V. Commissioner of Income Tax’ – 1980 -TMI - 37046 - KERALA High Court.   The said decision was subsequently reversed by the Supreme Court. The Supreme Court held that payment of tax made within the financial year, though not within specified dates, should be treated as advance tax and the assessee was entitled to interest on excess tax paid. The assessee filed an application under Section 154 of the Act for rectification of the order of the Tribunal in view of the Supreme Court judgment. The Kerala High Court came to the conclusion that the rectification contemplated under Section 154 must be a ‘rectifiable mistake’ which is a mistake in the light of law in force at the time when the order sought to be rectified was passed.

In ‘MEPCO Industries Limited V. Commissioner of Income Tax’ – (2009 -TMI - 35015 - SUPREME COURT) the appellant is engaged in the business of manufacture of Potassium Chlorates in the Union Territory of Pondicherry.  The appellant received power subsidy for two years which it initially offered as revenue receipt. Later the appellant filed a revision petition under Section 264 of the Act contending that the subsidy amount was a capital receipt and not liable to be taxed.  The revision petition was allowed by the Commissioner on 30.04.1997.

On 19.09.1997, the Supreme Court in the case of ‘Sahney Steel and Press Works Limited V. Commissioner of Income Tax’ – 1997 -TMI - 5620 - SUPREME Court held that incentive subsidy admissible to the petitioner was a revenue receipt and hence it was liable to be taxed under Sec. 28 of the Act.  The order stated that incentives would not be available unless and until production had commenced.  Following this judgment the Commissioner of Income Tax passed an order of rectification on 30.03.1998.  According to the Commissioner the power tariff subsidy given to the appellant was admissible only after the commencement of production.  The said subsidy constituted operation subsidies and not capital subsidies.

Aggrieved by the order the appellant filed a writ petition before the Madras High Court which took the view that, in view of the subsequent decision of the Supreme Court in the case of ‘Sahney Steel and Press Works Limited’ the Department was entitled to invoke Section 154 of the Act and that the Commissioner was right in treating the receipt of subsidies as a revenue receipt.  The said decision was affirmed by Division Bench of the Madras High Court.

The appellant filed this appeal by special leave before Supreme Court. The assessment years are 1993 – 94 and 1994-95. The short point involved in the appeal is whether there existed a ‘rectifiable mistake’ enabling the Department to invoke Section 154 of the Act.  The Supreme Court that Sec. 154 could not be invocable.  The present case involves change of opinion. The Government grants different types of subsidies to the entrepreneurs.  The subsidy in the case of ‘Sahney Steel and Press Works Limited’ was an incentive subsidy linked to production. In income tax matters one has to examine the nature of the item in question, which would depend on the facts of each case.  This exercise cannot be done under Section 154 of the Act.  In this case originally, the Commissioner of Income Tax had taken the view that the subsidy in question was a capital receipt not taxable under the Act.  After judgment of the Supreme Court in ‘Sahney Steel and Press Works Limited’ case the Commissioner of Income Tax has taken the view that the subsidy in question was a revenue receipt. Therefore in the view of the Supreme Court the present case is a classic illustration of change of opinion.  Therefore the Department has erred in invoking Section 154 of the Act.  The Supreme Court allowed the appeal filed by the appellant.