2025 (7) TMI 48 - AT - Income Tax

Revision u/s 263 - validity of Rectification u/s 154 order by deleting additions made u/s 68 - HELD THAT - We are of the considered view in this factual backdrop that such a course of substantive adjudication in an instance of section 154 rectification by the Assessing Officer could not be held sustainable in law as per T. S. Balaram ITO v Volkart Bros. 1971 (8) TMI 3 - SUPREME COURT This is what has formed the precise reason for the learned PCIT to invoke section 263 revision jurisdiction in light of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT We thus see no reason to interfere with the learned PCIT s impugned action holding the Assessing Officer s above section 154 rectification as an erroneous one causing prejudice to the interest of the Revenue. Rejected accordingly.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

• Whether the Assessing Officer's rectification order under section 154 read with section 143(3) of the Income-tax Act, 1961 (the Act), deleting additions made under section 68 relating to unexplained cash credits, was erroneous and prejudicial to the interest of the Revenue.
• Whether the Assessing Officer exceeded his jurisdiction under section 154 by undertaking a substantive adjudication and deleting additions that were debatable issues requiring appellate consideration rather than rectification.
• Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking his revisionary powers under section 263 of the Act to cancel the Assessing Officer's rectification order and direct reassessment including the addition of Rs. 4.55 crores.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality and scope of Assessing Officer's rectification under section 154 r.w.s. 143(3)

Relevant legal framework and precedents: Section 154 provides limited powers to the Assessing Officer to rectify "mistakes apparent from the record". The scope of such rectification is circumscribed and does not extend to re-opening or re-adjudicating issues that are debatable or require detailed examination. The Supreme Court in T. S. Balaram, ITO v Volkart Bros (1971) 82 ITR 40 (SC) has held that rectification cannot be used as a substitute for appeal or revision. Similarly, Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC) affirms that revision under section 263 can be invoked where the order is erroneous and prejudicial to Revenue.

Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer initially made additions under section 68 for unexplained cash credits amounting to Rs. 4.23 crores. Subsequently, by a rectification order dated 17 March 2023, the AO deleted these additions, reducing the assessed income drastically. The Tribunal held that such a substantive change in assessment through a rectification order was impermissible. The rectification provision cannot be used to revisit debatable issues or to overturn considered findings made after due enquiry. The AO's action amounted to transgressing the limited scope of section 154 and encroaching upon appellate jurisdiction.

Key evidence and findings: The AO's initial assessment order dated 9 September 2021 had detailed reasons for additions under section 68, including dissatisfaction with the genuineness and creditworthiness of the creditors. The rectification order was based on the assessee's submission of evidence during scrutiny but did not constitute a mistake apparent from record. The PCIT found the AO's deletion of additions as erroneous and prejudicial to Revenue.

Application of law to facts: The Tribunal applied the principle that rectification under section 154 is limited to correcting clerical or arithmetical mistakes or errors apparent on the face of record. The deletion of additions based on reassessment of facts and appreciation of evidence was beyond the scope of rectification. Such matters are to be decided in appeal or revision, not through rectification.

Treatment of competing arguments: The assessee argued that the rectification was justified because all relevant evidence was filed proving identity, genuineness, and creditworthiness of the cash credits. However, the Tribunal rejected this, emphasizing that the genuineness of credits under section 68 is a debatable issue requiring application of mind and cannot be undone by rectification. The Revenue and PCIT contended that the AO's order was erroneous and prejudicial, which the Tribunal upheld.

Conclusions: The rectification order deleting additions under section 68 was held to be erroneous and beyond the scope of section 154. The AO had no jurisdiction to delete additions on merits through rectification.

Issue 2: Validity of PCIT's exercise of revisionary powers under section 263

Relevant legal framework and precedents: Section 263 empowers the PCIT to revise an order if it is erroneous and prejudicial to the interest of Revenue. The revision cannot be arbitrary and must be based on a clear error of law or fact. The Supreme Court in Malabar Industrial Co. Ltd. vs. CIT confirmed that revision is justified where the Assessing Officer has passed an order which is erroneous and causes prejudice to Revenue.

Court's interpretation and reasoning: The Tribunal found that the PCIT rightly invoked section 263 to cancel the AO's rectification order. Since the rectification order was held to be erroneous and prejudicial to Revenue, the PCIT's direction to restore the additions and pass a fresh order was valid. The PCIT correctly identified that the AO had exceeded his jurisdiction under section 154 and that the matter involved debatable issues requiring proper adjudication.

Key evidence and findings: The PCIT's order detailed that the AO's deletion of additions was not a rectification of a mistake apparent from record but a substantive change in assessment. The PCIT emphasized that additions under section 68 require satisfaction of the AO based on evidence and cannot be deleted through rectification. The PCIT's findings were supported by the assessment record and submissions.

Application of law to facts: The Tribunal applied the principle that revision under section 263 is a supervisory jurisdiction to correct erroneous orders prejudicial to Revenue. Since the AO's rectification order was erroneous, the PCIT's exercise of revisionary power was valid and justified.

Treatment of competing arguments: The assessee contended that the PCIT's revision was unjustified as the rectification was lawful. The Tribunal rejected this, holding that the PCIT's action was in accordance with law and necessary to protect Revenue's interest.

Conclusions: The PCIT's invocation of section 263 to cancel the erroneous rectification order and direct reassessment was upheld as valid and lawful.

3. SIGNIFICANT HOLDINGS

The Tribunal preserved the following crucial legal reasoning verbatim from the PCIT's order:

"6.2. The powers of AO relating to section 154 of the I. T. Act are very limited, they are related to any mistake apparent from record only. The additions made u/s 68 of the I. T. Act after giving reasons may be a matter for appeal before CIT(A) but cannot be rectified by AO u/s 154 of the I. T. Act to the effect of deleting the additions u/s 68 of the I. T. Act."

"6.4. The genuineness of the claim of the assessee relating to section 68 of the I. T. Act & requirement of satisfaction of the AO for such credits is a matter which would require deliberation and application of mind. An addition for three credits, found to be not fully explained u/s 68 of the I. T. Act, is not an addition which can be rectified u/s 154 of the I. T. Act as it is a debatable issue. The addition made by the AO is not a mistake which can be rectified as apparent from record."

"7. In view of the discussion in the foregoing paragraphs, the rectification order completed in this case u/s 154 of the I. T. Act, 1961 for A.Y. 2018-19 on 17.03.2023 is held to be erroneous, in so far as it is prejudicial to the interest of revenue under the ambit of the provisions of section 263 of the I. T. Act, 1961. The order u/s 154/143(3) dated 17.03.2023 of the I. T. Act is cancelled."

The core principles established by the Tribunal include:

• Rectification under section 154 is confined to correcting mistakes apparent from the record and cannot be used to revisit debatable issues or substantive adjudications.
• Additions made under section 68 relating to unexplained cash credits involve satisfaction of the Assessing Officer based on evidence and are not amenable to rectification once decided after due enquiry.
• The revisionary power under section 263 is validly exercisable where an order is erroneous and prejudicial to Revenue, including where the AO exceeds jurisdiction under section 154.

Final determinations on each issue were:

• The Assessing Officer's rectification order deleting additions under section 68 was erroneous and beyond the scope of section 154.
• The PCIT was justified in invoking section 263 to cancel the rectification order and direct reassessment including the addition of Rs. 4.55 crores.
• The appeal filed by the assessee against the PCIT's revision order was dismissed.