Rectification cannot cure a debatable tax issue when exemption and disallowance provisions remain unsettled

Section 154 could not be invoked to recompute a disallowance under section 40A(5) by adjusting for exemption under section 10(6)(viia) where the interaction of those provisions remained debatable. The Court treated the extent of exemption available to a foreign managing director's remuneration and perquisites as a disputed point of law, not a mistake apparent from the record. Because a reasonable controversy cannot be corrected through rectification, the rectification order was held unsustainable and the issue was decided in favour of the assessee.

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Issues: Whether the Assessing Officer could invoke rectification under section 154 of the Income-tax Act, 1961, to recompute the disallowance under section 40A(5) on the basis of the extent of exemption available under section 10(6)(viia), when the underlying controversy was debatable.

Analysis: The relevant controversy concerned the interaction between section 40A(5) and the exemption under section 10(6)(viia) in relation to the remuneration and perquisites of a foreign managing director. The Court noted that the scope of section 40A(5) and the extent to which exempt amounts under section 10(6)(viia) were to be taken into account were matters on which the law was not settled at the material time. A point that is open to reasonable debate cannot be treated as a mistake apparent from the record for the purpose of section 154.

Conclusion: The rectification order was not sustainable, as section 154 could not be used to correct a debatable issue; the questions were answered in favour of the assessee and against the Revenue.

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