2013 (1) TMI 46 - HC - Income Tax

Tribunal rules on expenditure & interest calculation; Supreme Court clarifies Section 154 scope

The Tribunal ruled in favor of the assessee on issues related to expenditure on sales promotions and advertisement, holding that the mistakes made by the ... Scope of Section 154 - Mistake apparent from the record – Whether decision on debatable point of law is mistake apparent on the record - Difference between change of opinion and the rectification of mistake - Rectifiable mistake – Advertisement in newspapers & articles given to the stockiest and dealers claim as business expenditure u/s 37(3A) – After completion of assessment - AO passes order u/s 154 on the ground that advertisement was not made in small newspapers - and the presentation articles were given under the scheme to the stockiest and not to the consumers, was a debatable issue - Held that:- As concluding from the fact of the case that during the course of assessment the claims were duly scrutinized, considered and allowed in respect of expenses claimed both under the head. Following the decision in case of In Mepco Industries Ltd., (2009 (11) TMI 24 - SUPREME COURT), Apex Court has drawn the difference between change of opinion and the rectification of mistake - a rectifiable mistake is mistake, which is obvious and not something, which needs to be established by a long drawn process of reasoning, or where two opinions are possible. It must be a patent mistake, which is obvious. Its discovery should not depend on elaborate arguments. - Therefore, the order u/s 154 was not made on any mistake apparent from the record, which was a rectifiable mistake, but was change of opinion by which the department had to adopt the reasoning on which two opinions should be possible. In favour of assessee Interest u/s.139 (8) – Rectification of order u/s 154 – Mistake in calculation of month for charging interest u/s 139(8) - Due date of filing return was 31.7.1979 – Return was filed on 31.12.1979 - Held that:- In case Laxmi Rattan Cotton Mills (1973 (4) TMI 29 - ALLAHABAD HIGH COURT) that a month, must be taken to mean a period of 30 days - the word ''month' is to be taken to mean a period of 30 days and thus the delay for charging interest was of five months and not of four months. The mistake, therefore, was obvious and apparent to on the record and was rectifiable mistake for which proceedings under Section 154 could be taken. - In favour of revenue Advance tax – Whether the amount deposited prior to 31st March, 1979, as advance-tax but after the due date can be considered for the purposes of the computation of interest - The assessee had paid Rs.38,700/- on 21.10.1978 - The advance tax was due by 15.9.1978 - The AO felt that the belated payment could not be treated as advance tax - Held that:- The amount deposited prior to 31st March, 1979 could be treated as advance tax. After the due date it could not be treated as advance tax for the purposes of computation of interest. It was admitted that amount was deposited after the due date and thus A.O. could not have deducted it to arrive on an amount on which interest is to be charged. It was a mistake apparent from the record and which was rectifiable and which could be corrected u/s 154. In favour of revenue Issues Involved:1. Applicability of Section 37(3) for expenditure incurred under the scheme given to stockists and distributors.2. Rectifiability of the expenditure incurred on advertisement in newspapers under Section 154.3. Applicability of Section 37(3A) for advertisement expenditure and its rectifiability under Section 154.4. Correctness of interest computation under Section 139(8) and its rectifiability under Section 154.5. Definition of 'one month' in the context of interest computation under Section 139(8).6. Applicability of Section 154 for debatable issues where two opinions are possible.Detailed Analysis:Issue 1: Applicability of Section 37(3) for expenditure incurred under the scheme given to stockists and distributorsThe Tribunal held that the expenditure of Rs.1,70,699/- on presentation articles to stockists and dealers is clearly an expenditure on sales promotions and falls within the purview of Section 37(3A). The Tribunal found that the Assessing Officer (A.O.) made a patent and obvious mistake of law, which could be rectified under Section 154. The Tribunal concluded that the CIT (A) erred in holding that the issue was debatable and thus not subject to rectification under Section 154.Issue 2: Rectifiability of the expenditure incurred on advertisement in newspapers under Section 154The Tribunal found that the CIT (A) was in error in holding that not disallowing any portion of expenditure on advertisement in newspapers was not a mistake rectifiable under Section 154. The Tribunal stated that the onus was on the assessee to establish that the advertisement was given in small newspapers. The A.O. overlooked the provisions of sub-section (3A) at the time of assessment, making it a mistake rectifiable under Section 154.Issue 3: Applicability of Section 37(3A) for advertisement expenditure and its rectifiability under Section 154The Tribunal held that the expenditure on advertisement falls under the purview of sub-Section 37(3A). The A.O.'s failure to disallow a portion of this expenditure at the time of assessment was a patent and obvious mistake of law, rectifiable under Section 154. The Tribunal disagreed with the CIT (A)'s view that the issue was debatable and thus not rectifiable.Issue 4: Correctness of interest computation under Section 139(8) and its rectifiability under Section 154The Tribunal found that the A.O. made a mistake in working out the amount of interest, which could be rectified under Section 154. The CIT (A) had cancelled the additional interest charged on the grounds that the A.O. had the discretion to reduce or waive interest under Rule 117A. The Tribunal held that the CIT (A) was not justified in interfering with the A.O.'s order, as there was no evidence on record to support the reduction or waiver of interest.Issue 5: Definition of 'one month' in the context of interest computation under Section 139(8)The Tribunal relied on the judgment of the Allahabad High Court in CIT v. Laxmi Ratan Cotton Mills Co. Ltd., which held that a month under Section 271(1)(a) must be taken to mean a period of 30 days. Thus, the A.O. was justified in holding that the delay was of five months, making the charging of interest for four months a mistake rectifiable under Section 154.Issue 6: Applicability of Section 154 for debatable issues where two opinions are possibleThe Supreme Court in MEPCO Industries Ltd. v. Commissioner of Income Tax & Anr. held that a rectifiable mistake must be obvious and not something that needs to be established by a long drawn process of reasoning. The Tribunal found that the issues of expenditure on advertisement in newspapers and presentation articles to stockists were debatable and involved a change of opinion, not a rectifiable mistake. Therefore, the order under Section 154 was not justified.Conclusion:- Questions (i), (ii), and (iii): Decided in favor of the assessee and against the revenue.- Question (iv): Decided against the assessee and in favor of the department, as the mistake in charging interest for four months was rectifiable.- Question (v): Decided against the assessee and in favor of the department, as the belated payment could not be treated as advance tax.- Question (vi): Decided accordingly, recognizing the applicability of Section 154 only for non-debatable issues.