Debatable interpretation bars rectification when carried-forward losses are excluded from dividend grossing-up under income-tax law.

Rectification under section 154 could not be used to revise the grossing-up of dividend income where the issue depended on whether carried-forward losses of the dividend-paying company fell within the proviso to section 16(2) of the Indian Income-tax Act, 1922. The Court noted that the provision referred to specified categories such as profits, income not taxable, and amounts attributable to allowances, and that a carried-forward business loss did not clearly fit those terms. Because the question was reasonably debatable and not an obvious mistake, the rectification order was unsustainable and the issue was decided in favour of the assessee.

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Issues: Whether the Income-tax Officer could invoke rectification powers under section 154 to revise the grossing-up of dividend income by treating carried-forward losses of the dividend-paying company as part of the amount out of which the dividend was declared.

Analysis: The controversy turned on the scope of the proviso to section 16(2) of the Indian Income-tax Act, 1922, which required inclusion only of specified items such as profits and gains not included in total income, income on which tax was not payable, and amounts attributable to allowances made in computing profits and gains. The carried-forward business loss did not clearly fall within any of those categories. The Court held that a distinction exists between an allowance and a deduction, and that it could not be said with certainty that every carried-forward loss was an allowance for this purpose. Since more than one view was reasonably possible on the construction of the provision, the issue was not one of obvious mistake but of debatable interpretation. Following the principle that rectification cannot be used to resolve a disputed legal question, the rectification order was unsustainable.

Conclusion: The alleged error was a debatable issue and could not be rectified under section 154; the question was answered in favour of the assessee.

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