2013 (10) TMI 1503 - AT - Income Tax

Revenue's Application Allowed for Ambica Realities; Patel's Dismissed. Tribunal's Power to Rectify Mistakes

ACIT, Circle-1, Rajkot Versus Mansukhlal N. Patel and M/s. Ambica Realities Pvt. Ltd

The Revenue's Miscellaneous Application in the case of M/s. Ambica Realities Pvt. Ltd. was allowed, taxing the entire profit of Rs. 2,16,56,000 ... - ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal can rectify its earlier order under section 254(2) to remove a mistake apparent from the record where the Tribunal confirmed a shareholder's quantified share of company profits but deleted the corresponding addition in the hands of the company, producing an inconsistent result. 2. Whether rectification under section 254(2) may be exercised suo motu or on application to amend an order to make the tax treatment consistent between shareholder and company assessments. 3. Whether the Revenue's request to restrict rectification to 93.75% of the assessed profit (i.e., exclude the already taxed 6.25% share) is legally tenable when the assessing officer had assessed the entire profit substantively in one assessment and protectively in the other. 4. Whether a miscellaneous application under section 254(2) filed to rectify a Tribunal order is maintainable where the Tribunal's original order has been affirmed by the High Court (i.e., whether the Tribunal's order has merged into the High Court's order and is therefore not amenable to rectification by the Tribunal). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Rectification under s.254(2) for inconsistency between shareholder and company assessments Legal framework: Section 254(2) empowers the Tribunal to amend its order under s.254(1) to rectify any mistake apparent from the record; the provision allows amendment suo motu or on application by a party. Precedent treatment: The Tribunal relied on statutory scope and principles governing rectification (no specific external precedents cited for the principle beyond statutory interpretation and accepted definitions of 'mistake apparent from record'). Interpretation and reasoning: A company is a distinct legal person and profits must exist in the company before allocation to shareholders. Confirming a quantified share for a shareholder presupposes availability of corresponding profit in the company. Two inconsistent orders - one taxing a quantified share in the hands of a shareholder and the other deleting the entire profit in the hands of the company - are inherently contradictory and self-contradictory on the face of the record. Such inconsistency qualifies as a mistake apparent from the record because the two outcomes cannot logically coexist: allocation to a shareholder without the company having the underlying profit is impossible. Ratio vs. Obiter: Ratio - where a Tribunal confirms a shareholder's quantified share of company profits, the Tribunal must ensure corresponding availability of those profits in the company; failure to do so results in a mistake apparent from the record amendable under s.254(2). Conclusion: The Tribunal may and should rectify its order to assess the underlying company profits substantively so that the confirmed shareholder allocation is consistent with the tax treatment of the company; accordingly rectification was warranted to tax the entire profit in the hands of the company. Issue 2 - Suo motu/amendment jurisdiction under s.254(2) Legal framework: Section 254(2) authorises amendment either on application by a party or by the Tribunal suo motu to rectify mistakes apparent from the record; the statutory object includes preventing miscarriage of justice, avoiding prejudice, and saving superior court time. Precedent treatment: Treated as an inherent statutory power; the Tribunal applied accepted tests for what constitutes a mistake apparent from record (self-evident errors, inconsistent or contradictory findings readily discernible on bare perusal). Interpretation and reasoning: The Tribunal explained the test for 'mistake' - an error arising from misapprehension of fact or law or from inconsistency that is self-evident on the record. Where such a mistake exists, the Tribunal has plenary jurisdiction to amend its earlier order to remove the inconsistency. Ratio vs. Obiter: Ratio - s.254(2) confers plenary power on the Tribunal to rectify mistakes apparent from the record, including by suo motu amendment where appropriate; the identified inconsistency met that standard. Conclusion: The Tribunal's exercise of rectification power under s.254(2) in the present circumstances was proper and justified to remove the inconsistency. Issue 3 - Whether rectification should be limited to 93.75% (excluding 6.25% already taxed in shareholder's hands) Legal framework: Assessing officer's orders and tribunal findings must be applied consistently; where the assessing officer assessed the full profit substantively in one assessment and protectively in another, rectification must address the actual addition made and the orders as they stand. Precedent treatment: No external authority cited; Tribunal relied on the factual matrix of how the assessing officer made additions (entire profit substantively in shareholder's assessment and protectively in company's assessment) and on the Tribunal's own deletion of the company's addition. Interpretation and reasoning: The Revenue's prayer to direct taxation of only 93.75% was misplaced because (a) the assessing officer had assessed the entire profit in the hands of the shareholder on substantive basis and protectively in the hands of the company - therefore rectification must address that entire assessed figure; (b) the Tribunal's order had deleted the entire addition of Rs.2,16,56,000 in both cases (not merely 93.75%); and (c) the High Court's confirmation that the shareholder's share is 6.25% necessarily implies that the entire profit (100%) exists and must be assessable in the company's hands so that the 6.25% allocation can stand. Limiting rectification to 93.75% would ignore the actual form of prior additions and the need to make the record consistent with the affirmed shareholder allocation. Ratio vs. Obiter: Ratio - rectification must operate on the actual assessed figure as it appears in prior orders; where the assessing officer assessed the entire profit and the Tribunal's deletion covered the whole sum, rectification should direct assessment of the entire profit in the company's hands to harmonise orders. Conclusion: Rectification was correctly directed to require assessment of the entire profit in the company's hands (not only 93.75%) to remove the inconsistency and give effect to the shareholder allocation confirmed by the High Court. Issue 4 - Maintainability of rectification application where the Tribunal's order has been affirmed by the High Court Legal framework: Final orders of the Tribunal, when affirmed by a higher court, ordinarily merge into and are superseded by the appellate court's judgment; rectification under s.254(2) is available only against the Tribunal's order where it remains amenable to amendment and not where the Tribunal's view has been finally adjudicated and merged into a higher court's order. Precedent treatment: The Tribunal applied the principle of merger of its order into the High Court's confirmed order and treated such merged orders as not amenable to rectification by the Tribunal under s.254(2). Interpretation and reasoning: Where the High Court has considered and affirmed the Tribunal's findings in respect of a particular appeal, the Tribunal's order stands merged in the High Court's order; it follows that the Tribunal lacks jurisdiction to rectify that aspect of its order under s.254(2) because the matter has been finally adjudicated. In the present factual matrix the High Court confirmed the Tribunal's quantification of the shareholder's 6.25% share and dismissed the Revenue's appeal in that regard; the Tribunal therefore found the miscellaneous application seeking rectification in the shareholder's case to be not maintainable. Ratio vs. Obiter: Ratio - a Tribunal cannot entertain rectification under s.254(2) in respect of an order or part of an order which has been finally adjudicated and affirmed by a higher court, as that Tribunal order has merged in the higher court's judgment. Conclusion: The miscellaneous application to rectify the Tribunal's order in the shareholder's appeal was not maintainable and was dismissed because the Tribunal's earlier view had been affirmed by the High Court and thus merged into the High Court's order; rectification by the Tribunal in that appeal was therefore barred. Overall Disposition (legal conclusion derived) The Tribunal concluded that: (a) rectification under s.254(2) was justified to remove an apparent mistake arising from inconsistent orders (shareholder taxed to the extent of 6.25% while company's entire profit was deleted), and therefore the company's assessment must be amended so that the entire profit is taxed in the company's hands; (b) the rectification should operate on the full sum as originally assessed by the assessing officer (i.e., entire profit), not merely 93.75%; and (c) the rectification petition in respect of the shareholder's matter was dismissed because the Tribunal's order in that appeal had been affirmed by the High Court and had merged into the High Court's order, rendering it not amenable to rectification by the Tribunal.