2022 (7) TMI 1525 - AT - Income Tax

ITAT rules rectification order invalid for prior period expenses requiring detailed examination beyond obvious mistakes

ITAT Mumbai held that rectification order u/s 154 regarding prior period expenses and loss on sale of RMC was invalid. Following SC precedent in T.S. ... Rectification order passed u/s 154 - AO found that the assessee has debited prior period expenses to the Profit & Loss Account and loss on sale of RMC, which are not allowable - HELD THAT:- The Hon'ble Supreme Court in T.S. Balram, ITO v/s Volkart Brothers [1971 (8) TMI 3 - SUPREME COURT] held that for initiating proceedings under section 154 of the Act, the mistake apparent from record must be an obvious and patent mistake and not something which can be established by long drawn process of reasoning on points on which there may conceivably be two opinions. In view of the above, as is evident from the facts available on record, the issue of prior period expenses, inter–alia, on which rectification u/s 154 was done by the AO in the present case is open to divergent views and the same requires long drawn process of examination, therefore, we are of the view that rectification order passed u/s 154 on this issue clearly falls beyond the ambit of expression “mistake apparent from the record”. Consequently, ground no.2, raised in assessee’s appeal is allowed. Issues involved:1. Appeal against order under section 250 of the Income Tax Act, 1961.2. Upholding of order under section 154 of the Income Tax Act, 1961 by the Commissioner of Income Tax (Appeals).3. Addition of prior period expenses and loss on sale of RMC by the Assessing Officer.Issue 1: Appeal against order under section 250 of the Income Tax Act, 1961:The appellant filed an appeal against the order dated 09/07/2021 passed under section 250 of the Income Tax Act, 1961 by the Commissioner of Income Tax (Appeals) for the assessment year 2011–12. The appellant raised grounds challenging the order, alleging that it was passed without proper consideration and appraisal of the facts of the case. The appellant argued that the order was capricious and made with the intention to punish, without taking into account genuine facts. The grievance of the appellant was primarily against the rectification order passed by the Assessing Officer under section 154 of the Act, which was upheld by the Commissioner of Income Tax (Appeals).Issue 2: Upholding of order under section 154 of the Income Tax Act, 1961 by the Commissioner of Income Tax (Appeals):The Assessing Officer, in the present case, made additions on account of prior period expenses and loss on sale of RMC under section 154 of the Act. The Commissioner of Income Tax (Appeals) upheld these additions, dismissing the appellant's appeal. The Commissioner noted that the appellant failed to provide written submissions or explanations to support their case during the proceedings. The Commissioner emphasized that deductions can only be permitted for expenses incurred in the relevant accounting year for computing profits. The appellant's claims regarding prior period expenses and loss on sale of RMC were dismissed due to lack of substantiation and non-compliance with the notices issued.Issue 3: Addition of prior period expenses and loss on sale of RMC by the Assessing Officer:The Assessing Officer, through a rectification order under section 154 of the Act, added amounts on account of prior period expenses and loss on sale of RMC to the appellant's income. The Assessing Officer found that these expenses were not allowable and required disallowance. However, during the appeal process, the appellant argued that the issue of prior period expenses was debatable and beyond the scope of section 154. The Tribunal referred to a previous case and held that the allowability of prior period expenses is a debatable matter, not falling under the purview of rectification under section 154. Consequently, the Tribunal allowed the appellant's appeal on the issue of prior period expenses but upheld the rectification order regarding the loss on sale of RMC.This detailed analysis covers the appellant's appeal against the orders under sections 250 and 154 of the Income Tax Act, 1961, focusing on the additions made by the Assessing Officer and the subsequent decisions by the Commissioner of Income Tax (Appeals) and the Tribunal.