Revenue department's Section 154 rectification order set aside for violating mandatory notice and hearing requirements

The Telangana HC allowed a writ petition challenging a rectification order under Section 154 that disallowed carrying forward of losses for FY 2016-17. The court held that since the disallowance would deny the petitioner the right to carry forward losses, causing prejudice, mandatory notice and hearing requirements under Section 154(3) applied. The revenue department failed to comply with these statutory requirements. The HC set aside the rectification order, finding it violated Section 154(3) provisions and was therefore unsustainable.

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Issues involved:
The judgment deals with a writ petition filed under Article 226 of the Constitution of India challenging an order passed by the 1st respondent under Section 154 r/w Section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2016-17, seeking relief on the grounds of being void, arbitrary, illegal, and in violation of Articles 14 and 265 of the Constitution of India, without jurisdiction, and in violation of principles of natural justice.

Adjudication of the present dispute:
The case involved a scheme of amalgamation between two companies, where one company was dissolved and its assets transferred to another company. The petitioner had filed its return for the Assessment Year 2016-17, which was subjected to scrutiny under Section 143(3) of the Income Tax Act, resulting in an order of assessment. However, an impugned order dated 27.03.2023 was passed by the 1st respondent under Section 154 read with Section 143(3) of the Act, disallowing the carrying forward of losses. The petitioner challenged this order on grounds of violation of natural justice, statutory provisions, and being barred by limitation.

Violation of Section 154:
The petitioner contended that the impugned order violated Section 154 of the Act by disallowing the carrying forward of losses without issuing a show-cause notice, as mandated by Sub-Section (3) of Section 154. The petitioner argued that the order had an adverse impact on their interests by depriving them of carrying forward the loss into the next financial year. The respondent-Department, however, argued that there was no adverse financial implication on the assessee, as it did not result in an enhanced tax liability or additional tax payment.

Legal Provisions and Interpretation:
Section 154 of the Income Tax Act provides for rectification of mistakes apparent from the record by the income-tax authority. Sub-Sections (1) & (2) grant powers for rectification, and Sub-Section (3) mandates that any rectification enhancing an assessment or reducing a refund must be done after giving notice to the assessee and providing a reasonable opportunity of being heard. The judgment emphasized the mandatory nature of Sub-Section (3) in cases where the assessee would suffer a loss due to the rectification.

Decision and Conclusion:
The Court found that the impugned order was in violation of the statutory provision of Section 153(3) of the Act by not complying with the requirement of issuing a notice and providing an opportunity of hearing to the assessee. As a result, the order was set aside, and the writ petition was allowed. The Court did not address other objections raised by the petitioner, leaving them open for future consideration.

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