2025 (11) TMI 568 - AT - Income Tax

Rectification under s.154 upholds 30% tax rate for domestic company formed in 2016-17; 29% not applicable

Nirchem Cement Limited. Versus Asst. Commissioner of Income Tax, Circle - 2 (3) (1), Mumbai

ITAT, Mumbai upheld the AO's rectification under s.154 increasing the domestic company tax rate to 30% from 29%, dismissing the assessee's claim that the ... Taxation of demestic company - Charging of tax @ 30% instead of 29% vide order passed u/s 154 - assessee submitted that, as per the Finance Act, 2017, the tax is payable @ 29% if the turnover of the domestic company is less than Rs. 5 crore during the previous year 2014-15 and since it was incorporated on 02.08.2016, its turnover for the previous year, 2014-15, was Rs. Nil, and hence, the tax rate applicable for the year under consideration is 29%. HELD THAT:- We do not find any merit in the submission of the assessee or the analogy drawn during the hearing, as in the present case, the assessee, being the juridical person, came into existence only on the date of its incorporation, i.e. 02.08.2016, falling within the previous year 2016-17. Therefore, there can be no question of the assessee having a turnover or gross receipts in the previous year 2014-15, i.e., prior to its coming into existence or incorporation. Accepting the assessee’s plea is similar to expecting an unborn child to have an income. Therefore, the provisions of clause (i) of Paragraph E of the First Schedule to the Finance Act, 2017, prescribing the tax rate of 29%, are only applicable in case of a domestic company which was in existence in the previous year 2014-15 and had a total turnover or gross receipt not exceeding Rs. 5 crore. Thus, we do not find any infirmity with the findings of the CIT(A) that the above provisions are not applicable in the case of the assessee and its case only falls within the provisions of clause (ii), prescribing a tax rate of 30%. Since vide order passed under section 143(3) of the Act, the tax was levied @ 29%, we are of the considered view that the same was an obvious mistake which was apparent from the record, as the assessee’s case clearly falls under clause (ii) of Paragraph E of the First Schedule to the Finance Act, 2017. Accordingly, we upheld the exercise of the jurisdiction by the AO under section 154 of the Act in levying the tax @30% in the present case. As regards the decision in the case of Kluber Lubrication India Pvt. Ltd. [2024 (7) TMI 1374 - ITAT BANGALORE] placed reliance upon by the learned Senior Counsel, we are of the considered view that the said decision is factually distinguishable as the issue whether the excise duty forms part of the turnover can only come up for consideration once the company is in existence. Thus, this issue is not debatable and the order under section 154 of the Act was rightly passed levying the tax @30%. As a result, the impugned order passed by the learned CIT(A) is upheld, and the grounds raised by the assessee are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a domestic company incorporated after the relevant previous year (2014-15) can be treated as having 'total turnover or the gross receipt in the previous year 2014-15' not exceeding Rs. 5 crore for the purpose of application of the 29% tax rate under Paragraph E(i) of the First Schedule to the Finance Act, 2017. 2. Whether an Assessing Officer correctly exercised rectification jurisdiction under section 154 of the Income Tax Act, 1961 to alter tax charged from 29% to 30% on the ground that charging at 29% was an 'obvious mistake apparent from the record.' 3. Whether a cited decision holding a different factual/legal proposition is binding or distinguishable on the present issue (treatment of turnover for a company not in existence in the relevant previous year). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of 29% rate where company did not exist in previous year 2014-15 Legal framework: Paragraph E of the First Schedule to the Finance Act, 2017 prescribes two alternative rates for a domestic company: (i) 29% where 'its total turnover or the gross receipt in the previous year 2014-15 does not exceed five crore rupees'; and (ii) 30% for cases not covered by (i). Precedent Treatment: No binding precedent was applied to expand clause (i) to companies not yet in existence in 2014-15; a decision cited by the appellant on turnover components (Kluber Lubrication India Pvt. Ltd.) was relied on but treated as factually distinguishable. Interpretation and reasoning: The Court construed clause (i) as applicable only to a domestic company that was in existence during the previous year 2014-15 and whose turnover/gross receipts in that year did not exceed Rs. 5 crore. A juridical-entity approach was adopted: a company incorporated on 02.08.2016 (financial year 2016-17) could not logically or legally be said to have turnover or gross receipts in the previous year 2014-15 because it did not exist then. The analogy equating non-existence to a nil turnover was rejected as unreasonable (described metaphorically as expecting 'an unborn child to have an income'). Ratio vs. Obiter: Ratio - Clause (i) is confined to companies in existence in the specified previous year; a company incorporated later cannot fall within clause (i). Obiter - The Court's rejection of the analogy and the childbirth metaphor are explanatory but not separate holdings. Conclusion: Clause (i) of Paragraph E is inapplicable to companies that came into existence after the previous year 2014-15; such companies fall under clause (ii) and are chargeable at 30%. Issue 2 - Validity of rectification under section 154 to change tax rate from 29% to 30% Legal framework: Section 154 permits rectification of 'mistakes' apparent from the record. The AO used this power to alter tax charged from 29% to 30% after noting the company was not in existence in 2014-15. Precedent Treatment: The Court applied established principles that rectification under section 154 may be exercised where an error is obvious from the record; no precedent was cited to limit the use of section 154 in this factual matrix. Interpretation and reasoning: Because the tax rate applicable depends on the company's existence and turnover in 2014-15, and the record indisputably showed incorporation in 2016-17, the original charging of 29% was an evident error apparent on the face of the record. The Court found no debatable point of law or fact that would preclude rectification; the rectification was not a re-opening of issues but correction of a manifest mistake. Ratio vs. Obiter: Ratio - Rectification under section 154 was properly invoked where the record plainly demonstrated the company could not meet the statutory precondition for the 29% rate, making the original 29% charge an obvious mistake. Obiter - Observations on the scope of rectification beyond the immediate facts are explanatory. Conclusion: The AO validly exercised section 154 jurisdiction to change the tax rate to 30%; the rectification was justified as correction of a mistake apparent from the record. Issue 3 - Treatment of cited authority and distinction Legal framework: Judicial decisions that address elements of turnover or inclusion/exclusion of specific items (e.g., excise duty) inform but do not determine application where foundational facts (existence of the company in the relevant year) differ. Precedent Treatment: The appellant relied on a decision examining whether excise duty forms part of turnover; the Court held that such a question presupposes that the company was in existence in the relevant year and thus is inapplicable to a company incorporated subsequently. Interpretation and reasoning: The Court found the cited decision factually distinguishable because the turnover question there arose only after establishing company existence; in the present case the threshold issue of existence in 2014-15 is determinative and not in dispute. Therefore, the authority did not create a debatable legal point to impede rectification. Ratio vs. Obiter: Ratio - A decision dealing with composition of turnover is distinguishable where the company did not exist in the reference year; such precedents do not assist an appellant whose primary contention rests on imputing turnover to a non-existent entity. Obiter - Remarks in the cited case about turnover components are not binding here. Conclusion: The cited authority is distinguishable on facts and does not prevent application of clause (ii) or the exercise of rectification under section 154 in the present circumstances. Cross-reference: Issues 1 and 2 are interlinked - the factual finding on non-existence in the previous year (Issue 1) directly supports the conclusion that charging at 29% was an apparent error remediable under section 154 (Issue 2).