Clarification on Rectification under Section 154 for Section 40A(3) Disallowance: Shiv Shakti Traders v. ACIT

Introduction

The case of Shiv Shakti Traders, Ghaziabad v. ACIT, Circle-2, Ghaziabad was adjudicated by the Income Tax Appellate Tribunal (ITAT), Delhi Bench "G", on March 15, 2022. Shiv Shakti Traders, engaged in wholesale trading of iron and steel, challenged the disallowance of certain expenditures under Section 40A(3) of the Income Tax Act, 1961, following a rectification order under Section 154. The primary issue revolved around the applicability and jurisdiction of Section 154 in revisiting the disallowance of expenditure deemed non-compliant with statutory provisions.

Summary of the Judgment

The ITAT upheld the rectification order passed by the Assessing Officer (AO), which disallowed expenditures totaling Rs. 23,72,40,000/- under Section 40A(3) for being made via cash or bearer cheques, contrary to the mandatory provision requiring account payee instruments. The Appellate Tribunal dismissed the assessee's contention that the disallowance was unjustified and outside the purview of Section 154, reinforcing the AO's authority to rectify apparent mistakes in the original assessment.

Analysis

Precedents Cited

The judgment extensively referenced several landmark cases to substantiate the applicability of Section 154 in rectifying errors related to mandatory provisions:

• ITO v. Ashok Textile Ltd. (41 ITR 732 (SC)) – Established that overlooking mandatory provisions is an apparent mistake rectifiable under Section 154.
• CIT v. Janatha Steel Mills Pvt. Ltd. (294 ITR 668 (Ker)) – Applied the principles from Ashok Textile to similar contexts.
• CIT v. Lucas T.V.S. Ltd. (249 ITR 306 (SC)) – Differentiated between rectification under Section 154 and reopening assessments under Section 147(b).
• T.S. Balaram ITO v. Volkart Brothers (82 ITR 50 (SC)), CIT v. Tata Engg. And Locomotive Co. Ltd. (108 ITR 869 (Bom)), and CIT v. Hero Cycles Pvt. Ltd. (228 ITR 463 (SC)) – Emphasized that mistakes apparent from the record are rectifiable under Section 154.
• CIT v. Delhi Cloth & General Mills Co. Ltd. (197 ITR 223 (Del)) – Highlighted that mistakes must be glaring, obvious, or self-evident to qualify for rectification.

Legal Reasoning

The tribunal examined whether the disallowance under Section 40A(3) constituted an apparent mistake justifying rectification under Section 154. It was determined that the AO had indeed overlooked the mandatory provision of Section 40A(3) during the original assessment and appropriately acted upon the audit objection raised by the Revenue Audit Party. The tribunal concluded that such an oversight falls within the ambit of rectifiable mistakes, as affirmed by the cited precedents.

Furthermore, the tribunal dismissed the assessee's reliance on the CIT v. Lucas T.V.S. Ltd. judgment by distinguishing the nature of the rectification under Section 154 from reopening assessments under Section 147(b). Since the issue at hand was the disallowance of expenses due to non-compliance with a mandatory provision, it was deemed appropriate for rectification.

Impact

This judgment reinforces the authority of Assessing Officers to rectify apparent mistakes related to mandatory compliance provisions under the Income Tax Act. It underscores the non-debatable nature of such rectifications, ensuring that taxpayers adhere strictly to statutory mandates. Future cases involving disallowances under Sections like 40A(3) can rely on this precedent to understand the boundaries and applicability of Section 154 for rectifications.

Complex Concepts Simplified

Section 40A(3) of the Income Tax Act

This section stipulates that no deduction is allowed for any expenditure exceeding Rs. 20,000 in a day, made by cash or bearer cheque, not through account payee instruments like bank cheques or drafts. Its primary objective is to curb tax evasion by ensuring transaction transparency.

Section 154 of the Income Tax Act

Section 154 grants the Assessing Officer the power to amend any previous order under the Act to rectify any mistake apparent from the record. The key condition is that the mistake must be glaring, obvious, or self-evident, leaving no room for debate or argument.

Rectification vs. Reopening Assessment

Rectification under Section 154 is limited to correcting apparent mistakes without delving into new arguments or evidence, whereas reopening an assessment under Section 147(b) allows for re-examination based on fresh evidence or a different interpretation.

Conclusion

The ITAT's decision in Shiv Shakti Traders v. ACIT reaffirms the statutory authority granted to Assessing Officers to rectify apparent mistakes related to mandatory provisions, specifically under Section 40A(3). By dismissing the assessee's arguments against the applicability of Section 154, the tribunal emphasized the inviolable nature of mandatory compliance and the limited scope of taxpayers to challenge such rectifications. This judgment serves as a crucial reference for both taxpayers and tax authorities, delineating the boundaries of rectification powers and the importance of adhering to prescribed payment norms to avoid disallowances.