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Case Number

Tax Case No. 425 of 1984 (Reference No. 374 of 1984)

Judges

N.V Balasubramanian
P. Thangavel, JJ.

Acts

section 271(1)(a) of the Income-tax Act, 1961 (hereinafter referred to as the Act),
section 263 or section 264.10. Section 154
section 256(1) of the Income-tax Act, 1961,
section 250 or section 271;(c)

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Smart Summary

Structured Summary of the Opinion (N.V. Balasubramanian, J.)

Factual and Procedural Background

The dispute concerns a penalty imposed for the assessment year 1972-73. An Income-tax Officer (ITO) passed an order dated 29 March 1977 imposing a penalty under section 271(1)(a) of the Income-tax Act, 1961 for default in filing the return. That order quantified the penalty at Rs. 4,569. The order, however, contained a calculation error: the period of default was taken as four months instead of 16 months. The opinion records the correct amount of the penalty variously as Rs. 15,064 and, in the rectification order, as Rs. 15,864; the rectification order (dated 20 November 1979) fixed the penalty at Rs. 15,864.

Believing the mistake to be apparent on the record, the ITO issued a show-cause notice on 27 June 1979 and, in the absence of a response from the assessee, passed a rectification order under section 154 on 20 November 1979 to correct the quantification of the penalty.

The assessee appealed the rectification order to the Appellate Assistant Commissioner, who rejected the challenge and held that a penalty order under section 271(1)(a) can be amended under section 154. The assessee then appealed to the Income-tax Appellate Tribunal (ITAT). The ITAT rejected the assessee's contentions that (a) the rectification was barred by the limitation in section 275 and (b) section 154 could not be used to amend a penalty order under section 271. The ITAT dismissed the appeal.

The assessee challenged the ITAT order and sought a reference of two questions of law. The ITAT declined to state the first proposed question (whether there was a mistake apparent on the record) as arising out of its order, but it stated a case and referred the following question under section 256(1) for the High Court's opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the Income-tax Officer as not barred by limitation and, therefore, valid?”

Legal Issues Presented

Whether the Tribunal was right in law in upholding the ITO's rectification under section 154 as not barred by the limitation prescribed in section 275 of the Income-tax Act, 1961, and therefore valid.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The power to impose penalty derives from section 271 of the Act and the time limit for passing an order imposing penalty is prescribed by section 275; the last day for passing such an order in this case was 31 March 1977.
The rectification order dated 20 November 1979 was therefore beyond the time limit under section 275 and barred by limitation.
It is impermissible to impose or augment a penalty by invoking section 154; rectification cannot be used to increase penalty beyond the limitation period prescribed by section 275.
Because section 271 is penal in nature, benefit of doubt should be given to the assessee and the ITO cannot, by recourse to section 154, get over the bar of limitation in section 275.
Relied on the Supreme Court decision in Shapoor Chenai v. Asst. CED [1980] 122 ITR 21 as supporting the proposition that a longer rectification period under section 154 cannot be used to evade a shorter mandatory limitation under section 275.

Respondent's (Revenue's) Arguments

The initial penalty order was passed within the period prescribed by section 275 (on 29 March 1977).
Section 154 authorises the ITO to rectify any mistake apparent from the record in any order passed by him, and that power extends to penalty orders under section 271.
The rectification did not impose a fresh penalty but corrected a mistake in quantification in an order already imposing penalty; therefore limitation under section 275 does not bar rectification.
Section 154 applies to penalty orders and the ITO's rectification was within his competence and permissible under the statute.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Shapoor Chenai v. Asst. CED, [1980] 122 ITR 21 (SC)	Cited by the assessee to support the proposition that invoking rectification under section 154 (which allows a longer period) cannot be used to evade a shorter limitation period applicable to imposing penalty under section 275.	The court held that this decision had no application to the facts: because penalty had already been imposed within section 275, the rectification only corrected quantification and did not amount to imposing a penalty afresh; thus Shapoor Chenai did not support the assessee's case.
CIT v. Sri Ramakrishna Motor Transport, [1983] 144 ITR 797 (Andhra Pradesh High Court)	Held that section 154(1)(a) is wide enough to include any order and that ejusdem generis should not be applied to restrict its amplitude; the phrase “any other order” is inclusive.	The court relied on this decision to support the view that section 154 empowers the ITO to rectify orders beyond merely assessments and refunds, and that penalty orders fall within the scope of “any other order passed by him.”
Commissioner Of Income-Tax v. Sara Enterprises, [1997] 224 ITR 169 (this Court)	Followed earlier High Court decisions to hold that the bar in section 275 applies only to the initial order of penalty and does not apply to subsequent orders resulting from directions on appeal, revision or answers given by higher courts.	The court applied the principle from this decision to hold that section 275's time limit applies to the first penalty order only; where an initial penalty order was passed within section 275, rectification under section 154 is governed by section 154's own conditions and time limits.
J.P. Sharma and Sons v. CIT, [1985] 151 ITR 138 (Rajasthan High Court)	Interpreted the scope of section 275 to apply to the initial penalty order; supports approach that later orders given after directions/appeals are not governed by the initial limitation bar.	Relied upon (via Sara Enterprises) by this court to support the view that section 275 applies only to the first penalty order and does not prevent rectification within the ambit of section 154 when the original penalty was timely.
CIT v. Vakharia Cotton Traders, [1986] 161 ITR 441 (Gujarat High Court)	Also supports the principle that the bar of limitation in section 275 applies to the initial penalty order and not to subsequent orders made after appellate or revisional directions.	Followed (via Sara Enterprises) as part of the line of authority establishing that rectification or subsequent penalty orders flowing from appellate/revisional directions are not automatically barred by section 275.

Court's Reasoning and Analysis

The court framed the central point as whether a penalty order under section 271(1)(a) of the Act can be rectified under section 154. It proceeded by (i) examining the statutory language of section 154, (ii) considering the legislative scheme and specific cross-references within section 154, and (iii) applying prior authorities.

First, the court quoted section 154(1)(a)–(c) and noted that section 154 empowers the Income-tax Officer to amend “any order of assessment or of refund or any other order passed by him.” The court interpreted the phrase “any other order” broadly and concluded that it brings within its scope every order passed by the ITO under the Act, including orders under section 271 imposing penalty.

Second, the court pointed to section 154(1)(b), which expressly empowers the Appellate Assistant Commissioner to amend any order passed by him under section 250 or section 271. Parliament's explicit grant of rectification power to an authority that is also empowered to levy penalty (the Appellate Assistant Commissioner) supported the inference that the power of rectification should not be denied to the ITO, who is also an authority empowered to levy penalty under section 271.

Third, the court observed that the question whether an order can be rectified must be tested against the language and conditions of section 154. If the statutory ingredients of section 154 are satisfied (i.e., a mistake apparent on the record and other conditions), rectification is permissible.

Fourth, the court addressed the interplay between sections 275 and 154. It accepted that section 275 prescribes the period within which an order imposing penalty should be passed; however, drawing on a line of earlier decisions (including this court's decision in Commissioner Of Income-Tax v. Sara Enterprises and two High Court decisions), the court held that the bar of section 275 applies only to the initial or first order of penalty. Where the initial order was passed within section 275 (as in this case, dated 29 March 1977), a later correction of an apparent mistake in that order is governed by section 154 and its conditions and time limits, not by section 275.

The court expressly held that the rectification in this case simply corrected the quantification of an already-imposed penalty and did not amount to imposing a fresh penalty; therefore the decision in Shapoor Chenai relied upon by the assessee was not applicable to these facts.

The ITAT had found that the other conditions of section 154 were satisfied (i.e., that the mistake was apparent from the record). The High Court found no error in that factual/legal conclusion and accepted the ITAT's view.

Holding and Implications

Holding: The court answered the referred question in the affirmative and against the assessee: it held that the Tribunal was right in law in upholding the ITO's rectification under section 154 as not barred by limitation under section 275, and that the ITO was competent to rectify the penalty order under section 154 of the Income-tax Act.

Implications:

The immediate effect is that the rectification order of 20 November 1979 correcting the quantification of the penalty is lawful and valid, and the Tribunal's dismissal of the assessee's appeal is upheld.
The court emphasised that section 275's time bar applies to the initial penalty order only; where an initial penalty order was passed within section 275, subsequent rectification of an apparent mistake in that order is governed by section 154 (subject to its conditions).
The court found the decision in Shapoor Chenai inapplicable on these facts; it did not purport to overrule that decision generally but confined its conclusion to the statutory interpretation and facts before it.
The court ordered that, in the circumstances, there would be no order as to costs.

Note: This summary is strictly limited to the content and findings contained in the provided opinion and does not add or infer information beyond the text of the opinion.

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Henri Isidore v. Commissioner Of Income-Tax

N.V Balasubramanian, J.:— At the instance of the assessee, the Income-tax Appellate Tribunal, Madras, has stated a case and referred the following question of law under section 256(1) of the Income-tax Act, 1961, for the assessment year 1977-78, for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the Income-tax Officer as not barred by limitation and, therefore, valid?”

2. The facts leading to the reference are as under:

The assessment year related to the tax case is 1972-73. For the said assessment year, the Income-tax Officer levied a penalty on the assessee under section 271(1)(a) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), on March 29, 1977, for default in filing the return of income within the prescribed time. The Income-tax Officer in the order of the penalty passed by him, by mistake, had calculated the amount of penalty leviable at Rs. 4,569, instead of the correct amount of penalty leviable at Rs. 15,064. The mistake has occurred in the order of penalty as the period of default was erroneously taken as four months instead of 16 months. Since this mistake was apparent from the record the Income-tax Officer was of the view that the order of penalty passed by him should be rectified under section 154 of the Act. The Income-tax Officer issued a show-cause notice to the assessee on June 27, 1979, calling for the assessee's objections and in the absence of any explanation from the assessee, the Income-tax Officer rectified the order of penalty by an order dated November 20, 1979, determining the correct amount of penalty at Rs. 15,864.

3. The assessee preferred an appeal challenging the order passed by the Income-tax Officer under section 154 of the Act on the ground that there was no mistake in the original order and the Income-tax Officer has no power to deal with the provisions of section 271 of the Act. The Appellate Assistant Commissioner, however, rejected the assessee's contention stating that the mistake in the order under section 271(1)(a) of the Act can be amended by passing an order under section 154 of the Act. Dissatisfied with the order of the Appellate Assistant Commissioner, the assessee preferred a further appeal to the Income-tax Appellate Tribunal. It was contended before the Appellate Tribunal that the time limit pres-cribed in section 275 of the Act would equally apply to the order passed under section 154 of the Act, and therefore, the Income-tax Officer has no power to amend an order passed under section 271 of the Act. The Appellate Tribunal, however, rejected the contentions of the assessee and held that the time limit prescribed under section 275 of the Act would apply only to the first order of penalty passed by the Income-tax Officer. The Appellate Tribunal also rejected the contention of the assessee holding that the penalty order under section 271 of the Act can be rectified by the Income-tax Officer invoking the provisions of section 154(1)(a) of the Act. The Appellate Tribunal in this view dismissed the appeal preferred by the assessee.

4. The assessee has challenged the order of the Appellate Tribunal and sought for a reference on two questions of law. The first question that was sought for by the assessee was “whether, there was a mistake apparent on the record in the original order of penalty dated March 29, 1977”. The Appellate Tribunal, however, rejected that question on the ground that the said question sought for did not arise out of the order of the Appellate Tribunal, but, however, it stated a case and referred the question of law set out supra.

5. Mr. K. Ramagopal, learned counsel appearing for the assessee, submitted that the source of the power of the Income-tax Officer to levy penalty is section 271 of the Act and under section 275 of the Act the order imposing penalty should be passed before the expiration of the two years from the end of the financial year in which the proceedings were completed. He, therefore, submitted that the last day for passing the order is March 31, 1977, and the order rectifying the penalty order was passed on November 20, 1979, and, therefore, the order passed is beyond the time limit prescribed in section 275 of the Act. The further submission of learned counsel appearing for the assessee is that penalty cannot be imposed under the guise of rectification and when the Income-tax Officer exercised suo motu power for rectification he, in effect, levies penalty on the enhanced amount and it is not possible for him to get over the bar of limitation prescribed under section 275 of the Act and he submitted that the penalty levied has serious consequences and since section 271 of the Act is penal in nature, the benefit of doubt must be given to the assessee. The sum and substance of the argument of learned counsel for the assessee is that the source of power on the part of the Income-tax Officer to levy penalty is section 271 of the Act and after the time limit prescribed under section 275 of the Act, it is not open to the Income-tax Officer to levy penalty and rectify the order of assessment by recourse to section 154 of the Act.

6. Learned counsel for the assessee relied upon the decision of the Supreme Court in the case of Mrs. Khotshed, Shapoor Chenai v. Asst. CED, [1980] 122 ITR 21 and submitted that it is not permissible for the Income-tax Officer to invoke the powers of rectification as larger period is prescribed under section 154 of the Act when section 275 of the Act prescribes a shorter period for the levy of penalty.

7. Mr. C.V Rajan, learned counsel appearing for the Revenue, on the other hand, submitted that the power to levy penalty has been exercised within the period prescribed under section 275 of the Act and under section 154 of the Act it is open to the Income-tax Officer to rectify the mistake in the order of penalty. His further submission was that the Income-tax Officer by the rectification order has not imposed penalty which was already imposed in the original order and in the rectification he only rectified the mistake that occurred in the calculation of the penalty in the original order. His submission was that the provisions of section 154 of the Act would apply to penalty orders as well.

8. We have carefully considered the submissions of learned counsel appearing for the assessee and learned counsel appearing for the Revenue. The facts of the case have been set out earlier. There is no dispute that the initial order of penalty was passed by the Income-tax Officer within the time limit prescribed in section 275 of the Act, namely, on March 29, 1977. The only question is whether the order of penalty passed under section 271(1)(a) of the Act can be rectified under section 154 of the Act. It is relevant to notice that the mistake is with reference to the calculation of penalty and the quantification of the penalty in the original order was made at Rs. 4,569 instead of the correct amount of Rs. 15,864. The mistake has occurred because the Income-tax Officer has erroneously taken the period of default as four months instead of 16 months. The question whether the order of penalty passed under section 271 of the Act can be rectified has to be considered in the light of the provisions of section 154 of the Act.

9. The material provisions of section 154 of the Act, in so far as it is relevant for the purpose of the case, reads as under:

“154. Rectification of mistake—(1) With a view to rectifying any mistake apparent from the record—

(a) the Income-tax Officer may amend any order of assessment or of refund or any other order passed by him;

(b) the Appellate Assistant Commissioner may amend any order passed by him under section 250 or section 271;…

10. Section 154 empowers the Income-tax Officer to amend any order of assessment, any order of refund or any other order passed by him. We are of the view that the expression “any other order passed by him” occurring in section 154 of the Act brings within its scope every order passed by the Income-tax Officer under the Act and that would necessarily include the order passed by the Income-tax Officer under section 271 of the Act as well.

11. In CIT v. Sri Ramakrishna Motor Transport, [1983] 144 ITR 797, the Andhra Pradesh High Court was dealing with a case of the power of the Income-tax Officer to rectify the order cancelling the registration under section 186 of the Act. The Andhra Pradesh High Court held that the power of the Income-tax Officer under section 154(1)(a) of the Act is wide enough to include any order and there is no warrant to apply the principle of ejusdem generis and cut down the amplitude of the power of rectification under section 154(1)(a) to orders of assessment and refund, more particularly in view of the fact that the words “assessment” and “refund” do not constitute a “class” and, therefore, the language employed in section 154 of the Act is wide and brooks no ambiguity. The above decision of the Andhra Pradesh High Court makes it clear that it is permissible for the Income-tax Officer to rectify any order passed by him under the provisions of the Income-tax Act.

12. Secondly, section 154(1)(b) of the Act empowers the Appellate Assistant Commissioner to amend any order passed by him under section 250 or section 271 of the Act and it shows that Parliament has empowered the Appellate Assistant Commissioner, and he is one of the authorities mentioned in section 271 of the Act to levy penalty, to rectify the order of penalty passed by him under section 271 of the Act. If that is the intention of Parliament, there is absolutely no reason why the power of rectification should be denied to the Income-tax Officer who is also one of the authorities mentioned in section 271 of the Act to levy penalty.

13. Thirdly, the question whether the order can be rectified under the provisions of section 154 of the Act, has to be tested on the language employed under section 154 of the Act and the condition prescribed under section 154 of the Act. If the ingredients found in section 154 of the Act are satisfied we are of the opinion that the order passed by the Income-tax Officer under section 271 of the Act is also liable to be rectified provided, other conditions found in section 154 of the Act are satisfied.

14. There is no dispute that the source of power of the Income-tax Officer and the Appellate Assistant Commissioner, to levy penalty is under section 271 of the Act and when the Income-tax Officer has initiated penalty proceedings and completed the penalty proceedings within the period prescribed under section 275 of the Act, and if there are certain mistakes which are apparent on the face of the record in the order of penalty, the Income-tax Officer has necessary power to rectify the same under section 154 of the Act. The period prescribed under section 275 of the Act within which the order imposing penalty should be passed in our opinion, apply only to the initial order of the first order, of penalty which would be passed by the competent authority. This court, in the case of Commissioner Of Income-Tax v. Sara Enterprises, [1997] 224 ITR 169, following the decision of the Rajasthan High Court in the case of J.P Sharma and Sons v. CIT, [1985] 151 ITR 138, and the decision of the Gujarat High Court in the case of CIT v. Vakharia Cotton Traders, [1986] 161 ITR 441, has taken the view that the bar created by the provisions of section 275 of the Act would apply only to the initial order of penalty and if an order of penalty is passed on account of the direction of the higher authority in appeal or on revision, or on account of an answer given by the High Court, then, the time limit laid down in section 275 of the Act will not apply. Applying the principles laid down by the decision of this court cited supra, we hold that the provisions of section 275 of the Act would apply only to the case of the first order of penalty passed by the authority. If the order of penalty was passed within the time limit prescribed under section 275 of the Act, it is not necessary to refer to the time limit prescribed under section 275 of the Act, if there are mistakes in the order of penalty. The source of the power of the Income-tax Officer is section 154 of the Act, when he rectifies the order of penalty and only the time limit prescribed under section 154 of the Act would apply, provided other conditions of section 154 of the Act are fulfilled. The decision relied upon by learned counsel appearing for the assessee in the case of Mrs. Khorshed Shapoor Chenai v. Asst. CED, [1980] 122 ITR 21 (SC), in our opinion, has no application to the facts of the case. As rightly contended by learned counsel for the Revenue, the Income-tax Officer has already imposed penalty by the original order dated March 29, 1977, and there was a mistake in the quantification of the penalty and the mistake was sought to be rectified in the order passed by him under section 154 of the Act. We are of the view that by rectifying the mistake and calculating the correct amount of penalty, the officer is not imposing a penalty as penalty proceedings have already been initiated and penalty was imposed by the original order. The Appellate Tribunal has found that the other conditions of the provisions of section 154 of the Act are fully satisfied. We also do not find any force in the contention of Mr. K. Ramagopal, learned counsel for the assessee, that section 154 of the Act is placed under Chapter XIV, procedure for assessment and, therefore, the Income-tax Officer is not empowered to pass an order of rectification. A close study of section 154 of the Act shows that it applies not only to the order of assessment, but also to an order of refund. As already noticed by us, it applies to any other order passed by the Income-tax Officer. According to us, section 154(1)(a) applies to any order passed by the Income-tax Officer and if there are mistakes which are apparent in the records, it is open to the Income tax Officer to rectify the same. Further, the Appellate Assistant Commissioner is also empowered to pass an order rectifying the order passed by him under section 271 of the Act. Section 154(1)(b) of the Act indicates that it is not only confined to an order of assessment, but it also extends to the order of penalty passed under Chapter XXI, “penalties imposable”. Further more, the Commissioner of Income-tax is also empowered to amend any order passed by way of revision and the provisions relating to revision are found in Chapter XX, “appeals and revision”. Under the said provision, the Commissioner is also empowered to pass an order of rectification in the order of revision passed by him. Thus section 154 of the Act gives the indication that section 154 of the Act is not restricted to orders of assessment passed under Chapter XIV, “procedure for assessment” but extends to orders of penalty as well. Therefore, we reject the contention of Mr. Rama-gopal, learned counsel for the assessee, in this regard as untenable.

15. We find no error or any infirmity in the order of the Appellate Tribunal in holding that the Income-tax Officer was competent to rectify the order of penalty under section 154 of the Act. Accordingly, we answer the question of law referred to us in the affirmative and against the assessee. However, in the circumstances of the case, there will be no order as to costs.

Henri Isidore v. Commissioner Of Income-Tax

Structured Summary of the Opinion (N.V. Balasubramanian, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments

Respondent's (Revenue's) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Henri Isidore v. Commissioner Of Income-Tax

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