Including Additional Income In Absence Of Incriminating Material Is Outside The Purview Of Rectification Proceedings: Gujarat High Court

The Gujarat High Court has held that including additional income in the absence of incriminating material is outside the purview of rectification proceedings under Section 154 of the Income Tax Act, 1961.

The bench of Justice Bhargav D. Karia and Justice Niral R. Mehta has observed that inclusion of the disclosure made by the assessee company would require long-drawn reasoning and debate, and therefore, when the issues and contentions were debatable on uncertainty, the assessing officer could not have invoked the power under Section 154 of the Income Tax Act for rectification of the mistake apparent on record.

The respondent or assessee filed a return of income, declaring total income. The assessment was completed under Section 143(3), determining total income by making additions, on which the tax was determined, and book profit under Section 115JB was calculated, on which the tax was determined.

As the tax on normal rates was higher, the provision of Section 115JB was not applied by the Assessing Officer. A survey action under Section 133A was carried out. During the course of the survey, the assessee company declared additional income of Rs. 17 crore. It was reflected in the scrutiny note of the financial statement for A.Y. 2012–13 relevant to F.Y. 2011–12 as the assessee declared the additional income amounting to Rs. 17 crore.

The assessee company had reworked tax benefits for FY 2011–12, resulting in additional tax liabilities of Rs. Nil after adjusting MAT credit entitlement and changing the tax base from MAT to normal taxation. However, the amount of Rs. 17 crore was not recorded in the books of account, and therefore, the Assessing Officer issued notice under Section 154 and added Rs. 17 crore to the book profit for the purpose of calculating the book profit under Section 115 JB as per Schedule VI of the Companies Act, 1956, on the basis of the declaration made by the assessee during the course of the survey.

The assessee company preferred the appeal before the CIT (A), who confirmed the addition and the rectification order passed by the Assessing Officer under Section 154.

The assessee preferred the appeal before the tribunal. The Tribunal, on the basis of the facts on record, came to the conclusion that without any incriminating material found, the amount of disclosure could not have been necessarily included in the profit and loss account or book profit, as such inclusion would require long-drawn reasoning and debate.

The department contended that the amount of disclosure made by the assessee company during the course of the survey, which represents the profit of the company, is required to be shown in the profit and loss account, and therefore, the assessing officer has rightly invoked the power under Section 154 of the Act to rectify the assessment order by considering the disclosure as a part of the book profit for the purpose of applying Section 115 JB.

The assessee contended that power under Section 154 of the Act for making additions on the basis of the book profit under Section 154 JB could not have been invoked.

The court held that the Tribunal was right in observing that the action of the Assessing Officer as well as the CIT (A) under Section 154 of the Act was not warranted.

Counsel For Petitioner: Nikunt K Raval

Counsel For Respondent: B S Soparkar

Case Title: The Principal Commissioner Of Income Tax 1 Versus M/S Setco Automotive Ltd.

LL Citation: 2024 Livelaw (Guj) 36

Case No.: R/Tax Appeal No. 552 Of 2023

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