[Opinion] Rectification u/s 154 | A Comprehensive Guide

Dr. Suhas Kulkarni – [2024] 167 taxmann.com 421 (Article)

Introduction

Section 154 of the Income Tax Act, 1961 allows income tax authorities to rectify mistakes apparent from the record in their orders, either on their own or at the request of the taxpayer. The rectification must be of a clear and obvious error, such as arithmetical mistakes or misapplication of straightforward legal provisions, and must be done within four years from the end of the financial year in which the order was passed. If rectification increases the tax liability or reduces a refund, the taxpayer must be given an opportunity to be heard. Appeals can be filed against the rectified order if the taxpayer is dissatisfied.

FAQ. 1 Which orders are rectifiable u/s 154?

Any other order passed by the Income Tax authority as mentioned in S. 116.

The authorities as mentioned in S. 116 are as under:

1. CBDT
2. Pr. Directors General/Director General or Pr. CCIT/CCIT
3. Pr. Directors/Directors or Pr. CIT/CIT
4. Directors/CIT/CIT (Appeals)
5. Addl. Directors or Addl CIT/Addl CIT (Appeals)
6. Jt. Directors or Jt CIT/Jt CIT (Appeals)
7. Dy Directors or Dy CIT
8. Asstt. Directors or Asstt. CIT
9. ITO
10. TRO
11. Inspectors of Income-tax

FAQ. 2 What is the scope of S. 154?

1. Clear and obvious mistake of fact or law: Orders under Section 154 of the Income Tax Act can be rectified when there is a clear and obvious mistake of fact or law that is readily apparent from the record. The rectification process allows for corrections in cases where the error is so evident that it can be identified without the need for extended analysis or debate.
2. Clerical errors: Mistakes that qualify for rectification typically include clerical errors, arithmetical mistakes, or oversights in applying established legal principles. For example, if there has been a simple miscalculation, typographical error, or failure to apply a clearly defined rule of law.
3. Mistakes apparent from the record: The key requirement is that the error must be apparent from the face of the record, meaning it should be something that can be recognized at a glance without extensive investigation. This ensures that the rectification process remains straightforward and efficient, correcting only errors that are indisputable.
4. Obvious omission: There is an obvious omission or clerical oversight that affects the accuracy of the order.

FAQ. 3 What is the “mistake” envisaged in S. 154?

In taxation law, the word “mistake” holds unique significance. Defining a “mistake” precisely is challenging, as it often involves subjective judgment. What one person considers a mistake may not appear so to another. However, a well-informed and judicious mind, upon reviewing the records, can detect such errors. Thus, the word “mistake” encompasses errors that can be identified through careful examination of the relevant records.

As far as Section 154 of the Income Tax Act is concerned, a mistake refers to an inadvertent error made in the application of existing facts and law, where something unintended has occurred. These mistakes are typically simple, obvious errors like clerical or arithmetical mistakes or the misapplication of clear legal provisions, which can be corrected without debate or interpretation.

Mistakes arising from conscious decisions, deliberate interpretations, or logical reasoning fall outside the scope of Section 154.

(Smriti Properties (P.) Ltd. v. Settlement Commission [2005] 149 Taxman 386/278 ITR 275 (Cal.))

FAQ. 4 What is the “meaning of Record” envisaged in S. 154?

The “record” does not refer solely to the assessment order but includes all proceedings on which the assessment order is based. The word “record” refers to the documents and information that the income tax authorities are obligated to examine when addressing mistakes in orders, as specified under Section 154(1). This section does not impose, either explicitly or by implication, any restriction on the scope of the authority’s review to the specific order being rectified. Instead, the authorities are empowered to examine the entire record, which may include all related documents and materials relevant to the rectification of the mistake. This broadens the scope of rectification, permitting tax authorities to correct mistakes not just within the confines of the original order, but by considering all relevant materials within the record. This ensures that justice is done and administrative errors are effectively corrected.

If the tax authorities find that the basis on which the rectification application is made pertains to earlier years, due to an initial error in calculating the written-down value, it cannot be said that this is not a mistake apparent from the record. Such a mistake should still be considered as rectifying an error from the record, not something outside of it.

CIT v. M. R. M. Plantations (P.) Ltd. [1999] 102 Taxman 1/240 ITR 660 (Mad.)

FAQ. 5 What is meant by rectifiable mistakes?

The rectification mechanism serves as a corrective tool to address undeniable errors that are easily identifiable and do not require further investigation or extensive interpretation.

1. Glaring mistake: For an error to be rectifiable under this section, it must be a glaring mistake, i.e., the mistake is so clear that it does not require a detailed inquiry or debate to recognize it.
2. Mistakes that do not require re-examining of issues: Rectification is meant to correct obvious and uncontested mistakes, i.e., mistakes that do not require re-examining of issues or where there are no differences in opinion.
3. Mistakes that do not require prolonged argument: Orders can be rectified when they do not require prolonged argument or re-evaluation of the matter.

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