Rectification u/s 154 of Income Tax Act cannot be Invoked to Adjust prior period Expenses: ITAT deletes Addition [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has deleted the addition holding that the rectification under Section 154 of the Income Tax Act 1961 could not be invoked to adjust prior period expenses.

The assessee, JBJ Technologies Ltd was subjected to limited scrutiny for Assessment Year 2015-16 under Section 143(3) of the Income Tax Act Act on the limited point of ‘mismatch in custom duty payment’. The Assessing Officer while framing the limited scrutiny assessment order under Section 143(3) of the Income Tax Act dated 06.11.2017, found no error or mismatch in such payment and accordingly accepted the income returned by the assessee.

Thereafter, the rectification proceedings were initiated under Section 154 of the Income Tax Act on the ground that while framing the original assessment order under Section 143(3) of the Income Tax Act, the Assessing Officer had failed to make additions by disallowance incurred by way of ‘prior period expenses.

On being confronted to the assessee, the assessee challenged the rectification proceedings on the ground that the issue involved was not only debatable but also, this issue was not subject matter of assessment under Section 143(3) of the Income Tax Act. The Assessing Officer however declined to agree with the contention of the assessee and enhanced the assessed income by passing order under Section 154 of the Income Tax Act dated 13.09.2019. 

P.P. Singh, appearing on behalf of the assessee submitted that the allowability of prior period expenses was essentially a question of fact and dependent upon attendant circumstances attributable to each case. It was not the abstract rule of law to outrightly reject the prior period expenses dehors the facts of the case. He also submitted that the issue, at times, was quite debatable and therefore, the Assessing Officer had no jurisdiction under Section 154 of the Income Tax Act to rectify and make additions on this count.

Vivek Vardhan,who appeared on behalf of the revenue submitted that the mistake being of apparent nature in not making adjustments towards prior period expenses declared by the assessee himself as relatable to the preceding assessment years, the action of the Revenue could not be interfered.

The two-member Bench of Chandra Mohan Garg, (Judicial Member) and Pradip Kumar Kedia, (Accountant Member) observed that, " From the case records that it was apparent that the original assessment which was subject matter of rectification was limited in its mandate. The case was selected under limited scrutiny scheme and therefore, the Assessing Officer was not entitled to look into any other aspect of the assessment other than specified issues. Thus, in the absence of any error in the action of the Assessing Officer, the resort to Section 154 could not have been taken at the first place."

The Bench allowed the appeal filed by the assessee holding that the plea on behalf of the assessee that allowability or otherwise of prior period expense required factual examination and thus could not be accepted or rejected without understanding the underlying facts and such adjustments were outside the ambit of provisions of Section 154 of the Income Tax Act.

To Read the full text of the Order CLICK HERE

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