The Allahabad High Court declares that a rectification application under the provisions of the Income Tax Act based on a subsequent decision of the Apex Court which was not available when the decision was given by the Tribunal is maintainable. The verdict of the Allahabad High Court went against the Revenue.
The assessee was an individual. In the Assessment Year 1990-91, the Tribunal at the time of allowing the appeal of the Revenue, made it clear that whatever may be the method of dissolution the business of the firm, the profits should be ascertained only by considering the closing stock at market price.
It was expressed that the accounts should be worked accordingly up to the date of dissolution or prior to such dissolution. The fact that the firm was dissolved for distributing its assets of the firm, or was dissolved to form a company, was not relevant as the accounts of the firm were to be prepared properly, though the business remained the same and stock was taken over by the new company.
For the purposes of income tax, the profit and loss of the firm had to be separately worked out without mixing up with that of the new company. The plea of the counsel appearing on behalf of the assessee that in conversion of a firm into a company, the business was not continued due to which same method of valuation of closing stock should be followed, was not acceptable.
The decision of the tribunal was given on the basis of the decision of the Hon’ble Supreme Court in A.L.A. Firm’s vs. CIT 2002, TIOL868, SC-IT-LB, where it was held that if a partnership was dissolved, the valuation of the closing stock should be valued at market value.
Being aggrieved, the assessee filed an application under section 254(2) of the Act for rectification of the mistake stating that there was an apparent error on the face of the record. During the pendency of this application, the Apex Court passed a judgment in the case of Shakti Trading Co. vs. CIT 2002-TIOL-569 -SC-IT where it was held that where the business is continued and the firm was reconstituted, the valuation of the closing stock should be determined at the market value or cost value, whichever was smaller.
In view of the aforesaid decision, which was cited before the Tribunal, the application of the assessee was allowed. Accordingly necessary rectification was made.
Being aggrieved by the aforesaid order, the tribunal filed an appeal before the High Court at Allahabad.
Issue appearing before the High Court:
Before the High Court, the assessee contended that a question of law arose that as the Tribunal had passed the order after considering the entire matter, it had no jurisdiction to rectify its mistake under the section referred and the said rectification amounted to review which was not permissible under the given section.
The judgment:
The Apex Court observed that the decision of the Tribunal has been given after noticing the decision of the Punjab and Haryana High Court in Shahabad Co-operative Sugar Mills Ltd. vs. DCIT, (2011) 336 ITR 0222 where it was held that rectification proceedings could be initiated if the Supreme Court rendered a decision clarifying its earlier decision which was permissible under section 154 of the Act.
In view of the above, it was held that there was an error apparent on the record which should be rectified through an application filed under the Act. Moreover it was stated that as long as the proceedings are validly initiated, the order containing an error in holding an opinion contrary to the decision of the Supreme Court would be rectifiable.
It was held that the Tribunal was right in passing the order. For the said reasons the appeal was dismissed.
Similar judgments of the other High Courts:
Many other High Courts have taken a view that a subsequent judgment of the Supreme Court changes the status of a case involving a mistake apparent from the record, which can be rectified by an application under section 154 of the Act. The Madhya Pradesh High Court in Navnirman Pvt. Ltd. v. CIT, 174 ITR 674, passed the judgment in similar terms.