ITAT Chennai: Rectification order passed u/s 154 of the Act quashed being barred by limitation

• Whether in the rectification proceedings u/s.154 of the Act, can the AO change the head of income from “Long Term Capital Gain – Non-indexed” (rate of tax 30%) to “Income from other Sources” (rate of tax 10%).
• Whether the AO can make rectification u/s.154 of the Act without issuing show cause notice and without affording reasonable opportunity of being heard as mandated u/s.154(3) of the Act.
• Whether the AO while acting u/s.154 of the Act can treat the income disclosed under the head “Long Term Capital Gain” being non-indexed, interest received as “income from other sources” which is highly debatable and contentious issue.

Facts:

• The assessee has filed his return of income for the assessment year 2010-11 on 30.07.2010. The assessee subsequently revised his return of income on 06.10.2010 and claimed TDS.
• His return of income was processed u/s.143(1) of the Act by the CPC, Bengaluru. The assessee filed rectification petition before the jurisdictional AO vide petition dated 13.08.2014 requesting for giving credit for TDS as against the claim of TDS allowed u/s.143(1) of the Act by CPC, Bengaluru of Rs.14,62,550 /-.
• The AO passed rectification order on 20.06.2016 and considered the rectification petitions dated 13.08.2014 and 25.04.2016.
• The AO while considering this rectification noted that as far as TDS is concerned, the income from Escrow account of Rs.2,92,62,629/- is to be considered as ‘income from other sources’ as against claimed by assessee as ‘LTCG’. Aggrieved, assessee preferred an appeal before the CIT(A).
• The CIT(A) confirmed the action of AO on the grounds raised by assessee but the assessee has not raised the ground of limitation before CIT(A). Now, the assessee before us has raised additional grounds on limitation viz:
• The order u/s 154 (dt.20.06.2016) in so far as it relates to shifting of LTCG of Rs.2,92,62,629/- admitted/assessed in the Intimation u/s.143(1) of the Act (dt. 05.03.2012) and treating the amount as “Income from Other sources” is barred by time.
• The appellant submits that his omission to raise the issue of limitation in the appeal before the Commissioner (Appeals) and in the Grounds of Appeal before this Hon’ble Tribunal is bonafide.

Observations and Findings:

• The return of income filed by the assessee was processed by CPC, Bengaluru and intimation u/s.143(1) of the Act was issued on 05.03.2012 (which is not disputed by Revenue). Admittedly, the AO passed rectification order on 20.06.2016.
• The claim of the assessee is that the rectification period i.e., limitation period expired on 31.03.2016 as per the provisions of Section 154(7) of the Act. When an order is rectified by an order of rectification u/s.154 of the Act, the time limit is to be reckoned as per the provisions of Section 154(7) of the Act.
• The provisions of section 154(7) of the Act makes it clear that except orders u/s.155 or 186(4) of the Act, no rectification order can be passed after the expiry of 4 years from the date of order sought to be rectified.
• Thus, the date of original order is the commencing point of limitation even if that order is in between these 4 years being subjected to a rectification on a later date, the commencing point of limitation remains the same date of the original order and not the later date of its subsequent rectification or subsequent application.
• This view is supported by the Hon’ble Jurisdictional High Court in the case of Kothari (Madras) Ltd., vs. AG(ITO), (1989) 177 ITR 538 Mad. In the present case before us there is no controversy about first order or second order but order under rectification is only the order passed by CPC, Bengaluru u/s.143(1) i.e., intimation or processing of return of income vide letter dated 05.03.2012.
• The rectification order by the AO u/s.154 of the Act was passed only on 20.06.2016. It means, that the rectification order u/s.154 of the Act in the present case can be passed upto 31.03.2016 and not beyond that.

Held:

In the given facts and circumstances and above legal position discussed, the bench was of the view that the rectification order passed u/s.154 of the Act was clearly barred by limitation and hence, on this sole ground, the order w