Facts of the Case

The Petitioner, AmbarNuj Finance and Investment Pvt. Ltd., filed its return for AY 2017–18 declaring NIL income due to business losses. During scrutiny assessment under Section 143(3) of the Income Tax Act, 1961, the Assessing Officer (AO) disallowed bad debts amounting to ₹30,00,152 and raised a tax demand.

The Petitioner filed an appeal, which was pending. Meanwhile, the Petitioner opted for settlement under the Direct Tax Vivad Se Vishwas Act, 2020 (DTVSV Scheme).

During processing of the application, the AO, based on an audit objection, passed a rectification order under Section 154, modifying the computation method and increasing tax liability significantly.

The Petitioner challenged the rectification order before the Delhi High Court.

Issues Involved

  1. Whether rectification under Section 154 can be made on a debatable issue involving interpretation of law.
  2. Whether an audit objection can justify rectification or reassessment.
  3. Whether modification of computation method (set-off of losses) amounts to change of opinion.
  4. Validity of rejection of application under the DTVSV Scheme based on such rectification.

Petitioner’s Arguments

  • The rectification order was beyond jurisdiction under Section 154, as the issue was debatable.
  • The AO’s action amounted to change of opinion, which is impermissible.
  • The method of set-off of losses adopted originally was legally permissible and beneficial to the assessee.
  • Audit objection cannot override statutory interpretation or judicial principles.
  • The rejection of the DTVSV application was arbitrary and without formal communication.

Respondent’s Arguments

  • The rectification was made pursuant to an audit objection highlighting incorrect tax computation.
  • The AO merely corrected the computation to reflect correct tax liability.
  • Rejection of the DTVSV application was consequential to corrected tax demand.

Court’s Findings / Order

  • Rectification under Section 154 is limited to mistakes apparent on record and cannot cover debatable issues.
  • The issue of set-off of losses involved two possible legal views, hence not rectifiable.
  • The AO acted solely on audit objection without independent application of mind.
  • Audit opinion on law cannot be treated as binding or “information” for rectification or reassessment.
  • The rectification order effectively amounted to reassessment, which is impermissible without statutory conditions.
  • The rectification order dated 15.02.2021 was set aside.
  • The rejection of the DTVSV application was also quashed, and the matter was restored for fresh consideration.

Important Clarifications

  • A “mistake apparent on record” must be obvious, not something requiring detailed reasoning.
  • Debatable legal issues cannot be rectified under Section 154.
  • Audit objections on legal interpretation are not binding on the Assessing Officer.
  • Assessee has the right to adopt a beneficial method of set-off of losses where law is silent.
  • Rectification cannot be used as a tool for review or reassessment.

Sections Involved

  • Section 143(3), Income Tax Act, 1961
  • Section 154, Income Tax Act, 1961 (Rectification of Mistakes)
  • Section 71(2), Income Tax Act, 1961 (Set-off of Losses)
  • Section 147, Income Tax Act, 1961 (Reassessment)
  • Direct Tax Vivad Se Vishwas Act, 2020 (Sections 4 & 5)

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/58902112022CW40932021_152352.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.