Rectification Order Invalid Due to Investment by Wife and Lack of Opportunity of Hearing

I. Rectification Order Invalid Due to Investment by Wife and Lack of Opportunity of Hearing

Issue:

Whether a rectification order passed under Section 154 of the Income-tax Act, 1961, is valid if it adds income based on an investment made by the assessee’s wife (with the assessee as a second holder) and is passed without providing the assessee a reasonable opportunity of being heard.

Facts:

For the assessment year 2007-08, the Assessing Officer (AO) passed an assessment order under Section 143(3), in which no addition was made concerning an investment in a mutual fund. Subsequently, the AO issued a rectification order under Section 154 to add an amount of Rs. 5.30 lakhs to the assessee’s income. The assessee contended that the investment in the mutual fund was made by his wife, and his name appeared only as a second holder, not as the primary holder. Furthermore, the assessee argued that the impugned rectification order was passed without providing him an opportunity of hearing.

Decision:

Yes, the impugned rectification order was set aside. The court held that since the investment in the mutual fund was made by the wife of the assessee and the assessee’s name appeared only as a second holder (not the primary holder), and importantly, because the rectification order was passed without providing the assessee an opportunity of hearing, it was bad in law and deserved to be set aside.

Key Takeaways:

Substantive Error in Rectification: A rectification order under Section 154 can only correct mistakes “apparent from the record.” If the factual ownership of an investment is not clear from the record or if the AO makes an addition based on incorrect assumptions about primary ownership, it is not a mistake apparent from the record.
Ownership of Investment: Attributing income from an investment primarily owned by one person (the wife) to another (the husband, merely a second holder) without proper investigation is a substantive error, not a rectifiable mistake apparent from the record.
Mandatory Opportunity of Hearing (Section 154(3)): Section 154(3) explicitly mandates that no amendment which has the effect of enhancing an assessment or reducing a refund shall be made unless the authority concerned has given notice to the assessee and has allowed a reasonable opportunity of being heard. This is a fundamental procedural safeguard.
Violation of Natural Justice: Passing an order that increases the assessee’s liability without providing a proper opportunity to explain or respond constitutes a violation of natural justice, rendering the order invalid.

II. Rectification Order Under Section 154 Bad in Law for Lack of Statutory Notice and Opportunity of Hearing

Issue:

Whether an order passed under Section 154, making an addition to the assessee’s income, is valid if the Assessing Officer neither issued a notice of hearing nor provided any opportunity of hearing to the assessee before making the amendment.

Facts:

For the assessment year 2007-08, the assessee filed his return of income, which was processed under Section 143(1). Subsequently, the Assessing Officer passed an order under Section 154, making an addition to the assessee’s income on account of an investment in a mutual fund.

Decision:

Yes, the order passed under Section 154 was held to be bad in law and deserved to be set aside. The court emphasized that as per Section 154(3), an amendment shall not be made under Section 154 unless the authority concerned has given notice to the assessee and has allowed the assessee a reasonable opportunity of being heard. Since, in this instant case, the Assessing Officer neither issued a notice of hearing to the assessee nor provided any opportunity of hearing before making the amendment to the order originally passed under Section 143(3), the order was invalid.

Key Takeaways:

Statutory Requirement of Notice and Hearing: Section 154(3) is a non-negotiable statutory requirement. Any rectification order that enhances the assessee’s liability must be preceded by a formal notice and a reasonable opportunity for the assessee to present their case.
Procedural Mandate: This section serves as a crucial procedural mandate to ensure fairness and transparency in rectification proceedings, especially when the outcome is detrimental to the taxpayer.
Nullification of Order: Failure to comply with the mandatory provisions of Section 154(3) constitutes a fatal flaw, rendering the rectification order ab initio void and liable to be set aside.
Distinction from Original Assessment: Even if the original assessment was a summary one (like 143(1)), any subsequent action under Section 154 that increases liability must follow the specific procedural safeguards outlined in Section 154 itself.

IN THE ITAT PUNE BENCH ‘SMC’

Brig. (Retd.) Jitendra Kumar Narang

Income-tax Officer

Manish Borad, Accountant Member
and Vinay Bhamore, Judicial Member

IT Appeal No. 228 (PUNE) OF 2025
[Assessment year 2007-08]

MAY 28, 2025

Sankalp Malik for the Appellant. Aviyogi Ambadkar for the Respondent.

ORDER

Vinay Bhamore, Judicial Member. – This appeal filed by the assessee is directed against the order dated 19.11.2024 passed by Ld. CIT(A)/NFAC for the assessment year 2007-08.

2. Facts of the case, in brief, are that the assessee is an individual worked in Indian Army & retired as Brigadier and has furnished its original return of income on 08.06.2007 declaring total income of Rs.4,86,993/-. The return was processed u/s 143(1) by accepting the returned income. The Assessing Officer on the basis of annual information return i.e. AIR found that the assessee has invested Rs.2,40,000/- in Sundaram BNP Paribas on 02.04.2006 and Rs.4 lakh in SBI mutual fund on 11.04.2006 which amounts in all to Rs.6,40,000/-. According to the Assessing Officer, the salary income of the assessee was only Rs.5,36,802/- and after deducting, house loan and interest thereon, investment u/s VI-A, payment of income tax and household expenses the assessee was left with only Rs.1,10,000/- of savings which could be said to be invested by the assessee in the above mutual funds and therefore the Assessing Officer was of the view that income of Rs.5,30,000/- (640,000-110,000) has escaped from assessment. Accordingly, the Assessing Officer initiated reassessment proceedings u/s 147 of the IT Act after getting approval from higher authority and issued notice u/s 148 of the IT Act. The assessee in response submitted that the original return already filed may kindly be treated as filed in response to the notice issued u/s 148 of the IT Act, since according to the assessee no income was escaped from assessment. During the course of the assessment proceedings, the assessee furnished written submission wherein he also offered interest income of Rs.58,280/-and short term capital gain on sale of mutual funds and shares at Rs.20,626/- which was not offered in the original return of income. After discussion and verification of the documents, the Assessing Officer completed the assessment u/s 143(3) r.w.s. 147 of the IT Act vide order dated 23.03.2015 on a total income of Rs.5,64,290/- as against the income returned by the assessee at Rs.4,86,993/-. Subsequently, order dated 11.09.2017 was passed u/s 154 of the IT Act wherein order dated 23.03.2015 was revised and further addition of Rs.5,30,000/- on account of purchase of mutual fund was made to the income of the assessee and accordingly the revised income was computed at Rs.10,94,290/- as against the original income assessed under section 143(3) r.w.s. 147 of the IT Act at Rs.5,64,290/-.

3. After considering the reply of the assessee, Ld. CIT(A)/NFAC dismissed the appeal filed by the assessee by observing as under :-

“5.4 The A.O., by virtue of order u/s 154 of the Act, has made addition of Rs.5,30,000/- stating that in the assessment order u/s 147/143(3) of the Act, amount of Rs.5,30,000/- was disallowed on account of purchase of Mutual Fund, but, in the computation of total the amount of disallowance of Rs.5,30,000/- remained to be added to the total income of the assessee. On plain reading of the assessment order dated 23/03/2015 it becomes clear that the A.O. has ruled out an amount of Rs.5,30,000/-, but, the same was not added while computing total income. Consequently, an order u/s 154 of the Act was passed to cure the mistake. For the purpose of determination of ‘Mistake apparent from record’, there must be a mistake. In this case, it is clear that the A.O. has worked an amount of Rs.5,30,000/- as unexplained. While determining such unexplained investment, the A.O. has considered all the aspects, including savings etc. and granted telescopy of Rs.1,00,000/- Thus, in my considered opinion, addition of Rs.5,30,000/- though discussed in the body of the assessment order dated 23-03-2015 but remained to be mentioned in the computation part of assessment order (last part of the assessment order). Accordingly, this is a curable error within the meaning of provisions of section 154 of the Act. So it be, the order passed u/s 154 of the Act is found in order. Further, the present appeal is filed against the order u/s 154 of the Act. The scope of section 154 of the Act is limited and confined to ‘mistake apparent from record. In nutshell, the addition of Rs.5,30,000/- made by the A.O. in rectification order is sustained and all the Grounds of appeal of the appellant are dismissed.

6.0 In the result, appeal of the appellant is Dismissed.”

4. It is the above order against which the assessee is in appeal before this Tribunal.

5. Ld. AR appearing from the side of the assessee submitted before us that the order passed by Ld. CIT(A)/NFAC wherein he sustained the order passed u/s 154 of the IT Act is unjustified. Ld. AR submitted before the bench that the assessee with the help of a written submission dated 27.01.2015 already explained before the Assessing Officer that the assessee is only the second holder of the impugned mutual fund and the first holder is his wife i.e. Mrs. Minni Narang and the above investment was made by her. It was also explained that the mutual funds were purchased by his wife as first holder from the redemption of old mutual funds standing in her name and complete details of redemption of these mutual funds was produced before the Assessing Officer and after considering those details and verifying the documents the Assessing Officer did not made any addition on the basis of purchase of impugned mutual funds however certain other additions were made by the Assessing Officer. Apart from the above merits of the case, Ld. AR also submitted before the bench that the order u/s 154 of the IT Act was passed in gross violation of principles of natural justice since the order was passed without issuing a single notice of hearing and without hearing the assessee. Ld. AR referred section 154 of the IT Act wherein it has been clearly provided that no order shall be passed without hearing to the assessee. Under the above facts and in the circumstances of the case, Ld. AR requested before the bench to set-aside the order passed by the Assessing Officer u/s 154 of the IT Act.

6. On the other hand, Ld. DR appearing from the side of the Revenue relied on the orders passed by the subordinate authorities and requested to confirm the same.

7. We have heard Ld. Counsels from both the sides and perused the material available on record including the paper book furnished by the assessee. In this regard, we find that on 23.03.2015 assessment order u/s 143(3) r.w.s. 147 of the IT Act was passed, wherein the re-assessment was completed however no addition was made on the basis of which the reassessment proceedings were initiated, although certain other additions i.e. interest on FDR and income from short term capital gain on sale of mutual funds were made. Subsequently, on 11.09.2017 the Assessing Officer passed order u/s 154 by making addition on account of investment in purchase of mutual fund of Rs.5,30,000/- to the income of the assessee thereby revising the income to Rs.10,94,290/- which was originally assessed at Rs.5,64,290/-. We further find that Ld. CIT(A)/NFAC dismissed the appeal filed by the assessee and held that the order passed u/s 154 of the IT Act is correct. In this regard, we further find that the assessee has already clarified before the Assessing Officer that he is the second holder and the mutual funds were purchased by his wife Mrs. Minni Narang as first holder out of the receipt of redemption of other mutual funds held by her since long. The complete detail of redemption of mutual funds was also produced before the Assessing Officer and again the same is produced before the bench also. From the perusal of the chart furnished by the counsel of the assessee, it is apparent that wife of the assessee, Mrs. Minni Narang received amounting in all to Rs.5,97,117/- from the redemption of four mutual funds in the month of March 2006 i.e. well before the purchase of impugned mutual funds. Accordingly, we are satisfied that more than enough amount was available with the wife of the assessee who purchased the impugned mutual funds being the first holder and under these circumstances of the case, we find force in the arguments of learned counsel of the assessee that the order passed u/s 143(3) r.w.s. 147 of the IT Act was rightly passed wherein no addition was made on the basis of impugned mutual fund and therefore there was no error which was required to be rectified as per the subsequent order passed u/s 154 of the IT Act. Apart from this, it was also the contention of Ld. counsel of the assessee that the order u/s 154 of the IT Act was passed without providing any opportunity of hearing to the assessee, hence it is bad in law and therefore needs to be quashed. In this regard, we produce section 154 of the IT Act hereinbelow :-

“Rectification of mistake.

154. (1) With a view to rectifying any mistake apparent from the record an income-tax authority referred to in section 116 may,—

(a)

amend any order passed by it under the provisions of this Act;

(b)

amend any intimation or deemed intimation under sub-section (1) of section 143;

(c)

amend any intimation under sub-section (1) of section 200A;

²²[(d)

amend any intimation under sub-section (1) of section 206CB.]

(1A) Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided.

(2) Subject to the other provisions of this section, the authority concerned—

(a)

may make an amendment under sub-section (1) of its own motion, and

(b)

shall make such amendment for rectifying any such mistake which has been brought to its notice by the assessee or by the deductor] —[or by the collector], and where the authority concerned is the Commissioner (Appeals), by the Assessing Officer also.

(3)

An amendment, which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee or the deductor —[or the collector], shall not be made under this section unless the authority concerned has given notice to the assessee or the deductor —[or the collector] of its intention so to do and has allowed the assessee or the deductor —[or the collector] a reasonable opportunity of being heard. “

8. From the perusal of above sub-section (3) of section 154 of the IT Act, it becomes crystal clear that an amendment shall not be made under this section unless the authority concerned has given notice to the assessee and has allowed the assessee reasonable opportunity of being heard. In the instant case in hand, from the perusal of impugned order passed u/s 154 of the IT Act it is apparent that the concerned authority i.e. the Assessing Officer neither issued notice of hearing to the assessee nor provided any opportunity of hearing to the assessee before making the amendment in the order passed under section 143(3) r.w.s. 147 of the IT Act. Therefore, we find force in the arguments of Ld. counsel of the assessee that the order u/s 154 was passed without providing any opportunity of hearing to the assessee, hence the order passed u/s 154 of the IT Act is bad in law and accordingly deserves to be set-aside. Considering the totality of the facts of the case and on the basis of material available on record, we are of the considered opinion that the investment in the impugned mutual fund was made by wife of the assessee namely, Mrs. Minni Narang from the receipt of redemption of other mutual funds and the name of the assessee was appearing only as a second holder and not as the primary holder. Secondly, the impugned order u/s 154 of the IT Act was passed without issuing any notice to the assessee and also passed without providing any opportunity of hearing to the assessee, accordingly it is bad in law and cannot be sustained. Thus, we deem it appropriate to set-aside the order passed by Ld. CIT(A)/NFAC and direct the Assessing Officer to delete the addition of Rs.5,30,000/- made by him in the hands of the assessee. Thus, the effective grounds of appeal raised by the assessee are allowed.

9. In the result, the appeal filed by the assessee is allowed.