Whether, based on subsequent decision of Supreme Court which was not available at time of decision given by Tribunal, rectification application u/s 254(2) is maintainable - YES: HC

THE issues before the Bench are - Whether, based on a subsequent decision of the Supreme Court which was not available at the time of decision given by the Tribunal, a rectification application u/s 254(2) is maintainable and Whether in the event of closure of a firm, stock of the said firm would be carry forward to the newly formed company, at cost only. And the verdict goes against the Revenue.

Facts of the case

The assessee is an individual. In the AY 1990-91, the Tribunal while allowing the appeal of the Revenue, had observed it was clear that whatsoever may be the mode of dissolution or closure of the business of the firm, the profits had to be ascertained only by taking the closing stock at market value. The accounts had to be worked out on that basis upto the date of dissolution or prior to it. The situation that the firm came to an end by way of liquidation or partners dissolved the firm for distributing the assets of the firm, or dissolved and closed the firm with a view to form a company or otherwise, were not relevant because the accounts of the outgoing entity, i.e., the firm, were to be prepared properly, may be the business remained the same and stock was also taken over by the new entity i.e., the company. For tax purposes, the profit and loss of the outgoing entity, i.e., the firm had to be properly and separately worked out and was not to be mixed up with the new entity, i.e., the company. The plea of the counsel for the assessee that in a case of conversion of a firm into a company, the business was not continued and, therefore, same method of valuation of closing stock should be applied, was not acceptable. This view of the tribunal was made on the basis of the decision SC in A.L.A. Firm's Vs. CIT 2002-TIOL-868-SC-IT-LB, in which it was held that if the partnership was dissolved, the valuation of the closing stock had to be valued at market price.

The assessee being aggrieved filed an application u/s 254(2) for rectification of the mistake contending that there was apparent on the face of the record. During the pendency of this application, the SC delivered a decision in Sakthi Trading Co. Vs. CIT 2002-TIOL-569-SC-IT holding that where the business continued and the firm was reconstituted, the valuation of the closing stock would have to be determined at cost price or market price, whichever was lower. In the light of this decision, which was brought to the knowledge of the Tribunal, the application of the assessee u/s 254(2) was allowed and the necessary rectification was made.

Before the HC, the assessee had contended that a substantial question of law arose namely that since the Tribunal had passed the order on merits after considering the pros and cons of the matter, it had no jurisdiction to rectify its mistake u/s 254(2) and in as much as the said rectification amounted to a review of its decision, which was not permissible u/s 254(2).

Held that,

++ we find that the Central Board of Direct Taxes has issued a Circular No. 68 explaining as to when a mistake apparent from the record could be corrected in the event of a subsequent decision delivered by the Supreme Court of India. In ACIT Vs. Saurashtra Kutch Stock Exchange Ltd. 2008-TIOL-170-SC-IT, the SC held that the rectification of an order stems from the fundamental principle that justice is above all and that it has to be exercised to remove the error and achieve the finality. The Supreme Court held that an error apparent on the record means an error which strikes one on mere looking and does not need a long drawn out process of reasoning on points on which there may be conceivably two opinions. The Supreme Court, in the said case, found that the decision of the Appellate Tribunal was rendered without noticing the decision of the High Court. The Supreme Court held that there was an error apparent on the record, which could be rectified by a miscellaneous application being filed under section 254(2). Similarly, in Shahbad Co-operative Sugar Mills Ltd. Vs. DCIT [2011] 336 ITR 0222, the Punjab and Haryana High Court held that recourse to rectification proceedings would be taken once the Supreme Court rendered its decision clarifying the earlier decision passed by it and that such rectification was permissible under section 154;

++ we find that pursuant to the decision given by the Supreme Court in Sakthi Trading Co., as a result of subsequent interpretation of law by the Supreme Court, fairly indicating that where the business continued, the valuation of the closing stock would have to be determined either at cost price or market price, whichever is lower. Such decision passed by the Tribunal based on an earlier decision of the Supreme Court is a mistake apparent from the record and consequently a rectification application under section 254(2) is maintainable. We are of the opinion that the Tribunal was justified in passing the order under section 254(2). In view of the aforesaid, we do not find that any substantial question of law arises for consideration. The appeal fails and accordingly dismissed