Holding

Section 154 can be invoked only to correct a patent mistake apparent from the record, not to alter a position based on a change of opinion or a debatable legal issue; therefore the rectification order was invalid.

Summary

Mepco Industries Ltd. received a power subsidy for two years and initially treated it as a revenue receipt. The assessee argued that the subsidy was a capital receipt and sought revision of assessment orders, which were initially allowed by the Commissioner of Income Tax. After the Supreme Court’s decision in Sahney Steel & Ors. (1997) that a similar incentive subsidy was a revenue receipt, the Commissioner changed its view, invoked Section 154 of the Income Tax Act to rectify its earlier order, and the Madras High Court upheld the rectification. The Supreme Court held that Section 154 can only correct a patent mistake apparent from the record and cannot be used to alter a position based on a change of opinion or a debatable legal issue. Consequently, the rectification order was invalid, the High Court’s judgment was set aside, and the appeals were allowed.

Issues considered

Whether the Commissioner of Income Tax can invoke Section 154 of the Income Tax Act, 1961 to rectify its own order on the ground of a change of opinion after a Supreme Court decision.
What constitutes a 'rectifiable mistake' under Section 154 – whether a change of opinion or a debatable point of law qualifies.
Whether the power subsidy received by Mepco Industries is a capital receipt or a revenue receipt for tax purposes.

Legislation cited

Income Tax Act, 1961s. 147, s. 148, s. 149, s. 150, s. 151, s. 152, s. 153, s. 154, s. 264, s. 28

Subjects

Income TaxSection 154Rectification of mistakeCapital receiptRevenue receiptSubsidyChange of opinionTax law

Judgment

[2009] 15 (ADDL.) S.C.R. 1026

A
MtS. MEPCO INDUSTRIES LTD. MADURAI
V.
COMMISSIONER OF INCOME TAX &ANR.
. (Civil Appeal Nos. 7662-7663 of 2009)
NOVEMBER 19, 2009
B
[S.H. KAPADIA, H.L. DATIU AND DEEPAK VERMA, JJ.]

Income Tax Act, 1961 - s. 154 - Rectification of mistake
under - Assessee received power subsidy for two years -
Assessee's case that subsidy amount a capital receipt, hence
C not liable to be taxed - Revision petitions allowed by CIT~
Subsequently, rectification of the orcjer by CIT holding that
receipt of subsidies, a revenue receipt - Order upheld by
Single Judge and Division Bench of High Court - On appeal,
held: Instant case involves change 9f opinion - No 'rectifiable
D mistake' existed to enable the Department to invokes. 154 -
Government grants different types of subsidies to
entrepreneurs, thus, in eCJch case, the nature of subsidy is to
be examined - This exercise cannot be undertaken uls. 154 -
- Thus, order of High Court set aside.
E Sahney Steel and Press Works Limited and Ors. vs.
Commissioner of Income Tax 1997 (228) l.T.'R.253;
Commissioner of Income Tax vs. P.J. Chemicals Limited 1994
(210) l.T.R.830; Commissioner of Income Tax vs. Ponni
Sugars and Chemicals Limited 2008 (306) l.T.R.392;
Jiyajeerao Cotton Mills Limited vs. Income Tax Officer,
F Calcutta and Ors. 1981 (130) l.T.R.710; Kil Kotagiri Tea and
Coffee Estates Company Limited vs. Income Tax Appellate
Tribunal and Ors. 1988 (174) l.T.R.579; A. Sethumadhavan
vs. Commissioner of Income Tax 1980 (122) l.T.R.587; Santha
S. Shenoy vs. Union of India 1982 (135) l.T.R.39; Deva Metal
G Powders (P) Limited vs. Commissioner, Trade Tax, Uttar
Pradesh 2008 (2) S.C.C.439; Commissioner of Central
Excise, Calcutta vs. A.S.C.U. Limited 2003 (151) E.L.T. 481,
referred to.
1026
H
MEPCO INDUSTRIES LTD. MADURAI v. COMMNR. 1027
OF INCOME TAX
Case Law Reference : A
.., 1997 (228) l.T.R.253 Referred to. Para 3
1994 (210) l.T.R.830 Referred to. Para 4
2008 (306) l.T.R.392 Referred to. Para 7
1981 (130) l.T.R.710 Referred to. Para 8
1988 (174) l.T.R.579 Referred to. Para 9 B
1980 (122) l.T.R.587 Referred to. Para 9
1982 (135) l.T.R.39 Referred to. Para 9
..., 2008 (2) S.C.C.439 Referred to . Para 10
2003 (151) E.L.T. 481 Referred to. Para 11
='!
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
c
7662-7663 of 2009.
From the Judgment & Order dated 29.11.2007 of the High
Court of Judicature at Madras in Writ Appeal Nos. 2769 and
2770 of 2004.
Pritesh Kapur, Radha Rangaswamy for the Appellant. D
8. Bhattacharya, ASG, H. Raghavendra Rao, M. Khairati,
"' D.K. Singh, 8.V. Balaram Das, for the Respondents.
The Judgment of the Court was delivered by
KAPADIA, J. 1. Heard learned counsel on both sides.
E
2. Leave granted.
3. The short question which arises in the facts and
-( circumstances of these appeals is: whether it was open to the
Commissioner of Income Tax to rectify its own order under
Section 154 of the Income Tax Act, 1961, on the basis of the
judgement of this Court [later judgement] in the case of Sahney F
Steel and Press Works Limited & Ors. vs. Commissioner of
Income Tax, reported in [1997] 2281.T.R.253? In short, in these
appeals, we are concerned with the scope of Section 154 of the
Act.
4. The appellant is engaged in the business of manufacture G
of Potassium Chlorates. Its factory is located in the Union Territory
of Pondicherry. The appellant received power subsidy for two
\, years, which it initially offered as revenue receipt in its Return of
Income. In the petitions filed under Section 264 of the Income
Tax Act, 1961 [for short, "the Act"], the assessee pleaded that
H
,.
1028 SUPREME COURT REPORTS [2009] 15 (ADDL.) S.C.R.
,l

A the subsidy amount was a capital receipt, hence not liable to be ...
taxed, and, accordingly, it sought revision of the assessment
orders for Assessment Years 1993-1994 and 1994-1995. In the
revision petitions, appellant had pleaded that the subsidy amount
was a capital receipt and, for that purpose, it relied upon the
judgement of this Court in the case of Commissioner of Income
B
Tax vs. P.J. Chemicals Limited, reported in [1994] 210
l.T.R.830. The revision petitions filed by the appellant under
Section 264 of the Act stood allowed by the Commissioner of ~

Income Tax by order dated April 30, 1997. Subsequent to the
said order, on 19th September, 1997, this Court in the case of .•"'
c Sahney Steel and Press Works Limited (supra) held that
incentive subsidy admissible to Sahney Steel and Press Works
Limited was a revenue receipt and, hence, it was liable to be
taxed under Section 28 of the Act. This decision was based on
a detailed examination of the Subsidy Scheme formulated by the
Government of Andhra Pradesh. It stated that incentives would
D
not be available unless and until production had commenced. In ....
that matter, this Court found that incentives were given by refund
of sales tax and by subsiqy on power consumed for production.
In short, on the facts and circumstances of that case, this Court \
came to the conclusion that incentives were production I

E incentives in the sense that the assessee was entitled to
~
incentives only after entering into production. It was also clarified
that the Scheme was not to make any payment directly or '"""
indirectly for setting up the industries.
5. Following the judgement of this Court in the case of ...
F Sahney Steel and Press Works Limited (supra), delivered on
19th September, 1997, the Commissioner of Income Tax passed
an order of rectification dated 30tli March, 1998. The only ground
on which rectification was sought to be made by the
Commissioner of Income Tax was that Power Tariff Subsidy
given to the appellant herein was admissible only after
G commencement of production. Consequently, according to the
Commissioner of Income Tax, Power Tariff Subsidy constituted
i
operational subsidies, they were not capital subsidies and, in
the circumstances, applying the ratio of the judgement of this
)c
Court in the case of Sahney Steel and Press Works Limited >-
H ~
MEPCO INDUSTRIES LTD. MADURAI v. COMMNR. 1029
OF INCOME TAX [S.H. KAPADIA, J.]

(supra), the Commissioner of Income Tax sought to rectify its A
. earlier order dated 30th April, 1997, by invoking Section 154 of
the Act. Aggrieved by the said order, the appellant herein filed
writ petitions before the Madras High Court, which took the view
that, in view of the subsequent decision of this Court in the case
of Sahney Steel and Press Works Limited (supra), the
B
Department was entitled to invoke Section 154 of the Act and
that the Commissioner was right in treating the receipt of
subsidies as a revenue receipt. This decision of the learned
Single Judge has been affirmed by the Division Bench of the
Madras High Court. Hence, these appeals by special leave.
6. At the outset, we may state that, in these appeals, we arec
concerned with Assessment Years 1993-1994 and 1994- 1995.
The short point involved in these appeals is, whether there existed
a ·rectifiable mistake' enabling the Department to invoke Section
154 of the Act? If one examines the Scheme of the Income Tax
Act, as it stood at the material time, one finds a clear dichotomy D
between Section 154 and Section 147 of the Act. Section 154
deals with rectification of mistake. Section 154(1 ), inter alia,
states that, with a view to rectify any mistake apparent from the
record, an Income Tax Authority may amend any order passed
by it under the provisions of the Act, whereas Section 147, inter
alia, states that if the Assessing Officer has reason to believe E
that any income charged to tax has escaped assessment for any
assessment year, he may, subject to the provisions of Sections
148 to 153, assess or re-assess such income which has escaped
assessment and which comes to the notice of the Assessing
Officer subsequently in the course of proceedings under the said F
Section. In the present case, the Department did not invoke
Section 147 of the Act even when the matter was within the time
limit prescribed. Be that as it may, in these appeals, we are
concerned with the meaning of the words 'rectifiable mistake'.
7. On the facts of the present case, we are of the view that G
the present case involves change of opinion. In this connection,
\
it must be noted that Government grants different types of
• subsidies to the entrepreneurs. The subsidy in Sahney Steel
and Press Works Limited (supra) was an incentive subsidy linked
to production. In fact, in Sahney Steel and Press Works Limited
H
1030 SUPREME COURT REPORTS (2009] 15 (ADDL.) S.C.R.

A (supra) [at page 257], this Court categorically stated that the
Scheme in hand was an incentive Scheme and it was not a .. .
Scheme for setting up the industries. In the said case, the salient
features of the Scheme were examined and it was noticedthat
the Scheme formulated by the Government of Andhra Pradesh
was admissible only after the commencement of production. In .....
B Income Tax matters, one has to examine the nature of the item
in question, which would depend on the facts of each case. In
the present case, we are concerned with power subsidy whereas
in the case of Commissioner of Income Tax vs. Ponni Sugars \.

and Chemicals Limited, reported in [2008] 306 "l.T.R.392, the
c subsidy given by the Government was for re-paying Joans.
Therefore, in each case, one as to examine the nature of subsidy.
This exercise cannot be undertaken under Section 154 of the
Act. There is one more reason why Section 154 in the present
lo
case was not invokable by the Department. Originally, the
D Commissioner of Income Tax, while passing orders under
Section 264 of the Act on 30th April, 1997, had taken the view
that the subsidy in question was a capital receipt not taxable
under the Act. After the judgement of this Court in Sahney Steel
and Press Works Limited (supra), the Commissioner of Income
Tax has taken the view that the subsidy in question was a
E revenue receipt. Therefore, in our view, the present case is a
classic illustration of change of opinion.
8. We may now deal with the judgement of the Calcutta High '.
Court in the case of Jiyajeerao Cotton Mills Limited vs. Income
Tax Officer, Calcutta & Ors., reported in [1981) 130 l.T.R. 710.
F In that case, the appellant-assessee derived profits from three
industries, one of which qualified for special rebate under Part-
I of Schedule-I to the Finance Act, 1965, for the Assessment Year
1966-1.967. In granting this special rebate, the Income fax Officer
computed the profits attributable to that industry witr.:.ut deducting
development rebate granted to the appe!!ant. The Income Tax
G Officer sought to rectify the mistake under Section 154 of the Act
by re-computing the profits by deducting the development
rebate. The appellant filed a writ petition for setting aside the I
~

notice of rectification. It was held by the Calcutta High Court that
since there was conflict of opinion on computation of profits of
H priority ind ustry for granting tax relief which conflict was resolved
MEPCO INDUSTRIES LTD. MADURAI v. COMMNR. 1031
OF INCOME TAX [S.H. KAPADIA, J.]
by the Supreme Court later on for the subsequent Assessment A
Year 1967-1968, such subsequent decision of the Supreme
Court did not obliterate the conflict of opinion prior to it. It was
held that, under Section 154 of the Act, rectification was not
permissible on debatable issue.
9. In Kil Kotagiri Tea and Coffee Estates Company Limited 8
vs. Income Tax Appellate Tribunal & Ors., reported in [1988]
174 l.T.R.579, the facts were as follows: the assessee claimed
interest on advance tax paid by it in excess but beyond the due
dates. The Income Tax Officer disallowed the claim of the
assessee. The Commissioner of Income Tax upheld the claim
of the assessee. Following the decision of a learned Single C
Judge of the Kerala High Court in A. Sethumadhavan vs.
Commissioner of Income Tax [1980] 122 l.T.R.587, the Tribunal
held that belated payments were not to be taken into account as
advance tax for the purpose of Section 214 of the Income Tax
Act, and, therefore, interest was not admissible for such belated o
payments. However, subsequently, a Division Bench of the same
High Court in Santha S. Shenoy vs. Union of India [1982] 135
l.T.R.39, reversed the decision of the learned Single Judge in
A. Sethumadhavan (supra) and held that payment of tax made
within the financial year, though not within specified dates, should E
be treated as advance tax and, consequently, the assessee was
entitled to interest on excess tax paid. The assessee filed an
application under Section 154 of the Act for rectification of the
order of the Tribunal in view of the later decision in Santha S.
Shenoy(supra). On the facts of that case, the Kerala High Court
> came to the conclusion that the rectification contempiated under F
Section 154 must be a 'rectifiable mistake' which is a mistake
in the light of the law in force at the time when the order sought
to be rectified was passed. The Kerala High Court also
· examined the judgement of the Calcutta High Court in Jiyajeerao
Cotton Mills Limited (supra) and held that the said decision was G
distinguishable. The High Court laid down a principle of law,
which was applicable across the board, namely, payment of
advance tax made within the financial year, though not within the
specified dates, should be treated as advance tax and, therefore,
the assessee was entitled to interest on excess tax paid. The
judgement in Kil Kotagiri Tea and Coffee Estates Compm:w H
1932 SUPREME COURT REPORTS [2009] 15 (ADDL.) S.C.R.

A Limited (supra) is not applicable to the facts of the present case,
as stated above. Sahney Steel and Press Works Limited & Ors.
. '

(supra) was a case which dealt with production subsidy, Ponni
Sugars and Chemicals Limited (supra) dealt with subsidy linked
to loan re-payment whereas the present case deals with a
B subsidy for setting up an industry in the backward area.
Therefore, in each case, one has to examine the nature of the
subsidy. The judgement of this Court in Sahney Steel and Press
Works Limited & Ors. (supra) was on its own facts; so also, the
judgement of this Court in Ponni Sugars and Chemicals
Limited (supra). The nature of the subsidies in each of the three
C cases is separate and distinct. There is no straighHacket
principle of distinguishing a capital receipt from a revenue
receipt. It depends ,upon the circumstances of each case. As
stated above, in Sahney Steel and Press Works Limited & Ors.
(supra), this Court has observed that the production incentive
D scheme is different from the Scheme giving subsidy for setting
up industries in backward areas. In the circumstances, the
present case is an example of change of opinion. Therefore, the
Department has erred in invoking Section 154 of the Act.
10. Before concluding, we may state that in Deva Metal
Powders (P) Limited vs. Commissioner, Trade Tax, Uttar
E Pradesh, reported in 2008 (2) S.C.C.439, a Division Bench 0f
this Court held that a ·rectifiable mistake' must exist and the same
must be apparent from the record. It must be a patent mistake,
which is obvious and whose discovery is not dependant on
elaborate arguments.
F 11. To the same effect is the judgement of this Court in the
case of Commissioner of Central Excise, Calcutta vs. A. S. C. U
Limited [2003] 151 E. L. T. 481, wherein it has been held tnat a~
'rectifiable mistake' is a mistake which is obviou~ dnd not
something which has to be established by a long drawn process
G of reasoning or where two opinions are possible. Decision on
debatable point of law cannot be treated as "mistake apparent
from the record".
12. For the afore-stated reasons, appellant-assessee
succeeds, impugned judgement is set aside and, consequently,
the appeals are allowed with no order as to costs.
H N.J. Appeals allowed.