Section 154 Rectification Cannot Be Used to Make Fresh Disallowances: Bangalore ITAT Upholds Jurisdictional Limits

Overview of the Judgment

The Income Tax Appellate Tribunal, Bangalore Bench, delivered a significant ruling in the case of Jana Small Finance Bank Ltd. Vs ITO (ITAT Bangalore), reaffirming that the rectification powers available under Section 154 of the Income Tax Act, 1961 are strictly circumscribed. The Tribunal categorically held that these powers do not extend to introducing entirely new disallowances that were never examined or raised during the original assessment proceedings. The ruling serves as an important reminder of the jurisdictional boundaries that govern rectification proceedings and the distinction between rectification and review.

Background and Factual Matrix

The assessee, Jana Small Finance Bank Ltd., is a corporate entity engaged in the business of banking and financial services. The sequence of events that led to this appeal before the Tribunal is as follows:

Filing of Return and Scrutiny Assessment

  • The assessee filed its return of income on 28/11/2014 for Assessment Year 2014-15.
  • A revised return was subsequently filed on 29/03/2016, and the tax liability as per the revised return was duly discharged.
  • The revised return was initially selected for limited scrutiny, which was later converted into complete scrutiny.
  • A notice under Section 143(2) of the Income Tax Act, 1961 was issued, and the assessee cooperated by furnishing all requisite details sought by the Assessing Officer (AO).
  • The assessment was completed under Section 143(3) of the Act on 29/12/2017.

First Round of Litigation

  • In the assessment completed on 29/12/2017, the AO raised certain disallowances. The assessee challenged these before the Commissioner of Income Tax (Appeals) [CIT(A)].
  • The assessee also moved an application for admission of additional evidence before the CIT(A), which was not accepted.
  • The CIT(A) dismissed the appeal entirely.
  • Aggrieved, the assessee preferred an appeal before the Tribunal, which set aside the CIT(A)'s order and restored the matter to the AO for de novo adjudication.

Second Assessment Order

  • Following the Tribunal's remand, the AO issued a fresh notice, the assessee filed detailed submissions, and a fresh assessment order under Section 143(3) was passed on 31/03/2022.
  • The assessee challenged this second assessment order as well before the CIT(A).

Key Observation: In neither the assessment order dated 29/12/2017 nor the one dated 31/03/2022 did the AO raise any objection or disallowance in respect of the loss on write-off of assets claimed by the assessee-bank.

The Rectification Proceedings Under Section 154

AO's Proposal and Objections

While the challenge to the second assessment order was pending, the Revenue proposed to rectify the Section 143(3) order dated 31/03/2022 by invoking Section 154 of the Income Tax Act, 1961. The assessee filed its objections to the proposed rectification. Despite these objections, the AO proceeded to pass a rectification order on 30/05/2024.

Through this rectification order, the AO sought to: