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Omega Sports & Radio Works v. Commissioner Of Income-Tax, Lucknow.
Judgment Summary — Reference under Section 256(1), Income-tax Act, 1961
Factual and Procedural Background
M/s. Omega Sports & Radio Works, Gorakhpur (the "assessee") was a registered partnership firm of three partners. On 19 August 1968 two partners retired, and with effect from 20 August 1968 the surviving partner and another person formed the partnership. For the assessment year 1969 (previous year ending 31 March 1969) the assessee filed two returns: for the first period claiming renewal of registration and for the latter period claiming a fresh registration. The Income-tax Officer (ITO) made a single assessment for the entire year treating the entity as a registered firm, but allocated income between partners according to the two periods and allowed renewal of registration under s.184(7) for the first period and fresh registration under s.185(1)(a) for the second period.
No appeal was filed against that assessment order. The assessee applied under s.154 (rectification of mistake) seeking separate assessment orders for the two periods, alleging a mistake apparent on the face of the record because only one assessment had been framed. The ITO rejected the s.154 application (order dated 11 May 1973). On appeal the Appellate Assistant Commissioner (AAC) directed the ITO to frame separate assessments. The Revenue then appealed to the Income-tax Appellate Tribunal (Tribunal). Before the Tribunal the Revenue conceded that the Full Bench decisions of the Allahabad High Court (this court) in Dahi Laxmi Dal Factory and Kunj Behari Shyam Lal were binding in Uttar Pradesh, but argued that because the question was debatable (other High Courts had taken different views) rectification under s.154 should not be available. The Tribunal accepted that contention and refused rectification, reasoning that divergence of opinion elsewhere meant there was no glaring or obvious mistake of law. The Tribunal's order was referred to this court under s.256(1), posing the question whether the Tribunal was right in holding that s.154 was not applicable.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of section 154 were not applicable in this case?
Arguments of the Parties
Assessee's Arguments
- The framing of one assessment for the entire year was an obvious and patent mistake correctable under s.154, because it was contrary to binding decisions of this court (notably Dahi Laxmi Dal Factory) which require separate assessments when a firm's constitution changes during the year.
- The ITO was bound to follow the law declared by this High Court and, therefore, the single assessment constituted a mistake apparent on the record.
Revenue's Arguments
- The error could not be treated as a "mistake apparent on the record" under s.154 because the question whether one assessment or separate assessments should be framed is a highly debatable issue; other High Courts have taken contrary views.
- Because of divergence in judicial opinion elsewhere, rectification under s.154 should not be available — relying on the principle that a "mistake apparent" must be obvious and not a point on which reasonable minds might differ.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Dahi Laxmi Dal Factory v. ITO, [1976] 103 ITR 517 (FB) | Holds that when constitution of a firm changes during the year separate assessments should be framed for the two periods. | Considered binding within the State of U.P.; formed the primary basis for holding that separate assessments should have been made and that the single assessment was contrary to settled law in this State. |
| Commissioner of Income-Tax, U.P. v. Kunj Behari Shyam Lal, [1977] 109 ITR 154 (FB) | Reinforces the position that change in firm constitution during a year requires separate assessments. | Treated as binding authority in U.P. alongside Dahi Laxmi Dal Factory, supporting the conclusion that separate assessments were required. |
| T.S. Balaram, ITO v. Volkart Brothers, [1971] 82 ITR 50 (SC) | Defines "mistake apparent on the record" as an obvious and patent mistake, not a debatable point of law requiring long reasoning; a decision on a debatable point is not a mistake apparent from the record. | Distinguished: the court held T.S. Balaram's principle not applicable here because the law in U.P. was settled by the Full Bench decisions of this court, so the present case was not a merely debatable point within this State. |
| Karam Chand Thapar and Brothers v. State of Uttar Pradesh, [1975] UPTC 11 | Authority for the proposition that administrative authorities are bound to apply the law declared by the High Court. | Cited to support that the ITO was bound to follow the law declared by this court. |
| U.P. Agricultural Corporation v. Commr. of Sales Tax, [1978] UPTC 414 | Similar proposition that authorities must follow law declared by the High Court. | Used to reinforce that the ITO was bound to apply this court's decisions. |
| Devendra Prakash v. ITO, [1969] 72 ITR 151 (All) | Indicates that the Income-tax Officer may take judicial pronouncements (including High Court decisions) into account when deciding whether an assessment record reveals a "mistake apparent from the record". | Relied upon to support the proposition that a High Court decision showing an earlier assessment order to be erroneous can justify rectification under s.154. |
| CIT v. Ramjibhai Hirjibhai & Sons, [1977] 110 ITR 411 (Guj) | Holds that a High Court decision binds I.T. authorities within its State and divergence elsewhere does not create a debatable issue within that State. | Applied to show that divergence of opinion in other High Courts does not prevent s.154 being invoked where a local High Court decision has settled the issue. |
| Dalwadi & Co. v. CIT (Income-tax Reference No.54 of 1972) (decided 17 Dec 1973) | Referenced as a decision of the Gujarat High Court that left no scope for debate on the point in that State. | Used by the court to explain the reasoning in Ramjibhai Hirjibhai & Sons and to show that a local High Court decision can make the question non-debatable for authorities in that jurisdiction. |
| CIT v. Mohan Lal Kansal, [1978] 114 ITR 583 (P&H) | Holds that I.T. authorities within a High Court's jurisdiction are bound by that court's decisions; where a point is no longer debatable in that jurisdiction rectification can follow. | Quoted to illustrate that Tribunal was wrong to refuse rectification on the ground of conflicting decisions elsewhere when a binding decision existed in the relevant jurisdiction. |
| Brij Bushan Lal v. CIT, [1971] 81 ITR 497 | Applied in the Mohan Lal Kansal case and cited for the rule followed by that High Court. | Referenced in the discussion of Mohan Lal Kansal to show how earlier High Court precedent affected rectification decisions. |
| Commissioner Of Income-Tax, Kanpur v. Vindeshwari Trading Corporation, [1978] 113 ITR 791 | Division Bench decision considering whether separate assessments are to be framed when a firm's constitution changes; noted that the question stood concluded by this court's Full Bench decisions but that an Andhra Pradesh Full Bench had taken a contrary view. | The court held the decision did not help the revenue's argument that the question was debatable within U.P.; cited to explain that divergence elsewhere does not make the issue debatable for U.P. authorities. |
| Addl. CIT v. Visakha Flour Mills, [1977] 108 ITR 466 (Andhra Pradesh FB) | Full Bench decision of Andhra Pradesh High Court taking a view contrary to this court's Full Bench decisions on whether separate assessments are required. | Mentioned as an example of judicial divergence in other States; the court noted this divergence but held it did not make the question debatable within U.P. while this court's Full Bench decisions remained binding. |
Court's Reasoning and Analysis
The court first reiterated the factual position and the procedural history, and then framed the narrow question referred by the Tribunal: whether the Tribunal was right in holding that s.154 was not applicable. The court proceeded by examining whether the single assessment constituted a "mistake apparent on the record" correctable under s.154.
The court emphasized that in Uttar Pradesh the law was settled by this court's Full Bench decisions in Dahi Laxmi Dal Factory and Kunj Behari Shyam Lal, which require separate assessments when the constitution of a firm changes during the year. Given those binding decisions, the court concluded that the ITO ought to have made separate assessments for the two periods and that the one assessment was contrary to the declared law in that State.
The court addressed the revenue's reliance on the Supreme Court decision in T.S. Balaram that a "mistake apparent on the record" must be an obvious and patent mistake and not a debatable point of law. The court distinguished T.S. Balaram because, in its view, the present situation was different: the question was not open to debate within Uttar Pradesh where this court's Full Bench decisions had already settled the law. Thus the single assessment was an obvious contradiction of binding High Court authority and properly characterized as a mistake apparent on the record for the purposes of s.154.
To reinforce this conclusion the court relied on several authorities (Devendra Prakash; Ramjibhai Hirjibhai; Mohan Lal Kansal) which support the proposition that I.T. authorities must take into account binding High Court decisions and that divergence of opinion in other jurisdictions does not make a point debatable within the State where a High Court's decision has settled the law. The court also observed that the departmental representative had conceded before the Tribunal that, in view of Dahi Laxmi Dal Factory, it could not be argued that a single assessment was legally justified in this case.
On these grounds the court held the Tribunal erred in its conclusion that s.154 could not be invoked merely because of conflicting decisions in other High Courts, and answered the referred question against the Tribunal and in favor of the assessee.
Holding and Implications
Holding: The court answered the referred question in the negative — i.e., the Tribunal was not right in holding that the provisions of section 154 were not applicable in this case. The Tribunal erred; rectification under s.154 was available and appropriate because the single assessment was contrary to binding High Court authority.
Implications:
- Direct effect on the parties: The decision vindicates the assessee's position that separate assessments should be framed for the two periods and that rectification under s.154 was available. The court awarded costs to the assessee in the amount of Rs. 250.
- Scope of precedent and authority: The judgment reiterates that Income-tax authorities within a High Court's jurisdiction are bound by that High Court's decisions; divergence of opinion in other High Courts does not prevent s.154 being invoked where local authority is settled. The court distinguished the Supreme Court's T.S. Balaram principle on "mistake apparent" as inapplicable where a High Court's binding decision has settled the law in that jurisdiction.
This summary is based exclusively on the text of the provided opinion and does not add information beyond that opinion.
R.R Rastogi, J.:— This is a reference under s. 256(1) of the I.T Act, 1961 (hereinafter “the Act”). The brief facts are these. M/s. Omega Sports & Radio Works, Gorakhpure, hereafter “the assessee”, was a registered firm of three partners. On August 19, 1968, two of the partners retired and with effect from the following date, i.e, August 20, 1968, the surviving partner and one another formed the partnership. For the assessment year 1969, the previous year ended on March 31, 1969, the assessee filed two returns and in respect of the first period claimed renewal of the registration and for the latter period a fresh registration. The ITO being of the opinion that there was a change in the constitution of the firm with effect from August 20, 1968, made one assessment for the entire year in the status of a registered firm. The income of the two periods aforesaid was allocated amongst the partners of the firm as existing during the two periods respectively and allowed renewal of registration under s. 184(7) for the first period and for the second period allowed fresh registration under s. 185(1)(a) of the Act.
2. No appeal Was filed against that order. Subsequently, the assessee made an application under s. 154 of the Act, requiring the ITO to pass separate assessment orders for the two periods aforesaid. It was contended that a mistake apparent on the face of the record had occurred, inasmuch as only one assessment had been framed for the entire period and, hence, rectification was sought. The ITO did not accept that contention and rejected the application, vide his order dated May 11, 1973. On appeal, the AAC took a contrary view and directed the ITO to frame separate assessments for the aforesaid two periods. The department then took up the matter in appeal before the I.T Appellate Tribunal. The revenue conceded before the Appellate Tribunal that in view of the Full Bench decision of this court in Dahi Laxmi Dal Factory v. ITO, [1976] 103 ITR 517, which is binding in the State of Uttar Pradesh, it may not be possible to argue that one assessment for the entire period was legally justified in the case. It was, however, contended that in view of the fact that the question is highly debatable in nature and the Punjab and Haryana High Court has taken a different view on this matter, recourse to s. 154 of the Act could not be taken. This contention has found favour with the Appellate Tribunal and it has taken the view that even though, because of the fact that the decisions of this court are binding in Uttar Pradesh, it was not possible to hold that an order passed by an authority in the State of U.P contrary to the ratio of the decision of the Allahabad High Court suffers from a glaring or obvious mistake of law. Since this question was highly contentious, recourse to s. 154 of the Act was not justifiable.
3. Now, at the instance of the assessee, the Appellate Tribunal has referred the following question of law to this court.
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of section 154 were not applicable in this case?”
4. We have already narrated the facts of the case above and it would be seen that in view of the decisions of this court in Dahi Laxmi Dal Factory, [1976] 103 ITR 517 [FB], Commissioner Of Income-Tax, U.P v. Kunj Behari Shyam Lal., [1977] 109 ITR 154 [FB], the controversy stands concluded that in the event of a change taking place in the constitution of a firm during the course of a year, separate assessments should be framed for the two periods. That being so, in the case of the assessee for the two periods aforesaid separate assessments should have been made. The question, which, however, falls for consideration is as to whether there was a mistake apparent on the record which could be rectified under s. 154 of the Act?
5. It was submitted before us on behalf of the assessee by Sri R.K Gulati, that there was an obvious and patent mistake which could be rectified under s. 154 of the Act because the framing of the assessment for the entire period was against the decision of this court and there can be no room for any controversy that the decisions of this court are binding on all the I.T authorities in this state. On the other hand, Sri Markandey Katju, for the department, contended that this mistake could not be treated as a mistake apparent on the record because it is a highly debatable issue as to whether in the circumstances of the case one assessment need be framed for the entire year or separate assessments are required to be framed for the period preceding the change taking place in the constitution of the firm and for the period thereafter. It was contended that some other High Courts have taken a view which is contrary to the view taken by this court, and, therefore, it cannot be said that it is a settled and concluded question of law. We are not inclined to agree with Sri Katju. In T.S Balaram, ITO v. Volkart Brothers, [1971] 82 ITR 50 (SC), of course it has been laid down that a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. A decision on a debatable point of law, is not a mistake apparent from the record. This decision is, however, not applicable to the situation obtaining in the present case because the law, in so far as this State is concerned, stands settled by the decisions of this court in Dahi Laxmi Dal Factory, [1976] 103 ITR 517 [FB] and Kunj Behari Shyam Lal, [1977] 109 ITR 154 [FB]. The ITO was, therefore, bound to apply the law declared by this court (see Karam Chand Thapar and Brothers v. State of Uttar Pradesh, [1975] UPTC 11 and U.P Agricultural Corporation v. Commr. of Sales Tax, [1978] UPTC 414). Apart from this, as has been indicated above, it was conceded by the departmental representative before the Appellate Tribunal that in view of the decision of this court in Dahi Laxmi Dal Factory, [1976] 103 ITR 517 [FB], which is binding within the State of U.P, it may not be possible to argue that one assessment for the whole period was legally justified in this case. In our opinion, therefore, the Appellate Tribunal was in error in holding:
“While, there can be no dispute that the decisions of the hon'ble High Court are binding in the State of U.P, it is not possible to hold that an order passed by an authority in the State of U.P contrary to the ratio of the decision of the Allahabad High Court suffers from a glaring or obvious mistake of law.”
6. The consensus of judicial opinion as well is to the same effect. In Devendra Prakash v. ITO, [1969] 72 ITR 151 (All) it was observed (p. 155):
“It is clear, therefore, that the Income-tax Officer does, not have to shut his eyes completely to all extraneous matters when judging whether a particular assessment record reveals a ‘mistake aparent from the record’. He can take into account statutory provisions and pronouncements of the Supreme Court. We see no reason why this principle should not also apply to a case where a High Court has given a decision that shows an existing assessment order to be erroneous; and if the argument is taken to its logical extreme, the Income-tax Officer should be able to take note of any judicial pronouncement by any court or tribunal, when considering whether there is a ‘mistake apparent from the record’ of a prior assessment.”
7. The Gujarat High Court in CIT v. Ramjibhai Hirjibhai & Sons, [1977] 110 ITR 411 did not approve of the view taken by the Tribunal that in view of the divergence of judicial opinion between some High Courts it could not be said that the provisions of section 154 would be applicable on the facts of the case and held that one of the reasons for that was that there was no scope for debate on the question involved in view of the decision of that court in Dalwadi & Co. v. CIT (Income-tax Reference No. 54 of 1972 decided on December 17, 1973). In other words if there is a decision on a particular point by a High Court it is binding on the I.T authorities in that State and merely because there is some judicial divergence of opinion on that point between that court and some other High Courts, it cannot be said that there is scope for debate so that s. 154 cannot be attracted.
8. We may also refer to a decision of the Punjab and Haryana High Court in CIT v. Mohan Lal Kansal, [1978] 114 ITR 583, where it has been laid down that the I.T authorities situated within the jurisdiction of a particular High Court are bound by its decision. So long as the decision stood, the I.T authorities were bound to follow the rule laid down therein. In that case the assessee-firm did contract work for the Government. In its assessment for the year 1970–71, the receipts did not include the value of materials supplied by the Government. The ITO in view of the judgment of that court in Brij Bushan Lal v. CIT, [1971] 81 ITR 497, rectified this assessment and included in the total income a further sum representing the value of the materials supplied by the Government. The AAC reversed that order and the Tribunal affirmed it. The Tribunal took the view that since there was a conflict of opinion on this question among the courts there was no mistake apparent on the record to justify the rectification and also refused to state a case for a reference to the High Court. On an application to the High Court under s. 256(2) of the Act, it was held that the I.T authorities, so long as the decision in Brij Bushan Lal stood, were bound to follow the rule laid down therein. It was observed (p. 586 of 114 ITR):
“As the point in issue was no more debatable, the Tribunal was not justified in refusing to refer the question noted above on the basis of the decision of the Supreme Court in T.S Balaram's case, [1971] 82 ITR 50.”
9. It would appear, therefore, that the I.T authorities situated within the jurisdiction of a particular High Court are bound by its decisions and simply because some other courts have taken a different view, it would not be correct to say that that issue was debatable in so far as that court was concerned. Learned counsel for the department drew our attention to a Division Bench decision of this court in Commissioner Of Income-Tax, Kanpur v. Vindeshwari Trading Corporation, [1978] 113 ITR 791. We do not think that this decision helps the revenue in any way. That was a decision given on an application under s. 256(2) of the Act and the question for which reference was sought was as to whether separate assessments are to be framed when a change takes place in the constitution of a firm. Their Lordships took the view that in view of the decisions of this court in Dahi Laxmi Dal Factory and Kunj Behari Shyam Lal, [1977] 109 ITR 154 [FB] this question stands concluded. But, in view of the fact that a Full Bench of the Andhra Pradesh High Court, in the case of Addl. CIT v. Visakha Flour Mills, [1977] 108 ITR 466, after considering one of the aforesaid Full Bench decisions of this court, took a view contrary to that taken by this court, and this controversy has not been settled by the Supreme Court, took the view that it could not be said that no statable question of law arose from out of the appellate order of the Tribunal. This decision does not say that in so far as the I.T authorities of this State are concerned, they can take the view that this question is of a debatable nature because some of the High Courts have taken a different view, and so, recourse cannot be taken to s. 154 of the Act. On this view the Appellate Tribunal was not right in holding that s. 154 of the Act would not be invoked in this case.
10. We, therefore, answer the question in the negative, in favour of the assessee and against the department. The assessee in entitled to costs which we assess at Rs. 250.
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