Ramniklal Tribhowandas v. V.R Amin, First Income-Tax Officer, C-Ii Ward, Bombay.

Tambe, J.:— This is a petition under article 226 of the Constitution of India. The petitioner is the assessee. The respondent is the First Income-tax Officer, C-II Ward, Bombay. We are here concerned with the assessment year 1952-53. By his order dated April 4, 1956, the respondent determined the petitioner's total income at Rs. 1,02,318. In determining that figure the respondent had deducted a sum of Rs. 22,185 which was estimated to be the share of the loss of the petitioner in a firm known as “The Bombay Import and Export Agency” in expectation that the firm would in its assessment be treated as a registered firm. By a further order of rectification under section 35 of the Income-tax Act, the petitioner's total income was determined at Rs. 1,00,830. Thereafter the assessment of the firm-Bombay Import and Export Agency—was completed. The said firm, however, was not treated as a registered firm and it was assessed to the total loss of Rs. 1,57,802 and the petitioner's share of loss therein was determined at Rs. 13,150. Intimation, accordingly, was communicated by the Income-tax Officer, A-V Ward, to the respondent regarding the share of the loss of the petitioner from the firm. On receiving the intimation, the respondent again acting under section 35 of the Act rectified the petitioner's assessment by adding the entire amount of Rs. 22,185 to the total income of the petitioner. The petitioner's total income was thus increased from Rs. 1,00,830 to Rs. 1,23,015. The petitioner was thereafter called upon to pay income-tax and super-tax on the aforesaid total income of Rs. 123,015 and a notice of demand to pay the said taxes was issued on February 11, 1957. Against this order of the respondent the petitioner moved the Commissioner of Income-tax under section 33A to get the order of the respondent revised. One of the contentions raised by the petitioner before the respondent and the Commissioner of Income-tax was that on a correct interpretation of section 14(2)(a) and section 16(1)(a) of the Income-tax Act, the petitioner's share of loss from the unregistered firm should be deducted from the total income for determining the rate at which tax was payable by the petitioner. This contention of the petitioner was not accepted by the Commissioner of Income-tax. Consequently the revision application preferred by the petitioner was rejected by him on August 28, 1959. The petitioner avers that he received intimation about this order on September 4, 1959. On October 21, 1959, the petitioner has preferred this application raising the same contentions, and according to Mr. Palkhivala, learned counsel for the petitioner, the error committed by the income-tax authorities in rejecting his contention is an error apparent on the face of the record, and, therefore, this petition be allowed. Before we proceed to deal with the contentions raised it would be necessary to deal with the preliminary objections raised by Mr. Joshi, learned counsel for the respondent. To appreciate the preliminary objections, some more facts may be stated. We have already stated that the petitioner feeling aggrieved by the order of the respondent had preferred a revision to the Commissioner of Income-tax and that application was rejected by the Commissioner of Income-tax. The petitioner, however, has not joined the Commissioner of Income-tax as a respondent to this petition. Nor has he asked for issue of a writ in the nature of a certiorari or other direction for quashing the aforesaid order of the Commissioner of Income-tax made in revision. On the other hand, the relief sought is to get quashed the order of the respondent made on February 11, 1957. Mr. Joshi raises three contentions by way of preliminary objections. In the first instance it is his contention that the order of the respondent made on February 11, 1957, has merged in the order made by the Commissioner of Income-tax in revision on August 28, 1959, and that is the operative order in the case. The petitioner not having chosen to challenge the order of the Commissioner, it is not open to him to say that the order of the respondent dated February 11, 1957, be quashed. In support of his contention Mr. Joshi has placed reliance on a decision of this court in Special Civil Application No. 886 of 1959, decided on December 1, 1959. Mr. Palkhivala, on the other hand, contends that the order made by the Commissioner in revision was not one varying or modifying the order of the Income-tax Officer, but the order made is one of rejecting the application. The substance of the order of the Commissioner of Income-tax thus being one refusing to interfere with the order of the Income-tax Officer that order still remains as an operative order and has not merged in the order of the Commissioner of Income-tax. This petition is, therefore, maintainable even though the Commissioner of Income-tax is not joined as a respondent to this petition and the relief asked is not to get his order of August 28, 1959, quashed. Reliance is placed by Mr. Palkhivala on Lata Mangeshkar v. Union of India [1959] 36 I.T.R 527.. In that case an identical objection was raised and was overruled by a Division Bench of this court. It was pointed out that there is a clear distinction between an order made in appeal and an order made in revision rejecting the application in revision. At page 532 it is observed:

“First of all I would like to accentuate only one point of differentiation between an appeal and a revisional application, which to my mind is sufficient to bring out this distinction. An appeal is a rehearing of the suit and, therefore, it would be sound logic to say that when there is any judicial determination of an appeal, the decree under appeal becomes merged in the decree passed on appeal, even though the decree under appeal is after judicial determination left untouched and unvaried. Such confirmation, it has been ruled, has the same effect as an order of reversal would have had in so far as it leaves the decree of the appellate court as the only decree in existence for the purpose of execution and the decree of the lower court becomes incorporated in it. This cannot be said of an order dismissing a revisional application. When a revisional application is dismissed, there is no confirmation of any decree or order, but there is only a refusal by the court to exercise its powers of supervision. In such a case the decree or order under revision is left untouched, neither confirmed, nor varied, nor reversed, and it remains a decree or order of the lower court, which can be executed.”

2. It is true that the view taken in Special Civil Application No. 886 of 1959 is that the principle of merger is applicable in the case of both appellate as well as revisional orders. In our view the decision of the Supreme Court in State of Uttar Pradesh v. Mohammad Nooh runs counter to the view taken in Special Civil Application No. 886 of 1959. The facts of the Supreme Court case were that consequent on a departmental inquiry, a head constable was dismissed from service. The dismissal was prior to the coming into force of the Constitution. The constable had preferred an appeal against that order and the appellate authority had dismissed the appeal. The order of dismissal, however, was made subsequent to the date the Constitution came into force. The constable further had preferred a revision application against the order of the appellate authority. That application was also rejected. The matter was then taken to the High Court by way of a writ petition. The High Court found that the dismissal was wrongful and allowed the petition setting aside the order of dismissal. Against the order of the High Court an appeal was taken to the Supreme Court on a certificate granted by the High Court. The question raised was that the dismissal having taken place prior to the date the Constitution came into force, the High Court had no jurisdiction to interfere by way of a writ under article 226 or 227 of the Constitution of India. This argument was countered by another argument on behalf of the constable that though the order of dismissal was made prior to the date the Constitution came into force, the appellate order and the order made in revision were made subsequent to the date the Constitution came into force. The original order of dismissal had got merged first in the order of the appellate authority and later in the order of the revisional authority. The final operative order thus being of the revisional authority and that having been passed subsequent to the date the Constitution came into force, the High Court had jurisdiction to issue a writ under articles 226 and 227 of the Constitution of India. The contention raised on behalf of the constable was rejected by their Lordships of the Supreme Court. In dealing with this contention at page 611 of the report Das, C.J, has observed:

“There appear to be two answers to the foregoing contention. As we have already observed an order of dismissal passed on a departmental enquiry by an officer in the department and an order passed by another officer next higher in rank dismissing an appeal therefrom and an order rejecting an application for revision by the head of the department can hardly be equated with any propriety with decrees made in a civil suit under the Code of Civil Procedure by the court of first instance and the decree dismissing the appeal therefrom by an appeal court and the order dismissing the revision petition by a yet higher court, as has been sought to be done by the High Court in this case, because the departmental tribunals of the first instance or on appeal or revision are not regular courts manned by persons trained in law although they may have the trappings of the courts of law. The danger of so doing is evident from what has happened in the very case now before us. In the next place, while it is true that a decree of a court of first instance may be said to merge in the decree passed on appeal therefrom or even in the order passed in revision, it does so only for certain purposes, namely, for the purposes of computing the period of limitation for execution of the decree or for computing the period of limitation for an application for final decree in a mortgage suit. But, as pointed out by Sir Lawrence Jenkins, whatever be the theory under other systems of law, under the Indian law and procedure an original decree is not suspended by the presentation of an appeal nor is its operation interrupted where the decree on appeal is merely one of dismissal.”

3. The ratio emerging from this decision is that where an order in appeal or an order in revision merely dismisses the appeal or rejects the revision application, the original order is not affected in any manner but remains effective. It necessarily follows that in such cases the original order does not merge in the appellate order or the order in revision. This decision of the Supreme Court was followed by a Special Bench of the Calcutta High Court in East India Commercial Ltd. v. Collector of Customs. The facts in that case were that the Collector of Customs, whose office was situated within the jurisdiction of the Calcutta High Court, had made an order under the Sea Customs Act against the petitioner levying the duty and penalty. This order was confirmed in appeal by the appellate authority, namely, the Central Board of Revenue, whose office is located outside the jurisdiction of the Calcutta High Court. Thereafter the petitioner moved the Calcutta High Court by way of a writ petition under article 226 of the Constitution to get quashed the order of the Collector of Customs and an order preventing the customs authorities from taking any action against the petitioner under the law. An objection was raised to the tenability of the petition on the ground that the order of the Collector had merged in the order of the appellate authority; that the order of the appellate authority was the effective order and the appellate authority being located outside the jurisdiction of the Calcutta High Court, that court could not issue a writ against the appellate authority and, therefore, no relief could be granted to the petitioner. This contention was not accepted by the learned judges deciding that case. After referring to the decision of the Supreme Court and the observations, which we have already reproduced above, they observed that the pronouncement of the Supreme Court furnished a conclusive answer to the question they had to decide. Their answer was that after the appeal is dismissed and the original order is confirmed, the formal existence of the order made by the appellate authority is no reason why the court should not exercise the jurisdiction under article 226 of the Constitution in respect of the original order. Mr. Joshi, however, drew our attention to the following observations of their Lordships of the Supreme Court in Commissioner of Income-tax v. Amritlal Bhogilal & Co.:

“If an appeal is provided against an order passed by a tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the tribunal, it is obvious that it is the appellate decision that is effective and can be enforced. In law the position would be just the same even if the appellate decision merely confirms the decision of the tribunal. As a result of the confirmation or affirmance of the decision of the tribunal by the appellate authority the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement.”

4. These observations of their Lordships, in our view, are of little assistance to the respondent in this case. We are not here dealing with an appellate order but we are dealing with an order made by the Commissioner of Income-tax in revision. The ratio arising from the decision of the Supreme Court in State of Uttar Pradesh v. Mohammad Nooh [1958] S.C.R 595., so far as the order rejecting a revision application is concerned, remains unaffected. A distinction between an appeal and a revision has been clearly pointed out in Lata Mangeshkar's case [1959] 36 I.T.R 527. and no good reason has been shown to us to take a view different from that taken by a Division Bench of this court in Lata Mangeshkar's case . That decision has not been noticed in Special Civil Application No. 886 of 1959. The decision in Special Civil Application No. 886 of 1959 chiefly turned on the weight of authorities. The aforesaid decision of the Supreme Court in State of Uttar Pradesh v. Mohammad Nooh also had not been noticed in that case. We, therefore, hold that when a revisional court does not reverse or modify the order of the subordinate court but only rejects the application for revision, there is no merger of the order of the subordinate court in the order of the revisional court and the operative order that remains is the order of the subordinate court and not that of the revisional court. For these reasons in our view the first preliminary objection raised by Mr. Joshi should fail.

5. It is next contended by Mr. Joshi that, even if it be open to the petitioner to challenge the original order made by the respondent, the petitioner has come to this court after an inordinate delay and on that ground alone the petition is liable to be dismissed in limine. It is true that the order of the respondent was made against the petitioner on February 11, 1957, and the petitioner has moved this court under article 226 of the Constitution on October 21, 1959, that is, nearly after two years and 8 months and it is an inordinate delay. But it is to be noticed that during the interim period the petitioner had not been remaining quiet without challenging the order of the respondent but was availing himself of another remedy open to him. He had, within the period allowed to him, moved the Commissioner of Income-tax in revision. The Commissioner decided the case on August 28, 1959. The order was communicated to the petitioner on September 4, 1959. Within a month and a half thereafter the petitioner has approached this court. These facts, in our view, afford an adequate and satisfactory explanation for the delay. The second preliminary objection also, in our opinion, should fail.

6. Lastly it is urged by Mr. Joshi that the petition filed in this court on its face does not disclose that there is any error apparent on the face of the record. The argument is founded on the absence of a specific averment in the petition that there is an error apparent on the face of the record. In our opinion, whether the petitioner specifically avers in the petition that there is an error apparent on the face of the record or fails to make any such specific averment would make no difference as regards the tenability of the petition. The petitioner's saying that there is an error apparent on the face of the record would not make out any such error if none exists. Similarly, the petitioner's failure to make such a specific averment would not obliterate any such error if it exists. This contention also, in our opinion, is without any merit and should fail. This brings us to the merits of the case.

7. As already stated, it is the contention of Mr. Palkhivala and that contention has been specifically raised in paragraph 7(a) of the petition that on a correct interpretation of section 14(2)(a) and section 16(1)(a) of the Income-tax Act the petitioner's share of loss from the unregistered firm should be deducted from the total income for computing the rate of tax applicable to the petitioner's total income. Admittedly this has not been done and it is the contention of the petitioner that this failure to so construe or interpret these sections is an error on the face of the record.

8. Now, the expression “error apparent on the face of the record” has been considered by their Lordships of the Supreme Court and certain tests have been laid down. In Hari Vishnu Kamath v. Syed Ahmad Ishaque it is observed:

“It may, therefore, be taken as settled that a writ of certiorari could be issued to correct an error of law. But it is essential that it should be something more than a mere error; it must be one which must be manifest on the face of the record. The real difficulty with reference to this matter, however, is not so much in the statement of the principle as in its application to the facts of a particular case. When does an error cease to be mere error, and become an error apparent on the face of the record? Learned counsel on either side were unable to suggest any clear cut rule by which the boundary between the two classes of errors could be demarcated. Mr. Pathak for the first respondent contended on the strength of certain observations of Chagla, C.J, in Batuk K. Vyas v. Surat Municipality , that no error could be said to be apparent on the face of the record if it was not self-evident, and if it required an examination or argument to establish it. This test might afford a satisfactory basis for decision in the majority of cases. But there must be cases in which even this test might break down, because judicial opinions also differ, and an error that might be considered by one judge as self-evident might not be so considered by another. The fact is that what is an error apparent on the face of the record cannot be defined precisely or exhaustively, there being an element of indefiniteness inherent in its very nature, and it must be left to be determined judicially, on the facts of each case.”

9. Considering this aspect in another decision, Satyanarayan Laxmi-narayan Hegde v. Mallikarjun Bhavanappa Tirumale, it has been observed that an error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record.

10. It is the say of Mr. Palkhivala that on a true construction of these two sections, it is impossible to reach the conclusion arrived at by the income-tax authorities. The only possible conclusion is that the share of loss sustained by a partner in an unregistered firm has to be deducted from his total income for computing the rate of tax applicable to the partner's total income. It has, therefore, to be seen, applying the test laid down by their Lordships of the Supreme Court in Hegde v. Tirumale, whether it can be said that the view taken by the income-tax authorities may conceivably be taken. The argument advanced by Mr. Palkhivala, on the strength of sections 8, 10 and 12, was that the scheme of the Income-tax Act in determining the income of an assessee was that not only the profits earned by him in business, profession or trade are taken into account but also the losses incurred by him. The income-tax authorities have to determine the income not only where profits are made but also where losses are incurred, even though the expression used in these sections is only “profits”. On the basis of this analogy Mr. Palkhivala argues that the expression “profits” referred to in section 14(2)(a) and section 16(1)(a) must also include losses. It is an admitted position that the share of profits earned by a partner of an unregistered firm is taken into account in determining the total income of the assessee for purposes of computing the rate of tax and there is no logic and no equity to exclude the loss incurred by a partner in computing the rate of tax. On the other hand, the contention of Mr. Joshi is that the rate of tax is always co-related to the total income determined by the income-tax authorities. The petitioner admits that he is not entitled to deduct his share of loss incurred by him in the business of an unregistered firm in the matter of determination of his total income. He, therefore, cannot claim any deduction of that amount for purposes of determination of rate also. It is also the contention of Mr. Joshi that on a true construction of these two sections, such a result would follow. Whether it results in hardship to the petitioner or not is not relevant to the construction of these sections.

11. In our opinion it cannot be positively said that the contentions raised by Mr. Joshi are without force. It is not in dispute and Mr. Joshi does not dispute that the expression “profits” in sections 8, 10 and 12 would include the losses incurred by an assessee but that, in our opinion, would be of no assistance to the petitioner if on the terms of sections 14(2)(a) and 16(1)(a) it is not possible to include losses in the expression “profits” used in section 14(2)(a). Section 16(1)(a) enumerates exemptions and exclusions in determining the total income. Clause (a) of sub-section (1) of section 16 material for the purpose of this case would read:

“In computing the total income of an assessee any sums exempted under…sub-section (2)…of section 14,… shall be included,…… for the purpose of determining the rates at which income-tax (but not supertax) is payable by the assessee to whom the exemption is given.”

12. On the terms of this clause it is clear that what can be included in the total income for purposes of determining the rates at which income-tax is payable are the sums referred to in sub-section (2) of section 14 of the Act. In other words if the expression “any sums exempted under sub-section (2) of section 14” would clearly include the loss incurred by a partner in an unregistered firm, the petition should succeed. If, on the other hand, there be any doubt for its inclusion, the petition must fail and this brings us to section 14(2)(a). It enumerates the items of income of an assessee, which are not taxed in his hands. Sub-section (2)(a) provides that the tax shall not be payable by an assessee:

“(a) if a partner of an unregistered firm, in respect of any portion of his share in the profits and gains of the firm computed in the manner laid down in clause (b) of sub-section (1) of section 16 on which the tax has already been paid by the firm.”

13. Now, to attract the provisions of sub-section (2) of section 14, the following three conditions have to be satisfied. The assessee should be a partner in an unregistered firm, his share of profits and gains therein must have been included in the computation of the income of the firm and tax thereon must have been already paid by the firm. The last condition envisaged in this clause, in our opinion, leads to an inference that the expression “profits and gains” used in this section would include only positive profit and gain and not loss. Otherwise it is not conceivable that any tax could already have been paid thereon by the firm. The position becomes further clear when we refer to the provisions of clause (b) of section 16 read together with section 24. Section 16, as already stated, relates to the exemption and exclusion of certain items of income in determining the total income. Clause (b) of sub-section (1) provides:

“(1) In computing the total income of an assessee—

(b) when the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of any interest, salary, commission or other remuneration payable to any partner in respect of the previous year:

Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of section 24.”

14. The terms of the proviso to this clause directs that the share of loss of a partner of an unregistered firm has to be dealt with in a particular manner as provided in section 24. The relevant part of section 24 reads:

“Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year:

Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause (b) of subsection (5) of section 23 in the manner applicable to a registered firm any such loss shall be set off only against the income, profits and gains of the firm and not against the income, profits and gains of any of the partners of the firm; and where the assessee is a registered firm, any loss which cannot be set off against other income, profits and gains of the firm shall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off under this section.”

15. On the terms of this proviso, in our opinion, it is possible to take a view that where an unregistered firm incurs a loss that loss is not apportioned amongst its partners but remains the loss of the firm to be carried forward in its accounts of the next year for adjustment.

16. For the reasons stated above, it cannot be said that it was not possible to take the view taken by the income-tax authorities in this case. That being the position, it is difficult to hold that the order impugned suffers from any infirmity or error apparent on the face of the record. The petition should, therefore, fail.

17. The rule is accordingly discharged with costs.

18. Petition dismissed.