Commissioner Of Income-Tax v. Ramesh Electric And Trading Co.

Mrs. Sujata Manohar, J.:— The assessee carries on a business in electrical goods and appliances. For the assessment year 1970–71, for which the accounting period is the financial year ending with March 31, 1970, the assessee debited a sum of Rs. 54,000 as commission paid to one Messrs. Neeta Electric Corporation, Bombay. The firm of Messrs. Neeta Electric Corporation was a partnership firm in which two of the partners of the assessee-firm were partners. The other partners of Messrs. Neeta Electric Corporation were the wives of the partners in the assessee-firm and the fifth partner of Messrs. Neeta Electric Corporation was an employee in the assessee-firm. Thus, all the five partners of the firm of Messrs. Neeta Electric Corporation had close links with the assessee-firm.

2. Under an agreement dated October 29, 1969, entered into between the assessee-firm and Messrs.

3. Neeta Electric Corporation, it was agreed that the assessee-firm would pay a commission on purchases made by the assessee-firm through Messrs. Neeta Electric Corporation from Bombay at the rate of two per cent, on the first Rs. 20 lakhs and at 1½ per cent, on any excess over Rs. 20 lakhs.

4. The assessee claimed that they had paid a sum of Rs. 54,000 to Messrs. Neeta Electric Corporation as commission during the relevant year, and this amount was claimed by the assessee-firm as a deduction under section 37 of the Income-tax Act, 1961. The Income-tax Officer disallowed this deduction after examining evidence ‘and holding that the so-called commission was not paid for business purposes but for some other reasons. The Appellate Assistant Commissioner upheld the findings of the Income-tax Officer, holding that there was no evidence produced by the assessee in respect of the services rendered by Messrs. Neeta Electric Corporation.

5. The assessee preferred an appeal before the Appellate Tribunal. The Appellate Tribunal, by its order dated June 9, 1975, dismissed the appeal. While doing so, the Tribunal also examined the relevant circumstances. It relied upon the observation of the Supreme Court in the case of CIT v. A. Raman and Co., [1968] 67 ITR 11, and held that, if, by adopting a device, it is made to appear that the income which belonged to the assessee has been earned by some other person, that income may be brought to tax in the hands of the assessee. It said that it is open to the Income-tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37. The Tribunal observed that the assessee was asked by the Income-tax Officer to produce evidence, such as correspondence, etc., with Messrs. Neeta Electric Corporation, to prove the services rendered by Messrs. Neeta Electric Corporation. No such evidence was adduced either before the authority below or before the Tribunal. The Tribunal did not accept the assessee's explanation that all directions were given on phone, in view of the magnitude of the transactions effected. The Tribunal also noted the fact that the assessee-firm had a Bombay office for making purchases and the expenses incurred in respect of the Bombay office were claimed as business expense. The Tribunal also noted that in the purchase bills of the assessee which were called for, there was no reference to the order being placed by the so called commission agent. The Tribunal also noted the relationship between the partners of the assessee-firm and the partners of Messrs. Neeta Electric Corporation, and said that the circumstances were collectively sufficient to compel the Tribunal to hold that the purchasing agency agreement between the appellant-firm and Messrs. Neeta Electric Corporation was only a make-believe arrangement.

6. The assessee moved a Miscellaneous Application dated July 4, 1975, under section 254(2) of the Income-tax Act, 1961, seeking rectification of the order of the Tribunal dated June 9, 1975. The letter for moving this application states that, although the appeal memo before the Tribunal contained five different grounds of appeal, the order of the Tribunal dated June 9, 1975, did not mention three of these grounds of appeal. The assessee contended that the order of the Tribunal did not consider some of the arguments advanced by the assessee. The Tribunal entertained this application and in the purported exercise of its power of rectification under section 254(2) of the Income-tax Act, 1961, it apprently reheard the matter, reassessed all the circumstances and allowed the deduction of commission payment to Messrs. Neeta Electric Corporation by its order dated November 6, 1975. From this order of the Tribunal dated November 6, 1975, the following two questions have been referred to us under section 256(1) of the Income-tax Act, 1961:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal acted without jurisdiction and/or acted beyond its jurisdiction in setting aside its order dated June 9, 1975, and allowing the appeal?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the commission of Rs. 54,000 paid to Messrs. Neeta Electric Corporation as a deduction under section 57 of the Income-tax Act, 1961?”

7. Under section 254(2) of the Income-tax Act, 1961, the Appellate Tribunal may, “with a view to rectifying any mistake apparent from the record”, amend any order passed by it under sub-section (1) within the time prescribed therein. It is an accepted position that the Appellate Tribunal does not have any power to review its own orders under the provisions of the Income-tax Act, 1961. The only power which the Tribunal possesses is to rectify any mistake in its own order which is apparent from the record. This is merely a power of amending its order. The extent of this power of rectification was considered by the Supreme Court as far back as in 1971 in the case of T.S Balaram, ITO v. Volkart Brothers, [1971] 82 ITR 50. The Supreme Court said (headnote):

“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 be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record.”

8. This view of the Supreme Court has held the field for a long time, and has been followed by other High Courts. Thus, for example, in the case of V.P Minocha, ITO v. ITAT, [1977] 106 ITR 691, the Gujarat High Court relying upon Balaram's case, [1971] 82 ITR 50 (SC), said that a decision given by the Tribunal on a debatable point of law cannot be subsequently considered as showing any mistake apparent from the record which the Tribunal could consequently rectify. Similarly, the Madras High Court in the case of CIT v. R. Chelladurai, [1979] 118 ITR 108, said that the Tribunal's power under section 254(2) is not to review its earlier order but only to amend it with a view to rectifying any error apparent from the record. The court held that, in the case before it, the Tribunal had no power or authority to interfere with the quantum of penalty in exercise of its powers of rectification. In the case which is before us, it is obvious that the Tribunal's earlier order of June 9, 1975, was based on the merits of the case. Various arguments were advanced before the Tribunal by the assessee in support of its contention that the commission of Rs. 54,000 which was paid to Messrs. Neeta Electric Corporation was a genuine payment made in the course of business dealings for purchases effected by Messrs. Neeta Electric Corporation on behalf of the assessee-firm. After examining all the circumstances, the Tribunal came to the conclusion that the payment of Rs. 54,000 was not a genuine business payment. The only grounds on which the Tribunal has subsequently purported to “rectify” its order of June 9, 1975, are (i) that the Income-tax Officer had wrongly calculated the percentage of profit of the assessee-firm while holding that the business transaction with Messrs. Neeta Electric Corporation was not a genuine business transaction, and (ii) that it overlooked the argument of the assessee to the effect that, if the amount of Rs. 54,000 was taxed in the hands of the assessee as also in the hands of Messrs. Neeta Electric Corporation, it would amount to double taxation. These two arguments, according to the Tribunal, were overlooked by it while passing the earlier order, and, hence, it purported to exercise its power of rectification by re-examining all the circumstances relating to this transaction and upholding it. Clearly, this could not have been done in the exercise of any power of rectification. In the present case, in the first order, there is no mistake which is apparent from the record at all. The Tribunal was required to decide whether the commission payment of Rs. 54,000 was deductible under section 37 of the Income-tax Act. After examining the circumstances, the Tribunal came to the conclusion that it was not so deductible. The Tribunal cannot, in exercise of its power of rectification, look into some other circumstances which would support or not support its conclusion so arrived at. The mistake which the Tribunal is entitled to correct is not an error of judgment but a mistake which is apparent from the record itself. No such mistake was apparent from the record. In fact, we doubt if this sort of an exercise could have been done by the Tribunal even if it had the power of review. The Tribunal has, patently, far exceeded its jurisdiction under section 254(2) of the Income-tax Act in redeciding the entire dispute which was before it in this fashion, and the Tribunal has committed a gross and inexplicable error for reasons which we fail to understand.

9. Mr. Inamdar, learned advocate for the assessee, drew our attention to a judgment of the Madhya Pradesh High Court in the case of CIT v. Mithalal Ashok Kumar, [1986] 158 ITR 755. The Madhya Pradesh High Court said that the Tribunal can correct its mistake by rectifying the same in case it is brought to its notice that the material which was already on record before deciding the appeal on merits was not considered by it. It, however, said that this will depend on the facts of each case. And whether it amounts to a review or rectification will depend on the facts of each case. In our view, these wide observations do not accord with the decision of the Supreme Court on this point in T.S Balaram v. Volkart Brothers, [1971] 82 ITR 50. Similarly, the decision of the Allahabad High Court in the case of Laxmi Electronic Corporation Ltd. v. CIT, [1991] 188 ITR 398 to the effect that if the Tribunal fails or omits to deal with an important contention affecting the maintainability/merits of an appeal, it must be deemed to be a mistake apparent from the record which can be rectified by the Tribunal by its subsequent order, is also, in our view, in the teeth of the Supreme Court judgment in the case of Balaram v. Volkart Brothers, [1971] 82 ITR 50. In fact, we find that the decision in the case of Balaram v. Volkart Brothers, [1971] 82 ITR 50 (SC), was not brought to the attention of the learned judges who decided the above Case. In our view, the power of rectification under section 254(2) of the Income-tax Act can be exercised only when the mistake which is sought to be rectified is an obvious and patent mistake which is apparent from the record, and not a mistake which requires to be established by arguments and a long drawn process of reasoning on points on which there may conceivably be two opinions, as has been shown in the present case. Failure by the Tribunal to consider an argument advanced by either party for arriving at a conclusion is not an error apparent on the record, although it may be an error of judgment. In the present case, the alleged failure, at least on one count, is attributed by the assessee to the Income-tax Officer and not the Tribunal. In our view, the Tribunal had no jurisdiction under section 254(2) to pass the second order.

10. The questions, therefore, are answered as follows:

Question No. 1: In the affirmative and in favour of the Revenue.

Question No. 2: The Tribunal was not justified in allowing the commission of Rs. 54,000 as a deduction under section 37 of the Income-tax Act, in view of the fact that it had no jurisdiction to pass the second order on November 6, 1975.

11. The respondent to pay to the applicant costs of the reference.