Grasim Industries Ltd. v. Commissioner Of Income-Tax

R.S Mohite, J.:— The question of law as referred to us under section 256(1) of the Income-tax Act, 1961, is as follows:

“(1) Whether the Tribunal was right in law in holding that when the Income-tax Officer is directed to rectify his order under section 154(2)(b) of the Income-tax Act, 1961, on the basis of the application for rectification filed by the assessee in time as per the Central Board of Direct Taxes Circular No. 73, dated January 7, 1972, he can as well rectify the other apparent mistakes on his own motion under section 154(2)(a) which he finds at the time of passing the order on the assessee's application even if the limitation period of four years under section 154(7) of the Act has expired ?”

2. The brief facts of the case are as follows:

(a) In respect of the assessee's return for the assessment year 1960-61, the Income-tax Officer passed an order under section 143(3) on March 23, 1965.

(b) Aggrieved by this order of assessment the assessee filed an appeal before the Commissioner (Appeals) and one of the grounds of appeal raised by the assessee was that the Income-tax Officer had erred in rejecting the assessee's claim under section 15C of the Indian Income-tax Act, 1922.

(c) The Commissioner (Appeals) by his order dated February 27, 1969, was pleased to allow the appeal and to grant the assessee's claim under section 15 C which pertained to the profits of new industrial undertakings of the assessee. No further appeal was preferred against this order and thus the same became final.

(d) The order of the Commissioner (Appeals) was given effect to by the Income-tax Officer, vide his further order dated May 29, 1969, and relief under section 15C to the extent of Rs. 1,04,01,109 was granted to the assessee.

(e) On December 21, 1972, the assessee filed an application for rectification of the order dated May 29, 1969. In this application he contended that, while calculating the benefit under section 15c, the income-tax Officer had not added half of the profits of the current year as well as half of the development rebate as was required to be done under rule 3(6) of the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949. It was contended that the said rule was declaratory and a request was made that the order dated May 29, 1969, be rectified under section 35 of the Indian Income-tax Act, 1922, since there was a mistake apparent from the record. There was a further request to pass a fresh order in this respect.

(f) By his further order dated March 20, 1975, purporting to be an order passed under section 154 of the Income-tax Act, 1961, the Income-tax Officer granted the benefit as sought by the assessee under rule 3(6).

(g) However, though there was no prayer in the assessees' application, the Income-tax Officer further observed that there was an additional mistake as certain additional liabilities had not been taken into account while calculating the benefits under section 15C. The exact observations of the Income-tax Officer in this regard were as follows:

“On going through the computation and the records, I found that some other points like managing agency commission, sundry creditors, regarding bonus provisions unclaimed dividends and tax deducted on dividends of preference shares, etc., were also left to be considered as liability shown in the balance-sheet of the head office. These liabilities have to be considered while computing the capital employed under section 15c read with rules made thereunder.”

Accordingly, the Income-tax Officer passed an order adding profits under rule 3(6) but suo motu increasing the liabilities under section 3(4) of the aforesaid Rules. The final recomputation of the benefits under section 15C was made by the Income-tax Officer as per details contained in the annexures to his order.

(h) The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) but the same was dismissed on January 24, 1983. The assessee then preferred a further appeal before the Income-tax Appellate Tribunal but this appeal was also dismissed on September 3, 1986.

(i) The assessee then filed an application dated May 24, 1988, under section 256(1) for referring various questions and by an order dated March 20, 1989, the aforesaid question has been referred by the Income-tax Appellate Tribunal to this court.

3. On a perusal of section 154 of the Income-tax Act it is clear that a condition for the exercise of jurisdiction under section 154 is the existence of “any mistake apparent from the record”. The law relating to the question as to what is a mistake apparent from the record is well settled.

4. In Arvind N. Mafatlal v. ITO reported in [1957] 32 ITR 350, this court was considering the scope of the jurisdiction under section 35 of the Indian Income-tax Act, 1922, which was in pari materia to section 154 and in its judgment this court defined the scope of the jurisdiction as under (headnote):

“The jurisdiction of the Income-tax Officer under section 35 of the Indian Income-tax Act, 1922, is to rectify mistakes which are ‘apparent from the record’ and is not restricted to rectification of mistakes which are clearly clerical or arithmetical. The expression ‘apparent from the record’ should not be equated with the expression ‘apparent on the face of the record’. The mistake to be rectified should, however, be a mistake ‘patent on the record and not a mistake which may be discovered by a process of elucidation, argument or debate’.”

5. This court further observed as under (headnote):

“In ascertaining whether there is an error apparent from the record the Income-tax Officer need not confine himself to the order of assessment of the assessee alone. All proceedings which constitute evidence on which the assessment order is passed must be regarded as record for the purposes of section 35. The Income-tax officer is not prohibited from looking at the evidence to ascertain whether an error has been committed.”

6. The issue has also been dealt with by the apex court in the case of T.S Balaram, ITO v. Volkart Brothers reported in [1971] 82 ITR 50. In this case, the Supreme Court which was considering the scope of section 154 of the Income-tax Act, 1961, made the following observations (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.”

7. In the present case, we find that the Income-tax Officer was required to calculate the benefits grantable to the assessee under section 15C of the Indian Income-tax Act, 1922, and this calculation was required to be done in accordance with rule 3 of the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949. The said rule 3 is in the zfollowing terms:

“3.(1) For the purpose of section 15C of the Act, the capital employed in an undertaking to which the said section applies shall be taken to be—

(a) in the case of assets acquired by purchase and entitled to depreciation—

(i) if they have been acquired before the computation period, their written down value on the commencing date of the said period;

(ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period;

(b) In the case of assets acquired by purchase and not entitled to depreciation—

(i) if they have been acquired before the computation period, their actual cost to the assessee;

(ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period;

(c) in the case of assets being debts due to the person carrying on the business, the nominal amounts of those debts;

(d) in the case of any other assets the value of the assets when they became assets of the business provided that if any such asset has been acquired within the computation period, only the average of such value shall be taken in the same manner as average cost is to be computed.

(2) Where the price of any asset has been satisfied otherwise than in cash, the then value of the consideration actually given for the asset shall be treated as the price at which the asset was acquired.

(3) Any borrowed money and debt due by the person carrying on the business shall be deducted and in particular there shall be deducted any debts incurred in respect of the business for income-tax and super-tax or business profits tax or for advance payments due under any provision of the Indian Income-tax Act, 1922, or for any sum payable in relation to business profits tax under section 13 of the Business Profits Tax Act, 1947 (XXI of 1947):

Provided that any such debt for income-tax or super-tax or business profits tax shall, for the purpose of this sub-rule, be deemed to have become due—

(a) in the case of income-tax and super-tax on the last day of the period of time within which the tax is payable under section 45 of the Act;

(b) in the case of business profits tax on the first day after the end of the chargeable accounting period in respect of which the tax is assessable notwithstanding that the business profits tax may not have been assessed until after that date;

(c) in the case of any advance payment due under any provision of the Act or of any provisional tax paid under section 23B of the Act, on the date on which, under the provision of section 45 of the Act, the payment first became due.

(4) Where any debt for business profits tax assessable in respect of any period is to be deducted under this rule, the amount thereof shall not be reduced as a result of any relief to be given in respect of a deficiency of profits accruing in any subsequent period, and the amount of such relief shall be treated as having become an asset of the business on the first day after the end of the chargeable accounting period in which the deficiency occurred.

(5) Any investments the income from which is not to be taken into account in computing the profits of the business and any moneys not required for the purposes of the business, shall be left out of account, but where any investments in the beneficial ownership of the person carrying on the business are so left out of account, the sum (if any) to be deducted under sub-rule (3) in respect of borrowed money shall be computed as if the principal of the borrowed money were reduced by the value of those investments.

(6) For the purpose of ascertaining the average amount of capital employed in a business during any computation period, the profits or losses made in that period shall, except so far as the contrary is shown, be deemed—

(a) to have accrued at an even rate throughout the said period; and

(b) to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business.”

From the scheme of rule 3 it is seen that capital employed amounted to the value of total assets under rule 3(1) and (2) deducted by the value of certain liabilities as calculated as per rule 3(3), (4) and (5) and added by certain profits as calculated under rule 3(6).

8. Counsel appearing for the respondents contended that the debts contemplated by rule 3(3), (4) and (5) were not necessarily the debts as shown in the balance-sheet of the company. The debts as shown in the balance-sheet would comprise of debts owed as well as debts due. For example, sundry creditors could be creditors in favour of whom a debt was owed but due sometime in the future and there could also be sundry creditors to whom debt was actually due.

9. As regards the remuneration payable to the managing agent it is also contended that under the articles of association the remuneration payable to the managing agents was not to be paid until the accounts of the company for such financial year have been audited and laid before the company in a general meeting. Our attention was drawn to the relevant clause in the articles of association of the company which was as under:

“The remuneration payable to the managing agents for the time being for any financial year or part thereof shall not be paid until the accounts of the company for such financial year have been audited and laid before the company in general meeting, provided, however, that the said minimum remuneration for every financial year may be paid by the company to the managing agents by twelve monthly instalments at the end of each and every month of that year.”

10. It was pointed out that, in the present case, these accounts were placed before the annual general meeting on June 16, 1959 (for the previous year ending March 31, 1959) and September 14, 1960 (for the previous year ending March 31, 1960). It was contended that these amounts were not dues payable in the previous years in question. Reliance was placed upon a judgment of this court in the case of CIT v. National Organic Chemical Industries Ltd. reported in [1978] 115 ITR 56, in which this court emphasised the distinction between the terms “debts owed” and “debts due”. The observations of this court in this regard were as under (headnote):

“There is a recognised distinction between ‘debts owed’ and ‘debts due’. Standing alone, the word ‘debt’ is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing and of the latter that it is a debt due. Only debts that had become due as at the end of the accounting period could be excluded while computing the capital for purposes of section 80J. The concept of debt owed and debt due has been clearly defined by the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT, [1966] 59 ITR 767 (SC). No question of law can, therefore, arise from a decision of the Tribunal that a distinction exists between ‘debts owed’ and ‘debts due’ and only the latter are to be taken into account while computing capital for purposes of section 80J.”

11. Apart from this, the balance-sheets for the years 1959 and 1960 were also placed on record and it was contended that the figures in respect of the managing agent commission as well as figures relating to sundry debtors did not tally with the figures as mentioned in the annexure to the Income-tax Officer's order that pertained to the computation of liability.

12. We thus find that there is substance in the contention of the assessee that the computation of the debts due as contemplated under rule 3(3), (4) and (5) could not be made merely by looking as liability column in the balance-sheet. That was a matter which would involve debatable points of law as well as process of elucidation, argument or debate. No distinction was made by the Income-tax Officer to categorise the debts into “debts due” and “debts owed”. The record does not indicate that the mistake was corrected in respect of debts due. It must, therefore, be held that the mistake which was rectified by the Income-tax Officer could not be said to be a “mistake apparent on the record”. We, therefore, conclude that the rectification sought to be done in this case by addition of certain liabilities could not be said to be a mistake apparent on the record. This being the position, the rest of the question referred is not required to be answered. The reference is thus, answered to a limited extent and stands disposed of with no order as to costs.