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Case Number

W.A No. 1017 of 1990

Attorney(S)

Mr. VS. Jayakumar for Appellant.

Judges

Dr. A.S Anand, C.J
Raju, J.

Acts

provisions of S 254(2) of the Income-tax Act,
provisions of S. 64 of the Income-tax Act
S. 254(2) of the Income tax Act

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The appellant is an income-tax assessee and a partner (through his Kartha) in the partnership firm M/s. Muthukumaraswamy Chetty Co., which marketed edible oil. The firm gave an interest-free loan to the appellant's minor son, who was a member of the appellant's Hindu undivided family. The appellant deposited sums (out of amounts taken as loan from the firm) as recurring deposits with Thanjavur Permanent Bank. On maturity, Rs. 40,000 (including interest) was returned on 22.7.1980 and credited to the loan account in the name of the appellant's son.

For the assessment year 1981-82 the appellant filed a return (filed on 5.11.1982 for the year ending 31.3.1981) and contended that section 64 of the Income-tax Act did not apply and that the interest income on the recurring deposit belonged to the minor son (and thus was not taxable in the appellant's hands). The Income-tax Officer rejected that contention. The appellant's appeal to the Appellate Assistant Commissioner failed; a further appeal to the Income-tax Appellate Tribunal (ITAT) was dismissed by order dated 26.10.1989.

The appellant filed an application under section 254(2) of the Income-tax Act seeking recall or modification of the ITAT order dated 26.10.1989 on the ground that mistakes had crept into the order. By communication dated 29.5.1990 the Assistant Registrar of the ITAT informed the appellant that the request to recall or modify the order stood dismissed. The appellant filed a writ petition challenging that dismissal; the learned single Judge dismissed the writ petition. This opinion arises from the appellant's writ appeal against that dismissal.

Legal Issues Presented

Whether the dismissal of an application for rectification under section 254(2) of the Income-tax Act without affording an opportunity of hearing violated the principles of natural justice.
Whether the proviso to section 254(2) — which requires notice and a reasonable opportunity to be given where a rectification would enhance assessment, reduce refund or otherwise increase the assessee's liability — must be read as requiring a hearing in all rectification applications (i.e., whether audi alteram partem applies beyond the cases specifically covered by the proviso).
Whether an application under section 254(2) can be treated as an appeal in disguise or whether its scope is limited to correcting mistakes apparent from the record.

Arguments of the Parties

Appellant's Arguments

The appellant (through counsel) contended that the application under section 254(2) was dismissed without any hearing, and that this procedure violated the principles of natural justice.
Reliance was placed on the decision of the Delhi High Court in Smart (P) Ltd. v. ITAT, 182 I.T.R. 384, to argue that the Tribunal must grant an opportunity of hearing before passing orders on applications under section 254(2).

Respondent / Tribunal / Single Judge Position

The learned single Judge held that because the rejection of the application did not vary the tax liability (did not enhance assessment, reduce refund, or otherwise increase liability), there was no necessity to provide an opportunity of hearing and thus no violation of natural justice.
The Tribunal declined the rectification application on the ground that no mistake "apparent from the record" was shown; the Tribunal did not alter its earlier order of 26.10.1989.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Smart (P) Ltd. v. ITAT, 182 I.T.R. 384 (Delhi High Court)	Held that the proviso to section 254(2) requires the Tribunal to grant an opportunity of hearing when deciding rectification applications (interpreted to require hearing even beyond the specific cases in the proviso).	The court respectfully declined to follow this broader reading, holding that Smart was incorrect to read a general right to hearing into section 254(2) beyond the specific circumstances enumerated in the proviso.
Swadeshi Cotton Mills v. Union of India, A.I.R. 1981 S.C. 818	Principle that rules of natural justice can supplement statutory law but cannot supplant clear statutory provisions; where statute excludes natural justice by implication or expressly, courts should not read it in.	The court relied on this principle to support the conclusion that natural justice cannot be extended beyond what section 254(2) (and its proviso) prescribes.
Union of India v. Tulsiram Patel, A.I.R. 1985 S.C. 1416	Affirmation by a five-judge Bench of the limits on applying rules of natural justice where statutory provisions exclude them.	The court treated this decision as a confirming authority ("seal of approval") for the proposition that the legislature's clear scheme controls whether natural justice applies.
Union of India v. J.N. Sinha, A.I.R. 1971 S.C. 40	Statement that courts should apply natural justice where consistent with statute, but must not read natural justice into a provision when expressly or by necessary implication excluded; factors to determine include language, nature and purpose of power.	The court quoted and applied this reasoning to determine that section 254(2)'s plain language confines the situations in which a hearing must be provided.

Court's Reasoning and Analysis

The court began by construing the language of section 254(2) of the Income-tax Act. The court emphasized the following textual and structural points drawn from the section:

Section 254(2) empowers the Appellate Tribunal to amend an order within four years to rectify any "mistake apparent from the record."
Rectification is limited to mistakes apparent from the record; it cannot be used for re-opening merits or treating the rectification application as an appeal in disguise.
The proviso to section 254(2) makes it mandatory for the Tribunal to give notice and a reasonable opportunity of being heard only when the proposed amendment would enhance assessment, reduce refund, or otherwise increase the liability of the assessee.

From this textual analysis the court derived the legal consequences:

The requirement of notice and opportunity of hearing (as laid down in the proviso) is triggered only in the specified circumstances where the rectification would worsen the assessee's position (enhance assessment, reduce refund, or increase liability).
Where a rectification application does not have any such adverse effect on the assessee's tax liability, the proviso does not apply and there is no statutory requirement to afford a hearing before rejecting the rectification application.
The purpose and limited scope of the rectification power — to correct mistakes apparent from the record, not to re-examine or re-decide questions of fact and law already adjudicated — supports confining the right to hearing to cases covered by the proviso.

The court then examined authorities relied upon by the appellant. It respectfully disagreed with the Delhi High Court's decision in Smart (P) Ltd. v. ITAT to the extent that that decision read an overarching requirement of hearing into section 254(2). The court held that it would be improper to extend the audi alteram partem rule beyond the clear legislative mandate in the proviso.

The court invoked established principles (Swadeshi Cotton Mills, Tulsiram Patel, and J.N. Sinha) that natural justice supplements statute only where consistent with the statutory scheme and cannot be read in where the statute either expressly or by necessary implication excludes it. The court applied those principles to conclude that the proviso's limited scope determines when a hearing is required.

Turning to the facts, the court observed that the appellant had full opportunity of hearing at the assessing authority, before the Appellate Assistant Commissioner, and before the Tribunal when the original order was passed on 26.10.1989. The rectification application attempted to re-argue the same points; no mistake "apparent from the record" was pointed out. Because the Tribunal did not find an apparent mistake and the rectification would not increase the appellant's liability, there was no statutory duty to afford a further hearing before rejecting the rectification application.

Holding and Implications

Holding:

The writ appeal is dismissed. The court upheld the judgment of the learned single Judge dismissing the writ petition that challenged the dismissal of the rectification application under section 254(2).

Implications and Consequences:

Direct effect: The appellant's challenge to the dismissal of the section 254(2) rectification application failed and the earlier order of the Tribunal dated 26.10.1989 remains unaltered by the rectification process as there was no mistake apparent from the record and no requirement to hold a hearing in these circumstances.
Legal implication: The court clarified that the proviso to section 254(2) narrowly prescribes when notice and hearing are mandatory — only where the rectification would increase the assessee's liability (enhance assessment, reduce refund, or otherwise increase liability). The court rejected a broader reading that would import a general right to hearing into all rectification proceedings under section 254(2).
No expression on merits: The court expressly clarified that a reference arising from the ITAT order dated 26.10.1989 (which was said to be pending) shall be decided on its own merits and that nothing stated in this opinion should be construed as an expression of opinion on those merits.

Judge indication in file: Opinion delivered by Dr. A.S. Anand, C.J., and the appeal was dismissed (RR/VCS initials appear in the record).

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S. Ramakrishnan v. Income-Tax Appellate Tribunal, Madras-34

Dr A.S Anand, C.J

1. This writ appeal is directed against the judgment of a learned Judge of this Court in Writ Petition No. 13800 of 1990.

2. The appellant is an income-tax assessee. During the year ending 31.3.1981 he filed a return of income on 5.11.1982 The appellant was a partner through its Kartha in the firm called M/s. Muthukumaraswamy Chetty Co. The firm carried on business of marketing edible oil. The partnership firm gave interest-free loan to the minor son of the appellant who is also a member of the Hindu undivided family. The appellant made recurring deposit with M/s. Thanjavur Per-manent Bank out of the amounts taken as loan from the firm. The deposits matured and a sum of Rs 40 000 including interest was returned on the 22.7.1980 That amount was credited to the loan account standing in the name of the son of the appellant. During the assessment year 1981-82, the appellant filed his return of income. It was pleaded that the provisions of S. 64 of the Income-tax Act were inapplicable and that the interest income out of the recurring deposit would not be subjected to tax in the hands of the appellant in as much as the income belonged to the minor son. That plea was rejected by the Income-tax Officer. Aggrieved by the said order, the appellant preferred an appeal before the Appellate Assistant Commissioner of Income tax The appeal failed and the appellant preferred a second appeal before the Income-tax Appellate Tribunal By order dated 26 10.1989 the Appellate Tribunal dismissed the appeal. The appellant thereafter filed an application which is available at page 8 of the typed set of papers seeking recalling or modification of the order dated 26.10.1989 on the ground that certain mistakes had crept in in the order of the Appellate Tribunal. By communication dated 29.5.1990 from the Assistant Registrar of the Income-tax Appellate Tribunal, the appellant was informed, in response to his letter dated 24th January, 1990, that his request to recall or modify the order of the Tribunal dated 26.10.1989 stood dismissed. Aggrieved, the appellant filed the writ petition which was dismissed by the learned single Judge. Hence this appeal.

3. Learned counsel for the appellant had submitted before the learned single Judge that the application filed by the appellant under S. 254(2) of the Income tax Act was dismissed without any hearing and relying upon the judgment of the Delhi High Court in Smart (P) Ltd. v. Itat 182 I.T.R 384. had argued that the dismissal of that application, for recalling or modification of the earlier order dated 26.10.1989 by the Tribunal, without granting any opportunity of hearing to him violated the principles of natural justice, thereby vitiating the order. The learned single Judge, however, found that since there had been no varying of the tax liability, by the rejection of the application, there was no necessity to provide an opportunity to the appellant and thus there had been no violation of the rules of natural justice. Learned counsel for the appellant has questioned that finding and has reiterated the same plea which had been advanced before the learned single Judge.

4. To appreciate the argument of the learned counsel it is desirable to first notice the provisions of S 254(2) of the Income-tax Act, That section reads as follows:

“The Appellate Tribunal may, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub S (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the (assessing) Officer. Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this sub-section unless the Appellate Tribunal has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard.”

A bare reading of the section shows that the Tribunal has been invested with the power to rectify its mistakes which are apparent from the record. Rectification is, therefore, not permissible in any other case. An application for rectification cannot be treated as an appeal in disguise. Power of rectification can be exercised only for the limited purpose under section 254(2) of the Act. The proviso to sub-S.(2) of S. 254, which makes it incumbent upon the Tribunal to issue notice to the parties comes into play only when the rectification has the effect of enhancing the assessment or reducing the refund or otherwise increasing the liability of the assessee. In other cases, the proviso has no application. The Legislature, thus, confined the issuance of notice and the grant of opportunity of hearing only to the specified cases detailed in the proviso and that appears logical also because after the parries bad full dressed arguments before the assessing authority. Appellate Assistant Commissioner and the Appellate Tribunal, the necessary of granting hearing in an application seeking rectification of the order of the Tribunal would arise only in cases mentioned in the proviso and not where no rectification is being made. Admittedly, the communication which was impugned in the writ petition had neither the effect of er hancing the assessment nor reducing the refund or in any other manner increasing the liability of the assessee. By rejecting the application seeking rectification of the order of the Appellate Tribunal, no settled rights of the appellant were altered to its prejudice; Under the circumstances, the issuance of notice or grant of hearing was not necessary in the facts of the instant case.

5. The Delhi High Court in Smart (P) Ltd., v. Itat, after analysing the provisions of S. 254(2) of the Income-tax Act, opined that by virtue of the proviso to S. 254(2). the Tribunal can pass orders on an application under that section only after granting opportunity to the applicant. The Delhi High Court has read into S 254(2) the necessity to provide hearing even if the case is not the one wnich was covered by the proviso to sub-S.(2) of S. 254. With great respect to the learned Judges of the Delhi High Court, we find ourselves unable to subscribe to that view, which runs counter to the legislative mandate. Extension of the rule of audi-alteram-partem, where the legislature has confined its applicability, beyond what the legislature provided for, is not permissible.

6. It is settled law that the rules of natural justice can supplement the law but cannot supplant it. Where a statutory provision either specifically or by inevitable implication excluded the application of the rules of natural justice, then the court cannot ignore the mandate of the Legislature and extend the application of the rules even to the excluded categories. Where the language of the statute is clear, nothing more can be read into it and in any event, not for defeating the intention of the Legislature. In Swadeshi Cotton Mills v. Union of India A.I.R 1981 S.C 818., the Apex Court opined:

“The rules of natural justice can operate only in areas not covered by any law valitly made They can supplement the law but cannot supplant it. (Per Hegde, J. in A K. Kraipak, ibid) If a statutory provision either specifically or by inevitable implication excludes the application of the rules of natural justice, then the court cannot ignore the mandate of the Legislature. Whether or not the application of the principles of natural justice in a given case has been excluded, wholly or in part, in the exercise of statutory power, depends upon the language and basic scheme of the provision conferring the power, the nature of the power, the purpose for which it is conferred and the eflect of the exercise of that power.”

The aforesaid principle of law has received the seal of approval by a five Judge Bench of the apex Court in Union of India v. Tulsiram Patel A.I.R 1985 S.C 1416..

7. The compliance with the rules of natural justice is aimed at securing justice or to prevent miscarriage of justice. Where the Legislature in its supreme wisdom excludes the application of the rules of natural justice, it is improper for the Courts to ignore the mandate of the Legislature. These rules, therefore, operate in areas not covered by any law validly made. In Union of India v. J.N Sinha A.I.R 1971 S.C 40., their Lordships opined:

‘If a statutory provision can be read consistently with the principles cf natural justice, the courts should do so. But if a statutory provision either specifically or by necessary implication excludes the application of any rules of natural justice then the Court cannot ignore the mandate of the legislature or the statutory authority and read into the concerned provision the principles of natural justice. Whether the exercise of a power conferred should be made in accordance with any of the principles of natural justice or not depends upon the express words of the provision conferring the power, the nature of the power conferred, the purpose for which it is conferred and the effect of the exercise of that power.”

Going by the plain and clear phraseology of sub-S (2) of S. 254 of the Act and the scheme of the said provision, we are clearly of the opinion that the principles of natural justice cannot be pressed into aid in cases which are not covered by the proviso to sub-S (2) of S. 254. The purpose for which the power of rectification is conferred by S. 254(2) of the Act, when considered with the effect of exercise of that power also unmistakably exposes the sound logic for confining the right of hearing only to the cases covered by the proviso and not to others. Principles of natural justice do not operate in a vacuum and their compliance depends on the facts and circumstances of each case.

8. So far as the facts of the present case are concerned, we find that the case of the appellant before the Income-tax authorities as well as before the Appellate Assistant Commissioner was the same as was projected before the Income-tax Appellate Tribunal. The appellant had the opportunity before the original as well as the appellate authority. Even before the Tribunal, it had been provided with an opportunity of hearing. If the appellant chose not to avail the same, it has to thank itself for it. Principles of natural justice had been duly complied with at all stages till the order was made by the Tribunal on 26-10-1989. The appellant, while filing the application for rectification, attempted to raise the same pleas which had been raised in the appeal filed before the Appellate Assistant Commissioner as well as the Income-tax Appellate Tribunal again. The Tribunal obviously did not find any mistake “apparent from the record” and declined to interfere, with the result that the earlier order was not altered at all. No hearing was, therefore, necessary to be provided to the appellant before the rejection of its application filed under S. 254(2). Learned counsel was even unable to point out any such mistake which was'apparent from the record'and as a matter of fact, his effort was to question the basic findings concurrently recorded by all the authorities. Scope of an application under S. 254(2) of the Act did not permit it and keeping in view the limited scope of the provision, the Tribunal rightly declined to interfere with its earlier order. The learned single Judge was, therefore, perfectly justified in dismissing the writ petition.

9. Thus, for what we have said above, we do not find any cause to interfere with the judgment of the learned single Judge. This writ appeal consequently fails and is dismissed.

10. We would like to clarify that the reference arising out of the order of the Appellate Tribunal dated 26-10-1989, which we are informed is still pending, shall be decided on its own merits and nothing said hereinabove should be construed as an expression of opinion on the merits of the case.

RR/VCS.

S. Ramakrishnan v. Income-Tax Appellate Tribunal, Madras-34

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Respondent / Tribunal / Single Judge Position

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

S. Ramakrishnan v. Income-Tax Appellate Tribunal, Madras-34

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