Commissioner Of Income-Tax v. E.I.D Parry Limited.

The Judgment of the Court was delivered by

Mishra, J.:— The instant proceedings show how a mistake which is committed either intentionally or unintentionally, can cause injury to public interest and attempts to rectify the mistake can result in protracted litigations and end in a blind. The questions received on reference from the Income-tax Appellate Tribunal, Madras Bench “A” are:

“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income-tax Officer was not correct in applying the provisions of section 154 to disallow a sum of Rs. 1,42,659 under section 37(3) of the Income-tax Act, 1961, and in withdrawing the relief of Rs. 4,60,505 also allowed under section 80-I of the Income-tax Act, 1961?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income-tax Officer was not correct in assessing a sum of Rs. 1,09,950 as profits under section 41(1) in the proceedings made under section 154?

3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income-tax Officer was not justified in modifying the disallowance under section 40(c)(iii) of the Income-tax Act, 1961, in the rectification proceedings made under section 154 of the Income-tax Act, 1961?

4. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income-tax Officer was not justified in modifying the disallowance under section 40(a)(v) of the Income-tax Act, 1961, in the rectification proceedings made under section 154 of the Income-tax Act, 1961 ?”

2. The assessee is a company. It submitted its income-tax returns for the years 1968–69 and 1969–70, which were, after enquiry, accepted by the Income-tax Officer and it was accordingly assessed and subjected to tax. It is not clear when and how, because all the relevant materials, are not on record, but it is accepted by all concerned, that a revision of the assessment was undertaken and in the course of the proceedings for revision, the assessment orders for the years 1968–69 and 1969–70 were recast. It seems, for reasons which are not fully disclosed in the materials which are placed before us, the Income-tax Officer decided to reopen the proceedings under section 147(b) of the Income-tax Act, 1961 (for short, “the Act”), and issued notice under section 148 of the Act and substantially changed the assessments resulting in a demand for tax on the basis of the finding that substantial income had escaped assessment. The assessee appealed against the said order and while its appeal was pending, the Income-tax Officer decided to write to the appellate authority to take recourse to the proceedings for rectification of mistake under section 154 of the Act, when it was not satisfied about the reopening under section 147(b) of the Act and notwithstanding the pendency of the appeal and later when he (Income-tax Officer) had written to the appellate authority, he himself took up proceedings allegedly for rectification of mistake apparent from the record under section 154 of the Act. The Income-tax Officer, accordingly, issued notices to the assessee stating, inter alia, with respect to the assessment for the year 1968–69 and the revision thereof as follows:

“1. Excessive depreciation is found to be allowed on certain items of plant and machinery;

2. Depreciation on certain items is found to be allowed in short;

3. Certain mistakes in the computation of disallowances under section 40(c)(iii) are noticed;

4. E.S.A is found to be allowed on N.E.S.A items;

5. Mistake in the computation of interest levied under section 139(8) resulting in short, demand;

6. Excessive tax relief on superannuation fund has been allowed on Rs. 8,964 as against the correct amount of deduction of Rs. 5,849 allowable;

7. Original deduction under section 80-I has been erroneously granted since the mixture of fertilisers is not contemplated under item 13 of the Sixth Schedule to the Income-tax Act, 1961;

8. Mistake in the computation of profit under section 41(1) in the revision order dated April 29, 1974, has been noticed. In the revision order dated April 29, 1974, a sum of Rs. 16,57,626 has been taken as the profit under section 41(1) as against the correct figure of Rs. 18,08,517; and

9. Allowance wrongly made in respect of the expenditure incurred on the maintenance of guest portion of accommodation.”

“Besides the above mistakes the assessment also requires revision for withdrawal of development rebate in respect of the following items which were added in the accounting years 1966–67 and 1972–73 but were sold within a period of eight years:

Account year Assessment year Cost Sold in assessment year Rs. (a) Steam vapour piping 1966-67 337 1970-71 1968-69 (b) Sulphur furnace 1971-72 5,116 1973-74 1973-74 5,453 Development rebate allowed at 20 per cent. 1,091

This will also be withdrawn in this revision order.”

3. Invoking thus the power under section 154 of the Act, the Income-tax Officer revised the assessment for 1968–69 for reasons as stated by him in the orders adjusting specifically to,—

(1) wrong allowance of expenditure incurred by the assessee on the maintenance of accommodation in the nature of guest house under section 37(3);

(2) deduction wrongly allowed under section 80-I; and

(3) profit assessable under section 41(1) of the Act.

4. The Income-tax Officer gave notice to the assessee for the rectifica-tion of the alleged mistakes in the assessment for the year 1969–70 and the revision thereof, namely,

(1) Excessive depreciation allowed on certain items of plant and machinery, etc.;

(2) Short depreciation of certain items allowed;

(3) Mistakes in the computation of disallowance under section 40(c)(iii);

(4) Excessive tax relief on superannuation fund;

(5) Allowance wrongly made in respect of the expenditure incurred on the maintenance of guest portion of accommodation; and

(6) Withdrawal of development rebate in respect of plant and machinery which were sold within a period of eight years.

5. He accordingly allegedly rectified the assessment by adjusting specifi-cally to the withdrawal of development rebate, guest house expenditure, etc. On appeal, the Commissioner of Income-tax (Appeals) sustained the order of the Income-tax Officer passed under section 154 of the Act, holding,

(1) Disallowance under section 37(3) was proper; and

(2) Relief under section 80-I to be withdrawn was only Rs. 54,608 and not Rs. 4,60,505.

6. With regard to the disallowance under section 40(c)(iii), the Commis-sioner of Income-tax (Appeals) held that the Income-tax Officer was not competent to pass an order under section 154. According to him, the Income-tax Officer was competent to correct the mistakes which were manifest and perceivable and in the guise of remedying an error, it was not open to the Income-tax Officer to reframe the order and conclude that what was held to be 100 per cent, for the benefit of the employees was only 60 per cent, and the remaining 40 per cent, as guest house. As regards profits assessed under section 41(1) of the Act, the Commissioner Of Income-tax (Appeals) held that no allowance was made on Rs. 18,08,817 and, therefore, the Income-tax Officer was not correct in invoking the provisions of section 41(1) of the Act. He found that against the sum of Rs. 1,50,891 only a sum of Rs. 1,08,550 stood assessed. He directed the Income-tax Officer accordingly to retain the sum of Rs. 42,341 and delete the disallow-ance of Rs. 1,08,550., Thus, the assessee's appeal to the Commissioner of Income-tax (Appeals) was allowed in part.

7. Both the assessee and the Department went on appeal to the Tribunal for the assessment year 1968–69, while the Department (Revenue) alone filed an appeal for the year 1969–70. The Tribunal held,

(1) The Income-tax Officer was not justified in invoking the pro-visions of section 154 in respect of the disallowance made under section 37(3);

(2) The Income-tax Officer was not justified in withdrawing the relief under section 80-I and also in adjusting the disallowance under section 40(c)(iii) of the Act;

(3) Since the assessee was not allowed deduction under section 41(1) of the Act in the previous years, there was no scope for making any addition under section 41(1) of the Act;

(4) The disallowance under section 37(3) was not proper.

8. The Tribunal, however, also observed and it has so stated in the statement of the case as follows:

“According to the Tribunal, when the matter could not be reopened under section 147(b), there is no case for rectification under section 154. Regarding the withdrawal of relief under section 80-I, the Appellate Tribunal held that the issue was debatable and, therefore, the provisions of section 154 could not be invoked. Regarding the disallowance made under section 40(c)(iii) and the profit of Rs. 1,08,550 assessed under section 41(1), the Appellate Tribunal agreed with the reasonings of the Commis-sioner of Income-tax (Appeals) to hold that the provisions of section 154 could not be invoked in the assessee's case for rectification of the above mistakes. Thus, the Departmental appeals were dismissed and the assessee's appeal was allowed.”

9. It is important to notice that precisely for the same purposes, the Income-tax Officer had reopened the assessment under section 147(b) of the Act and had held almost in respect of the matters as above only that the assessee had escaped tax. The said order had been appealed against and finally the Tribunal had held that reopening of the assessment under section 147(b) of the Act was not valid and had accordingly revised the assessment. The proceedings which start for assessment culminate with an order under section 143(1)(a) or under section 143(3) of the Act or in the case of best judgment assessment under section 144 thereof. The income escaping assessment is brought under section 147 of the Act, which provides, inter alia,

“(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,

he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allow-ance, as the case may be, for the assessment year concerned.”

10. It is stated in the instant proceedings that the Income-tax Officer had had recourse to section 148 of the Act and called upon the assessee accord-ingly to produce evidence, etc. The assessee had appeared and objected to the reassessment and the Income-tax Officer had found fault with the assessment and accordingly revised the assessment. The said proceeding, however, was held to be invalid by the Tribunal and the Revenue never sought for any reference on any question of law in the said reopened proceedings for assessment of tax. The Income-tax Officer, however, had ignored his earlier orders under section 147(b) of the Act and issued notice as contemplated under sub-section (3) of section 154 of the Act to the assessee for rectifying the mistakes, which, according to him, were appar-ent from the records. He has almost (although the order under section 147(b) of the Act and the consequent reassessment order are not available) reiterated, as the order rectifying the mistakes apparent from the record, his earlier order in the proceedings under section 147(b), of the Act. The crucial expressions for the exercise of two jurisdictions, one for the reopening of the assessment under section 147(b) of the Act and the other for rectifying any mistake apparent from the records under section 154 of the Act, are, for the former, the Income-tax Officer has in consequence of information in his possession reason to believe that the income chargeable to tax has escaped assessment, and, for the latter, any mistake apparent from the record.

11. Although speaking in a case falling under section 62 of the Estate Duty Act, in the case of T.S Rajam v. CED, [1968] 69 ITR 342, a Bench of this court has observed (at page 349) : “‘Mistake’ is an ordinary word, but in taxation law, it has a special signification. It is not an arithmetical or clerical error alone that comes within its purview. It comprehends errors which, after a judicious probe into the record from which it is supposed to emanate, are discerned. It is difficult to axiomatise and lay down dicta for the discovery of a mistake from official records. The word ‘mistake’ is inherently indefinite in scope, as what may be a mistake to one may not be one for another. It is mostly subjective and the dividing line in border areas is thin and indiscernible. Indeed, it is imponderable due to its inherent indefiniteness. It is something which a duly and judiciously instructed mind can find out from the record. It may be that sometimes an argument, though not a complex study, may be required to find it out. But that by itself is not the test to discountenance it as being not a mistake apparent from record. In the ultimate analysis, the conclusion a well-equipped and trained judicial mind will reach after scrutinising the record, will govern and his finding whether it is a mistake or not has to be accepted.” This judgment has noticed the analogous provision in section 35 of the Indian Income-tax Act, 1922, and its interpretation in CIT v. O. RM.M SM. SV, Sevugan, [1948] 16 ITR 59, 66 (Mad), wherein it was observed, “Section 35 has limited application…. Clearly that section does not enable an order to be reversed by revision or by review but permits only some error, which is apparent on the face of the record, to be corrected.”

12. In Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tirumale, AIR 1960 SC 137, the Supreme Court has pointed out that where an error is far from self-evident, it ceases to be an apparent error and in M. Subbaraja Mudaliar v. CIT, [1958] 33 ITR 228 (Mad), it is said (at page 230) : “The jurisdiction of the officer to rectify a mistake is dependent on the mistake being apparent from the record. It is no doubt true that a mistake capable of being rectified under section 35 is not confined to clerical or arithmetical mistakes. On the other hand, it does not cover any mistake which may be discovered by a complicated process of investiga-tion, argument or proof.” The view in this behalf in the judgments of the Supreme Court in Master Construction Co. (P.) Ltd. v. State of Orissa, [1949] 17 STC 360 and ITO v. S.K Habibullah, [1962] 44 ITR 809, we shall presently see, has not suffered any change and is, even today, the correct approach for rectification of an error, which is said to be apparent from the record, the mere complexity of the problem or that genuine argument is necessary to discover the same, may not by themselves be sufficient to oust the jurisdiction of the Tribunal to rectify such a mistake. If, however, it could be discerned with some precision after a fair probe into the assessment records and a reasonable and probable conclusion can be arrived at, that the court's conscience has been shaken, in that there appears an error on record which has to be certainly corrected, then it would appear that the jurisdiction of the Tribunal vested with the power to rectify such mistakes arises. It is different from the provisions under Order XLVII, rule 1, of the Code of Civil Procedure, in the sense that rectification of any mistake in the case of the Revenue is when the mistake is “apparent from the record” and in the case of a review, as in the said provision of the Code of Civil Procedure, it is in the case of an error “apparent on the face of the record”.

13. In Mrs. Khorshed Shapoor Chenai v. Asst. CED, [1980] 122 ITR 21 (SC), a case falling under the Estate Duty Act, the Supreme Court consi-dered the case of assessment to duty which was sought to be rectified on the ground that the value of the compensation had been enhanced by the civil court, and observed (at page 36) : “It is thus clear that the rectifi-cation is being undertaken on the ground that the initial valuation adopted in respect of the acquired lands was based at rates fixed by the Land Acquisition Officer, that such valuation was obviously wrong in view of the enhanced compensation awarded by the civil court and, therefore, the enhanced compensation was sought to be included in the principal value of the estate by undertaking the rectification proceedings. In substance, it cannot be said to be a case of rectification of any mistake apparent from the record, but the respondent is really seeking to change his opinion about the valuation of the acquired lands because some other authority, namely, the civil court has valued the same differently.” The view in Volkart Brothers' case, [1971] 82 ITR 50 (SC), in this behalf that it is open to the Income-tax Officer to go into the true scope of the relevant provi-sions of the Act in a proceeding under section 154 of the Act, and 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 b, e conceivably two opinions, is one which holds the field and is the principle which no court or authority can ignore. The line of demarcation is neither firm nor fixed. Sometimes, an evident error which does not require any extraneous matter to show its incorrect-ness is confused with an erroneous view of law on a debatable point or a wrong exposition of the law or a wrong application of the law or a failure to apply the appropriate law. In the, former case, it is error apparent from the record and in the latter case, it is not so apparent. Discovery of an error on the basis of assessment due to initial mistake, say in determining the written down value which happened on account of misapplication of the law can provide a ground for rectification, but where it is debatable whether there was any mistake or misapplication of the law, rectification may not be permissible. Can there be a case, however, where it is apparent from the record, that some income has escaped taxation and such discovery of fact is taken as the basis for reopening the assessment under section 147(b) of the Act ? A Bench of the Patna High Court in Mahasukhram Madanlal v. Commissioner Of Income-Tax*, [1955] 28 ITR 299, 305 has considered this aspect under section 34 of the Indian Income-tax Act, 1922, and observed, “the jurisdiction of the Income-tax Officer to start a proceeding under section 34 cannot obviously depend upon the ultimate result of the proceeding. Even if it is found ultimately upon enquiry that there has been no escapement of income, it is not a sound argument to advance that the Income-tax Officer had no jurisdiction to initiate the proceeding…. The Income-tax Officer has stated in the course of his order that action under section 34 was taken because it was detected in the assessment proceeding of 4944–45 that there was a difference in the capital account of the two firms between the Samvat years…. It is clear that though the original order of the Income-tax Officer was missing there were circumstances in the case which definitely pointed to the conclusion that before the issue of notice under section 34, the Income-tax Officer had present before his mind the difference in the capital accounts' of, the two firms between the two relevant Samvat years. That was the definite information upon which the Income-tax Officer Mr. Patnaik started the proceeding under section 34 and it is difficult to accept the argument of Mr. Dutt that there is complete absence of evidence to show that there was definite information of that kind before the initiation of the proceeding under section 34.”

14. We do not propose in this case, however, to deal any further as the existence of the information for the belief that income chargeable to tax has escaped assessment is the sine qua non for reopening the assessment under section 147(b) and discovery of an error apparent on the record is the sine qua non for rectification under section 154 of the Act. The provisions for rectification of error apparent on the record and for taking proceedings regarding escapement are common features in the tax laws and they are to be invoked in different circumstances. The Income-tax Officer can have recourse to one or the other, but he must have recourse to the appropriate provision having regard to the facts and circumstances in each case. In cases where the two appear to overlap, the Income-tax Officer must choose one in preference to the other and proceed. He should not take one as the appropriate proceeding and give it up at a later stage to have recourse to the other, since such proceedings are quasi-judicial and adjudication after notice is intended for the same purpose. In such a case of overlapping, constructive res judicata and not the statutory inhibition, should make the Income-tax Officer desit from using one proceeding after the other instead of using one of the two with due care and caution. We have, however, felt in the instant case that in respect of most of the items, the Income-tax Officer has exhibited ignorance of law and the Tribunal, for good reasons, has held about them that no case of error apparent on the record was made out. We have some ‘apprehension of our own in respect of one item and the need of rectification in respect of the said item for assessment under section 37(3) of the Act. The assessee has claimed computation of income after deducting the expenses upon a guest house and claimed 100 per cent, of the annual value of the premises as allotted to the staff, i.e, the benefit or amenity provided to the employees. That it has done without any evidence, so much so, that even a statutory requirement of maintaining a register showing the particulars as required under rule 6C(iii) of the Income-tax Rules, 1962, is not observed. In the original assessment, the entire claim of the assessee was accepted. No serious effort is required to see that the entire claim of the assessee could not be allowed without evidence showing the expenditure. We are, however, not sure whether any proceeding under section 147(b) of the Act also was taken as escaped income and adjudicated after notice to the assessee in accordance with law and which proceeding ended against the Revenue’. If that be so, it will be proper to hold that recourse to rectification is in fact an attempt to review the order of assessment and further that the rectification proceeding is being used as an alternative to a proceeding which has ended against the Revenue. If, however, this item is not included in the proceeding under section 147(b) of the Act, in our opinion, it will be permissible to call upon the assessee to produce evidence and since no evidence is produced by the assessee, to hold against the assessee by best judgment assessment which in the absence of evidence in this behalf may not be illegal in any sense. In view of the above, we answer all the questions against the Revenue and in favour of the assessee except questions relating to the disallowance under section 37(3) of the Act, in respect of which, we remand the matter to the Tribunal for reconsideration in accordance with law in the light of the observations above.