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Commissioner Of Income-Tax, West Bengal-I v. Indian Iron & Steel Co. Ltd.
Factual and Procedural Background
This is a consolidated reference under section 256(1) of the Income-tax Act, 1961, concerning assessment years 1960–61, 1961–62 and 1962–63 (previous years ending 31 March 1960, 31 March 1961 and 31 March 1962). In the original assessments of Indian Iron & Steel Co. Ltd. (the assessee) development rebates were allowed. A revenue audit reported that the rebate allowed was irregular. The Income-tax Officer (ITO) issued a notice under sections 154/155 requiring the assessee to show cause why alleged mistakes should not be rectified, alleging that the statutory reserve required by section 34(3) was not maintained and that amounts from that reserve were used for prohibited purposes (including, it was alleged in some years, declaration of dividends).
The assessee denied prohibited use and maintained that sums were lawfully used for business purposes, including repayment of Government of India and World Bank loans. The ITO concluded the reserve had not been kept intact and had been indirectly used for dividends by transfers to the general reserve, withdrew the rebates and raised demands. The assessee appealed to the Appellate Assistant Commissioner, who allowed the appeals, holding that a reserve is not cash and that utilisation for repayment of loans lawfully wiped out the reserve; he found that the statute did not require the reserve to be kept intact for eight years.
The revenue appealed to the Income-tax Appellate Tribunal (the Tribunal). The Tribunal held that section 155(5) applies only if the requisite conditions for allowance of development rebate under sections 33 and 34 were fulfilled at the time of assessment and subsequently violated; if the conditions were not present ab initio, section 155(5) does not apply. The Tribunal further held that a controversy over whether the conditions were fulfilled cannot be resolved by rectification proceedings under section 154, and it dismissed the revenue's appeals.
The present reference asks whether the Tribunal was right in holding that neither section 154 nor section 155(5) was applicable.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that neither section 154 nor section 155(5) of the Income-tax Act, 1961, was applicable.
- Whether rectification proceedings under section 154 could be applied by themselves (in particular, whether rectification was permissible in the first assessment year on the ground that the correct amount had not been kept in the development reserve).
Arguments of the Parties
Revenue's Arguments (Mr. B.L. Pal)
- The revenue audit report, being part of the record, disclosed a mistake apparent on the record which could be rectified under section 154.
- Cited Indra Singh & Sons P. Ltd. v. Union of India ([1967] 64 ITR 501 Cal) for the proposition that an Income-tax Officer may proceed under one provision even though he has jurisdiction under another provision — analogously arguing that the ITO had independent jurisdiction to proceed under section 155 as well as section 154.
- Cited Commissioner of Income-tax v. Khemchand Ramdas ([1938] 6 ITR 414 PC) for the principle that subsequent orders form part of the record and, therefore, can make a mistake apparent.
- Cited M.K. Venkatachalam v. Bombay Dyeing & Mfg. Co. Ltd. ([1958] 34 ITR 143 SC) as applying and approving Khemchand Ramdas and for the proposition that a mistake apparent from the record may include an obvious mistake of law resulting from amendment of a statutory provision.
- Cited P.K. Malhotra v. Kasturbhai Lalbhai ([1977] 109 ITR 537) for the proposition that the audit department's intimation is information within section 147(b) enabling reopening of assessments.
Assessee's Arguments (Dr. Debi Pal)
- Relied on an earlier decision involving the same assessee (Income-tax Reference No. 29 of 1970 — Commissioner of Income-tax v. Indian Iron & Steel Co. Ltd., [1978] 111 ITR 843 (Cal)) where this Court held that amounts transferred from the development reserve for repayment of Government and World Bank loans were not prohibited by section 155 and therefore the development rebate could not be withdrawn for the assessment years 1961–62 and 1962–63.
- In the instant case, contended there was no allegation that the withdrawn amounts were used for dividend payment (i.e., no allegation of distribution by way of dividends in the present proceedings, at least in some years).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Indra Singh & Sons P. Ltd. v. Union of India, [1967] 64 ITR 501 (Cal) | That an Income-tax Officer could proceed under one provision even though he had jurisdiction to proceed under another provision (example given: section 35 of 1922 even though section 34 also available). | Cited by revenue to support the contention that the ITO had independent jurisdiction to proceed under both section 155 and section 154. The Court recorded the citation but rejected the revenue's reliance in the facts of this case (see reasoning that section 154 could not be applied where section 155 was not attracted). |
| Commissioner of Income-tax v. Khemchand Ramdas, [1938] 6 ITR 414 (PC) | That subsequent orders form part of the record and such subsequent orders could make a mistake apparent on the face of the record. | Cited by revenue to argue that the audit report / subsequent information could render a mistake apparent. The Court noted the authority but found that, on the facts (i.e., absence of a clear finding that the reserve was not initially created), rectification under section 154 was not justified. |
| M.K. Venkatachalam v. Bombay Dyeing & Mfg. Co. Ltd., [1958] 34 ITR 143 (SC) | The Supreme Court applied and approved Khemchand Ramdas and held a mistake apparent from the record may include an obvious mistake of law resulting from amendment of a statutory provision. | Cited by revenue; the Court recorded the citation but, applying the statutory provisions to the specific facts, concluded that the prerequisites for rectification or for invoking section 155(5) were not satisfied. |
| P.K. Malhotra v. Kasturbhai Lalbhai, [1977] 109 ITR 537 (SC) | That an audit department's intimation may constitute information within section 147(b) of the Income-tax Act, 1961, enabling reopening of assessment. | Cited by revenue as supporting reopening/rectification based on audit reports. The Court noted the citation but concluded, on the facts before it, that rectification under section 154 was not properly available where section 155 did not apply and where there was no clear finding of initial non-creation of the requisite reserve. |
| Commissioner of Income-tax v. Indian Iron & Steel Co. Ltd., Income-tax Reference No. 29 of 1970, [1978] 111 ITR 843 (Cal) | On facts identical to those before the Court, this Court held that amounts transferred from the development reserve for repayment of Government and World Bank loans were not prohibited by section 155, and the development rebate could not be withdrawn. | Relied on by the assessee; the Court expressly noted this earlier decision and applied the same reasoning to conclude that, given the admitted facts (reserve created and amounts used for loan repayment), section 155 was not attracted in the present reference. |
Court's Reasoning and Analysis
The Court proceeded by examining the admitted facts and the relevant statutory provisions (sections 33, 34, 34(3) and 155(5) of the Income-tax Act, 1961). The key analytical steps, as stated in the opinion, were:
- The Court accepted that a development reserve had been created and that amounts from the reserve had been spent for repayment of the assessee's business loans (Government of India and World Bank loans). These facts were not in dispute.
- The Court interpreted section 155(5) in light of the admitted facts and the earlier decision in Income-tax Reference No. 29 of 1970. On those facts — where the reserve was created and sums were used to repay business loans — the Court held there was no violation of section 155 and therefore section 155(5) was not attracted.
- The Court then addressed whether section 154 (rectification) could independently be applied. It observed that only possibly in the first assessment year (1960–61), when the reserve was created, could it be argued that an incorrect amount was initially kept in the reserve. However, there was no clear finding in the record that the assessee had not initially created the requisite reserve. Whether the use of the reserve in that particular assessment year was correct was a debatable question on which two views were possible.
- Because the question in the first assessment year was debatable, the Court held rectification proceedings could not be properly initiated there. For the subsequent assessment years, if section 155 was not applicable, section 154 could not be invoked to achieve the revenue's aim.
- On these grounds the Court concluded that the revenue's contention lacked merit and that the Tribunal was right in holding that neither section 154 nor section 155(5) applied in the present circumstances.
The Court also noted as a practical observation that the assessee was now a public undertaking run by the Government of India and that departmental settlement on the basis of the earlier decision could have saved public money and judicial time.
Holding and Implications
Holding: The Court answered the referred question in the affirmative and in favour of the assessee — the Tribunal was right in holding that neither section 154 nor section 155(5) of the Income-tax Act, 1961, was applicable on the facts before it. There will be no order as to costs.
Implications:
- Direct effect on the parties: The revenue's attempt to withdraw the development rebates and to rectify the assessments under section 154 or to invoke section 155(5) was rejected; the assessments, as upheld by the Tribunal and earlier appellate bodies, stand in favour of the assessee for the issues in question.
- Scope of legal consequence: The Court applied established principles and an earlier decision involving the same assessee to the facts and found no breach of section 155 where reserve sums were used for repayment of business loans. The opinion does not assert the setting of a new legal principle beyond the application of existing statutory provisions and prior case law to these facts.
Dipak Kumar Sen, J.:— In this consolidated reference under section 256(1) of the Income-tax Act, 1961, the assessment years involved are 1960–61, 1961–62 and 1962–63. The relevant previous years ended on March 31, 1960, March 31, 1961, and March 31, 1962. The question referred is as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that neither section 154 nor section 155(5) of the Income-tax Act, 1961, was applicable?”
2. The facts found and/or admitted in these proceedings are that in the original assessments of Indian Iron & Steel Co. Ltd., Calcutta, the assessee, development rebates of various amounts were allowed. Subsequently, it was pointed out by the revenue audit that the rebate allowed was irregular and, therefore, should be withdrawn by rectification of the assessments. Thereupon, the Income-tax Officer issued a notice under section 154/155 of the Income-tax Act, 1961, requiring the assessee to show cause why the alleged mistakes should not be rectified. It was alleged that the statutory reserve which the assessee had to maintain under section 34(3) of the Income-tax Act, 1961, was not maintained and further that amounts out of the said statutory reserve had been utilised for prohibited purposes, being, inter alia, declaration of dividend. The assessee contended that there was no violation of the statutory provisions as it had lawfully utilised the statutory reserve for the purposes of its business. Government of India and World Bank loans had been repaid out of the said reserve.
3. The Income-tax Officer, however, came to the conclusion that the statutory reserve not having been kept intact and indirectly utilized for declaration of dividend by transferring amounts there from to the general reserve account there was violation of the provisions of section 155(5) of the Income-tax Act, 1961. He withdrew the rebates originally granted and raised additional demands.
4. Being aggrieved by the orders of the Income-tax Officer, appeals were filed by the assessee before the Appellate Assistant Commissioner who held that it was not the provision of the statute that such reserve should be held intact. He allowed the appeals of the assessee with the following observations:
“The facts are so clear in this case that it appears to me rather strange that anybody with even a rudimentary knowledge of income-tax law and accountancy principles could have come to the conclusion that Section 155(5) was applicable here. I entirely agree with Shri Mitra that a reserve is not cash—it only shows that a certain amount of the cash belonging to a company is being kept for a particular purpose. Therefore, once the money has been actually utilized for this purpose, the reserve itself must be held to have been so utilized. In the instant case, when the loans were repaid, the development rebate reserve was accordingly utilized to that extent and the assessee-company was entirely justified in wiping out the reserve fund accordingly. Under these circumstances, the insistence by the Income-tax Officer that the reserve fund should have been kept intact is like asking the assessee-company to eat a cake and to keep it also. I entirely agree with Shri Mitra that the Act nowhere specifies that the reserve must be held intact for 8 years. This requirement is entirely a figment of imagination on the part of the Income-tax Officer and fails to take into account not only the words used in the section but also the whole purpose for which the section was at all enacted. The Act clearly states that the reserve is to be utilized for any business purpose. It is not known from where the Income-tax Officer has drawn his inspiration to state that the reserve must be kept intact. In my opinion, once the loans were repaid, the development rebate reserve was utilised to the extent of the repayment and hence the assessee-company was entirely justified in reducing the development rebate reserve account in the manner it had done.” The revenue preferred appeals before the Income-tax Appellate Tribunal against the order of the Appellate Assistant Commissioner. The Tribunal held that if the requisite conditions for the allowance of development rebate as prescribed in sections 33 and 34 of the Act had been fulfilled at the time of assessment and subsequently there was a violation of section 34(3) only in such a case section 155(5) would be attracted and the assessments could be rectified. But if the conditions of allowance of development rebate were not in existence, ab initio, section 155(5) had no. application. The Tribunal held further that if there was a controversy as to whether the requisite conditions laid down in sections 33 and 34 of the Act had been fulfilled or not, the same could not be resolved by taking resort to section 154 and initiating rectification proceedings. The Tribunal accordingly did not express any opinion whether the development rebate had been correctly allowed in the original assessment or not and dismissed the appeals of the revenue.
5. Mr. B.L Pal, learned counsel for the revenue has contended before us that in view of the report of the revenue audit, which was a part of the record, there was a mistake apparent in the record and it could be rectified by initiating proceedings under section 154. In support of the contentions Mr. Pal cited Indra Singh & Sons P. Ltd. v. Union of India, [1967] 64 ITR 501 (Cal) for the proposition that an Income-tax Officer could proceed under section 35 of the Indian Income-tax Act, 1922, even though he had jurisdiction to proceed under section 34 of the Act in the same facts and circumstances. Mr. Pal contended that in the instant case the Income-tax Officer concerned had independent jurisdiction to proceed under section 155 as also under section 154.
6. Mr. Pal also cited Commissioner of Income-tax v. Khemchand Ramdas, [1938] 6 ITR 414 (PC) for the proposition laid down by the Judicial Committee that subsequent orders also formed part of the records and when a firm's registration was cancelled for the purpose of the Income-tax Act then the order of cancellation which formed part of the record would make a mistake apparent.
7. Mr. Pal also cited M.K Venkatachalam, Income-tax Officer v. Bombay Dyeing & Manufacturing Co. Ltd., [1958] 34 ITR 143 (SC). In this case the Supreme Court applied and approved the decision of the Privy Council in Khemchand Ramdas, [1938] 6 ITR 414. The Supreme Court held that a mistake apparent from the record would include an obvious mistake of law resulting from the amendment of a statutory provision.
8. Mr. Pal cited another decision of the Supreme Court in the case of P.K Malhotra, Income-tax Officer v. Kasturbhai Lalbhai, [1977] 109 ITR 537. The Supreme Court held in this case that the audit department was the proper machinery to scrutinize the assessments of Income-tax Officers and point out the errors, if any, in law and the intimation received by the Income-tax Officer from such reports constituted information within the meaning of section 147(b) of the Income-tax Act, 1961, in consequence of which the Income-tax Officer could reopen the assessment.
9. Dr. Debi Pal, learned counsel for the assessee, has drawn our attention to a decision of this court in the case of the same assessee (Income-tax Reference No. 29 of 1970—Commissioner of Income-tax v. Indian Iron & Steel Co. Ltd., [1978] 111 ITR 843) where this court on facts identical to those before us held that in the assessment years 1961–62 and 1962–63 the amounts which were transferred from the reserve account of the assessee for the purpose of repayment of loans obtained from the Government of India and the World Bank were not prohibited by section 155 of the Income-tax Act, 1961, and on that ground development rebate granted could not be withdrawn. In those years it had been alleged by the revenue that the amounts withdrawn from the development reserve had been utilized for the purpose of payment of dividend.
10. In the instant case Dr. Pal contended that there was not even that allegation. All that was alleged by the Income-tax Officer was that the reserve concerned had not been maintained for the years in question and that the amounts of the said reserve had been spent for prohibited purpose.
11. For the purpose of resolving the controversy in this reference we have to keep the relevant statutory provisions in view. The relevant provisions of the Income-tax Act, 1961, are as follows:
“33. Development rebate.— (1)(a) In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of section 34, be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in clause (b)… …”
“34. … … … the deduction referred to in section 33 shall be allowed only if the particulars prescribed for the purpose of clause (i) and clause (ii) of sub-section (1) of section, 32 have been furnished by the assessee in respect of the ship or machinery or plant… … …
(3) (a) The deduction referred to in section 33 shall not be allowed unless an amount equal to seventy-five per cent. of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking, other than—
(i) for distribution by way of dividends or profits; or
(ii) for remittance outside India as profits or for the creation of any asset outside India… … …”
“155. (5) Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of a ship, machinery or plant installed after the 31st day of December, 1957, in any assessment year under section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (XI of 1922), and subsequently—
(i) at any time before the expiry of eight years from the end of the previous year in which the ship was acquired or the machinery or plant was installed, the ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or succession referred to in sub-section (3) or sub-section (4) of section 33; or
(ii) at any time before the expiry of the eight years referred to in subsection (3) of section 34, the assessee utilizes the amount credited to the reserve account under clause (a) of that sub-section—
(a) for distribution by way of dividends or profits; or
(b) for remittance outside India as profits or for the creation of any asset outside India; or
(c) for any other purpose which is not a purpose of the business of the undertaking;
the development rebate originally allowed shall be deemed to have been-wrongly allowed, and the Income-tax Officer may, notwithstanding anything contained in this Act, recomputed the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the previous year in which the sale or transfer took place or the money was so utilized.”
12. It is not in dispute here that a development reserve was created. It is also not in dispute that amounts have been spent from this reserve for the purpose of repayment of business loans of the assessee. On the aforesaid facts, it cannot be held that there has been any violation of section 155. This is also the view taken in Income-tax Reference No. 29 of 1970 [Commissioner of Income-tax v. Indian Iron & Steel Co., [1978] 111 ITR 843 (Cal)] noted earlier.
13. The only question that remains is whether section 154 could have been applied by itself. In the facts only in the first assessment year when the development reserve was created it might have been possible to contend that a correct amount was not kept in the said reserve. There is no clear finding at any stage of the proceedings below that the assessee did not initially creat the requisite reserve. As to whether the user of the said reserve in the said assessment year concerned was correct or not the same would be a debatable question on which two views are possible. Therefore, even in the first assessment year, i.e, assessment year 1960–61, it cannot be said that rectification proceedings could be properly initiated and rectification could be validly made. In the subsequent assessment years if section 155 of the Income-tax Act, 1961, was not applicable, section 154 could never be applied. For the reasons given above, it appears to us that there is no merit in the case of the revenue and the question referred must be answered in favour of the assessee. Accordingly, we answer the question in the affirmative and in favour of the assessee. There will be no order as to costs.
14. We take note of the fact that the assessee is now a public undertaking being run by the Government of India. Both public money and judicial time could have been saved if the matter could have been settled depart-mentally on the basis of the decision in Income-tax Reference No. 29 of 1970 [Commissioner of Income-tax v. Indian Iron & Steel Co. Ltd., [1978] 111 ITR 843 (Cal)].
C.K Banerji, J.:— I agree.
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