Citation Codes

Equivalent Citations

citation codes

Case Number

Miscellaneous Petitions Nos. 203, 204, 205 and 463 of 1976

Judges

G.L Oza
G.G Sohani, JJ.

Acts

Profits Tax Act, 1963, and the provisions of Rule 3 of the Second Schedule to the Surtax Act,
SECTION 13 COMPANIES PROFITS SURTAX ACT 1964
Rule 4 to the Second Schedule of the Companies (Profits) Surtax Act,
Sections 154-155 of the Income-tax Act, 1961....... NATURE OF MISTAKE
u/s. 13 of the Surtax Act. Assessment year 1967-68.
SUPER PROFITS TAX ACT 1963
provisions of Section 13 of the Surtax Act.
provisions of Section 154 of the I.T. Act
ARTICLE 226 CONSTITUTION OF INDIA
SECTION 154 INCOME TAX ACT 1961
Section 13 of the Surtax Act,
provisions of Rule 2
Surtax Act, 1964.
INCOME TAX ACT
Section 6(2)

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

Several petitions (including M.P. Nos. 203, 204, 205 and 463 of 1976) under Article 226 of the Constitution were filed by a public limited company carrying on manufacture of rayon-grade pulp, staple fibre, rayon plant and machinery and other related products. The petitions challenged notices issued by the Income-tax Officer (respondent No.1) under Section 13 of the Companies (Profits) Surtax Act, 1964 ("the Surtax Act") which purported to invoke the power of rectification of "mistakes apparent on the face of the record" in past surtax assessments for various assessment years.

Although multiple reliefs were claimed in the petitions, at hearing the petitioner pressed only the relief that the notices issued under Section 13 of the Surtax Act be quashed and that a writ of prohibition be issued restraining the respondents from proceeding further pursuant to those notices. The petitions arose after assessments under the Income-tax Act, 1961 ("I.T. Act") and the Surtax Act were completed and, subsequently, the ITO issued notices under Section 13 seeking to amend those surtax assessments on the ground of mistakes apparent on the face of the record. The petitioner replied to the notices, contending lack of jurisdiction and that any issues were debatable rather than patent mistakes; when the department proceeded, the petitioner brought these petitions to the High Court seeking quashing of the impugned notices.

Legal Issues Presented

Whether, in issuing the impugned notices under Section 13 of the Surtax Act, the Income-tax Officer exceeded the jurisdiction conferred upon him by that provision (i.e., whether the supposed mistakes are "mistakes apparent on the face of the record").
Whether a decision on a debatable point of law or mixed questions of fact and law can be treated as a "mistake apparent on the face of the record" for the purpose of Section 13 of the Surtax Act.
Specific statutory questions that the court considered as examples of the foregoing general issue:
1. Whether amounts deductible under Sections 80I and 80J of the I.T. Act are "a part of the income, profits and gains of a company not includible in its total income as computed under the Income-tax Act" for the purpose of Rule 4 of the Second Schedule to the Surtax Act (i.e., whether proportionate deduction from capital should be made).
2. Whether the issue of bonus shares necessarily leads to an addition in paid-up share capital for computing surtax under the Surtax Act (and whether decisions under the Super Profits Tax Act are applicable).
3. Whether sums set aside as specific reserves (for example, capital redemption reserve or contingency reserve) constitute "reserves" for the purpose of computing capital under Rule 1 of the Second Schedule to the Surtax Act.

Arguments of the Parties

Petitioner's Arguments

The notices issued under Section 13 of the Surtax Act were without jurisdiction and should be withdrawn.
There were no mistakes in the original assessment orders; therefore, there was nothing to rectify under Section 13.
Alternatively, even if there were errors, they were not "mistakes apparent on the face of the record" because the matters were highly debatable and would require extensive reasoning and consideration of contested legal questions (i.e., the issues were not patent or self-evident).
Specific contentions included that deductions under Sections 80I/80J of the I.T. Act should not be treated as "not includible" amounts under Rule 4 of the Second Schedule to the Surtax Act, and that reserves set aside by the company qualified as reserves for capital computation under Rule 1.

Respondent's (Department / ITO) Arguments

The notices under Section 13 were valid because the ITO identified mistakes apparent on the face of the record in the original surtax computations that required rectification.
For certain years, the proportionate capital of deductions under Section 80J ought to have been deducted from the computation of capital (invoking Rule 4 to the Second Schedule), and such omission was a mistake apparent from the record.
In relation to bonus shares, the department relied on decisions (in the context of another statute) holding that issue of bonus shares leads to an addition to paid-up capital and therefore the assessments should be rectified accordingly; it also contended that certain reserves (for redemption of preference share capital or contingency reserve) should not have been included in the capital computation because they were provisions or were not true reserves.
The department relied on prior judicial decisions and on the ITO's reading of the relevant rules to justify proposed amendments to the capital computations made in the original assessments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tirumale, AIR 1960 SC 137	Defines the scope of "an error apparent on the face of the record": an error requiring long-drawn reasoning or involving debatable points is not an error apparent on the face of the record.	The court relied on this authority to state and apply the principle that an error which must be established by lengthy argument or is a debatable point of law cannot be treated as a mistake apparent from the record for purposes of rectification under Section 13.
ITO v. Volkart Brothers (T.S. Balaram), [1971] 82 ITR 50 (SC)	Interprets Section 154 of the I.T. Act and equates its scope to the High Court's test for "error apparent on the face of the record".	The court used Volkart Brothers to reinforce that the power to rectify under statutory provisions similar to Section 13 is limited to obvious and patent mistakes and does not extend to debatable legal questions.
Sidhramappa Andannappa Manvi v. Commissioner of Income-tax, [1952] 21 ITR 333 (Bom)	Illustrates that a decision on a debatable point of law is not a mistake apparent from the record.	Referential use: supports the general proposition that debatable issues are not rectifiable as mistakes apparent on the record.
Stumpp, Schuek & Somappa Pvt. Ltd. v. ITO, [1976] 102 ITR 320 (Kar) and Second ITO v. Stumpp, Schuele & Somappa P. Ltd., [1977] 106 ITR 399 (Kar)	Interpretation of the phrase "not includible" in Rule 4 of the Second Schedule to the Surtax Act: meaning sums not capable of being included (i.e., those excluded by Chapter III of the I.T. Act), not amounts later deducted under other statutory provisions.	The court cited these decisions to show that whether Chapter VI-A deductions fall within "not includible" is a substantial and debatable question, supporting the conclusion that the ITO's proposed rectification was not based on an obvious mistake.
Addl. CIT v. Bimetal Bearings Ltd., [1977] 110 ITR 131 (Mad)	Further authority construing "not includible" for purposes of Surtax computation (similar principle as above).	Used with other decisions to demonstrate that the disputed question about inclusion/exclusion for capital computation is not a patent mistake.
CIT v. Century Spinning & Mfg. Co. Ltd., [1978] 111 ITR 6 (Bom)	Authority on treatment of certain reserves/contingency reserves and on differences between particular rules under related statutes (and on interpretation relevant to capital computation).	The ITO invoked this decision to justify treating some reserves or contingency items as non-reserves for capital computation; the court recognized the decision but treated the issue as one of fact and law that is debatable and not an apparent mistake.
I.T. Reference No. 501 of 1977 (Commr. of Surtax v. Ballarpur Industries Ltd.), unreported judgment of Bombay High Court delivered June 16, 1978 [1979] 116 ITR 528 (Bom)	Construed the phrase "not includible" in the Second Schedule similarly to the other cited decisions.	Grouped with the other authorities to demonstrate that the rule has been interpreted to mean "not capable of being included", indicating the question was debatable.
CIT v. Mohan Meakin Breweries Ltd., [1974] 95 ITR 586 (H.P.)	Held (in the context of the Super Profits Tax Act) that the issue of bonus shares leads to an addition in paid-up share capital.	The department relied on this case on the bonus-shares point; the court noted the authority but observed that its applicability to the Surtax Act was contested and debatable.
CIT v. Geoffrey Manners and Co. Ltd., [1978] 112 ITR 334 (Bom)	Another authority on the bonus-share/paid-up capital question (context of Super Profits Tax Act).	Referenced by the court as part of the body of decisions the department relied upon; the court concluded the issue remained debatable for the Surtax Act context.
CIT v. Century Spinning & Mfg. Co., [1953] 24 ITR 499 (SC)	Earlier Supreme Court authority on reserves and contingency reserves (treatment and indication of destination required to treat an item as a reserve for capital computation).	The ITO relied on the principles in this Supreme Court decision to treat certain balance-sheet items as not taking the character of reserves; the court considered the point contested and requiring fact-specific inquiry and therefore not a patent mistake.

Court's Reasoning and Analysis

The court's reasoning proceeded from a central jurisdictional premise: the power of the ITO under Section 13 of the Surtax Act to amend an order depends on the existence of a "mistake apparent from the record." The court adopted and applied established authority (including Satyanarayan Laxminarayan Hegde and Volkart Brothers) holding that a "mistake apparent on the face of the record" must be obvious and patent and cannot be a point which would require long-drawn reasoning or resolve a debatable question of law or fact.

Applying that test, the court examined the specific mistakes the ITO proposed to rectify in each petition and asked whether those mistakes were patent or self-evident from the record, or whether they involved debatable legal questions and factual inquiries that could not be resolved summarily by rectification proceedings.

For M.P. No. 203/1976 (deductions under Sections 80I/80J and Rule 4 of the Second Schedule): the ITO's contention that proportionate capital of deductions under Chapter VI-A should have been deducted was shown by a series of authorities to raise a substantial and debatable question of law (whether "not includible" in Rule 4 refers to amounts not capable of inclusion under Chapter III of the I.T. Act). Because that question was not patent and required detailed legal consideration, the court held the ITO had no jurisdiction under Section 13 to rectify the assessment and quashed the notices.

For M.P. No. 204/1976 (similar issue as in M.P. No. 203): the court applied the same reasoning and quashed the notices since the purported error was not apparent on the face of the record.

For M.P. No. 205/1976 (issue of bonus shares and increase in paid-up share capital): the court noted conflicting authorities, including decisions under the Super Profits Tax Act holding that bonus issues add to paid-up capital, and other authorities emphasizing differences in statutory provisions. The court concluded the question was debatable and therefore not a patent mistake that could be rectified under Section 13; accordingly the impugned notices were quashed.

In the petition dealing with reserves (resolution creating capital redemption reserve and general reserve): the ITO proposed to withdraw amounts claimed as reserves on the ground they were provisions or would afford double benefit. The court observed that whether the sums constituted "reserves" within Rule 1 of the Second Schedule was a vexed question involving examination of various factual and legal points. Since it was not an error apparent on the face of the record, the ITO had exceeded jurisdiction in issuing the rectification notice and the notice was quashed.

Throughout, the court emphasized that where an issue is a debatable point — even if the department believes the original assessment to be incorrect — such disputed questions cannot be corrected under the summary rectification process envisaged by Section 13; the proper course for resolution is by appropriate proceedings where the points can be fully argued and adjudicated.

Holding and Implications

CORE RULING: The impugned notices issued under Section 13 of the Companies (Profits) Surtax Act, 1964, in the matters under consideration were quashed because the alleged mistakes were not "mistakes apparent on the face of the record" and thus the Income-tax Officer had exceeded his jurisdiction in issuing those notices.

Immediate consequences and directions given in the opinion:

The notices referred to in the respective petitions (including the notices identified in M.P. Nos. 203, 204 and 205 of 1976 and other annexures described in the opinion) were quashed.
Parties were ordered to bear their own costs in the circumstances of the cases where so stated.
The outstanding amounts of security deposit were ordered to be refunded to the petitioner where applicable.

Broader implications: The opinion does not purport to lay down a new legal principle; rather it applies established authorities to hold that debatable legal or factual issues are not susceptible to rectification under Section 13 as "mistakes apparent on the face of the record." The decision's effect is to restrict summary rectification under Section 13 to only those errors that are obvious, patent and self-evident from the record; contested or complex questions must be resolved in appropriate adjudicatory proceedings.

This summary is based exclusively on the content of the provided opinion. No information has been added beyond what appears in the text of that opinion.

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Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. H.A Jhawar, Income-Tax Officer, A Ward, Indore, And Another.

1. This order shall also govern the disposal of M.P. Nos. 204, 205 and 463, all of 1976.

2. All these petitions under art. 226 of the Constitution are directed against the notices issued to the petitioner under Section 13 of the Companies (Profits) Surtax Act, 1964, hereinafter called the Surtax Act. Though in the petitions the petitioner claimed a number of reliefs, the only relief pressed by learned counsel for the petitioner at the time of hearing was that the notices issued under Section 13 of the Surtax Act be quashed and that a writ of prohibition be issued restraining the respondents from proceeding further in pursuance of those notices.

3. Before we deal with the particular facts of each petition separately, it would be useful to refer to certain common facts and questions of law arising in all these petitions. The petitioner is a public limited company carrying on business as manufacturers of rayon grade pulp, staple fibre, rayon plant and machinery and other chemical plants, man-made fibre fabrics, textiles, etc. The petitioner is assessed in the status of a company under the I.T. Act, 1961, hereinafter called the I.T. Act. For the relevant assessment years, the petitioner was assessed to surtax under the provisions of the surtax act by respondent No. 1. After the orders of assessment were passed by respondent No. 1 in respect of the relevant assessment years, respondent No. 1 issued, in exercise of the powers conferred by Section 13 of the Surtax Act, the impugned notices to the petitioner, with a view to rectify mistakes apparent on the face of the record. Section 13 of the Surtax Act reads as under;

"13. Rectification of mistakes.--(1) With a view to rectifying any mistake apparent from the record, the Commissioner, the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal may, of his or its own motion or on an application by the assessee in this behalf, amend any order passed by him or it in any proceeding under this Act, within four years of the date on which such order was passed.

(2) An amendment which has the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the assessee shall not be made under this section unless the authority concerned has given notice to the assessee of its intention so to do and has allowed the assessee a reasonable opportunity of being heard.

(3) Where an amendment is made under this section the order shall be passed in writing by the authority concerned.

(4) Subject to the other provisions of this Act where any such amendment has the effect of reducing the assessment, the Income-tax Officer shall make any refund which may be due to such assessee.

(5) Where any such amendment has the effect of enhancing the assessment or reducing the refund already made, the Income-tax Officer shall serve on the assessee a notice of demand in the prescribed form specifying the sum payable."

4. It is not disputed before us on behalf of the department that the jurisdiction of the ITO to make an order of rectification under Section 13 of the Surtax Act depends upon the existence of a mistake apparent on the face of the record. In Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tirumale, AIR I960 SC 137, the Supreme Court observed, while dealing with the scope of the expression "an error apparent on the face of record" as follows :

" An error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions can hardly be said to be an error apparent on the face of the record. As the above discussion of the rival contentions show the alleged error in the present case is far from self-evident and if it can be established, it has to be established by lengthy and complicated arguments."

5. It is true that, in the aforesaid case, the Supreme Court was spelling out the scope of the powers of a High Court under art. 226 of the Constitution. But the aforesaid observations were also held to govern the provisions of Section 154 of the I.T. Act relating to rectification, which are similar to the provisions of Section 13 of the Surtax Act. While dealing with the scope of section 154 of the i.t. act, the Supreme Court observed in T.S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50 (SC) as follows (at p. 53):

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 conceivably be two opinions. As seen earlier, the High Court of Bombay opined that the original assessments were in accordance with law though in our opinion the High Court was not justified in going into that question. In Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tirumale, AIR 1960 SC 137, this court while spelling out the scope of the power of a High Court under article 226 of the Constitution ruled that an error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record. A decision on a debatable point of law is not a mistake apparent from the record. See Sidhramappa Andannappa Manvi v. Commissioner of Income-tax [1952] 21 ITR 333 (Bom). The power of the officers mentioned in Section 154 of the Income-tax Act, 1961, to correct ' any mistake apparent from the record ' is undoubtedly not more than that of the High Court to entertain a writ petition on the basis of an ' error apparent on the face of the record '.

6. It can thus be taken to be a well established principle that a decision on a debatable point of law is not a mistake apparent on the face of the record. It was also not seriously disputed before us on behalf of the department that if in issuing a notice under Section 13 of the Surtax Act, the ITO had exceeded the jurisdiction conferred upon him by the provisions of Section 13 of the Surtax Act, this court can under article 226 of the Constitution of India quash the notice, as no such relief as could be obtained by the petitioner under article 226 of the Constitution of India is provided by or under the provisions of any other law for the time being in force.

7. The short question for consideration in each case, therefore, is whether in issuing the impugned notice under Section 13 of the Surtax Act, the ITO has exceeded the jurisdiction conferred upon him by that provision. This will necessitate examination of the mistake sought to be rectified in each case and the consideration of the question as to whether the mistake, so sought to be rectified, can be held to be a mistake apparent on the face of the record so as to confer jurisdiction on the ITO to issue the impugned notice. M.P. No. 203/1976 :

8. The material facts for the purpose of this petition briefly are as follows ; The income-tax assessments of the petitioners were duly completed for the assessment years 1968-69, 1969-70, 1970-71 and 1971-72, and in computing the total income of the petitioner, deductions specified in section 80i and in section 80j of the i.t. act were allowed from the gross total income of the petitioner. As far as the assessments of the petitioner under the provisions of the surtax act were concerned, for the assessment years 1968-69 and 1970-71, while computing the capital of the company under the Second Schedule to the Surtax Act, no deductions were made on account of the aforesaid reliefs under Sections 80I and 80J of the I.T. Act. Similarly, for the assessment years 1969-70 and 197-1-72 also, no deduction was made from capital in respect of relief under Section 80I of the I.T. Act. The first respondent, however, issued a notice dated 5th May, 1973, to the petitioner under Section 13 of the Surtax Act with a view to rectify mistakes apparent on the face of the record. In that notice, it was, inter alia, stated as follows:

Sub:--Surtax assessment year 1970-71.--Surtax assessment was completed on 1st February, 1973, on net chargeable profits at Rs. 98,87,015. The capital was computed at Rs. 22,40,12,672. Under Rule 4 to the Second Schedule of the Companies (Profits) Surtax Act, part of the income, profits and gains which are not includible in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with Rules 1, 2 and 3 diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains. This year the proportionate capital of deductions u/s. 80J should have been deducted from the computation of capital.

9. In its reply dated 13th June, 1973, and also in the reply dated 27th July, 1973, sent on behalf of the petitioner, it was pointed out that the said notice issued under Section 13 of the Surtax Act was without jurisdiction, and respondent No. 1 was requested to withdraw that notice. In the said letters, the petitioner contended (i) that there were no mistakes at all in the said assessment orders and, therefore, the question of rectifying those mistakes did not arise, and (ii) that even assuming that there were mistakes, they were not mistakes apparent on the face of the record, as the issues involved were highly debatable ones and, as such, those mistakes could not be held to be mistakes apparent on the face of the record. It was, therefore, contended that the provisions of section 13, which would be attracted only for the purpose of rectifying mistakes apparent on the face of the record, could not be invoked.

10. Respondent No. 1 did not, however, accept the contentions urged on behalf of the petitioner and sent another notice, which was received by the petitioner on 16th October, 1973. In that notice, it was stated, inter alia, as follows :

" The assessment refund order under Section 6(2) for the assessment years 1964-65 to 1969-70 and 1970-71 on...required to be amended as there is a mistake apparent from the record within the meaning of Sections 154-155 of the Income-tax Act, 1961.......

NATURE OF MISTAKE PROPOSED TO BE RECTIFIED.

Deduction allowed under Chapter VI-A while computing capital base is to be withdrawn. "

11. Objections were again raised on behalf of the petitioner contending that it was not permissible to rectify the alleged mistakes under Section 13 of the Surtax Act. Ultimately, the petitioner approached this court praying that the aforesaid notices be quashed.

12. The question as to what part of the income of a company can be regarded as " not includible in its total income as computed under the Income-tax Act ", within the meaning of that expression as used in r. 4 of the Second Schedule to the Surtax Act, came up for consideration in Stumpp, Schuek & Somappa Pvt. Ltd. v. ITO [1976] 102 ITR 320 (Kar), Second ITO v. Stumpp, Schuele & Somappa P. Ltd. [1977] 106 ITR 399 (Kar), Addl. CIT v. Bimetal Bearings Ltd. [1977] 110 ITR 131 (Mad), CIT v. Century Spg. & Mfg. Co. Ltd. [1978] 111 ITR 6 (Bom) and in I.T. Reference No. 501 of 1977 (Commr. of Surtax v. Ballarpur Industries Ltd.), an un-reported judgment of the Bombay High Court delivered on June 16, 1978 [1979] 116 ITR 528 (Bom). It has been held in all these decisions that the expression "not includible", occurring in r. 4 means not capable of being included and that it cannot refer to an amount which forms part of the gross total income but is later on deducted for the purpose of determining tax liability under the provisions of the I.T. Act, These decisions lay down that the clause "" a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act" refers to those sums which are not includible in the total income by virtue of the provisions of Chapter III of the I.T. Act and do not refer to any of the statutory deductions claimed under other provisions of the I.T. Act.

13. It is not necessary for the purpose of this petition to decide as to whether the aforesaid decision lays down correct law. From a perusal of these decisions, it is quite clear that the question as to whether the expression

" a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act"

, appearing in r. 4 of the Second Schedule to the Surtax Act, refers to statutory deductions allowed to a company under Sections 80I and 80J of the I.T. Act is, in any event, a highly debatable issue. The mistake sought to be rectified by respondent No. 1, assuming it to be a mistake, is not one which is patent or self-evident on the face of the record. It must, therefore, be held that respondent No. 1 has no jurisdiction under Section 13 of the Surtax Act to rectify the said mistakes. The notices (annexures B and B3) issued in that behalf deserve to be and are accordingly hereby quashed.

14. For all these reasons, this petition succeeds as aforesaid. Parties shall bear their own costs in the circumstances of this case. The outstanding amount of security deposit shall be refunded to the petitioner. M. P. No. 204/76 :

15. In this petition, the petitioner prays that the notices dated 4th May, 1974 (annexures 3 and 3A), issued by respondent No. 1 under Section 13 of the Surtax Act in respect of the assessment years 1969-70 and 1971-72 be quashed,

16. By the aforesaid notices, the mistake sought to be rectified is to make proportionate deduction from capital under r, 4 of the Second Schedule to the Surtax Act on account of deduction allowed to the petitioner from the gross total income under Section 80I of the I.T. Act in respect of the assessment years in question. For the reasons already given by us in M.P. No. 203 of 1976, the error sought to be rectified by the ITO in the instant case cannot be held to be an error apparent on the face of the record. The notices (annexures 3 and 3A), therefore, deserve to be and are accordingly quashed.

17. The petition accordingly succeeds as aforesaid. In the circumstances of the case, parties shall bear their own costs. The outstanding amount of security deposit shall be refunded to the petitioner. M.P. No. 205/76 :

18. In this petition, the petitioner has prayed that the notice dated 30th August, 1972, and the notices dated 12th June, 1974 (annexures R1, El and E2), issued by the ITO, A-Ward, Indore, under Section 13 of the Surtax Act, be quashed.

19. The relevant assessment years are 1967-68, 1969-70 and 1971-72. The order of assessment for the assessment year 1967-68 was passed by respondent No. 1 on 1st June, 1971. In computing the amount of surtax payable by the petitioner, respondent No. 1 proceeded on the basis that issue of bonus shares by the petitioner amounted to an increase in paid-up share capital of the company. On 30th August, 1972, respondent No. 1 issued a notice to the petitioner under Section 13 of the Surtax Act stating, inter alia, as follows :

" Notice u/s. 13 of the Surtax Act.

Assessment year 1967-68.

During this year you were allowed an increase of capital to the tune of Rs. 1,50,68,493 on issue of bonus shares on 23-8-1966. Under rule 3, this increase should have been allowed if there had been any increase in the capital. But this increase is only a transfer entry from general reserve. As such there was no increase in capital. You have been allowed excessive relief in company's capital to the strength of Rs. 1,50,68,493. This mistake being apparent from record, please let me know whether you have any objection to the proposed rectification. "

20. Similarly, notices in respect of assessment for the assessment years 1969-70 and 1971-72 were also sent to the petitioner.

21. In cases arising out of assessments under the provisions of the Super Profits Tax Act, 1963, it has been held in CIT v. Mohan Meakin Breweries Ltd. [1974] 95 ITR 586 (H.P.) and in CIT v. Geoffrey Manners and Co. Ltd. [1978] 112 ITR 334 (Bom) that the issue of bonus shares necessarily leads to addition in the paid up share capital. In CIT v. Century Spg. & Mfg. Co. Ltd. [1978] Ml ITR 6 (Bom) it was, however, held that there was material difference between the provisions of Rule 2 of the Second Schedule to the Super Profits Tax Act, 1963, and the provisions of Rule 3 of the Second Schedule to the Surtax Act, and the decision in CIT v. Mohan Meakin Breweries Ltd. [1974] 95 ITR 586 (HP) was, therefore, held to be inapplicable in assessment proceedings arising out of assessment under the Surtax Act. On behalf of the petitioner, it was contended that there was no material difference between the two provisions as pointed out in CIT v. Century Spg. & Mfg. Co. Ltd. [1978] MI ITR 6 (Bom) and the decision in CIT v.

Mohan Meakin Breweries Ltd. [1974] 95 ITR 586 (HP) would also govern assessment under the Surtax Act. It is not necesssary for us, for the purpose of the present petition, to decide the correctness of the contention raised on behalf of the petitioner, because if the issue raised by the petitioner is a debatable one, and it is so in our opinion, then there is no mistake apparent on the face of the record, as urged on behalf of the department. Respondent No. 1, therefore, had no jurisdiction under Section 13 of the Surtax Act to rectify the mistakes sought to be rectified as referred to in the impugned notices. These notices, therefore, deserve to be and are hereby quashed.

24. The facts relevant for the purposes of this petition are that by a resolution dated 4th August, 1967, passed by the board of directors of the petitioner-company, a sum of Rs. 15 lakhs was set aside as capital redemption reserve and a sum of Rs. 2,19,43,148 was set aside as general reserve. These sums were treated as "reserves" in the original order of assessment passed by respondent No. 1 in respect of the assessment year 1968-69. Subsequently, respondent No. 1 issued the impugned notice to the petitioner under Section 13 of the Surtax Act with a view to rectify mistakes apparent on the face of the record. The nature of the mistake proposed to be rectified by respondent No. 1 was stated by him in the annexure to the said notice as follows :

" The reserve created to meet redemption of preference share capital being for the specific and ascertained object, it should not have been taken into account in computing the capital employed of the company already, vide r. 1 to the Second Schedule of the Surtax Act, 1964. Preference share capital is firstly included in the paid up share capital and thus the company was already given its advantage, reserve created to meet the redemption liabilities of preference share capital, being for the specific object, its reconsideration in the capital computation would result in double benefit.

I, therefore, propose to modify capital computation by withdrawing the double benefit already allowed.

The reserves which are not designed to meet any liability, contingency, commitment or dimunition in value of assets known to exist as at the date of balance-sheet cannot be considered as reserve. The reserve may be a general reserve or special reserve but there must be a clear indication whether reserve was either a general reserve or a special reserve. This view has been pronounced by the Supreme Court of India in the case of CIT v. Century Spinning & Mfg. Co. [1953] 24 ITR 499. The contingency reserve appearing in your balance-sheet gives no such indication, the indication in particular of the manner of its disposal and its destination. In view of the legal position explained by the Supreme Court in 1953 and there being no indication in any direction, amount of reserve for contingency should also not have been considered in the computation of the capital employed."

25. It was contended on behalf of the petitioner that the aforesaid reserves were " reserves " for the purpose of computing capital in accordance with r. 1 of the Second Schedule to the Surtax Act. It was urged that only such amounts, as were specified in the Explanation to the aforesaid r. 1, could not be regarded as reserves. On behalf of the department it was contended by Shri. Mathur that the amount of Rs. 15 lakhs set aside as capital redemption reserve was not really in the nature of reserve but was a provision made by the petitioner and, as such, it could not be treated as reserves. Reliance was placed on CIT v. Century Spg. & Mfg. Co. Ltd. [1953] 24 ITR 499 (SC). The question as to whether the amounts in question constituted " reserves " within the meaning of r. 1 of the Second Schedule to the Surtax Act is a vexed question, in the circumstances of the case, and the decision on that issue will necessitate examination of various questions of fact and law. It is, therefore, quite clear that the error sought to be corrected by respondent No. 1 under Section 13 of the Surtax Act cannot be held to be an error apparent on the face of the record. In issuing the impugned notice under Section 13 of the Surtax Act, the ITO must be held to have exceeded the jurisdiction conferred upon him by that provision and the impugned notice, therefore, deserves to be and is accordingly quashed.

26. The petition, therefore, succeeds as aforesaid. In the circumstances of the case, parties shall bear their own costs of this petition. The outstanding amount of security deposit shall be refunded to the petitioner.

Gwalior Rayon Silk M... v. H.A Jhawar, Income-T...