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Commissioner Of Income-Tax v. Ram Lal Babu Lal

Punjab & Haryana High Court

Feb 6, 1998

Judgment

Subsequent
References

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Structured Summary of the Opinion (G.C. Garg, J.)

Factual and Procedural Background

Based exclusively on the provided opinion.

The assessee was a registered firm whose dispute concerned the assessment year 1975-76. For that year the assessee claimed a deduction of Rs. 12,692 for "Rasoi" (kitchen/food) expenses. The Income-Tax Officer (ITO), while making the assessment under section 143(3) of the Income-Tax Act, initially disallowed Rs. 1,000 and thus allowed Rs. 11,692 of the Rasoi expenses.

Subsequently the ITO became aware of the decision in CIT v. Gheru Lal Bal Chand, [1978] 111 ITR 134 (P&H), in which this court held that Rasoi expenses are "in the nature of entertainment expenditure" and are not admissible as a deduction. Relying on that decision, the ITO issued a notice under section 154 of the Income-Tax Act and passed an order of rectification disallowing Rs. 11,692 (after adjusting the earlier disallowance) and thereby reducing the deduction.

The assessee objected to the rectification, referring to contrary decisions of other High Courts (notably the Bombay and Gujarat High Courts). The ITO's rectification was affirmed by the Commissioner of Income-Tax (Appeals). The assessee then appealed to the Income-Tax Appellate Tribunal (ITAT), which allowed the appeal and set aside the rectification on the ground that divergent High Court authorities meant the issue was debatable and therefore not a "mistake apparent on the face of the record" within section 154.

The Revenue (through the Commissioner of Income-Tax) referred the following question to this court under section 256(1): whether the Tribunal was right in law in holding that allowing the deduction (contrary to the Punjab & Haryana High Court decision) was not a mistake apparent on record and that the ITO was not justified in proceeding under section 154 to disallow the deduction.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the allowance of the deduction in respect of Rasoi expenses — which this court had held not admissible in CIT v. Gheru Lal Bal Chand, [1978] 111 ITR 134 — was not a mistake apparent from the record within the meaning of section 154 of the Income-Tax Act, and consequently whether the Income-Tax Officer was not justified in proceeding under section 154 to disallow that deduction.

Arguments of the Parties

Assessee's Arguments

The assessee relied on decisions of other High Courts (specifically the Bombay High Court in CIT v. Shah Nanji Nagsi, [1979] 116 ITR 292 and the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd., [1977] 106 ITR 424) which had taken a different view and treated such Rasoi expenses as not being entertainment expenses.
On that basis the assessee argued that different High Courts had taken different views and therefore the point was debatable; consequently a rectification under section 154 (which requires a "mistake apparent on the face of the record") was not permissible.

Revenue's / Assessing Authority's Position

The Income-Tax Officer relied on the opinion of this court in CIT v. Gheru Lal Bal Chand, [1978] 111 ITR 134 (P&H), which held that Rasoi expenses are in the nature of entertainment expenditure and are not admissible as a deduction.
Relying on that binding opinion within the territorial jurisdiction of the Punjab & Haryana High Court, the ITO issued a notice under section 154 and corrected the assessment by disallowing the Rasoi expenses he had earlier allowed.
The Revenue's position, as adopted by this court on reference, was that a definite opinion of this court which was ignored by the assessing authority amounts to a mistake apparent on the face of the record and that rectification under section 154 was therefore proper.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court in This Opinion
CIT v. Gheru Lal Bal Chand, [1978] 111 ITR 134 (P&H)	Held that Rasoi (kitchen/food) expenses, while not falling within the strict dictionary meaning of "entertainment expenditure", are nonetheless "in the nature of entertainment expenditure" and are not admissible as a deduction.	The court treated this decision as a definite opinion of the High Court that is binding on authorities functioning within its territorial jurisdiction; the ITO relied on it to issue a rectification under section 154 and this court upheld that rectification as lawful.
CIT v. Shah Nanji Nagsi, [1979] 116 ITR 292 (Bombay)	Represented a contrary High Court view (as relied on by the assessee) that Rasoi expenses did not represent entertainment expenditure.	The ITAT cited such contrary decisions to say the issue was debatable; this court noted the existence of that contrary view but held that it does not override a binding opinion of the Punjab & Haryana High Court for authorities within its jurisdiction.
CIT v. Patel Brothers & Co. Ltd., [1977] 106 ITR 424 (Gujarat)	Another contrary High Court view relied on by the assessee supporting allowability of such expenses.	Similar to the Shah Nanji case: the court acknowledged the divergent view but held that such decisions cannot be used to defeat a binding opinion of this court for its territorial jurisdiction when considering whether a mistake is apparent on the face of the record.
CIT v. East India Cold Storage (P.) Ltd., [1996] 218 ITR 668 (Cal)	Illustrated that where a settled judicial view (as to legal entitlement) exists and was not taken into account in the original assessment, rectification under section 154 can be valid; contrasted with situations where the issue is debatable.	The court relied on this case as an example where the High Court disagreed with the Tribunal's view that the mistake was not apparent; the High Court held the ITO was right to rectify and answered the question in favour of the Revenue.
Commissioner Of Income-Tax v. Vardhman Spinning, [1997] 226 ITR 296 (P&H)	Stated the general test for section 154: a mistake apparent from the record is one which requires no elaborate inquiry; if two opinions are possible the error is not apparent on the face of the record.	The opinion was used to restate the applicable standard for rectification: where there is a settled view of the court and that view was not acted upon in the original assessment, rectification is permissible; but if the point is genuinely debatable with two reasonable opinions, section 154 is not available.

Court's Reasoning and Analysis

The court's analysis proceeds from the legal standard governing rectification under section 154 and from the status of earlier judicial pronouncements within the territorial jurisdiction of the court.

Identification of the applicable legal standard: The court reiterated that section 154 empowers income-tax authorities to rectify mistakes which are apparent from the record — mistakes that are plain and require no elaborate inquiry. Where two reasonable views are possible and the question is debatable, an alleged error will not qualify as a "mistake apparent on the face of the record". (This principle is explained with reference to Vardhman Spinning and the discussion in the cited authority East India Cold Storage.)
Application to the facts: The court observed that this court, in CIT v. Gheru Lal Bal Chand, had recorded a definite opinion that Rasoi expenses are not deductible. That opinion, being the view of the Punjab & Haryana High Court, is binding on authorities functioning within its territorial jurisdiction.
Evaluation of the ITAT's approach: The ITAT allowed the assessee's appeal and set aside the rectification because other High Courts (Bombay and Gujarat) had taken a contrary view and therefore the point was, in the Tribunal's view, debatable. The Tribunal treated the presence of divergent High Court opinions as making rectification under section 154 impermissible.
Rejection of the ITAT's conclusion: The court held that the Tribunal's approach was incorrect as a matter of law. Where a definite opinion of the territorial High Court exists and that opinion was ignored by the assessing authority in the original assessment, the omission constitutes a mistake apparent on the face of the record. Authorities cannot defeat a binding opinion of this court by pointing to contrary decisions of other High Courts and thereby claim the issue is debatable for the purpose of section 154.
Support from precedent: The court relied on the principles exemplified in East India Cold Storage and Vardhman Spinning to confirm that rectification is appropriate where a settled judicial view applicable to the assessing authority's jurisdiction was not followed in the original assessment. When a settled view of the relevant High Court exists, the assessing authority must follow it; failure to do so is a rectifiable error.
Conclusion of reasoning: Given that this court had earlier taken a definite view that Rasoi expenses are not deductible, the ITO's original allowance of those expenses was a mistake apparent on the face of the record and the ITO was therefore justified in issuing a notice under section 154 and passing the rectification order.

Holding and Implications

Holding: The question referred is answered in the negative; the court held in favour of the Revenue and against the assessee. The court concluded that the Income-Tax Officer was right in issuing a notice under section 154 and in passing the rectification order disallowing the Rasoi expenses which had earlier been allowed.

Implications:

Direct effect on the parties: The rectification passed by the Income-Tax Officer stands; the assessee's appeal to set aside that rectification was incorrectly allowed by the Tribunal and is disapproved by this court. The decision operates in favour of the Revenue and against the assessee in this matter.
On authority and precedent: The court emphasized that a definitive opinion of the territorial High Court is binding on authorities within that jurisdiction; divergent views from other High Courts do not render such a point debatable for the purpose of section 154 when the local High Court has already expressed a clear ruling. The opinion therefore reinforces the proposition that ignoring a settled view of the territorial High Court in the original assessment can amount to a mistake apparent on the face of the record.
Broader precedential effect: The opinion applies the existing legal standard for rectification under section 154 to the facts before the court. The text does not state that the court intended to set a new principle beyond applying binding precedent; it resolves the referral in favour of the Revenue. The court also recorded "No costs."

Show all summary ...

G.C Garg, J.:— The Income-Tax Appellate Tribunal, Amritsar, has referred for the opinion of this court the following question of law:

“Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the allowance of the deduction in respect of Rasoi expenses which are not admissible for deduction in view of the decision of the Punjab and Haryana High Court in CIT v. Gheru Lal Bal Chand, [1978] 111 ITR 134, was not a mistake apparent from record within the Act and that the Income-Tax Officer is not justified in proceeding under section 154 to disallow the deduction made in respect of these expenses?”

2. The assessee is a registered firm. The dispute relates to the assessment year 1975-76. During the relevant year the assessee claimed deduction of Rs. 12,692 on the ground that it had incurred Rasoi expenses during the accounting year. The Income-Tax Officer disallowed a sum of Rs. 1,000 from the same while making an assessment under section 143(3) of the Income-Tax Act. However, subsequently, the Income-Tax Officer realised that an error had occurred in allowing the assessee Rasoi expenses amounting to Rs. 11,692. The Income-Tax Officer came to this conclusion in view of the decision of this court in the case of CIT v. Gheru Lal Bal Chand, [1978] 111 ITR 134. According to the decision in Gheru Lal Bal Chand's case, [1978] 111 ITR 134, the amount incurred on Rasoi expenses, being entertainment expenses, is not saved on the ground that the expenditure was undertaken to extend customary hospitality. The Income-Tax Officer consequently issued a notice under section 154 of the Act calling upon the assessee to show cause as to why the error apparent on the face of the record in the assessment order be not corrected in respect of the Rasoi expenses. The assessee filed a reply objecting to the rectification in respect of the Rasoi expenses. It was submitted that the expenses incurred on supplying food and refreshments by businessmen to constituents had been the subject-matter of a decision by various High Courts. The decisions of the Bombay High Court and the Gujarat High Court, in CIT v. Shah Nanji Nagsi, [1979] 116 ITR 292 and CIT v. Patel Brothers and Co. Ltd., [1977] 106 ITR 424, respectively, were referred to. According to the assessee different High Courts had taken different views and the Rasoi expenses did not represent entertainment expenses. The Income-Tax Officer rectified the order of assessment by disallowing a sum of Rs. 11,692 representing the expenditure on Rasoi expenses after adjusting the expenditure earlier disallowed. The assessee filed an appeal before the Commissioner of Income-Tax (Appeals). The appeal was dismissed. The assessee filed a further appeal before the Income-Tax Appellate Tribunal. It came to the conclusion that the issue regarding allowability or otherwise of expenditure incurred over the supply of food and refreshments by a businessman to his constituents is no longer an open issue as far as the State of Punjab is concerned and all authorities subject to the jurisdiction of the Punjab and Haryana High Court are bound by the rule of law enunciated in Gheru Lal Bal Chand's case, [1978] 111 ITR 134 (P&H). The Tribunal, however, went on to state that there is a controversy about the issue and it cannot shut its eyes to the decisions of the other High Courts, for the matter of deciding whether a rectification within the purview of section 154 of the Income-Tax Act is permissible or not. The matter would have been entirely different about the allowability or otherwise of such an expenditure, if it was in an appeal filed against the assessment order, but in the matter of rectification the matter is otherwise. The matter was not free from controversy in view of the judgments of the Bombay High Court and the Gujarat High Court. It thus ultimately came to the conclusion that the provisions of section 154 were not applicable for the purposes of causing rectification when there were different views available on the subject. The Tribunal, therefore, agreed with the submission of the asses-see that when there were different views on the issue, the Income-Tax Officer was not right in proceeding under section 154 to rectify the assessment by withdrawing the allowance previously allowed by him. The findings recorded by the Commissioner of Income-Tax (Appeals), were set aside and the order of rectification was cancelled by allowing the appeal.

3. On the application under section 256(1) of the Commissioner of Income-Tax, the question as reproduced above has been referred to this court for opinion.

4. In the case of CIT v. Gheru Lal Bal Chand, [1978] 111 ITR 134 (P&H), the assessee was a commission agent dealing in foodgrains and other commodities. The assessee claimed allowance on account of expenditure incurred for maintaining a kitchen at his place of business for serving meals to its constituents. This claim was allowed by the Tribunal. On a reference at the instance of the Revenue, this court came to the conclusion that according to the strict dictionary meaning the kitchen expenses incurred by the assessee do not fall within the meaning of the words “entertainment expenditure” but the expenses incurred are certainly “in the nature of entertainment expenditure”. The view of this court is thus clear that Rasoi expenses are not admissible for claiming deduction. The opinion of this court, as also noticed by the Appellate Tribunal is binding on the authorities under the Income-Tax Act functioning within the jurisdiction of the High Court. True that the Bombay High Court and the Gujarat High Court had taken a different view, but that will not make any difference so far as the authorities functioning within the territorial jurisdiction of the Punjab and Haryana High Court are concerned. In the event of an opinion of this court on a point being not available it is open to the authorities to take support from or place reliance on the decisions of other High Courts, but in the presence of a decision of the Supreme Court or of the reference court, the authorities are bound by that opinion.

5. The opinion of this court having come to the notice of the Income-Tax Officer, he issued a notice under section 154 of the Income-Tax Act for rectification of the order of assessment originally passed and relying on the decision of this court in Gheru Lal Bal Chand's case, [1978] 111 ITR 134, passed an order of rectification.

6. The question thus arises whether in the facts of this case there was a mistake apparent from the record or not.

7. In CIT v. East India Cold Storage (P.) Ltd., [1996] 218 ITR 668 (Cal), a question arose whether the Tribunal was right in law in setting aside the Income-Tax Officer's order under section 154 of the Income-Tax Act, 1961, for the assessment year 1979-80. In that case, the Income-Tax Officer completed the original assessment and while doing so he allowed investment allowance under section 32A of the Act on the machinery and plant of cold storage and also allowed deduction in respect of profits and gains from the cold storage under section 80HH. A little later the Income-Tax Officer was of the opinion that such allowance and deduction were wrongly allowed to the assessee and it was a mistake apparent from the record. He thus after issuing notice under section 154 withdrew the allowance and the deduction. The Tribunal in second appeal held that the mistake was not apparent from the record as the dispute involved was debatable. It was in this context held that in view of the decision of the Supreme Court, a cold storage cannot come within the meaning of “industrial undertaking”. The High Court, thus, came to the conclusion that the opinion of the Income-Tax Officer was right in rectifying the assessment and holding that the cold storage is not an industrial undertaking and, as such, is not entitled to the benefit of either section 32A or section 80HH. The question was answered in the negative and in favour of the Revenue.

8. In Commissioner Of Income-Tax v. Vardhman Spinning., [1997] 226 ITR 296 (P&H), a question arose whether the Tribunal was right in law in holding that there was no mistake apparent from the record, which could be rectified by the Income-Tax Officer under section 154 of the Income-Tax Act, 1961. It was held that power has been conferred under section 154 of the Act on every Income-Tax authority to rectify mistakes which are apparent from the record. The mistake has to be such for which no elaborate reasons or inquiry is necessary and where two opinions are possible, then, it cannot be said to be an error apparent on the face of the record. In that case the assessee claimed deduction under section 84, now section 80J, for the assessment year 1967-68. The deduction was not allowed. The assessee moved an application under section 154 by giving details. The Income-Tax Officer passed an order under section 154, whereby he deducted the average of the secured loans. The assessee filed an appeal, which was partly allowed. The Revenue accepted the order passed by the Appellate Assistant Commissioner, but the assessee preferred an appeal before the Income-Tax Appellate Tribunal, which was dismissed. It was thereafter that the assessee moved an application under section 254(2) of the Income-Tax Act for rectification of the order of the Tribunal. The Tribunal accepted the miscellaneous application of the assessee, relying upon a decision of the Calcutta High Court and held that the question whether the amount of secured loans obtained by the assessee from the Punjab Financial Corporation was deductible or not while computing the capital employed as per the provisions of rule 19 of the Income-Tax Rules, was a debatable issue and, therefore, the provisions of section 154 of the Act were not applicable to the facts of the case. The Income-Tax Officer thus had no jurisdiction to act under section 154 of the Act, there being no mistake apparent from the record. A reading of the above judgment clearly gives an indication that if there is a settled view of the court on a point and which view had not been taken note of by the Income-Tax Officer while framing the original assessment, it is open to the Income-Tax Officer to pass a rectification order under section 154 of the Act, there being a mistake apparent on the face of the record.

9. In the present case this court in the case of Gheru Lal Bal Chand, [1978] 111 ITR 134, recorded a definite opinion that Rasoi expenses are not admissible for deduction. The Income-Tax Officer relying on this decision issued a notice to the assessee under section 154 of the Act for rectification and ultimately relying thereon passed an order of rectification. The Tribunal took a contrary view after observing that the opinion expressed by the Punjab and Haryana High Court is binding on the authorities functioning under the jurisdiction of this court, but in this case there being divergent opinions of different courts, two views were possible and thus it cannot be said that there was a mistake apparent on the face of the record. The Tribunal in other words was of the opinion that in view of the decisions of the Bombay High Court and the Gujarat High Court on the point, taking a view contrary to the one taken by this High Court on the point and thus there being a conflict of opinion amongst the High Courts, it was not a fit case for issuing a notice under section 154 as it was not a case of a mistake apparent on the face of the record. On a consideration of the matter we are of the opinion that the Tribunal was not right in law in coming to the above conclusion. It is true that the Bombay High Court and the Gujarat High Court have taken a view contrary to the one taken by the Punjab and Haryana High Court, but in the presence of a definite opinion of this court, the same shall prevail and is binding on the functionaries working within the territorial jurisdiction of this court. The authorities by reference to the opinion of another High Court cannot say that the point is debatable and thus is not a mistake apparent on the face of the record. The view of this court as already noticed by the Tribunal was definite and the question of a doubt being there did not arise if the assessment order had been passed in the first instance. The assessing authority could not have taken a view contrary to the one taken in the case of Gheru Lal Bal Chand, [1978] 111 ITR 134 (P & H), by reference to the decisions of the other High Courts. In view of the fact that the opinion rendered by this court is binding on the functionaries working within the territorial jurisdiction of this court, and once that is so the order passed by the assessing authority by ignoring the opinion of this court is a mistake apparent on the face of the record and thus the Income-Tax Officer in our opinion was right in issuing a notice and passing an order of rectification. The Tribunal was not right in coming to the conclusion that the mistake in this case was not apparent on the face of the record in view of the conflicting views of the other High Courts.

10. In view of the above the question referred for the opinion of this court is answered in the negative, i.e, in favour of the Revenue and against the assessee. No costs.