- Bookmark
- Share
- CaseIQ
Commissioner Of Income Tax, Jabalpur v. Durga Engineering & Foundry Works .
Factual and Procedural Background
The case concerns the assessment years 1987-88 and 1988-89. The Income-tax Officer added Rs 5,00,851 and Rs 85,700 to the income of the assessee-partnership firm as unexplained cash credits standing in the names of its partners. These additions were upheld by the Commissioner (Appeals). On 7-11-1994, the Income-tax Appellate Tribunal (“ITAT”) allowed the assessee’s appeal and remanded the matter to the Assessing Officer for a fresh decision after giving the assessee an opportunity to substantiate the documents earlier filed.
The assessee then filed an application under Section 254(2) of the Income-tax Act, 1961, contending that one of its points—credit should be assessed in the hands of the partners—had not been decided. By order dated 4-1-1995, the ITAT rectified its earlier order and directed deletion of the additions from the firm’s hands, leaving it open to the Department to investigate the matter in the partners’ hands.
The Revenue sought a reference of two questions arising out of this rectification order. The ITAT refused, treating them as questions of fact. The Revenue’s application to the High Court under Section 256(2) was dismissed, the High Court following its earlier decision in Popular Engineering Co. v. CIT (1983) 140 ITR 398 (MP) which held that no reference lay against an order on a Section 254(2) rectification application. The Revenue appealed to the Supreme Court.
Legal Issues Presented
- Whether, under Section 256 of the Income-tax Act, 1961, a question of law can be referred to the High Court arising out of an order passed by the ITAT in rectification proceedings under Section 254(2).
- Consequently, whether the ITAT was bound to refer the following Revenue-proposed questions for opinion of the High Court:
- Whether Section 68 was applicable to the facts of the present case.
- Whether the ITAT was justified in deleting the additions of Rs 5,00,851 and Rs 85,700 made under Section 68 as unexplained cash credits.
Arguments of the Parties
Revenue’s Arguments
- The rectification order deleted substantial additions; questions of law under Section 68 clearly arose and should be referred.
- The ITAT erred in treating the proposed questions as purely factual.
- The High Court wrongly relied on Popular Engineering Co., as Section 256 permits references from any order under Section 254, including one under sub-section (2).
Assessee’s Arguments
- After the ITAT’s rectification order, identical amounts were assessed in the partners’ hands; hence nothing survived for decision so far as the firm was concerned.
- The High Court could examine this aspect if it nevertheless decided to call for a reference.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Popular Engineering Co. v. Commissioner of Income-tax, (1983) 140 ITR 398 (MP) | Held that a reference under Section 256 does not lie against an order dismissing a rectification application under Section 254(2). | The Supreme Court held that this view was erroneous; Section 256 covers questions of law arising from any order under Section 254, including rectification orders. |
Court's Reasoning and Analysis
1. Section 256 allows either party to seek a reference of “any question of law arising out of an order passed under Section 254.” The statutory language does not confine such orders to those passed on appeal but extends to orders passed on rectification applications.
2. Section 254(1) empowers the ITAT to pass orders on the appeal “and such applications as are made in the appeal,” after hearing both parties. Section 254(2) authorises rectification of any mistake apparent from the record within four years. Such rectification can materially affect the assessee’s tax liability.
3. It is “unthinkable,” the Court observed, that an assessee (or the Revenue) should lack a High Court remedy if a rectification order erroneously alters the tax liability.
4. Reading Sections 254 and 256 harmoniously, the Court concluded that references are maintainable from orders under both sub-sections (1) and (2) of Section 254.
5. The earlier Madhya Pradesh High Court ruling in Popular Engineering Co., which confined Section 256 references to appellate orders alone, was deemed incorrect and therefore the High Court’s reliance on it in the present case was misplaced.
6. Because the ITAT’s rectification order deleted sizeable additions, the questions proposed by the Revenue unmistakably involved questions of law. The High Court should therefore have required the ITAT to state the case and refer the questions.
7. The Court noted the assessee’s submission that assessments had since been made in the partners’ hands; however, it held that the High Court could consider that aspect when it heard the reference.
Holding and Implications
Holding: The civil appeal is allowed; the High Court’s order dismissing the Section 256(2) application is set aside. The ITAT is directed to frame a statement of case and refer the two specified questions of law to the High Court.
Implications: The decision clarifies that orders passed in rectification proceedings under Section 254(2) are amenable to reference under Section 256. This ensures both taxpayers and the Revenue retain a legal remedy when rectification orders raise substantial questions of law, broadening the scope of judicial scrutiny and overruling contrary High Court authority.
Order
1. The assessment years in question are 1987-88 and 1988-89. For these assessment years, the Income Tax Officer made additions to the income of the assessee, which is a partnership firm, of sums which, in his view, represented the unexplained cash credits in the name of partners of the firm. The assessments were upheld by the Commissioner in appeal. The Income Tax Appellate Tribunal, on 7-11-1994, allowed the assessee's appeal and, setting aside the assessment orders, restored the matters to the file of the Assessing Officer, directing him to pass a fresh order after allowing the assessee the opportunity to support the documents that it had earlier filed before him. Neither party sought to file any reference application thereagainst but the assessee filed an application before the Tribunal under Section 254(2) of the Income Tax Act, 1961 seeking to rectify it on the basis that a contention that it had raised had not been decided. On 4-1-1995 the Tribunal allowed the rectification application. It noted that the assessee's objection was that the assessment on account of the credits should be made in the hands of the partners of the assessee as they had made payments by cheque. The Tribunal observed that this issue had not been decided by it and that there was sufficient force in it. Accordingly, it rectified
“the error by disposing of the preliminary issues raised by the assessee. We accordingly amend our order and direct that the additions made by the Assessing Officer amounting to Rs 5,00,851 and Rs 85,700 be deleted from their income for Assessment Years 1987-88 and 1988-89. As observed, the Department may investigate the matter in the hands of the partners”.
2. The Revenue filed an application before the Tribunal seeking reference of two questions that arose out of the order on the rectification application. The questions read thus:
“1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of Section 68 of the Income Tax Act, 1961 are not applicable to the facts of the present case?
2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the additions of Rs 5,00,851 and Rs 85,700 made by the Assessing Officer under Section 68 of the Income Tax Act, 1961, representing the unexplained cash credits in the accounts of the partners?”
3. The Tribunal declined to make the reference on the basis that these were questions of fact. The Revenue then made an application to the High Court under Section 256(2) of the Income Tax Act and, by the order under challenge, the same was dismissed. The order under challenge followed an earlier decision of the High Court, in the case of Popular Engg. Co. v. CIT (1983) 140 ITR 398 (MP) in which it had been held that a reference against an order of rectification under Section 254(2) was not maintainable.
4. In the earlier judgment, the High Court said:
“The language used in Section 256(1) shows that the order contemplated under Section 256(1) is the order passed under Section 254 of the Act. Under Section 254(1) the Appellate Tribunal passes an order on the appeal filed by the assessee or the Revenue. This order may be amended under Section 254(2) of the Act with a view to rectifying any mistake apparent from the record. If, however, the application for rectification is dismissed, there is no amendment of the order passed under Section 254(1) of the Act. Since no reference in the instant case was sought in respect of the appellate order passed under Section 254(1), we are of the view that no reference from the order rejecting an application for rectification of any mistake is tenable under Section 256(1) of the Act. The position obviously would have been different had the Appellate Tribunal amended its appellate order with a view to rectifying any mistake from the record. In that case the amended order could be a subject-matter of reference under Section 256(1) of the Act. But if the order is not amended and the application for rectification is dismissed, the only order which stands is the order passed in appeal under Section 254(1) of the Act and if no reference has been sought in respect of such order, the same becomes final in view of the language used in Section 254(4) of the Act.”
5. Section 256 reads thus:
“256. (1) The assessee or the Commissioner may, within sixty days of the date upon which he is served with notice of an order passed before the 1st day of October, 1998, under Section 254, by application in the prescribed form, accompanied where the application is made by the assessee by a fee of two hundred rupees, require the Appellate Tribunal to refer to the High Court any question of law arising out of such order and, subject to the other provisions contained in this section, the Appellate Tribunal shall, within one hundred and twenty days of the receipt of such application, draw up a statement of the case and refer it to the High Court:
Provided that the Appellate Tribunal may, if it is satisfied that the applicant was prevented by sufficient cause from presenting the application within the period hereinbefore specified, allow it to be presented within a further period not exceeding thirty days.
(2) If, on an application made under sub-section (1), the Appellate Tribunal refuses to state the case on the ground that no question of law arises, the assessee or the Commissioner, as the case may be, may, within six months from the date on which he is served with notice of such refusal, apply to the High Court, and the High Court may, if it is not satisfied with the correctness of the decision of the Appellate Tribunal, require the Appellate Tribunal to state the case and to refer it, and on receipt of any such requisition, the Appellate Tribunal shall state the case and refer it accordingly.
(3) Where in the exercise of its powers under sub-section (2), the Appellate Tribunal refuses to state a case which it has been required by the assessee to state, the assessee may, within thirty days from the date on which he receives notice of such refusal, withdraw his application, and, if he does so, the fee paid shall be refunded.”
6. Section 254, so far as it is relevant, reads thus:
“254. (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.
(2) The Appellate Tribunal may, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the Assessing Officer:
Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this sub-section unless the Appellate Tribunal has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard:
Provided further that any application filed by the assessee in this sub-section on or after the 1st day of October, 1998, shall be accompanied by a fee of fifty rupees.”
7. Section 256 empowers the assessee and the Revenue to “require the Appellate Tribunal to refer to the High Court any question of law arising out of” an order passed under Section 254. Section 254(1) states that the Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. It would appear that the High Court read Section 254(1) as referring only to orders passed by the Tribunal on an appeal. We do not think that that would be a correct way of reading Section 254(1). Section 254(1) empowers the Tribunal to pass orders not only on an appeal before it but also upon such applications as are made in the appeal and it specifies that, before doing so, it shall hear both parties to the appeal. Section 254(2) permits the Tribunal to rectify any mistake apparent from the record and amend any order passed by it under sub-section (1) within four years from the date of that order. The proviso requires it to give notice to the assessee before enhancing an assessment and allow him a reasonable opportunity of being heard. It will be seen, therefore, that the consequence of an order passed in rectification under Section 254(2) could have serious financial implications for the assessee and it is unthinkable that the assessee should be left without a remedy, by way of a reference to the High Court, if his assessment is erroneously increased in rectification proceedings.
8. It is also to be noted that Section 256 contemplates the reference of a question of law arising out of an order passed “under Section 254”; that is to say, an order both under Section 254(1) and Section 254(2).
9. In our view, therefore, under the provisions of Section 256, a reference may be made to the High Court of a question of law that arises upon any order of the Tribunal. The view taken by the High Court in the earlier judgment in Popular Engg. Co. (1983) 140 ITR 398 (MP) and followed by it in the order under challenge is erroneous.
10. There is no doubt in our mind, particularly having regard to the fact that the deletions of the additions that had been made by the Assessing Officer were made in rectification proceedings, that the questions that were sought to be referred were questions of law and that the High Court ought to have called upon the Tribunal to refer the same to it for its consideration.
11. Learned counsel for the assessee submitted that pursuant to the order of the Tribunal in the rectification proceedings, the amounts of the additions had been assessed in the hands of the partners of the assessee and that, therefore, nothing survived for consideration insofar as the assessee was concerned. It is unclear whether the assessments in the hands of the partners were on a protective basis or otherwise. In any event, this is something that the High Court can go into in greater detail when it nears the reference.
12. The civil appeal is allowed. The order under appeal is set aside. The Tribunal shall refer to the High Court for its consideration the questions set out above, having framed a statement of case.
13. No order as to costs.
Alert