Chemical Enterprises (P) Ltd. vs Commissioner Of Income Tax and Anr

Varadarajan, J.—This writ petition filed under Art. 226 of the Constitution of India is for the issue of a writ of certiorari calling for the

records of the case C. No. 124 (133)/76-77/TN. II on the file of the CIT, Tamil Nadu-II, the first respondent and the records of the case No.

47-003-C.T.044/2C/74-75, dated 27-10-1975 on the file of the ITO, Company Circle II(1), Madras, the second respondent and to quash the

orders dated 18-4-1977 of the first respondent and 27-10-75 of the second respondent. For the assessment year 1974-75, the petitioners

Chemical Enterprises Private Limited submitted a return on 27-11-1974 for the accounting year 1973-74 to the second respondent. In respect of

that return, the enquiry was posted for hearing and the assessment was completed on 16-8-1975. In the enquiry, the capital gain was determined

as Rs. 68,531/- for the purpose of capital gains tax. In the pervious year 1972-73, there was a business loss and there was unabsorbed

depreciation for the years 1970-71 to 1973-74. The tax on the capital gains of Rs. 68,531/- was, however, shown as nil due to a mistake and a nil

demand notice was sent to the assessees on 2-9-75. The mistake was subsequently noticed, and u/s 154 of the Income Tax Act, a notice dated

15-10-1975 was issued for rectification of the order of assessment and served on the assessees on 16-10-1975. In that notice, the date of hearing

on the enquiry for rectification of the assessment order was fixed as 27-10-1975. The assessees submitted their explanation by letter dated 21-10-

1975. Neither the assessees nor their representative appeared at the enquiry on 27-10-1975 and an ex parte order rectifying the mistake was

passed and the capital gains tax was computed as Rs. 32,042/- without deducting the unabsorbed depreciation for the years 1970-71 to 1973-74.

There was a mistake in the calculation of the capital gains tax in that order to the disadvantage of the petitioners in so far as the said unabsorbed

depreciation was not taken into account in arriving at the tax, and after deducting the same, the rectification was made nothing the capital gains tax

as Rs. 20,956/- inclusive of interest of Rs. 787/- payable as per s. 139 of the Income Tax Act and a demand for that amount was issued to the

assessees. Though an appeal u/s 246 (f) of the Income Tax Act could have been filed to the AAC against the order passed by the ITO u/s 154 of

the Act rectifying the order as assessment and a further appeal lies to the Income Tax Appellate Tribunal and reference could be made to the High

Court u/s 256 of the Income Tax Act, no appeal was filed against the order. But the assessees had filed a petition u/s 154 of the Income Tax

before the second respondent objecting to the levy of capital gains tax on several grounds, the main ground being that the capital gain, if any, was

due to considerable inflation in the economy of the country and that it could not, therefore, be taken into consideration for the purpose of

assessment of capital gains tax. This application was rejected by the second respondent as incompetent on 27-10-1975. Subsequently, the

assessees filed a revision petition u/s 264 of the Income Tax Act for cancellation of the said order, dated 27-10-1975 of the second respondent.

That petition was rejected by the first respondent. That petition was rejected by the first respondent by order, dated 18-4-77. The writ petition has

been filed to quash the said order dated 27-10-1975 of the second respondent and the order dated 18-4-77 of the first respondent.

The main grounds urged in the affidavit filed in support of the writ petition are :

(1) that a personal hearing in the rectification proceedings taken by the second respondent u/s 154 of the Act was not granted to the assesses ;

(2) that the order passed by the second respondent on 27-10-1975 is a non speaking and illegal order;

(3) that the first respondent has simply accepted the observations of the second respondent in coming to the conclusion that there was any liability

for capital gains tax;

(4) that the assessing authority, the second respondent, had no right to rectify the nil order of assessment and levy the capital gains tax; and

(5) that the first respondent had not given reasons for passing the impugned order dated 18-4-1977.

The writ petition is opposed on the ground that the assessees had a right of appeal u/s 246 of the Income Tax Act to the AAC and then to the

Tribunal u/s 252 of the Act and a right of reference to the High Court u/s 256 of the Act against the order passed by the second respondent u/s

154 of the Act after due notice to the assessee as required by s. 154 (3) of the Act and, therefore, the second respondent rightly rejected the

petition filed by the assessee u/s 154 of the Act not maintainable. The respondents further contend that the first respondent has considered all the

grounds raised by the assessees in the revision petition and urged before him by the assessees counsel Mr. P.R. Narayana Iyer and that no ground

has been made out to interfere with the order of the respondents and this Court cannot go into questions of fact in the petition filed under Art. 226

of the Constitution of India.

S. 147 of the Income Tax Act, 1961 deals with income escaping assessment and lays down that ""if the ITO has reason to believe that, by

reason of the omission or failure on the part of an assessee to make a return u/s 139 for any assessment year to the ITO or to disclose fully and

truly any material facts necessary for his assessment for that year, income chargeable to tax has escaped for that year ... he may, subject to the

provisions of ss. 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the

assessment year concerned (hereafter in s. 148 to 153 referred to as the relevant assessment year)."" S. 154 of the Income Tax Act relates to

rectification of mistake and lays down that ""with a view to rectify any mistake apparent from the record (a) the ITO may amend any order of

assessment or of refund or any other order passed by him .."". Cl. (3) of s. 154 provides for the issue of notice and says ""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 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."" S. 46 (f) of the Income Tax Act provides for an appeal being filed against an order passed u/s 154 or s. 155 having the effect of

enhancing the assessment or reducing refund or an order refusing to allow the claim made by the assessee under either of the said sections. S. 256

of the Income Tax Act provides for a reference being made to the High Court at the instance of the assessee or the Commissioner within the

period mentioned in that section. S. 263 of the Income Tax Act provides for a suo motu revision by the Commissioner of Income Tax of any order

passed in the proceedings under the Act. S. 264 of the Act provides for revision by the Commissioner of other orders and says that ""in the case of

any order other than an order to which s. 263 applies passed by an authority subordinate to him, he may, either of his own motion or on an

application by the assessee for revision, call for the record of any proceeding under this Act in which any such order has been passed and may

make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, he may pass such order thereon, not being an order

prejudicial to the assessee, as he thinks fit.

The case is not one falling u/s 147 of Income Tax Act as no income chargeable to tax has escaped by reason of the omission or failure on the

part of the assessee to make a return u/s 139 for any assessment year. In the present case, in the return submitted by the assessees themselves on

27-11-1974 for the accounting year 1973-74, the assessees have shown the capital gains as Rs. 68,531/-. It is, therefore only a case of the

Income Tax Officer committing a mistake in not levying the assessment on the returned capital gains after making the necessary deduction. The

case, therefore, fell squarely u/s 154 of the Income Tax Act and the second respondent had the jurisdiction to amend the order of assessment after

issuing a notice as required by s. 154 (3) of the Act which in fact has been served on the assessees on 16-10-1975. There is no substance in the

contention of the assessees that a personal hearing in the rectification proceeding was not granted to them, for in the notice admittedly served on

the assessees on 16-10-1975, the date of enquiry had been mentioned as 27-10-1975 and neither the assessees nor their representative appeared

before the second representative appeared before the second respondent on that date though the assessees submitted their explanation to the

proposed amendment by their explanation to the proposed amendment by their letter dated 21-10-1975. Though there was an error even in the

second rectification order dated 28-9-1976 where the capital gains tax payable by the assessees has been mentioned as Rs. 20,956/- after

rectifying the defect, namely, by deducting the unabsorbed depreciation as per order dated 16-8-1975 for the years 1970-71 to 1973-74. It may

be stated here that this rectification order dated 28-9-76 of the second respondent has not been questioned by the petitioner probably because

they have questioned the very order of assessment of the capital gains tax. There is no substance in the objection of the petitioner that the second

respondents order dated 27-10-75 is a non-speaking and an illegal order. As already stated, the second respondent had the right u/s 154 of the

Income Tax Act, after issuing the necessary notice required by cl. (3) of that section which was given to the petitioners, to rectify the mistake that is

apparent from the record, namely, the omission to levy the tax on the disclosed capital gains. The second respondent has, after hearing the

assessees counsel, stated in his order dated 27-10-1975 that there is an error on the face of the order and it is apparent and obvious and that it is

only clerical oversight. He has also stated in that order that there is a definite statement in the order itself that capital gains will be taxed and that

even in their reply to the notice u/s 154, the petitioners have not exercised their option and, therefore, the assessment has to be revised, levying

capital gains tax. Equally, there is no substance in the objection of the petitioners that the assessing authority had no right to rectify the nil order of

the assessment and levy the capital gains tax. As stated earlier, the matter fell within the scope of s. 154 of the Income Tax Act, and it is not a case

falling u/s 147 of the Act and the rectification has been made after of the Act. The second respondent the assessing authority had the right u/s 154

of the Act to rectify the mistake which was apparent on the face of the record.

The only other objection to be noted is that the Commissioner had simply accepted the observations of the Income Tax Officer in holding that

there was any liability for capital gains tax and has not given reasons for passing the impugned order dated 18-4-77. A perusal of the first

respondents order passed u/s 264 of the Income Tax Act, 1961 shows that four objections were raised by Mr. P.R. Narayanan Iyer, the

petitioners learned counsel. They are : (1) that the order dated 27-10-1975 of the second respondent is not one made u/s 154, but it is really an

order u/s 147 and that the second respondent had no jurisdiction to amend the original order of assessment dated 16-8-1975 so as to impose a

liability of Rs. 32,042/- mentioned in the order dated 27-10-1975; (2) that the order dated 27-10-1975 suffers from a lack of judicial or even

quasi-judicial mind and outlook which the law enjoining on the assessing officer as a Tribunal vested with quasi judicial functions; (3) that the

computation of capital gains was erroneous inasmuch as the assessing officer had failed to deduct the cost of various right which the assessee had,

for example, the tenancy rights; and (4) that the apparent capital gain was only due to inflation in the economy and, therefore, no amount could be

taxed. In dealing with the first objection, the first respondent has stated in paragraph 5 of his order that it was clear from the original order of

assessment dated 16-8-1975, which was carefully gone through, that there was a glaring, obvious and self-evident mistake of fact, viz., the failure

to levy tax on the sum of Rs. 68,531/- being the amount of capital gain determined by the assessing officer. Dealing with the contention that the

assessing officer failed to deduct the cost of various for example, the tenancy right which the assessee had, the first respondent has stated in

paragraph 6 of his order that even if it was assumed for the sake of argument that the assessee had sold the unexpired portion of the tenancy right

and the consideration for the sale of that asset was included in the sum of Rs. 1,80,000/- it would be evident that the cost of acquisition could not

be modified because the assessee company had not paid anything for the tenancy right. Therefore, he first respondent rejected the contention that

some deduction should be allowed on account of the sale of the tenancy right. No sale of any other right for the said consideration of Rs.

1,80,000/- appears to have been brought to the notice of the first respondent. Dealing with the contention that the apparent capital gains was only

due to inflation in the economy and, therefore, no amount should have been taxed, the first respondent had sated in paragraph 7 of his order that

though there has been considerable inflation in the economy of the country and the price of real estate and various commodities have risen, he was

unable to see as to how no capital gains should taxed merely because the increase in the price of assets sold by the assessee-company may be due

to inflation. The first respondent has further observed that due to inflation, the taxes also are being collected in terms of the depreciated rupees and

there was absolutely no merit in the said contention, namely, that the apparent capital gain was only due to inflation in the economy and, therefore,

no amount should be taxed. Dealing with the other objections that the second respondent had not exercised a judicial mind in passing the order

dated 27-10-75, the first respondent has stated in paragraph 5 of his order that after giving the opportunity prescribed in the Act, the assessing

Officer has made the order dated 27-10-75, the first respondent has stated in paragraph 5 of his order that after giving the opportunity prescribed

in the Act, the assessing Officer has made the order dated 27-10-75 levying tax at 45% in accordance with the provisions of s. 115 and there was

absolutely no error in what he did and by no stretch of imagination can it be said that he lacked any jurisdiction to pass that order. The mistake was

apparent on the face of the record as the second respondent had erred in not charging the capital gains tax. There is no dispute regarding the rate.

Therefore, there is no substance in the petitioners objection that there was any lack of exercise of a judicial or even a quasi-judicial mind in passing

the impugned order dated 27-10-75 by the second respondent. In the revision before the first respondent under s. 264 of the Act, the first has

considered the various objections urged by the petitioners counsel and has given elaborate reasons for reaching the conclusion that no interference

with the order of the second respondent is called for. Therefore, the objection that the Commissioner has simply accepted the observations of the

second respondent in holding that there was any liability for capital gains tax is, say the least, uncharitable to the first respondent.

For the reasons stated above, I am of the opinion that no interference with the orders of the respondents is called for. The writ petition

accordingly fails and is dismissed with costs.