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Judgment
P.K. Mishra, J.—The instant proceedings show how a mistake which is committed either intentionally or unintentionally, can cause injury to
public interest and attempts to rectify the mistake can result in protracted litigations and end in a blind. The questions received on reference from
the Tribunal, Madras Bench ''A'' are:
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the income tax Officer was not
correct in applying the provisions of section 154 to disallow a sum of Rs. 1,42,659 u/s 37(3) of the income tax Act, 1961, and in withdrawing the
relief of Rs. 4,60,505 also allowed u/s 80-I of the income tax Act, 1961?
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the income tax Officer was not
correct in assessing a sum of Rs. 1,09,950 as profits u/s 41(1) in the proceedings made u/s 154?
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the income tax Officer was not
justified in modifying the disallowance u/s 40(c) (iii) of the income tax Act, 1961, in the rectification proceedings made u/s 154 of the income tax
Act, 1961?
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the income tax Officer was not
justified in modifying the disallowance u/s 40(a) (v) of the income tax Act, 1961, in the rectification proceedings made u/s 154 of the income tax
Act, 1961?
The assessee is a company. It submitted its income tax returns for the years 1968-69 and 1969-70, which were, after enquiry, accepted by the
ITO and it was accordingly assessed and subjected to tax. It is not clear when and how, because all the relevant materials are not on record, but it
is accepted by all concerned, that a revision of the assessment was undertaken and in the course of the proceedings for revision, the assessment
orders for the years 1968-69 and 1969-70 were recast. It seems, for reasons which are not fully disclosed in the materials which are placed
before us, the ITO decided to reopen the proceedings u/s 147(b) of the income tax Act, 1961 (''the Act''), and issued notice u/s 148 of the Act
and substantially changed the assessments resulting in a demand for tax on the basis of the finding that substantial income had escaped assessment.
The assessee appealed against the said order and while its appeal was pending, the ITO decided to write to the appellate authority to take
recourse to the proceedings for rectification of mistake u/s 154 of the Act, when it was not satisfied about the reopening u/s 147(b) and
notwithstanding the pendency of the appeal and later when he (ITO) had written to the appellate authority, he himself took up proceedings
allegedly for rectification of mistake apparent from the record u/s 154. The ITO, accordingly, issued notices to the assessee stating, inter alia, with
respect to the assessment for the year 1968-69 and the revision thereof as follows:
Excessive depreciation is found to be allowed on certain items of plant and machinery;
Depreciation on certain items is found to be allowed in short;
Certain mistakes in the computation of disallowances u/s 40(c) (iii) are noticed;
E.S.A. is found to be allowed on N.E.S.A. items;
Mistake in the computation of interest levied u/s 139(8) resulting in short demand;
Excessive tax relief on superannuation fund has been allowed on Rs. 8,964 as against the correct amount of deduction of Rs. 5,849 allowable;
Original deduction u/s 80-I has been erroneously granted since the mixture of fertilizers is not contemplated under item 13 of the Sixth Schedule
to the income tax Act, 1961;
Mistake in the computation of profit u/s 41(1) in the revision order dated April 29, 1974, has been noticed. In the revision order dated April 29,
1974, a sum of Rs. 16,57,626 has been taken as the profit u/s 41(1) as against the correct figure of Rs. 18,08,517; and
Allowance wrongly made in respect of the expenditure incurred on the maintenance of guest portion of accommodation.
Besides the above mistakes, the assessment also requires revision for withdrawal of development rebate in respect of the following items which
were added in the accounting years 1966-67 and 1972-73 but were sold within a period of eight years:
This will also be withdrawn in this revision order.
Invoking thus the power u/s 154, the ITO revised the assessment for 1968-69 for reasons as stated by him in the orders adjusting specifically
to,-
(1) wrong allowance of expenditure incurred by the assessee on the maintenance of accommodation in the nature of guest house u/s 37(3) of the
Act;
(2) deduction wrongly allowed u/s 80-I of the Act; and
(3) profit assessable u/s 41(1) of the Act.
The ITO gave notice to the assessee for the rectification of the alleged mistakes in the assessment for the year 1969-70 and the revision thereof,
namely.-
(1) Excessive depreciation allowed on certain items of plant and machinery, etc.;
(2) Short depreciation of certain items allowed;
(3) Mistakes in the computation of disallowance u/s 40(c) (iii);
(4) Excessive tax relief on superannuation fund;
(5) Allowance wrongly made in respect of the expenditure incurred on the maintenance of guest portion of accommodation; and
(6) Withdrawal of development rebate in respect of plant and machinery which were sold within a period of eight years.
He accordingly allegedly rectified the assessment by adjusting specifically to the withdrawal of development rebate, guest house expenditure,
etc. On appeal, the Commissioner (Appeals) sustained the order of the ITO passed u/s 154, holding,
(1) Disallowance u/s 37(3) was proper; and
(2) Relief u/s 80-I to be withdrawn was only Rs. 54,608 and not Rs. 4,60,505.
With regard to the disallowance u/s 40(c) (iii), the Commissioner (Appeals) held that the ITO was not competent to pass an order u/s 154.
According to him, the ITO was competent to correct the mistakes which were manifest and perceivable and in the guise of remedying an error, it
was not open to the ITO to reframe the order and conclude that what was held to be 100 percent for the benefit of the employees was only 60
percent and the remaining 40 percent as guest house. As regards profits assessed u/s 41(1), the Commissioner (Appeals) held that no allowance
was made on Rs. 18,08,817 and, therefore, the ITO was not correct in invoking the provisions of section 41(1). He found that against the sum of
Rs. 1,50,891 only a sum of Rs. 1,08,550 stood assessed. He directed the ITO accordingly to retain the sum of Rs. 42,341 and delete the
disallowance of Rs. 1,08,550. Thus, the assessee''s appeal to the Commissioner (Appeals) was allowed in part.
Both the assessee and the Department went to appeal to the Tribunal for the assessment year 1968-69, while the Department (Revenue) alone
filed an appeal for the year 1969-70. The Tribunal held,
(1) The ITO was not justified in invoking the provisions of section 154 in respect of the disallowance made u/s 37(3);
(2) The ITO was not justified in withdrawing the relief u/s 80-I and also in adjusting the disallowance u/s 40(c) (iii);
(3) Since the assessee was not allowed deduction u/s 41(1) in the previous years, there was no scope for making any addition u/s 41(1); and
The disallowance u/s 37(3) was not proper.
The Tribunal, however, also observed and it has so stated in the statement of the case as follows:
According to the Tribunal, when the matter could not be reopened u/s 147(b), there is no case for rectification u/s 154. Regarding the withdrawal
of relief u/s 80-I, the Tribunal held that the issue was debatable and, therefore, the provisions of section 154 could not be invoked. Regarding the
disallowance made u/s 40(c) (iii) and the profit of Rs. 1,08,550 assessed u/s 41(1), the Appellate Tribunal agreed with the reasonings of the
Commissioner of income tax (Appeals) to hold that the provisions of section 154 could not be invoked in the assessee''s case for rectification of
the above mistakes. Thus, the Departmental appeals were dismissed and the assessee''s appeal was allowed.
It is important to notice that precisely for the same purposes, the ITO had reopened the assessment u/s 147(b) and had held almost in respect of
the matters as above only that the assessee had escaped tax. The said order had been appealed against and finally the Tribunal had held that
reopening of the assessment u/s 147(b) was not valid and had accordingly revised the assessment. The proceedings which start for assessment
culminate with an order u/s 143(1)(a) or u/s 143(3) of the Act or in the case of best judgment assessment u/s 144 thereof. The income escaping
assessment is brought u/s 147, which provides, inter alia,
(a) the income tax Officer 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 income tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income
chargeable to tax has escaped assessment for that year, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the income tax Officer has in
consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,
he may, subject to the provisions of sections 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.
It is stated in the instant proceedings that the ITO had recourse to section 148 of the Act and called upon the assessee accordingly to produce
evidence, etc. The assessee had appeared and objected to the reassessment and the ITO had found fault with the assessment and accordingly
revised the assessment. The said proceeding, however, was held to be invalid by the Tribunal and the Revenue never sought for any reference on
any question of law in the said reopened proceedings for the assessment of tax. The ITO, however, had ignored his earlier orders u/s 147(b) and
issued notice as contemplated under sub-section (3) of section 154 to the assessee for rectifying the mistakes, which, according to him, were
apparent from the records. He has almost (although the order u/s 147(b) and the consequent reassessment order are not available) reiterated, as
the order rectifying the mistakes apparent from the record, his earlier order in the proceedings u/s 147(b).
The crucial expressions for the exercise of two jurisdictions, one for the reopening of the assessment u/s 147(b) and the other for rectifying any
mistake apparent from the records u/s 154 of the Act, are, for the former, the ITO has in consequence of information in his possession reason to
believe that the income chargeable to tax has escaped assessment, and, for the latter, any mistake apparent from the record.
Although speaking in a case falling u/s 62 of the Estate Duty Act, in the case of T.S. Rajam Vs. Controller of Estate Duty, Madras, a Bench of this
Court has observed:
''Mistake'' is an ordinary word, but in taxation law, it has a special signification. It is not an arithmetical or clerical error alone that comes within its
purview. It comprehends errors which, after a judicious probe into the record from which it is supposed to emanate, are discerned. It is difficult to
axiomatise and lay down dicta for the discovery of a mistake from official records. The word ''mistake'' is inherently indefinite in scope, as what
may be a mistake to one may not be one for another. It in mostly subjective and the dividing line in border areas is thin and indiscernible. Indeed, it
is imponderable due to its inherent indefiniteness. It is something which a duly and judiciously instructed mind can find out from the record. It may
be that sometimes an argument, though not a complex study, may be required to find it out. But that by itself is not the test to discountenance it as
being not a mistake apparent from record. In the ultimate analysis, the conclusion a well-equipped and trained judicial mind will reach after
scrutinising the record, will govern and his finding whether it is a mistake or not has to be accepted.
This judgment has noticed the analogous provision in section 35 of the Indian income tax Act, 1922, and its interpretation in CIT v.
O.RM.M.SM.SV. Sevugan [1948] 161 ITR 59, 66 (Mad.), wherein it was observed, ""Section 35 has limited application.... Clearly that section
does not enable an order to be reversed by revision or by review but permits only error, which is apparent on the face of the record, to be
corrected"".
In Satyanarayan Laxminarayan Hegde and Others Vs. Millikarjun Bhavanappa Tirumale, the Supreme Court has pointed out that where an
error is far from self-evident, it ceases to be an apparent error and in M. Subbaraja Mudaliar Vs. Commissioner of Income Tax, Madras, and
Another, it is said:
The jurisdiction of the officer to rectify a mistake is dependent on the mistake being apparent from the record. It is no doubt true that a mistake
capable of being rectified u/s 35 is not confined to clerical or arithmetical mistakes. On the other hand it does not cover any mistake which may be
discovered by a complicated process of investigation, argument or proof."" The view in this behalf in the judgments of the Supreme Court in Master
Construction Co. Ltd. v. State of Orissa [1949] 17 STC 360 and Income Tax Officer, V Circle, Madras, and Another Vs. S.K. Habibullah, we
shall presently see, has not suffered any change and is, even today, the correct approach for rectification of an error, which is said to be apparent
from the record, the mere complexity of the problem or that genuine argument is necessary to discover the same, may not by themselves be
sufficient to oust the jurisdiction of the Tribunal to rectify such a mistake. If, however, it could be discerned with some precision after a fair probe
into the assessment records and a reasonable and probable conclusion can be arrived at, that the Court''s conscience has been shaken, in that
there appears an error on record which has to be certainly corrected, than it would appear that the jurisdiction of the Tribunal vested with the
power to rectify such mistakes arises. It is different from the provisions under Order XLVII, rule 1, of the Code of Civil Procedure, in the sense
that rectification of any mistake in the case of a revenue is when the mistake is ''apparent from the record'' and in the case of a review, as in the
said provision of the Code of Civil Procedure, it is in the case of an error ''apparent on the face of the record''.
In Mrs. Khorshed Shapoor Chenai and Others Vs. Assistant Controller of Estate Duty, Andhra Pradesh and Others, a case falling under the
Estate Duty Act, the Supreme Court considered the case of assessment to duty which was sought to be rectified on the ground that the value of the
compensation had been enhanced by the civil court, and observed:
...It is thus clear that the rectification is being undertaken on the ground that the initial valuation adopted in respect of the acquired lands was based
at rates fixed by the Land Acquisition Officer, that such valuation was obviously wrong in view of the enhanced compensation awarded by the Civil
Court and, therefore, the enhanced compensation was sought to be included in the principal value of the estate by undertaking the rectification
proceedings. In substance, it cannot be said to be a case of rectification of any mistake apparent from the record, but the respondent is really
seeking to change his opinion about the valuation of the acquired lands because some other authority, namely, the Civil Court has valued the same
differently....
The view in T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, in this behalf that it is open to the
ITO to go into the true scope of the relevant provisions of the Act in a proceeding u/s 154, and 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 be
conceivably two opinions, is one which holds the field and is the principle which no Court or authority can ignore. The line of demarcation is neither
firm nor fixed. Sometimes, an evident error which does not require any extraneous matter to show its incorrectness is confused with an erroneous
view of law on a debatable point or a wrong exposition of the law or a wrong application of the law or a failure to apply the appropriate law. In the
former case, it is error apparent from the record and in the latter case, it is not so apparent. Discovery of an error on the basis of assessment due
to initial mistake, say in determining the written down value which happened on account of misapplication of the law can provide a ground for
rectification, but where it is debatable whether there was any mistake or misapplication of the law, rectification may not be permissible.
Can there be a case, however, where it is apparent from the record, that some income has escaped taxation and such discovery of fact is
taken as the basis for reopening the assessment u/s 147(b)? A Bench of the Patna High Court in Mahasukhram Madanlal Vs. Commr. of Income
Tax, has considered this aspect u/s 34 of the Indian income tax Act, 1922, and observed:
...The jurisdiction of the income tax Officer to start a proceeding u/s 34 cannot obviously depend upon the ultimate result of the proceeding. Even if
it is found ultimately upon enquiry that there has been no escapement of income, it is not a sound argument to advance that the income tax Officer
had no jurisdiction to initiate the proceeding....
...The income tax Officer has stated in the course of his order that action u/s 34 was taken because it was detected in the assessment proceeding
of 1944-45 that there was a difference in the capital account of the two firms between the Samvat years.... It is clear that though the original order
of the income tax Officer was missing there were circumstances in the case which definitely pointed to the conclusion that before the issue of notice
u/s 34, the income tax Officer had present before his mind the difference in the capital accounts of the two firms between the two relevant Samvat
years. That was the definite information upon which the income tax Officer Mr. Patnaik started the proceeding u/s 34 and it is difficult to accept the
argument of Mr. Dutt that there is complete absence of evidence to show that there was definite information of that kind before the initiation of the
proceeding u/s 34.
We do not propose in this case, however, to deal any further as the existence of the information for the belief that income chargeable to tax has
escaped assessment is the sine qua non for reopening the assessment u/s 147(b) and discovery of an error apparent on the record is the sine qua
non for rectification u/s 154 of the Act. The provisions for rectification of error apparent on the record and for taking proceedings regarding
escapement are common features in the tax laws and they are to be invoked in different circumstances. The ITO can have recourse to one or the
other, but he must have recourse to the appropriate provision having regard to the facts and circumstances in each case. In cases where the two
appear to overlap, the ITO must choose one in preference to the other and proceed. He should not take one as the appropriate proceeding and
give it up at a later stage to have recourse to the other, since such proceedings are quasi-judicial and adjudication after notice is intended for the
same purpose. In such a case of overlapping, constructive res judicata and not the statutory inhibition, should make the ITO desist from using one
proceeding after the other instead of using one of the two with due care and caution. We have, however, felt in the instant case that in respect to
most of the items, the ITO has exhibited ignorance of law and the Tribunal, for good reasons, has held about them that no case of error apparent
on the record was made out. We have some apprehension of our own in respect of one item and the need of rectification in respect of the said
item for assessment u/s 37(3). The assessee has claimed computation of income after deducting the expenses upon a guest house and claimed 100
percent of the annual value of the premises as allotted to the staff, i.e., the benefit or amenity provided to the employees. That it has done without
any evidence, so much so, that even a statutory requirement of maintaining a register showing the particulars as required under rule 6C(iii) of the
income tax Rules, 1962, is not observed. In the original assessment, the entire claim of the assessee was accepted. No serious effort is required to
see that the entire claim of the assessee could not be allowed without evidence showing the expenditure. We are, however, not sure whether any
proceeding u/s 147(b) also was taken as escaped income and adjudicated after notice to the assessee in accordance with law and which
proceeding ended against the revenue. If that be so, it will be proper to hold that recourse to rectification is in fact an attempt to review the order
of assessment and further that the rectification proceeding is being used as an alternative to a proceeding which has ended against the revenue. If,
however, this item is not included in the proceeding u/s 147(b), in our opinion, it will be permissible to call upon the assessee to produce evidence
and since no evidence is produced by the assessee, to hold against the assessee by best judgment assessment which in the absence of evidence in
this behalf may not be illegal in any sense. In view of the above, we answer all the questions against the revenue and in favour of the assessee
except questions relating to the disallowance u/s 37(3), in respect of which, we remand the matter to the Tribunal for reconsideration in
accordance with law in the light of the observations above.