Commissioner of Income Tax vs Kerala State Coir Corporation Ltd.

S. Sankarasubban, J.—This reference is at the instance of the Revenue u/s 256(1) of the Income Tax Act, 1961 (for short, "the Act"). The questions of law referred are as follows :

"1. Whether, on the facts and in the circumstances of the case and on an interpretation of the relevant provisions of the Income Tax Act, the Tribunal is right in law in cancelling the levy ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that when the rectification order was passed no mistake apparent from the record as a result of the retrospective amendment to Section 143(1A) of the Income Tax Act and, therefore, the levy of additional tax is deleted ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding, --

(i) the "intimation" dated January 24, 1991, sent by the Assessing Officer is no "intimation" at all and has no legal sanction in terms of Section 143(1)(a) read with the proviso thereto ; ''it is non est in the eye of law''?

(ii) the officer ''has acted in excess of jurisdiction'' ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding,--

(i) once notice u/s 143(2) is issued, the regular assessment proceedings get started and thereafter the Assessing Officer is not empowered to have or continue to have the preliminary proceedings u/s 143(1)(a) of the Income Tax Act ?

(ii) a validly initiated assessment proceeding u/s 143(2) will prevail over and supersede the provisions of Section 143(1)(a) ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding,-

(i) there is no valid intimation existing in terms of Section 143(1)(a) of the Income Tax Act ?

(ii) the order u/s 154 dated March 10, 1993, purporting to rectify certain mistakes in the non-existing intimation dated October 24, 1991, with a view to levy additional tax u/s 143(1A) of the Act is without legal basis ?"

The facts leading to the reference are as follows : The assessee filed its return admitting a total loss of Rs. 2,79,43,720 which included current year''s loss amounting to Rs. 79,66,386 and the brought forward loss of Rs. 1,99,77,334. In arriving at that amount, instead of taking the amount of depreciation allowable for the year at Rs. 10,79,912, the assessee had taken Rs. 54,72,243. This was apparently a mistake. The Assessing Officer accepted the return filed by the assessee and sent an intimation to the assessee on October 24, 1991, purporting to be u/s 143(1)(a) of the Act. Later, the Assessing Officer issued a notice dated October 28, 1991, requiring the presence of the assessee on November 11, 1991, at his office and this notice has been issued under the provisions of Section 143(2) of the Act. When the case stood posted for hearing under the provisions of Section 143(2), the Assessing Officer issued a notice dated March 3, 1993, u/s 154 of the Act proposing to rectify the mistake found in the return which was unnoticed in the first proceedings u/s 143(1) of the Act. The assessment u/s 143(3) was completed on March 16, 1993, adopting the correct figure of depreciation of Rs. 10,79,912 and making certain disallowances under rule 6D of the Income Tax Rules and the unpaid interest to the Kerala Financial Corporation thus determining the total loss for the year at Rs. 20,55,035. Thereafter, the Assessing Officer passed an order u/s 154 dated March 10,1993, whereby he withdrew the excess depreciation allowed in the intimation sent to the appellant u/s 143(1)(a) and levied additional tax on the difference at 20 per cent, resulting in a demand of additional tax on Rs. 4,75,676. This rectification was in respect of the intimation dated October 24, 1974. Against the aforesaid order, the assessee filed an appeal. The learned Commissioner of Income Tax (Appeals) dismissed the appeal in view of the retrospective amendment with effect from April 1,1989, of Section 143(1A) by the Finance Act, 1993. Against that order, the assessee preferred an appeal before the Tribunal. According to the Tribunal, there was no scope for levy of additional tax on the amount of loss disallowed unless there was some tax payable to the Government or some refund was due to the assessee and in any case, there was no scope for levy of additional tax on the amount of loss disallowed treating such amount as the income of the assessee. The substituted Section 143(1A) providing for levy of additional tax even in a case of disallowance of loss, treating the amount disallowed as income of the assessee, was given retrospective effect from April 1, 1989, by the Finance Act, 1993, which received the assent of the President of India, only on May 13, 1993. The amended provision would, no doubt, give rise to a mistake deemed to have occurred in the original intimation and continued right up to the time of rectification, but such mistake was not apparent from the record as the amended provision which was given assent on May 13, 1993, was not in existence at the time when the Assessing Officer rectified the order on March 10, 1993. Apart from the above reasoning, the Tribunal took support from the decision of the Calcutta High Court in Commissioner of Income Tax Vs. General Electric Co. of India Ltd., , to show that the retrospective amendment does not apply. Further, it held that the rectification proceeding itself was illegal as there was no valid intimation u/s 143(1)(a) of the Act. It was further held that once an order was passed u/s 143(3), there is no scope for passing an order u/s 154(1)(b) of the Act.

Initially, in this case, the Assessing Officer accepted the return u/s 143(1)(a) of the Act. It was by the Amendment Act of 1987 that Section 143 was substituted in the Income Tax Act to introduce a new scheme of assessment after the return of income has been filed. As per the new scheme, the requirement of passing an assessment order in all cases where returns of income are filed has been dispensed with and the issue of an acknowledgment slip to the assessee will be the end of the matter, if he has correctly paid the tax and interest, if any, due on the basis of the return. If on the basis of the return, any amount is found due from the assessee, it can be recovered ; and if any refund is found due to the asses-see, it can be granted without passing an assessment order. The assessment orders will be passed only in a very limited number of cases selected for scrutiny. As per the proviso to Section 143(1)(a), the Assessing Officer is allowed to make adjustments to the returned income or loss for the purposes of computing the tax or interest payable by or refundable to the assessee. u/s 143(1)(a) of the Act, an intimation shall be sent to the assessee if any tax or interest is found due on the basis of the return. As per the proviso, such intimation shall not be sent after the expiry of two years from the end of the assessment year in which the income was first assessable. The new Section 143(1A) was introduced with effect from 1989.

Going by the terms of Section 143(1)(a), initially, we find the Income Tax Officer accepted the return as such even though there was a mistake in the claim of depreciation. It appears that, the Income Tax Officer sent annexure E, filed along with C.M. P. No. 4482 of 1989. It is actually an acknowledgment. It is not an intimation as envisaged u/s 143(1)(a)(i) of the Act. An intimation u/s 143(1)(a)(i) will arise only if any tax or interest is found due on the basis of the return after adjustment of the tax deducted at source. A power of rectification of mistakes is given u/s 154(1)(b) to amend any intimation sent by it under Sub-section (1) of Section 143, or enhance or reduce the amount of refund granted by it under that sub-section. Thus, going by the provisions of Section 143(1)(a)(i) and 154(1)(b), it is not possible to rectify annexure E acknowledgment which is styled as intimation. There is no dispute that it is annexure E that is sought to be rectified u/s 154 of the Act. But, what has now happened is that treating the acknowledgment dated October 24, 1991, as an intimation, notice u/s 154 was issued. That notice was notice calling for objection dated March 3, 1993. Two grounds were stated in that notice. (1) The claim for depreciation at Rs. 54,72,243 is not correct. Actually this should be only at Rs. 10,79,912 as per the depreciation statement enclosed along with the return of income, and (2) There is an excessive claim under rule 6D at Rs. 12,920 as per Section 44AB report enclosed along with the return of income. The above two discrepancies are to be corrected and the assessee was called to file objections, if any, to the proposed rectification.

As already stated, the notice for rectification was issued on March 3, 1993. There was an amendment to Section 143 of the Act, by substituting Sub-section (1A)(a). Section 143(1A)(a) of the Act reads as follows :

"(1A)(a) Where, as a result of the adjustments made under the first proviso to Clause (a) of Sub-section (1),--

(i) the income declared by any person in the return is increased ; or

(ii) the loss declared by such person in the return is reduced or is converted into income,

the Assessing Officer shall,--

(A) in a case where the increase in income under Sub-clause (i) of this clause has increased the total income of such person, further increase the amount of tax payable under Sub-section (1) by an additional Income Tax calculated at the rate of twenty per cent, on the difference between the tax on the total income so increased and the tax that would have been chargeable had such total income been reduced by the amount of adjustments and specify the additional Income Tax in the intimation to be sent under Sub-clause (i) of Clause (a) of Sub-section (1) ;

(B) in a case where the loss so declared is reduced under sub-clause (ii) of this clause or the aforesaid adjustments have the effect of converting that loss into income, calculate a sum (hereinafter referred to as "additional income tax") equal to twenty per cent, of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person and specify the additional Income Tax so calculated in the intimation to be sent under Sub-clause (i) of Clause (a) of Sub-section (1) ;

(C) where any refund is due under Sub-section (1), reduce the amount of such refund by an amount equivalent to the additional Income Tax calculated under Sub-clause (A) or Sub-clause (B), as the case may be." Thus, as per the amendment, even where the loss declared by a person in his return is reduced, a sum equivalent to twenty per cent, of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person and specify the additional Income Tax so calculated in the intimation to be sent. Thus, as a result of the introduction of the section, in this case, the Assessing Officer found that the total loss was Rs. 35,61,135. Therefore, the additional loss claimed was Rs. 44,05,251. Twenty per cent, of the tax calculated on the above amount was fixed at Rs. 4,75,767. We have already found in this case that there was no intimation as per Section 143(1)(a) because, a reading of the entire provisions of Section 143(1)(a) of the Act will show that intimation is directed only where any tax or refund is due. It was only subsequently that a proviso was added stating that an acknowledgement will be deemed to be an intimation. No doubt, after the amendment in 1993, by introduction of Section 143(1A), even in a case where no tax or refund is due, additional tax is leviable in the form of penalty in cases where the loss declared is reduced.

Learned counsel for the assessee submitted that in a proceeding u/s 154, Section 143(1A) cannot be applied, because, according to him on the day on which notice was issued, Section 143(1A) does not apply. Learned counsel for the assessee brought to our notice the decisions in Commissioner of Income Tax Vs. Hindustan Electro Graphites Ltd., ; Commissioner of Income Tax Vs. General Electric Co. of India Ltd., , while learned counsel for the Revenue relied on the decisions in M.K. Venkatachalam, I.T.O. and Another Vs. Bombay Dyeing and Mfg. Co., Ltd., and Assistant Commissioner of Income Tax Vs. J.K. Synthetics Ltd., .

In Commissioner of Income Tax Vs. Hindustan Electro Graphites Ltd., , the Supreme Court considered the matter. In that case, the assessee a public limited company, filed its return for the assessment year 1989-90 on December 29, 1989. Clause (iiib) in Section 28 of the Income Tax Act, 1961, was inserted by the Finance Bill of 1990, which ultimately became the Finance Act and received the assent of the President of India on May 31, 1990. Clause (iiib) was given retrospective operation with effect from April 1, 1967. Clause (iiib) is as under : "cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India". Before the insertion of Clause (iiib), cash assistance received by any person on exports under any scheme of the Government could not be charged to Income Tax under the head "Profits and gains of business or profession". The assessee had received in the previous year relevant to the assessment year 1989-90 a sum of Rs. 1,31,41,030 by way of cash assistance. Since, Clause (iiib) was inserted in Section 28, though having retrospective operation by the Finance Act, 1990, the assessee did not include this income in its return. The Assessing Officer by his order passed u/s 143(1)(a) of the Act added the aforesaid amount of Rs. 1,31,41,030 representing the cash compensatory support received by the assessee. The assessee had not offered this amount to tax. The Assessing Officer treated this as additional income u/s 143(1A) of the Act and levied the amount of tax at a higher rate on this additional income and also charged consequential interest. The Tribunal held that no additional tax could be levied in respect of the amount of cash compensatory support and no interest could be charged on the said amount. The High Court upheld this decision. The Department preferred an appeal to the Supreme Court. Dismissing the appeal, the honourable Supreme Court held that, where a return is filed, the law applicable would be the law as it stood on the date of filing of the return. In the instant case, there was not even a bona fide mistake and in fact it was not a case where under some mistaken belief the assessee did not disclose the cash compensatory support received by it. It is true that income by way of cash compensatory support became taxable retrospectively with effect from April 1, 1967, but that was by an amendment of Section 28 by the Finance Act of 1990, which amendment could not have been known before the Finance Act came into force. Levy of additional tax bears all the characteristics of penalty. Additional tax was levied as the assessee did not in his return show the income by way of cash compensatory support. After the assessee had filed its return of income, which was correct as per law on the date of filing of the return, the cash compensatory support also came within the sway of Section 28. When additional tax has the imprint of penalty, the Revenue cannot say that levy of additional tax is automatic u/s 143(1A) of the Act. If additional tax could be levied in such circumstances, it will be punishing the assessee for no fault of his. That cannot ever be the legislative intent. In the circumstances of the present case, levy of additional tax taking into account the income by way of cash compensatory support was not warranted.

In Assistant Commissioner of Income Tax Vs. J.K. Synthetics Ltd., , the facts are as follows : The assessee had returned a net loss. After adjustments had been made by the taxing authorities under the provisions of Section 143(1A) (sic-section 143(1)(a)), the amount of loss stood reduced. The taxing authorities under the provisions of Section 143(1A) sought to levy additional tax upon the assessee in this behalf and this was challenged in the writ petition. The Supreme Court held that the substituted Sub-section (1A) made it clear that even where the loss declared by an assessee had been reduced by reason of adjustments made under Sub-section (1)(a) the provisions of Sub-section (1A) would apply. The argument before the Supreme Court was on the basis of the decision in Commissioner of Income Tax Vs. Hindustan Electro Graphites Ltd., . The Supreme Court held that it was a case where the return that the assessee had filed was correct by reason of the law as it stood when the return was filed. A retrospective amendment of Section 28 of the Act rendered that return incorrect. The adjustment in the return was made under Sub-section (1) of Section 143 and, therefore, the provisions of Sub-section (1A) of Section 143 were sought to be invoked. This was challenged and the High Court upheld the challenge, as did this court. It took the view that the additional penalty under Sub-section (1A) bore the imprint of a penalty and no penalty could be levied because the return filed by the assessee was correct when it was filed. The Supreme Court held that, that judgment has no application to the facts of the present case for the reason that it is nobody''s case that a retrospective amendment has rendered a correct return filed by the assessee incorrect. Thus, the latter decision distinguishes the earlier decision of the Supreme Court.

If a correct return is filed on the basis of the law that stood on that date, then, a penalty cannot be imposed by virtue of a subsequent amendment. According to us, it cannot be held, in this case that Section 143(1A) will not apply. The next question is whether Section 143(1A) can be invoked to exercise the power u/s 154. To find out whether there was an error apparent on the face of the record, it is to be found whether the error was in existence on the date on which the proceedings u/s 154 was initiated. Admittedly, on the date on which the proceedings u/s 154 were initiated, Section 143(1A) had not been brought into force. In M.K. Venkatachalam, I.T.O. and Another Vs. Bombay Dyeing and Mfg. Co., Ltd., , the Income Tax Officer had assessed the assessee which was a company to tax for the assessment year 1952-53, by an order dated October 9, 1952. In that assessment order, the Income Tax Officer had given a credit for Rs. 50,063 being interest at two per cent, on the tax paid in advance u/s 18A(5) of the Income Tax Act. Subsequently, the Indian Income Tax (Amendment) Act, 1953, was passed. In this amending Act, a proviso to Section 18A(5) was added providing that an assessee was entitled to interest not on the whole of the tax paid in advance, but only on the difference between the tax so paid and the tax as determined on regular assessment, This amending section was deemed to have come into force on April 1, 1952, i.e., prior to the date of the assessment order in the instant case. Under this amended Act, the assessee was entitled to a lesser sum than what was allowed to him originally on account of interest. After the amendment Act was passed, the Income Tax Officer exercised his power u/s 35 of the Indian Income Tax Act, 1922, and rectified the mistake in the order of assessment and demanded repayment of the sum which was allowed to the assessee in excess. It was held by the Supreme Court as follows (page 149) :

"It is in the light of this position that the extent of the Income Tax Officer''s power u/s 35 to rectify mistakes apparent from the record must be determined ; and, in doing so, the scope and effect of the expression ''mistake apparent from the record'' has to be ascertained. At the time when the Income Tax Officer applied his mind to the question of rectifying the alleged mistake, there can be no doubt that he had to read the principal Act as containing the inserted proviso as from April, 1, 1952. If that be the true position then the order which he made giving credit to the respondent for Rs. 50,603-15-0 is plainly and obviously inconsistent with a specific and clear provision of the statute and that must inevitably be treated as a mistake of law apparent from the record. If a mistake of fact apparent from the record of the assessment order can be rectified u/s 35, we see no reason why a mistake of law which is glaring and obvious cannot be similarly rectified. Prima facie it may appear somewhat strange that an order which was good and valid when it was made should be treated as patently invalid and wrong by virtue of the retrospective operation of the Amendment Act. But such a result is necessarily involved in the legal fiction about the retrospective operation of the Amendment Act. If,, as a result of the said fiction, we must read the subse- quently inserted proviso as forming part of Section 18A(5) of the principal Act as from April 1, 1952, the conclusion is inescapable that the order in question is inconsistent with the provisions of the said proviso and must be deemed to suffer from a mistake apparent from the record. That is why we think that the Income Tax Officer was justified in the present case in exercising his power u/s 35 and rectifying the said mistakes."

In S.A.L. Narayan Row and Another Vs. Ishwarlal Bhagwandas and Another, , the facts before the Supreme Court were that for the assessment year 1948-49, a notice was served on the assessee u/s 18A(1) of the Indian Income Tax Act, 1922, for the payment of advance tax. The assessee first filed an estimate u/s 18A(2) and, thereafter, a revised estimate and paid tax accordingly. In the regular assessment made on March 31, 1953, it was found that the tax paid on the basis of the estimate of the assessee was less than 80 per cent, of the tax actually assessed. On the unpaid tax, no interest was charged. In 1956, on objection from the audit, the Income Tax Officer proceeded u/s 35 of the Indian Income Tax Act, 1922, and passed an order charging interest on the ground that the failure to charge interest u/s 18A(6) was a mistake apparent from the record and could be rectified. This order was confirmed by the Commissioner of Income Tax u/s 33A of the Act. Thereafter, proceedings were held under Article 226 of the Constitution at the instance of the assessee who prayed for quashing of the order of the Commissioner under a writ of certiorari. A Full Court of the High Court of Bombay quashed the orders passed by the Income Tax Officer and the Commissioner. An appeal was preferred by the judgment of the Bombay High Court to the Supreme Court. The Supreme Court held that, the High Court was right in setting aside the orders passed by the Income Tax Officer and the Commissioner of Income Tax. The Supreme Court found that Section 18A(6) had been amended retrospectively by an Amendment Act of 1953 and the retrospective operation commenced from April 1, 1952. Under this amendment, a proviso was added to Section 18A(6) providing that in cases falling under the said Section and under the circumstances that may be prescribed the Income Tax Officer could reduce or waive the interest payable. The Supreme Court by its majority judgment held that by virtue of this retrospective amendment the order which was made by the Income Tax Officer on the date of the assessment and which was plainly inconsistent with the terms of the section as it then stood became an order which he was competent to pass in exercise of his powers. The Income Tax Officer in view of the retrospective amendment was bound to consider whether the assessee was entitled to reduction or waiver of interest under the added proviso and if interest was not charged it could not be said that there was necessarily a mistake apparent from the record.

Thus, the above decisions of the Supreme Court show that by virtue of the amendment and by bringing into force Section 143(1A) retrospectively, Section 143(1A) should be deemed to be in the statute book from April 1, 1989, onwards. If that be so, normally, the Assessing Officer will be entitled to take into account Section 143(1A).

The next question that was argued was that there was no question of continuing with the proceedings u/s 143, if proceedings have been finalised u/s 143(3). So far as this case is concerned, we cannot say that because, the order is passed u/s 145(3), the proceedings u/s 143(1)(a) cannot be invoked. In the above view of the matter, the questions of law are answered as follows :

Question No. 1 is answered affirmatively and in favour of the assessee. So far as the second question is concerned, we hold that the Tribunal was not correct in holding that there was no power for rectification since Section 143(1)(a) was substituted subsequently. Question No. 3(i) is answered in the positive and against the Department. Question No. 3(ii) is answered in the positive and against the Department. So far as question No. 4 is concerned, we think, in the facts and circumstances of the case, it is not necessary to answer the question of law as they do not arise for consideration and as they are not relevant. Question No. 5(i) is answered in the affirmative and against the Department. Question No. 5(ii) is answered in the affirmative and against the Department.