Commissioner of Income Tax vs Tanjore Permanent Bank Ltd.

Ramanujam, J.—The assessee in this case is a public limited banking company. For the assessment year 1968-69, it claimed credit for Rs.

1,51,342 being tax deducted at source in arriving at the demand for tax payable by the assessee. That amount included a sum of Rs. 22,975 which

was the tax deducted at source in respect of the interest earned on 51 per cent Tamil Nadu State Electricity Board Bonds, 1979 which stood in

the name of the assessee. It appears that these securities were purchased by the assessee for its constituents by advancing funds. Subsequent to

the purchase of the bonds by the assessee in its name but for the benefit of its constituents, the bonds had been kept by the assessee as security for

the repayment of the amount advanced to the constituents for purchase of the securities. Originally, the ITO allowed deduction of the entire amount

claimed without making a difference between the said sum of Rs. 22,975 which was the interest earned on the said State Electricity Board Bonds

and the amount of tax deducted at source in respect of other securities. However, the ITO subsequently took the view that since then securities

were never the properties of the assessee, the tax deducted at source in respect of the interest earned on these securities cannot be taken as the

payment by the bank in computing the tax payable by the bank especially when the bank did not return the interest earned on the securities as its

income. Treating the credit given to the assessee in a sum of Rs. 22,975 as a mistake apparent from the records, he initiated proceedings for

rectification u/s 154 of the income tax Act, 1961 (''the Act''). The assessee resisted the rectification proceedings contending that it was not a

mistake apparent from the record, that the question as to who as between the assessee and its constituents is the owner of the securities in the

circumstances is a debatable point and, therefore, it was not a case for rectification. The ITO, however, overruled that objection and passed an

order of rectification dated 12-10-1971 by which he withdrew the credit given in the original assessment for the sum of Rs. 22,975.

The assessee took the matter in appeal to the AAC contending that the ITO has already decided the issue as to whether the assessee is entitled

to get credit for the sum of Rs. 22,975 and, therefore, the rectification was due to a mere change of opinion and not in respect of any error

apparent from the record. The AAC did not agree with the contention of the assessee, and held that the rectification proceedings were validly

initiated as there was an error apparent from the record which the ITO was entitled to rectify.

The assessee took the matter in appeal to the Tribunal, contending that what was rectified was not a simple mistake apparent from the record

because the question whether the assessee was the owner of the securities or not is a debatable issue and the said question which involves a

debate cannot be a mistake apparent from the record so as to enable the ITO to initiate rectification proceedings. The revenue resisted the appeal

before the Tribunal contending that the assessee not being the owner of the securities, the tax deducted at source in respect of the interest earned

thereon, cannot be given credit to the assessee but only to the real owners who are the constituents of the assessee and, therefore, there was

clearly an erroneous adjustment in the assessment which required to be rectified.

The Tribunal, after considering the rival contentions, held that the rectification proceedings cannot be sustained in law as it is not a case of

mistake apparent from the record, that the question as to who is the real owner of the securities as between the assessee and its constituents is a

debatable issue and, therefore, the rectification proceedings cannot be initiated on the basis that it is an error apparent from the record. In this view

of the matter, the Tribunal set aside the rectification proceedings. Aggrieved by the view taken by the Tribunal, the revenue has sought and

obtained a reference to this Court on the following two questions:

on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that there was no mistake apparent from the

records and that the order u/s 154 withdrawing the excess credit of tax deducted at source amounting to Rs. 22,975 was invalid?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law, in giving credit for the tax deducted at source

on interest on securities held by the assessee on behalf of its constituents, the income from which was at no point of time admitted for assessment

by the assessee?

The following facts are not in dispute. The assessee has advanced monies to its constituents for the purpose of the State Electricity Board

Bonds. On the instructions of the constituents the bonds have been purchased by the assessee with the amount advanced by it to the constituents.

But the bonds had been taken in the name of the assessee-bank and kept in its possession as a security for the loan advanced to its constituents for

the purchase of the bonds. Though the bonds were in the name of the assessee, the interest income from the bonds has not been returned by the

assessee as part of its income in the relevant assessment year. This is presumably for the reason that the bank itself treated the bonds as security

and the interest income from the bonds as the income of the constituents. Since the amounts had been advanced by the assessee- bank to its

constituents for the purchase of the bonds, the bank had been collecting the interest on the loans given to its constituents. Therefore, the assessee,

on the belief that the income from the bonds is the income of the constituents, has not returned the income from the securities as part of its income.

Though these facts were before the ITO at the time of the original assessment, he merely proceeded on the basis of the tax deduction certificate

and granted the relief to the assessee, without going into the question as to whether the assessee is entitled in law to get credit for the sum of Rs.

22,975. Normally, before credit is given for the sum of Rs. 22,975 which is the tax deduction at source on the interest earned on the bonds in

question, the ITO should consider two matters : (1) Whether the assessee is the owner of the bonds so as to claim the benefit of the tax credit, and

(2) Whether the income in respect of which the tax has been deducted at source had been offered for assessment? Without going into these two

questions, the ITO appears to have blindly given tax credit for a sum of Rs. 22,975 on the basis of the tax deduction certificate given by the Tamil

Nadu State Electricity Board. Subsequently the ITO found that the allowance of the tax credit is a mistake and on that basis, he initiated

proceedings u/s 154. The Tribunal has taken the view that the question as to who is the owner of the security on the facts of this case, is a

debatable issue and on the basis of such a debatable issue, the ITO could not initiate rectification proceedings.

We are not, however, inclined to accept the view of the Tribunal in this case. Once it is admitted by the assessee that the bonds had been

purchased for the benefit of its constituents by using the money advanced to them by the assessee but the bonds were taken in the assessee''s name

and kept in its possession as security for the payment of the monies advanced to its constituents, the legal inference which will normally follow from

this admission is that the bank has got the custody of the bonds only as a security for the payments of the money advanced by it to its constituents.

When the assessee says that it is in custody of the bonds of the constituents only as a security for the amounts advanced to them, the assessee-

bank should be taken to be in possession of the bonds only as a creditor and not as their owner. Even according to the assessee the bonds had

been purchased with the monies advanced by it to the constituents. Therefore, with reference to the bonds the bank is only a creditor of the

constituents and not their true owner. It is no doubt true, the bonds have been taken in the name of the assessee-bank and the certificate of

deduction of tax was given in the name of the assessee. But once the assessee admits that it is in possession of the bonds only as a security for the

amounts advanced to its constituents, the bank should be taken to be an ostensible owner and the real or beneficial owner of the bonds is only its

constituents. In this case, the Tribunal has placed emphasis on the facts that the bonds are in the name of the assessee and the certificates of

deduction have been given in the name of the assessee. That will make the assessee only an ostensible owner. When the assessee itself has

admitted that the beneficial owners of the bonds are the constituents, we do not see how a debatable issue arises as to the ownership of the bonds.

Even according to the assessee, it is the ostensible owner of the bonds and the real owners are its constituents. This is clear from the stand taken

by the assessee that the bonds were purchased with the constituents'' money, though they were purchased in the bank''s name as security for the

payment of the monies advanced to the constituents by the bank. According to us no debatable issue arises on the admitted facts and the facts

admitted by the assessee and found by the ITO. It was never the assessee''s case that it is the beneficial owner of the bonds purchased. It had the

custody of that bonds bought only as a security for repayment of the advances made by it to its constituents. As already stated, once a loan is

advanced by the assessee to the constituents and that amount has been utilised for the purchase of the bonds, the assessee can never claim to be

the beneficial owner of the bonds. The fact that the assessee did not offer for assessment the interest income received from the bonds will itself

indicate that the assessee proceeded on the basis that the beneficial ownership of the bonds was with the constituents and that as such the Income

received therefrom Is the income of the constituents. If really the assessee has offered the interest income from the bonds for assessment and

claimed benefit of tax credit in relation to that income in respect of which tax was deducted, it is possible to say that the assessee is claiming tax

credit on behalf of the constituents to pass on the benefit to the constituents or as one having a charge on the bonds. But in this case without

offering the interest income from the bonds for assessment the assessee merely claims the benefit of tax credit. It is well established that a tax credit

can be given only in cases where the tax is paid on the income in respect of which deduction has been made at source.

In Kanga and Palkhivala''s The Law and Practice of income tax, Seventh edn., Volume I, the following passage occurs:

...The tax deducted at source is deemed under this section (section 199) to have been paid on behalf of ''the owner of the security'' and credit is to

be given to him therefore. The word ''owner'' would include a beneficial owner. Therefore, a beneficial owner of securities, who is entitled to the

interest on securities and in whose total income the interest as such is included, would be entitled to credit under this section for the tax deducted at

source, even though the securities may not have stood in his name at the time when the interest was paid. (p. 1048)

It is, no doubt true, in the case of dividends to a shareholder the tax deducted at source has to be given credit only to a shareholder and not to

any other person as a beneficial owner, for a shareholder is one whose name finds a place in the register of the company. But in the case of

securities, it has consistently been held by the Courts that there is a possibility of one being the ostensible owner and another being a beneficial

owner. In Commissioner of Income Tax, Bombay City II Vs. Shakuntala and two Ors. etc., the Supreme Court has explained the position thus:

...The section does not talk of the beneficial owner of the share. It talks of the shareholder only section 18(5) of the Act deals with grossing up of

dividend and two expressions occur therein : ''owner of the security'' and the ''shareholder''. So far as the expression owner of the ''security'' is

concerned, it may perhaps include a beneficial owner; but it has been decided by this Court that the expression ''shareholder'' in section 18(5)

means the shareholder registered in the books of the company. As we have earlier said, no good reason exists as to why the expression

''shareholder'' in section 23A shall not have the same meanings. Sub-sections (3) and (4) of section 23A also make the position clear; they talk of

members of the company and a Hindu undivided family as such is not a member of the company. (p. 357)

In COMMISSIONER OF Income Tax, MADRAS Vs. NATTARASANKOTTAI ELECTRIC SUPPLY CORPORATION., a Division Bench

of this Court has proceeded on the basis of an assumption that there can be a beneficial owner in the case of securities standing in the name of

another. The learned Judges observed:

...The position is essentially the same as if the company had purchased Government bonds and lodged them with the trustee as security for the

debenture holders. The resolution passed at the general meeting of the debenture holders referred to already in pursuance of which the company

purchased the debentures in the name of the trustee makes the position perfectly clear. The company therefore remained the owner of these

debentures subject to the charge created in favour of the debenture holders, and the so called interest paid by the company to the trustee was in

truth a deposit with the trustee of part of its funds for purposes of security. (p. 500)

In Shri Jagdish Mills Ltd. Vs. Commissioner of Income Tax, Bombay North, , the Bombay High Court has also proceeded on the assumption that

there can be a beneficial ownership for securities though somebody else may be the ostensible owner. Though in that case factually the Court held

that the assessee therein was neither the legal owner nor beneficial owner of the securities, the judgment proceeds on the basis that there can be a

beneficial owner apart from legal owner in the case of securities. Even assuming that the question as to who is the owner of the securities and who

is entitled to get tax credit as between true owner and ostensible owner is a debatable point still, without going into that issue, the matter can be

looked at a different angle. The ITO, at the stage of the original assessment, gave the tax credit to the assessee even though the income in respect

of the tax deducted has not been offered for assessment. As already stated, tax credit can be given only in cases where the tax is paid on the

income in respect of which tax has been deducted at source. But in this case, the assessee has not offered for assessment the income from the

bonds, either as owner or as a creditor having a charge therein.

The learned counsel for the assessee would contend that in a case as this where the income from the securities has not been offered for

assessment, the only way open to the ITO is to call upon the assessee to offer the income from the securities for a assessment but he cannot

withdraw the benefit of the tax credit already given. We are not in a position to accept the contention of the learned counsel for the assessee. It is

no doubt true, the ITO can, by initiating proceedings u/s 147 of the Act, reopen the assessment and include the income from the securities as

income of the assessee treating the assessee as the owner of the securities based on the fact that the certificates stand in the name of the assessee-

bank and ignoring the assessee''s contention that it has got only a charge on the securities for the amount advanced to the constituents. But that will

not take away the jurisdiction of the ITO to initiate proceedings u/s 154 to rectify a mistake apparent from the record, the mistake being that he

has given the benefit of tax credit in a case where the income in respect of which tax has been deducted at source has not been offered for

assessment. That is clearly a mistake on the part of the ITO. Even if the mistake is treating the assessee as the owner of the securities cannot be

treated as a mistake as according to the Tribunal it is a debatable issue, still giving tax credit in a case where the related income has not been

offered for assessment is a mistake and that can be taken as the basis by the ITO for initiating proceedings u/s 154.

In this view of the matter, it is unnecessary for us to deal with the various decisions referred to by the learned counsel on both sides as to the

circumstances in which section 154 could be invoked by the ITO and what will amount to a debatable point which cannot be taken advantage of

by the ITO by reopening the assessment u/s 154. We are, therefore, of the view that in this case the rectification of the mistake by the ITO is valid

and is within his jurisdiction. The result is, the questions referred to us are answered in the negative and against the assessee. The revenue will have

its costs from the assessee, Counsel''s fee Rs. 500.