Kaira District Co-operative Milk Producers'' Union Ltd. vs Assistant Commissioner of Income Tax (No. 2)

Rule. Mr. M.J. Thakore waives service of rule for the respondent. The petitioner challenges the notice (exhibit-J at page 109), dated March 9, 1995, issued by the assessing authority u/s 154 of the income tax Act, 1961, for rectification of order dated February 27, 1991, in relation to the assessment year 1988-89. The notice of rectification reads as under:

In this case, the A.O. was passed u/s 143(3) on February 27, 1991, and during the verification it is found that deduction u/s 80P(2)(d) was not allowed correctly as it appears that there was no investment with the said co-operative bank while it is only the balance in the current account when the bank allowed interest and as such the conditions of section 80P(2)(d) should have been allowed according to the provisions of section 80AB of the income tax Act, because interest paid by the assessee on borrowed funds of Rs. 2.24 crores is directly related to the sales which is deposited with the Kaira District Central Co-operative Bank. The interest paid is much higher than the interest income, and thus, the net result is nil and, therefore, the assessee is not entitled for deduction u/s 80P(2)(d) of the income tax Act. It is a mistake apparent on the record and, therefore, I hereby show cause to rectify the same u/s 154 of the income tax Act. Your explanation with necessary details/evidences are requested to furnish on or before the date mentioned in the said notice.

(Sd.) (R.A. Verma ).

Learned counsel for the petitioner challenges that the reading of the notice along with the assessment order which is sought to be rectified leaves no room for doubt that there is no mistake apparent from the record which can be rectified by having recourse to proceedings u/s 154, hence, the very assumption of jurisdiction by the assessing authority is bad and the petitioner is entitled to a writ of prohibition. On the other hand, it has been strenuously contended by learned counsel for the Revenue that as the finding arrived at by the assessing authority during the course of the assessment proceedings that there is a nexus between the interest earned and the interest paid to the co-operative society in its current account and the assessee is liable to claim deduction in terms of section 80P(2)(d) has been arrived at in a different context but in fact there was no investment with the co-operative bank which can entitle the petitioner to the benefit of deduction in terms of Commissioner of Income Tax, Lucknow Vs. U.P. Cooperative Federation Ltd., , a decision by the Supreme Court, it amounts to a mistake apparent from the record and is liable to be rectified.

We have carefully considered the rival contentions.

Law is well-settled as far as the scope of proceedings under authority to rectify the authorities'' own orders whether u/s 35 of the 1922 Act or u/s 154 of the income tax Act, 1961, is concerned, since the decision in T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, , which succinctly states as to what is the meaning of a mistake apparent on the face of the record (headnote):

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. A decision on a debatable point of law is not a mistake apparent from the record.

Applying the aforesaid test, we find that the mistake which the authority purports to rectify by the impugned notice cannot be said to be a mistake apparent on the face of the record. The assessing authority wants to assume jurisdiction on the ground that there was no investment by the assessee with the co-operative bank for earning interest thereon to invoke section 80P(2)(d). This is necessarily a fact which has neither been found in the assessment order nor is undisputed. On the contrary, the assessing authority has, in unequivocal terms, recorded the finding in favour of the assessee in the assessment order, which is sought to be rectified, as under:

In the present case, whenever the assessee has surplus fund, the same is deposited in the co-operative bank otherwise the same is used in its business activity. Thus, when funds were idle the assessee has to pay interest on such idle funds. A prudent businessman will reduce his interest burden by repaying such amount against loan raised from the co-operative societies or advance such money at higher rate of interest. In the present case, the assessee is depositing the surplus in the co-operative bank and claims exemption u/s 80P(2)(d). Thus, interest bearing funds are deposited in the co-operative bank and thus there is a direct nexus between funds borrowed and that of deposit in banks. Thus, only on net interest the assessee is entitled for deduction u/s 80P(2)(d). So the admissible deduction u/s 80P(2)(d) on interest income comes to Rs. 48,84,628.

Therefore, it cannot be said that the basic assumption of a fact that the assessee was not an investor with the co-operative bank is existing on record and if that fact is taken into account, the assessing authority has reached an apparent wrong decision contrary to the law laid down by the Supreme Court. If the foundational fact itself has to be determined after inviting objections and leading evidence, it cannot be said to be a mistake apparent on the face of the record. It becomes a case where the assessing authority, by holding an enquiry, will have to establish a fact on the basis of which the earlier order can be said to be erroneous. That is to say the order itself does not suffer from any error apparent from the record but may become erroneous if a particular fact is established after holding an enquiry therein, nor is it a case where it can be said that the finding of the assessing authority quoted above suffers from any such error apparent from the record which could itself be corrected u/s 154. The notice assumes that the assessing authority in its original order has allowed certain deductions in respect of certain amounts of interest on surplus which was held not allowable which is an assumption contrary to the record. In our opinion, the notice read in the light of the finding recorded by the assessing authority leaves no room for doubt that the assessing authority has assumed jurisdiction u/s 154 not for making any rectification, but for ratifying its decision by holding an enquiry afresh into the matter. Such a course of action is not contemplated u/s 154. The authority cannot have recourse to such proceedings by assuming some state of fact to exist de hors the record. We are, therefore, of the clear opinion that the condition necessary for assuming jurisdiction u/s 154 does not exist in the present case. Accordingly, the petition is allowed. Notice at exhibit-J dated March 9, 1995, is quashed. Rule is made absolute with no order as to costs.