Mitsui and Co. Ltd. vs Commissioner of Income Tax

In this reference u/s 256(1) of the Income Tax Act, 1961 (''the Act'') relevant for the assessment years 1978-79 and 1979-80, the following questions of law has been referred for our opinion:

Whether, the Tribunal is justified in holding that the provisions of Section 263 could be applied to an assessment order passed by the Inspecting Asstt. Commissioner under the provisions of Section 146(3) of the Income Tax Act, 1961?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that there was a business connection of the assessee in India on account of the functioning of its Indian branches in India?

Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that on a proper reading of the Article 2(1) of the Agreement for Avoidance of Double Taxation between of India and Japan, the activities, of India branch of the non-resident assessee-company resulted in bringing about existence of a permanent establishment of the assessee in India and thereby making liable to tax in India income attributable to the permanent establishments in India in respect of the transaction in India which materialised on account of assistance and trading operations of the branches?

It is submitted by Mr. Saubhagya Aggarwal, learned Counsel for the assessee, that in the event the first question is decided in favour of the assessee and it is hold that the Commissioner of Income Tax (Commissioner) could not exercise powers u/s 263 of the Act, questions (2) and (3) would be rendered academic.

Ms. Sonia Mathur, learned standing counsel for the revenue does not contest this position but submits that some other High Courts have earlier taken a contrary view mainly relying upon the opening words in the Explanation; "For the removal of doubts". She submits that the legal position that the aforementioned explanation is merely clarificatory and therefore retrospective has been held by several High Courts in the following decisions COMMISSIONER OF INCOME TAX Vs. MULCHAND BAGRI., Duncan Agro Industries Ltd. Vs. Income Tax Officer, Central Section XXIX, Calcutta and Others, ; Commissioner of Income Tax Vs. K.C. Rangaiah and Co., ; Commissioner of Income Tax Vs. Vithal Textiles, ; Commissioner of Income Tax Vs. Vincentian Orissa Society, and Commissioner of Income Tax Vs. S. Khushal Singh, .

At this stage, it would be necessary to quote Section 47 of the Taxation Laws (Amendment) Act, 1984, which reads us follows:-

Amendment of Section 263.-In Section 263 of the Income Tax Act, with effect from the 1-10-1984.

Learned Counsel for the assessee has drawn our attention to a decision rendered by this Court in CIT v. Smt Asha M. Primlani (IT Reference No. 532 of 1986, dated 6-9-2007 to contend that it has already been held that the Commissioner of Income Tax could exercise powers u/s 263 of the Act in respect of an order passed by the Inspecting Assistant Commissioner but only with effect from 1-10-1984. In other words, the amendment to Section 263 was with prospective effect from 1-10-1984, the date mentioned in Section 47 of the Taxation Laws (Amendment) Act, 1984.

(a) In Sub-section (1), the following explanation shall be inserted at the end, namely :

''Explanation.-For she removal of doubts, it is hereby declared that, for the purposes of this Sub-section, an order passed by the Income Tax Officer shall include -

(a) an order of assessment made on the basis of directions issued by the Inspecting Assistant Commissioner u/s 144A or Section 144B; and

(b) an order made by the Inspecting Assistant Commissioner in exercise of the powers or in performance of the functions of an Income Tax Officer conferred on, or assigned to, him under clause (a) of Sub-section (1) of Section 125 or under Sub-section (1) of Section 125A''; (b) for Sub-section (2), the following Sub-section shall be substituted, namely:

''(2) No order shall be made under Sub-section (1) after expiry of two years from the end of the financial year in which the order sought to be revised was passed.''

In our decision in Smt. Asha M. Primlani''s case {supra), we have compared and contrasted the language used in Section 47 of the Taxation Laws (Amendment) Act, 1984 with the language used in the subsequent amendment to Section 263 of the Act, by the Finance Act, 1989 which introduced clause (c) to the Explanation which reads thus:

(c) where any order referred to in this Sub-section and passed by the assessing officer had been the subject-matter of any appeal filed on or before or after 1-6-1988, the powers of the Commissioner under this Sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.

The subsequent amendment in 1989 has been interpreted by the Supreme Court in COMMISSIONER OF Income Tax Vs. SHRI ARBUDA MILLS LTD., ''. This has been reiterated in Commissioner of Income Tax, Bangalore Vs. Shree Manjunatheaware Packing Products and Camphor Works, a decision cited by learned Counsel for the revenue.

Thus within the same provision, that is, the Explanation to Section 263, two different types of languages are used. The words "shall he deemed always to have extended to such matters" occurring in clause (c) is absent in clause (a). It was the presence of those words in clause (c) that persuaded the Supreme Court in Shri Arbuda Mills Ltd.''s case (supra) to hold that clause (c), which was introduced by the 1989 Amendment was retrospective, that is, even prior to the date of the said amendment. On the other hand, apart from the fact that such words are absent in clause (a), the opening line of Section 47 of the Amendment Act of 1984 indicates that such provision has been inserted only with effect from 1-10-1984, Recognition of this fact is of crucial importance.

We, have examined the decisions cited by learned Counsel for the revenue. We may straightway point out that the decision in K. C. Rangaiah & Co.''s case (supra) deals with the subsequent amendment concerning clause (b) of the Explanation and therefore is not immediately relevant for the present case. However, what is significant is that even in clause (b), the words "shall include and shall be deemed always to have included" occur and therefore puts this clause on a different footing as regards its retrospective nature.

As regards the other decisions of the Calcutta, Orissa and Madhya Pradesh High Courts, there was no occasion for those High Courts to compare the 1984 Amendment with the subsequent amendment in 1989 which has been explained by the Supreme Court in Shri Arbuda Mills'' case (supra). It must be pointed out that the judgment of a learned Single Judge of the Calcutta High Court in Duncan Agro Industries Ltd.''s case (supra) given in 2001, does refer to Shri Arbuda Mills Ltd.''s case (supra) but does not notice the contrast in the language of the two amendments, that is, the amendment in 1984 and the subsequent amendment in 1989.

We are accordingly not persuaded to reconsider the view already expressed by us in Smt. Asha M. Primlani''s case (supra).

Under the circumstances, we answer question No. (1) in the negative, in favour of the assessee and against the revenue. Question Nos. (2) and (3), therefore, do not arise for consideration.

The reference is disposed of accordingly.