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Judgment
Sethuraman, J.—This is a reference u/s 256(1) of the Income Tax Act of 1961. The assessee is a co-operative society engaged in the
marketing of the agricultural produce of its members. It is exempt from Income Tax and super-tax in respect of profits and gains of the business
carried on by it by virtue of Sections 81 and 99 of the Income Tax Act, 1961, as it was in force in the relevant year. We arc considering in this
reference the assessment for the assessment year 1963-64. The Income Tax Officer made an assessment on the asses see on 20th of August,
1963, computing the total income as follows :
Interest on securities Business Other sources
Rs. Rs. Rs.
1,723 2,40,695 236
Total income Rs. 2,42,654.
As mentioned earlier, since the assessec was not liable to Income Tax and super-tax with reference to its business promts, the Income Tax
Officer levied the tax on the aggregate of interest from securities, Rs. 1,723, and other sources, Rs. 236, in all Rs. 1,959. The tax was worked out
as follows:
Rs.
income tax on Rs. 1,959 at the rate applicable to Rs. 2,42,654, viz., 23,885 467.90
Add : Surcharge at 5% 23.40
Special surcharge 70.20
Proportionate additional surcharge on Rs. 1,959 186.48
747.98
After adjusting the tax deducted at the source and the advance tax paid, he made a demand for the balance of tax due from the assessee.
There was a change in the incumbent and the succeeding Income Tax Officer took proceedings u/s 154 of the Income Tax Act of 1961. Under
that provision, with a view to rectifying any mistake apparent from the record, the Income Tax Officer may amend any order of assessment or of
refund or any other order passed by him. Such an amendment cannot be made after the expiry of four years from the date of the order sought to
be amended. Within about two years from the assessment, the Income Tax Officer set in motion the proceedings u/s 154. In his order of 12th
August, 1965, he wrote as follows:
In the original assessment made on August 20, 1963, (i) super-tax was omitted to be calculated; and (ii) additional surcharge on the residual
income was levied proportionate to non-exempt income which was not correct.
As these mistakes are apparent from the records, revise the assessment as under after calling for assessee''s objection.
He took the total income at the same figure, viz., Rs. 2,42,654, as computed by his predecessor and proceeded to work out the tax as follows :
Rs. Ps.
income tax 468.50
Surcharge at 5% 23.42
Special surcharge 70.26
Addl. Income Tax surcharge 29.70
Super-tax 317.52
Additional surcharge on the residual income- Rs. 1,39,029 12,792.90
Total tax Rs. 13,702.30
The assessee objected to the application of Section 154 and also to the levy of the additional surcharge of Rs. 12,792.90. In the order u/s 154,
the Appellate Assistant Commissioner pointed out that ""the Income Tax Officer failed to levy super-tax and additional surcharges correctly by
mistake"" and that these mistakes were apparent from the records. Regarding the objection of the assessee against the levy of additional surcharge
of Rs. 12,792.90 by taking into account the exempted business income, he proceeded to make some discussion, which appears to be beside the
point. '' In the result, he dismissed the appeal.
The assessee appealed to the Appellate Tribunal and contended that there was no mistake apparent from the record so as to attract Section
154 and that the additional surcharge could not be levied in respect of the income from the business having regard to the provisions of the Income
Tax Act, 1961, and the Finance Act, 1963, applicable to the present case. The Tribunal noticed :
It is unfortunate, however, that in the orders of the Income Tax Officer and the Appellate Assistant Commissioner no attempt has been made to
set out how the calculation of tax made in the original assessment u/s 143(3) was wrong and how the.calculation made u/s 154 is correct.
It, however, considered elaborately the various provisions of the Income Tax Act and the Finance Act, 1963, and came to the conclusion that
there was a mistake in the calculation of tax in general and the calculation of additional surcharge in particular and that the mind of the Income Tax
Officer could and did notice that there was a mistake which he proceeded to rectify according to what he considered to be correct. The Tribunal
endeavoured to demonstrate in its order as to how the Income Tax Officer''s working was justified. The result is that we get an insight into what the
Income Tax Officer has done only from the order of the Tribunal.
At the instance of the assessee, the following two questions have been referred :
(1) Whether, on the facts and in the circumstances of the case, the levy of tax of Rs. 12,792.90 as additional surcharge on the assessee is in
accordance with law ?
(2) Whether, on the facts and in the circumstances of the case, there was any error apparent from the record regarding levy of additional surcharge
which could be rectified u/s 154 of the Income Tax Act, 1961?
The learned counsel for the assessee submitted that the second question should have priority of consideration as in case he succeeds on that
question, the consideration of the first question would not arise. He submitted that there was no error apparent from the record in the calculation of
tax, which could have been rectified by the Income Tax Officer. He referred us to two decisions of the Supreme Court in this connection which
would be noticed presently. For the respondent, the learned counsel argued that the provisions of the Finance Act, 1963, were clear and that the
Income Tax Officer had unfortunately omitted to calculate the proper tax on the earlier occasion in accordance with the said provisions and that the
rectification was of an error which was apparent from the record. His submission went to the full logical extent, viz., that there could be no two
views possible in the relevant provisions of the Finance Act, 1963, so that the error in the calculation 6f tax in the original assessment was a patent
one.
Section 81(1)(c) provides that Income Tax shall not be payable by a cooperative society in respect of the profits and gains of business carried
on by it, if it is a society engaged in the marketing of the agricultural produce of its members. Section 99(1)(v) provides that super-tax shall not be
payable by an assessee in respect of, inter alia, the following amount included in his total income-
(v) where the assessee is a co-operative society, any income in respect whereof no Income Tax is payable by it by virtue of the provisions of
Section 81.
There is no dispute that in the present case the assessee was eligible for exemption from levy of Income Tax and super-tax on Rs. 2,40,695
which was its business income. Paragraph A of Part I of the First Schedule to the Finance Act of 1963 provides for levy of surcharge on Income
Tax. To the extent relevant it runs as follows:
The amount of Income Tax computed at the rates hereinbefore specified shall be increased by the aggregate of the surcharges calculated as under
:--.....
(c) an additional surcharge for purposes of the Union calculated on the amount of the residual income at the following rates, namely :--
(i) On the first Rs. 6,000 of the residual income 4%
(ii) On the next Rs. 9,000 of the residual income 6%
(iii) On the next Rs. 12,000 of the residual income 8%
(iv) On the next Rs. 15,000 of the residual income 9%
(v) On the balance of the residual income 10%
The rest of the provision need not be extracted. Section 2(8) of the same Finance Act, 1963, provides:
(8) For the purposes of Paragraphs A and C of Part I of the First Schedule, the expression ''residual income'' means the amount of the total
income as reduced by-
(a) the amount of the capital gains, if any, included therein ; and
(b) the amount of tax (exclusive of additional surcharge) which would have been chargeable on such reduced total income if it had been the total
income no part of which had been exempt from tax and on no portion of which deduction of tax had been admissible under any provisions of the
Income Tax Act or this Act.
The present case comes under Paragraph A of Part I of the First Schedule to the Finance Act of 1963. From the assessment order, it would
be clear that though the assesses''s total income was Rs. 2,42,654 after deducting the exempted income u/s 81(1)(c) and Section 99(1)(v), there
was only a balance of Rs. 1,959, which was liable to be assessed to Income Tax as well as super-tax. The first Income Tax Officer levied the
additional surcharge only on this sum of Rs. 1,959. His successor, who initiated the rectification proceedings, considered that this additional
surcharge should have been levied on the ""residual income"" of Rs. 1,39,029. The question raised is whether the levy of additional surcharge on the
residual income"" of Rs. 1,39,029 in this case was proper in the context of the exemption of Rs. 2,40,695. In eff 3ct, though Income Tax and
supertax were not charged on the sum of Rs. 2,40,695, the successor-income tax Officer, levied additional surcharge on a substantial part of this
amount. The point to be considered is whether in charging the additional surcharge originally in the minner done, the Income Tax Officer committed
any error which was apparent from the record.
The Supreme Court has on more than one occasion gone into the question as to what is an error apparent from the record in the context of
Section 154 of the 1961 Act or its predecessor Section 35 of the 1922 Act. It is enough for our purpose to consider the latest decision on this
point, which is reported in T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, . The assessee in that
case was a registered firm with two partners. The two partners were non-residents. The firm had been assessed for the assessment years 1958-
59, 1960-61, 1961-62 and 1962-63 on the slab rates prescribed under the respective Finance Acts applicable to this firm. The partners were
charged tax at the maximum rate as they were non-residents. The Income Tax Officer took proceedings u/s 154 for all these years stating that
there was mistake apparent from the record inasmuch as the firm itself had not been charged tax at the maximum rate u/s 17(1) of the Indian
Income Tax Act of 1922. Section 17(1) provided that where a person was not resident in the taxable territories and was not a company, the tax,
including super-tax, payable by him would be an amount equal to the Income Tax which would be payable on his total income at the maximum
rate, plus either the super-tax which would be payable on his total income at the rate of nineteen per cent. or the super-tax which would be
payable on his total income if it were the total income of a person resident in the taxable territories, whichever was greater. The word ""person"" was
defined in the Income Tax Act as including a Hindu undivided family and a local authority. Unless a firm could be considered as a ""person"", Section
17(1) could not govern the assessment of the firm. The assessee contended that the applicability of Section 17(1) of the Act of 1922 to a firm was
not free from doubt and that, therefore, Section 154 could not be applied. The Income Tax Officer rejected this contention and passed an order
u/s 154, which was challenged before the Bombay High Court. The Bombay High Court held that the original assessments made on the firm were
prima facie in accordance with law and that there was no obvious or patent mistake in those orders of assessment, which the Income Tax Officer
was competent to rectify. In the appeal against the order of the High Court, the Supreme Court held construing Section 17(1) of the Act of 1922
as follows--See T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, :
From what has been said above, it is clear that the question whether Section 17(1) of the Indian Income Tax Act, 1922, was applicable to the
case of the first respondent is not free from doubt. Therefore, the Income Tax Officer was not justified in thinking that on that question there can be
no two opinions. It was not open to the Income Tax Officer to go into the true scope of the relevant provisions of the Act in a proceeding u/s 154
of the Income Tax Act, 1961. 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 conceivably be two opinions.
The Supreme Court observed that the Income Tax Officer was wholly wrong in holding that there was a mistake apparent from the record in
that case.
Therefore, the point before us is whether the mistake, if any, here is an obvious and patent mistake, and not something which has to be
established by a long drawn process of reasoning on points on which there may conceivably be two opinions. The construction of this very
provision in the Finance Act in relation to a co-operative society came up for consideration in Madurai District Central Co-operative Bank Ltd.
Vs. Third Income Tax Officer, Madurai, . That was a co-operative society engaged in the business of banking. The exemption from Income Tax
and super-tax is available to a co-operative society engaged in carrying on business of banking in the same way as it applies to a society engaged
in marketing of agricultural produce of its members as here. The total income of that co-operative society was computed at Rs. 10,00,098. Out of
this, Rs. 9,48,335 was its business income, while Rs, 51,763 was its income from other sources. The Income Tax Officer levied Income Tax and
super-tax only on the income from other sources at the rate applicable to the total income. He, however, computed the residual income at Rs.
5,39,386 and levied additional surcharge under the same provision of the Finance Act of 1963. The assessee challenged the assessment in
proceedings under article 226. The main grievance of the assessee before the High Court was that whereas its taxable income was only Rs.
51,763, a total tax of Rs. 76,674.07 was imposed on it and that the relevant provisions of the Finance Act were invalid, as they could, not be
subject to an additional surcharge on income which was exempt from tax under the provisions of the Income Tax Act. It was also contended that
the additional surcharge was intended as an additional levy on Income Tax and had no independent existence apart from it so that where there was
no Income Tax, there could be no surcharge. These contentions were rejected by this court and the matter was taken on appeal to the Supreme
Court. The Supreme Court held that the new charge under the relevant provisions of the Finance Act, 1963, in the shape of additional surcharge
could be levied even on a part of the income of a co-operative society which was exempt from Income Tax and super-tax under Sections 81 and
99 of the Income Tax Act, 1961, to the extent contemplated therein. In other words, it was held that the surcharge was but an additional mode or
rate for charging Income Tax and the levy of additional surcharge on income exempt from Income Tax was authorised by the provisions of the
Finance Act, 1963.
This decision would dispose of the first question if it were to be considered. However, we are now on the question as to whether the
proceedings u/s 154 were competent. At page 31 of the report it was observed--See Madurai District Central Co-operative Bank Ltd. Vs. Third
Income Tax Officer, Madurai, :
Granting that the word ''income tax'' includes surcharges, it may be arguable that the exemption from the payment of Income Tax u/s 81(i)(a) of
the 1961 Act would extend to surcharges. But the matter does not rest with what Section 81(i)(a) says.
The above passage goes to show that there was an arguable question before the Supreme Court. In the judgment, a decision of the Allahabad
High Court in Allahabad District Co-operative Bank Ltd. Vs. Union of India (UOI) and Others, has also been noticed at page 35. That decision
construing the identical provision of the Finance Act, 1963, was in favour of the assessee. But the Supreme Court pointed out that the said case
was incorrectly decided.
It is clear from the fact that a Bench of the Allahabad High Court took a different view regarding the levy of the additional surcharge with
reference to any part of the exempted income, that the construction of the relevant provision of the Finance Act, 1963, cannot be said to be so
clear as to give no room for two opinions. In other words, the mistake in the matter of calculation of additional surcharge with reference to the
exempted income cannot be said to be an obvious and patent mistake so as to be rectifiable u/s 154. The construction of the said provision bristles
with various problems such as--1. as to whether the surcharge would apply to exempted income; and 2. whether the expression ""the amount of
Income Tax.....increased by"" occurring in the provision of Para. A of Part I of the First Schedule to the Finance Act, 1963, relating to the
additional surcharge required a positive figure which alone could be increased.
Especially in the context of the observation of the Supreme Court it may be arguable that the exemption from payment of Income Tax and
super-tax would extend to surcharges. Having regard to the aforesaid decision of the Allahabad High Court which was dissented from by the
Supreme Court, we consider that two views were possible on the construction of the provisions at the time when the succeeding Income Tax
Officer proceeded u/s 154 and that the Income Tax Officer could not have resorted to that section, as if there was only an obvious and patent
mistake. We, therefore, answer question No. 2 in the negative and in favour of the assessee.
As we have already stated, the answer to the first question would arise for consideration only in the event of there being an error apparent from
the record, which is the subject-matter of question No. 2 answered above. In the event of our having to consider this question, we would hold that
it is covered by the decision of the Supreme Court in Madurai District Central Co-operative Bank Ltd. Vs. Third Income Tax Officer, Madurai, .
The answer to the first question would, therefore, be in the affirmative. As the assessee has substantially succeeded in the reference, it will be
entitled to its costs. Counsel''s fee Rs. 250.