1976-VIL-460-MAD-DT

Equivalent Citation: [1977] 110 ITR 822, 1977 CTR 29

MADRAS HIGH COURT

Date: 21.04.1976

METTUR CHEMICALS AND INDUSTRIAL CORPORATION LIMITED

Vs

COMMISSIONER OF INCOME-TAX, MADRAS I

BENCH

Judge(s)  : ISMAIL., SETHURAMAN 

JUDGMENT

The judgment of the court was delivered by

ISMAIL J.-The Income-tax Appellate Tribunal, Madras Bench, has stated a case and referred the following two questions of law under section 256(1) of the Income-tax Act, 1961, for the opinion of this court:

" (1) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that there was a mistake apparent from the record which could be rectified by the Income-tax Officer under section 154 in respect of the assessments relating to 1959-60 and 1960-61 ?"

"(2) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the order under section 154 dated February 25, 1965, relating to the assessment for 1959-60 was not rendered illegal on the ground that it was barred by the period of limitation ?"

These questions relate to two assessment years, viz., assessment years 1959-60 and 1960-61. The assessee is a public company. The assessment for 1959-60 was made on May 27, 1960, determining the total income at Rs. 15,03,585. This included income from the business determined at Rs. 14,43,495. Though there is no specific discussion in the assessment order about the admissibility of wealth-tax as a deduction in arriving at the business income, the figures found in the assessment order itself clearly showed that the income from the business was arrived at after deducting the wealth-tax paid by the assessee. The assessment was reopened under section 147(b) and by an order dated November 23, 1962, passed under section 143(3) read with section 147 the total income was determined at Rs. 15,04,680 and income from the business was determined at Rs. 15,44,590. Though income was incurred on account of certain additions the deduction of wealth-tax for the computation of the income made by the Income-tax Officer by his original order remained untouched by this revised order. The assessment for 1960-61 was made under section 23(3) on March 16, 1961. The total income was determined at Rs. 14,43,297 inclusive of income from business of Rs. 1,32,660. The order of assessment for this year also showed deduction of wealth-tax from the income from the business for arriving at the taxable income. The assessment for 1960-61 also was reopened and an order under section 143(3) read with section 147(b) was passed on November 23, 1962. In this case also though there were certain additions, the deduction of wealth-tax from the income of the business for arriving at the assessable income from the business remained untouched. There was one more occasion for reopening the assessment under section 147 and by another order passed under section 143(3) read with section 147(b) dated November 23, 1964, the total income and business income were determined at Rs. 14,70,753 and Rs. 13,54,122, respectively. Here again the deduction of the wealth-tax from the income from the business remained untouched. However, subsequently the Income-tax Officer took proceedings in respect of both the assessment years under section 154 of the Income-tax Act, 1961. Even though the notice issued by the Income-tax Officer on February 16, 1965, to the assessee conveyed the fact that he had noticed a mistake which was apparent from the record in relation to each of the two assessments for 1959-60 and 1960-61, inasmuch as the wealth-tax paid by the assessee was deducted from the income from the business and even though it did not specifically refer to the decision of this court in Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income-tax [1963] 50 ITR 809 (Mad) holding that wealth-tax paid by the assessee was not deductible from the income from the business for arriving at the taxable income, still that judgment was the occasion for the issue of the notice on February 16, 1965, under section 154 of the Act. The assessee raised certain objections. The Income-tax Officer rejected them and passed two separate orders dated February 25, 1965, for the two years under section 154 by which he added back the wealth-tax paid by the assessee to the total income from the business which he had originally deducted by way of rectifying the mistake said to be apparent from the records. The assessee filed appeals against both the orders to the Appellate Assistant Commissioner and the said appeals were dismissed by the Appellate Assistant Commissioner. The assessee thereafter filed appeals to the Tribunal relating to both the years. The Tribunal heard both the appeals together and disposed of them by a common order. One of the contentions put forward before the Tribunal was that there was no mistake apparent from the records which could be rectified by the Income-tax Officer under section 154. Another objection raised was that the proceedings under section 154 were barred by limitation. The Tribunal rejected these contentions and dismissed the appeals. It is thereafter, at the instance of the assessee, the above two questions have been referred to this hon'ble court for its opinion.

As far as the first question is concerned, we are clearly of the opinion that the answer to the said question must be in the affirmative. Section 154 of the Act enables the Income-tax Officer to rectify any mistake apparent from the record. In this case, as we already pointed out, the Income-tax Officer had deducted the wealth-tax paid by the assessee from the business income for computing the assessable income from the business. The decision of this court referred to above, viz., Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income-tax [1963] 50 ITR 809 (Mad) held that wealth-tax paid by a company under the provisions of the Wealth-tax Act, on the net wealth of the company is not an allowable expenditure in computing the taxable income of the company, either under section 10(2)(xv) or under section 10(1) of the Indian Income-tax Act, 1922. This decision of this court is an authoritative pronouncement as to the scope of section 10(2)(xv) and section 10(1) as far as the Income-tax Officer was concerned. Consequently, this decision made it clear that the Income-tax Officer has committed an error in deducting the wealth-tax paid by the assessee from the income from the business and that error was apparent from the record. Consequently, the Income-tax Officer acted well within his jurisdiction in proceeding under section 154 of the Income-tax Act, 1961, in order to rectify a mistake apparent from the record by adding back the wealth-tax which he had originally deducted. We are not referring to the subsequent decisions on this question and the retrospective amendment of the law in this behalf because at the time when the Income-tax Officer took proceedings under section 154 this was the only binding decision in existence and, therefore, it was not merely the right but the duty of the Income-tax Officer to give effect to the law as declared by this court in the decision referred to above by correcting the mistake which he had already committed. Consequently, our answer to the first question referred to above is in the affirmative and against the assessee.

This takes us to the second question and that question is confined to the assessment for 1959-60. As we already pointed out, the assessment for this year was originally completed on May 27, 1960, and the notice under section 154 was issued for the first time only on February 16, 1965. Consequently, the notice was issued beyond the period of four years prescribed under section 154(7) for the purpose of enabling the Income-tax Officer to exercise his jurisdiction under that section. Therefore, if the mistake was with reference to the order dated May 27, 1960, the proceedings initiated on February 16, 1965, are obviously beyond the period of limitation and, consequently, the Income-tax Officer was not entitled to proceed under that section. However, the learned counsel for the department contended that the period of limitation should be computed not from the date of the original order of assessment, namely, May 27, 1960, but from the date of the subsequent order by which the assessment was reopened under section 147(b) of the Income-tax Act. That order was dated November 23, 1962, and if the contention of the learned counsel for the revenue is correct on this point, certainly the notice under section 154 dated February 16, 1965, will be well within the period of four years from the date of November 23, 1962. On the other hand, the argument advanced on behalf of the assessee is that the error had crept into the order dated May 27, 1960, itself, and notwithstanding the subsequent reopening of the assessment, that error remained untouched and, therefore, that error cannot be said to have crept into the order dated November 23, 1962, so as to enable the Income-tax Officer to compute the period of limitation from that date and that the period of limitation should be computed only from the date of the original order, viz., May 27, 1960. This was sought to be countered by the learned counsel for the revenue by putting forward the argument that once the Income-tax Officer took proceedings under section 147 and passed a fresh order of reassessment the original order has ceased to have an independent existence and it had merged in the subsequent order or it has become non-existent.

We are of the opinion that the contention of the learned counsel for the revenue is not correct. Before giving our reasons in this behalf we may refer to the only decision which is directly in point rendered by the Allahabad High Court. That decision is in Standard Chemical Co. Pvt. Ltd. v. Income-tax Officer. In that case the assessee was a limited company. For the assessment year 1966-67 in computing the total income the assessee was granted development rebate in respect of some machinery which had been installed by it in the calendar year 1964. The assessee had also claimed depreciation on certain assets including land. However, the Supreme Court in Commissioner of income-tax v. Alps Theatre [1967] 65 ITR 377 (SC) had held that the depreciation was allowable only on the value of buildings and not on the value of land. Consequently, the Income-tax Officer relying on the decision of the Supreme Court took proceedings under section 147 of the Income-tax Act, 1961, and passed a supplemental assessment order on October 16, 1969, withdrawing the depreciation on the value of the land. Subsequently, the Income-tax Officer felt that the development rebate had also been wrongly allowed to the assessee inasmuch as the assessee had not created a reserve for the same during the year the machinery was installed. Therefore, he issued a notice under section 154 of the Act on April 14, 1971, treating it as a case of rectification of mistake. He finally passed an order under that section on September 10, 1971, withdrawing the development rebate which has been allowed to the assessee in the original assessment order after overruling the assessee's objection that the proceedings were time-barred. Thereafter, the assessee approached the Allahabad High Court by a petition under article 226 of the Constitution of India to quash the order of the Income-tax Officer passed under section 154 of the Act.

We may point out in this context that since the original order of assessment was dated 9th February, 1967, the notice issued under section 154 on April 14, 1971, was beyond the period of four years just as in the present case. However, the contention of the department was that since the original order of assessment was reopened under section 147 of the Income-tax Act, 1961, and a fresh order was passed on October 16, 1969, the four year period prescribed under section 154(7) has to be computed from October 16, 1969, and if it is so done the notice dated April 14, 1971, was within four years. The reasoning advanced on behalf of the revenue in that case was that the original assessment order had merged in the order passed under section 148 by the Income-tax Officer, and, therefore, the limitation should be counted from the date of the later order. The Bench of the Allahabad High Court rejected this contention. The Bench said:

" An order under section 148 is a separate order dealing with an item of income which had escaped assessment. The original assessment order does not merge into an order passed under section 148. Where reassessment is made under section 148 (corresponding to section 34 of the Indian Income-tax Act, 1922) the Income-tax Officer's jurisdiction is confined to the income which had escaped assessment and does not extend to revising, reopening and reconsidering the whole assessment. See Kashi Nath Bagla v. Commissioner of Income-tax [1950] 4 ITC 472 (All) and Kevaldas Ranchhodas v. Commissioner of Income-tax [1968] 68 ITR 842 (Bom). Likewise, in proceedings under section 34 the assessee cannot reagitate questions which have been decided in the original assessment. So the original assessment cannot be challenged in appeal against an assessment order under section 34. See Commissioner of Income-tax v. A. D. Shroff [1957] 31 ITR 284 (Bom). It is thus clear that the question of development rebate had become final when the original assessment order was passed. It was not the subject-matter of dispute in subsequent proceedings under section 148; so the original assessment order cannot be said to have merged in the order under section 148, which was restricted only to depreciation."

This decision of the Allahabad High Court is on all fours with the facts of the present case and, therefore, on the basis of this decision it must be held that the proceedings initiated by the Income-tax Officer in the present case under section 154 was barred by limitation.

Realising this, Mr. Jayaraman, learned counsel for the revenue, who at one stage of the argument had contended that the original order has merged in the reassessment order made under section 148, subsequently contended that as soon as an order under section 148 is passed the original order has ceased to be in existence and, therefore, the only order that could be rectified under section 154 was the subsequent order of reassessment. In support of this contention, the learned counsel drew our attention to a decision of this court and an observation of the Supreme Court in another decision. The decision of this court is Sundaram and Co. (P.) Ltd. v. First Additional Income-tax Officer [1964] 1 MLJ 1 (Mad). In that case a company was assessed to super-tax for 1956-57 in the sum of Rs. 2,47,325 after allowance of rebate under the Finance Act, 1956. The Income-tax Officer passed a distribution order under section 23A of the Indian Income-tax Act, 1922, on the score that the company had not distributed dividends for the years 1946-47 to 1951-52. Pursuant to the distribution order, the company declared dividends out of the profits of the account year relevant to 1956-57. This entailed a reduction in the super-tax rebate already allowed. The officer reopened the assessment for 1956-57 under section 34, and redetermined the super-tax at Rs. 3,28,304 after reducing the rebate. The reassessment was challenged in appeal by the assessee. Hence, the Income-tax Officer, by way of caution, also took action under section 35, purporting to rectify the original order of assessment by reducing the rebate and enhancing the super-tax. The assessee-company filed a petition under article 226 of the Constitution of India before this court to quash the order of rectification. The court held that the Income-tax Officer had acted in excess of jurisdiction and the original order of assessment sought to be rectified did not subsist on the date when proceedings were initiated under section 35, for the order was cancelled and set aside by the officer himself, and hence there was no order which could form the subject-matter of proceeding under section 35. The Bench observed:

" It seems to us to he obvious that in the present case the Income-tax Officer acted in excess of his jurisdiction in passing the order of rectification under section 35 of the Act. The order sought to be rectified dated 29th March, 1957, did not subsist on the date when proceedings were initiated under section 35. That order was cancelled and set aside by the Income-tax Officer himself in the purported exercise of his jurisdiction under section 34. As stated already, there was an appeal from that order to the Appellate Assistant Commissioner who modified it. The effect of the dismissal of the appeal by the Tribunal is to keep intact the order of the Appellate Assistant Commissioner. The only order that is now in force is that of the Appellate Assistant Commissioner who modified the reassessment order of the Income-tax Officer dated 28th March, 1959. There cannot be any doubt that the Income-tax Officer could not rectify the order dated 29th March, 1957, which ceased to exist on and from 29th March, 1959, when the Income-tax Officer himself passed the order of reassessment under section 34 of the Act. We are of the opinion that the above observations have to be understood in the context of the facts of that particular case and we are unable to hold that the Bench of this court in that case laid down a general proposition that once the Income-tax Officer takes action under section 34 of the Indian Income-tax Act, 1922, to assess the escaped income or to reassess the income, the original order automatically ceased to exist for all purposes. If we may say so with respect, the decision of this court in that case is absolutely correct on facts. The scope of the action taken by the Income-tax Officer in that case under sections 34 and 35 was the same, namely, redetermination of the super-tax after reducing the rebate. Once the Income-tax Officer effects the same in the exercise of his jurisdiction under section 34, there will be no order to be rectified under section 35."

The next judgment relied on is that of the Supreme Court in Jaganmohan Rao v. Commissioner of Income-tax [1970] 75 ITR 373 (SC). That case referred to the condition precedent for the invocation of the jurisdiction of the Income-tax Officer under section 34 of the Indian Income-tax Act, 1922. In the course of the judgment in that case the Supreme Court observed (page 380):

" It was stated on behalf of the appellant that in any case the Income-tax Officer could have legitimately assessed one-third share of the income which was due to the assessee according to the judgment of the Madras High Court and there was escape only to the extent of two-thirds share of the income. This argument is not of much avail to the appellant because once proceedings under section 34 are taken to be validly initiated with regard to two-thirds share of the income, the jurisdiction of the Income-tax Officer cannot be confined only to that portion of the income. Section 34 in terms states that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous order of assessment is set aside and the whole assessment proceedings start afresh."

The above observations were made in the context of the extent of the jurisdiction of the Income-tax Officer under section 34 and the Supreme Court was not considering a question whether after a reassessment has been made under section 34 the original order has ceased to exist for all purposes or not. Consequently, we are unable to hold that the observation of the Supreme Court in the decisions referred to above are of any avail to the revenue in the present case.

As stated in the judgment of the Allahabad High Court referred to above by proceedings under section 148 the original assessment order does not merge into the order passed under section 148 because where reassessment is made under section 148 of the Income-tax Act, 1961 (corresponding to section 34 of the Indian Income-tax Act, 1922), the Income-tax Officer's jurisdiction is confined to the income which has escaped assessment and does not extend to revising, reopening and reconsidering the whole assessment and likewise in any proceedings under section 34 the assessee cannot reagitate questions which had been decided against him in the original assessment. The correctness of the legal position so stated by the Allahabad High Court was not challenged before us. We may also point out that against an order of assessment passed by the Income-tax Officer under section 143 the assessee can certainly prefer an appeal to the Appellate Assistant Commissioner, and a further appeal to the Income-tax Appellate Tribunal in so far as the Income-tax Officer had negatived any contention which the assessee had put forward. But the pendency of that appeal does not preclude the Income-tax Officer from proceeding under section 147 of the Income-tax Act, 1961, corresponding to section 34 of the Indian Income-tax Act, 1922, in respect of a matter which was not the subject-matter of appeal. If so, it cannot be contended that as soon as the Income-tax Officer takes proceedings under section 147 of the Income-tax Act, 1961, the appeal already preferred by the assessee lapses and the entire original assessment order had been nullified or set at naught or set aside by the fresh order passed by the Income-tax Officer with the consequence that the assessee has to file a fresh appeal against the order of reassessment questioning even matters decided against him by the officer in the original order of assessment itself. The restrictions and the limitations with regard to the scope of the jurisdiction of the Income-tax Officer under section 147 are mutual. The Income-tax Officer purports to reassess an escaped income or withdraw an excess relief which he had already given to the assessee by taking proceedings under section 147. In the course of the proceedings, it is not open to the assessee to contend that certain reliefs which had been denied to him already should have been granted and they were originally denied wrongly or illegally, because that should have been the subject-matter of appeal preferred by the assessee to the appellate authorities prescribed under the Act. Consequently, it cannot be held that once proceedings are initiated under section 147 of the Income-tax Act, 1961, the entire order of assessment originally passed by the Income-tax Officer ceased to exist and the only order that remains in force is the order passed by the Income-tax Officer under section 148, for instance, with reference to the proceedings by way of appeal already initiated by the assessee, the original order of assessment is in existence and can be dealt with by the appellate authorities constituted under the Act. Therefore, we are unable to subscribe to the general and the wide proposition put forward by the learned counsel for the revenue that once the Income-tax Officer reopens the assessment under section 147 and passes an order under section 148 that puts an end to the original order of assessment completely and it totally replaces that order in all respects. If so, we are of the opinion-if we may say so with respect-that the decision of the Allahabad High Court which is directly in point is correct and following that judgment we hold that the proceedings of the Income-tax Officer initiated under section 154 with regard to the assessment year 1959-60 were clearly barred by limitation and, therefore, the order passed by him under that section was without jurisdiction. We may point out that apart from the decision of the Allahabad High Court referred to above, counsel on both sides agree that there is no other decision of any court directly touching the point involved in this case.

We may also mention the fact that Mr. Jayaraman, at one stage, contended that the mistake in the assessment order for the year 1959-60 dated May 27,1960, crept in only by the judgment of this court dated January 16, 1963, and there was no mistake earlier and the period of limitation, therefore, had to be computed from the date of that judgment. We are unable to accept this contention. Either there is a mistake in the order as passed on the date when it was passed or there was no such mistake and there was no question of notional mistake creeping into an order as a result of the courts in the country declaring the law subsequently. As a matter of fact, the effect of the judgment of this court in Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income-tax [1963] 50 ITR 809 (Mad) is one to declare that, as the law stood always, the wealth-tax paid by an assessee could not be deducted in the computation of the business income either under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act, 1922, and this court did not intend to lay down any law for the first time by the said judgment. Section 154(7) of the Income-tax Act, 1961, states that the period of four years should be from the date of the order sought to be amended and not from the date when a mistake can be said to have crept into that order. Therefore, even assuming that a mistake crept into the order only when the High Court delivered the judgment, certainly the date of the judgment of the High Court cannot be said to be the date of the order of the Income-tax Officer within the scope of section 154(7) of the Income-tax Act, 1961.

Under these circumstances, our answer to the second question is in the negative and against the revenue. Since both parties have succeeded in part, there will be no order as to costs

 

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