1963-VIL-46-MP-DT

Equivalent Citation: [1966] 59 ITR 308

MADHYA PRADESH HIGH COURT

Miscellaneous Petition No. 62 of 1963

Dated: 09.08.1963

KALOORAM TIRASILAL

Vs

INCOME-TAX OFFICER, C-WARD, JABALPUR

For the Petitioner: A. P. Sen

For the Respondent: M. Adhikari (Advocate-General) and R. J. Bhave (Government Advocate)

Bench

P. V. Dixit (CJ) And K. L. Pandey, JJ.

JUDGMENT

P. V. Dixit, CJ.

By this application under articles 226 and 227 of the Constitution, the petitioners seek a writ of certiorari for quashing an order made by the Income-tax Officer, C-Ward, Jabalpur, on 28th March, 1962, under section 35 of the Indian Income-tax Act, 1922, rectifying an error in the assessment made against the petitioners for the assessment year 1956-57.

The matter arises thus: In the course of assessment proceedings with respect to the assessment year 1956-57, the Income-tax Officer noticed an item of Rs 44,659 as cash credit in the capital account of the petitioner assessee. When asked to explain this item, the assessee said that they were sale proceeds of 508 tolas of gold and gold ornaments belonging to the family. The Income-tax Officer was not satisfied with this explanation. He took the view that having regard to the financial condition of the assessee, the accumulation or possession of so much gold as to yield Rs 44,659 as sale proceeds was not possible. Having regard to the circumstances of the assessee, he came to the conclusion that the assessee had derived Rs 40,000 as income from undisclosed sources. To this income, the Income-tax Officer added the income of the assessee from a registered firm, income from house property and income which the assessee earned from business in the material year, and then set off against this total income the business loss carried forward from the assessment year 1955-56. On this basis an assessment order was passed against the petitioner on 20th February, 1961. The petitioner then preferred an appeal before the Appellate Assistant Commissioner of Income-tax who, while affirming the decision of the Income-tax Officer that the cash credit discovered was "income from undisclosed sources", reduced that income to Rs 30,000. An appeal preferred by the petitioner against the decision of the Appellate Assistant Commissioner is still pending before the Income-tax Appellate Tribunal, Bombay.

On 19th March, 1962, a notice under section 35 of the Act was issued to the petitioner saying that in the assessment for the year 1956-57 made on 20th February, 1961, there was a mistake apparent from the record in that the business loss of the year 1955-56 had been set off against income from undisclosed sources, registered firm and house property for the assessment year 1956-57, and that as a result of the intended rectification the assessment would be enhanced by Rs 7,866.80 nP. The petitioner was intimated of the date of hearing and asked to appear in person, or by a representative, or to send his reply in time if he did not wish to be heard in person. In reply to this notice under section 35, the petitioner raised no objection in regard to the error of setting off the business loss of the year 1955-56 against income from the registered firm and house property. He, however, urged that the income of Rs 30,000 from undisclosed sources was really business income and that he was entitled to have the loss of the previous year, namely, 1955-56, set off against this income. This contention was negatived by the Income-tax Officer who held that in the assessment proceedings for the year 1956-57 his predecessor-in-office treated the income of Rs 40,000, reduced to Rs 30,000, as income from undisclosed sources and not as income from business and consequently the assessee was not entitled to set off the business loss for the assessment year 1955-56 against this income. The set-off given by the then Income-tax Officer in the assessment concluded on 20th February, 1961, was regarded by the Income-tax Officer in proceedings under section 35 as a mistake apparent from the record. He accordingly rectified the mistake and modified the assessment.

Shri Sen, learned counsel appearing for the petitioner-assessee, argued that previously the Income-tax Officer had in fact treated the income of Rs 40,000, reduced to Rs 30,000, as income from business and had rightly set off under section 24(2) the business loss of the previous year against this income; that there was no error apparent from the record justifying rectification of the assessment under section 35; that the successor Income-tax Officer issued the notice he did under section 35 merely because he happened to hold an opinion different from that of his predecessor with regard to the source of Rs 30,000; and that when the entry of Rs 44,659 appeared as cash credit in the account books, then the Income-tax Officer was bound to treat the credit, ultimately determined by the Appellate Assistant Commissioner as Rs 30,000, as business receipts. Learned counsel relied on Lakhmichand Baijnath v. Commissioner of Income-tax [1959] 35 I.T.R. 416; [1959] Supp. 1. S.C.R. 415. It was said that the mistake which the Income-tax Officer rectified was not any mistake apparent from the record but was one which could at the most be discovered by investigation or a process of elucidation or argument, and that such a mistake could not be rectified under section 35 of the Act. Learned counsel referred us to Sidhramappa Andannappa Manvi v. Commissioner of Income-tax [1952] 21 I.T.R. 333 and K. Parameswaran Pillai v. Additional Income-tax Officer, Quilon [1955] 28 I.T.R. 885, for the proposition that the power of rectification under section 35 is limited to correcting only those mistakes which are apparent from the record and that the mistake must be patent on the record and not one which could be discovered by a process of elucidation, argument or debate.

In our judgment, this petition must be dismissed. It is now authoritatively settled by the decisions of the Supreme Court in Maharana Mills (Private) Ltd. v. Income-tax Officer, Porbandar [1959] 36 I.T.R. 350; [1959] Supp. 2 S.C.R. 547 and Income-tax Officer, Alwaye v. Asok Textiles Ltd. [1961] 41 I.T.R. 732; [1961] 3 S.C.R. 236, that the Income-tax Officer can under section 35 of the Act examine the record and if he discovers that he has made a mistake he can rectify the error and the error which can be corrected may be an error of fact or of law, and that the mistake contemplated by this section is not one which is to be discovered as a result of an argument but it is open to the Income-tax Officer to examine the record including the evidence and if he discovers any mistake he is entitled to rectify the error. In Income-tax Officer, Alwaye v. Asok Textiles Ltd. [1961] 41 I.T.R. 732; [1961] 3 S.C.R. 236 the Supreme Court regarded the overlooking by the Income-tax Officer of the provisions of section 2 of the Finance Act, 1952, and of section 18A(8) of the Income-tax Act as a mistake apparent from the record justifying rectification under section 35. As will be shown presently, the mistake which the Income-tax Officer rectified here did not constitute any change of opinion with regard to the source of the income of Rs 30,000. The mistake lay in the omission to apply the clear and mandatory provisions of section 24(2) of the Act. The mistake was apparent from the record and did not require any debate or argument for being brought to the surface.

Now, under section 24(2) of the Act the right to carry forward a loss is subject to certain restrictions and the two restrictions, which are material here, are that the loss must be in a business, profession or vocation, and the business, profession or vocation in which the loss was originally sustained must be continued to be carried on by the assessee in the year in which the carried forward loss is sought to be set off. Clause (ii) of section 24(2) plainly lays down that the loss sustained by the assessee in any business, profession or vocation shall be set off against the profits or gains, if any, of any business, profession or vocation carried on by him in that year, provided that the business, profession or vocation in which the loss was originally sustained is continued to be carried on by the assessee in the year in which the carried forward loss is intended to be set off. It is, therefore, clear that the business loss of the year 1955-56 could be set off in the assessment for the year 1956-57 only against the profits and gains of any business if the business in which the loss was originally sustained was carried on by the assessee in that year. If, therefore, the unexplained income of Rs 30,000 was not a business income, then the loss of the previous year, namely, the year 1955-56, could not be set off against that income. That the Income- tax Officer never treated the income of Rs 40,000 which he originally determined and which was reduced in appeal to Rs 30,000 as business income but treated as income from undisclosed sources is abundantly plain from the assessment order itself which was passed on 20th February, 1962. In that order, he observed:

"Taking into consideration all these facts, I give an allowance of Rs 4,458 and make an addition of Rs 40,000 as income from undisclosed sources." (Underlining Here printed in italics ours)

Again, while giving the details of the income, the Income-tax Officer described Rs 40,000 as income from undisclosed sources. No doubt, after adding Rs 40,000 to the business income of the assessee, the Income-tax Officer described the total income of Rs 66,140 as business income. But when he described the whole of the income, including the income from undisclosed sources, as business income, he was clearly in error.

Learned counsel for the assessee said that as the credit entry was found in the business account of the assessee, the inference was inevitable that it was a receipt from business and that the amount of Rs 30,000 was not an income from undisclosed sources but from business. We do not agree. There is no inflexible rule that when an amount is credited in business account it must be taken as a receipt from business. The answer to the question whether the amount represented by the cash entry in the account books is income from an undisclosed source, that is to say, some profit arising out of some unknown activity of the assessee, or is an undisclosed profit of the business activity of the assessee depends on the evidence tendered before the Income-tax Officer and the explanation offered by the assessee. As stated earlier, here on the explanation given by the assessee the Income-tax Officer held the amount of Rs 40,000, reduced to Rs 30,000, as income from undisclosed sources and not as undisclosed profit from the assessee's business. After having found that the income was from an undisclosed source, the Income-tax Officer was not bound to indicate what that source was. In Seth Kalekhan Mahomed Hanif v. Commissioner of Income-tax [1958] 34 I.T.R. 669 the Income- tax Officer brought to tax the amount represented by certain cash credit entries in the account books of the assessee treating it as income from undisclosed sources in circumstances somewhat similar to those in the present case. It was held by a Division Bench of this court in that case that the Income-tax Officer could only act upon the evidence tendered before him and where the evidence tendered was worthless or no evidence was tendered, all that remained was the fact of cash credits for which no explanation existed and in such circumstances he was justified in taking the evidence of the books showing the cash deposits as conclusive of the fact that some income was made and related to an undisclosed source and he was not bound to indicate what that source was. This decision was followed by this court in Ratanchand Dipchand v. Commissioner of Income-tax [1960] 38 I.T.R. 188. The decision of the Supreme Court in Lakhmichand Baijnath v. Commissioner of Income-tax [1959] 35 I.T.R. 416; [1959] Supp. 1. S.C.R. 415, relied on by the petitioner, does not lay down that when a credit entry is found in the business accounts of the assessee, then the amount represented by the entry must always be taken as a receipt from business. What has been held in that case is that if the credits are found in the business accounts of the assessee and the explanation as to how the amounts came to be received is rejected by the income-tax authorities, then they are entitled to treat the credits as business receipts chargeable to tax. If the income-tax authorities are entitled to treat a credit entry as representing a receipt from business, that does not mean that they must do so in each and every case irrespective of the facts and circumstances of it. The other decision cited on behalf of the petitioner, namely, Mansfield and Sons v. Commissioner of Income-tax [1963] 48 I.T.R. 254, also does not lay down that where a credit entry is found in the business accounts of an assessee, then it must in all cases be treated as business income of the assessee. In that case, a credit entry was found in the business accounts of an assessee and the explanation offered by him as to how he came to receive the amount was rejected by the income-tax authorities. It was held that the income can be treated as business income if the assessee has no other source of income and taken into account as business income for the purposes of the excess profits tax. In that case, the Calcutta High Court has not held that when a credit entry is found in the business accounts of an assessee and his explanation as to its receipt is rejected, then the amount can never be treated as income from an undisclosed source. In Mansfield's case [1963] 48 I.T.R. 254, the income-tax authorities had recorded a distinct finding that the amount represented by the cash entry was an undisclosed profit from business and thus his (assessee's) undisclosed business income. That case is, therefore, distinguishable on facts.

In our opinion, it is clear from the record that the income of Rs 30,000 was never held by the income-tax authorities in the present case as undisclosed profits of any business of the petitioner. It was treated as income from an undisclosed source. That being so, in the face of the clear provisions of section 24(2)(ii) of the Act, the business loss of the previous year, namely, the year 1955-56, could not clearly be set off against that income. When, therefore, in the assessment order dated 20th February, 1961, the Income- tax Officer set off the business loss of the assessment year 1955-56 against the income from undisclosed sources contrary to section 24(2), he committed a mistake and that mistake was apparent from the record. The successor Income-tax Officer was, therefore, justified in issuing to the petitioner a notice under section 35 of the Act for rectifying the assessment in the manner he did by his impugned order dated 28th March, 1962. He was competent to do so notwithstanding the fact that the petitioner had appealed to the Appellate Assistant Commissioner against the assessment order dated the 20th February, 1961, and in that appeal the petitioner's income from undisclosed source was determined at Rs 30,000 and the fact that an appeal against the decision of the Appellate Assistant Commissioner is pending before the Tribunal. The Income-tax Officer's jurisdiction to rectify the mistake under section 35 is not taken away because of these appeals for the reason that the question whether the business loss of the earlier year could or could not be set off against income from an undisclosed source was not in fact the subject-matter of the appeal preferred before the Appellate Assistant Commissioner. So far as this court is concerned, this point is concluded by the decision in Central Indian Insurance Co. Ltd. v. Income-tax Officer, A-Ward, Indore [1963] 47 I.T.R. 895.

For all these reasons, our conclusion is that the Income-tax Officer acted within his powers and jurisdiction in passing the order of rectification dated 28th March, 1962, and that order is in conformity with sections 24(2) and 35 of the Act. The result is that this petition is dismissed with costs. Counsel's fee is fixed at Rs 200. The outstanding amount of security deposit, if any, after deduction of costs, shall be refunded to the petitioner.

Petition dismissed.