Commissioner of Income Tax vs Shree Eklingji Trust

S.K. Mal Lodha, J.—This is an application u/s 256(2) of the I.T. Act, 1961 (No. 43 of 1961) ("the Act" herein), by the Commissioner of Income Tax, Jodhpur ("the CIT"), for a direction to the Income Tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), to state the case and refer the following questions for the opinion of this court:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that notwithstanding the findings arrived at by the Income Tax Officer in the course of original assessment that the provisions of Section 13(1)(c)/13(2)(a) of the Act were applicable, the ITO''s failure to deny exemption in terms of Sections 11 and 12 with respect to the assessee-trust''s income was not an obvious, glaring and apparent legal mistake rectifiable u/s 154 of the I.T. Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in ignoring that the matter in dispute was straightaway covered by the decision of the Supreme Court in the case of M.K. Venkatachalam, I.T.O. and Another Vs. Bombay Dyeing and Mfg. Co., Ltd., to the effect that an obvious and glaring mistake of law is a mistake apparent from the record rectifiable u/s 154 of the Act ?

(3) Whether, on the facts and in the circumstances of the case, and in view of the weight of material on record, the Tribunal was justified in cancelling the order of the Income Tax Officer passed u/s 154 of the Act ?"

The assessee is a trust, which was allowed exemption under the Act. Deceased Bhagwat Singh was its managing trustee. A sum of Rs. -3,50,000 was advanced to a private limited company known as Lake Palace Hotels and Motels (P) Ltd., Udaipur (hereinafter to be referred as "the company"), on an interest at 5% p. a. in earlier year. Deceased Bhagwat Singh was also the managing director of the company. During the course of the assessment proceedings, the ITO found that the trust has advanced a further sum of Rs. 1,50,000 to the company at 10% p. a. The ITO concluded that the assessee-trust had advanced loans without adequate interest to a person having substantial interest within the meaning of Section 13(3) of the Act. The ITO further considered interest at 10% as reasonable on the advance of Rs. 3,50,000 and accordingly taxed the excess amount of interest. According to the successor-ITO, the entire income of interest of the assessee-trust is taxable in view of the provisions of Clause (a) of Sub-section (1) of Section 13(1) of the Act read with Clause (a) of Sub-section (2) of Section 13 and not the excess amount of interest charged to tax by the predecessor-ITO. He was of the opinion that there was a mistake apparent from the record when the predecessor-ITO charged to tax only the excess amount of interest and that was a mistake of law. A notice u/s 154 of the Act was issued asking the assessee to show-cause as to why the assessment be not rectified by denying the exemption allowed under Sections 11 and 12 of the Act. A reply was filed by the assessee on June 26, 1980, stating that u/s 154(1A) of the Act, the ITO can order rectification of mistake in relation to any matter other than the matter which has been considered and decided by the AAC in appeal. In this connection, it was submitted on behalf of the assessee that the AAC had considered the taxability of Rs. 13,125 and decided that the entire income of the trust was not taxable. The ITO rejected all the contentions raised by the assessee-trust and came to the conclusion that as the assessee-trust has lent money to a private limited company which is a person referred to in Section 13(3) on an inadequate interest, provisions of Section 13(2)(a) read with Section 13(1)(c) are applicable and, consequently, Sections 11 and 12 will not be attracted. He, therefore, rectified the assessment u/s 154 of the Act and recomputed the taxable income of the assessee by his order dated July 17, 1980. An appeal was filed and the CIT (Appeals), Rajasthan-I, Jaipur, by his order dated December 18, 1980, disposed of the appeal holding that the question whether the appellant is entitled to exemption under any or all the provisions contained in Sections 11 and 12 is a highly debatable question and a mistake, if any, on this point, cannot be said to be apparent from the record. He was further of the view that the ITO had exceeded his jurisdiction in passing the impugned order. The Department filed an appeal before the Tribunal and it has observed as under:

"However, the Commissioner of Income Tax (Appeals) has rightly decided the issue in favour of the assessee and had come to the conclusion that the mistake pointed out by the ITO was not obvious and patent. The assessee was charged to tax on the additional interest of Rs. 13,125. The order u/s 154 had been passed that the interest income attracted the provisions of Sections 13(1)(c) and 13(2)(a) of the Act. However, it is clear from the order passed u/s 154 of the Act that another item of income of Rs. 1,73,953 had been taxed. It is not clear whether the provisions of Sections 13(1)(c) and 13(2)(a) were applicable in relation to the income of Rs. 13,125 or Rs. 1,73,953 or to both. Under the above circumstances, the mistake pointed out by the ITO was neither obvious nor glaring. It was neither a legal nor an arithmetical mistake. Under the above circumstances, the Commissioner of Income Tax (Appeals) was perfectly justified having in mind the decision in T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, , in setting aside the order of the ITO u/s 154 of the Act."

In view of the above conclusion, the appeal was dismissed. An application u/s 256(1) of the Act was filed by the CIT for referring the aforesaid three questions. The Tribunal by its order dated May 18, 1983, dismissed the reference application holding that according to the ratio of the decisions of the Supreme Court on the issue, no referable question arises and that whether or not the issue is debatable, is a finding of fact recorded by the Tribunal. Hence, this application u/s 256(2) of the Act as aforesaid.

We have heard Mr. J.L. Daga, learned counsel for the Department, and Mr. R. Mehta, learned counsel for the assessee.

Section 11 deals with income from property held for charitable or religious purposes and Section 12 deals with income of trusts or institutions from contributions. Section 13 lays down that Section 11 or Section 12 will not apply in certain cases. The material part of Section 13 for the present purpose reads as under:

"Section 13(1). Nothing contained in Section 11 or Section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof--.......

(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof-

(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or

(ii) if any part of such income or any property of the trust or institution (whenever created or established) is during the previous year used or applied,

directly or indirectly for the benefit of any person referred to in Sub-section (3)......

(2) Without prejudice to the generality of the provisions of Clause (c) and Clause (d) of Sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that Clause, be deemed to have been used or applied for the benefit of a person referred to in Sub-section (3),--

(a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in Sub-section (3), for any period during the previous year without either adequate security or adequate interest or both."

The ITO has rectified the assessment order on the ground that the assessee had lent its fund to the aforesaid private limited company which falls within the purview of Section 13(3) of the Act on inadequate interest and, therefore, the provisions of Section 13(2)(a) read with Section 13(1)(c) are applicable and, consequently, Sections 11 and 12 cannot be availed of. In other words, according to the ITO, omission to charge tax was a mistake apparent from the record, for the assessing ITO had no discretion to assess only the excess interest in respect of the entire income, which was done at the time of the original assessment for the year 1974-75. The ITO has referred to M.K. Venkatachalam, I.T.O. and Another Vs. Bombay Dyeing and Mfg. Co., Ltd., , to support the order of the rectification wherein the scope and effect of the expression "mistake apparent from the record" was considered. The principle laid down therein is that when there is omission to charge tax, such mistake can be rectified by exercising powers u/s 35 of the Indian I.T. Act, 1922 ("the old Act"), which is similar to Section 154 of the Act.

We may, however, refer to the decisions of the some of the High Courts bearing on the question.

In S. T. Velu Vs. Commissioner of Income Tax, Madras, , it was held that where the ITO omitted to include super-tax and surcharge on super-tax in the assessment as he ought to have done for that assessment year, there was a mistake apparent from the record and that the ITO had jurisdiction to proceed u/s 35 of the Act and rectify the omission.

In V. N. S. Sockalingam Chettiar and Others Vs. Income Tax Officer, Pudukottai, , the Division Bench of the Madras High Court opined that if the order of assessment shows that interest in accordance with Section 18A(8) has not been added to the tax determined on the basis of the regular assessment, such omission is a mistake. It was held that Section 35 of the old Act applies and the mistake can be rectified under that section. In A. H. WHEELER and CO. PRIVATE LTD. Vs. Income Tax OFFICER, ALLAHABAD., , it was opined that where the ITO had made an assessment for 1958-59 and 1959-60, without reducing the super-tax rebate as required by the Finance Acts of the respective years, that can be rectified u/s 35 of the old Act.

It was observed in PAMULAPATI ANKINEEDU AND KOTA VENKATASUBBIAH RICE MILL CO. Vs. THE ADDITIONAL Income Tax OFFICER, BAPATLA., , that the ITO has ample authority in rectification proceedings u/s 35 of the old Act to add interest in the assessment in accordance with Section 18A(6) where the assessee is a new one within the ambit of Section 18A(3) despite the fact that no estimate was submitted by the assessee.

In SWADESHI COTTON MILLS CO. LTD. Vs. Income Tax OFFICER, SPECIAL INVESTIGATION CIRCLE, C-WARD, KANPUR., , it was ruled that according to the mandatory provision of the Finance Act of 1956, contained in Paragraph D of Part II, the rebate given under Clause (ii) of the first proviso had to be further recalled as required by Clause (i)(b) of the second proviso thereto and if it was not inadvertently given effect to, then there is a mistake of law apparent from the record and that the ITO would be justified in invoking Section 35 of the old Act. The Gujarat High Court has also occasion to consider the scope of Section 154 of the Act in Commissioner of Income Tax, Gujarat-I Vs. Ahmedabad Jupitor Spg., Wvg. and Mfg. Co. Ltd., . In that case, the question that arose was whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the order of the ITO u/s 143(3) dated March 28, 1968, granting set-off of unabsorbed development rebate relating to assets installed prior to January 1, 1958, by Hind Mills Ltd., was not liable to rectification u/s 154 of the Act as it was not a mistake apparent from the record. It was held that such mistake was liable to rectification u/s 154 of the Act and the view taken by the Tribunal was erroneous.

In the case on hand, there was omission to charge tax by the ITO, for, he had no discretion to assess the excess interest only. The entire income was taxable. The assessee had lent its funds to the private limited company on an inadequate interest, and, therefore, Sections 13(1)(c) and 13(2)(a) are applicable and Sections 11 and 12 could not be attracted.

In view of the decisions referred to above, we are of opinion that such a mistake is rectifiable u/s 154 of the Act. The finding of the Tribunal that no referable question of law arises and such a mistake could not be rectified u/s 154 of the Act is incorrect. We have already held that omission to charge tax on the entire amount was a mistake apparent from the record and that could be rectified u/s 154 of the Act. The CIT has suggested three questions in his application u/s 256(1) of the Act. Having considered the order dated November 3, 1981, of the Tribunal, we are of opinion that only one question arises out of the aforesaid order of the Tribunal.

We, therefore, allow the application u/s 256(2) of the Act and direct the Tribunal to state the case and refer the following question for the opinion of this court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that notwithstanding the findings arrived at by the ITO in the course of original assessment that the provisions of Sections 13(1)(c) or 13(2)(a) of the Act were applicable, the ITO''s failure to deny exemption in terms of Sections 11 and 12 with respect to the assessee-trust''s income was not a mistake rectifiable u/s 154 of the Income Tax Act, 1961?"

In the circumstances of the case, the parties are left to bear their own costs.