Commissioner of Income Tax, M.P. vs M/s. Harnandrai Akodia

K.L. Pandey, J.—The income tax Appellate Tribunal, Bombay, has referred to this Court for its opinion two questions of law, the first, u/s 66 (I) of the Indian income tax Act, 1922, and the second, as required, u/s 66 (2) of that Act. These questions are:

(i) Whether, on the facts and circumstances of the case, the interest paid by the Association of Persons to one of its members was an allowable deduction in the assessment of the Association of Persons u/s 10 (2) (iii) of the Act;

(ii) Whether the Appellate Tribunal had the power and jurisdiction to restore the assessee''s appeal which had been dismissed under Rule 24 for default of appearance of the assessee on 23rd June 1960

This judgment shall also dispose of Miscellaneous Civil Case No. 125 of 1964 which covers the second question.

The material facts as appearing from the two statements of the case are these. The assessment year is 1964-65, the account year being the one ending Diwali 1053. Originally, the income tax Officer, by his order dated 10 July 1957, assessed Messrs Harnandrai Shrikiahan in the status of a registered firm and disallowed, as required by section 10 (4) (b) of the Act, Rs. 12,358 paid as interest to Shrigopal, one of the partners of the firm. The status of the assessee as a registered firm had been questioned before the Tribunal in another appeal arising out of the assessment made for an earlier year. The Tribunal held that there was no genuine firm in existence in the account year corresponding to that assessment year. Since there was no change in the subsequent years in that position, the Commissioner of income tax, by his order dated 17 June 1959, revised u/s 33B (1) of the Act the order of assessment made by the income tax Officer on 10 July 1957 and directed him to re-assess Messrs Harnandrai Shrikiahan in the status of an Association of Persons and also to disallow the interest paid to Shrigopal. Being aggrieved, the assessee preferred an appeal to the Tribunal u/s 33B (3) of the Act.

By a notice dated 19 April 1960, the Tribunal intimated to the assessee that the appeal was fixed for hearing on 19 May 1960. In response thereto, the assessee''s representative G.D. Ladha sent on 8 May 1960 a telegram, which was followed by a letter of even date, requesting for a month''s adjournment on the ground that he was going on a pilgrimage to Badrinath and that he would return there from on 15 June 1960. This request was granted and he was intimated by a telegram as well as by a letter sent by ordinary post that the appeal was fixed for hearing on 23 June 1960. On 15 June 1960, the assessee sent a telegram requesting for adjournment on the ground that return of G.D. Ladha from Badrinath was delayed on account of oar trouble. On 17 June 1960, G. D Ladha himself sent from Badrinath a telegram making a similar request. The request was refused and an intimation thereof was issued from the office of the Tribunal on 17 June 1960. A telegram communicating the refusal was again sent to the assessee. On 22 June 1960, the office of G.D. Ladha sent a telegram acknowledging receipt of the communication on the same day and requesting for an adjournment. On 23 June 1960, the assessee sent a similar telegram stating inter alia that, after starting on that date from Akodia, it was impossible to attend the hearing before the Tribunal which was fixed for the same date. On that date (23 June I960), the assessee was not present and the-appeal was, therefore, dismissed for default.

On 29 December 1960, the assessee filed a miscellaneous application for restoring and reconsidering the appeal which had been dismissed for default. On 23 June 1961, the Tribunal rectified the order of dismissal for default and restored the appeal to file. In considering this aspect of the matter, the Tribunal stated as follows:

Considering the fall facte of the case, we have come to: the conclusion now that there was sufficient cause which prevented the appellant and /or their representative from Attending before the Bench of the Tribunal which heard the appeal on 23-6-1960 and m each we rectify the order of dismissal u/s 35 (2).

In consequence, the Tribunal re-heard the appeal and allowed it on the view that interest paid by an association of persons on money borrowed by it for its business from one of its members was allowable u/s 10 (2) (iii) as a legitimate business expense.

In regard to the first question, the amount of interest paid on capital borrowed for the purpose of business is a deduction which is, subject to certain exceptions, allowable u/s 10 (2) (iii) of the Act. The exception which was initially said to be material in this case was that no interest which had been paid to a partner of the asseseee-firm could be allowed. But the assessee was subsequently assessed to tax in the statue of an association of persons. The proviso to section 10 (2) (iii) does not apply to such an association, which is an entity quite distinct from the individual members who cumulatively constitute the association. In our opinion, a member, who advances money to the association for its business, is in the position of a creditor of the association and the interest paid to him qua creditor is a legitimate business expense allowable u/s 10 (2) (iii) of the Act.

Coming to the second question, it is obvious from the Tribunal''s order dated 23 June 1961 that it restored the appeal by rectifying u/s 35 (2) of the Act the earlier order dated 23 June 1960 dismissing it for default. It is equally clear that, in adopting that course, the Tribunal took into consideration not only the letters, telegrams and documents which were on record on 23 June 1960 but also other material including two affidavits dated 20 April 1961 and 27 April 1961. It was on the basis of this material extra-neons to the record: that the Tribunal came to the conclusion that there was sufficient cause for the failure of the assessee to appear on 23 June 1960. Now it is well established that the power to rectify a mistake u/s 35 of the Act is a qualified power in that it is limited to correction of only such mistakes as are ''apparent from the record''. In Maharana Mills (Private) Ltd. Vs. Income Tax Officer, Porbandar, the Supreme Court pointed out that, if the very basis of the assessment is discovered to be erroneous and, if for discovering that mistake, the income tax Officer had to go to the previous record, it was nonetheless a mistake apparent from the record which could be rectified. The Supreme Court stated:

The power u/s 35 is no doubt limited to rectification of mistakes which are apparent from the record. A 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 mistakes, he is entitled to rectify the error provided that if the result is enhancement of assessment or reducing the refund then notice has to be given to the assesses and he should be allowed a reason-able opportunity of being heard.

[Pages 358-9]

In The Income Tax Officer, Alwaye Vs. The Asok Textiles Ltd., Alwaye, , the Supreme Court recalled the view taken by it in the earlier case and held that, u/s 35, the income tax Officer could examine the record and, if he discovered any mistake, whether of fact or of law, he could rectify it. The Supreme Court also pointed that the restrictive operation of the power of granting review of a mistake or error apparent on the face of the record under Order 47, rule 1 of the CPC did not apply to a case of rectification of mistake apparent from the record u/s 35 of the Act. Even so, it is well

settled that the mistake should be discoverable from the assessee''s own record and not from the record of another assessee or as a result of disposal of another case: Income Tax Officer, V Circle, Madras, and Another Vs. S.K. Habibullah, and Second Additional Income Tax Officer, Guntur Vs. Atmala Nagaraj and Others, . In our opinion, a mistake, which is not gatherable from the record as it stands and requires, for being shown to be a mistake, matter or evidence extraneous to the record is not a mistake apparent from the record which can be corrected u/s 35 of the Act. In the instant case, as indicated earlier, the so called mistake could be shown only by placing before the Tribunal material extraneous to the record. Rectification of such a mistake is, in our view, not within the ambit of the powers exercisable u/s 35 of the Act.

But there is another aspect of the question. Although a mistake, which could be shown to be such only with reference to material extraneous to the record, is not a mistake apparent from the record within the meaning of section 35 of the Act, the other aspect of the questions is whether it is such a mistake for the reason that Rule 24 of the Appellate Tribunal Rules, 1946, as amended in 1948, is ultra vires and the order of dismissal of the appeal for default on 23 June 1960 was for that reason altogether incompetent. It would appear that, when the mistake was rectified u/s 35 (2) of the Act, this aspect of the question was not present to the mind of the Tribunal. Even so, we think it is open to us to consider that aspect and we derive support for this view from the following observations of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., at p. 612:

Section 66 (1) speaks of a question of law that arises out of the order of the Tribunal. Now a question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that section 66 (1) requires is that the question of law which is referred to the Court for decision and which the Court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over refinement of the position to hold that each aspect of the question is itself a distinct question for the purpose of section 66 (1) of the Act. That was the view taken by this Court in COMMISSIONER OF Income Tax, BOMBAY SOUTH, BOMBAY Vs. OGALE GLASS WORKS LTD., and in Zoraster and Co. Vs. The Commissioner of Income Tax, Delhi, Ajmer, Rajasthan and Madhya Bharat (Now) Madhya Pradesh, and we agree with it.

As the question on which the parties were really at issue was whether the order of dismissal for default dated 23 June 1960 could be rectified, the ground that the aforesaid order of dismissal was apparently erroneous, being incompetent for the reason that Rule 24 ibid was ultra vires, is one which was properly within the scope of the question considered by the Tribunal.

The vires of Rule 24 of the Appellate Tribunal Rules, 1946, promulgated u/s 5 A (8) of the Act was considered by a full Bench of the Madras High Court in S. Chenniappa Mudaliar Vs. Commissioner of Income Tax, . After an elaborate consideration of the arguments advanced in the case, Ramchandra Iyer C.J., who spoke for the Court, concluded as follows:

To sum up the position, the Appellate Tribunal is the appointed machinery under the Act for finally deciding questions of fact in relation to assessment of income tax. Its composition, consisting as it does of qualified persons in law and accountancy, makes it peculiarly qualified to deal with all questions raised in a case, whether there be assistance from the party or his counsel or not. Section 33 (4) obliges it to decide an appeal, after giving an apportunity to the parties to put forward their case. The giving of the opportunity only emphasises the character of the quasi-judicial function performed by the Appellate Tribunal. The fact that that opportunity is not availed of in a particular case will not entitle the Tribunal not to decide the case. There can be no decision of the case on its merits if the matter is to be disposed of for default of appearance of the parties. Further, an adjudication on the merits of the case is essential to enable the High Court to perform its statutory duty and for the Supreme Court to hear an appeal filed u/s 66A. Section 33 (4) itself indicates by the use of the word ''thereon'' that the decision should relate to the subject-matter of the appeal. Rule 24, therefore, to be consistent with section 33 (4), could only empower the Tribunal to dispose of the appeal on its merits whether there be an appearance of the party before it or not. This was indeed the rule when it was first promulgated in the year 1941. The rule in its present form, as amended in the year 1948, in so far as it enables the dismissal of an appeal before the income tax Appellate Tribunal for default of appearance of the appellant will, therefore, be ultra vires, as being in conflict with the provisions of section 33 (4) of the Act.

We may also point out that if the Appellate Tribunal should have a power of dismissing an appeal for default of appearance of a party, such power can only be given by the legislature itself; it cannot be done by a mere rule promulgated u/s 5A(8) as any rule made in that behalf will be contrary to the existing provision in section 33(4) of the Act. We, therefore, answer the question set out at the beginning in the affirmative.

The learned Chief Justice noticed, and dissented from, the contrary view taken in Bhagwan Radha Kishen Vs. Commissioner of Income Tax, and Mangat Ram Kuthiala v. Commissioner of income tax (1960) 38 I T R 1. In our opinion the view taken by the Full Bench of the Madras High Court, against which the learned Advocate-General has nothing to say, is the correct view and, in agreement with that view, we hold that Rule 24 is ultra vires as being in conflict with the provisions of section 33 (4) of the Act.

In the view we have taken, it is no longer necessary to consider whether there is any inherent power to restore an appeal dismissed for default on being satisfied that there was sufficient cause for the failure of the assessee to appear on the date fixed for its hearing. As we have pointed out, there is no power at all to dismiss an appeal for default.

In view of the foregoing considerations, we answer the first question in the affirmative. In regard to the second question, our answer is that, although there is no power to restore an asseasee''s appeal which has been dismissed under Rule 24 for default, the order of dismissal, which was incompetently passed, could be rectified u/s 35 of the Act. In the circumstances of this case, we direct that the parties shall bear their own costs of this reference.