Madhu Jayanti (P.) Ltd. vs Commissioner of Income Tax

Sengupta, J.—In this reference u/s 256(1) of the income tax Act, 1961 (''the Act'') for the assessment year 1979-80, the following question of law has been referred to this Court:

Whether, on the facts and in the circumstances of the case, the rectification order dated September 10, 1985, was barred by limitation?

The assessment for the assessment year 1979-80 was originally completed by the ITO on 30-5-1981. The assessee claimed weighted deduction u/s 35B of the Act, in respect of various items of expenditure including bank interest and packing expenses of Rs. 11,57,255 and Rs. 17,41,812, respectively. In the original assessment, the ITO allowed weighted deduction u/s 35B on all the items including bank interest and packing expenses.

A sum of Rs. 6,08,842 was spent on payment of allowance and commission to two governing directors of the assessee-company. In the original assessment, the ITO did not make any disallowance u/s 40(c) of the Act.

The ITO passed a rectification order u/s 154 of the Act on 10-9-1985. According to him, the assessee got the excess deduction of Rs. 4,64,842 u/s 40(c) and weighted deduction u/s 35B on the expenditure relating to bank interest and packing expenses was not covered u/s 35B(1). He, accordingly, withdrew the weighted deduction allowed in the original assessment on the aforesaid two items of expenditure and made an addition of Rs. 4,64,842 u/s 40(c).

Against the aforesaid rectification order, the assessee appealed to the Commissioner (Appeals) before whom it was contended that the rectification order passed by the ITO on 10-9-1985, was barred by limitation. The order of the ITO on the aforesaid points was also assailed on merits. The Commissioner (Appeals) rejected the assessee''s contention that the impugned order of the ITO was barred by limitation. He was further of the view that the point whether weighted deduction was allowable on bank interest and packing expenses was a debatable one and that the issue relating to this point could not be the subject-matter of rectification u/s 154. He, accordingly, cancelled the rectification order of the ITO withdrawing the weighted deduction u/s 35B in respect of the aforesaid two items of expenditure. Regarding the third point, namely, the addition made u/s 40(c), the Commissioner (Appeals) was of the view that, on this point, there cannot be any argument. The order of the ITO on this point was, accordingly, confirmed. As both the parties felt aggrieved by the order of the Commissioner (Appeals), they came up in appeal before the Tribunal.

In the appeal filed by the assessee, only one point was pressed, viz., that the order passed by the ITO u/s 154 on 10-9-1985, was barred by limitation. The other ground, namely, that the Commissioner (Appeals) was in error in confirming the order of the ITO u/s 154 in respect of deduction u/s 40(c) was not pressed on behalf of the assessee and the said ground was, accordingly, rejected by the Tribunal.

The learned advocate for the assessee submitted that the mistake, if there was any, occurred in the original assessment dated 30-5-1981. The order of rectification was an extension of the assessment and it was a part of the proceeding for assessment. On making this submission, the learned advocate for the assessee drew strength from the decision of the Supreme Court in S. Sankappa and Others Vs. The Income Tax Officer, Central Circle II, Bangalore, wherein it has been held by the Supreme Court that, in proceedings under the provisions of sections 35(1) and 35(5} of the Indian income tax Act, 1922, what the ITO does is to correct the errors in or rectify orders of assessment made by him, and orders making such corrections or rectifications are, therefore, clearly a part of the proceedings for assessment. It was then contended on behalf of the assessee that the law to be applied was that which was in force in the assessment year 1979-80. It was then pointed out that section 154(7), as it stood before the amendment introduced with effect from 1-10-1984, prescribed four years'' limitation running from the date of the order sought to be amended for passing a rectification order u/s 154. It was further contended that the limitation would run from the date of the order sought to be rectified and, therefore, the rectification order passed by the ITO on 10-9-1985, was clearly barred by limitation. In this connection, it was pointed out that the assessment order was passed on 30-5-1981, and that limitation would run from that date in this case. On behalf of the department it was, on the other hand, submitted that section 154(7), as amended by the Taxation Laws (Amendment) Act, 1984, with effect from 1-10-1984, would govern the period of limitation for rectification of the assessment order. It was submitted that the rectification order was passed within the time extended by the amendment introduced u/s 154(7) with effect from 1-10-1984, and was, therefore, within time. Reliance was placed on the decision of the Tribunal in the case of (1986) 19 ITD 747 It was further submitted on behalf of the department that the first rectification order was passed by the ITO on 20-4-1985, and that fresh limitation would run from that date and for this reason also the rectification order passed by the ITO on 10-9-1985, would be within time. In support of this contention, reliance was placed on the decision of the Patna High Court in the case of Bihar State Road Transport Corporation Vs. Commissioner of Income Tax,

After considering the rival submissions made on behalf of the parties and the facts on record, the Tribunal rejected the contention advanced on behalf of the assessee that the rectification order dated 10-9-1985, is barred by limitation.

The question which arises for consideration is whether the order of rectification is barred by limitation. Before amendment of section 154(7), the limitation of four years started from the date of the order sought to be amended. If section 154(7) had not been amended, four years'' limitation for amending the assessment order dated 30-5-1981 would have expired on 30-5-1985. Before the limitation expired, the law was amended with effect from 1-10-1984, so that limitation now runs from the end of the financial year in which the order sought to be amended was passed. It is not disputed that the rectification order dated 10-9-1985, was passed within the period of four years beginning from the end of the financial year in which the rectification order was passed.

At the hearing before us, it was submitted by Dr. Pal that a proceeding for rectification is a proceeding for assessment and, accordingly, the law as it stood in the assessment year, would govern the proceedings. He submits that an order made by the ITO in rectifying an assessment order forms part of the proceedings of assessment. He has drawn our attention to the decision of the Supreme Court, which was also relied on before the Tribunal, in the case of S. Sankappa (supra). There, the Supreme Court observed that when proceedings are taken for rectification of assessment to tax, those proceedings must be held to be proceedings for assessment. In the proceedings for rectification, what the ITO does is to correct the errors in, or rectify orders of, assessment made by him, and orders making such corrections or rectifications are, therefore, clearly part of the proceedings for assessment. In our view, the word ''assessment'' must be understood in the context in which it is used. The ITO is clothed with the jurisdiction to rectify any order, not necessarily an order of assessment u/s 154, if there is a mistake apparent from the records. This power has also been given not only to the ITO but also to the IAC and the Commissioner who may not deal with the assessment proceedings at all but may be concerned with certain orders passed by them. Accordingly, the word ''assessment'' cannot be construed in a narrow sense.

For the purpose of rectification of an order, special provision is contained in section 154(7). It is well-settled that the law of limitation is procedural and it has nothing to do with the substantive right of the assessee. In this case, as we have already noticed, time to rectify the order even under the unamended law did not expire when the proceeding for rectification was initiated. Accordingly, during the pendency of the proceeding, the time limit to pass the order having been enlarged, the ITO was justified in taking recourse to such extended period of limitation.

In our opinion, therefore, section 154(7), as amended with effect from 1-10-1984, would be applicable in this case with the result that the rectification order dated 10-9-1985, passed within four years from the end of the financial year in which the assessment order dated 30-5-1981, was passed is well within limitation.

For the reasons aforesaid, we answer the question in this reference in the negative and in favour of the revenue. There will be no order as to costs.

Banerjee, J.

I agree.