Standard Radiators vs Commissioner of Income Tax

R.C. Mankad, J.—The Tribunal has referred to us for our opinion the following question u/s 256(1) of the income tax Act, 1961 (''the Act''):

Whether, on the facts and in the circumstances of the case, the mistake rectified by the AAC could be said to be ''a mistake apparent from the record'' referred to in section 154 of the income tax Act, 1961 ?

The facts leading to this reference are as follows:

The assessee is a registered partnership firm consisting of two partners and the assessment year under reference is the assessment year 1966-67, the previous year being the period from 5-11-1964 to 31-7-1965. On 31-7-1965, that is on the last day of the accounting period, the business. of the assessee-firm was transferred to a private limited company called ''Standard Radiators (P.) Ltd.'' (''the Company''). The only shareholders of the company were the two partners of the assessee-firm. The assessee-firm disclosed gross profit of Rs. 2,21,720 but showed loss in the profit and loss account so far as the business of radiators was concerned. Apart from this business activity, there arose income by way of deemed business profit u/s 41(2) of the Act and capital gains as a result of transfer of the assessee-firm''s business assets to the company. The 1TO while framing assessment for the assessment year 1966-67 included an amount of Rs. 2,90,750 in the total income of the assessee-firm as capital gains. It is not disputed that the correct figure of capital gains was Rs. 3,00,750 and not Rs. 2,90,750 included in the total income of the assessee-firm. There was thus a mistake of Rs. 10,000 in computation of capital gains. The ITO also found that he had committed mistake in calculation of deemed business profits u/s 41(2) and in setting off these profits against capital gains. He also found that tax payable by the assessee-firm on the capital gains was not determined in the assessment order. The ITO sought to rectify these mistakes u/s 154(1)(a) of the Act. The assessee-firm opposed the proposed action of the ITO to rectify the original assessment order. So far as proposed action of determining tax on capital gains was concerned, it was contended on behalf of the assessee-firm that since it was not decided whether or not capital gains are taxable in the hands of a partnership firm, tax payable on capital gains could not be determined by rectifying the order u/s 154. The ITO, however, rejected the contentions raised on behalf of the assessee-firm and recomputed the total income of the assessee-firm. So far as computation of business income was. concerned, he adjusted profits u/s 41(2) against the business loss and computed business loss at Rs. 4,785. This computation is not under challenge in this reference. So far as capital gains were concerned, the ITO added Rs. 10,000 and computed capital gains at Rs. 3 lakhs and determined tax payable thereon by the assessee-firm. The assessee-firm being aggrieved by the order passed by the ITO carried the matter in appeal before the AAC. The only ground which was pressed before the AAC was that the ITO could not have determined tax payable on capital gains component of the total income of the assessee-firm u/s 154. The AAC relied the decision of this Court in CIT v. Navinchandra Tribhovandas [IT Reference No. 40 of 1971, dated 25-9-1973] and held that since the question whether a partnership firm is liable to pay income tax on capital gains was not determined, the ITO could not have determined such tax by rectifying assessment order u/s 154. The revenue did not prefer appeal against the order of the AAC.

About 21/2 years after the AAC upheld the contention for the assessee in the appeal preferred by it as stated above, the decision of this Court in CIT v. Hasanali Khanbhai & Sons 1974 Tax 36 (3) 4 came to his notice. By this decision it was held, that a registered partnership firm was liable to pay tax on capital gains component of its total income u/s 114 of the Act. The AAC, therefore, issued notice to the assessee-firm proposing to amend his appellate order dated 30-6-1975 by which he had upheld the contention of the assessee-firm that whether or not tax was paid on capital gains was debatable and consequently set aside the order Of the ITO passed u/s 154. The assessee resisted the proposed action of the AAC. The AAC overruled the objection raised by the assessee-firm and held that having regard to the decision of this Court in Hasanali Khanbhai & Sons'' case (supra), he had committed a mistake apparent on the face of the record in partly allowing the assessee''s appeal and setting aside the order of the ITO determining tax on capital gains. The AAC by his order dated 7-3-1978, amended his earlier order dated 30-6-1975 and restored the order of the ITO charging capital gains to tax. Being aggrieved by the order of the AAC, the assessee-firm carried the matter in appeal before the Tribunal. The Tribunal by its order dated 30-11-1979 held that the AAC was correct in rectifying his appellate order dated 30-6-1975 and thus restoring the order dated 6-3-1975 of the ITO. The assessee being dissatisfied with the order of the Tribunal, at its instance, the question set out hereinabove has been referred to us for our opinion.

The first question that we have to decide is whether, on the facts and in the circumstances of the case, the AAC was acting within his powers in making the impugned rectification. The second question on which arguments were advanced by the Learned Counsel for the parties is whether the ITO could have rectified or amended the assessment order in the manner he had done and if he had no power to pass such rectification order, whether the AAC could have made the impugned rectification. The ITO and the AAC purported to make the said rectification u/s 154. That section, to the extent material for our purposes, reads as follows:

Rectification of mistake, -(1) With a view to rectifying any mistake apparent from the record-

(a) the income tax Officer may amend any order of assessment or of refund or any other order passed by him;

(b) the Appellate Assistant Commissioner may amend any order passed by him u/s 250 or section 271;

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(2) Subject to other provisions of this section, the authority concerned-

(a) may make an amendment under sub-section (1) of its own motion, and

(b) shall make such amendment for rectifying any such mistake which has been brought to its notice by the assessee, and where the authority concerned is the Appellate Assistant Commissioner by the income tax Officer also.

Section 154 came up for consideration before the Supreme Court in T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, . In that case, the Supreme Court has held that a mistake apparent on record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions. It was observed that a decision of a debateable point is not a mistake apparent on the record. Therefore, the question which we have to address ourselves is whether there was a mistake apparent on the record which was an obvious and patent mistake and not something which could be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions. The rectification order was passed by the ITO on 6-3-1975 and by this order amongst other things he sought to correct the mistakes of Rs. 10,000 in computation of capital gains and of determining tax payable on the capital gains. The argument of the assessee is that it was debatable whether the assessee, a registered partnership firm, was liable to pay income tax on capital gains and, therefore, it was not open to the ITO to determine the tax payable on capital gains. It was not disputed that there was mistake of Rs. 10,000 in computation of capital gains and that the ITO in the exercise of power conferred on him u/s 154 could have rectified computation of capital gains by adding Rs. 10,000 to the amount already computed. However, so far as the determination of tax was concerned, as stated above, the assessee''s contention is that since taxability of capital gains in the hands of the assessee was debatable, order determining tax on capital gains could not have been passed u/s 154. Now it is important to note that the date on which the ITO passed the order u/s 154, namely, 6-3-1975, the question whether capital gains could be taxed in the hands of a registered partnership firm was no longer res Integra. This question was settled by the decision of this Court in Hasanali Khanbhai & Sons'' case (supra). this Court in the light of the different provision mentioned in the judgment and particularly in the light of the definition of the word ''person'' in section 2(37) of the Act and also the definition of the word ''income'' in section 2(24) read with the provisions of section 114 and section 182 of the Act and the relevant provision of the Finance Act of each year, held that it was obvious that when considering the total income for the purpose of arriving at income tax payable by a registered firm as such on the total income, the amount of capital gains must be included. This decision was rendered by this Court on 25-9-1973. In the light of this decision which was binding on the ITO it must be held that the ITO had committed an error apparent on the face of the record in failing to determine the tax payable on the capital gains which were computed and included in the total income of the assessee.

In this connection we may refer to another decision of this Court in Parshuram Potterv Works Co. Ltd. Vs. D.R. Trivedi, Wealth Tax Officer, Morvi and Another, . That was a case in which, in the course of assessment to wealth-tax for the assessment years 1957-58 to 1959-60, the petitioner-company claimed to deduct in the computation of net wealth a certain amount each year in respect of provision for taxation, but the claim was disallowed on the ground that the amount provided for liability did not constitute ''debt owed'' from the petitioner on the relevant valuation dates within the meaning of section 2(m) of the Wealth-tax Act, 1957 (''the 1957 Act''). The petitioner did not prefer appeals against the orders of assessment. Subsequently, however, the petitioner came to know from a decision given by the Tribunal that the amounts claimed by it in respect of provision for taxation were deductible in computing the net wealth of the petitioner. The petitioner thereupon made application to the WTO for rectification of the orders of assessment u/s 35 of the 1957 Act which corresponds to section 154 of the 1961 Act on the ground that there was an error apparent on the face of the record. The applications were rejected by the WTO on the ground that there was no error of law apparent on the face of the record in the assessment orders. The petitioner''s revision petition to the Commissioner was unsuccessful. The petitioner thereupon approached this Court under article 226 of the Constitution and applied for writs to quash the orders refusing to rectify the assessment orders and for a direction to rectify the assessment orders. It was contended for the revenue that there was no error apparent on the face of the record and also as the assessee had not preferred appeals from the assessment orders, no writs could be issued. It was urged that the orders of assessment to wealth-tax made on the petitioner insofar as they disallowed the claim for deduction in respect of the amount of provision for taxation did not disclose any mistake apparent on the record and, therefore, the WTO and the Commissioner of Wealth-tax committed no error of law apparent on the face of the record in rejecting the applications of the petitioner for rectification of the assessment orders. It was also strenuously contended that neither the decision of this Court in Commissioner of Wealth Tax Vs. Raipur Manufacturing Co. Ltd., nor the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, was pronounced before the WTO made the assessment orders in the petitioner''s cases and since the law was not yet settled as on the date of assessment orders, it could not be said that the assessment orders disclosed any mistake of law apparent on the record. In other words, the submission was that the assessment orders were proper and valid when they were made and merely because the said orders were later found to be erroneous in view of the subsequent judicial pronouncements, the provisions of section 35 would not be attracted and the WTO would not be justified in rectifying the said orders on the ground that they disclosed mistake of law apparent on the record. These contentions raised on behalf of the revenue were rejected by this Court and it was held:

We are of the opinion that the submission is not well-founded. It is true that the Wealth-tax Officer did not have before him the decision of this Court in Commissioner of Wealth Tax Vs. Raipur Manufacturing Co. Ltd., or that of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, , when he passed the assessment orders in the petitioner''s case and that both the decisions were given after the assessment orders were made. But these decisions did not enact or make the law in any sense but merely interpreted the expression ''debt owed'' occurring in section 2(m) of the Act which was undoubtedly on the statute book at the time when the assessment orders were made by the Wealth-tax Officer. These decisions, in so far as they declared that the amounts claimed by an assessee in respect of provision for taxation are deductible in computing the net wealth of the assessee since they represent ''debt owed'' by the assessee within the meaning of section 2(m) of the Act, merely stated what the law had always been and must always be understood to have been. The facts that these decisions were not before the Wealth-tax Officer when he made the orders of assessment in the petitioner''s cases has, therefore, no material bearing on the question whether the said orders disclose any mistake apparent from the record. If that be the correct legal position, and we hold that it is, the only conclusion possible is that the assessment orders, in so far as they disallowed the claim of the petitioner for deduction in respect of the amount of provision for taxation, proceeded on a wrong view of the law and the said orders were bad at their very inception, on the date on which they were made. The orders of assessment thus disclosed a mistake apparent from the record and were liable to be rectified in exercise of the powers conferred u/s 35 of the Act. In our opinion, therefore, the Wealth-tax Officer committed an apparent error of law in rejecting the petitioner''s application for rectification of the mistake and the Commissioner of Wealth-tax likewise committed an error of law apparent on the face of the record in rejecting the petitioner''s revision application.

We find further that at least on the date of the decision of the Commissioner of Wealth-tax rejecting the revision applications of the petitioner directed against the order of the Wealth-tax Officer refusing to exercise the powers conferred u/s 35 of the Act, the decision of this Court in Raipur Mfg. Co.''s case (supra) was already pronounced. The decision of this Court in Raipur Mfg. Co.''s case (supra) was given on October 15 and 16, 1962, whereas the decision of the Commissioner of Wealth-tax in the revision application preferred by the petitioner was given on March 23, 1964. In fact, we find that in the memo of revision application presented by the petitioner to the Commissioner of Wealth-tax, a copy of which is annexed as ''exhibit B, collectively'' to the petition, pointed reference has been made to the decision of this Court in Raipur Mfg. Co.''s case (supra) and the Commissioner of Wealth-tax was invited to exercise his revisional jurisdiction so as to give effect to the said decision. We are of the opinion that, in these circumstances, it was incumbent upon the Commissioner of Wealth-tax to give effect to the decision of this Court in Raipur Mfg. Co.''s case (supra) and inasmuch as he failed to do so, there is an error of law apparent on the face of the record which has altogether vitiated his order. (p. 656)

Similar view was taken by another Division Bench of this Court in Shrid Geigy Ltd. [ST Reference No. 2 of 1974, dated 28-6-1974], in which reliance was placed on the aforesaid decision in Parshuram Pottery Works Co. Ltd.''s case (supra). The ratio of the decision in Parshuram Pottery Works Co. Ltd.''s case (supra) will apply to the facts of the instant case. For the reasons stated in the said judgment, it must be held that the ITO had committed an error apparent on the face of the record in not determining the tax payable on capital gains when he passed the assessment order. The fact that the decision of this Court in Hasanali Khanbhai & Sons'' case (supra) was not before the ITO when he made the assessment order in the assessee''s case, has no material bearing on the question whether the said order disclosed any mistake apparent on the record. When this Court held that capital gains were taxable in the hands of a registered firm, it merely stated:

What the law had always been and must always be understood to have been.

Therefore, as already observed, it is immaterial that the decision of this Court was not before the ITO when he made the assessment order. If the capital gains were liable to payment of tax as has been held by this Court in Hasanali Khanbhai & Sons'' case (supra), the only conclusion possible is that the assessment order insofar as it failed to deter- mine tax payable on capital gains proceeded on wrong view of law and was bad from its very inception, i.e., from the date on which it was made. The assessment order thus disclosed a mistake apparent on the face of the record and was liable to be rectified in exercise of the powers conferred u/s 154. In our opinion, therefore, the ITO had acted within his powers in rectifying the assessment order and determining the tax payable on the capital gains. Once this conclusion is reached, it is obvious that the AAC committed an error apparent on the face of the record in allowing the appeal filed by the assessee against the rectification order and setting aside the same. It may be recalled that the AAC interfered with the rectification order passed by the ITO on the ground that it was debatable whether capital gains were liable to tax in the hands of a registered partnership firm. The AAC allowed the appeal of the assessee on 30-6-1975 by which time, as already pointed out above, the decision of this Court in Hasanali Khanbhai & Sons'' case (supra) was available. In face of this decision which set at rest the controversy whether capital gains were taxable in the hands of a registered firm, the AAC could not have reversed the decision of the ITO and set aside the determination of tax payable on capital gains by the assessee. In allowing the appeal filed by the assessee, the AAC had acted contrary to the decision of this Court which was binding on him. He had, therefore, committed an error apparent on the face of the record which he could have rectified or amended in exercise of powers u/s 154. The reasons which we have given for holding that the ITO had acted within his powers in rectifying the assessment order apply with equal force in upholding the validity of the order of rectification passed by the AAC. Therefore, for the reasons which we have set out hereinabove, it must be held that the AAC was within his powers in rectifying his order u/s 154.

The Learned Counsel for the assessee however strongly relied on a decision of this Court in Navinchandra Tribhovandas''s case (supra) the same date on which the decision was rendered in Hasanali Khanbhai & Sons'' case (supra) and urged that facts in that case were on all fours with the facts in the instant case and, therefore, ratio of the decision of this Court in that case will govern the instant case. In that case, the assessee was a registered partnership firm and in its income tax assessment for the assessment year 1964-65, capital gains of Rs. 40,661 was not taken into consideration for the purpose of calculation of income tax payable by the registered firm under the provisions of section 182. Subsequently, on 18-6-1968 the ITO thought he had committed a mistake in the original assessment for the year 1964-65 inasmuch as he had not included the capital gains in the income of the firm for the purpose of determining the income tax payable by the firm. He treated the mistake as a mistake apparent on face of the record and initiated proceedings u/s 154 by way of rectification. The assessee objected to this both on merits as well as the legality of the proceedings u/s 154. The ITO, however, rejected the contentions of the assessee and held both as regards the maintainability of the proceedings as well as the merits against the assessee. On appeal, the AAC dismissed the appeal and upheld the order of the ITO on both the grounds. The assessee carried the matter in appeal before the Tribunal. The Tribunal held that for the purpose of computing the total income tax payable by a registered firm u/s 182, capital gains should not be taken into consideration while computing the total income of the registered firm. The Tribunal also held that the rectification proceedings u/s 154 were not maintainable as there was no mistake apparent on the record. In the view of the Tribunal the controversy was highly debatable and, therefore, section 154 would not apply. Thereafter, at the instance of the revenue, two questions were referred for the opinion of this Court, one of which was, whether, on the facts and in the circumstances of the case, the rectification order made by the ITO u/s 154 was validly passed ? Relying on the decision of the Supreme Court in Volkart Bros.'' case (supra), this Court held that the ITO was wrong in holding that there was mistake apparent from the assessment of the assessee-firm and it was not competent to go into the true scope of the provisions of the Act in rectification proceedings u/s 154. It is pertinent to note that this Court considered the validity of proceedings u/s 154 in the light of position of law as it obtained on the date on which the rectification order was made by the ITO. At that time the decision of this Court in Hasanali Khanbhai & Sons'' case (supra) wherein it is held that while computing the total income for the purpose of arriving at income tax payable by a registered firm, the amount of capital gains was includible, was not yet pronounced. In other words, the position of law, as to the taxability of capital gains in the hands of a registered firm was not settled and at the time when the assessment order was made as well as at the time when the ITO passed rectification order, it was debatable whether a registered firm was liable to pay tax on capital gains. It was in view of this position which obtained on the date of assessment and as also the rectification order that this Court relying on the decision of the Supreme Court in Volkart Bros.'' case (supra) held that the ITO was wrong in holding that there was a mistake apparent from the record in making the assessment of the assessee-firm and it was competent to go into the true scope of the provision of the Act in rectification proceedings u/s 154. We, therefore, find ourselves unable to agree with the Learned Counsel for the assessee that facts in the instant case are identical and, therefore, the ratio of the decision in Navinchandra Tribhovandas''s case (supra) will govern the instant case.

The Learned Counsel for the assessee next sought to rely on the decision of this Court in Smt. L.H. Kotechav. J.V. Shah [1980] 122 ITR 86. It was urged that since there was a view taken by another High Court contrary to the view taken by this Court, a debatable issue arose and. in case of such issue, rectification proceedings u/s 154 were not maintainable. That was a case in which the assessee was a partner in three firms. In one of the firms, two of her minor sons were admitted to the benefits of the partnership while in the other two, three of her minor sons were admitted to the benefits of the partnership. Clause 6 of the partnership deeds of the said two partnership firms was in identical terms. In the earlier portion of the said clause 6 it was stated:

...the minors admitted to the benefits of the partnership shall be entitled to the benefits of the partnership and shall not personally be liable for any obligation of the said firm but their respective share only shall be liable for the obligations of the said firm....

It went on to provide that-

... pending their respectively attaining the age of majority their respective shares in the profits of the business should be accumulated to their respective credits so as to be available to meet their respective share of losses, if any, incurred by the firm at any time during their respective minority, provided always that in the event of the accumulation to the credit of the minor, Rasikchandra Dayalbhai, being insufficient for his share of losses, if any, such insufficiency or deficit shall be exclusively borne by the second partner and in the event of accumulations to the credit of the minors, Narendrakumar Harjivandas Kotecha, Chandulal Harjivandas Kotecha, and Rameshchandra Harjivandas Kotecha, the eleventh partner, the twelfth partner and the thirteenth partner, respectively, being insufficient for their respective share of losses, if any, such insufficiency or deficit should be exclusively borne by the third partner (the assessee).

The share of minor children''s losses in the firm was allowed to be set off against the assessee''s total income from all sources. Subsequently, the ITO issued a notice under sections 154 and 155 of the Act and passed an order of rectification withdrawing the set-off. The order of the ITO was confirmed by the Commissioner on revision. The assessee approached this Court under article 226 of the Constitution and applied for writs to quash the said orders. It is pointed out that in Dayalbhai Madhavji Vadera Vs. Commissioner of Income Tax, Gujarat, , this Court had held that a minor child''s loss in a firm cannot be included in the total income of a parent and, therefore, the ITO was justified in passing the rectification order. It was, however, urged on behalf of the assessee that the decision of the Court in Dayalbhai Madhavji Vadera''s case (supra) had no application to the facts of the assessee''s case and there was, therefore, no error or mistake committed by the ITO while making original assessment. this Court, relying on the decision of the Supreme Court in Volkart Bros.'' case (supra), held that there cannot be said to be a mistake apparent from the record since the decision on a debatable point of law is not a mistake apparent on the record. The point was held to be debatable on three grounds, namely.

(1) There is scope for discussion, debate and argument as regards interpretation of clause 6 of the partnership deed.

(2) When this Court rendered decision in Dayalbhai Madhavji Vadera''s case (supra), its attention was not drawn to the circular of the CBE issued as far back as 1944.

(3) If the aforesaid circular dated 4-7-1944 issued by the CBR was brought to the notice of this Court particularly in the context of the decision of the Supreme Court in Navnitlal C. Javeri Vs. K.K. Sen, Appellate Assistant Commissioner of Income Tax, ''D'' Range, Bombay, , this Court would not have taken the view which it took. Further, other High Courts had taken a view contrary to the view taken by this Court.

It was, therefore, that this Court held that there cannot be said to be a mistake apparent from the record since the question on a debatable point is not a mistake apparent from the record at all. In our opinion, this decision cannot be of any assistance to the assessee in the instant case. It was only on the ground that other High Courts had taken a view contrary to the view taken by this Court in Dayalbhai Madhavji Vadera''s case (supra) that the Court held that the question before it was debatable. It was mainly having regard to the CBR''s circular of 1944 and clause 6 of the partnership deeds that the Court held that the question before the ITO was not free from doubt and was debatable. It may further be pointed out that the attention of the Court was not drawn to the decision of this Court in Parshuram Pottery Works Co. Ltd.''s case (supra). In that case it has been clearly held that the taxing authorities were bound by the decision rendered by this Court and they were bound to follow the same. If a decision is given contrary to the view expressed by this Court, there is an error apparent on the face of the record which not only can be, but should be, rectified or amended u/s 154.

We may also refer to the decision of the Supreme Court in East India Commercial Co. Ltd.,Calcutta and Another Vs. The Collector of Customs, Calcutta, . In this decision, Subba Rao, J. observed:

... The Division Bench of the High Court held that a contravention of a condition imposed by a licence issued under the Act is not an offence u/s 5 of the Act, This raises the question whether an Administrative Tribunal can ignore the law declared by the highest Court in the State and initiate proceedings in direct violation of the law so declared. Under article 215, every High Court shall be a Court of record and shall have all the powers of such a Court including the power to punish for contempt of itself. Under article 226, it has a plenary power to issue orders or writs for the enforcement of the fundamental rights and for any other purpose to any person or authority, including in appropriate cases any Government, within its territorial jurisdiction. Under article 227 it has jurisdiction over all Courts and Tribunals throughout the territories in relation to which it exercises jurisdiction. It would be anomalous to suggest that a Tribunal over which the High Court has superintendence can ignore the law declared by that Court and start proceedings in direct violation of it. If a Tribunal can do so, all the subordinate Courts can equally do so, for there is no specific provision, just like in the case of the Supreme Court, making the law declared by the High Court binding on subordinate Courts. It is implicit in the power of supervision conferred on a superior Tribunal that all the Tribunals subject to its supervision should conform to the law laid down by it. Such obedience would also be conducive to their smooth working: otherwise there would be confusion in the administration of law and respect for law would irretrievably suffer.... (p. 366)

In view of this decision of the Supreme Court, the ITO and the AAC were bound to follow the decision of this Court in Hasanali Khanbhai & Sons'' case (supra). If they failed to do so, it would under mine the respect for law laid down by the High Court and constitutional authority of the High Court and their conduct would, therefore, be apprehended by the principles underlined by the law of contempt. Under the circumstances, it must be held that both the ITO and the AAC were within their powers in rectifying the orders in the manner they have done. In the result, we answer the question referred to us in the affirmative and against the assessee. Reference answered accordingly with no order as to costs.