Patna High Court
Hindustan Malleables And Forgings Ltd. vs Income-Tax Officer And Anr. on 30 July, 1976
JUDGMENT M.P. Singh, J.
1. This is a petition by the assessee-company under Articles 226 and 277 of the Constitution of India. The petitioner seeks a writ of certiorari or other appropriate writ or order or direction for quashing the orders of rectification of annexures "2" and "4". The order of rectification at annexure "2" was passed by the Income-tax Officer (Special Circle), Dhanbad, under Section 154 of the Income-tax Act, 1961 (briefly "the Act"), on 18th December, 1973. By that order, he rectified the mistake in the assessment order dated December 30, 1969, for the assessment year 1965-66. His order was upheld by the Commissioner of Income-tax in revision under Section 264 of the Act. The order of the Commissioner dated January 25, 1975, is annexure "4" to this writ petition. The, facts in brief are these. The petitioner was previously a private limited company and was admittedly converted into a public limited company with effect from February 24, 1961. It derives its income from manufacture and also from malleable cast iron, forged fittings, etc. The petitioner in its original return filed on September 30, 1975, claimed deduction under Section 84(2) of the Act amounting to Rs. 78,347. The relevant portion of Section 84 is :
"(1) Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking or hotel to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking or hotel, computed in the prescribed manner.
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :--
(i) It is not formed by the splitting up, or the reconstruction of, a business already in existence"
2. This claim by the petitioner was disallowed by the Income-tax Officer on January 31, 1967, at the time of the original assessment made under Section 143(3) of the Act, but the order was set aside on appeal by the Appellate Assistant Commissioner with a direction to consider the claim of the petitioner under Section 84(2) of the Act afresh and for reassessment after giving the assessee an opportunity of being heard. Thereafter, the assessee was heard and reassessment was made. The exemption, however, claimed under Section 84(2) of the Act was again disallowed by Mr. G. Prasad, the then Income-tax Officer, W/A Dhanbad, by order dated December 30, 1969, at annexure "I", on the ground that the assessee-company was formed by the reconstruction of the previous private company. The Income-tax Officer while rejecting the aforesaid claim observed as follows:
"This exemption is not allowable to a company which is formed by the splitting up or the reconstruction of the business already in existence. The assessee-company was previously a private limited company and was converted into a public limited company with effect from 24-2-61. Since it is not an entirely new industrial undertaking, rather reconstruction of a previous private company, hence the assessee's claim of deduction Under Section 84(2) is rejected."
3. Appeal preferred by the assessee against that order was subsequently withdrawn. A similar claim, however, was made by the assessee-company again in the next assessment year 1966-67, but in that year also the claim was rejected by the Income-tax Officer on the same ground. Against this order of the Income-tax Officer rejecting the claim under Section 84 in the assessment year 1966-67, the assessee went up in appeal before the Appellate Assistant Commissioner who in his appellate order dated September 11, 1970, observed that Section 84 of the Act refers to profits and gains derived from "new industrial undertakings", which clearly implies that emphasis falls on "new industrial undertaking" rather than on the assessee claiming benefit under Section 84. In his appellate order the Appellate Assistant Commissioner opined that a mere change in the taxable entity of the "new industrial undertaking" shall not deprive the assessee-company from the benefits of the provisions of Section 84. Meanwhile, Mr. N. Prasad, the Income-tax Officer, discerned that some apparent mistake of fact and of law was committed by his predecessor in rejecting the claim of the assessee tinder Section 84(2) of the Act, and that his predecessor was not correct in holding that the present company was not a "new industrial undertaking". He thought that apparently the assessee was entitled to the exemption in the assessment year 1965-66, under Section 84 of the Act and accordingly on December 18, 1973, he allowed the claim of the assessee under that section, rectifying the previous order dated December 30, 1969. The order of Mr. N. Prasad, the Income-tax Officer, dated December 18, 1973, is annexure "2" to this writ petition. The petitioner, thereafter, moved a petition in the High Court at Patna in C.W.J.C. No. 1273 of 1974, but the writ petition was permitted to be withdrawn on August 20, 1974, with the observation that the petitioner has got adequate alternative remedy of challenging the order of rectification by filing an application in revision before the Commissioner of Income-tax under Section 264(1) of the Act. The order of the High Court is annexure "3". The petitioner then filed a revision petition before the Commissioner of Income-tax, Bihar-II, Patna, under Section 264(1) of the Act against the order of rectification. The revision petition was rejected on January 16, 1975. It was held by the Commissioner of Income-tax that the Income-tax Officer was perfectly justified in rectifying the mistake under Section 154 of the Act and the action was within his jurisdiction. He, accordingly, upheld the order of rectification passed by the Income-tax Officer. A copy of his order is annexure "4" to this writ application.
4. A counter-affidavit on behalf of the Income-tax Officer (Special Circle), Dhanbad, and the Commissioner of Income-tax, Bihar-II, Patna, has been filed. The main point stated in the counter-affidavit is that the Income-tax Officer was perfectly justified in rectifying the mistake under Section 154, as there was a clear mistake of fact and law by the Income-tax Officer apparent on the face of the record. The counter-affidavit mentions several other matters but they are not material for the purpose of this case and I do not think it necessary to refer to them.
5. Mr. K.N. Jain, appearing for the petitioner, contended that the industrial undertaking in question had been formed by the reconstruction of a business already in existence, and it was on this ground that the claim under Section 84 of the Act was refused twice by the Income-tax Officer after due deliberations and at least it was a case where two opinions were possible on the point as to whether or not it had been formed by the reconstruction of the business and, in this view of the matter the Income-tax Officer and the Commissioner of Income-tax were incompetent to pass the impugned orders at annexures "2" and "4". Learned counsel urged that where two views are possible, a mistake cannot be corrected under Section 154 of the Act, there being no error apparent on the face of the records. In continuation of this argument he submitted that a mistake of fact or of law is not something which can be established by long drawn process of reasoning on points on which there may conceivably be two opinions or which may be discovered by a complicated process of investigation, argument or proof. He drew our attention to the following observation of Chagla C.J. in Sidhramappa Andannappa Manvi v. Commissioner of Income-tax [1952] 21 1TR 333 (Bom) made in respect of the power of the Tribunal to rectify the mistake under Section 35(2) of the old Income-tax Act, 1922 (at pages 340, 342):
"Now the power is undoubtedly a limited power ; it is not a power of revision or review, but it is limited to correcting only those mistakes which are apparent on the record. A mistake must be patent on the record; it must not be a mistake which can be discovered by a process of elucidation, or argument, or debate. The mistake being patent on the record, rectification must be limited to correcting that mistake only without any further argument or debate......
It may be that the Tribunal might have taken a different view if they had considered this application, but in asking the Tribunal to come to a different conclusion on a consideration of this fact the assessee is really asking the Tribunal to revise or review their own decision and not rectify an apparent error on the face of the record..........the Tribunal was equally right in refusing to rectify its order at the instance of assessee."
6. He also brought to our notice several other decisions in support of this submission:
(1) M. Kumaran v. First Additional Income-tax Officer [1958] 33 ITR 290 (Ker).
(2) Budhram Kashiram v. State of Bihar [1970] 26 STC 505 (Pat).
(3) T.S. Balaram, Income-tax Officer v. Volkart Brothers [1971] 82 ITR 50 (SC).
(4) Commissioner of Income-tax v. Naya Sahitya [1972] 84 ITR 567 (Delhi).
(5) Commissioner of Income-tax v. Rajnagar Tea Co. Ltd. [1973] 87 ITR 669 (Cal).
(6) Commissioner of Income-tax v. Premraj Ganpatraj & Co. [1974] 95 ITR 447 (Guj).
7. These decisions lay down the principles that a mistake apparent is a mistake that is manifest, plain or obvious, a mistake that can be rectified without debate or dissertation. It is unnecessary to overburden this judgment by quoting from those judgments, because these principles are well established and are not in doubt--See [1972] 84 ITR 567, 571 (Delhi) :
"Although these principles are well settled, the difficulty arises in the application of such principles to the facts and circumstances of each case."
8. The difficulty was also realised by the Supreme Court in K. T. M. T. M. Abdul Kayoom v. Commissioner of Income-tax [1962] 44 ITR 689, 703, in the following passage:
"......none of the tests (laid down in various authorities) is either exhaustive or universal. Each case must depend on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases......by matching the colour of one case against the colour of another."
9. It is thus clear that each case has to be decided on its own facts. Keeping these guiding principles in view, let us consider whether in the instant case there was a mistake apparent from the record. The question is, was the Income-tax Officer justified in rectifying the mistake in the earlier order of December 30, 1969 (annexure 1), on the ground that the mistake was an obvious one. In other words, the question is, was Section 84 of the Act correctly invoked ? This is the only question that we have to decide. That section to the extent material for the present purpose reads as under I " 154. (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."
10. The corresponding section in the old Income-tax Act, 1922, is Section 35. From a bare perusal of the provisions reproduced above, it is clear that the jurisdiction of the Income-tax Officer to make order of rectification entirely depends upon the existence of a mistake apparent from the record when it is glaring, obvious or a self-evident mistake. I will now proceed to consider the facts of the present case in order to see whether there was a mistake apparent from the record. The facts are simple : The petitioner claimed deduction under Section 84(2) of the Act. Its claim was rejected by applying the provisions of Section 84(2)(1). That clause, as already said, provides that exemption can be allowed when an industrial undertaking is not formed by the splitting up or by the reconstruction of a business already in existence. Deduction is not allowable to a company which is formed by the splitting up or the reconstruction of the business already in existence. The petitioner was previously a private limited company incorporated in 1955 and was subsequently converted into a public limited company with effect from February 24, 1961. The Income-tax Officer rejected the claim for deduction at the time of original assessment and also at the time of reassessment on the ground that it was not entirely a new industrial undertaking, rather it was reconstruction of previous private business. Later on, the Income-tax Officer found out on his own motion the mistake and took the view that the assessee-company, namely, the petitioner, was a new industrial undertaking and that it had wrongly been treated as having been found by splitting up or reconstruction of the business which was already in existence and taking this view of the matter he rectified the mistake and allowed the deduction under Section 154 of the Act by order dated 18th December, 1973 (annexure "2"). He held in his order, passed under Section 154 of the Act, that it was not a case of splitting up or reconstruction of a business, rather a change in status from private to public company and the assessee was entitled to exemption as provided in law.
11. Now, can it not be said that it was a mistake apparent from the records ? Learned counsel for the petitioner says, it was not. According to him it was simply reconstruction of the business. It becomes now necessary to understand as to what is meant by "reconstruction of business". The meaning of the word reconstruction was explained by the Bombay High Court in Commissioner of Income-tax v. Gaekwar Foam & Rubber Co. Ltd. [1959] 35 ITR 662, in the following terms:
"The reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be lost or abandoned. The concept essentially rests on changes but the changes must be constructive and not destructive. The underlying idea of a reconstruction is of a 'business already in existence' : there must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to carry on the same business though in some altered or varied form. If the alterations and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. For instance if the ownership of a business or an undertaking changes hands not ostensibly but in reality and effectively that would not be reconstruction. Or, if the very nature of the business is changed, that again would not be reconstruction. On the other hand, reorganisation of the business on sounder lines or alterations in the mode or method or scope of the activities of the business or in its personnel or infusion of new blood in the management or control of the business which may even be by some changes in the constitution of persons interested in the undertaking would be no more than reconstruction of the business if it is substantially the same business carried on by substantially the same persons. In these matters, we have to look at the substance of the transaction and not the form. If, looking at the substance of the transaction, it is a sale, then the concept of reconstruction must be ruled out for in such a case there is no scope for speaking about any reconstruction of an existing business".
12. This view was approved in Commissioner of Income-tax v. Naya Sahitya [1972] 84 ITR 567 (Delhi) and was also referred to in Capsulation Services Pvt. Ltd. v. Commissioner of Income-tax [1973] 91 ITR 566 (Bom). The aforesaid observation shows that if the ownership of a business or an undertaking changes hands not ostensibly but in reality and effectively that would not be reconstruction. In a case of reconstruction of a business, its identity is not lost and the original undertaking continues to function with some minor changes or alterations. The present is not a case of that type. There was no change in the business. The previous identity was completely lost and the original undertaking acquired a new status. The former status as a private company was lost and a new status as a public limited company came into existence. There was no alteration in the original undertaking but it was entirely a new industrial undertaking with a change in name. In such a situation it cannot be called a case of reconstruction of the same business. The change in status was misunderstood by the Income-tax Officer and he wrongly treated the assessee-company as formed by the reconstruction of a business and due to this mistaken view he misread the provisions of Section 84(2) of the Act and did not allow deduction. He erroneously invoked the provision of Section 84(2)(i) of the Act. It was a mistake of fact as well as law patent on the face of the record and hence the Income-tax Officer was at liberty to rectify the mistake. It was his imperative duty to rectify the mistake under Section 154. It was not a mistake arrived at by long drawn process of reasoning or on which two opinions were possible or which was a debatable point. This was self evident. The change from a private limited company to a public limited company had been taken by the Income-tax Officer as reconstruction of a business already in existence. When he discovered the mistake, he rightly held that the change was merely one of status and that it did not mean splitting up or reconstruction of the business and as such the assessee-company was entitled to exemption as provided in Section 84. He was, I think) perfectly correct because no fact had to be ascertained or investigated before it could be said that there was a statutory obligation to allow exemption under Section 84. In my view, the Commissioner of Income-tax rightly observed in his order dated January 16, 1975 (annexure "4" to this writ petition) that by no stretch of imagination it can be said that the business of the petitioner public limited company was formed by splitting up or reconstruction of the business which was already in existence and thus the business was the same business without any break in its continuity. It is thus increasingly clear that the mistake was apparent from the record and it was rightly rectified.
13. Mr. Rajgarhia, appearing on behalf of the respondent, cited several decisions to show that mistake apparent from the record caused due to misreading or overlooking the provisions of the statute can be rectified. However, I will refer to some of them because the principles enunciated therein apply to the facts of the present case.
14. In M.K. Venkatachalam, Income-tax Officer v. Bombay Dyeing & Mfg. Co. Ltd. [1958] 34 ITR 143 (SC), a sum of Rs. 50,063 being interest on tax paid in advance was given credit for under Section 18A(5) of the Act. Subsequently, there was an amendment of the Act by which the interest became allowable only on difference between the amount of tax paid and what was actually determined. As a consequence of this, the Income-tax Officer purporting to act under Section 35 of the Act, rectified the mistake and reduced the amount of interest credited to Rs. 21,157 and issued a demand for the difference. The assessee obtained a writ of prohibition against the Income-tax Officer on the ground that the mistake contemplated under that provision had to be apparent on the face of the order and it was not contemplated to cover a mistake resulting from an amendment of the law even though it was retrospective in its effect. The revenue applied to the Supreme Court. Thus, the question for decision in that case was whether an order proper and valid when made could be said to disclose a mistake apparent from the record merely because it became erroneous as a result of a subsequent amendment of the law which was retrospective in its operation. In delivering the judgment of the court, Gajendragadkar J. said (at page 149):
"At the time when Income-tax Officer applied his mind to the question of rectifying the alleged mistake, there can be no doubt that he had to read the principal Act as containing the inserted proviso as from April 1, 1952. If that be the true position then the order which he made giving credit to the respondent for Rs. 50,603.15 is plainly and obviously inconsistent with a specific and clear provision of the statute and that must inevitably be treated as a mistake of law apparent from the record. If a mistake of fact apparent from the record of the assessment order can be rectified under Section 35, we see no reason why a mistake of law which is glaring and obvious cannot be similarly rectified."
15. In Income-tax Officer v. T.S. Devinatha Nadar [1968] 68 ITR 252 (SC), the assessment of a registered firm for the assessment year 1943-44 was completed on January 22, 1946, and the share income of each partner was determined at Rs. 8,265 and the assessments of the individual partners were completed on January 24, 1946. Thereafter, on reassessment of the firm made under Section 34 of the Indian Income-tax Act, 1922, on May 30, 1959, a sum of Rs. 90,000 was added to the income of the firm. On July 24, 1959, notices under Section 35(5) were issued for rectification of the partners' assessments on basis of the reassessment of the firm and orders of rectification were made. It was held that since the assessment of the firm was made after Section 35(5) came into force, Section 35(5) applied and the assessment of the partners could be rectified under that Section even though those assessments were made before April 1, 1952, and the orders of rectification under Section 35(5) were validly made.
16. In Income-tax Officer v. Raleigh Investment Co. Ltd. [1976] 102 ITR 616 (Cal), it was held that in a case where two views are not possible, if by misreading the section or miscalculation of the rate provided in the section a mistake is committed, such a mistake would come within the purview of Section 154.
17. It is clear that the general principles laid down in these decisions support the contention of the respondents.
18. The learned counsel for the petitioner lastly urged that a mistake discovered from the disposal of another case is not a mistake apparent from the record. He pointed out that, in the present case, the Income-tax Officer had discovered the mistake when he found that an observation was made by the Appellate Assistant Commissioner in another case of assessment for the year 1966-67 to the effect that Section 84 refers to profits and gains derived from the new industrial undertaking which clearly implies that emphasis falls on the new industrial undertaking rather than the assessee claiming benefit of Section 84, Reliance was placed on the case of Income-tax Officer v. S.K. Habibullah [1962] 44 ITR 809 (SC). In my opinion, the facts of that case are entirely different. In that case, the question was whether the Income-tax Officer had jurisdiction under Sub-section (5) of Section 35 of the old Income-tax Act, 1922 (as enacted by the Income-tax (Amendment) Act, 1973), to rectify the assessment of a partner consequent on the assessment of the firm, in cases where the firm's assessment was completed before 1st April, 1952. The facts were these :
One Mohideen who was a partner in two firms submitted returns of his income incorporating therein the estimated share of losses in the two firms for the assessment years 1946-47 and 1947-48. The estimates of the assessee were accepted by the Income-tax Officer who completed the assessments for the two years on February 20, 1950. The assessment of one of the firms for the same year was completed on October 31, 1950, but the proportionate share of the assessee for the losses were computed at much smaller figures. The Assessment of the other firm for 1947-48 was completed on June 30, 1951, again for a smaller sum than that estimated by the assessee. The Income-tax Officer started rectification proceedings on May 4, 1953, and ultimately passed an order for rectification on March 27, 1954, after taking into account the share of the losses as computed in the assessments of two firms. It will be noted at once that the finding about the incorrectness of the losses of the firm as estimated by the assessee as also the completion of his assessment preceded April 1, 1952, and Section 35(5) of the Indian Income-tax Act, 1922, could not be made applicable at all. It was stated in express terms by the Supreme Court--See [1962] 44 ITR 809, 815 :
"The power to rectify assessment of a partner consequent upon the assessment of the firm of which he is a partner by including or correcting his share of profit or loss can, therefore, be exercised only in case of assessment of the firm made on or after April 1, 1952."
19. The decision, therefore, does not support the contention of the petitioner. In the light of the above, I hold that the Income-tax Officer is justified in exercising his powers under Section 154 of the Act in rectifying the mistake and his order was rightly upheld by the Commissioner of Income-tax and, consequently, the orders of rectification at annexures "2" and "4" passed by them are held to be valid, effective and binding on the parties. The writ petition under Articles 226 and 227 of the Constitution of India is, accordingly, dismissed. No order as to costs.
Uday Sinha, J.
20. I agree.