Delhi High Court
Commissioner Of Income-Tax vs Delhi Cement Stockists on 14 January, 1971
Author: H.R. Khanna
Bench: H.R. Khanna
JUDGMENT Misra, J.
1. The following question has been referred by the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the omission to levy tax on the assessed firm in respect of the income for the period April 1, 1957, to June 10, 1957, was a mistake apparent on the face of the record rectifiable under Section 154 of the Income-tax Act, 1961 ?"
2. The matter relates to the assessment year 1958-59, for which the relevant previous year ended on 31st March, 1958.
3. The assessed is a registered firm carrying on the business of dealing in cement: By a partnership deed dated 1st April, 1956, the firm consisting of 17 partners was constituted. The relevant portion of Clause 5 of that deed was in the following terms:
"5. That in case any party wishes to retire from the firm or becomes of unsound mind or permanently incapable of performing .... partnership will then be reconstituted in accordance with the Partnership Act in force at the time."
4. One of the partners, L. Mahabir Prasad Jain, died on June 10, 1957. His minor son, Narendera Kumar Jain, was admitted to the benefits of the partnership and a separate partnership deed was drawn up on 17th June, 1957, which took effect from June 11, 1957. The relevant portion of its preamble is in the following terms:
" And whereas in deference to the wishes of the said L. Mahabir Prasad Jain and as provided in Clause 5 of the indenture of partnership executed on the 1st day of April, 1956, the parties to this agreement have admitted Shri Narendera Kumar Jain (minor) son of L. Mahabir Prasad Jain to the benefits of partnership in terms of Clause 10 below :-- "
5. According to the new partnership deed there was a reallocation in sharing profits and losses by the partners. Separate books of accounts were maintained for the period up to June 10, 1957, and for the period from June 10, 1957, to the end of the accounting year. Separate trading and profit and loss accounts were made out for these two periods. Two separate returns were filed on October 9, 1958, for these two periods. However, a single assessment was made by the Income-tax Officer on 24th November, 1959. By this assessment, income was computed for the two periods. The income for the first period was computed at Rs. 35,873 and for the second period, i.e., June 11, 1957, to March 31, 1958, at Rs. 1,37,467. After computing the income, the Income-tax Officer stated in his order :
" The income is taxed as it is more than Rs. 40,000. Share allocation among the partners is made as under :-- "
6. The assessment order allocated the income among the partners but there was only one allocation. While levying tax on the registered firm, the Income-tax Officer calculated the tax on the income for the second period i.e., Rs. 1,37,467, but did not include the income for the first period, i.e., Rs. 35,873.
7. The succeeding Income-tax Officer served a notice on the assessed that, since there was a mistake apparent from the record within the meaning of Section 154 of the Income-tax Act, 1961, inasmuch as the total income of the firm for two periods comes to Rs. 1,72,760 and whereas it has been taken at Rs. 1,37,467, he proposed to rectify that mistake and if the assessed wished to be heard or put in a representation, he might do so by 23rd January, 1963. The assessed in his reply contended that the old firm was dissolved on the death of L. Mahabir Prasad on June 10, 1957, and that that was a separate assessable unit and no tax could be charged since its income was below Rs. 40,000. The new firm was a separate assessable unit and had a separate total income of Rs. 1,37,467 on which tax was correctly charged and as such there was no mistake at all to be corrected. The Income-tax Officer did not accept the contention of the assessed and held that there was a mistake apparent on the face of the record in not clubbing the income for the two periods and that mistake should be corrected. He, therefore, clubbed the income for the two periods and issued a revised demand notice.
8. The assessed appealed to the Appellate Assistant Commissioner against this decision of the Income-tax Officer. The Appellate Assistant Commissioner came to the conclusion that when the Income-tax Officer made the original assessment order he intended to tax the entire income of the firm and not the income of the second period only. As such, a mistake was apparent from the face of the record and was correctly rectified under Section 154 of the Income-tax Act, 1961.
9. The assessed preferred second appeal to the Tribunal which held that a mistake was not apparent on the face of the record since it required a complicated process of investigation, argument and proof and so the Income-tax Officer was not justified in invoking the provisions of Section 154 of the Income-tax Act, 1961.
10. Mr. A. N. Kirpal, learned counsel for the Commissioner of Income-tax, contends that, though two returns of income were filed by the assessed, the Income-tax Officer passed a single assessment order and it shows that his intention was to tax the assessed in respect of both the periods, and it was only by mistake that he did not add the income computed for the first period to the income of the second period. He further submits that, under Section 26(1) of the Indian Income-tax Act, 1922, there was a change in the constitution of the assessed-firm and so the Income-tax Officer had passed one assessment order.
11. Mr. Yogeshwar Dayal, learned counsel for the assessed, contends that the assessed's case was one of succession as envisaged under Section 26(2) and not one of reconstitution under Section 26(1). He further contends that Section 26 of the Act is a procedural section and does not create any liability. It was there when Section 23 of the Act before its amendment in 1956 did not make the registered firm liable for payment of tax. He thus contends that the Income-tax Officer correctly made separate computations for the two periods and charged for the second period because the income of the firm exceeded Rs. 40,000. He also contends that Section 154 of the Income-tax Act, 1961, is not applicable since rectification, if any, could be done only under Section 35 of the Income-tax Act, 1922.
12. In order to find out whether there is a mistake apparent on the face of the record we have to find out the intention of the Income-tax Officer. If his intention at the time of assessment was to club the incomes computed for the two periods then there was a mistake in not clubbing these two incomes. However, if the intention of the Income-tax Officer was not to club the said two incomes, then it cannot be said that there was a mistake apparent on the face of the record. For a mistake to be apparent on the face of the record, the mistake must be obvious and patent and it should not be necessary to hold investigation or go into lengthy and complicated arguments to find out the mistake. Any error or mistake which could only be found out by arguments and is not otherwise obvious from the record, cannot be an error or mistake apparent from the record. The Supreme Court in Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Timmale, held:
"An error which has to be established by a long drawn process of reasoning pn points where there may conceivably be two opinions can hardly be said to be an error apparent on the face of the record. "
13. A Division Bench of the Bombay High Court in Volkart Brothers v. Income-tax Officer, Companies Circle IV (4), Bombay, held :
"The power of the Income-tax Officer under Section 35 of the Indian Income-tax Act, 1922, or the corresponding Section 154 of the Income-tax Act, 1961, is limited to rectification of mistakes which are apparent from the record. An error apparent from the record is not only confined to an error of fact but may also include errors of law. But it is necessary that the error must be apparent on the examination of the record itself without entering into any fresh or additional investigation, I must be obvious and patent from the record and an error which is not obvious or patent and can only be discovered as a result of an argument cannot be an error apparent from the record."
14. Section 3 of the Indian Income-tax Act, 1922, is the charging section. Section 23 of the Act relates to assessment. Before its amendment by the Finance Act, 1956, Sub-section 5(a) provided :
"In the case of a registered firm, the sum payable by the firm itself shall not be determined . . . . "
15. After the amendment of this section in 1956 a registered firm was made chargeable. Section 26 lays down the procedure in the following terms :
"26. Change in constitution of a firm.--(1) Where, at the time of making an assessment under Section 23, it is found that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment:
Provided that the income, profits and gains of the previous year shall, for the purposes of inclusion in the total incomes of the partners, be apportioned between the partners who in such previous year were entitled to receive the same:
Provided further that when the tax assessed upon a partner cannot be recovered from him it shall be recovered from the firm as constituted at the time of making the assessment.
(2) Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of Sub-section (4) of Section 25, each be assessed in respect of his actual share, if any, of the income profits and gains of the previous year:
Provided that, when the person succeeded in the business, profession or vocation cannot be found the assessment of the profits of the year in which the succession took place up to the date of succession, and for the year preceding that year shall be made on the person succeeding him in like manner and to the same amount as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him, shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid."
16. Section 26 of the Act provides for two situations. Sub-section (1) provides for a case where a change has occurred in the constitution of the firm at the time of making an assessment or the firm has been newly constituted. Sub-section (2) provides for a situation where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person. What amounts to a change in the constitution of the firm has not been provided for in the section. However, under the new Income-tax Act of 1961, Section 187(2) lays down as to what amounts to a change in the constitution of the firm and Section 188 provides for succession of one firm by another firm.
17. The resume of facts given above would show that the parties are at variance on the point as to whether in the instant case the assessed was a reconstituted firm or was a firm which succeeded the old firm. This controversy cannot be resolved except by way of complicated process of arguments and investigation. There are, however, certain broad facts which tend to show that the assessed-firm was considered to be distinct from the earlier firm. As stated above, after the 11th of June, 1957, the assessed carried on business not under the old partnership deed but under a new partnership deed which was executed on the 17th day of June, 1956, and came into effect on 11th June, 1956. The assessment order dated 24th November, 1959, shows that depreciation was allowed by the Income-tax Officer separately for the two periods. This fact would indicate that the intention of the Income-tax Officer perhaps was not to club the computed income of the two periods, i.e., the period before 11th June, 1956, and the subsequent period. He also did not assess any tax on the firm for the first period as the income was less than Rs. 40,000. In such a situation the omission of the Income-tax Officer to take the aggregate of the income for the two periods would not, in our opinion, be a mistake apparent on the face of the record.
18. So far as the contention of Mr. Yogeshwar Dayal is concerned that Section 154 of the Indian Income-tax Act of 1961 is not applicable and the rectification, if at all, could only be done under the provisions of the Act of 1922, the submission of Mr. Kirpal is that the assessed had not raised this plea before the Tribunal and therefore should not be allowed to agitate it before this court. In view of our finding given above, it is not necessary to go into this question.
19. The result is that the question referred by the Tribunal is answered in the negative, in favor of the assessed. The parties, in the circumstances, are left to bear their own costs.