Karnataka High Court
Additional Commissioner Of Income-Tax vs India Tin Industries (P) Ltd. on 1 August, 1986
Equivalent citations: ILR1986KAR3918, [1987]166ITR454(KAR), [1987]166ITR454(KARN)
JUDGMENT Mahendra, J.
1. The Income-tax Appellate Tribunal, Bangalore Bench ("Tribunal"), pursuant to the directions issued by this court in C. P. No. 127 of 1976, has referred the following question of law for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in upholding the Appellate Assistant Commissioner's decision in canceling the rectification orders passed by the Income-tax Officer to withdraw the excess allowance of development rebate allowed in the original assessment ?"
2. The facts as found by the Tribunal and not disputed before us are these :
3. M/s. The India Tin Industries (Pvt.) Ltd. (assessee) is a private company deriving income for the manufacture and sale of tin containers, etc. The assessment year is 1963-64, the relevant previous year being the year ending on June 30, 1962. The assessee claimed development rebate of Rs. 16,751 including development rebate of Rs. 5,740 on dies and tools. The Income-tax Officer disallowed the claim for rebate in respect of dies and tools and allowed development rebate of only Rs. 11,011, by his order of assessment made on January 11, 1964. The Appellate Assistant Commissioner, by his order made on June 17, 1964, allowed the assessee's appeal and allowed the claim of the assessee for development rebate in respect of dies and tools. This order was accepted by the Revenue.
4. Subsequently, the Income-tax Officer made an order on March 27, 1965, under section 154 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), holding that as the assessee had created development rebate reserve of Rs. 7,172 only, the maximum development rebate that may be allowed was Rs. 9,563, but he confined the development rebate reserve to be allowed to Rs. 9,550 in respect of machinery only, disallowing a sum of Rs. 7,201 out of Rs. 16,751 already allowed by the Appellate Assistant Commissioner. On appeal by the assessee, the Appellate Assistant Commissioner, by his order made on September 20, 1965, held that there would effective Compliance with the provisions of section 34(3)(a) of the Act and that the appellant is entitled to the entire claim of development rebate of Rs. 16,751. The Tribunal allowed the appeal of the Revenue and set aside the order of the Appellate Assistant Commissioner, and remitted the case to him for disposal afresh in accordance with law. The Appellate Assistant Commissioner, by his order made on October 30, 1973, held that the provisions of section 154 of the Act are not attracted to the facts of the case, as the provisions the provisions of section 34(3)(a) of the Act are substantially complied with having regard to the development rebate reserve available in the books of account and allowed the assessee's appeal. The Revenue carried the matter in appeal to the Tribunal. The Tribunal has observed in the course of its orders thus :
"The matter came in appeal before the Tribunal at the instance of the Income-tax Officer. It was argued that section 154 was clearly applicable. Reliance was placed on the Madras High Court ruling in Venkatasubramaniam (R.) v. CIT [1973] 91 ITR 220, especially the observations that granting of development rebate was a benefit conferred on the assessee and the provisions relating there to should be strictly constructed. Learned counsel for the assessee, on the other hand, relied on the judgment of the Mysore High Court in Narayan (M. D.) v. Agrl. ITO [1974] 95 ITR 452 and of the Bombay High Court in Tata Iron and Steel Co. Ltd. v. Upadhyaya (N. C.) [1974] 96 ITR 1.
The Tribunal considered the arguments in paragraph 6 of its order and came to the conclusion, after considering the various High Court decisions referred to therein, that the question whether the assessee is entitled to the benefit of development rebate in this case is a debatable point of law and, therefore, following the Supreme Court ruling in T. S. Balaram, ITO v. Volkart Bros. [1971] 82 ITR 50, section 154 was inapplicable to the facts of the case. In this view of the matter, the tribunal felt that it was really not necessary to consider the other question about the original order of the Income-tax Officer having merged with the order of the Appellate Assistant Commissioner and since that order had not been appealed against by the Department, the Income-tax Officer had no jurisdiction to rectify the so-called mistake under section 154 especially having regard to the provisions of section 154(1A). This point is discussed in paragraph 6 of its order and the Tribunal held that the question of allowance of development rebate was definitely a matter which was considered and decided by the Appellate Assistant Commissioner and if the Department self that he had failed to take into consideration a particular provision of the law in deciding the matter, it was open to the Department to have appealed against that order. On this view of the matter also, the Income-tax Officer was held to have no jurisdiction to pass the impugned order under section 154 and dismissed the appeal."
5. In this reference, at the instance of the Revenue, we are required to answer the question of law referred to earlier.
6. Sri K. Srinivasan learned senior standing counsel for the Income-tax Department, argued for the Revenue and Sri G. Sarangan argued for the assessee.
7. Sri Srinivasan argued (i) that a person claiming development rebate is required to create development rebate reserve in the year in which it was claimed under section 34(3)(a) of the Act and the assessee admittedly not having created the development rebate reserve for the year in question, was not entitled to the development rebate, and (ii) in the appeal before the Appellate Assistant Commissioner, the only question debated was whether the assessee was entitled to the development rebate in respect of the dies and tools and not whether the assessee was entitled to development rebate without creating development rebate as required under section 34(3)(a) of the Act and, therefore, the Income-tax Officer had the competence to exercise power under section 154(1A) of the Act and rectify the order.
8. Sri Sarangan argued that it was not necessary to create development rebate reserve as argued by Sri Srinivasan and there was compliance with section 34(3)(a) as there was sufficient development rebate reserve at the end of the year including the amount added during the year in question and the question considered by the Appellate Assistant commissioner was whether the assessee was entitled to development rebate and the said order having become final, the Income-tax Officer had no competence to exercise power under section 154 of the Act.
9. Development rebate is allowed under section 33 of the Act subject to the provisions of section 34 of the Act. The provisions of section 34 of the Act which are relevant for the purpose of the case reads :
"Section 34(3)(a) The deduction referred to ins section 33 shall not be allowed unless and amount equal to seventy-five per cent. of the development rebate to be actually allowed did debited to the profit and loss count of the relevant previous year and credited to a reserve account to be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking, other than -
(i) for distribution by way of dividends of profits; or
(ii) for remittance outside India as profits or for the creation of any asset outside India."
10. The development rebate is allowed under section 33 of the Act subject to the provisions of section 34 of the Act. Section 34(3)(a) provides specified therein is debited to the profit and los account of the relevant previous year and also credited to the reserve account to be utilised in the manner and for the period specified therein. This section, therefore, lays down that the development rebate shall not be allowed unless the conditions specified therein are complied with. The conditions laid down are : (i) the amount specified therein has to be debited to the profit and loss account of the relevant previous year and credited to the reserve account, and (ii) this for the period specified therein. The development rebate under section 33 for the period specified therein. The development rebate under section 33 of the Act is allowed subject to the condition specified in section 34(3)(a) of the Act being satisfied by the assessee. The expression "shall not be allowed" in section 34(3)(a) of the Act is a clear indication of the intention of the Legislature that the compliance with the conditions specified therein are mandatory and have, therefore, to be fulfilled.
11. In Indian Overseas Bank Ltd. v. CIT relied on on behalf of the Revenue, the Supreme Court considered whether the creation of a reserve in compliance with section 17 of the Banking companies Act is sufficient compliance with the requirement of section 10 (2) (vib), proviso (b), of the Indian Income-tax Act, 1922. In that case, the assessee, a banking company, claimed development rebate under proviso (b) to section 10 (2) (vib) of the Indian Income-tax Act, 1922, and contended that a transfer which it had made to a reserve fund was sufficient to meet the requirement of section 17 of the Banking companies Act, 1949, as well as proviso (b) to section 10 (2) (vib) of the Indian Income-tax Act, 1922. The Supreme Court held that the grant of rebate was a concession given subject to the fulfillment of the conditions prescribed under the proviso and the creation of the reserve fund under section 17 of the Banking Companies Act was not sufficient compliance with the proviso even though the amount so carried to the reserve found might be large enough to cover both the requirements and, therefore, the assessee was not entitled to the development rabbet.
12. It is, therefore, clear from the enunciation made in Indian Overseas bank's case , that the grant of rebate under section 33 of the Act is a concession given to the assessee subject to his fulfilling the conditions prescribed under section 34(3)(a) of the Act. The creation of a reserve fund from out of the profit and loss account of the relevant previous year is a condition to be satisfied by an assessee. The transfer to the "reserve fund" has therefore, to be made at the time of making up the profit and loss account of the relevant previous year. The assessee, admittedly, has not created the reserve fund at the time of making up the profit and loss account of the relevant year and has, therefore, not fulfilled the conditions prescribed for getting the concession given under section 33 of the Act. The assessee who claims the concession provided under section 33 of the Act has, therefore, to strictly comply with or satisfy the conditions specified or prescribed therein. He cannot, therefore, be heard to say that the development rebate reserve he has created for the earlier years is large enough to cover the development rebate reserve for the year in question also.
13. But Sir Sarangan relying on International Instruments (P.) Ltd. v. CIT [1980] 123 ITR 11 (Kar), maintained that if a larger development rebate reserve created in the earlier years cover the development rebate reserve for the relevant year also, it is not necessary to create a separate development rebate reserve for the later year.
14. In International instruments' case [1980] 123 ITR 11 (Kar), the assessee was denied relief by the Tribunal on a misconception that the specific instructions issued in the case of the assessee by the Central Board of Direct Taxes had been withdrawn while in fact it had not been so with drawn. The question decided in that case is, therefore, distinguishable and is of no assistance to the assessee.
15. We are, therefore, satisfied that an assessee claiming development rebate under section 33 of the Act, is required to create the development rebate reserve in the relevant year as prescribed under section 34(3)(a) of the Act and the assessee not having complied with or fulfilled one of the conditions prescribed under section 34(3)(a) of the Act is not entitled to the development rebate under section 33 of the Act.
16. Rectification of mistake is provided by section 154 of the Act, which reads :
"154. (1) With a view to rectifying any mistake apparent from the record, an income-tax authority referred to in section 116 may amend any order passed by it under the provisions of this Act.
(1A) Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under the sub-section in relation to any matter other than the matter which has been so considered and decided.
(2) Subject to the 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 or the commissioner (Appeals), by the Income-tax Officer also.........."
17. This section provides for rectification of any mistake apparent from the record by the Income-tax officer or the Appellate Assistant commissioner. The power to rectify can only be exercised by the authority which passed the order. Sub-section (1A) further provides that even after an appeal or revision is filed and decided against an order referred to in sub-section (1) of section 154 of the Act, a mistake apparent from that part of that order which was not the subject-matter of the appeal or revision, as the case may be, and which was left undisturbed by the appellate or revisional authority can be rectified by the authority which passed that order. The principle that part of an order which is not the subject-matter of an appeal or revision, and is undisturbed or not touched by the order in appeal or revision will not be merged in the order of the appellate or revisional authority is statutorily recognised by sub-section (1A) of section 154 of the Act.
18. It is the case of the assessee that the order of the Income-tax Officer made on March 31, 1964, was taken in appeal by it to the Appellate Assistant Commissioner and had merged with the order made by the Appellate Assistant Commissioner of June 17, 1964, and, therefore, the income-tax Officer had no competence to rectify the order. If, as contended by the assessee, the order of the Income-tax Officer had merged with the order of the Appellate Assistant Commissioner, there cannot be any doubt that the Income-tax Officer had no competence to exercise any power under section 154 of the Act. It is, therefore, necessary to examine the order of the Income-tax Officer, the subject-matter of the appeal before the Appellate Assistant Commissioner and the order of the Appellate Assistant Commissioner to ascertain whether the order of the Income-tax Officer had merged with the order of the appellate Assistant Commissioner.
19. The assessee claimed before the Income-tax Officer development rebate of Rs. 16,751 including development rebate of Rs. 5,740 on dies and tools. The Income-tax Officer disallowed the claim for development rebate in respect of dies and tools and allowed the rest of the claim for development rebate, viz., Rs. 11,011, by his order made on January 31, 1964. The assessee, to the extent his claim was disallowed, filed an appeal before the Appellate Assistant Commissioner. The assessee was not a person aggrieved by the order of the Income-tax Officer to the extent its claim for development rebate was allowed. The Revenue did not challenge the order of the Income-tax Officer to the extent he allowed Rs. 11,011 as development rebate but accepted the said order. The only question for consideration in the appeal before the Appellate Assistant Commissioner was whether the assessee was entitled to development rebate in respect of dies and tools. The Appellate Assistant Commissioner allowed the appeal, by his order made in June 17, 1964, and held that the assessee was entitled to the development rebate in respect of dies and tools. The assessee was satisfied with that part of the order of the Income-tax Officer allowing development rebate to an extent of Rs. 11,011. It was, therefore, not the subject-matter of the appeal before the Appellate Assistant Commissioner by the assessee and was not touched and was undisturbed by the appellate order of the Appellate Assistant commissioner and can, therefore, be rectified by the Income-tax Officer (Karsandas Bhagwandas Patel v. G. V. Shah, ITO [1975] 98 ITR (Guj)).
20. Sub-section (1A) of section 154 of the Act specifically provides that any matter which has not been considered and decided in any proceedings by way of appeal or revision filed against an order referred to in sub-section (1) of section 154 of the Act may be amended by the authority passing such an order in exercise of its power under sub-section (1) of section 154 of the Act. In other words, the authority passing an order may amend that part of the order which has not been considered and decided in any proceedings by way of appeal or revision against such an order. To put it otherwise, the authority passing an order has no competence to amend any part of the order which has been considered and decided in any proceeding by way of appeal or revision. In this case, that part of the order of the Income-tax Officer allowing development rebate to an extent of Rs. 11,011 was not the subject-matter of the appeal before the appellate Assistant Commissioner, was not, therefore, considered and decided by him. That part of the order had not, therefore, merged in the order made by the Appellate Assistant commissioner in appeal. What was decided by the Appellate Assistant Commissioner was not, as contended by Sri Sarangan, how much development rebate should be given. The only was whether the assessee is entitled to the deduction of development rebate in respect of dies and tools.
21. Sri Sarangan relied on the following decisions in support of his case.
22. Bhopal Sugar Industries Ltd. v. ITO . The facts in this case are these : The Income-tax Officer virtually refused to carry out the directions given by the Income-tax Appellate Tribunal in exercise of its appellate power in respect of an order of assessment made by him.
23. The Supreme Court had that "such refused was in effect a denial of justice as the Income-tax Officer failed to carry out the duty imposed on him and such failure was destructive of a basic principle of justice, and a writ of mandamus should issue to compel him to carry out the directions of the Appellate Tribunal. This is of no assistance to the assessee.
24. Rohtak & Hissar Districts Electric Supply Co. (P.) Ltd. v. CIT . In this case, the Delhi High Court held that though the order of the Appellate Assistant Commoner was silent in respect of depreciation and development rebate, if the appellate Assistant Commissioner did not modify or reverse the order of the Income-tax Officer on those two items, it meant that the confirmed the decision of the Income-tax Officer and the operative order thereafter was that of the Appellate assistant Commissioner and the Income-tax Officer had not jurisdiction to rectify any error apparent on the fact of the Income-tax Officer's order under section 154 of the Act. In that case, the assessee has taken a specific ground on the question of depreciation and development rebate in his appeal before the Appellate Assistant Commissioner and though the Appellate Assistant Commissioner did not pass any order in respect thereof, the and decided in the order of the Appellate Assistant Commissioner, so that, section 154(1A) would not apply. Rohtak and Hissar Districts Electric Supply Co.'s case is distinguishable and is of no assistance to the assessee.
25. CIT v. Indian Auto Stores . In this case for the delay in filing the return of income for 1968-69, the Income-tax Officer levied a penalty of Rs. 706 on the assessee, a registered firm. On appeal by the assessee, the Appellate Assistant commissioner affirmed the order that the Income-tax Officer and confirmed the penalty levied. the Income-tax Officer thereafter rectified the order levying penalty and levied a higher penalty under section 271(2). The Appellate Assistant Commissioner canceled the order on the ground that the mistake sought to be rectified was not a patent or glaring mistake of law. The Tribunal, however, held that the original order of penalty had merged in the order of the Appellate Assistant Commissioner had hence, the Income-tax Officer had no jurisdiction to rectify the order. On a reference, the High Court held that the Appellate Assistant Commissioner could have gone into the quantum of penalty in the light of section 271(2), that the question of the amount of penalty leviable had been considered and decided by the appellate Assistant Commissioner and, therefore, section 154(1A) did not apply. The court also held that as the entire order of penalty levied by the Income-tax Officer was the subject-matter of appeal before the appellate Assistant Commissioner, the order of the Income-tax Officer got merged with the order of the Appellate Assistant Commissioner. The facts are also distinguishable and this case is also of no assistant to the assessee.
26. The doctrine of merger is not a doctrine or rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior tribunal, and the other by a superior tribunal, passed in an appeal or revision, there is a fusion or merger of the two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute as laid down by the Supreme Court in State of Madras v. Madurai Mills Co. Ltd. [1967] 19 STC 144, relied on by Sri Sarangan. In CIT v. Amritlal Bhogilal & Co. , the Income-tax Officer made a composite order granting registration to the firm and also an order of assessment on the basis of registration. The assessee filed an appeal before the appellate assistant Commissioner against the composite order. The court held that the order of registration made by the Income-tax Officer was not the subject-matter of the appeal before the Appellate Assistant Commissioner and did not, therefore, merge with the order in appeal.
27. Whether there is merger of the order of assessment in the appellate order of the Appellate Assistant Commissioner and if there is, to what extent, came up for consideration before the Gujarat High Court in Karsandas Bhagwandas Patel v. G. V. Shah, ITO [1975] 98 ITR 255. The court held that it depends upon the subject-matter of the appellate order. The order of assessment made by the Income-tax Officer merges in the order of the appellate Assistant commissioner, only in so far as to relates to items considered and decided by the appellate assistant Commissioner. The part of the order of assessment which relates to items not forming the subject-matter of the appellate order left untouched does not merge in the order of the Appellate Assistant Commissioner. Even after an appeal from an order of assessment is decided by the appellate Assistant Commissioner, a mistake in the part of the order of assessment which was not the subject-matter of the appeal and was left untouched by the Appellate Assistant commissioner can be rectified by the Income-tax Officer under section 35 of the Indian Income-tax Act, 1922, because the mistake would power to rectify a mistake is conferred on the authorities specified therein by section 154 of the 1961 Act.
28. The principle enunciated in the above two cases is given statutory recognition by section 154(1A). It, therefore, follows that that part of the order of the Income-tax Officer, allowing a development rebate of Rs. 11,011 was not the subject-matter of the appeal before the Appellate Assistant Commissioner, and was left untouched by his order and, therefore, does not merge in the order of the appellate Assistant Commissioner. The mistake in that part of the order of assessment by the Income-tax Officer, which was not the subject-matter of the appeal, can be rectified under section 154 because the mistake would be the mistake of the Income-tax Officer, and he has always the competence to rectify his mistake under section 154 of the Act.
29. To attract the provisions of section 154 of the Act, there must be a mistake and it must be a mistake apparent from the record. Overlooking a mandatory provision of law which leaves no discretion to the taxing authorities like admission to tax, surcharge or interest in a mistake apparent from the record (Swadeshi Cotton Mills Co. Ltd. v. ITO [1966] 60 ITR 720 (All) : M. K. Venkatachalam, ITO v. Bombay Dyeing and Manufacturing Co. Ltd. . A decision on a debatable point of law or where the law confers on the taxing authorities a discretion cannot be corrected under section 154 of the Act.
30. We have already found that the conditions prescribed under section 34(3)(a) of the Act have to be complied with and unless they are complied with, and assessee is not entitled to claim the development rebate under section 33 of the Act. Allowing the concession of development rebate to an assessee who has not fulfilled the conditions specified is a mistake apparent from the record because the grant of development rebate is due to overlooking the mandatory provisions of section 34(3)(a) of the Act. This mistake is a mistake apparent from the record and attracts the provision of section 154 of the Act.
31. In the result and for the foregoing reasons, we answer the question referred to us in the negative, against the assessee and in favour of the Revenue. But, in the circumstances of the case, we direct the parties to bear their won costs.