Decided on August 30,1973

Premraj Ganpatraj And Company Respondents


MEHTA, J. - (1.)IN this reference the Tribunal has referred the following question to us for our opinion :
'Whether on the facts and in the circumstances of the case it was competent for the Income -tax Officer to pass orders under section 154 on the ground that there was a mistake apparent from the record ?'
The question arises in the following circumstances : The relevant assessment years are 1962 -63 and 1963 -64. In the course of that year the Income -tax Officer, while working out the capital employed for the purpose of section 84, added Rs. 1,15,807, being half of the profit of the relevant accounting year. Similar addition was made for the assessment year 1963 -64 when an amount of Rs. 1,93,628, being half the share of the profit, was added for purposes of ascertaining the average amount of the capital. The capital thus worked out at Rs. 5,97,313 and Rs. 7,81,916 for the assessment years 1962 -63 and 1963 -64, respectively. It appears that subsequently the Income -tax Officer was of the view that the addition of these amounts in the computation of the capital was incorrect because, in his opinion, the average amount of capital had already been worked out with reference to all the assets and liabilities of the business in the respective years and the profits would automatically be reflected in the assets of the business. Accordingly, the Income -tax Officer was of the view that inclusion of half of the relevant year's profits in the capital was a mistake apparent from the record. He, therefore, made a recomputation of the capital under section 154 of the Income -tax Act, 1961, excluding from the capital the two sums of profit aforesaid for the assessment years 1962 -63 and 1963 -64. The assessee being aggrieved with this order under section 154 went in appeal before the Appellate Assistant Commissioner and urged that it was not competent for the Income -tax Officer to pass orders under section 154 as the question was debatable. This contention did not find favour with the Appellate Assistant Commissioner as he was of the opinion that it did not necessarily involve any detailed reasoning. The appeals were consequently dismissed. The assessee, therefore, went before the Tribunal and raised the same contention. The contention found favour with the Tribunal, which following the decision of the Bombay High Court in Burmah -Shell refineries Ltd. v. G. B. Chand, Income -tax Officer, held that it was a debatable question and, therefore, allowed the appeal. At the instance of the Commissioner, the question set out above has been referred to us.
(2.)ON behalf of the revenue, it was pointed out to us that it is under rule 19 of the Income -tax Rules, 1962, that for purposes of giving benefit to the assess under section 84 as it then stood at the relevant time, the average amount of the capital has to be computed and that computation is to be made according to clause (1). Now, clause (5) of the said rule 19, which is relevant for the purposes of determination of the question, provides as under :
'(5) For the purpose of ascertaining the average amount of capital employed in a business during any computation period, the profits or losses made in that period shall, except so far as the contrary is shown, be deemed - (a) to have accrued, at an even rate throughout the said period; and (b) to have resulted, as they accrued, in a corresponding increase or decrease as the case may be, in the capital employed in the business'.

On a plain reading of this clause (5), it cannot be contended that the point as to how the average amount of capital was to be ascertained can be determined without any debate or involved reasoning. Whether capital and assets would necessarily reflect the profit of the relevant year is not a point which is free from doubt or there cannot be two opinions on it. It may depend on various circumstances. It may be, as rightly pointed out on behalf of the revenue, that the contrary to the fiction as incorporated in clause (5) can be shown in the facts and circumstances of a given case. However, it was not the case of the revenue here that there were facts and circumstances which showed contrary to the fiction incorporated in clause (5). The very fact that the legislature has provided a legal fiction in clause (5) and also provided for rebuttal of such fiction is sufficient, in our opinion, that this particular question is always a vexed one on which there will be always scope for two opinions : In T. S. Balaram, Income -tax Officer, Company Circle IV, Bombay v. Volkart Brothers, the Supreme Court rules as under :

'A mistake apparent on the 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... A decision on a debatable point of law is not a mistake apparent from the record'.

(3.)THEREFORE , in construing clause (5) of rule 19, we do not think that it can be suggested for a moment that necessarily there would not be a long drawn process of reasoning or another facet of the question. The point is, whether in working out the average amount of capital the deeming fiction of providing for the profit is really debatable or not. In that view of the matter, therefore, it cannot be said, as has been taken for granted by the Income -tax Officer, that this can be an error apparent on the record and merely because in the assets the relevant year's profit would necessarily be reflected, the deduction given in clause (5) of rule 19 should be withdrawn. In that state of affairs the Tribunal was perfectly justified in allowing the appeals.

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