LILAVATIBEN HARJIVANDAS KOTECHA Vs. INCOME TAX OFFICER
LAWS(GJH)-1979-1-15
HIGH COURT OF GUJARAT
Decided on January 29,1979

LILAVATIBEN HARJIVANDAS KOTECHA Appellant
VERSUS
INCOME TAX OFFICER AND ANR. Respondents

JUDGEMENT

B.J. DIVAN, C.J. - (1.) THE petitioner in this Special Civil Application is the assessee and is also the applicant in the income-tax reference. THE Special Civil Application is in connection with the asst. yr. 1961-62 and the reference is in connection with the asst. yr. 1962-63. THE question which arises for consideration is the same in both the matters as will be pointed out later in the course of this judgment and, therefore, we are disposing of both these matters by this common judgment.
(2.) THE petitioner in the special civil application challenges two orders, one passed by the ITO, the first respondent herein, on 10th Sept., 1970, being annex. "E" to the petition. This order was passed by way of rectification in exercise of the powers of the ITO under s. 35 of the Indian IT Act, 1922. THE other order which she challenges in these proceedings is the order of the CIT, the second respondent herein, passed in revision in exercise of the powers under s. 33A(2) of the Act of 1922. That order was passed on 19th Dec., 1973, and a copy of the order is Annexure "A" to the petition. Thus, in these proceedings, Annexures. "A" and "E" to the petition are challenged and the challenge is on the ground of the scope of the power of rectification under s. 35 of the Indian IT Act of 1922. The petitioner was a partner in three partnership firms, namely, Halar Salt and Chemical Works, Rasik Solvent Extraction Co. and Krishna Oil Mills. In Halar Salt Works, two of her minor sons were admitted to the benefits of the partnership, whereas in Rasik Solvent Extraction Company and Krishna Oil Mills, three minor sons of the petitioner, namely, Narendrakumar Harjivandas, Chandulal Harjivandas and Rameshchandra Harjivandas, were admitted to the benefits of the partnership. In Rasik Solvent Extraction Company, the petitioner was entitled to a share of one anna in the rupee and each of the three minor sons were admitted to the benefits of the partnership to the extent of one anna share in the profits of the firm. In Krishna Oil Mills the mother, that is the petitioner, was entitled to 6.25 paise share out of one rupee in the profits of the firm and each of the three minor sons was entitled to a share of 6.25 paise out of one hundred paise in the profits of the firm. In the partnership deeds of Rasik Solvent Extraction Company and Krishna Oil Mills, by cl. 6, which was in identical terms in both the cases, it was provided as follows : "The partners shall in like proportion bear all losses including the loss of capital, if any, provided however and it is hereby expressly agreed by and between the parties hereto being all majors that 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 and that pending their respectively attaining the age of majority their respective share in the profits of the business shall be accumulated to their respective credit 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 Vadera, 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 the accumulations to the credit of the minors, Narendrakumar Harjivandas Kotecha, Chandulal Harjivandas Kotecha and Rameshchandra Harjivandas Kotecha, the eleventh partner, the twelveth partner and the thirteenth partner, respectively, being insufficient for their respective share of losses, if any, such insufficiency or deficit shall be exclusively borne by the third respondent (the petitioner herein)." The terms and conditions of the deed of partnership of Halar Salt Works are not material for the purposes of this judgment. For the asst. yr. 1961-62, for which the relevant previous year was S.Y. 2016, that being the accounting period, the petitioner filed her return showing the total income of Rs. 70,710 comprising of property income of Rs. 417, income from moneylending business of Rs. 15,943 and share from moneylending business of Rs. 15,943. She disclosed share of profits from Halar Salt and Chemical Works of Rs. 54,350. By a note made in the return of income, it was mentioned that the income or loss, if any, from Rasik Solvent Extraction Company and Krishna Oil Mills would be shown at the time of assessment. The assessment of the petitioner's income for the asst. yr. 1961-62 was completed by the ITO, Ward-C, Jamnagar, on 25th Aug., 1961. The income of the petitioner was assessed at Rs. 71,756 and this total income included property income assessed at Rs. 1,084, income from moneylending business assessed at Rs. 16,322 and share of profit from Halar Salt and Chemical Works assessed at Rs. 54,350 subject to the modification under s. 35 of the Act. As regards her share of profits from Rasik Solvent Extraction Company, the petitioner had filed an extract of the profit credited to her account. This was to be taken provisionally subject to the modification under s. 35 of the Act as and when the final assessment of the firm was made by the concerned ITO. It appears that, ultimately, it was ascertained that the petitioner and her three minor sons were each entitled to Rs. 208 as and by way of their share in the profits of Rasik Solvent Extraction Company. The share of profits from Krishna Oil Mills was computed at nil subject to the modification under s. 35 of the Act on finalisation of the assessment of the said firm by the ITO in charge of the assessment of the firm. In exercise of the powers, under s. 155 of the IT Act, 1961, on 13th July, 1965, the ITO assessed the petitioner's income from Halar Salt and Chemical Works at Rs. 66,223 in place of Rs. 54,350 and he also allowed the sum of Rs. 4,648 as remuneration payable to one B. V. Trivedi. As a result of the aforesaid modification, the revised income of the petitioner came to be computed at Rs. 75,650. When the assessment of Krishna Oil Mills was completed by the order dt. 1st Dec., 1968, the accounts of the firm showed, after necessary computation, a loss of Rs. 1,50,916. The share of loss of each minor and that of the petitioner was computed at Rs. 9,434 and as a result of the completion of the assessment of Rasik Solvent Extraction Company and Krishna Oil Mills, the petitioner's income was rectified on 3rd Feb., 1967, by an order passed by the ITO under s. 155. The loss suffered by the three sons of the petitioner and by the petitioner herself in the asst. yr. 1961-62 so far as Rasik Solvent Extraction Company and Krishna Oil Mills were concerned, came to the following computation : The petitioner herself was entitled to a set-off of the loss of Rs. 94,340 against the income of Rs. 75,650 and by virtue of cl. 6 of the partnership deed of Krishna Oil Mills, she became entitled to a setoff of Rs. 28,102 against the said income of Rs. 76,650 according to the contentions urged on behalf of the petitioner. Thus, the entire amount of Rs. 37,736 comprising the loss suffered by the petitioner herself and the loss attributable to the shares of the three minor sons of the petitioner came to Rs. 37,736 and in the order which was passed on 3rd Feb., 1967, the petitioner was allowed the set-off of this amount of Rs. 37,736 against her total income from all other sources. Thus, the petitioner's income finally was revised at Rs. 41,698, it was further revised at Rs. 43,925 and later on by an order, which was final, revised on 9th Jan., 1970, and the petitioner's income stood assessed at Rs. 43,620. By a notice issued on 17th Jan., 1970, under s. 154/155 of the Act of 1961, the ITO, Ward-D, Jamnagar, informed the petitioner that her assessment under s. 155 for the asst. yr. 1961-62 was required to be amended as there was a mistake apparent on the fact of the record within the meaning of s. 154/155 of the Act of 1961. That notice mentioned at the foot : "Nature of mistake proposed to be rectified--Minor's share of loss from Rasik Solvent and Krishna Oil Mills which was set off, is to be withdrawn, comes to Rs. 28,302. A copy of that notice dt. 17th Jan., 1970, is Annexure "C" to the petition. Similar notices were also issued with reference to the asst. yrs. 1962- 63, 1963-64 and 1964-65. In response to the said notices, the petitioner, by her letter dt. 21st Jan., 1970, submitted her objections to the rectification of the alleged mistake and at the time of hearing of these notices before the ITO concerned, it was urged that in view of the specific provision made in the respective partnership deed as to the extent of the accumulated profits lying to the credit of the minors, and as the amounts lying to the credit of the minor sons were insufficient to meet their respective shares of loss, the insufficiency or deficit was exclusively to be borne by the petitioner and to the extent of the minors' losses, the losses were required to be borne by the petitioner since they were her losses. It was contended on behalf of the petitioner at the time of rectification proceedings that the decision of this High Court in Dayalbhai Madhavji Vadera vs. CIT (1966) 60 ITR 551 (Guj) : TC 42R.431 had no application to the facts of this case and it was contended that there was no mistake committed by the ITO while making the original assessment so as to justify rectification under s. 35 of the Act. The ITO hearing the proceedings in rectification came to the conclusion that there was an error apparent on the face of the record and under s. 35(5) of the Act of 1922, he passed an order on 10th Sept., 1970, which is Annexure "E" to the petition and it is one of the orders challenged in the present proceedings.
(3.) AGAINST the order of rectification an appeal was preferred to the AAC, but the AAC held that the appeal was not maintainable under the provisions of the 1922 Act and he, therefore, dismissed the appeal on that preliminary ground. Thereafter, the petitioner filed an application before the CIT, the first respondent in the special civil application under s. 33A of the Act of 1922, r/w s. 264 of the Act of 1961, against the order of rectification passed by the ITO. According to the petitioner, in regard to the orders of rectification passed by the ITO for the asst. yrs. 1962-63 and 1963-64, appeals were filed before the AAC. Those appeals were allowed by the AAC upholding the contention raised by the petitioner regarding the inapplicability of rectification provisions to the original orders of assessment as revised from time to time but as finalised ultimately. AGAINST the decision of the AAC, for the asst. yrs. 1962-63 and 1963-64, the Department went in appeal to the Tribunal, and while appeals for those two years were pending before the Tribunal, the revision application under s. 33A of the Act of 1922, r/w s. 264 of the Act of 1961, came up for hearing before the CIT. The petitioner was informed about the hearing by notice dt. 28th Nov., 1973, and by her letter dt. 5th Dec., 1973, the petitioner pointed out that though the CIT had fixed the hearing of the revision application on 10th Dec., 1973, in view of the fact that the same question was being agitated before the Tribunal in those two appeals, the hearing of the revision application should be postponed till after the decision given by the Tribunal in those two appeals. Without adjourning the matter and without giving any further opportunity of being heard to the petitioner, according to her, the CIT by his order dt. 19th Dec., 1973, Annexure "A" to the petition, dismissed the revision application under s. 33A and these two orders Annexures "A" and "E" to the petition, have been challenged in this special civil application. The facts leading to the reference are that, in connection with the asst. yr. 1962-63, the ITO had taken into consideration the losses allocated to the share of the assessee and her three minor sons when the assessments of the two partnership firms of Rasik Solvent Extraction Company and Krishna Oil Mills were finalised by the ITO in charge of the assessment of those two firms. As shown by the original order of assessment dt. 9th Jan., 1967, passed by the ITO, the minors' share of loss aggregating to Rs. 1,28,424 from Rasik Solvent Extraction Company and the minors' share of loss aggregating to Rs. 38,766 from Krishna Oil Mills were deducted from the income of the petitioner, computed from all other sources in her assessment for the asst. yr. 1962-63, and her total income was computed accordingly. A similar benefit was given to the petitioner in respect of the asst. yr. 1963-64, regarding the losses from Krishna Oil Mills and Rasik Solvent Extraction Company. After giving appropriate notice as required by law and hearing the petitioner, the ITO, by his order dated 10th Sept., 1970, rectified the orders of assessment for the asst. yrs. 1962-63 and 1963-64, and withdrew the benefit given to the petitioner in respect of losses which were reflected in her assessment as regards the attributable share of the minors in respect of losses from Rasik Solvent Extraction Company and Krishna Oil Mills. For the asst. yr. 1962-63, a sum of Rs. 38,004 in connection with the losses of the firm of Krishna Oil Mills was added back to the income of the assessee and a sum of Rs. 73,545 in respect of shares of losses which fell to the share of minors from the firm of Rasik Solvent Extraction Company was also added back. We are merely concerned in the present case with the asst. yr. 1962-63, because the reference has been made by the Tribunal only in respect of the asst. yr. 1962-63. The assessee carried the matter in appeal before the AAC who was of the view that in accordance with the provisions contained in cl. 6 of the partnership deed as also s. 3 of the Partnership Act, there was no question of construction of s. 16 (3) of the Act of 1922 or s. 64 of the Act of 1961. He further stated that the losses were allocated by the ITO in accordance with the partnership deed and he directed that the withdrawal of losses, to the extent of accumulated profits in the minors' hands, would stand but the main contention of the ITO on which the order under s. 154 was passed was not in order. He, accordingly, directed the ITO to modify his order in the light of the observations made by him. AGAINST the decision of the AAC, the Revenue took the matter in appeal before the Tribunal and the Tribunal, after considering the rival submissions, was of the view that as there was a mistake of law apparent from the record the ITO was competent to rectify the said mistake of law under the provisions of s. 154 of the Act. The Tribunal relied upon the decision of this High Court in Surat Textile Mills Ltd. vs. CIT (1971) 80 ITR 1 (Guj) : TC53R.171, and also relying upon the observations of this High Court in Dayalbhai Madhavji Vadera's case (supra), which the Tribunal took to be binding in the State of Gujarat, it held that the rectification order was proper. However, the Tribunal pointed out in its order that so far as Krishna Oil Mills were concerned, the ITO, who completed the assessment of that particular partnership firm, had determined the losses coming to the petitioner at twenty-five per cent and not at 6.25 per cent apparently because in that assessment order, as shown by Annexure "G" in the paper book at p. 82, an amount of loss representing 25 per cent was, shown against the name of the assessee. The Tribunal came to the conclusion that it was not open to the ITO, hearing rectification proceedings, to go behind the order passed under s. 156 of the IT Act and, hence, so far as Krishna Oil Mills were concerned, the order of rectification was erroneous and contrary to law. However, the Tribunal upheld the order of rectification as regards the deduction in respect of the minors' share of loss aggregating to Rs. 73,545. Thereafter, at the instance of the assessee, the following three questions have been referred to us for our opinion : "(1) Whether, on the facts and in the circumstances of the case, any mistake was committed by the ITO in computing the total income of the assessee at the time of making the original assessment ? If so, whether the mistake was apparent from the records so as to justify proceedings under s. 154 of the IT Act, 1961 ? (2) Whether, on the proper interpretation of s. 64 of the IT Act, 1961, the loss-share of the minor sons of the assessee in the firm in which the assessee is also a partner can be set off against the income of the assessee ? (3) Whether, in a proceeding for rectification of assessment, the assessee is precluded from contending that, in fact and in law, the minor sons' share of loss in the firm is the assessee's own loss, if in the assessment of the firm, the loss is apportioned to the minors' share ?" In view of the controversy, which is the real controversy between the parties, the real question which is needed to be decided is : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in the view that it took, namely, that it was open to the ITO to rectify the earlier assessment order dt. 19th Jan., 1967, on the ground that there was an error of law apparent on the face of the record ?" In our opinion, that is the real question which is needed to be decided in the present proceedings and, incidentally, that is also the question which is urged in the special civil application and hence we are taking up both these matters and disposing of them by this common judgment. In order to appreciate the contentions regarding powers of rectification, it is necessary first to refer to the provisions regarding rectification under s. 35 of the Act of 1922, and also refer to similar provisions in s. 154 of the Act of 1961. Under s. 35 : "The CIT or the AAC may, at any time within four years from the date of any order passed by him in appeal or, in the case of the CIT, in revision under s. 33A and the ITO may, at any time within four years from the date of any assessment order or refund order passed by him on his own motion, rectify any mistake apparent from record of the appeal, revision, assessment or refund, as the case may be, and shall within the like period rectify any such mistake which has been brought to his notice by an assessee......" that was the provision under s. 35 of the 1922 Act. It is clear that what is emphasised in the aforesaid section is that the powers of rectification could be exercised in respect of a mistake apparent from the record. Under s. 154 of the Act of 1961 also, the wording is identical, namely, "with a view to rectifying any mistake apparent from the record". In T. S. Balaram, ITO vs. Volkart Brothers (1971) 82 ITR 50 (SC) : TC53R.165, the Supreme Court held that a mistake apparent on the record or from the record must be an obvious and patent mistake and not something which could be established by a long-drawn process of reasoning on points on which there might conceivably be two opinions. A decision on a debatable point of law was not a mistake apparent from the record .Hegde J., speaking for the Supreme Court, in Volkart Brothers' case (supra), observed : "From what has been said above, it is clear that the question whether s. 17(1) of the Indian IT Act, 1922, was applicable to the case of the first respondent is not free from doubt. Therefore, the ITO was not justified in thinking that on that question there can be no two opinions. It was not open to the ITO to go into the true scope of the relevant provisions of the Act in a proceeding under s. 154 of the IT Act, 1961. 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. As seen earlier, the High Court of Bombay opined that the original assessments were in accordance with law though in our opinion the High Court was not justified in going into that question." It is in the light of this interpretation of what is meant by "a mistake apparent from the record" by the Supreme Court in Volkart Brothers' case (supra) that we will have to consider whether the rectification orders passed by the ITO concerned against the assessee, who is also the petitioner in the special civil application before us, were within the scope of the powers contemplated by s. 154 and earlier by s. 35 of the Act of 1922. As regards the asst. yr. 1961-62, in the order dt. 10th Sept., 1970, a copy of which is Annexure "E" to the petition, the ITO stated, after setting out the facts and after referring to cl. 6 of the partnership deed : "The set off of loss is, therefore, irregular because the total loss of the minors for all these years amounting to of Rs. 1,96,428 is less than their capital invested in these firms. Hence entire loss for all those years requires to be allocated among the minors. As per the Gujarat High Court decision in the case of Dayalbhai Madhavji Vadera vs. CIT (1966) 60 ITR 551 (Guj) : TC 42R.431, the loss so allocated cannot be clubbed in the hands of the mother and hence cannot be allowed to be set off against her other income." For the asst. yr. 1962-63, in the order of rectification under s. 154, being the order dt. 10th Sept., 1970, which is annex. "B" on the record of the paper-book in the IT reference, identical words were used by the ITO. After setting out the effect of cl. 6 of the partnership deed, he observed : "The set off of the loss is, therefore, irregular because the total loss of the minors for all these years amounting to Rs. 1,96,428 is less than their capital invested in these firms. Hence entire loss for all these years requires to be allocated among the minors. As per the Gujarat High Court decision in the case of Dayalbhai Madhavji Vadera vs. CIT (1966) 60 ITR 551 (Guj) : TC 42R.431, the loss so allocated cannot be clubbed in the hands of the mother and hence cannot be allowed to be set off against her other incomes." As pointed out earlier, the order of rectification for the two years, namely, asst. yr. 1961-62, which is challenged in the special civil application, and the asst. yr. 1962-63, which is challenged in the IT reference, were both passed on the very same day, namely, 10th Sept., 1970, and as we have pointed out above, they were passed in identical words and for identical reasons. ;


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