K.C. Agrawal, J. - (1.) THE assessee is a co-operative society engaged in the business of banking. For the assessment year 1963-64, the ITO computed the total income of the assessee at Rs. 1,88,997. Since under Section 81(i)(a), a co-operative society engaged in the business of banking is not liable to pay income-tax on its business income, the ITO granted rebate on income of Rs. 1,64,540. Amongst other rebates, one which had been grafted by the ITO was in respect of additional surcharge. Soon thereafter, the internal audit party pointed out to the ITO that, as additional surcharge was not income within the meaning of Section 81 (i)(a) of the Act, the rebate of Rs. 8,866.26 allowed in respect of additional surcharge was not admissible. THEreupon, the ITO issued a notice under Section 154 of the I.T. Act to the assessee and withdrew the rebate in respect of additional surcharge. While rectifying the mistake, he held that since no rebate could be granted in respect of the additional surcharge, the order to that extent was liable to be corrected.
(2.) AGAINST the order of the ITO rectifying the mistake, the assessee preferred an appeal before the AAC of Income-tax, Moradabad. The AAC allowed the appeal holding that, as the mistake pointed out by the ITO did not fall within the ambit of Section 154 of the Act, the ITO had no jurisdiction or power to rectify the same. Aggrieved, the CIT filed a second appeal before the Tribunal, which agreed with the view of the AAC and found that as there was no obvious and patent mistake committed by the ITO at the time of the original assessment, made on 30th November, 1963, the power conferred by Section 154 of the Act could not be exercised. At the instance of the Commissioner, the Tribunal referred the following question of law under Section 256(2) of the Act for the opinion of this court : " Whether, on the facts and in the circumstances of the case, there was any mistake apparent from the record in regard to the allowability of the rebate on additional surcharge ? " Since the question whether the mistake committed by the ITO was a mistake apparent from the record is linked with the merits of the allowability of the rebate on additional surcharge, it appears appropriate to deal with that question first. Section 81 (i)(a) of the Act provides that no income-tax shall be payable by a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members. The co-operative society, in the instant case, was a society engaged in carrying on the business of banking. Accordingly, Hinder this provision, the profits and gains earned by the society was exempt. In 1963, however, Parliament passed the Finance Act, XIII of 1963. It made a provision for the levy of additional surcharge on the residual income. The additional surcharge was payable by the persons falling within the framework of the aforesaid Finance Act, XIII of 1963. In pursuance of the aforesaid Finance Act, the assessee society had to pay additional surcharge. The assessee claimed that as additional surcharge was an additional levy on the income-tax and had no existence apart from that, it was entitled to get rebate on additional surcharge as well. As already seen above, this was allowed at the first instance by the ITO but was subsequently withdrawn by means of the proceedings started under Section 154 of the Act. The question relating to the validity of the levy of additional surcharge on a co-operative society engaged in the business of banking under the Finance Act, 1963, was raised before the Supreme Court in Madurai District Central Co-operative Bank Ltd. v. Third ITO [1975] 101 ITR 24 (SC). The argument advanced before the Supreme Court was that since a co-operative society is exempt from payment of tax on income, levy of additional surcharge by means of the Finance Act was contrary to the provisions of the I.T. Act. The argument was repelled by the Supreme Court. It held (p. 33): " Thus, both the purpose and concept of the additional surcharge are different from those of income-tax."
(3.) WHILE dealing with Section 81(i)(a) of the I.T. Act, the Supreme Court observed (p. 33) : " In order that the exemption granted to co-operative banks by Section 81 (i)(a) may not lose its meaning and content, Section 2(8) of the Finance Act introduces the concept of residual income on which alone the additional surcharge is payable. The residual income is not the same thing as the business income of a co-operative bank, which is exempt under Section 81(i)(a) from income-tax. For ascertaining the residual income, the total income is reduced by the amount of capital gains and further by the amount of tax (other than additional surcharge) which would have been charged on such reduced total income on the assumption that the whole of it was liable to be brought to tax." The observations extracted above would show that the additional surcharge was held to be different from income-tax and that a society would be made liable to pay additional surcharge although its income was liable to be exempt under Section 81(i)(a). This being so, no society could be granted rebate in respect of additional surcharge paid by it on the residual income. The ITO, therefore, committed an error in granting rebates on the amount of additional surcharge paid by the assessee-society.;