V.S. Desai, J.
1. This is a petition under article 226 of the Constitution of India challenging the orders of rectification under section 154 of the Indian Income-tax Act made on February 8, 1965, by the respondent of the assessments of the petitioner No. 1 firm for the assessment years 1958-59, 1960-61, 1961-62 and 1962-63 and for quashing the said orders and the subsequent notices of demand issued in pursuance thereof dated February 9, 1965. The petitioners Nos. 2 and 3 are the two partners of the petitioner No. 1 firm and the firm as well as the partners are being assessed in India as non-residents. The petitioner-firm was duly registered under the Indian Income-tax Act, 1922, and also under the Income-tax Act of 1961. In the original assessments of the firm for the relevant assessment years with which we are concerned, the assessments were made on the slab relates applicable to registered firms in the respective Finance Acts. In the individual assessments of the partners their respective shares in the income of the firm were included and assessed at the maximum rate of non-residents. On February 1, 1965, the petitioner-firm was served with a notice dated January 29, 1965, by the respondent intimating to it that in its assessments for the assessment years 1958-59, 1960-61, 1961-62 and 1962-63 there were mistakes apparent from the record inasmuch as the firm had not been charged at the maximum rates of income-tax under section 17(1) of the Act of 1922, corresponding to section 113 of Act of 1961, and he, therefore, proposed to rectify the assessment and enhance the tax under section 154 of the Indian Income-tax Act of 1961. The petitioners replied to the said notice contending that there was no mistake either apparent or otherwise in the said assessments and consequently the Income-tax Officer had no power to invoke his jurisdiction under section 154 of the Act. The respondent did not accept the said contentions and rectified the assessments for the said years by applying the provisions of section 17(1) of the Act of 1922 to the assessments of the firm and followed the said orders made by him by issuing notices of demand on February 9, 1965. The present writ application has thereafter been filed by the petitioners on February 26, 1965, complaining of the said rectification orders and the notices of demand following them and praying for the quashing of the said orders and notices of demand and for prohibiting the respondent from taking any further action in pursuance thereof.
2. The contentions of the petitioners are firstly that the original assessments made on the firm did not suffer from any mistake and, secondly, at any rate, the mistake alleged by the respondent, viz., that section 17(1) was not applied in making the assessments of the firm cannot be regarded as a mistake apparent from the record.
3. Now, the power of the Income-tax Officer under section 35 of the Income-tax Act, 1922, or the corresponding section 154 of the Act of 1961, is limited to rectification of mistakes which are apparent from the record. It is well settled that the error apparent from the record is not only confined to an error of fact but may also include errors of law. It is, however, necessary that it must be an error which is apparent on the examination of the record itself without entering into any fresh or additional investigation. Moreover, it must be obvious and patent from the record and an error, which is not obvious and patent and can only be discovered as a result of an argument, cannot qualify as an error apparent from the record. In the present case the error apparent from the record, according to the department, is the non-application of the provision of section 17(1) of the Act of 1922, or the corresponding provision of section 113 of the Act of 1961, to the assessments of the petitioner-firm. It is argued by the department that the said provision of law was clearly applicable to the case and the non-application there of by the Income-tax Officer constitutes an error apparent from the record, which the respondent was entitled to rectify under the power of rectification given to him under the Act. If the contention of the department that the case of the assessee-firm was clearly and unmistakably governed by the provision of section 17(1) is correct and there can possibly be no difficulty in coming to an immediate conclusion on a perusal of the said provision that it must apply to the assessee's case, the department would be right in saying that there is an error apparent from the record. It is, however, contended by the assessee-firm that it is clear from the said provision itself and also when considered in the context of the scheme and history of the assessee that the application of the shame and history of the legislation that it has no application to the assessment of a registered firm, nor was it ever intended to have any such application. It is argued on behalf of the assessee that the application of the said provision would lead to the stating result of the income being taxed at more that 100 per cent. and the provision, if interpreted in the manner as contended for by the department, would go beyond the ambit of the charging section, which requires the income-tax to be a tax on the income and, therefore, related to income, and thus would be rendered in operative and invalid. It is argued on behalf of the assessee that it is the action of the Income-tax Officer to apply the provisions of section 17(1) to the assessee-firm that would qualify to be an error apparent from the record rather than the non-application of the said provision in the original assessments of the firm. In these rival contentions put forward by the department and the assessee, we are inclined to agree with that of the assessee rather than that of the department. At any rate, there is no doubt whatsoever in our mind that the department's contention that on a perusal of the provisions of section 17(1) there can be no doubt whatsoever that it covers the cases of registered non-resident firms, cannot be sustained. It appears to us that the question whether the said provision can apply to the case of a registered non-resident firm would raise a highly controversial issue in which, much, at any rate, may be capable of being said against its non-applicability to the case of registered non-resident firms, and the controversy could only be decided after and elaborate argument. In that view of the matter we are of the opinion that the respondent was not entitled to invoke his power of rectifying the assessments of the assessee-firm on the ground that they suffered from errors apparent from the record, and the impugned orders of rectification passed by him are without jurisdiction and, therefore, liable to be set aside as prayed for by the assessee. In the view that we are taking, it is not necessary for us to proceed to decide the question as to whether the provision of section 17(1) is applicable to the case of a registered non-resident firm. We will, however, briefly indicate the reasons why we are inclined to take the view on merits that the provision can have no application.
4. The provision of section 17(1) with which we are concerned came on the statute book in 1951 in substitution of the prior provision, which was some what different. Under this provision an assessee other than a company, who was not a resident in the taxable territory, was liable to be taxed to income-tax on his total income at the maximum rate and to a super-tax either at a fixed specified rate or on the basis of a proportionate part of the super-tax on his total world income, whichever was higher. The proviso to the section provided an option to the assessee to be exercised by him once and for all whether he would agree to be assessed on this basis or on the basis of the old provision, which was being replaced by the present provision. It would be seen that an assessee who was a resident was taxed on his total income on the slab basis where the maximum income-tax at the rate of 25 per cent. was applicable to his income only when it exceeded a certain limit, whereas in the case of a non-resident assessee the whole of his income was taxed at the maximum rate of income-tax. Similarly, in the matter of super-tax, while the resident was subjected to taxation on a slab basis, the non-resident had to pay super-tax calculated on the whole of the income at a specified rate or the proportionate part of super-tax calculated on his total world income, whichever was greater. The rationale of this provision, it would appear to us, is that whereas in the case of residents their entire income was subject to the Indian Income-tax Act, in the case of the non residents their income which could be assessed to the Indian income-tax would not constitute their entire income, a part there of being outside the taxation laws of this country and consequently a higher rate of tax on their income which is taxable here will not be unjustified. Now at the time when section 17(1) provided for the taxation of a person who was not a resident, Hindu undivided family, company, local authority and a firm and other associations of persons. Section 17(1) in terms excluded a company from its operation. Under the scheme of the Income-tax Act there was no distinction between a company, which was a resident and a non-resident so far as the taxation was concerned, and all companies were taxed in the same manner. Although a firm was unit of assessment, a firm which was registered under the Indian Income-tax Act was itself not subjected to tax on its income. The assessment in the case of registered firms was only for the purpose of computing the total income of the firm and for ascertaining the shares of the individual partners in the said income. When that was done, the said individual shares were taken over to the individual incomes of the respective partners, clubbed with his other income and then taxed in their hands. It may also be pointed out that there was no difference between registered resident and non-resident firms and the same procedure and method was followed in the case of all registered firms. There being no assessment of tax on the registered firm itself, there was no occasion to apply the provision of section 17(1). It was only when the share of the income of the partner in the registered firm was taken over to his individual assessment, if the said partner happened to be a non-resident amenable to the provision of section 17(1), that the said provision had application to the income in the hands of the non-resident partner. After section 17(1) in the present form came on the statute book in 1951, for the years between 1951, 1956, the petitioner No. 1 firm, being a registered firm, there was no assessment of tax on the firm as such. The shares in the total income of the firm of the petitioners Nos. 2 and 3, who were the partners thereof, were taken over to their individual assessment and since both of them were non-residents, section 17(1) was applied to their individual assessments and the tax as levied was duly paid by them.
5. By the Finance Act of 1956 for the first time a provision was made for levying a tax on the registered firm itself on its total income, and since thereafter by the subsequent Finance Act a tax on the registered firm itself in respect of its income has been continued to be levied. It may, however, be pointed out that the main and substantial scheme in the matter of assessment of registered firms, viz., to compute the total income of the firm and determine the shares of the individual partners in the firm and thereafter take the said shares to the individual assessments of the individual partners and tax them in their hands along with their other income has not been abandoned. The entire income of the registered firm as computed is taken to the individual assessments of the partners and taxed there and it is in addition thereto that a further tax is levied on the firm itself. This obviously involves a double taxation to a certain to a certain extent and it appears that certain reliefs in respect thereof have been made available to the partners. It may also be pointed out that, whereas the computed total income of the firm, which is taken to the assessment of the individual partners, gets subjected not only to income-tax but also to super-tax in the hands of the partners, the new levy of tax on the registered firm itself is confined only to income-tax and not to super-tax and the relates at which the new levy is imposed on the firm are also very low compared with the rates which apply to the income when taken to the individual assessments of the partners. It will thus be seen that the new levy brought in by the Finance act of 1956 and continued by the subsequent Finance Act in the case of registered firms is not the substantial levy of income-tax on the income of the registered firm, which still continues to be taxed in the hands of the individual partners, but more or less a sort of a token levy in addition to the main and substantial tax.
6. Mr. Palkhivala has pointed out that in all these years this additional tax, which is also levied on a slab basis, has never gone beyond the maximum 12 per cent. It is important to note that until 1956, when the registered firms were not themselves subjected to tax, there was no distinction between registered resident and non-resident firms and when the Finance Act of 1956 and the subsequent Finance Acts brought in a levy on the registered firms, no distinction was made between registered resident and non-resident firms, a category 'D' having been provided in the Finance Act for all registered firms specifying the additional slab rates for the taxation. Having regard to these features about the levy of tax on the firm itself, its nature and the manner in which it is imposed, we find considerable substance in the submission of Mr. Palkhivala that it is not a substantial levy of income-tax. Section 17(1) is a provision which undoubtedly deals with the main and substantial taxation under the Indian Income-tax Act and it would appear to us that the incidence of a small and token tax in addition to a main and substantial tax, which was imposed on the registered firms in 1956 and thereafter, was not intended to bring, by reason thereof, the registered non-resident firms within the ambit of section 17(1).
7. There is some intrinsic evidence in the provision of section 17(1) when considered in the context of the provision relating to the imposition of tax on the firms themselves that the said section cannot apply to the registered non-resident firms. It appears that the section applies to case where a person is liable to the several taxes and charges, liable to be imposed under the Indian Income-tax Act, viz., the income-tax, super-tax and the corresponding surcharges. In other words, the provision of section 17(1) appears to cover cases of main and substantial taxation, and apply to persons who are liable both to income-tax and super-tax. The registered firm, as we have seen, is liable only to a small income-tax and not at all to the super-tax. It is, therefore, arguable that the provision of section 17(1) which is applicable to persons who are liable to be taxed to both income-tax and super-tax cannot apply to the registered firms which are not liable to super-tax altogether.
8. It is argued by Mr. Joshi that the relevant Finance Acts in their Schedules have provided that in every case in which under the provisions of the Indian Income-tax Act, income-tax is to be charged at the maximum rate, it should be charged on the whole income at the rates specified therein. Since section 17(1) provides for the charging of income-tax at the maximum rate in the case of any person who is a non-resident and since the petitioner No. 1 firm is a non-resident, income-tax must be charged at the maximum rate of 25 per cent. under the provisions of the Finance Acts. Now, the answer to this, it appears to us, is that section 17(1) spoke of subjecting the non-resident person to the maximum rate at a time when the non-resident registered firm was not liable to taxation. The section as it originally stood, therefore, could not have contemplated to bring within its ambit non-registered firms. The Finance Act, which, for the first time, levied a tax on the registered firm itself, made no distinction between registered resident and non-resident firms and gave a special table of taxation for all registered firms without any distinction. It will be seen from the Finance Act that paragraph 'D' specifying special rates of income-tax to be applied in the case of all registered firms comes after the provision in paragraph 'C' where a maximum rate of 25 per cent. is to be charged in all the cases where, under the provisions of the Income-tax Act, income-tax is to be charged at the maximum rate. It appears that the maximum rate spoken of in paragraph 'C' is applicable to cases of substantial and main levy of assessments and the rate of 25 per cent. so specified is the maximum rate, which is applicable on the slab basis beyond a particular level of income. As we have already pointed out earlier, the rationale of the provision which makes the maximum of the rate of tax applicable to a non-resident is that the whole of his income is not brought to tax in India and, therefore, the legislature desires that his income should be subjected to a higher rate than the income of a resident whose whole income is subjected to the Indian Income-tax Act. It is, therefore, that the maximum rate, which will be applicable in the case of a resident only after a particular level of the income is reached is made applicable to the non-resident to the extent of the whole income. It seems to us, therefore, that the provision as to the application of the maximum rate contained in paragraph 'C' applied to the cases of main and substantial taxation and was not intended to extend to the new category of registered firms which was specified in paragraph 'D' and for which a small token tax was prescribed.
9. There is also one more reason which appears to us to indicate strongly in favour of the non-application of the provisions of section 17(1) to the case of non-resident firms. Having regard to the fact that under the scheme of the Income-tax Act, the entire total income of the registered firm still continues to be taxed in the hands of the individual partners, if the interpretation which the department seeks to put on the provision of section 17(1) is accepted and the registered firm even in respect of the additional tax, which is now imposed upon them is brought within the purview of section 17(1), cases will easily arise where the total tax consisting of the tax on the firm and tax in the hands of the individual partners will be in excess of the income itself. The assessee has pointed out that even in its own case for the assessment year 1962-63, which is one of the assessment years with which we are concerned in the present petition, for the income of over Rs. 2 lakhs, the rate of tax calculated on the basis suggested by the department, viz., taxation at the maximum rate in the hands of the firm as well as in the hands of the partners, would go to 102 per cent. The actual calculations in this connection have not been challenged by the department. It is, however, argued by Mr. Joshi that in fact the petitioners have not been required to pay more than 100 per cent. of the income by way of tax this year. Mr. Palkhivala points out that the reason way in spite of the calculations which he has given, the total tax assessed does not exceed the total income computed for the levy of tax is because of the fortuitous circumstances that the said income includes some capital gains. If the amount of the capital gains is excluded, it will be seen that the total tax proposed to be collected would go beyond 100 per cent. of the total income. Since capital gains cannot be regarded as accruing every year and in the case of all assessees similarly situated, it appears to us that the construction sought to be put by the department on the provision would yield this astounding result. There can be no doubt whatsoever that the interpretation of the provision which leads to such a result has got to be avoided. Moreover, as Mr. Palkhivala argues, if such a construction is accepted, the provision may well be challenged as going beyond the ambit of the charging section.
10. We have indicated above the reasons why we are disposed to take the view that the original assessments made by the Income-tax Officer did not involve a mistake even on merits. Even if it were assumed that the grounds which we have mentioned are capable of being met and a different view is possible to be taken after a fuller and more exhaustive examination of the question, there cannot be any doubt whatsoever that the non-application of the provision of section 17(1) in the original assessment of the petitioner cannot be treated as a mistake apparent from the record so as to enable the respondent to invoke his jurisdiction under section 35 of the Act of 1922 or section 154 of the Act of 1961. The orders of rectification passed by the respondent of February 8, 1965, and the notices of demand issued in pursuance thereof of February 9, 1965, are, therefore, illegal and without jurisdiction and liable to be set aside.
11. We accordingly make the rule absolute and order that the impugned orders of rectification dated 8th February, 1965, and the notices of demand dated 9th February, 1965, be set aside and the respondent, his officers, agents and servants be restrained from taking any further action in pursuance thereof. The petitioners will get their costs from the respondent.