1. In this reference made to this court by the Tribunal under section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred for our opinion :
'Whether, on the facts and in the circumstances of the case, there was any mistake apparent from the record in the original orders passed by the Income-tax Officer for the assessment years 1957-58 and 1958-59, which could justify the orders passed by the Income-tax Officer under section 154 for both the years ?'
2. The short facts are that the assessee, which is public limited company, manufactures locomotives and trucks and for the two relevant assessment years it was regarded as having a new industrial undertaking that manufactures automobiles enabling it to obtain the relief under section 15C of the Act. Under section 15C, tax was not payable by an assessee on profits and gains derived from any industrial undertaking which satisfied certain conditions mentioned in the section up to the extent of 6% on the capital employed in the undertaking computed in accordance with the Rules made by the Central Board of Direct Taxes, called the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949. There was no dispute before the taxing authorities that the industrial undertaking of the assessee-company was entitled to the relief under section 15C, but the controversy was confined to the extent of relief to which that industrial undertaking was entitled and the issue centred round the computation of capital employed by the assessee in that industrial undertaking. When the Income-tax Officer initially in the original proceedings determined the profits of the company for the assessment years 1957-58, and 1958-59, the company claimed before him that the capital employed in the new undertaking was Rs. 3,90,59,681 in the first year and Rs. 5,32,46,910 in the second year, and such capital was computed by including therein the amounts of Rs. 40,47,095 in the first year and Rs. 59,97,244 in the second year representing the average profits calculated under the provisions of the relevant rule being rule 3 earned during the years which were employed in the business throughout the year. Such inclusion was based on the provision of sub-rule (6) of rule 3 and it was claimed that the assessee was entitled to exemption from income-tax on 6% of the aforesaid capital, which came to Rs. 23,43,591 in the first year and Rs. 31,94,815 in the second year. The Income-tax Officer accepted the computation given by the assessee and gave relief on that basis. Subsequently, under the proceedings initiated under section 154, the Income-tax Officer took the view that the inclusion of the two amounts of average profits in the capital employed was not justified, since, according to him, the assets and liabilities taken into account in the computation of capital had embedded in them the average profits earned during the period under consideration and that there was no justification for a further addition of average profits in determining the capital employed. Accordingly, he deducted the two sums of RS. 40,47,095 in the first year and Rs, 59,97,224 in the second year from the capital as computed earlier and withdrew the relief granted under section 15C proportionately. The assessee preferred appeals to the Appellate Assistant Commissioner against the rectification that was made by the Income-tax Officer for the two years. But the Appellate Assistant Commissioner confirmed the orders of the Income-tax Officer under section 154 for the said two years. When the matter was carried in further appeal to the Tribunal, it was contended on behalf of the assessee that the original computation submitted by it and accepted by the Income-tax Officer was strictly according to the rules prescribed and that at the highest the department could say that the matter was not free from doubt and the relevant rule could bear two interpretations, but since the question was highly debatable it could not be said that there was any mistake apparent on the face of the record which could be rectified under section 154 of the Act. The Tribunal accepted the contention of the assessee that the question whether the two amounts representing average profits should be included in computing the capital employed or should be excluded under the provisions of the relevant rule being rule 3(6) was highly debatable on which two views were possible and, therefore, the order of the Income-tax Officer rectifying the initial assessment was not justified. It took the view that the computation canvassed by the department under rule 3(6) appeared to be in accordance with recognized principle of accountancy and also with commercial practice but the computation prescribed in the rules was essentially an artificial computation and since the rules contain artificial provisions, it was not possible to dismiss as fantastic the argument of the assessee that the rules did contemplate the addition of the profits earned in the year of account to the capital determined by reference to the assets and liabilities. It, therefore, accepted the assessee's appeal. At the instance to the Commissioner the question set out at the commencement of the judgment has been referred to us for our determination.
3. Though, in this references we are really not concerned with deciding the issue on merits, we may state that the question as to whether the amounts of average profits earned by an assessee during the accounting years should be included or excluded while ascertaining the average amount of capital employed in a business during the relevant accounting period really turn upon the proper construction to be placed upon rule 3(6) of the relevant Rules made by the Central Board of Direct Taxes and the relevant rule reads as under :
'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 as corresponding increase or decrease, as the case may be, in the capital employed in the business.'
4. According, to the assessee, on a grammatical and a plain reading of the aforesaid provisions while ascertaining the average amount of capital employed in a business during any computation period, an amount representing the average profits earned during the year of account will have to be included and the computation made by it initially before the Income-tax Officer was strictly in accordance with the provisions of the Rules, whereas the taxing authorities took the view that the addition of the amount of average profits to the capital department by reference to the assets and liabilities could be a duplicate addition because the figures in the assets taken into account under rule 3 would automatically include the profits crystallized in the form of additional assets. The Tribunal, it appears, though it agreed with the department's computation, clearly expressed the view that the provision of the rule being artificial the computation done by the assessee also could not be regarded as absurd or wrong. There is no doubt that on this question two views are clearly possible and in fact we may point out that the Gujarat High Court in the case of Commissioner of Income-tax v. Elecon Engineering Co. Ltd. : 104ITR510(Guj) , while dealing with a similar provision which is to be found in rule 19(5) framed by the Central board of Direct Taxes under the 1961 Act, has actually taken the view that the amount representing average profits is liable to be added while ascertaining the average amount of capital employed in a business during the relevant computation period. Having regard to this position it seems to us clear that the question of proper interpretation of the relevant rule which in the instant case is rule 3(6) is undoubtedly a debatable question and the rule in question could be interpreted in two different ways and, therefore, it could not be said that there was any mistake apparent on the record in the original orders passed by the Income-tax Officer for the two relevant assessment years.
5. Mr. Joshi, appearing for the revenue, has referred to us a decision of the Madras High Court in the case of T. S. Rajam, v. Controller of Estate Duty : 69ITR342(Mad) , where the Madras High Court has taken the view that for a rectification of an error which is said to be apparent from the record, the mere complexity of the problem or that genuine argument in necessary to discover the same may not be themselves be sufficient to oust the jurisdiction of the Tribunal to rectify such a mistake, and having regard to this position as explained by the Madras High Court, he urged that even in the instant case the Income-tax Officer must be regarded as having exercised his jurisdiction to rectify the initial orders on the ground that there was a mistake apparent on the face of the record. It may be stated that the view expressed in the aforesaid decision of the Madras High Court has not been accepted by our court and has been expressly dissented from in the case of J. M. Shah v. J. M. Bhatia, Appellate Assistant Commissioner of Wealth-tax : 94ITR519(Bom) . Following the decision in T. S. Balaram, Income-tax Officer, v. Volkart Brothers : 82ITR50(SC) and this court's decision in the aforesaid case reported in : 94ITR519(Bom) , we are clearly of the view that the rectification orders passed by the Income-tax Officer, for the two assessment years 1957-58 and 1958-59, were not justified. We may also mention that when similar rectification orders were passed by the taxing authority under rule 19(5) while working out the capital for the purpose of section 84 of the Income-tax Act, 1961, the Gujarat High Court in the case of Commissioner of Income-tax b. Premraj Ganpatraj & Co. : 95ITR447(Guj) has also taken the view that the rectification was unjustified.
6. In the result, the question referred to us is answered in the negative and in favour of the assessee. The revenue will pay the costs of the reference.