1. This petition under Articles 226 and 227 of the Constitution is directed against an order dated 27 May, 1961 by which the Appellate Assistant Commissioner, Indore, rectified under Section 35 of the Indian Income-tax Act, 1922 (hereinafter called the Act), an order of his predecessor-in-office dated 29th May, 1957. By the impugned order, the losses allowed to be carried forward and set off were restricted to those incurred in the taxable territories. In this manner, the losses for the assessment year 194849 carried forward and set off were reduced from Rs. 78,123/-to Rs. 1,075/- and those for the assessment year 1949-50 were similarly reduced from Rs. 3,762/- to Rs. 123/-.
2. In the assessment years 194849 and 1949-50, the petitioner, who was assessed as -a non-resident, incurred losses, for the most part in the native State of Indore, to the extent of Rs. 78,123/- and Rs. 3,762/- respectively in the life insurance business carried on by it. From 1 December 1949, the petitioner started the business of insurance against fire also. In the proceedings for the assessment year 1950-51, the petitioner claimed inter alia Rs. 20,385/- as a revenue deduction, being the amount of reserve provided to meet the fall in the value of securities which were initially held in the life insurance business but which were, as from 1 December, 1949, bifurcated to the fire branch of the business. The petitioner further claimed that the losses sustained by it in the assessment years 1948-49 and 1949-50 be carried forward and set off in the assessment year 1950-51. By an order dated 7 March 1955, the Income-tax Officer, Indore, disallowed the two claims and determined Rs. 8,840/- to be the total income of the petitioner. In its appeal to the Appellate Assistant Commissioner, the petitioner attached the disallowance of Rs. 20,385/- and of the losses amounting to Rs. 78,123 and Rs. 3,762/-. By an order dated 29 May 1957, the Appellate Assistant Commissioner did not accept the reserve claimed on account of depreciation of the securities as an allowable revenue deduction, directed that the losses of the previous years be carried forward and set off as claimed and remitted the case to the Income-tax Officer to give effect to that direction. While the Department did not appeal against this direction relating to the losses of the two earlier years, the petitioner appealed to the Tribunal against the disallowance of Rs. 20,385/-. By an order dated 27 May 1958, the Tribunal allowed the deduction of Rs. 20,2387-on account of depreciation of the securities.
3. The Income-tax Officer, Indore, who had to give effect to the directions contained in the order dated 29 May 1957, thought that it was ambiguous and, by means of a letter dated 14 April 1961, requested for clarification. Thereupon, the Appellate Assistant Commissioner decided to rectify under Section 35 of the Act the direction relating to the carry-forward of the losses of the two previous years, issued notice to the petitioner to show cause against the course proposed to be adopted and, after giving to the petitioner a hearing, passed the impugned order dated 27 May 1961. The main reason which induced the Appellate Assistant Commissioner to rectify the mistake was this. In the years 194849 and 1949-50, the petitioner was assessed as a non-resident. It did not appeal against those orders and the determination of its status as a nonresident thus became final. In view of that position, only the losses incurred in the taxable territories, and not the entire losses incurred by it in those years, could be carried forward and set off against future profits. There was thus an error apparent from the record which needed rectification.
4. The order dated 27 May 1961 has been challenged mainly on the following grounds:
(i) The view that, in the circumstances of the case, the losses incurred at Indore and Bombay could not be set off is erroneous and there was, in ,fact, no error needing rectification.
(ii) Where a certain view of facts or of law was deliborately taken by the Appellate Assistant Commissioner and a conclusion was reached, whether right or wrong, it could not be rectified under Section 35 of the Act as 'an error apparent from the record particularly when the revenue could, but did not, appeal against it.
(iii) The Appellate Assistant Commissioner had no power to rectify the order of his predecessor after it had merged in the order passed by the Tribunal in the further appeal preferred by the petitioner.
5. Having heard the counsel, we are of opinion that the first ground is clearly untenable. Prior to its amendment by Act 25 of 1953, the relevant provisions of Section 24(2) of the Act read as follows:
'(2) Where any assessee sustains a loss of profits of gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, under the head 'Profits and gains of business, profession or vocation', and the loss cannot be wholly set off under Sub-section (1) the portion not so set off shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession of vocation for that year; and if it cannot be wholly so set off, the amount of loss not so set off shall be carried for ward to the following year, and so on; but no loss shall be so carried forward for more than six years, and a lost arising in the previous year for the assessment for the years ending on the 31st day of March, 1940, the 31st day of March 1941, the 31st day of March 1942, the 31st day of March, 1943 and the 31st day of March, 1944, respectively, shall be carried forward only for one, two, three, four and five years respectively:
(a) Where the loss sustained is a loss of profits and gains of a business, profession or vocation to which the first proviso to Sub-section (1) is applicable, and the profits and gains of that business, profession or vocation are under the provisions of Clause (c) of Sub-section (2) of Section 14, exempt from tax, such loss shall not be set off except against profits and gains accruing or arising in an Indian state from the same business, profession or vocation and exempt from tax under the said provisions;
After that amendment, they stood as follows:
'(2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year; ending on the 31st day of March 1940, in any business, profession or vocation, and the loss cannot be wholly set off under Sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year, and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year, and so on; but no loss shall be so carried forward for more than six years and a loss arising in the previous years for the assessment for the years ending on the 31st day of March, 1940, the 31st day of March, 1941, the 31st day of March, 1942, the 31st day of March, 1943 and the 31st day of March 1944, respectively, shall be carried forward only for one, two, three, four and five years, respectively:--
(a) Where the loss sustained is in any business, profession or vocation, so much of such loss as is referred to in the first proviso to Sub-section (1) shall not be set off except against the profits and gains accruing or arising in the State of Jammu and Kashmir from the same business, profession or vocation and exempt from tax under the provisions of Clause (c) of Sub-section (2) of Section 14.
In Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax, : 23ITR82(SC) the Supreme Court stated:
'......a set-off under Section 24(1) can only be claimed when the loss arises under one head and the profit against which it is sought to be set off arises under a different head. When the two arise under the same head, of course the loss can be deducted but that is done under Section 10 and not under Section 24(1)...... In the present case, the loss is computed by striking a balance in the profit andloss account of just the one business and consequently noquestion of different heads arises. On both these grounds,therefore, the assessee's contention must fail because,unless the loss can be set-off under Sub-section (1) ofSection 24, it cannot be carried forward under Sub-section(2) ......' (Page 86 of ITR): (at p. 113 of AIR)
As shown, this decision was superseded by the Indian Income-tax (Amendment) Act, 1953 (25 of 1953) with effect from 1 April 1952. The amended Sub-section (2) in terms provided that the whole loss could be carried forward even where the assessee had no other head of income. The precise question is whether the benefit of the amended Sub-section (2) could be claimed for determining the profits of the previous year preceding the assessment year 1950-51 when it was not in force. The learned counsel for the petitioner urged that that could be done and for that view he relied upon Commissioner of Income-tax Mysore, Travancore-Cochin and Coorg Bangalore v. Inclo-Mercantile Bank Ltd. : 36ITR1(SC) , Helen Rubber Industries Ltd. Kottayam v. Commissioner of Income-tax : 36ITR544(Ker) and Commissioner of income-tax v. Chuni Lal Moonga Ram : 43ITR1(SC) .
In our opinion, these cases are of no assistance to the petitioner. In the first case, the Supreme Court held that, for determining under Section 10 of the Act income under one and the same head, namely profits and gains of a business for any year, there was no distinction between business in British India and business in Indian States. It is obvious that no question of set off and carry forward of losses in the sense contemplated by Section 24 of the Act, as it stood before the Amendment, Act of 1953, arose in that case. In the second case, the Kerala High Court held that assessment, which included the process of carryforward of losses of earlier years and then set off or such losses against profits and gains of the previous year relatable to the assessment year, had to be made according to the law in force in the year of assessment. So far as this case is concerned, it is sufficient to say that it has been overruled by the Supreme Court in Commissioner of Income-tax Kerala and Coimbatore v. Helen Rubber Industries Ltd. : 44ITR714(SC) . The third case, in so far as it relates to assessment under the Act, is similar to : 36ITR1(SC) which was applied to that case.
6. In our opinion, the right to carry forward losses of earlier years and to set off those losses in the relevant previous year Is a substantive right which cannot be claimed apart from, and independently of, the provisions of the Act. It is implicit in this view that, when by an enactment, a right is given to carry forward losses, then, unless there is anything to the contrary in the enactment itself, that right can be claimed only in respect of the period during which the enactment has been in force. It is significant that Section 15 of the Income-tax (Amendment Act, 1953, amended Sub-section (2) of Section 24 retrospectively from 1 April 1952. The amended Section 24(2), Which gave a right to carry forward losses where the assesses had only one head of income, could not be availed of by the petitioner for the obvious reason that it was not in force in the accounting years 1948-49 and 1949-50. This conclusion is reinforced by another consideration. Clause 3 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, reads.
'Where in any previous year prior to the previous year for the assessment for the year ending on 31-3-1950, an assesses has sustained a loss of profits or gains in any business, profession or vocation carried on by him, and such loss would, had the State law continued to be in force, have been set off against the profits and gains, if any, from the game business chargeable to tax in the said year of assessment or in any year subsequent thereto; such loss would be so set off in the same manner, to the same extent, and up to the same year of assessment as it would have been set off had the State law continued to be in force.'
This restrictive clause would be wholly unnecessary if, as urged before us, Section 24(2), as amended, provided merely a process of arriving at or fixing the assessable income. The point is also no longer In doubt. In Indore-Malwa United Mills Ltd. v. Commissioner of Income-tax, : 35ITR271(Bom) the Bombay High Court held that the assessee, which mainly carried on business in the native State of Indore and incurred in that State a loss of Rs. 5,19,590/- in the year 1948-49, could not carry it forward for being set off against the profits and gains in taxable territories, that the loss could be set off only against the income accruing to the assessee in subsequent years in that State if the laws there prevailing permitted that course and that, since Under those laws the loss. could not be carried forward, it could not at all be set off against future income. The Bombay High Court observed:
'Now, the only right integration has given to an assessee is the right contained in Clause 3 of the Removal of Difficulties Order, 1930, and that right is that if the law of his own State permitted him to carry forward the losses, then that right is preserved under the Indian Income-tax Act.' (Pages 278-9)
These observations were quoted with approval by the Supreme Court in : 44ITR714(SC) (supra). Also, in the appeals filed by the assessesagainst the above-mentioned decision of the Bombay HighCourt, the Supreme Court upheld it and dismissed the appeals: Indore Malwa United Mills Ltd. v. Commissioner ofIncome-tax Civil Appeals Nos. 149 and 150 of 1961 D/-19-2-1962 (SC).
7. The second ground relates to the scope of the powers exercisable under Section 35 of the Act. The Supreme Court considered the ambit of those powers in three cases. In Venkatachalam v. Bombay Dyeing and . : 34ITR143(SC) their Lordships observed:
'It is in the light of this position that the extent of the Income-tax Officer's power under Section 35 to rectify mistakes apparent from the record must be determined; and, in doing so, the scope and effect of the expression mistake apparent from the record has to be ascertained. It the time when the Income-tax Officer applied his mind to the question of rectifying the alleged mistake, there can be no doubt that he had to read the principal Act as containing the inserted proviso as from April, 1, 1932. If that be the true position then the order which he made giving credit to the respondent for Rs. 50,603-15-0 is plainly and obviously inconsistent with a specific and clear provision of the statute and that must inevitably be treated as a mistake of law apparent from the record. If a mistake of fact apparent from the record of the assessment order can be rectified under Section 35, we see no reason why a mistake of law which is glaring and obvious cannot be similarly rectified. Prima facie it may appear somewhat strange that an order which was good and valid when it was made should be treated as patently invalid and wrong by virtue of the retrospective operation of the Amendment Act. But such a result is necessarily involved in the legal fiction about the retrospective operation of the Amendment Act. If, as a result of the said fiction, we must read the subsequently inserted proviso as forming part of Section 18A(5) of the principal Act as from April 1, 1952, the conclusion is inescapable that the order in question is inconsistent with the provisions of the said proviso and must be deemed to suffer from a mistake apparent from the record. That is why we think that the Income-tax Officer was justified in the present case in exercising his power under Section 35 and rectifying the said mistakes.'
(Pages 149-50 of ITR): (at pp. 879-830 of AIR)
In Maharana Mills (Private) Ltd. v. income-tax Officer, Porbandar : 36ITR350(SC) , their lordships recalled what they had said in the first case and stated:
'The power under Section 35 is no doubt limited to rectification of mistakes which are apparent from the record. A mistake contemplated by this section is not one which is to be discovered as a result of an argument but It is open to the Income-tax Officer to examine the record including the evidence and if he discovers any mistake he is entitled to rectify the error provided that if the result is enhancement of assessment or reducing the refund then notice has to be given to the assesses and he should be allowed a reasonable opportunity of being heard.'
(358-9 of ITR): (at p. 887 of AIR)
Their Lordships pointed out that if the very basis of the assessment is discovered to be erroneous and if, for discovering that mistake, the income-tax Officer had to go to the previous record, it is nonetheless a mistake apparent from the record which can be rectified under Section 35. In Income-tax Officer v. Asok Textiles Ltd. : 41ITR732(SC) , Their Lordships reaffirmed the view taken by them in the two earlier cases and observed :
'The learned Judges of the High Court seem to have fallen into an error in equating the language and scope of Section 35 of the Act with that of order XLVII, Rule 1, Civil Procedure Code. The language of the two is different because according to Section 35 of the Act which provides for rectification of mistakes the power is given to the various income-tax authorities within four years from the date of any assessment passed by them to rectify any mistake 'apparent from the record' and in the Civil Procedure Code the words are 'an error apparent on the face of the record' and the two provisions do not mean the same thing.'
In the instant case, the Appellate Assistant Commissioner had allowed the losses sustained by the petitioner in the Indore State in the assessment years 1948-49 and 1949-50 to be carried forward and set off against the income accruing in taxable territories for the assessment year 1950-51 in disregard of the unamended Section 24(2) of the Act and the specific and clear provision of Clause (3) of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950. In our opinion, this was a mistake apparent from the record which could be corrected under Section 35 of the Act.
8. The last ground raises the question whether, having regard to the fact that there was an appeal to the Tribunal, the Appellate Assistant Commissioner had jurisdiction to rectify an error in his own order after the Tribunal had passed an order in appeal, it is well-established that when an appeal or revision has been preferred against a decree, the power of the Court of first instance to amend the decree depends on the question whether the decree has been superseded by the appellate decree or is left intact it is also well settled that, where the decree of the lower Court is confirmed, reversed or varied in appeal, it Is superseded by the decree of the appellate Court and the only Court that can amend the decree thereafter is the appellate Court; Lala Brij Narain v. Tejbal Bikram Bahadur, 37 Ind App 70 . In Commissioner of Income-tax v. Amritlal Bhogilal and Co. : 34ITR130(SC) , the Supreme Court held that these principles applied to the proceedings under the Act and observed :
'There can be no doubt that, if an appeal is provided against an order passed by a tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the tribunal, it is obvious that it is the appellate decision that is effective and can be enforced. In law the position would be just the same even if the appellate decision merely confirms the decision of the tribunal. As a result of the confirmation or affirmance of the decision of the tribunal by the appellate authority the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement; but the question is whether this principle can apply to the Income-tax Officer's order granting registration to the respondents.'
(Page 136 of ITR): (at p. 871 of AIR)
In the Supreme Court case, the question was whether theorder of registration passed by the Income-tax Officer was affected by the order passed by the Appellate Assistant Commissioner. This is what their Lordships observed :
'It is true that, in dealing with the assessee's appeal against the order of assessment, the Appellate Assistant Commissioner may modify the assessment, reverse it or send it back for further enquiry; but any order that the Appellate Assistant Commissioner may make in respect of any of the matters brought before him in appeal will not and cannot affect the order of registration made by the income-tax Officer. If that be the true position, the order of registration passed by the Income-tax Officer stands outside the jurisdiction of the Appellate Assistant Commissioner and does not strictly form part of the proceedings before the appellate authority. Even after the appeal is decided and in consequence the appellate order is the only order which is valid and enforceable in law, what merges in the appellate order is the income-tax Officer's order under appeal and not his order of registration which was not and could never become the subject-matter of an appeal before the appellate authority. The theory that the order of the Tribunal merges in the order of the appellate authority cannot therefore apply to the order of registration passed by the Income-tax Officer in the present case.'
(Pages 138-9 of ITR): (at p. 873 of AIR)
In the light of these observations, the precise question is whether the order of the Appellate Assistant Commissioner dated 29 May 1957, allowing carry forward and set. off of the losses of the earlier years had merged in the order of the Tribunal. Admittedly, the revenue had not taken that matter to the Tribunal and it was, therefore, not the subject-matter of appeal before it. In our opinion, the jurisdiction of the Tribunal is confined to dealing with the subject-matter of the appeal and the subject-matter of the appeal is constituted by the grounds of appeal preferred by the appellant. So, in Puranmal Radhakishan v. Commissioner of Income-tax, Bombay : 31ITR294(Bom) , the Bombay High Court observed :
'Now, the jurisdiction of the Tribunal is to be found in Section 33(4) which is in very wide terms:
'The appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to the assessee and to the Commissioner. Wide as the language seems to be, this Court has construed this section and has particularly emphasised the language used by the Legislature, viz., 'thereon', and the view taken by the Court as we will presently point out, is that the orders that the Appellate Tribunal can pass, whatever the nature of the order may be, must be orders on the appeal and the Tribunal cannot travel outside the appeal. This decision is to be found in Motor Union Insurance Co. Ltd. v. Commissioner of Income-tax, Bombay : 13ITR272(Bom) .'
In New India Life Assurance Co. v. Commissioner of Income-tax, Bombay : 31ITR844(Bom) , that High Court stated :
'Sub-section (4) of Section 33 provides that the Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as It thinks fit, and shall communicate any such orders to the assessee and to the Commissioner. The expression 'thereon' has come in for considerable judicial comment and observation, and the authorities lay down that the power of the Tribunal is confined to dealing with the subject-matter of the appeal and the subject-matter of the appeal is con- stituted by the grounds of appeal preferred by the appellant. This subject-matter cannot be expanded even by the appellant unless leave is granted to him to do so by the Appellate Tribunal. The subject-matter can certainly not be expanded by the respondent, as already pointed out, if he has not either appealed or cross-objected.'
The observations just mentioned were again quoted with approval In Lajwanti v. Commissioner of Income-tax : 32ITR526(Bom) . In this view of the matter, the decision of the Appellate Assistant Commissioner that the losses of the earlier years should be allowed to be carried forward and set off against the income for the assessment year 1950-51 which was not in fact the subject-matter of further appeal and was not actually considered in that appeal, could not be regarded as having been adjudicated upon by the Tribunal by implication and so having merged in the Tribunal's order. Indeed, in the circumstances of the case, the Tribunal had no jurisdiction to consider that matter at all. That being so, the above-mentioned principles of merger did not apply and the power of the Appellate Assistant Commissioner to rectify that part of the order dated 29 May 1957, remained unaffected.
9. In the view we have taken, the three grounds urgedin support of the petition are untenable. That being so,this petition fails and is dismissed. The petitioner shallbear its own costs and pay out of the security amountthose incurred by the respondents. The remaining amountof security shall be refunded. Hearing fee Rs. 150/-.