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Shan Elahi Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1982)1ITD16(Delhi)
AppellantShan Elahi
Respondentincome-tax Officer
Excerpt:
.....of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the income-tax officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made.the.....
Judgment:
1. Consequent on a difference of opinion between the two Members of the Delhi Bench 'A' of the Tribunal, who heard this appeal, the following question has been referred to me, as third Member, under Section 255(4) of the Income-tax Act, 1961 ("the Act") : Whether, on the facts and in the circumstances of the case, the order under Section 154 dated 8-2-1978 for including the sum of Rs. 12,685 on account of disallowance under Section 40A(3) can be upheld legally? 2. The question, which has been referred, raises an interesting issue as to the period of limitation provided for in the first proviso to Section 40A(3) of the Act. The facts which are relevant for this reference can be briefly summarised as follows.

3. The assessment year involved is 1971-72, for which the accounting year of the assessee ended on 31-3-1971. The assessment for that year was completed by the ITO on 21-8-1971. In the accounts of that year, which were maintained on the mercantile system of accounting, the assessee had provided for payment of salary and commission to two persons, namely, Mustafa Ali and Mohd. Aslam, to the extent of Rs. 5,965.44 and Rs. 6,720.44, respectively. These amounts were claimed by the assessee as a deduction for the assessment year 1971-72 and were also allowed by the ITO while passing the order of assessment dated 21-8-1971.

4. At the time of the assessment for the assessment year 1972-73, the ITO found that the amounts due to the above two persons, and provided for in the accounts for the assessment year 1971-72, were paid by the assessee on 27-5-1971. Such payments exceeded Rs. 2,500 in each case.

The assessee had disbursed those payments in cash, contrary to the provisions of Section 40A(3). In the order of assessment for 1972-73, the [TO obesrved that, under the provisions of the first proviso to Section 40A(3), the said amounts had to be disallowed by rectifying the order of assessment dated 21-8-1971, for the assessment year 1971-72.

5. Pursuant to the above observations contained in the assessment order for 1972-73, the ITO issued a notice under Section 154 for the assessment year 1971-72, on 21-9-1976, proposing to withdraw the allowance of the above two amounts. However, before any rectification was carried out, pursuant to the above notice, the ITO issued a notice to the assessee under Section 148 for the assessment year 1971-72, proposing to reopen the assessment as house property income amounting to Rs. 492 had escaped assessment. On 28-2-1977, the ITO passed a combined order under Section 154 and Section 147. The opening paragraph of that assessment order reads as under : Notice under Section 148 was issued in this case after obtaining approval from the Commissioner, Agra, consequent upon the assessee's disclosure petition under Section 273 A of the Act. Rs. 12,685 which is to be disallowed under Section 40A(3)/154 for reasons discussed in the original order for the assessment year 1972-73, will also be added here.

However, in the computation of income at the end of the assessment order, the ITO again, failed to disallow and add the amount of Rs. 12,685 to the total income of the assessee, though in paragraph 1 of the order, reproduced above, he had expressed his intention of adding back that amount.

6. When the above omission was discovered by him, the ITO issued a fresh notice under Section 154 on 11-10-1977 and, again on 28-1-1978, seeking to rectify the error. The assessee filed objections against the proposed rectification. One of the objections taken was that the proposed rectification was barred by limitation in terms of the first proviso to Section 40A(3). The ITO rejected the assessee's objections against the rectification and passed an order, purported to be under Section 154, on 8-2-1978 rectifying the omission to add the amount of Rs. 12,685 to the total income.

7. Against the order dated 8-2-1978, the assessee filed an application dated 20-7-1978, in which it was pointed out that he had made certain submissions, as to fact, in his reply to the notices under Section 154, which would go to show that the provisions of the first proviso to Section 40A(3) were not attracted in his case and that the ITO had failed to consider those factual submissions while passing the impugned order dated 8-2-1978. The assessee requested the ITO to rectify the impugned order by considering those factual submissions. The ITO dismissed the application by his order dated 10-1-1979. The assessee filed an appeal before the AAC against that order and the AAC, by his order dated 17-7-1979, accepted the plea of the assessee that the ITO was wrong in passing the impugned order dated 8-2-1978, without considering the objections raised by the assessee. Accordingly, he , set aside that order and directed the ITO to dispose of the assessee's application dated 20-7-1978, afresh, in accordance with law.

8. In the meantime, the assessee had also filed an appeal before the AAC against the order dated 8-2-1978, whereby the ITO had carried out the rectification. In that appeal, the assessee had contended that the impugned order has been passed by the ITO beyond the period of limitation specified in the first proviso to Section 40A(3). According to the assessee, the order, purported to be under the first proviso to Section 40A(3) could have been passed only before 31-3-1977 whereas the impugned order was passed on 8-2-1978. The stand taken by the ITO was that the combined order under Section 154 and Section 147, which was passed by him on 28-2-1977, clearly contained an error apparent from the record, inasmuch as, though he had expressed his intention of adding back the amount of Rs. 12,685 to the total income of the assessee, he had omitted to do so by oversight. It was claimed by the ITO that this was a mistake which could be corrected under the provisions of Section 154(7) within the period of limitation specified therein and that such rectification will not be barred by the provisions contained in the first proviso to Section 40A(3). The AAC accepted this plea put forward on behalf of the ITO and dismissed the assessee's appeal.

9. Aggrieved by the said order, the assessee filed a second appeal before the Tribunal. After setting out the above facts, in detail, the learned Judicial Member came to the conclusion that the provisions of the first proviso to Section 40A(3) permitted the ITO to rectify the mistake only up to 31-3-1977. However, he observed, in the order dated 28-2-1977, that the ITO, while purporting to carry out the said rectification, committed another error, which was apparent from the record, inasmuch as, he failed to add that amount to the total income of the assessee. According to the learned Judicial Member, this order dated 28-2-1977 provided a fresh starting point for limitation under Section 154 so that, when the ITO passed the order of fresh rectification on 8-2-1978, it was within the period of limitation contemplated in Section 154.

10. The learned Accountant Member, on the other hand, was of the view that the normal period of limitation for carrying out a rectification in the order of assessment dated 21-8-1971 would have expired on 31-3-1977, in accordance with the provisions of Section 154(7).

However, where an amount of expenditure has been allowed in the original assessment, and it was sought to be withdrawn by invoking the first proviso to Section 40A(3), the period of limitation of four years, mentioned therein, was, according to the learned Accountant Member, absolute and if the rectificaton has not been carried out within that stipulated period, it could not be carried out with reference to any order other than the original order of assessment. He found support for his proposition in the decisions of the Punjab High Court in Lala Rajeshwar Pershad v. ITO [1959] 36 ITR 492, of the Mysore High Court in K.G. Subramanya v. CAIT [1969] 73 ITR 499, and of the Gujarat High Court in Ahmedabad Sarangpur Mills Co. Ltd. v. A.S.Manohar, ITO [1976] 102 ITR 712. He also referred to the commentary by Chaturvedi and Pillrisaria, 2nd edn. (1976), Vol. 11, at page 1788, in this connection. Accordingly, he held that the order dated 8-2-1978, by which the ITO purportedly rectified the mistake was beyond the prescribed period of limitation.

11. Consequent on the above difference of opinion between the two Members, the case has been referred to me under Section 255(4).

12. The learned counsel for the assessee, after taking me through the relevant facts, as stated above, as also the opinions expressed by the dissenting Members of the Bench, submitted that Section 154 identified the order in which the apparent mistake is contained and also the period of four yeas within which such mistake could be rectified. Under the provisions of Section 154(7), it is provided that except in those cases covered by Section 155 or Section 186(4), no amendment under that section shall be made after the expiry of four years from the date of the order sought to be amended. In the present case, he pointed out that the mistake was a "deemed mistake" and not a real one. Normally, any expenditure incurred by the assessee, for the purpose of his business, was an allowable expenditure and, when such expenditure is allowed, there could be said to be no mistake which called for rectification. However, the first proviso to Section 40A(3) has fictionally created a mistake, in the eyes of the Income-tax Act, if an assessee makes payments in excess of Rs. 2,500 otherwise than by a crossed cheque or by a crossed bank draft in any year, though such expenditure has been allowed as a deduction in an earlier year on the basis of provisions made in the accounts of the assessee. While creating such a fiction, the proviso also lays down a period of limitation within which such a mistake could be rectified. This period was four years from the end of the assessment order next following the previous year in which the payment was so made. In the present case, the impugned payments were made on 27-5-1971 so that the period of limitation would run from 1-4-1973 up to 31-3-1977. Though the ITO purported to rectify the mistake, by his order dated 28-2-1977, he failed to carry out the rectification, as he did not add back the amount to the total income of the assessee. Thus, though the order was described as an order under Section 154/147, it was only an order under Section 147 as the only amount added back by the ITO in that assessment was the property income of Rs. 492, which had escaped assessment. The only order of rectification, for the purpose of adding back the amount of Rs. 12,685 was pased by the ITO on 8-2-1978, which was beyond the period of limitation, which expired on 31-3-1977 The (earned counsel referred to the decision of the Gujarat High Court in Ahmedabad Sarangpur Mills Co. Ltd. v. A.S. Manohar, ITO (supra), of the Madras High Court in Mettur Chemical & Industrial Corporation Ltd. v. CIT [ 1977] 110 ITR 822 and of the Calcutta High Court in Bengal Assam Steamship Co. Ltd. v. CIT [1978] 114 ITR 327, in support of his contention that the period of limitation under Section 154 had to be computed with reference to the date of the original order of assessment and not with reference to the date of any rectificatory order passed thereafter.

13. On behalf of the revenue, it was contended that the impugned order of the ITO was an order of rectification, which was passed with reference to the assessment order dated 28-2-1977. As it was passed within the period of limitation specified in Section 154(7), it was contended that the order was passed within time. According to the learned departmental representative, there was a patent error in the order passed by the ITO on 28-2-1977, which was apparent from the record inasmuch as, he clearly proposed to add the amount of Rs. 12,685 but failed to do so by oversight. According to the learned departmental representative, this mistake clearly lead itself to rectification under Section 154.

14. I have carefully considered the two view-points expressed by the two learned Members of the Bench and also the arguments advanced from both sides supporting each of these views. Section 154(7) lays down a period of limitation for rectification of mistakes, apparent from the record. As far as the ITO is concerned, the orders which could be so rectified are any order of assessment or of refund or any order passed by him. Thus, the provisions of Section 154(7) are general provisions relating to limitation which would govern rectification of orders passed by the ITO. The period, limited therein, is four years from the date of the order sought to be amended. The limitation contained in Section 154(7) is in the following terms : (7). Save as otherwise provided in Section 155 or Sub-section (4) of Section 186, no amendment under this section shall be made after the expiry of four years from the date of the order sought to be amended.

15. In order to consider the provisions contained in the first proviso to Section 40A(3), it will be necessary to reproduce the sub-section and the proviso : (3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction : Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Income-tax Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of Section 154 shall, so far as may be, apply thereto, the period of four years specified in Sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made.

The sub-section provides that if the assessee incurs any expenditure in a sum exceeding Rs. 2,500, otherwise than by a crossed cheque or by a crossed bank draft, such expenditure shall not be allowed as a deduction. The first proviso deals with cases where an assessee, who follows the mercantile system of accounting, claims deductions in respect of expenditure for which liability has been incurred during the relevant accounting period. While completing the assessments in the case of the assessees following the mercantile system of accounting, the ITO allows expenditure on the basis of accrued liability and not on the basis of actual payments. The proviso provides that if, in any case, an expenditure has been allowed in any assessment year, on the basis of accrued liability and, in a later year, while making actual payments in respect of such liability, the assessee makes the payment otherwise than by crossed cheque or by crossed bank draft, of sums exceeding Rs. 2,500, the deduction which was allowed in the relevant assessment year in respect of such claim, should be treated as mistake apparent from the record and the deduction should be withdrawn by recourse to the provisions of the first proviso. For this purpose, a period of limitation, which is distinct and separate from the period of limitation prescribed in Section 154(7), has been provided. While, under Section 154(7) the period of limitation is four years from the date of the order sought to be rectified, under the first proviso to Section 40A(3), the period is four years from the end of the assessment year next following the accounting year in which the assessee makes actual payment in cash.

16. The above discussion would go to show that the provisions relating to period of limitation contained in the first proviso to Section 40A(3) is a special provision which governs the rectification of the "deemed mistake" arising from the payment, in cash, of amounts exceeding Rs. 2,500. Thus, in any case where it is sought to rectify such a deemed mistake, it is the provisions of the first proviso to Section 40A(3), which have to be applied, and not the provisons contained in Section 154(7), by application of the principle of generalia spedalibus non derogant.

17. In the present case, the ITO purported to carry out the rectification contemplated by the first proviso by his order dated 28-2-1977. If he had done so and had effected the rectification, there would have been an end of the matter, as 28-2-1977 is well within the period of limitation laid down in the first proviso. However, while expressing his intention of doing so, he failed to carry out the rectification. Thus, the order dated 28-2-1977 did not carry out an amendment of the order but only expressed an intention of amending it.

The period of limitation laid down in Section 154(7), as well as in the first proviso to Section 40A(3), is for amending the order containing the mistake, witness the words used in Section 154(7), "no amendment under this section shall be made after the expiry of four years ...." The first proviso to Section 40A(3) is to be read along with Section 154(7) in so far as the power of rectification is concerned. Unless the impugned order is actually amended within the periods limited therein, the rectifications will be barred by limitation.

18. Thus, as the limitation provided in the first proviso to Section 40A(3) is a special provision, the order of amendment or rectification, pursuant thereto, had to be passed within a period of four years from the end of the assessment year next following the accounting year in which the actual payments were made by the assessee ; in this case before 31-3-1977. As the actual amendment has been carried out only on 8-2-1978, the rectification is clearly barred by limitation.

19. The plea put forward on behalf of the department that the period of limitation for rectification should run from the date of the order under Section 154/147, namely, 28-2-1977, is, in my view, not acceptable, as such a rectification will not be in terms of the first proviso to Section 40A(3). The mistake which is sought to be corrected is a mistake which is deemed to exist in the order of assessment dated 21-8-1971. It is with reference to that order, that normal period of limitation under Section 154 has to be computed. However, as discussed by me earlier, we are not concerned with the general provisions of limitation contained in Section 154(7), as the present rectification is governed by a special provision contained in the first proviso to Section 40A(3) and that provision has to be strictly applied. In the light of this view, it is not necessary for me to consider the authorities cited by the learned counsel for the assessee, though, such authority would support his case, if the rectifications were to be made under Section 154(7).

20. In the light of the above discussion, I have to hold that the impugned order of the ITO, having been passed beyond the period of limitation, is invalid in law.

21. The case will now go back to the Bench, which heard the appeal, for disposal, in accordance with the above opinion.


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