Rectification could not be applied for order passed under section 104, which had become the subject matter of appeal before Appellate Assistant Commissioner.
The Income Tax Officer has no right to rectify matters which have become the subject-matter of appeal even after the insertion of section 154(1A). Rectification is not, therefore, possible in respect of an order under section 104 which had become the subject-matter of appeal before the Appellate Assistant Commissioner.
Section 104 is not applicable to current assessment years but above mentioned provision is still applicable to current years.
1. These two appeals have been filed by V. Ramakrishna Sons Ltd. against two orders of the Commissioner (Appeals) for the assessment year 1974-75. Both these orders have upheld modifications to the original order under Section 104 of the Income-tax Act, 1961 ('the Act'), and, hence, they are dealt with together.
2. The assessee is a company in which public are not substantially interested. It derives income from dividends, lease income, estates, etc. The distributable income for the purpose of Section 104 was worked out as below:Gross total income 15,33,909Less: Taxes 4,99,634Donations 45,000 5,44,634 The company is one which should have distributed 90 per cent of its distributable income, i.e., Rs. 8,90,343, but had actually distributed Rs. 2,50,000 only. The ITO issued notice and the matter was referred to the IAC who heard the assessee and approved the proposals of the ITO as required under Section 107 of the Act. He passed the order under Section 104 on 25-3-1977. There were two parallel developments thereafter. In working out the tax, the ITO had made a mistake in basing the calculation of tax on the shortfall in distribution, i.e., Rs. 6,40,343, with reference to the amount that should have been distributed to avoid Section 104 (i.e., 90 per cent) and not to the entire distributable income as required under Section 104. Meanwhile the assessee had appealed against the order under Section 104 and had already lost the appeal when the AAC has confirmed the assessee's liability under Section 104 vide his order dated 31-12-1977. The ITO discovered his mistake in not reckoning the shortfall with reference to distributable income and proposed to rectify the mistake under Section 154 of the Act. The assessee vide its reply dated 26-10-1978 claimed that no rectification is possible as the original order had already merged with the order of the AAC. It was, therefore, claimed that the ITO had no power to rectify his order any more. It was also claimed that in the original order the ITO has levied tax as approved by the IAC and that the ITO cannot go beyond such approval. Other objections were raised which, however, are not relevant for the purposes of these appeals. The Commissioner by his order dated 11-3-1980 confirmed the rectification on the ground that Section 154(1A) enables the ITO to rectify that part of the order which was not the subject-matter of appeal. According to him, this provision nullified the decision of the Kerala High Court in the case of Mather & Co. (P.) Ltd. v. ITO  71 ITR 247. The assessee is in appeal against this order in IT Appeal No. 1110 (Mad.) of 1980. There was also rectification to the original quantum assessment on 10-3-1978 as a result of which the distributable income had to be reworked as under:Gross total income as per order dated 15,33,919Less: Tax: Rs. 3,98,270+ Donation: 45,0004,43,270Distributable profit 10,90,649 The ITO proceeded to issue notice purportedly under Section 155(7) of the Act to rework the tax payable on the basis of a different distributable income. The assessee replied that the revisional income-tax order was by a wrong addition and that there is no jurisdiction to levy a demand higher than the one that was approved by the IAC. The ITO held that no fresh approval is necessary as the IAC had already approved action under Section 104. It is in this view that he passed the second order on 10-3-1979. This was confirmed by the Commissioner (Appeals) who held that order under Section 155(7) did not require the approval of the IAC. The appeal against this order is IT Appeal No. 2328 (Mad.) of 1979.
3. The learned Counsel for the assessee opposes both these orders, both on grounds of 'merger' and non-approval by the IAC. Either of his grounds, he submitted, would make the order illegal and, therefore, invalid. He pointed out that levy of tax under Section 104 is a penal levy as held by the Supreme Court in the case of CIT v. Gangadhar Banerjee & Co. (P.) Ltd.  57 ITR 176. He further pointed out that the Kerala High Court, in Mather & Co. (P.) Ltd.'s case (supra), in identical circumstances in respect of the first order under Section 154 had held that 'merger' came against the jurisdiction of the ITO under Section 154. He claimed that Section 154(1A) did not really nullify this position taken by the Kerala High Court. This amendment merely codified the pre-existing law. The Gujarat High Court in the case of Karsandas Bhagwandas Patel v. G.V. Shah, ITO  98 ITR 255 has pointed out that in the case of a single penal tax as under Section 23A of the Indian Income-tax Act, 1922 ('the 1922 Act') (analogous to Section 104 of the 1961 Act), the merger is total and approved the view of the Kerala High Court. He, therefore, contended that he is entitled to succeed in respect of both these appeals on the point of merger. He also claimed that he is entitled to succeed even on the issue of non-approval by the IAC. He claimed that such approval was mandatory and could not be dispensed with. The learned departmental representative claimed that the assessee was in error on both claims, which, according to him, were too technical and bereft of any merit. As for merger theory, he claimed that Section 154(1A) protected the action of the ITO. The view of the Kerala High Court, in his opinion, is no longer good law. He pointed out that the decision of the Gujarat High Court, approving this decision is in the nature of obiter. He also claimed that the matter is set beyond controversy by the decision of the Supreme Court in CIT v. J.K. Commercial Corpn. Ltd.  105 ITR 219 wherein it was pointed out that a rectification of an order under Section 23A of the 1922 Act is certainly possible under Section 35 of the 1922 Act [analogous to the provisions to Section 154 in the 1961 Act but without provisions similar to Section 154(1A) as Section 155(7)]. If such rectification were possible under the 1922 Act without the assistance of Section 154(1A) for the first order and Section 155(7) for the latter order under the 1961 Act, it was certainly possible to rectify mistakes under the new law which was more specific as well as comprehensive. As for approval under Section 307, he claimed approval is only for invoking Section 104 to the facts of the assessee's case and not for calculation of tax base or tax itself which had to be statutorily done.
4. We have carefully considered the records as well as the arguments.
We will first deal with the first order of rectification passed on 3-11-1978, which was passed subsequent to the order of the AAC upholding the levy on 31-7-1977. Identical mistake was held to be not capable of rectification by the Kerala High Court in Mather & Co. (P.) Ltd.'s case (supra) on the ground that the order of the ITO had merged with the order of the AAC. The decision of the Supreme Court in the case of J.K. Commercial Corpn. Ltd. (supra) cannot help the revenue because the Supreme Court in this case was not concerned with rectification of order which had become subject-matter of appeal.
Section 154(1A) does, not deal with orders like those falling under Section 104 or as pointed out by the Gujarat High Court orders, partition, etc., where the order is not a severable one. This is clear from the following observations of the Gujarat High Court in the case of Karsandas Bhagwandas Patel (supra).
The question is whether this doctrine applies in income-tax proceedings and, if so, to what extent. The first part of the question is not susceptible of a straight answer, 'yes' or 'no'.
Having regard to principle as well as authority it is not possible to say that the doctrine of merger does not apply at all in income-tax proceedings. Take for example a case like Mather & Co.
(P.) Ltd. v. ITO  71 ITR 247 (Ker.), where an order was made by the Income-tax Officer under Section 23A and it was appealed against by the company and the Appellate Assistant Commissioner affirmed it. The order under Section 23A made by the Income-tax Officer would in such a case be replaced wholly by the order of the Appellate Assistant Commissioner; there would be complete merger or fusion of the order of the Income-tax Officer with the order of the Appellate Assistant Commissioner....
The above observation cannot be dismissed as mere obiter. Section 154(1A) reads as under: Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in Sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided.
We are not in a position to say that the above section is intended to counteract the general theory of merger. Section 154(1A) which was introduced by the Direct Taxes (Amendment) Act, 1964, with effect from 6-10-1964, has only clarified that the merger is not always total. Even otherwise this has been the view of the Courts. The ITO has no right to rectify matters which have not (sic) become the subject-matter of appeal even after Section 154(1A). The decision in the case of Mather & Co. (P.) Ltd. (supra) is not against the principles embodied under Section 154(1A) even as clarified by the Gujarat High Court in the observation reproduced earlier. We, therefore, find that there is neither statute nor case law against the assessee's claim that rectification is not possible in respect of an order under Section 104 which had become the subject-matter of appeal before the AAC who alone had the right and probably the duty for setting right the mistake in calculation of tax either on his own or at the instance of the ITO. The ITO has chosen a remedy which is not available to the ITO. The order passed on 3-11-1978 cannot, therefore, stand.
5. We have yet to consider the other objection from the learned Counsel that this order of rectification required prior approval of the IAC. It has no doubt been held by the Supreme Court in the case of Gangadhar Banerjee & Co. (P.) Ltd. (supra) that Section 23A of the 1922 Act (a provision analogous to Section 104 of the 1961 Act) is in the nature of penal provision and that the revenue has strictly to comply with the conditions laid down therein. This has been reiterated in the decision of the Calcutta High Court in the case of Bhagwati Trading Co. Ltd. v.CIT  109 ITR 353 where a stricter interpretation of 'relative' was ordained because of this principle. Even so, the Supreme Court in J.K. Commercial Corpn. Ltd.'s case (supra) justified a rectification of an order under Section 23A of the 1922 Act as an assessment order and, therefore, capable of rectification [even without the assistance of a provision similar to Section 154(A) of the 1961 Act] on the ground that an order under Section 23A may be treated as supplementary assessment order if not an assessment order itself in the following words: In Sankappa's case  68 ITR 760 (SC), as we have said above, the same Bench which decided Parikh's case  63 ITR 663 (SC), after stating on the basis of certain earlier authorities that the word 'assessment' under certain circumstances in a given context has a more comprehensive meaning, finally said at page 764 of 68 ITR thus: 'It is clear that, when proceedings are taken for rectification of assessment to tax either under Section 35(1) or Section 35(5) of the Act of 1922, those proceedings must be held to be proceedings for assessment. In proceeding under those provisions, what the Income-tax Officer does is to correct errors in, or rectify orders of, assessment made by him, and orders making such corrections or rectifications are, therefore, clearly part of the proceedings for assessment.
The High Court in the judgment under appeal has extracted the above passage from Sankappa's case, but allowed itself to be misled by it.
Correctly appreciated, the passage means that what the Income-tax Officer does in a proceeding under Section 35(1) is to correct errors in assessment or rectify orders of assessment made by him.
Either of such orders is a part of the proceeding of assessment. In our considered opinion correcting an apparent error in an order made under Section 23A of the Act is rectifying a mistake in the record of assessment and clearly falls within the ambit of the power conferred upon the Income-tax Officer under Section 35(1) of the Act.
While we agree with the assessee that the construction of the provisions of this Chapter XI of the Act would require strict interpretation on the ground that it seeks to levy a penal tax, we cannot accept the assessee's plea that prior approval is necessary every time a mistake is committed. Section 107 reads as under: Except in cases where a decision is given by the Board under Sub-section (4) of Section 107A, no order shall be made by the Income-tax Officer under Section 104 unless the previous approval of the Inspecting Assistant Commissioner has been obtained, and the Inspecting Assistant Commissioner shall not give his approval to any order proposed to be made by the Income-tax Officer until he has given the company concerned an opportunity of being heard.
What is approved is the proposal of the ITO to pass an order as is evident from the fact that what is contemplated is 'approval to any order proposed to be made'. Previous approval is to his proposal and to a draft order. When the statute requires the entire draft order to be approved, it clearly states so as under Section 144B of the Act when sending a draft order is specifically stipulated. In this context, it is useful to consider the legislative history of this section, if it is considered that there may be some doubt about its interpretation. Under the old scheme prior to 1955, the ITO on his finding that a company in which public were not substantially interested had not distributed dividends or had distributed inadequate dividends, had to pass an order under Section 23A of the 1922 Act (analogous to Section 104 of the 1961 Act) determining the amount deemed to be distributed and apportioning the same to the shareholders pro rata. This order did not create any liability by itself and that is why the section itself was considered to be a procedural section by the Supreme Court in CIT v. Navinchandra Mafatlal  42 ITR 53. The charge was created in the assessments of the shareholders by an assessment on such notional income deemed to be distributed. In such a case, the approval under the then Section 23A in the case of the company was essentially concerned with the applicability of Section 23A and could not have concerned itself with the charge of tax itself. Section 23A under the old scheme of making the shareholders liable to tax required the order to be passed in writing with 'the previous approval' of the IAC who was statutorily required to give a hearing to the assessee. Hence, it is clear that the Act envisages approval for the ITO's order only in the sense that he had to approve the applicability of Section 23A as the determination of tax was not then a part of such order under Section 23A before 1955. It is, therefore, clear that the approval expected even after 1955 cannot be said to have enlarged to the extent of foisting the responsibility on the IAC for the determination of the tax itself. If he was not responsible at that time for approving the tax, it stands to reason that he is not expected to grant a fresh approval when a mistake in tax calculation is sought to be corrected. Hence, in any view of the matter, we do not think that the prior approval was necessary for an order under Section 154 though we might have wished that the ITO had avoided the controversy by referring the matter for approval especially when this objection was raised by the assessee before him. Even if we had considered that such approval by the IAC was necessary, we would not have cancelled the order of the ITO but only set aside with a direction to have it sent for approval or otherwise by the IAC as alternatively requested by the learned departmental representative. We would have been justified in doing so in view of the Supreme Court decision in CIT v. National Taj Traders  121 ITR 535 and we are of the view that following the rationale in that case, the time limit for rectification would have been relevant for the initial order and not the order passed in pursuance of the Tribunal's order. Since, however, the assessee has succeeded on its first objection based 'on merger', our rejection on this ground will not help the revenue in respect of the first order dated 3-11-1978.
6. We will now deal with the second order dated 12-3-1979. Here the distributable income underwent a change as a result of modification of the original quantum assessment. Section 155(7) specifically authorises subsequent modification in an order under Section 104 if there is a modification in assessment. The fact that there has been a merger in respect of original order cannot help the assessee under such circumstances covered by Section 155(7) in view of the clear statutory provisions enabling the ITO to modify the assessment under Section 104.
Hence, the only further question we are concerned is whether a fresh approval of the IAC is necessary for such an order under Section 155(7). For the same reasons stated in paragraph 5 supra we would have to hold that such prior approval is not necessary. It is not as though there was any dispute about the computation or the assessee had or could have had any objections to the computation in the order under Section 155(7). The learned Counsel has not pointed out any mistake in that order either on principle or figures. Section 104 was already held applicable. A larger distributable income came to be computed only because of revised computation of income and tax in the quantum assessment. The assessee's only objection is that the ITO should have got even such an order under Section 155(7) approved by the IAC because the statute requires it. Prejudice is claimed not on the ground that he might avoid the order under Section 155(7) altogether or would have got the tax reduced. In fact, even before us, the assessee has absolutely no objection on merits as such. It, therefore, appears to us that the assessee's objection is purely technical. Approval under Section 107 is for order proposed under Section 104 in Chapter XL Sections 154 and 155 are in Chapter XIV of the Act with the heading 'Procedure for assessment'. Section 154 deals with 'Rectification of mistake' and Section 155 with 'Other amendments'. Merely because the parent order required approval by a higher authority, we are not in a position to say the rectification of a mistake under Section 154 or other statutory amendment to the order under Section 155 would similarly require an approval. We might have understood the assessee's argument if some purpose or cause would be served thereby. If such proposed rectification or amendment could have had an impact on the original decision to invoke Section 304, we would have understood the assessee's argument. In the assessee's case approval was granted even when the distributable income was actually smaller than it turned out finally.
There were no new facts. We have, therefore, to uphold the second order as valid in law. Prior approval by the IAC is not required for same reasons as mentioned in respect of rectification in para 5 supra. As observed therein, even if we had agreed with the assessee that such prior approval was necessary, we would have accepted the alternative argument of the learned departmental representative and set aside the order with a direction to pursue the action which was validly initiated under Section 155(7) within time since it is not a case where the action was ab initio bad. Hence, the second order has to be upheld. We are aware that on upholding the second order practically nullifies the assessee's success in respect of the first order, since in the revised calculation in his order on a different distributable income, the ' ITO has not repeated his mistake. But this is a result which we cannot help. If a mistake gets lawfully rectified, neither the taxpayer nor the revenue can make a grievance of it as no one has a vested right to the fruits of the mistake committed by another.
7. In the result, the appeal in respect of the 'rectification' order dated 3-11-1978 is allowed and the impugned order is cancelled. The appeal in respect of the order dated 10-3-1979 is dismissed and the order of the Commissioner (Appeals) confirming the validity of the order is upheld.