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Ahmedabad Sarangpur Mills Company Ltd. Vs. A.S. Manohar, Income-tax Officer, Circle Iv, Ward-a (Companies), Ahmedabad - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberSpecial Civil Application No. 1798 of 1972
Judge
Reported in[1976]102ITR712(Guj)
ActsIncome Tax Act, 1922 - Sections 23, 35 and 35(5)
AppellantAhmedabad Sarangpur Mills Company Ltd.
RespondentA.S. Manohar, Income-tax Officer, Circle Iv, Ward-a (Companies), Ahmedabad
Appellant Advocate S.P. Mehta, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredOfficer and Mandal Ginning and Pressing Co. Ltd. v. Commissioner of Income
Excerpt:
.....for initiation of rectification proceedings on february 3, 1968. it should be recalled that this loss of assessment year 1954-55 was allowed to be set off in assessment year 1961-62 for which the order was passed on december 26, 1962. a further fact should also be recalled that the income-tax officer has by an order of may 21, 1965, rectified the original order of assessment pertaining to assessment year 1961-62, in pursuance of the decision in appeal on some rectification orders for different years. according to the learned counsel for the respondent, the words 'date of any order' should be so construed as to include assessment order passed under section 35 of the indian income-tax act, 1922. according to the learned counsel for the petitioner-company, there is no warrant in the..........assessment year 1961-62 with the result that an amount of rs. 47,887, which was a carried forward loss of assessment year 1954-55, remained outstanding. the assessment order for assessment year 1961-62 where carried forward loss of rs. 12,39,626 was allowed to be set off against the business income of the petitioner-company was made on december 26, 1962. it appears that on may 21, 1965, the income-tax officer passed an order under section 154 of the income-tax act, 1961, in view of the decision in appeal from rectification orders for different years computing afresh business losses, unabsorbed depreciation and development rebates that were to be carried forward. after adjusting the business loss of rs. 9,39,914 for assessment year 1953-54, against the business income of rs. 83,155 for.....
Judgment:

B.K. Mehta J.

1. This is petition under article 226 of the Constitution of India by the Ahmedabad Sarangpur Mills Company Ltd., a company incorporated under the Companies Act having its registered office at Ahmedabad, challenging the notices and the orders issued under section 154 of the Income-tax Act, 1961, by the respondent herein seeking to rectify the original orders of assessment in respect of assessment years 1961-62 to 1963-64, and also the notice of demand for the year 1963-64, which have been annexed collectively at exhibits E, G and H, respectively, to the petition. Shortly stated the facts leading to this petition are as under :

2. The petitioner-company is a public limited company carrying on its business of manufacture of cloth at Ahmedabad. The petitioner-company was assessed for the assessment years 1961-62 to 1963-64 by the predecessor-in-office of the respondent herein. The assessment order for assessment year 1961-62 was passed on December 26, 1962, for assessment year 1962-63, it was passed on March 25, 1966, and for assessment year 1963-64, it was passed on July 5, 1966. It appears that the respondent herein who was the Income-tax Officer at the relevant time having jurisdiction in the matter of assessment of the petitioner-company was of the opinion that a mistake had crept in computing loss for assessment year 1954-55 and effect of the loss would be arising for the first time in 1961-62 as there was positive income in that year. The respondent herein, therefore, wanted to rectify the assessment orders for assessment years 1961-62, 1962-63 and 1963-64; the reasons for rectification for all these assessment orders were identical. The respondent, therefore, issued notices under section 154 of the Income-tax Act, 1961, on February 3, 1968. The petitioner-company resisted the rectification proceedings sought to be initiated, contending, inter alia, that the proposed rectification would be beyond limitation as prescribed under the relevant sections. It should be noted that though the notices for initiation of rectification proceedings were issued under section 154 of the 1961 Act, for assessment year 1961-62 it was virtually a notice under section 35 of the 1922 Act. The objections of the petitioner-company did not find favour with the respondent, who, therefore, rejected all the objections including the one on the point of limitation. It should be noted that the petitioner-company had meanwhile moved this court on March 23, 1968, under article 226 of the Constitution of India by Special civil Application No. 424 of 1968, against the orders of the Income-tax Officer rectifying the assessment orders. On an objection being taken on behalf of the revenue in that special civil application that the petitioner-company had not exhausted the alternative remedy, The same was allowed to be withdrawn on October 7, 1968. The petitioner-company had taken the matter in appeal from the orders of the respondent herein rectifying the original assessment orders for assessment years 1961-62 to 1963-64 before the Appellate Assistant commissioner, who, however, rejected the appeals and confirmed the orders of the respondent herein. The petitioner-company, therefore, took the matters in further appeal before the Tribunal which appeals were also rejected on the ground that, as the rectification order made in the original assessment order for the assessment year 1961-62 was virtually one under section 35, no appeal was competent, and as the rectification orders in the original orders of assessment for the years 1962-63 and 1963-64 were consequential there would be no appeal against those orders also. On the point of limitation raised by the petitioner-company, the Tribunal, however, found that the order of rectification made in the original order of the assessment year 1961-62 was beyond the period of limitation prescribed under the relevant sections, and, therefore, beyond the competence, of the respondent herein. The Tribunal, therefore, rejected the appeal of the petitioner-company by its order of August 22, 1972. It appears that the petitioner-company sought reference from the Tribunal in these matters of rectification orders pertaining to assessment years 1961-62 to 1963-64. Simultaneously, the petitioner-company moved this court on October 20, 1972, under article 226 of the Constitution challenging these notices for initiation of rectification proceedings as well as the final rectification orders passed by the respondent herein. The Tribunal granted the reference and it has come before this court as Income-tax Reference No. 10 of 1972, which we have disposed of by separate order rejecting the said reference.

3. In order to understand the rival contentions in this special civil application, we may have to refer shortly to the dates of the original orders of assessment, the date of issuance of notices under section 154 and the nature of the mistake which was sought to be rectified.

4. For the assessment year 1954-55, the Income-tax Officer by his order of February 27, 1958, completed assessment of the petitioner-company and determined the business loss of the petitioner-company at Rs. 12,39,626 and the Income-tax Officer observed :

'Business loss determined for the assessment year is Rs. 12,39,626, and loss on account of depreciation is Rs. 1,69,284, which is carried forward.'

5. This loss of Rs. 12,39,626 was carried forward and ultimately allowed to be set off against the business income of Rs. 10,18,899 of the petitioner-company in the assessment year 1961-62 with the result that an amount of Rs. 47,887, which was a carried forward loss of assessment year 1954-55, remained outstanding. The assessment order for assessment year 1961-62 where carried forward loss of Rs. 12,39,626 was allowed to be set off against the business income of the petitioner-company was made on December 26, 1962. It appears that on May 21, 1965, the Income-tax Officer passed an order under section 154 of the Income-tax Act, 1961, in view of the decision in appeal from rectification orders for different years computing afresh business losses, unabsorbed depreciation and development rebates that were to be carried forward. After adjusting the business loss of Rs. 9,39,914 for assessment year 1953-54, against the business income of Rs. 83,155 for assessment year 1955-56 and against the business income of Rs. 7,87,948 for assessment year 1956-57 and against a part of the business income of Rs. 2,42,251 for assessment year 1957-58, the unabsorbed loss of Rs. 12,39,626 for assessment year 1954-55 was allowed to be carried forward, which was ultimately set off against the remaining business income of Rs. 1,73,440 of assessment year 1957-58, and against the business income of Rs. 10,10,487 for assessment year 1961-62, a carried forward loss of Rs. 55,699 was allowed. It should be recalled that this order of rectification was made on May 21, 1965, in view of certain decisions in appeal from the rectification orders for different years. As the respondent herein was of the opinion that some mistake has crept in in the computation of the loss for assessment year 1954-55, he again issued three notices on February 3, 1968, under section 154 of the Income-tax Act, 1961, for assessment years 1961-62 to 1963-64, calling upon the petitioner-company to show cause as to why rectification as mentioned in those notices should not be made by him. In other words, by the said notices the respondent proposed to rectify in the orders of assessment for assessment years 1961-62 to 1963-64, the mistake which was alleged to have occurred in assessment years 1954-55 in respect of computing the loss. The assessment order of assessment year 1954-55 was made on February 27, 1958. It is an admitted position that while computing loss for that year instead of making a deduction of the amount of Rs. 1,93,717 being the amount of valuation of the stock at the end of the year, it was added along with two other items of Rs. 1,244 and Rs. 4,529 being supervision charges and profit on sale of old machinery, respectively, to the actual loss of Rs. 9,46,030. In other words, the actual loss for assessment year 1954-55 to be set off was only Rs. 6,67,226. The Income-tax Officer allowed a set off of Rs. 10,10,487 as he had computed loss for the said assessment year 1954-55 at Rs. 12,55,920. This actual mistake has been clearly brought out in the notices issued by the respondent herein for initiation of rectification proceedings on February 3, 1968. It should be recalled that this loss of assessment year 1954-55 was allowed to be set off in assessment year 1961-62 for which the order was passed on December 26, 1962. A further fact should also be recalled that the Income-tax Officer has by an order of May 21, 1965, rectified the original order of assessment pertaining to assessment year 1961-62, in pursuance of the decision in appeal on some rectification orders for different years. The effect of this rectification (which we will call the first rectification for purposes of this petition) was that instead of a carry forward of Rs. 47,387 on account of loss of assessment year 1954-55, permitted by the Income-tax Officer in his original assessment order of December 26, 1962, the petitioner-company was permitted to carry forward a loss of Rs. 55,699 of the said assessment year 1954-55 by rectification order of May 21, 1965. It should be further noted that in this first rectification order, the Income-tax Officer repeated the same mistake and accepted business loss for assessment year 1954-55 at Rs. 12,39,626 instead of at Rs. 6,67,226. It appears that the respondent herein, therefore, issued the notices under section 154 on February 3, 1968, for initiating rectification proceedings. These notices are to be found at exhibit E (collectively). The reasons given in all the three notices are identical. The opening part of notice for assessment year 1961-62 stated that the order under section 154 of the Income-tax Act, 1961. After setting out the details of the correct amount of loss and the amounts to be carried forward, the respondent proposed in the last para. of the said notice to rectify the order dated May 21, 1965, referred to above to bring about the correct set-off as given above instead of the erroneous one in that order. As regards assessment years 1962-63 and 1963-64, notices are for consequential rectification. The petitioner-company has by its letter of February 15, 1968, objected to the initiation of proceedings on various grounds, including the one of limitation. There are three letters pertaining to the three notices for the assessment years 1961-62 to 1963-64. They are placed collectively at exhibit F.

6. The short question, therefore, which arises in the petition is whether the respondent has jurisdiction to initiate rectification proceedings by is notice of February 3, 1968, in the original assessment order pertaining to assessment year 1961-62, which has been made on December 26, 1962. The contention of the petitioner-company is that on the face of these notices, they were beyond the period of four years from the date of the original order of assessment for assessment year 1961-62 made on December 26, 1962. On behalf of the respondent it has been contended that since the Income-tax Officer has made the first rectification by his order of May 21, 1965, in the original assessment order pertaining to assessment year 1961-62, the respondent is within his competence to initiate proceedings for this second rectification challenged in this petition. The answer to the question raised in this petition turns on what is the import of the words, 'within four years from the date of any order passed' by the Income-tax Officer. According to the learned counsel for the respondent, the words 'date of any order' should be so construed as to include assessment order passed under section 35 of the Indian Income-tax Act, 1922. According to the learned counsel for the petitioner-company, there is no warrant in the structure of section 35 to enlarge the import of the words, 'from the date of any order', so as to consequentially enlarge the period of limitation of four years in cases like the present one. The learned counsel for the respondent in support of his contention that the court should not restrict the meaning of the words, 'from the date of any assessment order' to the assessment made only under section 23, relied on the decision of this court in Mandal Ginning and Pressing Co. Ltd. v. Commissioner of Income-tax, where a Division Bench of this court consisting of Bhagwati C. J. (as he then was) and P. D. Desai J. was concerned with the short question, whether appeal is competent under section 30 of the 1922 Act against an order of rectification made in pursuance of section 35 thereof. While negativing the contention urged on behalf of the assessee in the said case that since the rectification made under section 35 of the 1922 Act would result in the assessment of the assessee, there would be a right of appeal under section 30 of the 1922 Act, Bhagwati C. J. (as he then was), speaking for the court, observed :

'It would, therefore, appear that a proceeding for rectification of an assessment under section 23 is a proceeding for assessment; it is part of the procedure for ascertainment and imposition of tax liability on the assessee. When an assessment made under section 23 is rectified by an order of rectification, what was a wrong quantification of tax liability is rectified and a corrected quantification of tax liability is substituted for it. This may result in enhancement of the amount of the tax liability or reduction of the amount of the tax liability. Where the amount of the tax liability is enhanced by reason of the rectification made by the Income-tax Officer, can it be said that the enhanced tax liability, is the result of assessment under section 23 Is the enhanced tax liability whether by reason of enhanced computation of the amount of income or by reason of enhanced determination of tax alone, the result of exercise of power under section 23 or is it the result of exercise of power under section 35, sub-section (1) When an order of rectification is passed under section 35, sub-section (1), it undoubtedly rectifies the assessment under section 23, but the enhanced tax liability which results from it, owes its validity to the exercise of power under section 35, sub-section (1), and not to the exercise of power under section 23. The source of the power under which the enhanced tax liability arises is not section 23 but section 35, sub-section (1). It is, therefore, difficult to see how the enhanced tax liability, or, in other words, enhanced assessment resulting from the exercise of power under section 35, sub-section (1), can be said to be assessment under section 23. The corrected quantification of tax liability which is made by the order of rectification is nothing but a process of assessment and, therefore, the enhanced assessment which results from it is an assessment under section 35, sub-section (1). Once an assessment under section 23 is made, it is final and conclusive, unless the conditions exist which entitle the Income-tax Officer to disturb the finiality of the assessment under section 34 or section 35. When the Income-tax Officer disturbs the finality of the assessment by rectifying it in exercise of the power conferred under section 35, sub-section (1), he acts de hors section 23 with a view to overriding an erroneous part of the assessment under section 23. It is impossible to conceive how this act of the Income-tax Officer can be regarded as assessment under section 23. We may point out that there is nothing in Act which gives a mandate or creates a fiction that, when the Income-tax Officer rectifies an assessment in exercise of the power conferred under section 35, sub-section (1), he must follow the procedure laid down in sections 22 and 23 as we find in section 34 nor is there any fiction created by the statute that when an assessment is rectified in exercise of the power conferred under section 35, sub-section (1), the rectified assessment shall be deemed to be an assessment under section 23 or shall be treated as an assessment under section 23.'

7. Relying on the above observations of the Division Bench of this court in Mandal Ginning & Pressing Company's case, it was urged by the learned counsel for the respondent that there would be two assessments contemplated under the Income-tax Act, one is the original assessment under section 23, and the second, when the assessment is sought to be rectified by initiating proceedings under section 35. In the submission of the learned counsel for the respondent, the court should not try to restrict the meaning of the words, 'from the date of any order of assessment' to the assessment made under section 23 only, since Parliament has not thought fit to restrict it, as it has done in the case of the order of the Commissioner in revision under section 33A, in section 35(1).

8. We have not been able to appreciate this contention of the learned counsel for the revenue that merely because no appeal is maintainable from an order under section 35, it can be urged successfully that while construing section 35(1) for purposes of limitation, we must enlarge the meaning of words, 'from the date of any order' so as to include the order of assessment made under section 35(1). Apart from this inability of ours to appreciate this contention of the respondent, and assuming that on the basis of the observations made by the Division Bench of this court in Mandal Ginning & Pressing company's case it can be urged that there are two separate assessments - one under section 23 and another under section 35 - how can it necessarily follow from that argument that the period of limitation of four years will begin to run from the date of the order of rectification If that interpretation urged on behalf of the respondent is accepted, it would not only enlarge the meaning of the words, 'from the date of any assessment order,' but it would also result in enlarging the period of limitation. The learned counsel for the respondent, therefore, attempted to persuade us that the order of rectification will be projected in the original order of assessment and that original order of assessment as rectified would be a final order from which the limitation would begin to run. In support of this contention, the learned counsel for the respondent relied on the decision of this court in Karsondas Bhagwandas Patel v. G. V. Shah, Income-tax Officer, Rajkot, where the Division Bench was concerned with the question of jurisdiction of the Income-tax Officer to rectify proceedings under section 35(5) of the Indian of the Income-tax Act, 1922. In sup-section (5) of section 35 it has been provided that in respect of any completed assessment of a partner in a firm if it is found on the assessment or reassessment of the firm or on any reduction or enhancement made in the income of the firm under section 31, section 33, section 33A, section 33B, section 66 or section 66A, that the share of the partner in the profit or loss of the firm has not been included in the assessment of the partner or, if included, is not correct, the inclusion of the share in the assessment or the correction thereof, as the case may be, would be deemed to be a rectification of a mistake apparent from the record within the meaning of section 35 and the provisions of sub-section (1) would apply thereto accordingly, the period of four years referred to in that sub-section being computed from the date of the final order passed in the case of the firm. The Division Bench of this court in Karsondas Bhagwandas Patel's case while dealing with the point of limitation urged on behalf of the assessee-petitioner in that case observed :

'Now, in the present case, if the period of four years is counted from the date of the order of rectification of the firm's assessment, namely, 25th February, 1963, the impugned orders of rectification made under section 35, sub-section (5), would be within time but they would be beyond time if the period of four years is counted from the date of the order of the Appellate Assistant Commissioner, namely, 18th August, 1961. The question, therefore, is : which is the final order passed in the case of the firm within the meaning of section 35, sub-section (5) Is it the order of the Appellate Assistant Commissioner dated 18th August, 1961, or is it the order of rectification dated 25th February, 1963 The answer can only be : the order of rectification dated 25th February, 1963. The final order passed in the case of the firm means the order which effects the final assessment of the firm. It is now well established that a proceeding for rectification of an assessment is a proceeding for assessment : it is part of the procedure for ascertainment and imposition of tax liability on the assessee. When an assessment is rectified by an order of rectification, what was wrong quantification of tax liability is rectified and a correct quantification of tax liability is substituted for it. vide S. Sankappa v. Income-tax Officer and Mandal Ginning and Pressing Co. Ltd. v. Commissioner of Income-tax. The order of rectification thus corrects the assessment and the corrected assessment is the final assessment, unless it is followed by subsequent order disturbing the corrected assessment. Where, therefore, the order of rectification under section 35, sub-section (1), is not followed by a subsequent order disturbing the corrected assessment, it would be the final order passed in the case of the assessee and where the assessee is a firm it would be the final order passed in the case of the firm within the meaning of section 35, sub-section (5).'

9. These observations made apropos the question arising before the Division Bench in the case of assessment of a firm under sub-section (5) of section 35 cannot be of any assistance to the revenue in this case, for the simple reason that Parliament has prescribed the period of four years to run from the date of the final order passed in the case of the firm. This appears to have been advisedly done because the rectification which would be required in the case of a partner's assessment may be the result of assessment/reassessment of the firm or on any reduction or enhancement made in the income of the firm under the sections prescribed in sub-section (5) of section 35. In those different contingencies whether it may be assessment or it may be reassessment of the firm or any reduction or enhancement made in the income of the firm, it would be the date of the final order which is to be considered as a commencing point of limitation. How that commencing point of limitation which is available under sub-section (5) of section 35 can also be relied upon for purposes of computation of limitation under section 35(1) has not been appreciated by us. The learned counsel for the respondent attempted to persuade us that it is the date of the final order which should be considered the commencing point of limitation, whether the case is under sub-section (5) or sub-section (1) of section 35. We are not inclined to accept this submission of the learned counsel for the respondent for the simple reason, as stated above, that the commencing point of limitation prescribed in the case of assessment, reassessment, etc., of the income of the firm cannot be the same when the Income-tax officer is trying to exercise his rectification power under section 35(1) in cases other than those of firms. The apparent difference in the expression as to the commencing point of limitation under section 35(1) and section 35(5) also supports the view which we are taking in this matter.

10. The learned counsel for the respondent, therefore, finally urged that, in view of the decision in Mandal Ginning & Pressing Co. Ltd.'s case, the limitation should commence to run from the date of the order of rectification because the rectification proceedings are in the nature of assessment proceedings and the order made therein is an assessment order. We are afraid we cannot accept this submission of the learned counsel for the revenue as, in our opinion, as stated above, the mere fact of rectification in any assessment order cannot enlarge the period of limitation as has been sought to be urged by the learned counsel for the respondent-revenue. Assuming that there are two assessments which are contemplated, one under section 23 and another under section 35, even then, the period of limitation for rectifying the respective order should be four years from the date of the relevant order. Merely because an assessment order is rectified, it cannot enlarge the period of limitation. This conclusion which we have reached on the plain reading of section 35 is borne out when we compare the language of sub-section (5) of section 35 where the legislature has expressed itself appropriately when it wanted to give an enlarged period of limitation by saying that the limitation of four years referred to in sub-section (1) would be computed from the date of the final order. The legislature would have certainly expressed itself in similar terms, if the intention had been to give an enlarged period of limitation in other cases. In that view of the matter, therefore, it cannot be gainsaid that the commencing period of limitation in this case should be considered to be from 26th December, 1962, when the order of assessment was made in respect of the assessment year 1961-62. If that is the commencing date of limitation, the notices issued on February 3, 1968, for initiation of rectification proceedings were clearly time-barred. Even assuming as contended by the learned counsel for the revenue that the limitation should commence to run for the first rectification order of May 21, 1965, even then, what was sought to be rectified was the mistake which was committed by the Income-tax Officer in allowing the set-off of the loss of assessment year 1954-55 against the business income of the petitioner-company for the relevant assessment year 1961-62. In the aforesaid first rectification order of May 21, 1965, the Income-tax Officer had taken the same amount, namely, Rs. 12,39,626, as loss for assessment year 1954-55. It, therefore, cannot be said that what was sought to be done by the respondent herein was in effect and substance the rectification of the order of May 21, 1965. Assuming that it is virtually an order of assessment as held by the Division Bench of this court in Mandal Ginning & Pressing Company's case, it, therefore, cannot be said that the Income-tax Officer was within limitation prescribed for rectifying action under section 154 since what he was trying to rectify was the error of setting off of the loss of Rs. 12,39,626 of assessment year 1954-55, which he has allowed against the business income of Rs. 10,18,899 of assessment year 1961-62 by his assessment order of December 26, 1962. In that view of the matter, therefore, the effort of the Income-tax Officer was to rectify the error which had crept in the original assessment order pertaining to the assessment year 1961-62, which has been made on December 26, 1962. On that count also, therefore, the notice which has been issued on February 3, 1968, for initiation of rectification proceedings for assessment year 1961-62, was clearly time-barred and beyond the jurisdiction of the Income-tax Officer. The two subsequent notices for initiation of rectification proceedings for assessment years 1962-63 and 1963-64 were consequential and, therefore, if the first notice pertaining to assessment year 1961-62 was beyond the jurisdiction and competence of the respondent herein, the remaining two consequential notices were also beyond the jurisdiction and authority of the Income-tax Officer.

11. The result is that the notices are in excess of jurisdiction, bad in law, void and ineffective. The rectification orders which have been made in pursuance of these three notices would also, therefore, fail and, therefore, the aforesaid notices along with the said orders are liable to be quashed and set aside. The result is that this petition is allowed and the rule is made absolute with costs.

12. Petition allowed.


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