1. The following question is referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in setting aside the order of the Income-tax Officer passed under s. 154 of the Income-tax Act, 1961, holding that the said section did not apply ?'
2. A few facts may be noticed in order to understand the rival contentions in connection with the question referred to us.
3. The assessee in the public limited company running a textile mill at Kalol. It field its return of income for the assessment year 1967-68, disclosing a total income of Rs. 6,89,500 on September 30, 1967. It appears that for the previous year relevant to the assessment year 1965-66, the assessee had declared dividend of Rs. 1,20,000, when its total income for the assessment year 1965-66 was determined at nil and, therefore, no tax was chargeable for that assessment year. Similarly, the total income for the assessment year 1966-67 was also determined at nil after setting off the development rebate carried forward from the earlier years and, therefore, no tax was chargeable for the said assessment year. It should be noted that the assessee-company declared dividend of Rs. 1,32,000 in the said assessment year 1966-67. For the assessment year 1967-68, which is under reference, the total income assessed was at Rs. 8,01,460 and the dividend declared was Rs. 1,80,000. The case of the Revenue is that since there was return of nil income for the assessment years 1965-66 and 1966-67, no dividend tax could be levied in these years and, therefore, the unabsorbed dividend tax was required to be carried forward to the subsequent year. The Income-tax Officer while making the assessment for the assessment year in question, namely, 1967-68, subjected the amount of dividend declared to dividend tax. He also brought to dividend tax the amount of dividend of Rs. 1,32,000 declared for the assessment year 1966-67. However, inadvertently or otherwise, the Income-tax Officer omitted to bring to tax the dividend declared for the assessment year 1965-66, to the tune of Rs. 1,20,000. This error, it was so claimed by the Revenue, being an error apparent on the face of the record, was sought to be rectified by the ITO by charging dividend tax at the rate of 7.5% on the said amount of Rs. 1,20,000 by his order of assessment of December 13, 1968, purporting to have been made under s. 154 of the I.T. Act, 1961. The assessee being aggrieved by this order of the ITO, said to have been made under s. 154 of the I.T. Act, 1961, rectifying the assessment of the year 1967-68, went in appeal before the AAC, who, by his order of March 7, 1970, rejected the appeal and confirmed the order of the ITO rectifying the assessment. The assessee-company, therefore, carried the matter in further appeal to the Tribunal, which by its short order of January 8, 1973, held that the chargeability of dividend tax was not free from doubt and it required debate or argument in order to decide finally as to whether the said tax was chargeable on the said amount of Rs. 1,20,000 declared for the assessment year 1965-66. The Tribunal, therefore, was of the opinion that the invocation of the power under s. 154 was completely misconceived and, in that view of the matter, allowed the appeal and set aside the order of rectification in question. It is at the instance of the Revenue that this reference has been made and the question which had been set out above has been referred to us.
4. The jurisdiction of the ITO to rectify the assessment orders under s. 154 of the I.T. Act, 1961, has been clearly delineated by the Supreme Court in Balram, ITO v. Volkart Brothers : 82ITR50(SC) . The question before the Supreme Court was, whether the respondent-firm came within the mischief of s. 17(1) of the Indian I.T. Act, 1922, having regard to the definition of the term 'person' in the said Act. The ITO concerned recitified the earlier assessment and held respondent-firm was within the mischief of s. 17(1) as he was of the opilnion that term 'person' as defined in the 1961 Act was merely declaration of the law as it was clearly understood under the Indian I.T. Act, 1922. The respondent-firm moved the High Court of Bombay under art. 226 of the Constitution challenging the rectification proceedings. The High Court quashed and set aside the rectification order. The Revenue carried the matter in appeal before the Supreme Court and Justice Hegde, as he then was, speaking for the court, observed as under : (p. 53) :
'From what has been said above, it is clear that the question whether section 17(1) of the Indian Income-tax Act, was applicable to the case of the first respondent is not free from doubt. Therefore, the Income-tax Officer was not justified in thinking that on that question there can be no two opinions. It was not open to the Income-tax Officer to go into the true scope of the relevant provisions of the Act in a proceeding under section 154 of the Income-tax Act, 1961. A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions...'
5. In the context of the above settled legal position, we have to examine whether there was an error apparent on the record in the matter of assessment of the assessee-company for the assessment year 1967-68. On behalf of the Revenue, learned advocate was at pains to carry us through the relevant provisions of the Finance Acts of 1965, 1966 and 1967, to impress upon us that this is not a question where conceivably there can be two opinions which would involve a debate or long protracted reasoning. In the submission of the learned advocate of the Revenue, this is a case where the ITO did not apply the clear-cut provision of statute and that should be considered an error apparent on the face of the record. If that is so, the Tribunal was not all justified in eking out, in the face instance, a debate on the question of interpretation of a doubtful provision, and then to deny the Revenue the right to rectify the proceedings. We must admit, as has been done by Mr. Justice Hegde in CIT v. Naga Hills Tea Co. Ltd. : 89ITR236(SC) , that the provisions of the relevant statutes pointed out to us are difficult to follow, if not, to say the least, confusing. We must also admit that it required more than one reading on our part to understand what it means. In spite of our limitations, we made an attempt to understand what these provisions actually comprehend. We are concerned in this case with the provisions of the Finance Act, 1967, where dividend is subjected to tax. Paragraph F (Part I, Schedule I) in so far as is relevant for our purposes, reads as under :
'In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), -
RATES OF INCOME TAXI. In the case of a domestic company - ...(A)(2) where the company is not a companyin which the public are substantiallyinterested, -(i) in the case of an industrial company -(1) on so much of the total income asdecided ones not exceed Rs. 10,00,000 55 per cent;(2) on the balance, if any, of the totalincome 60 per cent;(ii) in any other case 65 per cent. of thetotal income; and(B) in addition, where the company is - .....(ii) a company as is referred to in clause(iii) of subsection (2) or clause (a) orclause (b) of sub-section (4) of section104 of the Income-tax Act, or...on so much of the total income as does notexceed the relevant amount the distributionsof dividends by the company 7.5 per cent. Provided that...
Explanation 1. - In clause (B), the expression 'the relevant amount of distributions of dividends' means the aggregate of the following amounts namely : -
(a) the amount, if any, by which the 'relevant amount of distributions of dividends' by the company as computed in accordance with Explanation 1 to item I of Paragraph F of Part I of the First Schedule to the Finance Act, 1966 (13 of 1966), exceeds its total income (reduced by the amount of capital gains, if any, relating to capital assets other than short-term capital assets included therein) assessable for the assessment year commencing on April 1, 1966; and
(b) so much of the amount of the dividends, other than dividends on preference shares declared or distributed by the company during the previous year as exceeds ten per cent. of its paid up equity share capital as the 1st day of the previous year...'
6. The grievance made on behalf of the Revenue is that the ITO concerned in the original assessment order for the assessment of 1967-68, merely considered clause (b) for computation of dividend tax and did not consider at all the provisions contained in clause (a) of Explanation 1 and to that extent, therefore, there is a clear error. In the submission of the learned advocate for the Revenue, for the purposes of working out clause (a), the ITO must bring in the excess dividend which has not been subjected to tax in the prior assessment years, namely, assessment years 1966-67 and 1965-66. In the present case, it was pointed out to us that the ITO did bring to dividend tax the excess dividend of the assessment year 1966-67, but failed to bring to tax the dividend declared for the assessment year 1965-66, and this was clearly an error apparent on the record which the ITO was legally competent to rectify under s. 154 of the Act.
7. The assessee, inter alia, contended before the Revenue authorities that for purposes of finding out the relevant amount of distributions of dividends, the ITO has to ascertain the amount, if any, by which the relevant amount of distributed dividends by the company as computed in accordance with the relevant provisions of the prior Finance Acts (in the present case Finance Acts 1965 and 1966) exceeded the total income assessable for the assessment year commencing on April 1, 1966. It may be, according to the assessee, that the total income may be nil, but it may be for various reasons and it may depend on various factors. It was, inter alia, contended by the assessee that when the total income was nil, there was no question of excess dividends over the total income. On behalf of the Revenue, the contention before the lower authorities was that when the total income was determined at nil for the assessment year 1965-66, and the dividends were declared for that year, the dividends exceeded the total income and, therefore, the excess has not to be brought to tax. In the context of these rival contentions, the Tribunal, following the well settled position as enunciated by the Supreme Court in T. S. Balaram's case : 82ITR50(SC) , observed as under :
'...It is not necessary for us to say which of the views is the correct one. It is definite that the point is not free from difficulty. It requires debate or argument in order to decide finally as to which of the contentions is to be upheld. To such a matter, application of section 154 will be totally misconceived. On this point alone we think the assessee's appeal should succeed.'
8. We do not think that there are any justifying circumstances for us to interfere with this conclusion of the Tribunal. The reasons are obvious. Under clause (a) to Explanation 1 in Paragraph F, what the ITO was to ascertain is the amount, if any, by which the relevant amount of distribution of dividends by the company as computed in accordance with the relevant provisions of the Finance Act, 1966, exceeding its total income (less by the amount of capital gains) assessed for the assessment year commencing on April 1, 1966. The ITO might have, therefore, reasonably considered that the excess dividend declared for the assessment year 1965-66, namely, Rs. 1,20,000 and which was not subjected to tax was not to be brought to tax while computing dividend tax, for the assessment year 1967-68. We do not think that this can be said to be an interpretation which is not capable of being advanced on the provision contained in clause (a) to Explanation 1 of Paragraph F. It should be recalled that the ITO has, while computing the dividend tax for the assessment year 1967-68, considered the excess dividend which was not subjected to tax for the assessment year 1966-67. It is only in respect of the excess dividend declared for the year 1965-66 that he did not bring it to dividend tax. On a plain reading of clause (a) to Explanation 1, it cannot be said that the interpretation of the ITO is so absurd that there was an error apparent on the record in the matter of interpretation and the succeeding ITO was, therefore, justified in exercising his rectification powers under s. 154 of the Act. In that view of the matter, therefore, we do not think that the Tribunal was justified in setting aside the order of the ITO passed by him under s. 154 of the Act.
9. The result is that we answer the question referred to us in the affirmative. The Commissioner shall bear the costs of this reference.