SETHURAMAN J. - This is a reference under section 256(1) of the Income-tax Act of 1961. The assessee is a co-operative society engaged in the marketing of the agricultural produce of its members. It is exempt from income-tax and super-tax in respect of profits and gains of the business carried on by it by virtue of sections 81 and 99 of the Income-tax Act, 1961, as it was in force in the relevant year. We are considering in this reference the assessment for the assessment year 1963-64. The Income-tax Officer made an assessment on the assessee on 20th of August, 1963, computing the total income as follows :
Interest on securities
Total income Rs. 2,42,654
As mentioned earlier, since the assessee was not liable to income-tax and super-tax with reference to its business profits, the Income-tax Officer levied the tax on the aggregate of interest from securities, Rs.1,723, and other sources, Rs. 236, in all Rs. 1,959. The tax was worked out as follows :
Income-tax on Rs. 1,959 at the rate applicable to Rs. 2,42,654, viz., 23,885
Add : Surcharge at 5%
Proportionate additional surcharge on Rs. 1,959
After adjusting the tax deducted at the source and the advance tax paid, he made a demand for the balance of tax due form the assessee.
There was a change in the incumbent and the succeeding Income-tax Officer took proceedings under section 154 of the Income-tax Act of 1961. Under that provision, with a view to rectifying any mistake apparent from the record, the Income-tax Officer may amend any order of assessment or of refund or any other order passed by him. Such an amendment cannot be made after the expiry of four years from the date of the order sought to be amended. Within about two years from the assessment, the Income-tax Officer set in motion the proceedings under section 154. In his order of 12th August, 1965, he wrote as follows :
'In the original assessment made on August 20, 1963, (i) super-tax was omitted to be calculated; and (ii) additional surcharge on the residual income was levied proportionate to non-exempt income which was not correct.
As these mistakes are apparent from the records, revise the assessment as under after calling for assessee's objection.'
He took the total income at the same figure, viz., Rs. 2,42,654, as computed by his predecessor and proceeded to work out the tax as follows :
Supercharge at 5%
Addl. income-tax surcharge
Additional surcharge on the residual incomeRs.1,39,029
The assessee objected to the application of section 154 and also to the levy of the additional surcharge 12, 792.90. In the order under section 154, the Appellate Assistant Commissioner pointed out that 'the Income-tax Officer failed to levy super-tax and additional surcharges correctly by mistake' and that these mistakes were apparent from the records. Regarding the objection of the assessee against the levy of additional surcharge of Rs. 12,792.90 by taking into account the exempted business income, he proceeded to make some discussion, which appears to be beside the point. In the result, he dismissed the appeal.
The assessee appealed to the Appellate Tribunal and contended that there was no mistake apparent from the record so as to attract section 154 and that the additional surcharge could not be levied in respect of the income from the business having regard to the provisions of the income-tax Act, 1961, and the Finance Act, 1963, applicable to the present case. The Tribunal noticed :
'It is unfortunate, however, that in the orders of the Income-tax Officer and the Appellate Assistant Commissioner no attempt has been made to set out how the calculation of tax made in the original assessment under section 143(3) was wrong and how the calculation made under section 154 is correct.'
It, however, considered elaborately the various provisions of the Income-tax Act and the Finance Act, 1963, and came to the conclusion that there was a mistake in the calculation of tax in general and the calculation of additional surcharge in particular and that the mind of the Income-tax Officer could and did notice that there was a mistake which he proceeded to rectify according to what he considered to be correct. The Tribunal endeavoured to demonstrate in its order as to how the Income-tax Officer's working was justified. The result is that we get an insight into what the Income-tax Officer has done only from the order of the Tribunal.
At the instance of the assessee, the following two questions have been referred :
'(1) Whether, on the facts and in the circumstances of the case, the levy of tax of Rs. 12,792.90 as additional surcharge on the assessee is in accordance with law ?
(2) Whether, on the facts and in the circumstances of the case, there was any error apparent from the record regarding levy of additional surcharge which could be rectified under section 154 of the Income-tax Act, 1961 ?'
The learned counsel for the assessee submitted that the second question should have priority of consideration as in case he succeeds on that question, the consideration of the first question would not arise. He submitted that there was no error apparent from the record in the calculation of tax, which could have been rectified by the Income-tax Officer. He referred us to two decisions of the Supreme Court in this connection which would be noticed presently. For the respondent, the learned counsel argued that the provisions of the Finance Act, 1963, were clear and that the Income-tax Officer had unfortunately emitted to calculate the proper tax on the earlier occasion in accordance with the said provisions and that the rectification was of an error which was apparent form the record. His submission went to the full logical extent, viz., that there could be no two views possible in the relevant provisions of the Finance Act, 1963, so that the error in the calculation of tax in the original assessment was a patent one.
Section 81(1)(c) provides that Income-tax shall not be payable by a co-operative society in respect of the profits and gains of business carried on by it, if it is a society engaged in the marketing of the agricultural produce of its members. Section 99(1)(v) provides that super-tax shall not be payable by an assessee in respect of, inter alia, the following amount included in his total income -
(v) where the assessee is a co-operative society, any income in respect whereof no income-tax is payable by it by virtue of the provisions of section 81.
There is no dispute that in the present case the assessee was eligible for exemption from levy of income-tax and super-tax on Rs. 2,40,695 which was its business income. Paragraph A of Part I of the First Schedule to the Finance Act, of 1963 provides for levy of surcharge on income-tax. To the extent relevant it runs as follows :
'The amount of income-tax computed at the rates hereinbefore specified shall be increased by the aggregate of the surcharges calculated as under :- ......
(c) an additional surcharge for purposes of the Union calculated on the amount of the residual income at the following rates, namely :
On the first Rs. 6,000 if the residual income
On the next Rs. 9,000 of the residual income
On the next Rs. 12,000 of the residual income
On the next Rs. 15,000 of the residual income
On the balance of the residual income
The rest of the provision need not be extracted. Section 2(8) of the same Finance Act, 1963, provides :
'(8) For the purposes of Paragraphs A and C of Part I of the First Schedule, the expression `residual income' means the amount of the total income as reduced by -
(a) the amount of the capital gains, if any, included therein; and
(b) the amount of tax (exclusive of additional surcharge) which would have been chargeable on such reduced total income if it had been the total income no part of which had been exempt from tax and on no portion of which deduction of tax had been admissible under any provisions of the Income-tax Act or this Act.'
The present case comes under Paragraph A of Part I of the First Schedule to the Finance Act of 1963. From the assessment order, it would be clear that though the assessee's total income was Rs. 2,42,654 after deducting the exempted income under section 81(1)(c) and section 99(1)(v), there was only a balance of Rs. 1,959, which was liable to be assessed to income-tax as well as super-tax. The first Income-tax Officer levied the additional surcharge only on this sum of Rs. 1,959. His successor, who initiated the retification proceedings, considered that this additional surcharge should have been levied on the 'residual income' of Rs. 1,39,029. The question raised is whether the levy of additional surcharge on the 'residual income' of Rs. 1,39,029 in this case was proper in the context of the exemption of Rs. 2,40,695. In effect, though income-tax and super-tax were not charged on the sum of Rs. 2,40,695, the successor-Income-tax Officer, levied additional surcharge on a substantial part this amount. The point to be considered is whether in charging the additional surcharge originally in the manner done, the Income-tax Officer committed any error which was apparent from the record.
The Supreme Court has on more than one occasion gone into the question as to what is an error apparent from the record in the context of section 154 of the 1961 Act or its predecessor section 35 of the 1922 Act. It is enough for our purpose to consider the latest decision on this point. which is reported in T.S. Balaram, Income-tax Officer v. Volkart Brothers : 82ITR50(SC) . The assessee in that case was a registered firm with two partners. The two partners were non-residents. The firm had been assessed for the assessment years 1958-59, 1960-61, 1961-62 and 1962-63 on the slab rates prescribed under the respective Finance Act applicable to this firm. The partners were charged tax at the maximum rate as they were non-residents. The Income-tax Officer took proceedings under section 154 for all these years sating that there was mistake apparent from the record inasmuch as the firm itself had not been charged tax at the maximum rate under section 17(1) of the Indian Income-tax Act of 1922. Section 17(1) provided that where a person was not resident in the taxable territories and was not a company, the tax, including super-tax, payable by him would be an amount equal to the income-tax which would be a payable on his total income at the maximum rate, plus either the super-tax which would be payable on his total income at the rate of nineteen per cent. or the super-tax which would be payable on his total income if it were the total income of a person resident in the taxable territories, whichever was greater. The word 'person' was defined in the Income-tax Act as including a Hindu undivided family and a local authority. Unless a firm could be considered as a 'person' section 17(1) could not govern the assessment of the firm. The assessee contended that the applicability of section 17(1) of the Act of 1922 to a firm was not free from doubt and that, therefore, section 154 could not be applied. The Income-tax Officer rejected this contention and passed an order under section 154, which was challenge before that Bombay High Court. The Bombay High Court held that the original assessments made on the firm were prima facie in accordance with law and that there was no obvious or patent mistake in those orders of assessment, which the Income-tax Officer was competent to rectify. In the appeal against the order of the High Court, the Supreme Court held construing section 17(1) of the Act of 1922 as follows - See : 82ITR50(SC) :
'From what has been said above, it is clear that the question whether section 17(1) of the Indian Income-tax Act, 1922, 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 f 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.'
The Supreme Court observed that the Income-tax Officer was wholly wrong in holding that there was a mistake apparent from the record in that case.
Therefore, the point before us is whether the mistake, if any, here is an obvious and patent mistake and not something which has to be established by a long drawn process of reasoning on points on which there may conceivable be two opinions. The construction of this very provision in the Finance Act in relation to a co-operative society came up for consideration in Madurai District Central Co-operative Bank Ltd. v. Third Income-tax Officer, Madurai : 101ITR24(SC) . That was a co-operative society engaged in the business of banking. The exemption from income-tax and super-tax is available to a co-operative society engaged in carrying on business of banking in the same way as it applies to a society engaged in marketing of agricultural produce of its members as here. The total income of that co-operative society was computed at Rs. 10,00,098. Out of this, Rs. 9,48,335 was its business income, while Rs. 51,763 was its income from other sources. The Income-tax Officer levied income-tax and super-tax only on the income from other sources at the rate applicable to the total income. He, however, computed the residual income at Rs. 5,39,386 and levied additional surcharge under the same provision of the Finance Act of 1963. The assessee challenged the assessment in proceedings under article 226. The main grievance of the assessee before the High Court was that whereas its taxable income was only Rs. 51,765, a total tax of Rs. 76,674.07 was imposed on it and that the relevant provisions of the Finance Act were invalid, as they could not be subject to an additional surcharge on income which was exempt from tax under the provisions of the Income-tax Act. It was also contended that the additional surcharge was intended as an additional levy on income-tax and hadno independent existence apart from it so that where there was no income-tax, there could be no surcharge. These contentions were rejected by this court and the matter was taken on appeal to the Supreme Court. The Supreme Court held that the new charge under the relevant provisions of the finance Act, 1963, in the shape of additional surcharge could be levied even on a part of the income of a co-operative society which was exempt from income-tax and super-tax under sections 81 and 99 of the Income-tax Act, 1961, to the extent contemplated therein. In other words, it was held that the surcharge was but an additional mode or rate for charging income-tax and the levy of additional surcharge on income exempt from income-tax was authorised by the provisions of the Finance Act, 1963.
This decisions would dispose of the first question if it were to be considered. However, we are now on the question as to whether the proceedings under section 154 were competent. At page 31 of the report it was observed - See : 101ITR24(SC) :
'Granting that the word 'income-tax' includes surcharges, it may be arguable that exemption from the payment of income-tax under section 81(i)(a) of the 1961 Act would extent to surcharges. But the matter does not rest with what section 81(i)(a) says.'
The above passage goes to show that there was an arguable question before the Supreme Court. In the judgment, a decision of the Allahabad High Court in Allahabad District co-operative Bank Ltd. v. Union of India : 83ITR895(All) has also been noticed at page 35. That decision construing the identical provision of the Finance Act, 1963, was in favour of the assessee. But the Supreme Court pointed out that the said case was incorrectly decided.
It is clear from the fact that a Bench of the Allahabad High Court took a different view regarding the levy of the additional surcharge with reference to any part of the exempted income, that the construction of the relevant provision of the finance Act, 1963, cannot be said to be so clear as to give no room for two opinions. In other words, the mistake in the matter of calculation of additional surcharge with reference to the exempted income cannot be said to be an obvious and patent mistake so as to be rectifiable under section 154. The construction of the said provision bristles with various problems such as - 1. as to whether the surcharge would apply to exempted income; and 2. whether the expression 'the amount of income-tax..... increased by' occurring the provision of para. A of Part I of the First Schedule to the Finance Act, 1963, relating to the additional surcharge required a positive figure which alone could be increased.
Especially in the context of the observation of the Supreme Court it may be arguable that the exemption from payment of income-tax and super-tax would extend to surcharges. Having regard to the aforesaid decision of the Allahabad High Court which was dissented from by the Supreme Court, we consider that two views were possible on the construction of the provision at the time when the succeeding Income-tax Officer proceeded under section 154 and that the Income-tax Officer could not have resorted to that section, as if there was only an obvious and patent mistake. We, therefore, answer question No. 2 in the negative and in favour of the assessee.
As we have already stated, the answer to the first question would arise for consideration only in the event of there being an error apparent from the record, which is the subject-matter of question No. 2 answered above. In the event of our having to consider this question, we would hold that it is covered by the decision of the Supreme Court in Madurai District Central Co-operative Bank Ltd. v. Third Income-tax Officer, Madurai : 101ITR24(SC) . The answer to the first question would, therefore, be in the affirmative. As the assessee has substantially succeeded in the reference, it will be entitled to its costs. Counsel's fee Rs. 250.