M. K. Venkatachalaivi, I. T. O.... vs Bombay Dyeing And Mfg. Co., Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No.122 of 1956

Decision Date: 28 April 1958

Coram: P.B. Gajendragadkar, A.K. Sarkar

The case titled M. K. Venkatachalaivi, I. T. O. … versus Bombay Dyeing and Manufacturing Co., Ltd. was decided by the Supreme Court of India on 28 April 1958. The judgment was authored by Justice P. B. Gajendragadkar, who was a member of the bench together with Justice A. K. Sarkar. The petitioner, identified as M. K. Venkatachalaivi, an Income‑Tax Officer, together with another petitioner, appealed against the respondent, Bombay Dyeing and Manufacturing Co., Ltd. The official citation of the decision is reported in the 1958 volume of the All India Reporter at page 875 and also in the 1959 volume of the Supreme Court Reports at page 703.

The operative statutes in the dispute were provisions of the Indian Income‑Tax Act, 1922, specifically sections 18‑A and 35, and the Indian Income‑Tax (Amendment) Act, 1953, sections 1 and 13. The factual background was that the Income‑Tax Officer, by an order dated 9 October 1952, had assessed the respondent for the assessment year 1952‑53 and had granted a credit of Rs 50,603‑15‑0 as interest on tax paid in advance under section 18‑A(5) of the Income‑Tax Act. Subsequently, on 24 May 1953, the Indian Income‑Tax (Amendment) Act, 1953, came into force adding a proviso to section 18‑A(5) stating that the assessee was entitled to interest only on the excess of the advance tax paid over the amount finally assessed. The amendment was deemed to have effect from 1 April 1952.

Acting under section 35 of the Income‑Tax Act, the Income‑Tax Officer rectified the earlier assessment, holding that, because of the retrospective operation of the amendment, the respondent was entitled to a reduced interest credit of Rs 21,157‑6‑0. The officer therefore issued a notice of demand for the balance amount of Rs 29,446‑9‑0. The respondent challenged this rectification by filing a petition in the High Court of Bombay under article 226 of the Constitution, seeking a writ that would prohibit the enforcement of the rectified order and the demand notice. The High Court denied relief, holding that section 35 was not applicable because the mistake contemplated by that section must be apparent on the face of the order and the question should be decided based on the law as it stood at the time the order was made.

The Supreme Court held that the Income‑Tax Officer was justified in exercising the powers conferred by section 35 to rectify the mistake. The Court explained that the retrospective effect of the amendment meant that the proviso added to section 18‑A(5) formed part of that provision as of 1 April 1952, rendering the original order of 9 October 1952 inconsistent with the amended law. Consequently, the original order contained a mistake apparent from the record and could be rectified under section 35.

The Court noted that the authorities cited by counsel included Ramdas, (1938) L.R. 65 I.A. 236 and Moka Venkatappaiah v. Additional Income‑tax Officer, Bapatla, (1957) 32 I.T.R. 274. It observed that the order issued by the Income‑tax Officer under section 18‑A could not be described as final in the strict literal sense because it remained subject to modification under section 35. The Court further rejected the proposition that the retrospective operation of the amended section 18‑A(5) was intended to avoid affecting transactions that had already been concluded. The judgment proceeded as a civil appellate matter, specifically Civil Appeal No. 122 of 1956, arising from the judgment and order dated 5 March 1954 of the Bombay High Court in appeal from its original jurisdiction miscellaneous application No. 1 of 1954. Counsel for the appellants comprised the Additional Solicitor‑General and two other advocates, while counsel for the respondent consisted of five senior advocates. The judgment was delivered on 28 April 1958 by Justice Gajendragadkar. The appeal was brought by the Income‑tax Officer, Companies Circle I (1), Bombay, and the Union of India, and it presented a concise question concerning the construction of section 35 of the Income‑tax Act read together with section 1, sub‑section (2) and section 13 of the Indian Income‑tax (Amendment) Act, 1953 (XXV of 1953). The factual background was that the Income‑tax Officer, by an assessment order dated 9 October 1952 for the assessment year 1952‑53, had assessed the respondent, Bombay Dyeing and Manufacturing Co. Ltd., under the Act. In that assessment the respondent received a credit of Rs 50,603‑15‑0, representing interest at two per cent on tax paid in advance under section 18A, based on the provisions of section 18A, sub‑section (5) as then in force. On 24 May 1953 the Amendment Act became operative, and section 1, sub‑section (2) of the Amendment Act stipulated that, subject to any special provision, it would be deemed to have commenced on 1 April 1952. Section 13 of the Amendment Act inserted a proviso into section 18A(5). The effect of that insertion was to limit the assessee’s entitlement to interest at two per cent to the difference between the amount actually paid in advance and the amount at which the assessee was assessed under the regular assessment under section 23, rather than on the whole advance sum as previously. After the amendment became effective, the first appellant exercised his power under section 35 of the Act to rectify what he considered a mistake apparent from the record concerning the credit of Rs 50,603‑15‑0 that had been allowed to the assessee. The first appellant held that the assessee was really entitled to a credit of

The amendment made in s. 18A (5) operated retrospectively, so the assessee was entitled only to interest of Rs. 21,157-6-0 on tax paid in advance. Following that order, a notice of demand under s. 29 of the Act was issued against the assessee for Rs. 29,446-9-0. The demand was based on the claim that the assessee had received credit for an excess amount because of a mistake. The respondent, dissatisfied with the notice, filed a petition in the High Court of Bombay on 4 January 1954 under Article 226 of the Constitution. The petition sought a writ that would prohibit the appellants from enforcing both the rectified order and the notice of demand. The petition was admitted by Justice Tendolkar on 6 January 1954, and a rule was subsequently issued thereon. Subsequently the Chief Justice directed that the petition be placed before a Division Bench for proper final disposal. Accordingly, on 5 March 1954, the petition was heard before Chief Justice Chagla and Justice Tendolkar, and a writ was issued against the appellants. The High Court then held that section 35 of the Act did not apply because the mistake apparent from the record contemplated by that section must arise from the amendment of the law. The Court further observed that a retrospective amendment does not create such a mistake because the error must be evident in the original order itself. In the Court’s view, the mistake must be visible on the face of the order and must be assessed according to the law that existed on the date the order was passed. The appellants subsequently applied for and obtained a certificate from the High Court on 8 October 1954 thereafter. They claimed that the Court had erred in law by deciding that appellant No. I could not rectify the alleged mistake under section 35 of the Act. The present appeal therefore raises the short question whether an order that was proper and valid when made can be regarded as containing a mistake apparent from the record. The question further asks if a later amendment, intended to operate retrospectively, makes such an order erroneous in law.

The Court notes that it is unnecessary to revisit the provisions of section 18A (5) or the proviso added later by section 13 of the Amendment Act. It is agreed that, without the later inserted proviso, the assessee would have been entitled to a credit of Rs. 50,603-15-0. It is also agreed that, if the proviso applied to the assessee’s circumstance, the credit would be limited to Rs. 21,156-9-0. Hence, it is clear that the circumstances described above form the basis of the legal issue at hand.

The Court observed that the order granting the assessee the specified credit had been valid at the time it was issued, but that the same order would be erroneous in view of the amendment that was later introduced. The Court then asked whether, under those circumstances, the first appellant was justified in using the power of rectification provided by section 35 of the Act. To answer this question, the Court explained that it was necessary to ascertain the true legal effect of the retrospective operation of the Amendment Act. Section 1, sub‑section (2) of the Amendment Act explicitly states that, subject to the special provisions contained in the Act, the amendment shall be deemed to have come into force on the first day of April 1952. Consequently, the amendment effected by section 13 of the Amendment Act must, by operation of legal fiction, be treated as having been incorporated into the principal Act as of 1 April 1952. This reasoning leads inevitably to the conclusion that when the Income‑tax Officer issued his original order on 9 October 1952, allowing the respondent a credit of Rs 50,603‑15‑0, the proviso introduced by section 13 of the Amendment Act must be considered as having already been inserted in the Act. The Court quoted Lord Asquith of Bishopstone in East End Dwellings Co. Ltd. v. Finsbury Borough Council (1), noting that when one is required to treat an imagined state of affairs as real, one must also treat the inevitable consequences of that imagined state as real, unless expressly prohibited. The Court applied this principle to hold that the retrospective effect of the Amendment Act means that the proviso added to section 18A (5) must, for all legal purposes, be deemed part of the Act from 1 April 1952.

Nevertheless, the Court recorded the respondent’s contention that the retrospective operation of the relevant provision was not intended to disturb assessments that had already been completed. The respondent conceded that if any assessment proceedings relating to the assessee’s income for a period after 1 April 1952 were still pending at the time the Amendment Act was enacted, the proviso inserted by section 13 would govern the outcome of those pending proceedings. However, the respondent argued that once an assessment proceeding had been concluded and an assessment order had been issued by the Income‑tax Officer, that completed assessment should remain unaffected and could not be reopened under section 35 merely because of the retrospective operation of the Amendment Act. In support of this position, the respondent relied upon the observations cited in the proceeding. The Court noted these arguments as part of the analysis of whether the retrospective amendment could justify the exercise of rectification powers.

In citing authority, the Court referred to the Privy Council decision in Delhi Cloth and General Mills Co. Ltd. v. Income‑tax Commissioner, Delhi and Anr., reported in 1952 A.C. 109 at page 132. The judgment of the Board was delivered by Lord Blanesburg, who also mentioned an earlier Board decision in Colonial Sugar Refining Company v. Irving, reported in 1905 A.C. 369. That earlier case, as explained by Lord Blanesburg, established that statutory provisions dealing solely with procedural matters may be given retrospective effect, provided such an interpretation is not ruled out by the text of the statute. Conversely, provisions that affect a right which existed at the time the statute was passed may not operate retrospectively unless the statute expressly provides for such operation or clearly intends it. The learned judge further observed that the Board was certain that any provision which, if applied retrospectively, would defeat the existing finality of orders that were final when the statute came into force, necessarily touches existing rights. The principle of finality of orders and the sanctity of existing rights had previously been affirmed in cases reported in 1927 L.R. 54 I.A. 421 and in the 1905 A.C. 369 decision.

The respondent argued that the taxpayer had acquired a right under the order issued by the Income‑tax Officer to claim credit under section 18A(5) and that this right could not be withdrawn by the retrospective operation of section 13 of the Amendment Act. The same contention was expressed in another form, asserting that the finality of the officer’s order could not be impaired by the retrospective amendment. The Court, however, found that this line of argument did not assist the respondent because the order made under section 18A(5) was not final in the strict literal sense. The order remained subject to modification under section 35 of the Act. The Income‑tax Officer, in the present case, was not merely revising his order because of the amendment introduced by section 13; rather, he was exercising the power conferred on him by section 35. Consequently, the matter before the Court turned on the interpretation of the phrase “mistake apparent from the record” contained in section 35. For this reason, the Court concluded that the principle of finality of orders or the sanctity of existing rights could not be successfully invoked by the respondent.

The respondent further urged that the Amendment Act should not be granted a broader retrospective effect than is necessary to give effect to its language and overall legislative scheme. To support this position, the respondent pointed to the specific language contained in section 3, sub‑section (2), section 7, sub‑section (2) and section 30, sub‑section (2) of the Amendment Act. The contention was that the statute makes it clear that wherever Parliament intended its amendments to disturb even those assessment orders that had already been concluded, it would do so by an explicit provision. Because section 13 lacks any express language authorising the reopening of assessments which had already been finalized, the Court concluded that the retrospective operation of that section could not be read to include completed assessments. Thus, the amendment could not be employed to unsettle the finality of assessment orders that were in force before the amendment was enacted.

In the present appeal the respondent relied on the contention that the Amendment Act could not be given a retrospective effect on assessments that had already been concluded because section thirteen of the principal Act did not expressly authorize the reopening of such assessments. The Court, however, was not persuaded that this contention possessed a solid foundation. To determine the correctness of the argument, the Court examined three specific provisions of the Amendment Act on which the argument was premised. Section three, sub‑section one of the Amendment Act introduced several additions and modifications to section four of the principal Act. Sub‑section two of section three then provided that the amendments made by sub‑clause three of clause (b) of sub‑section one would be deemed operative in relation to every assessment for any year, regardless of whether those assessments had been concluded before the commencement of the Amendment Act of 1953. The principal purpose of this sub‑section was to extend the retrospective operation of the relevant provisions of the Amendment Act beyond the 1 April 1952 date specified in section one, sub‑section two of the Amendment Act. Because the legislature intended to furnish such further retrospective effect, it expressly clarified that the extended operation would encompass all assessments, whether they had been completed prior to the Act’s commencement or not. Section seven, sub‑section one added two provisos to section nine of the principal Act by means of clauses (a) and (b). Sub‑section two of section seven then stipulated that the amendment made in clause (a) of sub‑section one would be deemed operative for any assessment for the year ending 31 March 1952, irrespective of whether the assessment was made before or after the Act’s commencement, and that, where an assessment had been made before commencement, the Income‑tax Officer concerned must revise it whenever necessary to give effect to the amendment. The position under section thirty, sub‑section two, was substantially analogous. Sub‑section one of section thirty effected certain additions and amendments in the schedule to the principal Act by clauses (a), (b), (c) and (d); sub‑section two then provided for the retrospective operation of the amendment made by sub‑section one in terms similar to those employed in section seven, sub‑section two. It was evident that the provisions contained in sections seven and thirty were intended for the benefit of the assessee, and consequently the legislature deemed it necessary to confer on the Income‑tax Officer a specific and express power to revise his orders concerning the relevant assessments wherever such revision was required to implement the amendments. The effect of these provisions was to oblige the Income‑tax Officer to amend his original orders in light of the amendment and to grant the assessee a right to claim such revision. It could be conceded, however, that for the other retrospective provisions of the Amendment Act, no such power to revise earlier orders was available to the Income‑tax Officer. In other words, a clear distinction could be drawn between the two provisions that empowered revision and the remaining provisions of the Amendment Act concerning the scope of the Income‑tax Officer’s authority to give effect to the legislative changes.

In this case the Court observed that the Amendment Act contains two specific provisions, namely sections 7 and 30, together with a number of other amendments. The Court explained that the power which the Income‑tax Officer may invoke to give effect to the amendments is limited to those two provisions. Specifically, where the amendments are made under section 7 and section 30 of the Amendment Act, the Income‑tax Officer is both authorised and required to revise his earlier orders that fall within the ambit of section 7, sub‑section (2) and section 30, sub‑section (2). By contrast, the same power of revision has not been granted to the Officer for the purpose of implementing any of the remaining amendments contained in the Amendment Act.

The Court further held that it would be neither legitimate nor reasonable to interpret sections 7(2) and 30(2) as implying that the retrospective operation of the other provisions of the Amendment Act is intended to leave concluded assessments completely untouched. It was necessary, the Court said, to remember that the revision power conferred by sections 7(2) and 30(2) is separate and independent from the power to rectify mistakes that the Income‑tax Officer may exercise under section 35 of the principal Act.

Consequently, the Court examined the scope of the Officer’s authority under section 35, which permits rectification of “mistakes apparent from the record.” The Court stressed that in order to determine the extent of this power, the meaning of the expression “mistake apparent from the record” must first be ascertained. When the Officer considered whether to rectify the alleged mistake, there was no doubt that he was required to read the principal Act as if the inserted proviso had been in force since 1 April 1952.

Given that premise, the Court found that the order in which the Officer gave credit to the respondent for the sum of Rs 50,603‑15‑0 was plainly and obviously inconsistent with a specific and clear statutory provision. Such inconsistency, the Court held, inevitably amounted to a mistake of law apparent from the record. Since a mistake of fact that is apparent from the record can be corrected under section 35, the Court saw no reason why a glaring and obvious mistake of law could not be corrected in the same manner.

The Court acknowledged that, at first glance, it might seem strange to declare an order that was valid when originally made to be patently invalid and “wrong” by virtue of the retrospective operation of the Amendment Act. However, the Court explained that this result follows inevitably from the legal fiction that the retrospectively inserted proviso is deemed to form part of section 18A(5) of the principal Act as from 1 April 1952. Accordingly, the order in question is inconsistent with the provisions of that proviso and must be regarded as suffering from a mistake apparent from the record.

The Court explained that the Income‑tax Officer was properly authorized in the present matter to invoke the power conferred by section 35 of the Act and to correct the identified errors. The Court also noted that the High Court of Andhra Pradesh, in the case of Moka Venkatappaiah v. Additional Income‑Tax Officer, Bapatla, had adopted an identical position, as reported in the 1957 volume of the Income‑Tax Reporter (32 I.T.R. 274). In support of this view, the Court referred to a significant decision of the Privy Council in the matter of the Commissioner of Income‑Tax, Bombay Presidency and Aden v. Khemchand Ramdas. In that case, the respondents were originally registered as a partnership firm and were assessed under section 23(4) on an income of rupees 1,25,000, which attracted the maximum rate of tax. Because the assessee was a registered firm, no super‑tax was imposed, and a demand notice had been issued before March 1927. Subsequently, on 13 February 1928, the Commissioner, exercising the authority under section 33, cancelled the registration of the assessees as a firm and instructed the Income‑tax Officer to undertake the necessary steps. Acting on this direction, the Income‑tax Officer levied a super‑tax upon the firm on 4 May 1929. The Privy Council held that the assessment dated 17 January 1927 was final with respect to both income‑tax and super‑tax, and that the later action taken on 4 May 1929 was barred by limitation, even though it was undertaken pursuant to the Commissioner’s instruction. Consequently, the Council concluded that the Income‑tax Officer had no jurisdiction to issue the 1929 order. One of the issues raised before the Privy Council was whether, under the prevailing circumstances, the Income‑tax Officer possessed the authority to make the impugned order under sections 34 or 35 of the Act. The Privy Council observed that the Commissioner’s cancellation of the registration had been lawfully effected, and therefore it was unnecessary to examine the applicability of section 34. In the view of the Council, the situation would have fallen within section 35 had the Income‑tax Officer exercised the powers conferred by that section within one year from the date the original demand was served on the respondents. The judgment further indicated that, when the record of the assessments was considered after the cancellation of the respondents’ registration, it became evident that a mistake had been made in stating that no super‑tax was payable. This point was supported by the earlier citation of the 1938 decision (L.R. 65 I.A. 236). The Privy Council thereby held that the subsequent cancellation of the registration formed part of the record retrospectively, and that the order was therefore afflicted by a mistake apparent from the record, justifying the exercise of the rectification powers under section 35.

The Court examined whether the provisions of section 35 of the Act applied to the facts of the present case. Because the Court was convinced that section 35 was plainly applicable, it chose not to consider the ancillary question of whether section 34 might also have been invoked. That determination reinforces the perspective that the Court is inclined to adopt regarding the true interpretation and reach of the phrase ‘the mistake apparent from the record’ as used in section 35. Consequently, the Court concluded that the High Court of Bombay had erred in holding that the notice issued by the Income‑tax Officer demanding the sum of Rs 29,446‑9‑0 from the respondent was not legally justified. Accordingly, the Court set aside the order of the High Court which had granted a writ against the appellant and allowed the present appeal, ordering costs to be paid throughout. In view of the foregoing analysis, the Court concluded that the appellant’s petition succeeded and that the relief sought by the appellant should be granted in its entirety. The Court also observed that the requirement of a mistake being evident from the record does not depend on administrative action, but must be discernible from documentary material existing at the time of the assessment. In this instance, the record clearly demonstrated that the assessment had been based on an erroneous conclusion that no super‑tax was payable, a mistake that was plainly apparent from the documentation. Therefore, the rectification power under section 35 was properly exercised, and the earlier cancellation of the taxpayer’s registration formed part of the record, confirming the existence of the mistake.