The Income-Tax Officer, Alwaye vs The Asok Textiles Ltd., Alwaye

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 311 of 1959

Decision Date: 13 December 1960

Coram: J.L. Kapur, M. Hidayatullah, J.C. Shah

The case before the Supreme Court was styled The Income‑Tax Officer, Alwaye versus The Asok Textiles Ltd., Alwaye, with judgment delivered on 13 December 1960. The opinion was authored by Justice J. L. Kapur and the bench comprised Justices J. L. Kapur, M. Hidayatullah and J. C. Shah. The citation of the decision appears as 1961 AIR 699 and 1961 SCR (3) 236, with a subsequent citator reference of E & D 1987 SC 575 (5). The matters under consideration involved provisions of the Income‑Tax Act, 1922, specifically sections 18A(8), 35 and the question of whether the scope of section 35 could be equated with the review mechanism provided under Order 47, rule 1 of the Code of Civil Procedure, 1908. The judgment also addressed the assessment of penal interest on advance tax defaults under the said section of the Act.

According to the record, the respondent’s net assessable income for the years 1952‑53 was computed, after which the company declared dividends that attracted tax liability under the Finance Act, 1952, thereby creating an additional income‑tax liability. The Income‑Tax Officer initially failed to include this liability, but after issuing a notice pursuant to section 35 of the Act, he rectified the assessment and imposed an additional tax at the rate of one anna per rupee. Subsequently, the Officer discovered that the correct rate should have been five annas per rupee; he therefore issued another rectification order adjusting the tax amount and, in the same order, corrected the earlier omission by imposing penal interest as required by section 18A(8). The respondent challenged the assessment before the High Court, arguing that section 35 did not apply to the situation and that, on the merits, the additional tax could not be levied. The High Court held that the necessary factual foundation for invoking the powers under section 35 had not been established, rendering the Officer without jurisdiction to issue the assessment, and likewise concluded that the penal interest provision could not be applied without jurisdiction. On appeal, the Supreme Court held that the language and scope of section 35 of the Income‑Tax Act could not be equated with the limited review powers under Order 47, rule 1 of the Civil Procedure Code. It affirmed that the Officer, under section 35, was empowered to examine the tax records and, upon discovering any mistake, to rectify errors of both law and fact without the restrictive constraints of civil‑procedure review. The Court further pronounced that section 18A(8) imposed a mandatory duty on the Officer to compute interest according to its provisions and to add such interest to the assessment. The Court cited earlier decisions, including Maharana Mills (P.) Ltd. v. Income‑Tax Officer (1959) 36 I.T.R. 350 and M. K. Venkatachalam v. Bombay Dyeing & Manufacturing Co. Ltd. (1958) 34 I.T.R. 143, to support its reasoning.

The Court noted that the decisions in Weaving Mills Co. Ltd. [1960] 40 I.T.R. 142, Commissioner of Income‑tax, Bombay City v. Jalgaon Electric Supply Co. Ltd. [1960] 40 I.T.R. 184 and Commissioner of Income‑tax, Bombay City v. Khatau Makanji Spinning & Weaving Co. Ltd. [1960] 40 I.T.R. 189 were not applicable to the present matter. The appeal, recorded as Civil Appeal No. 311 of 1959, arose from a judgment and order dated 31 October 1955 of the Travancore‑Cochin High Court at Ernakulam in Original Petition No. 75 of 1955. Counsel for the appellant were A. N. Kripal and D. Gupta, while counsel for the respondent appeared for the company. The judgment was delivered on 13 December 1960 by Justice Kapur. The appeal was filed pursuant to a certificate issued by the High Court of Kerala and centered on whether section 35 of the Indian Income‑Tax Act (hereinafter “the Act”) could be applied to the orders made by the Income‑tax Officer. The respondent was a limited company that owned a spinning mill at Alwaye. It began its business operations in January 1951, and its first accounting year concluded on 31 December 1951, making the assessment year 1952‑53 the relevant period. In its return the company reported total income of Rs 3,21,284 but omitted to claim the deduction allowed under section 15C of the Act. Consequently, on 2 February 1953 the net assessable income was fixed at Rs 1,47,083 after allowing a deduction of Rs 1,79,081 under section 15C. The company subsequently declared a dividend of Rs 4,72,415. This dividend attracted tax liability under section 2 of the Finance Act 1952 read with Part B, proviso (ii) of the First Schedule, thereby creating an additional income‑tax obligation that the Income‑tax Officer initially failed to recognise. After issuing a notice under section 35 of the Act, the Officer, by an order dated 25 January 1954, corrected the oversight and imposed an additional tax at the rate of one anna per rupee. The Officer later discovered that the correct rate should have been five annas per rupee and, by an order dated 12 August 1954, amended the assessment accordingly. Under section 18A the company was required to pay advance income tax; however, it had deposited only Rs 5,000, which made it liable to penal interest under section 18A(8) of the Act. The same order rectified the failure to impose the penal interest. The respondent then sought revision of this order under section 33A(2) before the Commissioner of Income‑tax, but the revision was dismissed. Subsequently, the respondent instituted a petition before the High Court of Kerala under article 226 of the Constitution, contending that section 35 of the Act was inapplicable and that, on the merits, the additional tax could not be imposed. The High Court, in its judgment dated 31 October 1955, held that the orders were made without jurisdiction and consequently granted a writ of certiorari, setting aside the orders of the Income‑tax Officer.

The Income‑Tax Officer filed the present appeal on the basis of a certificate issued by the High Court. The High Court had held that section 35 of the Income‑Tax Act was a provision intended to correct “mistakes apparent on the record” and, in the Court’s view, that provision was analogous to Order 47, Rule 1 of the Code of Civil Procedure, which permits a review on the ground of a mistake or error apparent on the face of the record. In reaching that conclusion, the High Court articulated its understanding of a “mistake apparent on the record” as follows: an evident error that does not require any extraneous material to demonstrate its incorrectness; the error may be factual but is not limited to factual matters and may also include errors of law, provided that the law involved is definite and capable of ascertainment; however, an erroneous view of law on a debatable point, a wrong exposition of law, a wrong application of law, or a failure to apply the appropriate law cannot be regarded as a mistake or error apparent on the face of the record. The High Court relied on Chitaley’s commentary on the Code of Civil Procedure, volume III, pages 3549‑50, fifth edition, for this definition.

The High Court further concluded that the question of whether proviso (ii) of Part B of the First Schedule of the Finance Act applied was a complex issue that could not be said to be “apparent on the face of the record.” Consequently, the Court found that the essential foundation required for exercising the powers conferred by section 35 had not been established, and therefore the Income‑Tax Officer lacked jurisdiction to issue the order that had been made. In addition, the High Court held that the imposition of penal interest under section 18A(8) of the Act for failure to make an advance deposit under section 18A(3) was likewise beyond the Officer’s jurisdiction.

The Supreme Court observed that the learned judges of the High Court erred by equating the language and scope of section 35 of the Income‑Tax Act with Order 47, Rule 1 of the Code of Civil Procedure. The Court explained that the two provisions employ different terminology: section 35 authorises various income‑tax authorities, within four years of the date of any assessment, to rectify any mistake “apparent from the record,” whereas the Code of Civil Procedure speaks of “an error apparent on the face of the record.” The Court stressed that these expressions do not convey the same meaning.

In the decision of Maharana Mills (Private) Ltd. v. Income‑Tax Officer, Porbandar, the Supreme Court delineated the scope of section 35, stating that the power under that section is indeed limited to the rectification of mistakes that are apparent from the record. Such a mistake is not one that emerges solely as a result of argument; rather, the Income‑Tax Officer may examine the record, including the evidence, and if he discovers any mistake, he is entitled to rectify the error, provided that if

The Court observed that whenever the effect of a correction under section 35 is to increase the amount of tax assessed or to reduce a refund, the Income‑tax Officer is obliged to serve a notice on the assessee and must afford the assessee a reasonable opportunity to be heard. In the case presently before the Court the error had arisen from an initial mistake in determining the written‑down value of an asset, a mistake that was later remedied. The Court then referred to an earlier decision, M. K. Venkatachalam v. Bombay Dyeing & Manufacturing Co. Ltd. (2), in which, as a result of a retrospective amendment of the law, the Income‑tax Officer reduced the interest payable under section 18A(5) of the Act. The assessee obtained a writ of prohibition from the High Court on the ground that the contemplated mistake must be apparent on the face of the order and not one arising from a legislative amendment, even though the amendment operated retrospectively. The Court held that this situation also constituted an error apparent from the record. Justice Gajendragadkar, J. explained that “at the time when the Income‑tax Officer applied his mind to the question of rectifying the alleged mistake, there can be no doubt that he had to read the principal Act as containing the inserted proviso as from April 1, 1952.” Consequently, this Court has held that the discovery of an error on the basis of an initial mistake in establishing the written‑down value is an error apparent from the record, and similarly a misapplication of the law, even when the law was given retrospective effect, as reflected in the authorities cited at (1) [1959] 36 I.T.R. 350 and (2) [1958] 34 I.T.R. 143. The Court affirmed that the Income‑tax Officer, pursuant to section 35 of the Act, may examine the record and, upon discovering a mistake, may rectify it; the mistake may be factual or legal in nature. The Court further stated that the restrictive operation of the power of review under Order 47 Rule 1 of the Civil Procedure Code does not apply to section 35 of the Act, and therefore it could not be said that the Officer’s order in the disputed assessment was without jurisdiction. Regarding section 18A(8), the Court noted that the learned judges had misdirected themselves, because that provision is mandatory. Section 18A(8) provides that when, after making a regular assessment, the Officer finds that tax has not been paid according to the preceding provisions, interest calculated as per sub‑section (6) must be added to the tax determined on the regular assessment. Accordingly, the Officer was required to compute the interest in the manner prescribed by sub‑section (6) and to add it to the assessment. Finally, counsel for the respondent raised the issue of the applicability of proviso (ii) of Part B of the First Schedule of the Finance Act 1952 and relied upon judgments of this Court in Commissioner of Income‑tax v. Elphinstone Spinning & Weaving Mills Co. Ltd. and similar cases.

The respondent referred to the judgment of Commissioner of Income‑tax v. Elphinstone Spinning and Weaving Mills Co. Ltd. (1) and to two similar decisions reported as Commissioner of Income‑tax, Bombay City v. Jalgaon Electric Supply Co. Ltd. (2) and Commissioner of Income‑tax, Bombay City v. Khatau Makanji Spinning and Weaving Co. Ltd. (3); however, the factual situations in those cases differed from the present case. In the first case there was no total income and consequently the Finance Act was not applicable; that decision is reported in [1960] 40 I.T.R. 142. In the second case the company had earned no profit in any preceding year, and therefore the statutory fiction that requires undistributed profits of one or more years immediately preceding the previous year could not be invoked; that judgment appears in [1960] 40 I.T.R. 184. In the third case the Finance Act was again inapplicable because the additional tax had not been properly assessed on the total income, and the amount that was actually taxed was never part of the total income of the preceding year; this ruling is recorded in [1960] 40 I.T.A. 189. The Court concluded that the order of the High Court was erroneous. Accordingly, the appeal was allowed, the judgment and order of the High Court were set aside, and costs were awarded both in this Court and in the High Court.