HIGH COURT AT CALCUTTA
I.T.A. No.201 of 2003
Md. Serajuddin & Brothers
Commissioner of Income Tax
Judgment on: 17.5.2012.
K.J. Sengupta, J.:-
The instant appeal has been preferred against the judgment and order dated 28th February, 2003 of the learned Tribunal for the assessment years 1995-96 to 1998-99. The above appeal was admitted by an order of this Court dated 17th November, 2003 on the following substantial questions of law:-
(i) Whether the Tribunal was justified in law in dismissing the appellant’s appeal for the assessment years 1995-96 to 1998-99 without affording to it reasonable opportunity of being heard ?
(ii) Whether the Tribunal was justified in law in upholding the orders of rectification under Section 154 rejecting the appellant’s contention that the issue relating to interpretation of Section 40(b)(v) and explanation 3 thereto was a debatable one and the proceedings under Section 154 were without jurisdiction ?
(iii) Whether and in any event, on a proper construction of the provisions of Section 40(b)(v) and explanation 3 thereto, book profit comprises the entire net profit as shown in the profit and loss account or only profit and gains of business assessed under Chapter IV–D ?
The short fact of this case leading to preferring the instant appeal is as follows:-
The assessee-appellant is a partnership firm within the meaning of Indian Partnership Act, 1932 and is regularly assessed to tax under the Income Tax Act, 1961 (hereinafter referred to as the said Act). The appellant-assessee had filed the returns for the previous years relevant to assessment years 1995-96 to 1998- 99. The returns filed for the assessment year 1995-96 was accepted as such under Section 143(1)(a) of the Act by issue of intimation dated September 24, 1996. The said intimation was rectified on January 27, 1997 by granting interest under Section 244A. The returns filed for the assessment years 1996-97 was also similarly accepted by issuing a notice under Section 143(1)(a) of the Act on January 14, 1998 with a marginal increase of the returned income by making a prima facie adjustment with reference to provisions of Section 43B. The returns filed by the appellant-assessee for the year 1997-98 was also accepted by issue of intimation under Section 143(1)(a) of the Act on March 10, 1999. The returns filed for the assessment year 1998-99 by the petitioners was accepted by issue of intimation dated March 9, 1999 under Section 143(1)(a) of the Act.
On 3rd January, 2001, the Assessing Officer after issuing the said intimation under Section 143(1) (a) of the Act in relation to the return of the aforesaid assessment years, issued notices under Section 154 for all the four years alleging that appellants had claimed excessive deduction on account of partners’ remuneration which has been wrongly allowed by the intimations under Section 143(1)(a) and orders under Section 154. It was alleged in the said notice under Section 154 that income by way of consultancy fees, interest on bank deposit, profit on disposal of assets and interest on advance tax which has been shown as income under the head ‘other sources’ could not be considered as part of the book profit for the purpose of computation of allowable partners’ remuneration. Hence the Assessing Officer proposed to rectify the said alleged mistake under Section 154 of the Act by adding back the deduction allowed in excess. The appellant-assessee duly replied to the said notice and objected to reopening of the same raising the question of jurisdiction as the point raised in the notice under Section 154 was debatable and arguable. The Assessing Officer however, did not accept the appellant’s contention and passed orders rectifying the intimations under Section 143(1)(a) for each of the years. The appellant thence preferred appeal against the aforesaid order of rectification before the Commissioner of Income Tax (Appeals) who by consolidated order dated 29th January, 2002 which apart from the aforesaid four years also for assessment year 1995-96 rejected all the appeals. Thereafter the petitioner took the matter to the learned Tribunal and preferred appeal once again in connection with the assessment years 1994-95 – 1996-98 to 1999. It is alleged that no notice was served before the said appeals were taken up for hearing by the learned Tribunal and the petitioners’ authorized representative duly appeared and submitted on the date of hearing on 31st of January. It is alleged learned Tribunal however assured the authorized representative of the appellants the appeals preferred by the appellants for the assessment year 1995-96 to 1998-99 which arose out of rectification of intimation issued under Section 143(1) (a) could be allowed in the appellants favour and as such he did not make any submission. As far as the appeal in relation to assessment year 1994-95 with reference to assessment made under Section 143(3) was adjourned till 24th March, 2003. Subsequently it was discovered instead of allowing appeal of the petitioners the same was dismissed by impugned order dated 28th February, 2003. Thus without giving any reasonable opportunity of being heard the said appeal was dismissed.
Mr. Khaitan, learned Senior Counsel appearing for the appellants submits that since it is an old appeal this Court instead of remanding the matter for fresh hearing by the learned Tribunal on the ground of not giving opportunity of hearing should be decided by this Court on its merit. He submits that for the purpose of Explanation 3 to Section 40(b)(v) the appellant took into consideration its net profit as shown in the profit and loss account which included granting consultancy fees, interest on bank and company deposit, profit on disposal of cars used in the business and interest on advance tax and those items of incomes were shown in the return under heading ‘income from other sources’.
He submits that although the same was shown under different heading but the same was classified under the aforesaid heading as shown appearing in the matter of computation book profit in terms of Explanation 3 of Section 40(b)(v) as the said explanation provides for taking the net profit as shown in the profit and loss account and not the profit computed under the head ‘profit and gains on business or profession’. Unlike Explanation (baa) to Section 80HHC and Section 33AB both of which mentioned profit as computed under the head ‘profit and gains on business or profession’, the Explanation 3 to Section 40(b)(v) does not refer to any head of income but maintains profit as shown in the profit and loss account however it was intended that for the purpose of Explanation 3 only profit computed under head ‘profits and gains on business or professions’ were to be considered, the expression used in Explanation 33A to Section 80HHC and Section 33AB would have also found place in Explanation 3.
He contends that stipulation for the net profit should be computed in the manner laid down in Chapter IV-D requires that computation provision of Chapter IV-D namely those contained in Sections 30 to 33D should have been followed in computing the net profit. Section 29 of the Act contained in Chapter IV-D deals with computation of income under the head ‘profits and gains on business or profession’. Sections 30 to 43D provide for various deductions. None of the said sections provide for exclusion of any item of income because it does not fall under the head of ‘profits and gains of business or profession’. The reasons for making the computation provisions of Chapter IV-D applicable for computing the book profit is only to ensure that all deductions have been allowed as otherwise an assessee may compute the book profit and higher figure and thereby claim a higher amount by way of remuneration for the purpose of deduction. According to him the quantum of deduction liable in computing income assessed under the head ‘profits and gains of business or profession’ may be computed with reference to income falling under the heads of income such as income from other sources.
He referring to the decision of the Supreme Court in case of Apollo Tyres v. CIT (2002) 255 ITR 273 (SC) submits that as to which item of income should be taken into account for computing the quantum of deduction depends upon the statutory provision allowing the deduction.
He submits further that the appellants in making its computation proceeded on the basis of Explanation 3 to Section 40(b)(v) which view, was correct one to take. He contends assuming another view is possible the Assessing Officer lacked the jurisdiction to act under Section 143(1) (a) or under Section 154 interpretation of Explanation 3 to Section 40(b)(v) requires decision on a debatable question of law which cannot be dealt with as a prima facie adjustment under Section 143(1)(a) or as mistake apparent from the records under Section 154.
He further submits that the procedure under Section 143(1)(a) as was in force during the material period, conferred a very limited power to an Assessing Officer to make an adjustment only in respect of what was obvious or deducible from the return as filed without doubt or debate. For making a prima facie adjustment under Section 143A(a), the deduction claimed had to be inadmissible on the face of the return and documents and accounts accompanying it. He while placing reliance on the decision of this Court in case of Modern Fibotex India Limited & Another v. Deputy Commissioner of Income Tax & others reported in (1995) 212 ITR 496 and in case of G.K.W. Limited v. CIT (2005) 273 ITR 380 and the case of Mintri Tea Company P. limited v. CIT reported in (2009) 319 ITR 264 (Cal) submits that if any factual inquiry was necessary or any debatable question of law had to be decided, it could not be made subject-matter of a prima facie adjustment under Section 143(1) (a) and issue which could not have been dealt with as a prima facie adjustment under Section 143A(a) cannot be dealt with as a mistake apparent from the record within the meaning of Section 154 and logically, he submits if no prima facie adjustment could be made on an issue under Section 143(1) (a) intimation issued under the said provision did not suffer from any mistake apparent from the record and there can be no question of exercising the power under Section 154 for rectifying such an intimation.
He reminds us referring to the decisions of the Supreme Court in case of CIT v. Hero Cycles Private Limited reported in (1997) 22 ITR 463 and Deva Metal Powders (P) Limited v. Commissioner, Trade Tax, Uttar Pradesh reported in (2008) 2 SCC 439 that rectification under Section 154 can only be made if there is a glaring mistake of fact and law but not if the question is debatable. A point which was not examined on fact or in law cannot be dealt with as a mistake apparent from the record within the meaning of Section 154.
Learned counsel for the respondent contends that in the returns filed by the assessee, the book profit for the purpose of computation of remuneration paid to partners has been taken as Rs.9,79,081/- which includes income under the heads ‘granting consultancy fees’ and ‘interest on bank deposit’ totaling to Rs. 18,77,749/-. The assessee himself detailed income under the head income from other sources. From the plain reading of Section 40(b)(v) Explanation 3 of the Act it is manifestly clear that the book profit means only that net profit computed in the manner laid down in Chapter IV-D of the Act which deals with profit and gains on business or profession. It does not include profits chargeable in Chapter IV-F that dealt with income from other sources.
He further submits that in a taxing statue the words of the statue are to be interpreted strictly. Section 40(b)(v) Explanation 3 makes it abundantly clear that the net profit has to be computed in the manner laid down in Chapter IV-D and does not include profit referred to in Chapter IV-F of the Act. He urges that Section 154(1)(b) provides that with view to rectify any mistake apparent from the record an income-tax authority referred to under Section 110 may amend any intimation or deemed intimation under which of subsequent of Section 143 of Act, therefore, Section 154(1)(b) of the Act specifically includes amendment of any intimation under Section 143(1) of the Act. According to him, the action of the Assessing Officer is not at all a debatable issue which is capable of two interpretations since the provisions of Section 40(b)(v) Explanation 3 of the Act is very clear and unambiguous and the only inescapable conclusion as that income falling under the head income from other sources under Chapter IV-F cannot be included under the term book profits the mistake in calculation by the appellant is a mistake apparent from the records and the Assessing Officer has rightly invoked the provisions of Section 154 of the Act and rectified the mistake. Hence there is no illegality and infirmity of the judgment and order of the learned Tribunal. Therefore, the appeal should be dismissed.
After hearing the learned counsel for the parties and after going through the record carefully it appears to us neither the learned Tribunal nor the Commissioner of Income Tax (Appeals) being the two successive Appellate Authority below applied their mind nor examined the orders passed by the Assessing Officer in proceedings under Section 154 of the said Act. They have merely accepted what the Assessing Officer has held. The contention and submission of the assessee was not dealt with at all. Under these circumstances it would have been ideal by this Court to remand the matter to the file of the learned Tribunal for fresh decision on the contention raised before us.
However, having regard to the age of the matter we refrained ourselves from remanding the matter and we decide the matter by ourselves.
As we have already observed learned two authorities below have not decided anything else, we therefore, examined the order passed by the Assessing Officer in relation to aforesaid two assessment years. Three several orders were passed with identical reasons and even language. It appears from the orders of the Assessing Officer when notice under Section 154 was issued replies in writing were given to the Assessing Officer explaining how the computation of remuneration of partners were determined and the same were shown in the audited accounts, the said explanation was not accepted. The Assessing Officer was of the view that the entire profit of the business of the assessee cannot be a book profit for the purpose of explanation 3 of Section 40(b)(v). It is better to quote the language used by the Assessing Officer in three assessment orders as follows:-
“Thus, clearly income from other sources is not to be included in the book profit for the purpose of computation of allowable remuneration to partners.”
In the respective intimations under Section 143(1) (a) of the Income Tax Act, 1961, it was specifically conveyed that the while determining the net profit rather book profit as mentioned in the said Explanation 3 the income from other sources were accepted. But in the order it appears the Assessing Officer was of the view that for the purpose of computation of allowable remuneration to partners the book profit has to be ascertained from the income of the business alone and not from other sources.
Thus, it clearly appears on earlier occasion it was decided that income from other sources could be taken into consideration for ascertaining book profit for the purpose of computation of allowable remuneration to partners not the income from business alone.
Undoubtedly this is a debatable issue and such debatable issue cannot be a ground for rectification under Section 154 of the said Act. This has been well settled by plethora of decisions of the Supreme Court and also High Courts we, therefore, quote few decisions of the Supreme Court on this point.
In the case of CIT v. Hero Cycles Pvt. Ltd. reported in (1997) 228 ITR 463 at page 467-468 it is ruled as follows-
“Rectification under Section 154 can only be made when a glaring mistake of fact or law committed by the officer passing the order becomes apparent from the record. Rectification is not possible if the question is debatable. Moreover, the point which was not examined on fact or in law cannot be dealt with as a mistake apparent on the record. This dispute raised a mixed question of fact and law.”
In the case of Deva Metal Powders (P) Ltd. v. Commissioner, Trade Tax Uttar Pradesh reported in (2008) 2 SCC 439 while examining the scope of Section 22 of U.P. Trade Tax Act, 1948 the language of which is almost pari materia of that of Section 154.The Supreme Court in paragraph 12 of the report held as follows:-
“A bare look at Section 22 of the Act makes it clear that a mistake apparent from the record is rectifiable. In order to attract the application of Section 22, the mistake must exist and the same must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. “Mistake” means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error, a fault, a misunderstanding, a misconception. “Apparent” means visible; capable of being seen; obvious; plain. It means “open to view, visible, evident, appears, appearing as real and true, conspicuous, manifest, obvious, seeming”. A mistake which can be rectified under Section 22 is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration.”
It is appropriate to quote also paragraph 15 of the said report-
“15. “Mistake” is an ordinary word but in taxation laws, it has a special significance. It is not an arithmetical error which, after a judicious probe into the record from which it is supposed to emanate is discerned. The word “mistake” is inherently indefinite in scope, as to what may be a mistake for one may not be one for another. It is mostly subjective and the dividing line in border areas is thin and indiscernible. It is something which a duly and judiciously instructed mind can find out from the record. In order to attract the power to rectify under Section 22, it is not sufficient if there is merely a mistake in the order sought to be rectified. The mistake to be rectified must be one apparent from the record. A decision on a debatable point of law or a disputed question of fact is not a mistake apparent from the record. (emphasis supplied by us). The plain meaning of the word “apparent” is that it must be something which appears to be so ex facie and it is incapable or argument or debate. It, therefore, follows that a decision on a debatable point of law or fact or failure to apply the law to a set of facts which remains to be investigated cannot be corrected by way of rectifications.”
It has been appropriately urged by Mr. Khaitan that in view of the aforesaid authoritative pronouncement of the Supreme Court and the observation recorded as above by us, it is not within the purview of Section 154 rather it could have been an action either by way of revision or by appeal not by a authority of having concurrent jurisdiction exercising power under Section 154 of the said Act.
We are unable to accept the contention of the learned counsel for the Revenue that it is sheer computation mistake based on law. This submission has no force at all in view of the legal position of the Income Tax Act. Clause (v) of Section 40 at that point of time provided as follows:-
“ (v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:-
(1) in case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section –
|a. on the first Rs. 1,00,000 of the book-profit or in case of a loss||Rs.50,000 or at the rate of 90 per cent of the book- profit, whichever is more;|
|b. on the next Rs. 1,00,000 of the book-profit||at the rate of 60 per cent;|
|c. on the balance of the book-profit||at the rate of 40 per cent;|
(2) in the case of any other firm –
|a. on the first Rs. 75,000 of the book-profit or in case of a loss||Rs.50,000 or at the rate of 90 per cent of the book- profit, whichever is more;|
|b. on the next Rs. 75,000 of the book-profit||at the rate of 60 per cent;|
|c. on the balance of the book-profit||at the rate of 40 per cent;|
Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.
Explanation 1.- Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as “partner in a representative capacity” and “person so represented”, respectively), –
(i) interest paid by the firm to such individual otherwise than a partner in a representative capacity, shall not be taken into account for the purposes of this clause;
(ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause.
Explanation 2.- Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.
Explanation 3.- For the purposes of this clause, “book-profit” means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.”
The said chapter nowhere provides that method of accounting for the purpose of ascertaining net profit should be the only income from business alone and not from other sources. Section 29 provides how the income from profits and gains of business or profession should be computed and this has to be done as provided under Section 30 to 43D. By virtue of Section 5 of the said Act that total incomes of any previous years includes all income from whatever source derived. Thus for the purpose of Section 40(b)(v) read with Explanation there cannot be separate method of accounting for ascertaining net profit and/or book-profit. The said section nowhere provides as rightly pointed by Mr. Khaitan, learned Senior Advocate that the net profit as shown in the profit and loss account not the profit computed under the head profit and gains of business or profession.
The decision of the Supreme Court in the case of Apollo Tyres Ltd. v. Commissioner of Income Tax reported in (2002) 255 ITR 273 (SC) is an appropriate guidance of this point as to what should be done in order to ascertain the net profit in case of this nature. At page 280 in the first paragraph of the report the Supreme Court observed as follows:-
“Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income-tax Act for the limited purpose of making the said account so maintained as a basis for computing the company’s income for levy of income-tax. Beyond that, we do not think that the said sub-section empowers the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company’s income, then it would have stated in section 11 5J that “income of the company as accepted by the Assessing Officer”. In the absence of the same and on the language of section 11 5J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal.”
At page 282 of the said report the Supreme Court has also observed amongst other-
“The fact that it is shown under a different head of income would not deprive the company of its benefit under section 32AB so long as it is held that the investment in the units of the UTI by the assessee-company is in the course of its “eligible business”. Therefore, in our opinion, the dividend income earned by the assessee-company from its investment in the UTI should be included in computing the profits of eligible business under section 32AB of the Act.”
Thus it emerges as follows:
Even if the income from other sources is included in the profit and loss accounts to ascertain the net profit qua book-profit for computation of the remuneration of the partners the same cannot be discarded.
In view of the aforesaid discussion as above we, therefore, allow this appeal and we set aside all the orders passed by all authorities below. There will be no order as to costs.