Facts

The assessee was a firm registered under both the Indian Income-tax Act, 1922 as well as the Income-tax Act, 1961. The assessee firm had two partners who were assessed in India as non-residents. The assessment of the firm for the relevant assessment years was made on slab rates applicable to registered firms based on  the respective Finance Acts. However, in the individual assessment of the partners who were non-residents, their respective shares in the income of the firm was included and assessed at the maximum rate of tax.

The assessee received a notice from the tax authorities stating that in the assessment for AY 1958-59 and 1960-61 to 1962-63, there were mistakes apparent on record as the assessee firm was not charged to tax at the maximum rate under section 17(1) of the 1922 Act. The tax authorities sought to rectify the assessment and enhance the tax under section 154 of the Act. The assessee contended that there was no mistake either apparent or otherwise and the AO had no power to invoke jurisdiction under section 154 of the Act. However, the AO went ahead    and rectified the assessment by applying the provisions of section 17(1) of the 1922 Act and thereby raised a fresh notice of demand. The assessee challenged    the validity of the rectification orders passed under section 154 of the Act  by way of a writ. The High court held that there was no obvious or patent mistake in the assessment orders and the original assessments were prima facie in accordance with law and the ITO was incompetent to pass the impugned orders.

Issue

Whether it is within the powers of the AO/ITO to make the impugned rectification under section 154 of the Act to the original assessment orders and whether the mistake sought to be rectified is an obvious and patent mistake?

View

In the decision of Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Triumale [1960] 1 SCR 890 (SC), which was rendered in respect of scope of powers of a High Court under Article 226 of the Constitution, it was held that an error which has to be established by a long drawn process of reasoning      on points, where there may conceivably be two opinions cannot be said to be an error apparent from the face of the record. Further, the decision of Sidhramappa Andannappa Manvi v. CIT [1952]21 ITR 333 (Bom) (HC), it was held that a decision on a debatable point of law is not a mistake apparent from record.

Held

The Honourable Supreme Court analysed the provisions of  section 17(1) of  the 1922 Act, wherein, a person being a non resident would be taxable at the maximum rate plus super tax. However, section 17(1) can apply only to a ‘person’ as defined in section 2(9) of the 1922 Act. The expression person was defined to include only a HUF and a local authority. A firm was not considered a person as defined and hence the provisions of section 17(1) of the 1922 Act could not apply    to the assessee firm. However, the provisions of section 2(31) of the Act defined      a person to include a firm. Whether the definition contained in section 2(31) of    the Act is an amendment of the law or merely declaratory of the law that was       in force earlier was kept open by the Supreme Court. The Supreme Court held    that since the application of the provisions of section 17(1) of the 1922 Act to the assessee was not free from doubt and there could be two opinions, the ITO was   not justified in his view that there could be no two opinions. The Supreme Court further held that the ITO cannot go into the scope of the provisions of the Act        in proceedings under section 154 of the Act as a mistake apparent on the record must be an obvious and patent mistake and not something which requires a long drawn process of reasoning where there may be conceivably two opinions. Hence, a decision on a debatable point of law is not a mistake apparent from the record. (AY. 1958-59,1960-61 to 1962-63) (CA No. 1170 of 1968 dt. 5-8-1971)

Editorial: Refer, CIT v. Hero Cycles P. Ltd. (1997) 228 ITR 463 (SC), similar wordings are used in section 254(2) of the Act in CIT v. Ramesh Electric and Trading Co. 203 ITR 497 (Bom) (HC) and the ratio is equally applicable here. CBDT Circular No. 68 dt. 17-11-1971 (1972) 83 ITR 6 (St), states that a mistake

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