TMI Blog2001 (2) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... said sum to tax was that the assessee had carried forward a sum of Rs. 3.50 lakhs advanced to Lake Palace Hotels and Motels (P.) Ltd., Udaipur, at an interest of 5 per cent. per annum and had further advanced a sum of Rs. 1.50 lakhs during the previous year on interest at 10 per cent. per annum. With effect from January 1, 1974, the rate of interest on the advance of Rs. 3,50,000 was also enhanced to 10 per cent. per annum. In the said company Maharana Bhagwat Singh was having substantial interest and he also happened to be the managing trustee of the assessee-trust. In view of these facts, the Income-tax Officer was of the view that the amount of Rs. 3,50,000 lent by the trust was to a person referred to in subsection (3) of section 13 and the interest being inadequate the market rate of interest was applied at 10 per cent. and the difference of the estimated income, which was considered to be applied for the benefit of such trustee, was accordingly taxed. However, the claim of the assessee for exemption under sections 11 and 12 in respect of other income was accepted. Denial of exemption in respect of certain income because of investment made in Lake Palace Hotels and Motels ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... highly debatable, and the mistake, if any, was not rectifiable and, secondly, because the order of the Income-tax Officer dated September 27, 1976, in respect of the assessment of income arising to the trust on account of investment made in the company in which Maharana Bhagwat Singh has substantial interest having been subjected to appeal and affirmed by the appellate authority, the order of the Income-tax Officer on the subject-matter merged with the order of the Appellate Assistant Commissioner, thereafter, the Income-tax Officer was left with no jurisdiction to initiate proceedings under section 154, were not accepted by the Income-tax Officer. An order of rectification was passed on July 17, 1980, bringing the alleged income of the trust, from donation stated to be as per the original assessment, subject to charge of tax. However, a comparative reading of the two orders do not support this statement. It appears that only the income from donation was subjected to tax and such income was earlier not at all included in the total income. How the amount of income from donations has been computed is neither discernible from the original assessment order nor from the rectification or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in valid exercise of his jurisdiction and has been correctly made. Learned counsel for the respondent reiterated both the contentions raised throughout before the Revenue authorities, namely, that the issue involved is highly debatable which could not be the subject-matter of rectification proceedings and that the order of the Income-tax Officer having merged in the order of the Appellate Assistant Commissioner, the Income-tax Officer lost jurisdiction to resort to the power of rectification under section 154 of the Act. The contours of jurisdiction under section 154 are well settled. Section 154 authorises every income-tax authority to amend any order passed by it under the provisions of this Act with a view to rectifying any mistake apparent from the record. "Mistake apparent from the record" is an expression, which has received judicial interpretation time and again and the courts have held that any mistake which is not obvious, or self-evident or which is to be discovered by effort, or is plausibly debatable cannot be considered to be a mistake apparent from the record. In T. S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50 (SC) the principle was laid bare. It was said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court. However, wide the expressions in the rule are construed, they cannot countenance a re-argument on merits on questions of fact or law, or permit a party to raise new arguments which he has not advanced at the first instance." A similar view was expressed by the Supreme Court in connection with the powers of rectification under section 154 of the Income-tax Act, 1961, with which we are concerned, recently in CIT v. Hero Cycles P. Ltd. [1997] 228 ITR 463 (SC). Referring to the provisions of section 154 of the Act of 1961 in Civil Appeal No. 7665 of 1996, out of a batch of petitions decided by the court, it was held that rectification is not possible if the question is debatable. Moreover, the point which was not examined on facts or in law cannot be dealt with as a mistake apparent on the record. It was a case in which in the original proceedings, the Income-tax Appellate Tribunal had not considered the claim of the assessee under section 35B of the Act of 1961. On an application for rectification made by the assessee, the Incometax Appellate Tribunal had resorted to the provisions of rectification and allowed the assessee's claim in respect of matters like coloured albums, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group of petitions of which Writ Petition No. 132 of 1963 gave rise to this very question. It was a case in which the dividend income received by the petitioner from the company was grossed up and credit for the tax was given to them as a result of the decision of the Appellate Assistant Commissioner of the Income-tax in their appeals. After the appeal was decided by the Appellate Assistant Commissioner, the Income-tax Officer resorted to powers under section 35 of the Indian Income-tax Act, 1922, for amending his own original order in respect of grossing up of the dividends. Against the exercise of jurisdiction under section 35 of the Indian Income-tax Act, 1922 (the corresponding provision to section 154 of the 1961 Act), the assessee has contended that in view of the merger of the order of the Income-tax Officer, in the case of grossing up the dividend income, in the order of the Appellate Assistant Commissioner, the Income-tax Officer had no jurisdiction to resort to section 35 of the Act of 1922. The court upheld the contention of the assessee and held : "The whole purpose of creating a hierarchy of authorities having appellate or revisional jurisdiction would be frustra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es or modifies the order passed by the lower authority. On such decision by the appellate authority, the order of the lower authority would stand merged in the order of appellate authority and the only order which thereafter could be amended is the order of the appellate authority accepted or decided. That has been also the view taken by the Allahabad High Court in Krishna Rice and Oil Mills v. CST [1987] 67 STC 195. It was a case where the appellate authority has modified the order of the Assessing Officer which affirmed the order passed by the Appellate Assistant Commissioner in appeals filed by the Revenue. Thereafter, the Commissioner of Sales Tax sought to invoke the power, of rectification in the original order of the appellate authority for the purpose of levy of surcharge. The application was opposed by the assessee on the main ground that as the order passed by the appellate authority dated February 3, 1981, has merged now in the subsequent order of the Tribunal dated October 23, 1982, the rectification of the said order was not possible by the lower appellate authorities. However, the appellate authority rejecting the objection rectified its earlier order which was aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or applied, directly or indirectly for the benefit of any person referred to in sub-section (3): Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period before the 1st day of June, 1970. . . (2) Without pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is not to be included for the purpose of sections 11 and 12 if any part of such income or any property of the trust or institution is during the previous year used directly or indirectly for the benefit of any person referred to in sub-section (3). Likewise, sub-section (2) of Section 13 creates a legal fiction. The provisions of clause (c) of sub-section (1) that for the purposes of subsection (1)(c) the application of income or part of income in the manner enumerated in various sub-clauses is deemed to have been used or applied for the benefit of a person referred to in sub-section (3) which, inter alia, deems to include in terms of sub-section (2) of section 13, if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3) for any period during the previous year without either adequate security or adequate interest or both. Thus, sub-section (1)(c), sub-section (2) and sub-section (3) of section 13 are integral parts of the same scheme and sub-section (3) does not operate and cannot be applied without reference to the provisions of section 13(1)(c) and 13(2)(a). These are the only two provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refers to "in-adequacy" of interest. It may be pertinent to notice that it is only on the finding that the income part of the funds of the trust has continued to be lent to Lake Palace Hotels and Motels Pvt. Ltd., in which the managing trustee of the trust has substantial interest for a period of nine months during the previous year at inadequate interest on the finding of that the reasonable rate of interest chargeable was 10 per cent. whereas money has been lent to the company for a period of nine months only at the rate of 5 per cent. Merely because the provision has not been referred to, it cannot be said that the additions in the income have been made without reference to those provisions. Thus, in our opinion, the very basis for invoking jurisdiction in respect of the order passed by the Income-tax Officer does not exist. Moreover, in the totality of the scheme of section 13, sub-section (4), too deserves consideration. It is a non-obstante clause envisaging anything contained in section 13(1)(c), if the aggregate of the funds invested in a concern in which any person referred to in sub-section (3) of section 13 has a substantial interest, does not exceed five per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was not passed by taking into consideration relevant provision. If there is any ground to support the reasoning given by the Assessing Officer about non-consideration of sub-section (1)(c) or (2) on the basis of no reference to such provision in the order for initiating proceedings for complete denial of exemption, there is equal probability of the Income-tax Officer having considered all the provisions including sub-sections (1), (2) and (4) before making the order particularly when it is apparent that the original order was fully justified if made with the aid of sub-section (4) when none of the provisions have been specifically referred to and the order is supportable under one of such provision which is part of the total scheme of section 13, it cannot be said that the mistake alleged is obvious or self-evident which could be discovered without establishing the necessary facts. In these circumstances, there is nothing to presume that the additions made in the assessment of the trust by disallowing exemption to the extent of income derived from Lake Palace Hotels and Motels Ltd. was in ignorance of the provision of sub-section (4) of section 13. In these circumstances, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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