1957 (1) TMI 40 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the rectification order under section 35 of the Indian Income-tax Act.
2. Jurisdiction of the Income-tax Officer to rectify mistakes.
3. Nature of mistakes that can be rectified under section 35.
4. Assessment of dividend income and its distribution.
5. Credit for tax paid by the company on dividend income.
6. Applicability of sections 16(2) and 18(5) of the Indian Income-tax Act.
7. Jurisdiction of the High Court to quash the rectification order.

Issue-wise Detailed Analysis:

1. Validity of the Rectification Order under Section 35 of the Indian Income-tax Act:
The core issue was whether the Income-tax Officer's order dated 12th October 1955, modifying the total world income of the assessee, was valid. The petitioners contended that the rectification order was ultra vires and illegal. The court found that the notice under section 35 was not related to a genuine error, thus the rectification order lacked jurisdiction and was invalid.

2. Jurisdiction of the Income-tax Officer to Rectify Mistakes:
The court held that even though the Phaltan State Income-tax Act was repealed, for purposes of levy, assessment, and collection of income-tax and super-tax, it survived. Rectification of a mistake in assessment is considered part of "assessment" within the meaning of section 7 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949.

3. Nature of Mistakes that can be Rectified under Section 35:
The court clarified that section 35 of the Indian Income-tax Act allows rectification of any mistake "apparent from the record" and is not limited to clerical or arithmetical errors. The mistake must be "patent on the record and not one that requires elucidation, argument, or debate." The court disagreed with the contention that the mistake must be "apparent on the face of the record."

4. Assessment of Dividend Income and Its Distribution:
The Income-tax Officer had assessed the assessee based on the dividend income received through the firm of Mafatlal Gagalbhai & Sons, treating the assessee as a nominee. The court noted that the Income-tax Officer should have assessed the real owner of the shares, i.e., the firm, and not the assessee individually. The dividend income in the hands of the firm could not be regarded as dividend income in the hands of the assessee.

5. Credit for Tax Paid by the Company on Dividend Income:
The court observed that the Income-tax Officer erred in giving credit for the tax paid by the company on the dividend income to the assessee, who was assessed as a partner of the firm. The mistake lay in giving credit for the tax paid by the company and not in failing to gross up the income under section 16(2).

6. Applicability of Sections 16(2) and 18(5) of the Indian Income-tax Act:
The court referred to the case of Shree Shakti Mills, Ltd. v. Commissioner of Income-tax, which held that only the shareholder of a company to whom dividends are paid is entitled to the procedures under sections 16(2) and 18(5). Since the assessee was a nominee and not the real owner, sections 16(2) and 18(5) did not apply. The real owner, Mafatlal Gagalbhai & Sons, could not process the income under these sections.

7. Jurisdiction of the High Court to Quash the Rectification Order:
The court concluded that the rectification order dated 12th October 1955 was without jurisdiction as it was based on an error that was not apparent from the record. The High Court had the jurisdiction to quash the order, demand notice, and chalans for recovery of excess tax. The court emphasized that even though the specific ground was not raised before the Income-tax Officer, the plea of want of jurisdiction was sufficient for the High Court to grant relief.

Conclusion:
The rule was made absolute, and the rectification order dated 12th October 1955, along with the consequent demand notice and chalans, was set aside. The court made no order as to costs, considering the petitioners succeeded on a ground not clearly set up in the petition.