1963 (8) TMI 56 - HC - Income Tax

Summary

Issues Involved:
1. Validity of rectification under Section 35 of the Indian Income-tax Act, 1922.
2. Classification of income as "income from undisclosed sources" versus "business income."
3. Applicability of Section 24(2) for setting off business losses.

Issue-wise Detailed Analysis:

1. Validity of Rectification under Section 35 of the Indian Income-tax Act, 1922:
The petitioners sought a writ of certiorari to quash an order made by the Income-tax Officer under Section 35, rectifying an error in the assessment for the year 1956-57. The Income-tax Officer issued a notice under Section 35, stating that there was a mistake apparent from the record because the business loss of 1955-56 had been set off against income from undisclosed sources, registered firm, and house property. The petitioners argued that the Income-tax Officer's action was merely a change of opinion and not a rectification of an apparent mistake. However, the court held that under Section 35, the Income-tax Officer could rectify errors of fact or law apparent from the record. The court cited Supreme Court decisions in Maharana Mills (Private) Ltd. v. Income-tax Officer and Income-tax Officer, Alwaye v. Asok Textiles Ltd., which established that the Income-tax Officer could correct errors apparent from the record without requiring debate or argument.

2. Classification of Income as "Income from Undisclosed Sources" versus "Business Income":
The Income-tax Officer initially classified Rs. 40,000 (later reduced to Rs. 30,000 by the Appellate Assistant Commissioner) as "income from undisclosed sources." The petitioner contended that this amount should be treated as business income since the credit entry appeared in the business account. However, the court disagreed, stating there is no inflexible rule that an amount credited in a business account must be taken as business income. The classification depends on the evidence and explanation provided by the assessee. The court referenced previous cases, including Seth Kalekhan Mahomed Hanif v. Commissioner of Income-tax and Ratanchand Dipchand v. Commissioner of Income-tax, to support the view that unexplained cash credits could be treated as income from undisclosed sources if the evidence was insufficient or worthless.

3. Applicability of Section 24(2) for Setting Off Business Losses:
Section 24(2) allows the carry-forward of business losses under certain conditions. The two relevant restrictions are that the loss must be from a business, profession, or vocation, and the same must be continued in the year the loss is set off. The court noted that the business loss of 1955-56 could only be set off against business income if the business continued in 1956-57. Since the Rs. 30,000 was classified as income from undisclosed sources rather than business income, the set-off was not permissible under Section 24(2). The court emphasized that the mistake in the original assessment was apparent from the record, as the Income-tax Officer had clearly treated the amount as income from undisclosed sources, not business income.

Conclusion:
The court concluded that the Income-tax Officer acted within his powers and jurisdiction in rectifying the assessment under Section 35. The rectification was necessary because the original set-off of business loss against income from undisclosed sources was contrary to Section 24(2). The petition was dismissed with costs, affirming the rectification order dated 28th March 1962. The court also noted that the pending appeals did not affect the jurisdiction of the Income-tax Officer to rectify the mistake. The petition was dismissed with costs fixed at Rs. 200, and any outstanding security deposit was ordered to be refunded to the petitioner.