1986 (5) TMI 20 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the rectification proceedings under section 154 of the Income-tax Act, 1961, versus section 35 of the Indian Income-tax Act, 1922.
2. Competence of the appeal before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal.
3. Limitation period for rectification.
4. Inclusion of brought forward losses in the computation of taxable profits for grossing up the dividend.

Detailed Analysis:

1. Validity of the Rectification Proceedings:
The primary issue was whether the rectification proceedings initiated by the Income-tax Officer were valid under section 154 of the Income-tax Act, 1961, or whether they should have been conducted under section 35 of the Indian Income-tax Act, 1922. The Tribunal held that the proceedings should be deemed to have been initiated under section 35 of the 1922 Act due to the provisions of section 297(2)(d)(i) of the 1961 Act, which allows continuity of proceedings under the old Act if they were initiated before the new Act came into force. The Tribunal concluded that the rectification proceedings were thus governed by the 1922 Act.

2. Competence of the Appeal:
The Revenue contended that the Appellate Assistant Commissioner erred in entertaining the appeal since no appeal lay from an order under section 35 of the 1922 Act. The Tribunal agreed, citing various precedents, including *Mela Ram & Sons v. CIT* and *S. Sankappa v. ITO*, which established that rectification orders under section 35 were not appealable. However, the Tribunal also noted that the appeal had been filed and entertained under section 154 of the 1961 Act, which is an appealable order. The Tribunal's decision was influenced by the precedent set in *Imperial Chemical Industries Ltd. v. CIT*, which allowed the Income-tax Officer the discretion to proceed under the new Act.

3. Limitation Period for Rectification:
The Tribunal held that the rectification was barred by limitation. The mistake that was sought to be rectified had occurred in the original assessment orders passed in 1959 and 1962. The rectification should have been made within four years from these dates. The Tribunal cited the decisions in *VR.C.R.M. Adaikkappa Chettiar v. CIT* and *CIT v. National Small Industries Corporation Ltd.*, which supported this view.

4. Inclusion of Brought Forward Losses:
The Revenue argued that the Income-tax Officer should have included the brought forward losses of the Indian company in the computation of taxable profits for grossing up the dividend. The Tribunal found this issue to be highly debatable and not free from doubt. It was held that the mistake, if any, related to the original assessment orders and was thus barred by limitation. The Tribunal noted that the earlier orders did not specifically address the issue of brought forward losses, making the rectification contentious.

Conclusion:
The High Court held that the Income-tax Officer had the jurisdiction to proceed under section 154 of the 1961 Act, as established in *Imperial Chemical Industries Ltd. v. CIT*. The appeal to the Appellate Assistant Commissioner was deemed competent, and the question referred was considered academic. The court refused to answer the question and directed the Revenue to make a formal application for a certificate to appeal to the Supreme Court, noting that the decision in *Imperial Chemical Industries Ltd.* had not been expressly dissented from by any other High Court. The judgment emphasized the discretionary power of the Income-tax Officer under section 297 of the 1961 Act and the binding nature of the precedent.