1982 (12) TMI 6 - HC - Income Tax

Summary

Issues Involved:
1. Justification of invoking Section 154 of the Income-tax Act, 1961, for the assessment year 1966-67.
2. Applicability of the Direct Taxes (Amendment) Act, 1974, with retrospective effect.
3. Determination of whether there was an error apparent on the face of the record warranting rectification under Section 154.

Issue-wise Detailed Analysis:

1. Justification of Invoking Section 154 of the Income-tax Act, 1961, for the Assessment Year 1966-67:

The assessee, a registered firm, filed its income return late for the assessment year 1966-67, leading the ITO to levy a penalty of Rs. 24 under Section 271(1)(a) of the Act. Subsequently, the ITO revised the penalty to Rs. 3,674 under Section 154, considering the tax computed as an unregistered firm per Section 271(2). The Tribunal set aside this enhanced penalty, stating that no penalty was leviable since the assessee had paid more tax under Section 140A than due, as interpreted by the Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC). The Tribunal concluded that no tax was due on the penalty date, hence no penalty could be levied, rendering the ITO's order under Section 154 invalid.

2. Applicability of the Direct Taxes (Amendment) Act, 1974, with Retrospective Effect:

The Direct Taxes (Amendment) Act, 1974, amended Section 271(1)(i) with retrospective effect, substituting "tax" with "assessed tax" and adding an Explanation defining "assessed tax." This amendment implied that on the penalty levy date, "assessed tax" was due from the firm, justifying the penalty. The Department filed a miscellaneous petition to modify the Tribunal's order in light of this amendment. The Tribunal, however, focused on whether the ITO's rectification under Section 154 was warranted, concluding that no apparent mistake existed in the original order, thus not addressing the amendment's effect.

3. Determination of Whether There Was an Error Apparent on the Face of the Record Warranting Rectification Under Section 154:

The Tribunal held that the ITO's failure to consider Section 271(2) was not a glaring or patent mistake justifying rectification under Section 154. It referenced the Supreme Court's ruling in T. S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50, stating that a mistake must be obvious and not debatable. The Tribunal noted that the relevant provisions were struck down as unconstitutional by the Karnataka High Court in M. Nagappa v. ITO [1975] 99 ITR 32, reinforcing that the error was not apparent.

Legal Position Clarification:

Ignoring the Direct Taxes (Amendment) Act, 1974, the Tribunal's decision on July 30, 1974, was correct as no penalty was due since no tax was due. However, the Amendment Act's retrospective effect changed this position, making the penalty valid. The Department contended that the ITO could rectify his order based on the Amendment Act, supported by the Supreme Court's decision in M. K. Venkatachalam, ITO v. Bombay Dyeing and Manufacturing Co. Ltd. [1958] 34 ITR 143 (SC), which allowed rectification of orders inconsistent with retrospective amendments.

Conclusion:

The High Court concluded that the Tribunal should have revised its order and upheld the ITO's rectification under Section 154, given the retrospective amendment. The question referred was answered in favor of the Department, stating that the invocation of Section 154 was justified. Hence, the Tribunal's failure to consider the retrospective amendment's effect was an error, and the ITO's rectification was valid.