1969 (12) TMI 26 - HC - Income Tax

Jurisdiction to rectify the assessment - mere fact that the notice issued before rectification referred to section 154 of the new Act instead of section 35 of the old Act would not take away the Income-tax Officer s jurisdiction to rectify the assessment - merely because officer had mentioned the wrong section his jurisdiction to rectify can not taken away

Summary

Issues Involved:
1. Legality of the Income-tax Officer's order under section 154 of the Income-tax Act, 1961.
2. Classification of the sum of Rs. 25,233 as salary income.

Detailed Analysis:

Issue 1: Legality of the Income-tax Officer's Order Under Section 154 of the Income-tax Act, 1961

Contention of the Assessee:
The assessee argued that the proceedings under section 154 of the Income-tax Act, 1961, were illegal as there was no "mistake apparent on the face of the record." The assessee contended that the amount of Rs. 25,233 was business income, not salary, and hence, the set-off against business losses was correct. The assessee also argued that the proper provision to be invoked should have been section 35 of the old Act of 1922, not section 154 of the new Act of 1961.

Tribunal's Decision:
The Tribunal upheld the order of the Income-tax Officer, dismissing the assessee's appeal. It found no substance in the assessee's contentions, confirming that the sum of Rs. 25,233 was part of the salary income and not business income.

Court's Analysis:
The court examined whether the rectification under section 154 was valid. It noted that the Income-tax Officer had treated Rs. 25,233 as business income, which was a mistake apparent from the record. The court stated that the entire remuneration under the service agreement should be classified under one head, either salary or business income, not both. The court cited the decision in Burmah-Shell Refineries Ltd. v. G. B. Chand, where the complexity of the problem was not sufficient to oust the jurisdiction for rectification.

Jurisdictional Issue:
The court referred to S. Sankappa v. Income-tax Officer, where it was held that rectification proceedings for assessment years prior to the commencement of the 1961 Act should be under section 35 of the 1922 Act, not section 154 of the 1961 Act. The court agreed with the assessee that the proceedings should have been under the old Act. However, it also cited Hazari Mal Kuthiala v. Income-tax Officer, stating that a wrong reference to the power under which an order is made does not per se vitiate the order if there is another power under which the order could lawfully be made.

Conclusion:
The court held that the Income-tax Officer's order could be treated as one under section 35 of the old Act. However, this would render the appeals to the Appellate Assistant Commissioner and the Tribunal, and the subsequent reference, without jurisdiction. Consequently, the reference was deemed incompetent, and the court declined to answer the questions, awarding costs to the revenue.

Issue 2: Classification of the Sum of Rs. 25,233 as Salary Income

Contention of the Assessee:
The assessee argued that the sum of Rs. 25,233 received under the service agreement was business income, not salary. The assessee relied on several judicial decisions to support the contention that the nature and scope of activities under the agreement indicated a business relationship rather than an employer-employee relationship.

Court's Analysis:
The court examined the service agreement dated June 2, 1957, which explicitly stated that the relationship was not one of partnership but a contract of service. The court noted that the assessee was prohibited from engaging in any other business and had to act under the general instructions of the employer. The remuneration included a fixed allowance and an additional 1/4th share of the profits earned by the employer.

The court distinguished the present case from the decisions cited by the assessee, such as Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad and Qamar Shaffi Tyabji v. Commissioner of Excess Profits Tax, where the nature of the agreements and the responsibilities of the parties involved indicated a business relationship. In contrast, the court found that the assessee in the present case was a full-time employee with no independent discretion, acting under the employer's directions.

Conclusion:
The court concluded that the sum of Rs. 25,233 was part of the salary income and not business income. The service agreement clearly indicated an employer-employee relationship, and the remuneration received under the agreement was correctly classified as salary income.

Summary:
The High Court of Madras held that the Income-tax Officer's order under section 154 of the Income-tax Act, 1961, was valid in correcting the mistake of treating Rs. 25,233 as business income instead of salary income. However, the court also noted that the proper provision to be invoked should have been section 35 of the old Act of 1922. The court treated the order as one under section 35, rendering the appeals and reference without jurisdiction. Consequently, the reference was deemed incompetent, and the court declined to answer the questions, awarding costs to the revenue. The court also affirmed that the sum of Rs. 25,233 was correctly classified as salary income under the service agreement.