1970 (11) TMI 12 - HC - Income Tax

Rectification on the ground that unearned income had escaped special surcharge would not come within the ambit of section 35 of Indian Income-tax Act, 1922

Summary

Issues:
Challenge to the order of rectification under the Income-tax Act, 1922 and subsequent revision application under section 33A(2) of the Indian Income tax Act, 1922.

Detailed Analysis:

The judgment pertains to a petition challenging the rectification order dated 24th March, 1966, made by the 1st respondent under section 35 of the Income-tax Act, 1922, regarding the assessment year 1957-58. The petitioners, heirs of the original petitioner, contested the rectification order on multiple grounds. Firstly, they argued that the rebate given to an assessee in respect of tax paid by a registered firm cannot be considered unearned income in the hands of the partner under section 14(2)(aa) of the Income-tax Act, 1922. Secondly, they contended that the notice for rectification was issued under the new Act (Income-tax Act, 1961), but the order was passed under the old Act (Income-tax Act, 1922), raising procedural concerns. Thirdly, they asserted that since no tax was payable on the partner's share of tax paid by the firm, no special surcharge could be levied, as surcharge is an addition to tax, and the amount on which no tax is payable cannot be termed as income. Lastly, they argued that the alleged mistake sought to be rectified was not apparent on the face of the record, as required under section 154 of the 1961 Act or section 35 of the 1922 Act.

The respondents justified the rectification based on the definition of earned income in section 2(6AA) of the Income-tax Act, 1922. They argued that any income exempt from tax under section 14(2) is deemed unearned income, justifying the surcharge. The court noted the lack of clear precedent supporting either party's interpretation and acknowledged the technical possibility of treating the income as unearned. However, it emphasized the arguable nature of the issue and cited authorities to highlight that rectification under section 35 requires errors to be glaringly apparent from the record, not open to debate or requiring fresh investigation.

The court referred to relevant case law, including National Rayon Corporation Ltd. v. G. R. Bahmani and Volkart Bros. v. Income-tax Officer, to emphasize that rectification can only be made for mistakes glaringly evident from the record, not those open to interpretation or debate. It concluded that the failure to apply a section of the Income-tax Act, subject to argument and not clearly evident, does not constitute an error apparent on the face of the record. Therefore, the rectification order was deemed illegal and without jurisdiction. The court held in favor of the petitioners, emphasizing the debatable nature of the issue and the lack of clear error evident from the record, making the rectification under section 35 unjustified.

In conclusion, the court made the rule absolute in favor of the petitioners, with each party bearing their own costs. The judgment underscores the requirement for errors to be glaringly apparent from the record for rectification under section 35, emphasizing the need for clarity and lack of debate in rectification proceedings.