1973 (7) TMI 16 - HC - Income Tax

New Industrial Undertaking - Deemed Dividend - Development Rebate Reserve - Rectification notices under section 154

Issues Involved:
1. Validity of rectification notices under section 154 of the Income-tax Act, 1961.
2. Allowance of development rebate on rolling mill rolls.
3. Creation and timing of development rebate reserve.
4. Binding nature of circulars issued by the Central Board of Direct Taxes.
5. Treatment of dividend adjusted against a loan under section 2(22)(e) of the Income-tax Act.

Detailed Analysis:

1. Validity of Rectification Notices under Section 154 of the Income-tax Act, 1961:
The petitioner challenged the rectification notices and orders issued under section 154 of the Income-tax Act for the assessment years 1965-66, 1966-67, 1967-68, and 1968-69. The petitioner argued that there was no mistake apparent from the record, as required for rectification under section 154. The court referenced the Supreme Court's judgment in T. S. Balaram, Income-tax Officer v. Volkart Brothers, which held that a mistake apparent on the record must be an obvious and patent mistake, not one requiring a long-drawn process of reasoning. The court concluded that since there were differing opinions among various High Courts on the issue, it was a debatable point of law, and thus, no mistake apparent from the record existed. Consequently, the rectification notices and orders could not be sustained as valid.

2. Allowance of Development Rebate on Rolling Mill Rolls:
The petitioner had claimed development rebate on rolling mill rolls based on a circular dated 16th November 1968, issued by the Central Board of Direct Taxes, which directed Income-tax Officers to allow development rebate on such rolls. The Income-tax authorities later sought to rectify the assessments, arguing that the Supreme Court's judgment in Indian Overseas Bank Ltd. v. Commissioner of Income-tax required the creation of a development rebate reserve before making up the profit and loss account of the relevant assessment year. The court, however, found that the Supreme Court had not decided the specific issue of the timing for creating the development rebate reserve. Therefore, the rectification based on this ground was not justified.

3. Creation and Timing of Development Rebate Reserve:
The court reviewed various High Court decisions on the timing of creating the development rebate reserve. The Gujarat High Court in Surat Textile Mills Ltd. v. Commissioner of Income-tax held that the reserve must be created in the same accounting year. In contrast, the Andhra Pradesh High Court in Veerabhadra Iron Foundry v. Commissioner of Income-tax and the Punjab and Haryana High Court in Commissioner of Income-tax v. Sardar Singh Sachdeva held that the reserve could be created before the assessment was completed. The court agreed with the latter view, stating that the Supreme Court had not laid down a specific timing requirement for creating the reserve. Thus, the petitioner's creation of the reserve in subsequent years due to a bona fide mistake was acceptable.

4. Binding Nature of Circulars Issued by the Central Board of Direct Taxes:
The petitioner argued that the circulars issued by the Central Board of Direct Taxes (CBDT) were binding on the Income-tax Officers. The court referred to section 119 of the Income-tax Act, which empowers the CBDT to issue orders, instructions, and directions for the proper administration of the Act, and these must be followed by the Income-tax authorities. The court also cited the Supreme Court's judgments in Navnit Lal C. Javeri v. K. K. Sen and Ellerman Lines Ltd. v. Commissioner of Income-tax, which held that such circulars are binding and can provide administrative relief to taxpayers. Consequently, the court held that the circulars dated 16th November 1968 and 21st November 1958 were binding, and there was no mistake apparent from the record.

5. Treatment of Dividend Adjusted Against a Loan under Section 2(22)(e) of the Income-tax Act:
In Miscellaneous Petition No. 190 of 1972, an additional issue involved the treatment of a dividend adjusted against a loan from Belpahar Refractories Ltd., a subsidiary of the petitioner. The petitioner had received a deposit of Rs. 20,00,000, treated as a loan and taxed as a dividend under section 2(22)(e) in the assessment year 1963-64. For the assessment year 1965-66, a dividend of Rs. 17,29,647 was declared and adjusted against the loan. The Income-tax Officer initially granted relief under section 85, but later sought to rectify this, arguing that the dividend adjusted against the loan was not a dividend under section 2(22)(e) and thus not eligible for relief. The court agreed with the Income-tax Officer, holding that the dividend adjusted against the loan was not a dividend by virtue of proviso (iii) to section 2(22)(e) and thus not eligible for relief under section 85.

Conclusion:
In Miscellaneous Petition No. 190 of 1972, the court set aside the rectification notices and orders pertaining to the development rebate but upheld the rectification concerning the tax on Rs. 14,12,954. In Miscellaneous Application No. 226 of 1973, the court made the rule absolute in favor of the petitioner, setting aside the rectification notice and orders with costs.

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