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TMI Blog1982 (5) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... d notice and the matter was referred to the IAC who heard the assessee and approved the proposals of the ITO as required under section 107 of the Act. He passed the order under section 104 on 25-3-1977. There were two parallel developments thereafter. In working out the tax, the ITO had made a mistake in basing the calculation of tax on the shortfall in distribution, i.e., Rs. 6,40,343, with reference to the amount that should have been distributed to avoid section 104 (i,e., 90 per cent) and not to the entire distributable income as required under section 104. Meanwhile the assessee had appealed against the order under section 104 and had already lost the appeal when the AAC has confirmed the assessee's liability under section 104 vide his order dated 31-12-1977. The ITO discovered his mistake in not reckoning the shortfall with reference to distributable income and proposed to rectify the mistake under section 154 of the Act. The assessee vide its reply dated 26-10-1978 claimed that no rectification is possible as the original order had already merged with the order of the AAC. It was, therefore, claimed that the ITO had no power to rectify his order any more. It was also claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llify this position taken by the Kerala High Court. This amendment merely codified the pre-existing law. The Gujarat High Court in the case of Karsandas Bhagwandas Patel v. G. V. Shah, ITO [1975] 98 ITR 255 has pointed out that in the case of a single penal tax as under section 23A of the Indian Income-tax Act, 1922 ('the 1922 Act') (analogous to section 104 of the 1961 Act), the merger is total and approved the view of the Kerala High Court. He, therefore, contended that he is entitled to succeed in respect of both these appeals on the point of merger. He also claimed that he is entitled to succeed even on the issue of non-approval by the IAC. He claimed that such approval was mandatory and could not be dispensed with. The learned departmental representative claimed that the assessee was in error on both claims, which, according to him, were too technical and bereft of any merit. As for merger theory, he claimed that section 154(1A) protected the action of the ITO. The view of the Kerala High Court, in his opinion, is no longer good law. He pointed out that the decision of the Gujarat High Court, approving this decision is in the nature of obiter. He also claimed that the matter i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellate Assistant Commissioner affirmed it. The order under section 23A made by the Income-tax Officer would in such a case be replaced wholly by the order of the Appellate Assistant Commissioner ; there would be complete merger or fusion of the order of the Income-tax Officer with the order of the Appellate Assistant Commissioner.... " The above observation cannot be dismissed as mere obiter, Section 154(1A) reads as under : " Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided. " We are not in a position to say that the above section is intended to counteract the general theory of merger. Section 154(1A) which was introduced by the Direct Taxes (Amendment) Act, 1964, with effect from 6-10-1964, has only clarified that the merger is not always total. Even otherwise this has been the view of the Courts. The ITO has no right to rectify mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs must be held to be proceedings for assessment. In proceeding under those provisions, what the Income-tax Officer does is to correct errors in, or rectify orders of, assessment made by him, and orders making such corrections or rectifications are, therefore, clearly part of the proceedings for assessment.' The High Court in the judgment under appeal has extracted the above passage from Sankappa's case, but allowed itself to be misled by it. Correctly appreciated, the passage means that what the Income-tax Officer does in a proceeding under section 35(1) is to correct errors in assessment or rectify orders of assessment made by him. Either of such orders is a part of the proceeding of assessment. In our considered opinion correcting an apparent error in an order made under section 23A of the Act is rectifying a mistake in the record of assessment and clearly falls within the ambit of the power conferred upon the Income-tax Officer under section 35(1) of the Act. " While we agree with the assessee that the construction of the provisions of this Chapter XI of the Act would require strict interpretation on the ground that it seeks to levy a penal tax, we cannot accept the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cability of section 23A as the determination of tax was not then a part of such order under section 23A before 1955. It is, therefore, clear that the approval expected even after 1955 cannot be said to have enlarged to the extent of foisting the responsibility on the IAC for the determination of the tax itself. If he was not responsible at that time for approving the tax, it stands to reason that he is not expected to grant a fresh approval when a mistake in tax calculation is sought to be corrected. Hence, in any view of the matter, we do not think that the prior approval was necessary for an order under section 154 though we might have wished that the ITO had avoided the controversy by referring the matter for approval especially when this objection was raised by the assessee before him. Even if we had considered that such approval by the IAC was necessary, we would not have cancelled the order of the ITO but only set aside with a direction to have it sent for approval or otherwise by the IAC as alternatively requested by the learned departmental representative. We would have been justified in doing so in view of the Supreme Court decision in CIT v. National Taj Traders [1980] 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parent order required approval by a higher authority, we are not in a position to say the rectification of a mistake under section 154 or other statutory amendment to the order under section 155 would similarly require an approval. We might have understood the assessee's argument if some purpose or cause would be served thereby. If such proposed rectification or amendment could have had an impact on the original decision to invoke section 104, we would have understood the assessee's argument. In the assessee's case approval was granted even when the distributable income was actually smaller than it turned out finally. There were no new facts. We have, therefore, to uphold the second order as valid in law. Prior approval by the IAC is not required for same reasons as mentioned in respect of rectification in para 5 supra. As observed therein, even if we had agreed with the assessee that such prior approval was necessary, we would have accepted the alternative argument of the learned departmental representative and set aside the order with a direction to pursue the action which was validly initiated under section 155(7) within time since it is not a case where the action was ab init ..... X X X X Extracts X X X X X X X X Extracts X X X X
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