Income-tax---

----Rectification of mistake---Non-resident shipping concern ---Loss-- Depreciation---Law applicable to assessment---Carry forward and set off of losses and depreciation---Insertion of section 44B of Indian Income Tax Act, 1961 with effect from 1=4-1976---Amendment necessitating bifurcation of 1Qsses and unabsorbed depreciation---Set off of total of losses and unabsorbed depreciation in assessment years 1974-75 and 1975, -76---Not a mistake which can be rectified---Indian Income Tax Act, 1961, Ss.44B & 154.

The assessee was a non-resident company engaged in the business of shipping. It incurred losses in the assessment years 1968-69, 1970-71, 1971-72 and 1972-73. The losses were carried forward and set off against profits for the assessment years 1969-70 and 1973-74 onwards. In setting off such losses, the Income Tax Officer, who made the original assessments for the assessment years 197.1-75 and 1975-76, did not make any distinction between unabsorbed depreciation and business loss. Subsequently, in view of the amendment of the Income Tax Act, 1961, which introduced section 44B with effect from April 1, 1976 which provided that the net profit of seven and a half percent. had to be estimated on the gross receipts from freight and ignoring the existing sections for computation of such income, the Income Tax Officer was of the opinion that there was a mistake in the assessment orders for the assessment years 1974-75 and 1975-76. The Income Tax Officer, therefore, invoked the provisions of section 154 of the Act for both the years. The Tribunal held that the proceedings under section 154 were not valid. On a reference:

Held, that it was only with effect from the assessment year 1976-77 that section44B of the Act was made applicable and the profit was computed at a sum equal to 7-1/2% of the aggregate of the amounts specified in section 44B(2) of the Act and no loss due to unabsorbed depreciation was allowed as a set-off against the profits. The Income Tax. Officer was not entitled to do indirectly what he was not permitted to do directly. So long as the provisions of section 44B did not come into operation, the assessee was entitled to set off the business loss as well as unabsorbed depreciation against the income of the years in question and it would appear that the loss in its entirety in some of the years had been set off. Thus, it could not be said that the orders for- the assessment years 1974-75 and 1975-76 contained a mistake apparent from the record calling for rectification and the question of bifurcation of losses under two different heads did not arise. The Tribunal was justified in cancelling the Income Tax Officer's order under section 154.

Arvind N. Mafatlal v. ITO (1957) 32 ITR 350 (Bom.); Balaram (T.S.) ITO v. Volkart Bros. (1971) 82 ITR 50 (SC); ITO v. Arvind N. Mafatlal (1962) 45 ITR 271 (SC); Maharana Mills (Pvt.) Ltd. v. ITO (1959) 36 ITR 350 (SC) and Universal Cargo Carriers Inc. v. CIT (1987) 165 ITR 209 (Cal.) ref.

SK Mitra and RC. Prasad for the Commissioner.

Dr. Pal and Miss M. Seal for the Assessee.

JUDGMENT

AJIT K. SENGUPTA, J.---In this reference under section 256(1) of the Income Tax Act, 1961, for the assessment years 1974-75 and 1975-76, the following question of law has been referred to this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the orders of the Commissioner of Income-tax (Appeals) cancelling the orders passed by the Income Tax Officer under section 154 of the Income Tax Act, 1961?".

Shortly stated, the facts are that the assessee incurred losses in the assessment years 1968-69, 1.970-71, 1971-72 and 1972-73. The losses were carried forward and set-off against profits of the assessment years 1969-70 and 1973-74 onwards. In setting off such losses, the Income Tax officer, who made the original assessments for the assessment years 1974-75 and 1975-76, did not make any distinction between unabsorbed depreciation and business loss and allowed a total loss of Rs.8,63,760 for the assessment year 1968-69, Rs.1,72,066 for the assessment year 1970-71, Rs.14,97,375 for the assessment year 1971-72, and Rs.42,16,245 for the assessment year 1972-73. -In the assessment year 1973-74, there was a profit of Rs. 4,12,440. The Income Tax Officer adjusted the loss of the assessment year.1968-69 to the extent of Rs. 4,12,440 without making any distinction between unabsorbed depreciation and business loss. Similarly, in the assessment year 1974-75, there was a profit of Rs.8,62,012. This was partly adjusted against the remaining loss for the assessment year 1968-69 and the loss for the assessment year 1970-71, and the balance profit was adjusted against the loss for the assessment year 1971-72. In the assessment year 1975-76, there was a profit of Rs. 18,84,870 and the Income Tax Officer adjusted the remaining loss for the assessment years 1971-72 and 1972-73 against this profit. Subsequently, in view of the amendment of the Income Tax Act, 1961, by introducing section 448 with effect from April 1, 1976, by which the net profit of seven and a half per cent had to be estimated on the gross receipts from freight and ignoring the existing sections for computation of such income, the Income Tax Officer was of the opinion that there was a mistake in the assessment orders for the assessment years 1974-75 and 1975-76. The Income Tax Officer, therefore, invoked the provisions of section 154 of the Act for both the years under appeal and withdrew the benefit of set-off already made in the assessment years 1974-75 and 1975-76 to the extent of unabsorbed depreciation.

Being aggrieved, the assessee filed an appeal to the Commissioner of 'Income-tax (Appeals). It was pointed out by the assessee that, in-the original assessments for the assessment years 1968-69 and 1970-71, no distinction was made between business loss and unabsorbed depreciation. The assessee further contended before the Commissioner of Income-tax (Appeals) that, if at all there was a mistake, such mistake was committed in the assessment orders for the assessment years 1968-69 and 1970-71, and unless these assessment orders were rectified, the Income Tax Officer was not justified in rectifying the assessment orders for the assessment years 1974-75 and 1975-76. The Commissioner of Income-tax (Appeals) accepted this argument of the assessee and cancelled the orders passed by the Income Tax Officer under section 154 of the Income Tax Act.

Being aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue filed appeals before the Tribunal and it was contended on behalf of the Revenue that whether the loss- in any year may be carried forward to the following year and set off against the profits and gains in the subsequent years has to be determined by the Income Tax Officer who deals with the assessment for the subsequent year.

On behalf of the assessee, the order of the Commissioner of Income tax (Appeals) was strongly supported. The Tribunal found that the Commissioner of Income-tax (Appeals) had given elaborate reasons for coming to the conclusion that the provisions of section 154 have no application to the facts of the case for both the assessment years under consideration. The Tribunal, therefore; upheld the order of the Commissioner of Income-tax (Appeals).

Dr. Pal, on behalf of the American Export Lines Inc., submits that the relevant assessment years are 1974-75 and 1975-76. The law as it then stood did not preclude the unabsorbed depreciation being set off against the business profits of the assessee who is a non-resident company engaged in the business of operation of ships. It is only by the introduction of section 44B-with effect from the assessment year 1976-77 that a sum equal to 7-1/2% of the aggregate of the amount specified in subsection (2) is deemed to be the profits and gains of such business chargeable to tax. Such profit is to be computed notwithstanding anything to the contrary contained in sections 28 to 43A of the Act. Therefore, it is only with effect from the assessment year. 1976-77 that section 448 of the Act is made applicable and the profit is computed at a sum equal to 7-1/2% of the aggregate of the amounts specified in section 448(2) of the Act and no loss due to unabsorbed depreciation is allowed as a set-off against the said profits. But the business loss may be carried forward anti allowed as a set-off as fixity of profit at a steady percentage overrides only' sections 28 to 43A of the Act. The short-cut in profit computation under the changed law may, for the assessment year 1976-77 onwards, call for bifurcation of the loss due to unabsorbed depreciation and the business loss. But such ascertainment of loss due to unabsorbed depreciation and business loss was not warranted by the law as it stood prior to the assessment year 1976-77. In those years, both business loss and the loss due to unabsorbed depreciation could be allowed as a set-off in computing the business income of a non resident shipping company. In fact, prior to the introduction of section 448 of the Act, the income of a non-resident shipping company was to be computed in accordance with the provisions of sections 28.to 43A of the Act and, therefore, the loss due to unabsorbed depreciation as also business loss were to be allowed as a set-off in computing the business income. Hence, for the assessment years 1974-75' and 1975-76, the Income Tax Officer had correctly applied the law and allowed the set-off both on loss due to unabsorbed depreciation and on business loss. Hence, there was no mistake apparent from the record in the order of the Income Tax Officer for the said two assessment years. In any event, whether after the introduction of section 448 of the Act with effect from April 1, 1976, loss due to unabsorbed depreciation should not be allowed and only business loss can be allowed under section 72 of the Act is a debatable question on which two conceivable views may exist. In such a case, the alleged mistake, if any, is not apparent from the record in view of the decision of the Supreme Court in T.S. Balaram. ITO v. Volkart Bros. (1971) 82 ITR 50 and various other decisions given by the different High Courts in the light of the aforesaid decision of the Supreme Court.

In any event, the loss due to unabsorbed depreciation and business loss has to be ascertained by investigating into the facts for the assessment years 1968-69 and 1970-71 which was not the subject-matter for rectification. Such investigation of facts is not permissible in a proceeding under section 154 of the Act.

In any event, if there is a mistake in not ascertaining the business loss and loss due to unabsorbed depreciation for the assessment years 1968-69 and 1970-71, in that event the orders for those years called for rectification if at all under section- 154 of the Act. 'As no proceeding for rectification under section 154 of the Act could be initiated for the said years because they have become tune-barred, the Income. Tax Officer cannot by a circuitous procedure, seek to rectify the mistake, if any, in the assessments for 1968-69 and 1970-71.

The short question which calls for determination in this case is whether there is any mistake apparent from the records for the assessment years 1974-75 and 1975-76. It appears that the Income Tax Officer sought to rectify the assessment orders for the aforesaid two years after section 44B of the Income Tax Act, 1961, came into force on April 1, 1976. The contention of the Department is that unabsorbed depreciation cannot be set off in view of the provisions of section 44B and it was, therefore, necessary to find out to what extent the unabsorbed depreciation accounts for the overall loss. The relevant orders by which the loss was allowed as a whole without distinction as between unabsorbed depreciation and business loss, the Income Tax Officer did not rectify. It appears that, because limitation barred rectification of the orders for the assessment years 1968-69, 1969-70, 1970-71, 1971-72 and 1972-73, the Income Tax Officer claimed that the mistake occurred when the business profit for the assessment years 1974-75 and 1975-76 had been considered without bifurcating loss under two different heads. As laid down in Maharana Mills (P.) Ltd. v. ITO reported in (1959) 36 ITR 350 (SC), the Income Tax Officer is entitled for the purpose of exercising jurisdiction under section 35 to look into the whole evidence and the law applicable to ascertain whether there was an error. If he doubts the written down value of the previous year, it is open to him to check up the previous calculations and if he finds any mistake, it is open to him to make fresh calculations in accordance with the law applicable including the rules made thereunder.

After section 44B came into force on April 1, 1976, the question might have arisen as to whether any unabsorbed depreciation could be carried forward against the business income or income under that head from the assessment year 1976-77. This Court in Universal Cargo Carriers Inc. v. CIT reported in (1987) 165 ITR 209 observed that; in view of the clear language of section 44B, while it is open to the assessee to claim adjustment of business loss of past years, which have been carried forward against its business income computed under the said section, it is not open to the assessee to put unabsorbed depreciation carried forward in the same bracket as carried over business loss and also seek adjustment of the same. The assessee must come strictly within the four corners of the section in order to be entitled to the advantage.

In our view, the mistake, if any, would have arisen for the assessment year 1976-77 and the Income Tax Officer, in making the assessment order' for the assessment year 1976-77 could have determined if any loss, carried forward from the earlier years, included any loss on account of unabsorbed depreciation. That was the course open and, in such a proceeding, the Officer would have been perfectly within his rights to look into the whole record, not merely confining himself to the order of assessment. All proceedings which constitute part of the evidence on which the assessment order is made are regarded as record for the purpose of rectification (See Arvind N. Mafatlal v. ITO (1957) 32 ITR 350 (Bom.) affirmed by the Supreme Court in ITO v. Arvind N. Mafatlal (1962) 45 ITR 271 and Maharana Mills (Pvt.) Ltd. v. ITO (1959) 36 ITR 350 (SC)). There was no mistake as such in the assessment orders which the Income Tax Officer sought to rectify. Those assessment orders could afford indisputable evidence of what mistake marked the assessment for assessment year 1976-77. In making the assessment for the assessment year 1976-77, he could have looked into the records to find out the extent of the business loss which would be set off against the income in view of the provisions of section 44B. As a matter of fact, he issued a notice under section 154 for the assessment year 1976-77, but ultimately dropped the said proceedings.

The Income Tax Officer is not, in our view, entitled to do indirectly what he was not permitted to do directly. So long as the provisions of section 44B did not come into operation, the assessee was entitled to set off the business loss as well as unabsorbed depreciation against the income of the years in question and, as a matter of fact, from the chart which has been relied on before the Tribunal as well as before the Commissioner of Income-tax (Appeals), it would appear that the loss in its entirety in some of the years had been set off. Thus, it could not be said that the orders for the assessment years 1974-75 and 1975-76 contained a mistake apparent for the record calling for rectification. In our view, therefore, there is really no mistake in the orders of assessment for the assessment years 1974-75 and 1975-76 and the question of bifurcation of the losses under two different heads did not arise.

By consent of the parties, the order of assessment for the assessment year 1976-77 and a notice which was issued under section 154 of the Act dated January 20, 1978, in the aforesaid assessment order had been placed before us. It will appear from the assessment order for the assessment-year 1976-77 that the assessee-claimed the entire income to be adjusted against the unabsorbed depreciation and unabsorbed business loss. But the Income Tax Officer, as a matter of fact, allowed the entire business loss for the years 1968-69, 1969-70, 1970-71,1971-72 and a part of 1972-73. The entire profit has been wiped out by the business loss of these years. He also directed that the assessment for the assessment year .1972-73 shall be carried forward for the subsequent years.

For the reasons aforesaid, the question in the reference is answered in the affirmative and in favour of the assessee.

There will be no order as to costs

BHAGABATI PRASAD BANERJEE, J.---I agree

M.B.A./142/T.F.Reference answered.