Income-tax---

----Rectification of mistakes---Special deduction---Newly established industrial undertaking---Computation of capital base---Preliminary expenses and share issue expenses not included in first two years of relief---Included in third year--.Rectification to exclude sums from computation of capital-- Proper---No long drawn out reasoning required---Sums in question not includible in capital base---Indian Income Tax Act, 1961, Ss.80J & 154-- Indian Income Tax Rules, 1962, R. 19A.

The assessee-company was incorporated in 1964 and was granted relief under section 80J of the Income Tax Act, 1961, commencing from the assessment year 1968-69. For the assessment year 1970-71, which was the third year of relief under section 80J of the Income Tax Act, 1961, the Income-tax Officer made an assessment including, inter alia, two sums representing preliminary expenses and share issue expenses, appearing in the balance-sheet as miscellaneous expenditure, as part of the capital employed for purposes of working out the relief, though these expenses were excluded from the capital base in the first two years. Subsequently, by an order of rectification 'Under section 154 of the Act, the income-tax Officer modified the relief under section 80J excluding these expenses from the computation of the capital base. The assessee filed an appeal questioning the jurisdiction of the Income-tax Officer under section 154 and the exclusion of the expenditure in question from the capital base. The Appellate Assistant Commissioner decided the question on the merits against the assessee. On further appeal, the Tribunal found after a detailed discussion on the merits that the preliminary expenses and the share issue expenses were not represented by any assets and did not form part of the capital base within the meaning of rule 19A(3) of the Income Tax Rules, 1962, but held that since the disallowance relating to these amounts could be made only after consideration of several arguments, the withdrawal of relief with reference to these amounts would not be within the scope of section 154. On a reference:

Held, that the assessment year under consideration was the third year in the matter of granting relief under section 80J of the Act. In the first two years the two items of expenses in question were -not included in ascertaining the capital base for the purpose of relief under section 80J. If these expenses were included in the assessment year under consideration for ascertaining the capital base, that would look odd. In the subsequent years also it was held that those two kinds of expenses were not includible in the capital base for relief under section 80J. Therefore, the Income-tax Officer was correct in excluding these two expenses while ascertaining the capital base for the assessment year under consideration. Moreover, a plain reading of rule 19A of the Income Tax Rules, 1962, would go to show that preliminary expenses and share issue expenses were not included as assets for the purpose of inclusion, while ascertaining the capital base for granting relief under section 80J of the Act. Therefore, when the two amounts in question were included in the capital base in the assessment year under consideration for granting relief under section 80J, that would itself amount to an error apparent on the face of the record, warranting exercise of Jurisdiction under section 154. No long drawn out process of reasoning was required to exclude the preliminary expenses and the share issue expenses from the capital base for the purpose of relief under section 80J of the Act. The jurisdiction under section 154 had been rightly assumed by the Income tax Officer.

Modella Woollens Ltd. v. CIT (1979) 120 ITR 726 (Bom.) rel. -

For the rectification of an error, which is said to be apparent from the record, the mere complexity of the problem or that genuine argument is necessary to discover the same, may not by themselves be sufficient to oust the jurisdiction of the Department to rectify such a mistake. If it could be discerned with some precision after a fair probe into the assessment records and a reasonable and probable conclusion can be arrived at and the Court's conscience has been shaken in that there appears an error on the face of the record, which has to be certainly corrected, then the jurisdiction of the Tribunal vesting it with power to rectify such a mistake arises. The essence of rectification is to bring the order, which was expressed and intended to be in pursuance of the existing law, into harmony with such law. Once the Tribunal or authority is able to predicate with certainty as to in what manner and how the order suffers by a mistake apparent from the record supported by irrefragable evidence, then it would enable them to bring the order complained against or impugned in conformity with the law and the facts in the record.

Balaram (T.S.), ITO v. Volkart Bros. (1971) 82 ITR 50 (SC) and Rajam (T.S.),v. CED (1968) 69 ITR 342 (Mad.) ref.

C. V. Rajan for the Commissioner.

T. N. Seetharaman for C. V. Mahalingam, K. J. Rebello, R. Santhanakrishnan and R. Meenakshisundaram for the Assessee.

JUDGMENT

K. A. THANIKKACHALAM,-J.---In compliance with the direction given by this Court in T. C. P. No. 128 of 1979, dated October 9, 1979, the Tribunal referred the following question, for the opinion of this Court, under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act )

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in its view that section 154 of the Income-tax Act, could not have been applied for rectifying the errors in disallowing the slims of Rs.14,549 and 85.78,011 being the preliminary and share issue expenses from the value of assets aggregated under rule 19A(3)?"

The assessee is a company incorporated in 1964. The assessee has started the business of manufacturing rectified spirit for industrial purposes on December I ; 1966, and the first accounting period relevant to this date ended on March 31, 1967, and the first relevant assessment year for the purposes of relief under section 80J of the Act for this business was assessment year 1968-69. Assessment year 1970-71 wherein the dispute now under reference had arisen. is the third year of relief under section 80J. In the original assessment, the Income-tax Officer had construed an amount of Rs.1,05,573 appearing in the balance-sheet as miscellaneous expenditure as part of the capital employed for purposes of working out the relief. This sum of Rs.1,05,573 comprised preliminary expenses amounting to Rs.14,549; share issue expenses amounting to Rs.78,011 and deficit in profit and loss account, am minting to Rs.13,013. However, the Income-tax Officer rectified the assessment under section 154 of the Act stating that consequent on the change of depreciation of earlier years, as per reassessment of even date, the assessment required to be modified. Further, development rebate has been allowed in preference to unabsorbed depreciation. Though he purportedly sought to rectify the assessment on these two grounds, he also modified the relief under section 80J of the Act in working out the deficiency to be carried forward by a fresh working shown in an annexure to the said order of rectification, dated March 8,1974. This Annexure did not give any reasons for variation from the relief allowed in the original assessment. However, he did not include the amount of Rs.1,05,573 as capital employed.

Aggrieved, the assessee filed an appeal before the Appellate Assistant Commissioner, questioning the jurisdiction under section 154 of the Act and the denial of inclusion of the aforesaid miscellaneous expenditure as part, of the capital base. The Appellate Assistant Commissioner in appeal decided the question on the merits against the assessee. Aggrieved, the assessee filed an appeal before the Appellate Tribunal. In a common order relating to the assessment years 1968-69 to 1972-73, the Tribunal considered the computation of relief under section 80J in respect of the amount of Rs.1,05,573 shown as miscellaneous expenditure for the purpose of computation of capital base under section 80J on the merits. 1t found after detailed discussion on the merits regarding Rs.14,549 relating to preliminary; expenses and Rs.78,011 relating to share issue expenses that they did not form part of the capital base within rule 19A(3) or otherwise, since the preliminary expenses are not represented by any value, but they are shown in the balance-sheet for the sake of complete exhibition of financial affairs. So were the expenses relating to share issues. The decision was arrived at after discussion of some authorities on accountancy. As for the balance of Rs.13,013, it was also found to be not an asset. In other words, it was found that the decision taken by the Income-tax Officer was correct on the merits However, for the assessment year 1970-71, the Income--tax Officer himself had worked out the relief by treating the entire miscellaneous expenditure as capital lie sought to withdraw the relief in an order under section 154 of the Ac;. The Tribunal concluded that the matter relating to rectification by way of withdrawal of relief to the extent of Rs.13,03 forming part of miscellaneous expenditure of Rs.1,05,573 was beyond any controversy an constituted a mistake apparent from the record. To J this extent, the withdrawal of relief was considered justified. However, in respect of the other two amounts of Rs.14,549 and Rs.78,011 representing preliminary, expenses and share issue expenses, it was found that the disallowance relating to these amounts could be made only after consideration of several arguments. It was, therefore, concluded that the withdrawal of relief with referrer if, these amounts would not be within the scope of section 154 and hence the appeal on this point was allowed in part relating to these two amounts.

Learned standing counsel appearing for the Department submitted that section 80J relief has got to be calculated from the assessment year 1968-69-. The assessment year under consideration, viz., 1970-71, is the third year in the matter of granting relief under section 80J of the Act. In the earlier two years, the Income-tax Officer did not consider the preliminary expenses and share issue expenses as assets and, therefore, they were excluded while computing the capital base for relief under section 80J. But the assessment year under consideration, viz., 1970-71, considering that mistake his occurred in including the preliminary expenses and share issue expenses in the capital base for the purpose of relief under section 80J Income-tax Officer invoked his jurisdiction under section 154 of the Act rectify the mistake by withdrawing the inclusion of the abovesaid two expenses while calculating the capital base. Therefore, according to learned standing counsel for the Department there is an error apparent on the face of the record in the original assessment computed by the Income-tax Officer for the, assessment, year under consideration where he failed to exclude the abovesaid two expenses, while calculating the capital base for relief under section 80J. Hence according to learned standing counsel for the Department exercise of jurisdiction under section 154 of the Act was in order. Learner standing counsel further submitted that in the earlier two years these two expenses were excluded while ascertaining the capital base. Therefore, the abovesaid two expenses cannot be included while arriving at the capital base for relief under section 80J in the third year. Learned standing counsel also pointed out that since there were several arguments to consider the abovesaid two expenses as assets, that would not itself go to show that there was a long drawn process in ascertaining whether these two expenses are really in the nature of assets. Even on this ground also learned standing counsel appearing for the Department submitted that the jurisdiction of the Income tax Officer under section 154 of the Act cannot be questioned. Learned standing counsel also pointed out that there are no two views possible in the matter of ascertaining whether the two expenses in question are in the nature if assets. For these reasons, it was submitted that the Tribunal was not correct in holding that there is no error apparent on the face of the record, warranting jurisdiction under section 154 of the Act.

On the other hand, learned counsel appearing for the assessee while supporting the order passed by the Tribunal, submitted that in the matter of understanding whether the preliminary expenses and the share issue expenses are in the nature of assets, even the Tribunal entered into a long drawn process in arriving at this conclusion. Therefore, it cannot be said that there is any mistake apparent on the face of the record, while the Income-tax Officer decided to include the abovesaid two items of expenses while ascertainingthe capital base.

We have heard learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. The point for consideration is whether the Tribunal was correct in holding that there is no jurisdiction for the Income-tax Officer to invoke the provisions of section 154 of the Act to exclude the preliminary expenses and share issue while ascertaining the capital base, which was originally included by the Income-tax Officer in his original assessment, even though on the merits, the Income-tax Officer was correct in excluding the abovesaid two expenses while ascertaining the capital base for the assessment year under consideration.

The first year of assessment in the case of the assessee for granting relief under section 80J of the Act is 1968-69. The assessment year under consideration is 1970-71, which is the third year. In the first two years, the Income-tax Officer has not included the preliminary expenses amounting to Rs.14,549 and the share issue expenses mounting to Rs.78,011, while ascertaining the capital base for relief under section 80J of the Act. In the third year, viz., the assessment year 1970-71, in the original assessment, the Income-tax Officer included the abovesaid two expenses while determining the capital base for relief under section 80J. Later on, he realised the mistake and exercising his jurisdiction under section 154 of the Act, excluded the abovesaid two items of expenses in determining the capital base.

The question whether the abovesaid two expenses were in the nature of assets, depends upon long drawn process of reasoning. The Tribunal itself came to the conclusion that the abovesaid two items of expenses were not assets in nature, after a prolonged discussion, based upon the accountancy principles. Therefore, the Tribunal held that even though on the merits the Income-tax Officer was correct in excluding the abovesaid two items of expenses while ascertaining the capital base, but with regard to the jurisdiction under section 154 of the Act, the Tribunal held that the Income tax Officer was not correct in rectifying the mistake, since there was no error apparent on the face of the record, inasmuch as ascertaining whether the abovesaid two expenses are in the nature of assets, depends upon along drawn process of reasoning.

It remains to be seen that the assessment year under consideration is the third year in the matter of granting relief under section 80J of the Act. In the first two years the abovesaid two items of expenses were not included in ascertaining the capital base for the purpose of relief under section 80J of the Act If these expenses were included in the present assessment year under consideration for ascertaining the capital base, that would look odd. In the subsequent years also it was held that these two kinds of expenses were includible in the capital base for relief under section 80J of the Act. Therefore, the Income-tax Officer was correct in excluding these two expenses while ascertaining the capital base in the assessment year under consideration.

In T. S. Balaram, ITO v. Volkart brothers (1971) 82 ITR 50 (SC), at page 53 it is stated: "that a mistake apparent on the record must be an obvious and patent mistake and not something, which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions." A plain reading of rule 19A would go to show that preliminary expenses and share issue expenses were not included as assets for inclusion, while ascertaining relief the capital base far granting under section 801 of the Act. Therefore, when the abovesaid two amounts were included in the capital base in the assessment year under consideration for granting relief under section 801 of the Act, that would itself amount to an error apparent on the face of the record, warranting jurisdiction antler section 154 of the Act. Only to show that these two expenses are ill the nature of assets, a long drawn process of reasoning required. The long drawn process of reasoning required to show that these two kinds of expenses are really in the nature of assets, would not go to show that there is an (no ?) error apparent on the face of the record warranting jurisdiction under section 154 of the Act.

It is also significant to note that the Bombay High Court in Modella Woollens Ltd. v. CIT (1979) 120 ITR 726, held "that although, according to the accountancy practice, preliminary expenses and share capital issue expenses ;Ire shown on the assets side of the balance-sheet of a company, such assets will have to be regarded as nominal or theoretical expenses. It has to be on (lie assets side for the purpose of drawing a proper balance sheet, but it is common knowledge that when the company starts earning profits, these expenses which are shown on the assets side are written off partly or wholly depending on the availability of profits. In fact, in the present case, the assessee made to a request to the Tribunal to consider these two expenses as assets. However, the tribunal did not accede to this request ".

In T. S. Rajam v. CED (1968) 69 ITR 342 (Mad), this Court held that (headnote) for a rectification of an error, which is said to be apparent from the record, the mere complexity of the problem or that genuine argument is necessary to discover the same may not by themselves be sufficient to oust the jurisdiction of the Department to rectify such a mistake If it could lie discerned with some precision after a fair probe into the assessment records and a reasonable and probable conclusion can be arrived, at and the Court's conscience has been shaken in that there appears an error on the face of the record. Which had to be certainly corrected, then the Jurisdiction of the Tribunal vesting it with power to rectify such a mistake arises. The essence of rectification is to bring the order, which was expressed and intended to be in pursuance of the existing law into harmony with such law. Once the Tribunal or authority is able to predicate with certainty as to in what manner and how he order suffers by a mistake apparent from the record supported by irrefragable evidence, then it would enable them to bring the order complained against or impugned against in conformity with the law and the facts in the record.

If an obvious error, a lurking mistake or an omission leading to a mistake is discovered from the record, it can be and ought to be corrected and rectified. Thus, considering the facts in this case, we are of the opinion that no long drawn process of reasoning is required to exclude the preliminary expenses and the share issue expenses in the capital base for the purpose of relief under section 80J of the Act. Accordingly, we hold that the Tribunal was not correct in coming to the conclusion that there is no error apparent on the face of the record, warranting jurisdiction under section 154 of the Act. In that view of the matter, we answer the question referred to us in the negative and in favour of the Department. No costs.

M.B.A./3174/FCQuestion answered.