Income-tax---

----Rectification of mistake---Mistake apparent from record ---ITO setting off carried forward business loss of assessment year 1976-77 against income from business and interest income shown as income from other sources of assessment years 1979-80, 1980-81 and 1981-82---Assessments rectified by limiting set off of brought forward losses against "income from business" only and to tax income from other sources---Interest income arose from deposits made at instance of Bank to enable Bank to give Bank guarantee-- Interest income closely connected with business income and was part of business income---In any case two views possible on question and point debatable---Rectification not valid---Indian Income Tax Act, 1961, S.154.

For the assessment year 1979-80, the Income-tax Officer computed the business income of the assessee at Rs.2,30,758 and "income from other sources" at Rs.1,07,670; for the assessment year 1980-81 the "income from business" at Rs.1,33,189 and "income from other sources" at Rs.1,85,103; and for the assessment year 1981-82, the total income was computed at Rs.2,99,273 and income from other sources at Rs.1,61,194. For all the three assessment years, the income from other sources was on account of interest, which was earned on the deposits made at the instance of the bank to enable .the bank to give bank guarantee for making bids for the contracts. There was carried forward business loss of Rs.10,20,700 pertaining to the assessment year 1976-77. The Income-tax Officer set off the carried forward business loss and made the assessment for the assessment years 1979-80 and 1980-81 at nil income and the remaining loss of Rs.3,64,983 against the income of Rs.4,61,267 for the assessment year 1981-82. Later, the Income-tax Officer issued notices under section 154 of the Income Tax Act, 1961, for rectifying the assessments by limiting the set off of losses brought forward from the earlier years against the income computed under the head "Business" only and to subject to tax the interest income. The assessee filed objections and overruling the objections, the Income-tax Officer rectified the assessment as, according to him, there was a mistake apparent from the-record in so far as the carried forward business loss was set off against income under the head "Income from other sources", since under section 72(1) of the Act the carried forward business loss of an earlier year could in no case be set off against the profits from a source other than business, profession or Vocation. On appeal to the Commissioner of Income-tax (Appeals), the assessee contended that the deposits which had yielded interest were made at the instance of the bank to enable the bank to give bank guarantee for bidding for the contracts, that the deposits were made in the course of business and as such the interest income arose in the course of the business, and that since the interest income was assessable as business income, there was no mistake in the orders of assessment wherein a set off of the carried forward loss had been allowed against interest as well. In the alternative, the assessee contended that in the event two views were possible in the matter of assessability of the interest like, whether it should be assessed as business income or under the head "Income from other sources", it would not be justified to take recourse to the provisions of section 154, as it could not be said that the setting .off of the carried forward loss against interest income was a mistake that was apparent on the face of records. The Commissioner of Income-tax (Appeals) accepted the contention of the assessee and cancelled the order of rectification on the ground that there could be two views on the question. On further appeal before the Tribunal, the Revenue contended that the assessee itself had shown the interest income under the head "Income from other sources" and the same had been assessed under that head, that it was a patent mistake of law committed by the Income-tax Officer to have set off carried forward business loss against the interest income as well, which was rectifiable under section 154. The Tribunal accepted the contention of the Revenue and held that there was a mistake apparent from the record in giving set off of carried forward business loss of earlier years against interest income of the subsequent years. On a reference:

Held, reversing the decision of the Tribunal, (i) that merely because the assessee had shown the income by way of interest as income from other sources, that would not disentitle it to urge before the authorities that the income earned by way of interest was business income as the said income arose in the course of the business. The assessee had to make deposit in the bank as a condition for obtaining bank guarantee to be filed before the excise authorities as required under the Excise Rules. The interest income which arose out of the transaction was closely connected with the business of the assessee and so the interest income was also part of business income. If the income was assessable as business income, then the-mere circumstance that the assessee had shown it as "income from other sources" or that it was assessed under the head "Income from other sources", should not be made a ground for denying to the assessee the set off of the carried forward losses.

In any case the assessee could not be precluded from establishing before the authorities that it was business income.

(ii) That whether interest income was assessable as "business income" or as "income from other sources" was a debatable point giving rise to the possibility of two views, it could not be said that there was a mistake apparent from the record and that, therefore, the order of rectification under section 154 passed by the Income-tax Officer was not valid.

Snam Progetti S. P. A. v. CIT (Addl.) (1981) 132 ITR 70 (Delhi) and CIT v. Madras Refineries Ltd. (1997) 228 ITR 354 (Mad.) fol.

Balaram (T. S.), ITO v. Volkart Bros. (1971) 82 ITR 50 (SC) ref

G. Sarangan, Senior Advocate for S. Parthasarathy for the Assessee.

M. V. Seshachala for the Commissioner.

JUDGMENT

ASHOK BHAN, J.---For the assessment years 1979-80, 1980-81 and 1981-82, the Income-tax Appellate Tribunal, Bangalore, for short "the Tribunal", has referred the following question of law to this Court with appropriate statement of case. As the issue involved in the appeals before the Tribunal was the same, the appeals were, for the sake of convenience, consolidated and heard together. One common order was passed in all the appeals. The reference applications were also disposed of by a common order, and therefore, this order shall dispose of the reference petitions for all the three years by a common order:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the order, dated December 3, 1985, under section 154 for the assessment year in question?"

The assessee is an arrack contractor. It has been assessed in the status of unregistered firm. In the assessment for the assessment year 1979-80 completed by .the Income-tax Officer, on February 15, 1982, the Income-tax Officer computed income under the head "Business income" at Rs.2,30,758 and income under the head "Income from other sources" at Rs.1,07,670. The total of the business income and the income from other sources came to Rs.3,38,428. For the assessment year 1980-81, the assessment was completed on December 28, 1982. The Income-tax Officer computed income under the head "Income from business" at Rs.1,33,189 and income under the head "Income from other sources" at Rs.1,85,103. The total income came to Rs.3,18,292. Assessment for the assessment year 1981-82, was made on March 31, 1983. The total income was computed at Rs.2,99,273 and the income under the head "Income from other sources" at Rs.1,61,994. For all the three assessment years "the income from other sources", was on account of interest, which was earned on the deposits made at the instance of the bank to enable the bank to give bank guarantee for making bids for the contracts.

There was carried forward business loss of Rs.10,20,700 pertaining to the assessment year 1976-77. The Income-tax Officer set off this carried forward loss and made the assessment for the assessment years 1979-80 and 1980-81 at nil income and the remaining loss of Rs.3,64,983 against the income of Rs.4,61,267 for the assessment year 1981-82. In short, the Income-tax Officer set of the loss suffered for the assessment year 1976-77 against the income earned for the years, 1979-80, 1980-81 and 1981-82.

Later, notices dated July 12, 1985, under section 154 were issued by the assessing authority proposing to rectify the assessment by limiting the set off of brought forward losses from earlier years to the income computed under the head "Business" only and to subject to tax the interest income. Objection letters dated July 17, 1985, were filed by the assessee. Overruling the objections, the assessing authority rectified the assessments. According to the Income-tax Officer, a mistake had crept in the order in so far as the carried forward business loss was set off against the income under the head "Income from other sources". According to him; section 72(1) of the Act makes it clear that the carried forward losses of an earlier year can in no case be set off against. the profits from a source other than business, profession or vocation. It rectified the mistakes committed in the assessments by passing orders under section 154 of the Act.

Being aggrieved by the order of rectification passed by the Income tax Officer, the assessee filed an appeal before the Commissioner of Income tax (Appeals). The argument raised before the first appellate authority was that the deposits which had yielded interest were made at the instance of the bank to enable the bank to give bank guarantee for bidding for the contract. The deposits were made in the course of the business and as such the interest income arose in the course of the business. It was, thus, pointed out that since the interest income was assessable as business income, there was no mistake in the orders of assessment wherein a set off of the carried forward loss had been allowed against interest as well. In the alternative, it was pleaded that in the event two views were possible on the matter of assessability of the interest like, whether it should be assessed as business income or under the head "Income from other sources" was possible, it would not be justified to take recourse to the provisions of section 154 as it could not be said that the setting off of the carried forward loss against interest income was a mistake that was apparent on the face of records. The Commissioner of Income-tax (Appeals) accepted the contention of the assessee and cancelled the order of rectification by holding that for the limited purpose of appeal it was not necessary to give a finding whether interest income in the present case is a business income. By referring to certain decisions of the High Court it was held that there could be two views on this question, and therefore, under such circumstances, the Income-tax Officer was not justified in resorting to the provisions of section 154.

The Department carried a further appeal before the Tribunal. The contention of the Department before the Tribunal was that the assessee itself had shown interest income under the head "Income from other sources". In the assessment made, interest income had been assessed under the head "Income from other sources". Since interest income had been assessed under the head "Income from other sources" it was an obvious mistake committed on the part of the Income-tax Officer to have set off carried forward business loss against the interest income as well. It was stated that it was a patent mistake of law, which was certainly rectifiable tinder section 154 of the Act. The assessee raised the same plea, which it had raised before the first appellate authority.

The Tribunal was of the view that since the assessee had returned income by way of interest under the head "Income from other sources" there was no scope left for debate on the subject whether interest income was the business income of the assessee. Income by -way of interest had also been assessed under the head "Income from other sources." Since the income had been assessed under the head "Income from other sources", it was clear that interest income was not from the business of the assessee. It was ruled that interest income could not constitute business income of the assessee and in such a situation a glaring and patent mistake had crept in the order of the Income-tax Officer in given set off of the carried forward business loss of earlier years against the interest income of the subsequent years. The appeal was accepted and the order of the Income-tax Officer was restored on this point.

The only question to be decided is whether in the facts and circumstances of the case, the Income-tax Officer was within his jurisdiction in making the impugned rectification. The purported rectification has been made in exercise of jurisdiction under section 154 of the Act. The section at the relevant time read as follows:

"154. Rectification of mistake.--With a view to rectifying any mistake apparent from the record an income-tax authority referred to . in section 116 may,-

(a) amend any order passed by it under the provisions of this Act;

(b) amend any intimation sent by it under subsection (1) of section 143, or enhance or reduce the amount of refund granted by it under that subsection...

We have to now see whether the Income-tax Officer was justified in opining that in the original orders of assessment there was only apparent mistake. The admitted case of the parties is that the deposits, which yielded interest were made at the instance of the bank to enable the bank to give bank guarantee for the assessee for bidding for the contract. The deposits were made in the course of the business. Once the deposits are made in the course of business then the interest income would also arise in the course of business. The assessee had shown in his return income by way of interest under the head "Income from other sources" and the Income-tax Officer also assessed the income by way of interest under the head "Income from other sources". Would that be sufficient to conclude that the interest income earned on the deposits made in the bank to get the bank gurantee for making bids in the contracts would be "income from other sources" and not "business income"? Only because the assesee had shown income by way of interest from other sources that would not disentitle it to urge before the authorities that the income earned by way of interests a business income as the said income arose in the course of the business. The assessee had to make deposit in the bank as a condition for obtaining bank guarantee to be filed before the excise authorities as required under the Excise Rules. The interest income which arose out of the transaction is closely connected with the business of the assessee and so the interest income was also part of the business income. If the income is assessable as business income, then the mere circumstances that assessee had shown it as "income from other sources" or that it was assessed under the head "Income from other sources", should not be made the ground for denying the set off of the carried forward losses. In any case the assessee could not be precluded from establishing before the authorities that it was a business income. The predominant view of the various High Courts is that interest income arising from the transaction connected with the business would be interest income.

In Snam Progetti S.P.A. v. Addl. CIT (1981) 132 ITR 70 (Delhi), an Italian company engaged in India in execution of engineering Works running into millions of dollars had large liquid funds. These funds were placed in short-term deposits and interest income was earned thereon. For the assessment year 1970-71,'it had incurred a net business loss of Rs.122 lakhs and in the next assessment year 1971-72 had earned a profits of Rs.30 lakhs and interest income of about Rs.5 lakhs and the question was whether. the business loss for 1970-71 carried forward could be set off against the interest income. A Bench of the Delhi High * Court on these facts held that the assessee had not come from Italy to make bank deposits, but had come to India to carry on business and the income earned by it by depositing spare funds in banks and earning interest thereon would also be business income and for the purpose of set off it could not be treated as separate from business income. It was observed (headnote):

"The question to be seen in such a case is whether the interest income is derived also from what may be described as 'business activity'. If it is so derived then the mere fact that it is taxed under a different section will make no difference. The approach to the problem has, therefore, to be disassociated from the section under which the tax is imposed on the form of income."

Similarly, a Bench of the Madras High Court in CIT v. Madras Refineries Ltd. (1997) 228 ITR 354, held that the deposit made by the as assessee in the bank is capital employed, that would become part of the income of the new industrial undertaking. Any income earned by the capital employed would automatically become the business income of the assessee and it could not be treated as income earned from "other sources". It was held that interest income on bank deposits had to be assessed under the head "Business income".

The point whether the interest income on these facts would be "business income" or "income from other sources" had not been referred to us and, therefore, we need not opine on it and confine ourselves to the question whether two views were possible on this point. From the judgments referred to above of the Delhi and Madras High Courts possibly a view could be taken that interest income on these facts was business income. It was a debatable point and two opinions were possible. If the point is debatable and can give rise conceptually to two opinions, then it would not be a mistake apparent on the face of the -record, authorising the Assessing Officer to exercise jurisdiction under section 154 of the Act. It is the consistent opinion of the Supreme Court as well as the various High Courts that the Assessing Officer would be clothed with jurisdiction under section 154 only if the mistake is apparent, obvious and patent on the face of the record and not admissible to two opinions. In case the mistake is conceivable of two opinions, then it would not be a mistake apparent on the face of the record. the Assessing Officer would, under those circumstances, not have the jurisdiction to rectify the mistake under section 154 of the Act. The Supreme Court in T. S. Balaram, ITO v. Volkart Brothers (1971) 82 ITR 50, summed up this point pithily in the following words (headonte):

"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 be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record."

Since the point was debatable giving rise to the possibility of two views it could not be said to be a mistake apparent on the face of the record and, therefore, the Assessing Officer was precluded from exercising his jurisdiction under section 154 of the Act for rectification of the orders passed earlier by him:

For the reasons stated, we answer the question referred to us in the negative, i.e., in favour of the assessee and against the Department. It is held that the Tribunal was not right in upholding the order of the Income-tax Officer under section 154 of the AC'R for the assessment years in question in exercise of his jurisdiction under section 154 of the Act. No costs.

M.B.A./3387/FC Reference answered.