Commissioner of Income-Tax V. Ramesh Electric & Trading Co

Commissioner of Income-tax v. Ramesh Electric & Trading Co. HIGH COURT OF BOMBAY I.T. REFERENCE NO. 253 OF 1977 NOVEMBER 6, 1992 MRS. SUJATA MANOHAR AND B.N. SRIKRISHNA, JJ. Counsels appeared Dr. V. Balasubramanian and P.S. Jetley for the Appellant. S.N. Inamdar for the Respondent . JUDGMENT Mrs. Sujata Manohar, J. —The assessee carries on a business in electrical goods and appliances. For the assessment year 1970-71, for which the accounting period is the financial year ending with 31-3-1979, the assessee debited a sum of Rs. 54,000 as commission paid to one Neeta Electric Corporation, Bombay. The firm of Neeta Electric Corporation was a partnership firm in which two of the partners of the assessee-firm were partners. The other partners of Neeta Electric Corporation were the wives of the partners in the assessee-firm and the fifth partner of Neeta Electric Corporation was an employee in the assessee-firm. Thus, all the five partners of the firm of Neeta Electric Corporation had close links with the assessee-firm. 2. Under an agreement dated 29-10-1969, entered into between the assessee-firm and Neeta Electric Corporation, it was agreed that the assessee-firm would pay a commission on purchases made by the assessee-firm through Neeta Electric Corporation from Bombay at the rate of two per cent on the first Rs. 20 lakhs and at 1½ per cent on any excess over Rs. 20 lakhs. 3. The assessee claimed that they had paid a sum of Rs. 54,000 to Neeta Electric Corporation as commission during the relevant year, and this amount was claimed by the assessee-firm as a deduction under section 37 of the Income-tax Act, 1961. The Income-tax Officer disallowed this deduction after examining evidence and holding that the so-called commission was not paid for business purposes but for some other reasons. The Appellate Assistant Commissioner upheld the findings of the Income-tax Officer, holding that there was no evidence produced by the assessee in respect of the services rendered by Neeta Electric Corporation. 4. The assessee preferred an appeal before the Appellate Tribunal. The Appellate Tribunal, by its order dated June 9, 1975, dismissed the appeal. While doing so, the Tribunal also examined the relevant circumstances. It relied upon the observation of the Supreme Court in the case of CIT v. A. Raman & Co. [1968] 67 ITR 11 , and held that, if, by adopting a device, it is made to appear that the income which belonged to the assessee has been earned by some other person, that income may be brought to tax in the hands of the assessee. It said that it is open to the Income-tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37. The Tribunal observed that the assessee was asked by the Income-tax Officer to produce evidence, such as correspondence, etc., with Neeta Electric Corporation, to prove the services rendered by Neeta Electric Corporation. No such evidence was adduced either before the authority below or before the Tribunal. The Tribunal did not accept the assessee's explanation that all directions were given on phone in view of the magnitude of the transactions effected. The Tribunal also noted the fact that the assessee-firm had a Bombay office for making purchases and the expenses incurred in respect of the Bombay office were claimed as business expense. The Tribunal also noted that in the purchase bills of the assessee which were called for, there was no reference to the order being placed by the so-called commission agent. The Tribunal also noted the relationship between the partners of the assessee-firm and the partners of Neeta Electric Corporation, and said that the circumstances were collectively sufficient to compel the Tribunal to hold that the purchasing agency agreement between the appellant-firm and Neeta Electric Corporation was only a make-believe arrangement. 5. The assessee moved a Miscellaneous Application dated July 4, 1975, under section 254(2) of the Income-tax Act, 1961, seeking rectification of the order of the Tribunal dated June 9, 1975. The letter for moving this application states that, although the appeal memo before the Tribunal contained five different grounds of appeal, the order of the Tribunal dated June 9, 1975, did not mention three of these grounds of appeal. The assessee contended that the order of the Tribunal did not consider some of the arguments advanced by the assessee. The Tribunal entertained this application and in the purported exercise of its power of rectification under section 254(2) of the Income-tax Act, 1961, it apparently reheard the matter, reassessed all the circumstances and allowed the deduction of commission payment to Neeta Electric Corporation by its order dated November 6, 1975. From this order of the Tribunal dated November 6, 1975, the following two questions have been referred to us under section 256(1) of the Income-tax Act, 1961: "1. Whether, on the facts and in the circumstances of the case, the Tribunal acted without jurisdiction and/or acted beyond its jurisdiction in setting aside its order dated June 9, 1975, and allowing the appeal? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the commission of Rs. 54,000 paid to Messrs. Neeta Electric Corporation as a deduction under section 37 of the Income-tax Act, 1961"? 6. Under section 254(2) of the Income-tax Act, 1961, the Appellate Tribunal may, "with a view to rectifying any mistake apparent from the record", amend any order passed by it under sub-section (1) within the time prescribed therein. It is an accepted position that the Appellate Tribunal does not have any power to review its own orders under the provisions of the Income-tax Act, 1961. The only power which the Tribunal possesses is to rectify any mistake in its own order which is apparent from the record. This is merely a power of amending its order. The extent of this power of rectification was considered by the Supreme Court as far back as in 1971 in the case of T.S. Balaram, ITO v. Volkart Bros. [1971] 82 ITR 50 . The Supreme Court said (head note): "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." This view of the Supreme Court has held the field for a long time, and has been followed by other High Courts. Thus, for example, in the case of V.P. Minocha, ITO v. ITAT [1977] 106 ITR 691 , the Gujarat High Court relying upon T.S. Balaram's case ( supra ), said that a decision given by the Tribunal on a debatable point of law cannot be subsequently considered as showing any mistake apparent from the record which the Tribunal could consequently rectify. Similarly, the Madras High Court in the case of CIT v. R. Chelladurai [1979] 118 ITR 108 , said that the Tribunal's power under section 254(2) is not to review its earlier order but only to amend it with a view to rectifying any error apparent from the record. The Court held that, in the case before it, the Tribunal had no power or authority to interfere with the quantum of penalty in exercise of its power of rectification. In the case which is before us, it is obvious that the Tribunal's earlier order of June 9, 1975, was based on the merits of the case. Various arguments were advanced before the Tribunal by the assessee in support of its contention that the commission of Rs. 54,000 which was paid to Neeta Electric Corporation was a genuine payment made in the course of business dealings for purchases affected by Neeta Electric Corporation on behalf of the assessee-firm. After examining all the circumstances, the Tribunal came to the conclusion that the payment of Rs. 54,000 was not a genuine business payment. The only grounds on which the Tribunal has subsequently purported to "rectify" its order of June 9, 1975, are ( i) that the Income-tax Officer had wrongly calculated the percentage of profit of the assessee-firm while holding that the business transaction with Neeta Electric Corporation was not a genuine business transaction, and ( ii ) that it overlooked the argument of the assessee to the effect that, if the amount of Rs. 54,000 was taxed in the hands of the assessee as also in the hands of Neeta Electric Corporation, it would amount to double taxation. These two arguments, according to the Tribunal, were overlooked by it while passing the earlier order, and, hence, it purported to exercise its power of rectification by re-examining all the circumstances relating to this transaction and upholding it. Clearly, this could not have been done in the exercise of any power of rectification. In the present case, in the first order, there is no mistake which is apparent from the record at all. The Tribunal was required to decide whether the commission payment of Rs. 54,000 was deductible under section 37 of the Income-tax Act. After examining the circumstances, the Tribunal came to the conclusion that it was not so deductible. The Tribunal cannot, in exercise of its power of rectification, look into some other circumstances which would support or not support its conclusion so arrived at.

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