REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.7662-7663 OF 2009 (Arising out of S.L.P. (C) Nos.9979-9980 of 2008)

M/s. Mepco Industries Ltd., Madurai        ...Appellant(s)

Versus

Commissioner of Income Tax & Anr.         ...Respondent(s)

J U D G M E N T

KAPADIA,J.

Heard learned counsel on both sides.

Leave granted.

The short question which arises in the facts and  

circumstances of these appeals is: whether it was open to  

the Commissioner of Income Tax to rectify its own order  

under Section 154 of the Income Tax Act, 1961, on the  

basis of the judgement of this Court [later judgement] in  

the case of  Sahney Steel and Press Works Limited & Ors.  

vs.  Commissioner of Income Tax,  reported  in  [1997] 228  

I.T.R.253?  In short, in these appeals, we are concerned  

with the scope of Section 154 of the Act.

The  appellant  is  engaged  in  the  business  of  

manufacture  of  Potassium  Chlorates.   Its  factory  is  

located  in the  Union  Territory  of  Pondicherry.    The

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appellant received power subsidy for two years, which it  

initially  offered  as  revenue  receipt  in  its  Return  of  

Income.  In the petitions filed under Section 264 of the  

Income Tax Act, 1961 [for short, “the Act”], the assessee  

pleaded  that the  subsidy amount  was a  capital receipt,  

hence not liable to be taxed, and, accordingly, it sought  

revision  of  the  assessment  orders  for  Assessment  Years  

1993-1994  and  1994-1995.   In  the  revision  petitions,  

appellant  had  pleaded  that  the  subsidy  amount  was  a  

capital receipt and, for that purpose, it relied upon the  

judgement of this Court in the case of  Commissioner of  

Income Tax vs. P.J. Chemicals Limited, reported in [1994]  

210  I.T.R.830.   The  revision  petitions  filed  by  the  

appellant under Section 264 of the Act stood allowed by  

the Commissioner of Income Tax by order dated April 30,  

1997.  Subsequent to the said order, on 19th September,  

1997, this Court in the case of  Sahney Steel and Press  

Works  Limited (supra)  held  that  incentive  subsidy  

admissible to Sahney Steel and Press Works Limited was a  

revenue  receipt  and,  hence,  it  was  liable  to  be  taxed  

under Section 28 of the Act.  This decision was based on a  

detailed examination of the Subsidy Scheme formulated by  

the  Government  of  Andhra  Pradesh.   It  stated  that  

incentives  would  not  be  available  unless  and  until  

production  had  commenced.   In  that  matter,  this  Court  

found that incentives were given by refund of sales tax  

and  by  subsidy  on  power  consumed  for  production.   In  

short, on  the facts and  circumstances of that case, this

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Court  came  to  the  conclusion  that  incentives  were  

production incentives in the sense that the assessee was  

entitled  to  incentives  only  after  entering  into  

production.  It was also clarified that the Scheme was not  

to make any payment directly or indirectly for setting up  

the industries.

Following the judgement of this Court in the case  

of Sahney Steel and Press Works Limited (supra), delivered  

on 19th September, 1997, the Commissioner of Income Tax  

passed an order of rectification dated 30th March, 1998.  

The only ground on which rectification was sought to be  

made  by  the  Commissioner  of  Income  Tax  was  that  Power  

Tariff  Subsidy  given  to  the  appellant  herein  was  

admissible  only  after  commencement  of  production.  

Consequently, according to the Commissioner of Income Tax,  

Power  Tariff  Subsidy  constituted  operational  subsidies,  

they were not capital subsidies and, in the circumstances,  

applying the ratio of the judgement of this Court in the  

case of Sahney Steel and Press Works Limited (supra), the  

Commissioner of Income Tax sought to rectify its earlier  

order dated 30th April, 1997, by invoking Section 154 of  

the  Act.   Aggrieved  by  the  said  order,  the  appellant  

herein filed writ petitions before the Madras High Court,  

which  took  the  view  that,  in  view  of  the  subsequent  

decision of this Court in the case of  Sahney Steel and  

Press Works Limited (supra), the Department was entitled  

to invoke Section 154 of the Act and that the Commissioner  

was right  in  treating  the  receipt  of  subsidies  as a

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revenue  receipt.   This  decision  of  the  learned  Single  

Judge  has  been  affirmed  by  the  Division  Bench  of  the  

Madras High Court.  Hence, these appeals by special leave.

At the outset, we may state that, in these appeals,  

we are concerned with Assessment Years 1993-1994 and 1994-

1995.   The  short  point  involved  in  these  appeals  is,  

whether there existed a `rectifiable mistake' enabling the  

Department  to  invoke  Section  154  of  the  Act?   If  one  

examines the Scheme of the Income Tax Act, as it stood at  

the  material time,  one finds  a clear  dichotomy between  

Section 154 and Section 147 of the Act.  Section 154 deals  

with  rectification  of  mistake.   Section  154(1),  inter  

alia,  states  that,  with  a  view  to  rectify  any  mistake  

apparent  from  the  record,  an  Income  Tax  Authority  may  

amend any order passed by it under the provisions of the  

Act, whereas Section 147, inter alia, states that if the  

Assessing Officer has reason to believe that any income  

charged to tax has escaped assessment for any assessment  

year, he may, subject to the provisions of Sections 148 to  

153,  assess or  re-assess such  income which  has escaped  

assessment and which comes to the notice of the Assessing  

Officer subsequently in the course of proceedings under  

the said Section.  In the present case, the Department did  

not invoke Section 147 of the Act even when the matter was  

within the time limit prescribed.  Be that as it may, in  

these appeals, we are concerned with the meaning of the  

words `rectifiable mistake'.

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On the facts of the present case, we are of the  

view that the present case involves change of opinion.  In  

this connection, it must be noted that Government grants  

different types of subsidies to the entrepreneurs.  The  

subsidy in  Sahney Steel and Press Works Limited (supra)  

was an incentive subsidy linked to production.  In fact,  

in  Sahney Steel and Press Works Limited (supra) [at page  

257], this Court categorically stated that the Scheme in  

hand was an incentive Scheme and it was not a Scheme for  

setting up the industries.  In the said case, the salient  

features of the Scheme were examined and it was noticed  

that  the Scheme  formulated by  the Government  of Andhra  

Pradesh  was  admissible  only  after  the  commencement  of  

production.  In Income Tax matters, one has to examine the  

nature of the item in question, which would depend on the  

facts of each case.  In the present case, we are concerned  

with power subsidy whereas in the case of Commissioner of  

Income  Tax vs.  Ponni  Sugars  and  Chemicals  Limited,  

reported in [2008] 306 I.T.R.392, the subsidy given  by  

the  Government was  for re-paying  loans.  Therefore, in  

each case, one as to examine the nature of subsidy.  This  

exercise  cannot be  undertaken under  Section 154  of the  

Act.  There is one more reason why Section 154 in the  

present  case  was  not  invokable  by  the  Department.  

Originally, the Commissioner of Income Tax, while passing  

orders under Section 264 of the Act on 30th April, 1997,  

had taken the view that the subsidy in question was a  

capital receipt  not taxable  under the  Act.   After  the

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judgement of this Court in  Sahney Steel and Press Works  

Limited (supra), the Commissioner of Income Tax has taken  

the  view  that  the  subsidy  in  question  was  a  revenue  

receipt.  Therefore, in our view, the present case is a  

classic illustration of change of opinion.   

We may now deal with the judgement of the Calcutta  

High Court in the case of Jiyajeerao Cotton Mills Limited  

vs.  Income  Tax  Officer,  Calcutta  &  Ors.,  reported  in  

[1981]  130  I.T.R.  710.   In  that  case,  the  appellant-

assessee derived profits from three  industries,  one of  

which  qualified  for  special  rebate  under  Part-I  of  

Schedule-I to the Finance Act, 1965, for the Assessment  

Year  1966-1967.   In  granting  this  special  rebate,  the  

Income Tax Officer computed the profits attributable to  

that industry without deducting development rebate granted  

to  the  appellant.   The  Income  Tax  Officer  sought  to  

rectify the mistake under Section 154 of the Act by re-

computing the profits by deducting the development rebate.  

The appellant filed a writ petition for setting aside the  

notice of rectification.  It was held by the Calcutta High  

Court  that  since  there  was  conflict  of  opinion  on  

computation of profits of priority industry for granting  

tax  relief  which  conflict  was  resolved  by  the  Supreme  

Court later on for the subsequent Assessment Year 1967-

1968, such subsequent decision of the Supreme Court did  

not obliterate the conflict of opinion prior to it.  It  

was held that, under Section 154 of the Act, rectification  

was not permissible on debatable issue.

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In  Kil  Kotagiri  Tea  and  Coffee  Estates  Company  

Limited vs. Income Tax Appellate Tribunal & Ors., reported  

in [1988] 174 I.T.R.579, the facts were as follows: the  

assessee claimed interest on advance tax paid by it in  

excess but beyond the due dates. The Income Tax Officer  

disallowed the claim of the assessee.  The Commissioner of  

Income Tax upheld the claim of the assessee.  Following  

the decision of a learned Single Judge of the Kerala High  

Court in  A. Sethumadhavan vs.  Commissioner of Income Tax  

[1980]  122  I.T.R.587,  the  Tribunal  held  that  belated  

payments were not to be taken into account as advance tax  

for the purpose of Section 214 of the Income Tax Act, and,  

therefore, interest was not admissible for such belated  

payments.  However, subsequently, a Division Bench of the  

same High Court in  Santha S. Shenoy vs.  Union of India  

[1982] 135 I.T.R.39, reversed the decision of the learned  

Single  Judge in  A. Sethumadhavan (supra) and  held that  

payment of tax made within the financial year, though not  

within specified dates, should be treated as advance tax  

and, consequently, the assessee was entitled to interest  

on excess tax paid.  The assessee filed an application  

under  Section  154  of  the  Act  for  rectification  of  the  

order of the Tribunal in view of the later decision in  

Santha S. Shenoy (supra).  On the facts of that case, the  

Kerala  High  Court  came  to  the  conclusion  that  the  

rectification  contemplated  under  Section  154  must  be  a  

`rectifiable mistake' which is a mistake in the light of  

the law in force  at the time  when the order sought to be

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rectified was passed.  The Kerala High Court also examined  

the  judgement of  the Calcutta  High Court  in  Jiyajeerao  

Cotton  Mills  Limited (supra)  and  held  that  the  said  

decision was distinguishable.  The High Court laid down a  

principle of law, which was applicable across the board,  

namely, payment of advance tax made within the financial  

year,  though not  within the  specified dates,  should be  

treated as advance tax and, therefore, the assessee was  

entitled to interest on excess tax paid.  The judgement in  

Kil  Kotagiri  Tea  and  Coffee  Estates  Company  Limited  

(supra)  is  not  applicable  to  the  facts  of  the  present  

case,  as  stated  above.   Sahney  Steel  and  Press  Works  

Limited  &  Ors. (supra)  was  a  case  which  dealt  with  

production subsidy,  Ponni Sugars and Chemicals Limited  

(supra)  dealt  with  subsidy  linked  to  loan  re-payment  

whereas the present case deals with a subsidy for setting  

up an industry in the backward area.  Therefore, in each  

case, one has to examine the nature of the subsidy.  The  

judgement of this Court in  Sahney Steel and Press Works  

Limited & Ors. (supra) was on its own facts; so also, the  

judgement  of  this  Court  in  Ponni  Sugars  and  Chemicals  

Limited (supra).  The nature of the subsidies in each of  

the three cases is separate and distinct.  There is no  

straight-jacket  principle  of  distinguishing  a  capital  

receipt  from  a  revenue  receipt.   It  depends  upon  the  

circumstances of each case.  As stated above,  in Sahney  

Steel  and  Press  Works Limited & Ors. (supra), this  

Court has observed that the production incentive scheme is

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different from the Scheme giving subsidy for setting up  

industries in backward areas.  In the circumstances, the  

present  case  is  an  example  of  change  of  opinion.  

Therefore, the Department has erred in invoking Section  

154 of the Act.

Before concluding, we may state that in Deva Metal  

Powders  (P)  Limited vs.  Commissioner,  Trade  Tax,  Uttar  

Pradesh, reported in 2008 (2) S.C.C.439, a Division Bench  

of this Court held that a `rectifiable mistake' must exist  

and the same must be apparent from the record.  It must be  

a patent mistake, which is obvious and whose discovery is  

not dependant on elaborate arguments.

To the same effect is the judgement of this Court  

in the case of  Commissioner of Central Excise, Calcutta  

vs. A.S.C.U. Limited [2003] 151 E.L.T. 481, wherein it has  

been held that a `rectifiable mistake' is a mistake which  

is obvious and not something which has to be established  

by a long drawn process of reasoning or where two opinions  

are possible.  Decision on debatable point of law cannot  

be treated as “mistake apparent from the record”.

For  the  afore-stated  reasons,  appellant-assessee  

succeeds,  impugned  judgement  is  set  aside  and,  

consequently, the appeals are allowed with no order as to  

costs.

......................J.            [S.H. KAPADIA]

......................J.            [H.L. DATTU]

......................J.            [DEEPAK VERMA]

New Delhi, November 19, 2009.