A. RAGHUVIR, C.J. :
The instant reference is under the IT Act. The assessee in the reference is a partnership firm M/s. Gourishankar Khatuwal & Bros. of Haibargaon in the district of Nagaon. The reference relates to the asst. yr. 1978-79.
2. The ITO, A-ward, Nagaon passed the assessment order on 30th October, 1978. In appeal the AAC modified the order on 10th October, 1979. On a further appeal to the Tribunal by the firm on 14th June, 1982 the appellate order was confirmed except in some minor aspects. The subject of the instant reference does not relate to the AACs order or that of the order of the Appellate Tribunal.
The CIT found exercising power under s. 263 of the IT Act that in the order of the ITO on 30th October, 1978 two items relating to interest were excluded from income. The exclusion of the Two items prejudicially affected the interest of the Revenue. He enumerated one of the items as Rs. 2,880. This amount was received by the assessee but it was excluded from income. As to the second item of interest said to have been paid to the relatives of the partners and sister concerns in contravention is not clear from the order of the ITO as this aspect is not even referred to in the order on 30th October, 1978.
3. The CIT on 7th August, 1980 held : 'As regards interest paid to the relatives of partners and to sister concerns, it has been stated before me that the ITO has properly applied his mind on going through the books of accounts produced and the allowed the same. It has also been stated that the ITO is the appropriate authority to decide whether the claim was excessive or unreasonable in the context of s. 40A(2). It has further been stated that interest at the same rate was paid and allowed even in the earlier year, and the ITO duly applied his mind to all the facts and therefore s. 263 is not attracted. I am unable to accept this contention also. From the details filed before me it appears that interest the relatives of partners and sister concerns were paid at 24% as against 18% at which interest was payable to banks. These facts prima facie provoked an enquiry for a proper decision after application of mind to the relevant facts in the context of s. 40A(2) but no such enquiry was made and even no details were taken or considered as appears from record while computing the assessment. It has been stated that the assessee has also to pay godown rent to the bank in the case of secured loan but that question arises only where some stock is pledged and does not arise in the case of unsecured loan which was taken in the present case from the relatives and sister concerns. Total amount of interest paid to relatives of partners and sister concerns come to Rs. 78,130 and the ITO had allowed the entire claim without any enquiry and without application of mind to the relevant fact and the provisions of s. 40A(2) though the circumstances provoked necessary enquiry as mentioned above. It is seen that in the order-sheet the ITO has recorded on 27th September, 1978 the fact that the case belongs to a group of cases in which detailed investigation is necessary thereafter he issued notice under s. 143(2) fixing the case on 21st October, 1978 on which date the hearing was taken and completed. Records do not show that any investigation whatsoever was made or any completed. Records do not show that any investigation whatsoever was made or any enquiry was undertaken. It view of these facts and circumstances and in view of the decisions in 79 ITR 386 and Smt. Tara Devi Aggarwal vs . CIT : [1973]88ITR323(SC) I hold that the assessment has been erroneous and prejudicial to the interest of Revenue on this point also'.
4. Touching on the two aspects the CIT ordered the ITO to make a fresh assessment after enquiry. Aggrieved by the order the assessee filed an appeal before the Appellate Tribunal. The Tribunal confirmed the order. It is an these circumstances under cl. (1) of s. 256 of the IT Act the following question was referred :
'Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the fresh enquiry by the ITO in pursuance of the order of the CIT should not cover the two items of Rs. 2,830 being the interest received in fixed deposit and the claim for interest paid to the relatives of the partners and to the sister concerns for the reason given by the Tribunal in its order in question.'
5. The assessee is not represented in this case, and after hearing the Standing Counsel for the Revenue we found orders of the Revenue authorities required a close scrutiny therefore we requested Shri J. P. Bhattacharjee to assist this Court. We are grateful for the assistance. He cited all the cases relevant to the question.
6. The assessee contended before the Tribunal that the order of the ITO merged in the order of AAC and of the Tribunal therefore the CIT had no jurisdiction under S. 263 to pass the directions for further enquiry. This question was considered by the several High Courts in many cases and at least four times by the Supreme Court.
7. To start with we take a case reported in CIT vs . Amritlal Bhogilal & Co. : [1958]34ITR130(SC) where the limits of the merger were considered by the Supreme Court. That case was relied on in State of Madras vs . Madurai Mills Co. Ltd. : [1967]1SCR732 where the extracts of the former case were cited. In the Two cases the doctrine of merger it is held is not a doctrine of rigid and universal application. An order of inferior Tribunal on appeal ordinarily merges in superior Tribunal passed in an appeal or revision. But it cannot be said because of appeal order or revision order there is a fusion or merger of two orders. In Amritlal Bhogilal & Co.s case, (supra) the order was a composite order viz., an order granting registration of the firm and making an assessment on the basis of the registration. It was observed referring to the facts in that case that the order of registration made by the ITO did not merge in the appeal order. (The appeal was taken by the assessee to the Appellate Commissioner against the composite order of the ITO.)
The High Court held that the order of the ITO granting registration merged in the appellate order. The revisional power of the CIT therefore cannot be exercised in respect of it. The view taken by the High Court was overturned as the order of the ITO granting registration cannot be deemed to have merged in the order of the Appellate Commissioner.
8. In State of Uttar Pradesh vs . Mohammed Nooh : [1958]1SCR595 principle of merger it was held cannot apply in the case of an order of dismissal of a public servant which was made by the departmental Tribunal on the 20th April, 1948 and against which the appeal was dismissed by the Appellate Authority on 7th May, 1949, and the revisional application was rejected on 22nd April, 1959.
9. There are two new cases where this principle was elucidated by the issue turned on cognate aspects which is cheek by jowl to the instant issue. The first case is CIT vs . Shapoorji Pallonji Mistryy : [1962]44ITR891(SC) and the second is case of CIT vs . Rai Bahadur Hardutroy Motilal Chamaria : [1967]66ITR443(SC) . The former case was confirmed in the latter case. The question in the two cases was whether AAC in enhancing the assessment can travel outside the return or discussed in the order of the ITO. In such a case the powers of AAC as to enhance the assessment whether it is confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found'. This view point was not accepted. AS against this the contention of the assessee was accepted. The assessee contended the powers of the AAC were confined to what was in the return or what was ordered by the ITO. The powers of the AAC though no doubt included to enhance the assessment but the contention to restrict the power was accepted.
10. In Karsandas Bhagwandas Patel vs. G. V. Shah, ITO, : [1975]98ITR255(Guj) the same view was reiterated by the Gujarat High Court. In these cases mention is made of the fact that another view (broader view) was possible but not explore the four corners of that view as the decision of the Supreme Court binds this Court under Art. 141 of the Constitution.
11. Two full Bench cases - one is of Madhya Pradesh High Court in CIT vs. R. S. Banwarilal : [1983]140ITR3(MP) wherein the view of the Supreme Court is followed. There is also a Full Bench case of Karnataka High Court in CIT vs. Hindustan Aeronautics Ltd. (1987) 157 ITR 315 in that the decisions of the Supreme Court were cited and followed.
12. In the following three cases, CIT vs. Tejaji Farasram Kharawala : [1953]23ITR412(Bom) CIT vs. P. Muncherji & Co. (1987) 167 ITR and J. K. Synthetics Ltd. vs. Addl. CIT : [1976]105ITR344(All) on facts the High Courts held the order merged and the Commissioners power under s. 263 was not available.
13. In the following six cases on facts it was held that Commissioner had power notwithstanding the orders in appeal. The cases are CIT vs. Travancore Teas Estates Co. Ltd. : [1988]172ITR733(Ker) Puthuthotam Estates (1943) Ltd. vs. State of Tamil Nadu, : [1980]125ITR41(Mad) CIT vs. City Palaycot Co. : [1980]122ITR430(Mad) Singho Mica Mining Co. Ltd. vs. CIT : [1978]111ITR231(Cal) Kanhiram Ramgopal vs. CIT : [1988]170ITR41(MP) CIT vs. Sakseria Cotton Mills Ltd. : [1980]124ITR570(Bom) and CIT vs. Smt. A. S. Narendrakumari Basaheba : [1989]176ITR515(Bom) .
14. For all the aforesaid reasons we answer the question in affirmative in favour of the Revenue and against the assessee. No costs.