1. This appeal by the assessee is directed against the order under Section 263 dated 31-3-1987 of the CIT, Meerut.
2. The assessee is a public limited company deriving income from manufacture and sale of vegetable ghee, refined oil, soap and paper.
Return of income for the assessment year 1982-83 had been filed by the assessee on 1st July, 1982 declaring income of Rs. 89,41,839 which was revised on 20th November, 1982 declaring net income of Rs. 87,68,898.
The return had again been revised on 13th March, 1985 disclosing net income at Rs. 79,26,250. The Assessing Officer framed an assessment under Section 143(3) vide order dated 29th March, 1985 determining income at Rs. 92,58,170. The assessee filed an appeal against the assessment order to the CIT (Appeals), Meerut who disposed of the same on 23-1-1987. The CIT (Administration) on-examination of assessment records of the assessee was of the prima facie view that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interests of the revenue. He accordingly issued a notice dated 6-3-1987 inviting objections as to why action under Section 263 may not be taken. The assessee objected to the proposed action vide letter dated 27th March, 1987. The CIT not being satisfied with the objections furnished on behalf of the assessee passed an order under Section 263 on 30th March, 1987. The issues raised by the Commissioner were as under : (a) In the details of closing stock of Banaspati Oil, etc. the company had shown stocks in the factory and the depots but there was no mention about the stocks with consignment agents of different States. According to the Commissioner the Assessing Officer did not exempt as to whether the stocks on consignment were duly reflected in the closing stock.
Another related issue raised by the CIT was that the Assessing Officer had not examined as to whether the consignment sales were properly recorded in particular year.
(b) The assessee had been granted investment allowance in respect of additional machinery installed at Ghaziabad and Rajpura in the soap units. Commissioner was of the view that the assessee was not entitled to investment allowance in respect of additional machinery installed in soap units as the manufacture of soap according to him was an item included in 1lth Schedule of the Income-tax Act, 1961 and deduction on account of investment allowance was specifically barred.
(c) Assessee had incurred legal expenses amounting to Rs. 93,940 in respect of acquisition proceedings relating to the property at Bombay and another sum of Rs. 25,868 on account of defending a suit in the High Court filed by Mrs. Tara Ben Shroff. According to the Commissioner the assets at Bombay were not business assets and, therefore, legal expenses incurred in respect of such assets would not qualify for deduction as business expenditure.
He accordingly directed the Assessing Officer to withdraw the investment allowance in respect of plant and machinery installed during the year in soap units after working the exact amount of deduction on account of machinery additions made during the year under appeal.
In respect of other two matters the Assessing Officer was directed to pass fresh order after making proper enquiries and after giving reasonable opportunity of being heard to the assessee.
3. The Assessing Officer has passed fresh order of assessment on 20th December, 1988 making the following three additions in consequence of the order passed under Section 263 : Since the originally assessed income was Rs. 92,58,719 the income was thus determined at Rs. 94,62,420. The assessee somehow has not appealed against this order to the CIT (A).
4. The order passed under Section 263 however, has been challenged before us on various grounds. Apart from grounds of appeal the following additional grounds of appeal have been raised vide application dated nil: 1. (a) The order under Section 263 passed by the learned Commissioner of Income-tax was beyond the period of limitation as the same was not passed within two years from the date of the assessment order.
(b) That the order of revision passed under Section 263 being beyond the period of limitation, prescribed under the law, deserved to be vacated.
2. (a) That the assessment order dated 29-8-1985 being subject-matter of appeal before the learned CIT (Appeals) and also subsequently before the learned Tribunal, the learned Commissioner of Income-tax was functus officio and was wrong to assume power of revision under Section 263 of the assessment order. The principle of merger applied in the present case.
(b) That the present being a case under the jurisdiction of the Hon'ble Allahabad High Court, the learned Commissioner of Income-tax was not empowered to revise the order of assessment in view of the decision reported as [1976] 105 ITR 344 - J.K. Synthetics Ltd. v. Addl. Commissioner of Income-tax, U.P. & another, the order passed under Section 263 deserves to be vacated on this legal ground also.
5. We have heard the learned counsel for the assessee Sri Monga, the learned departmental representative Sri D.K. Singh and have perused the records. The learned departmental representative objected to the admission of the additional ground at this stage. Reference was made to the decision of the Hon'ble Supreme Court in Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688 in support of the contention that the assessee must satisfy the Appellate Court about the circumstances for omission at the time of filing of appeal of the additional grounds now raised.
6. The learned counsel for the assessee in reply conceded the additional ground of appeal No. 1 in favour of the revenue by not pressing the same for admission. We, therefore, do not consider the first additional ground of appeal raised before us for admission.
7. However, with regard to the additional ground No. 2 the learned counsel for the assessee contended that the order of the CIT was patently contrary to the decision of jurisdictional High Court of Allahabad in the case of J.K. Synthetics Ltd. v. Addl CIT [1976] 105 ITR 344. The ground raised is purely legal in nature. It was accordingly pleaded that the same may be entertained and disposed of on merits. Sri Monga explained that the order of the Assessing Officer having been the subject-matter of appeal before the CIT (Appeals) the CIT could not invoke the jurisdiction under Section 263 as held by their Lordships of the Allahabad High Court in the case of J.K.Synthetics Ltd. (supra).
8. On careful consideration of the rival contentions, we are of the view that the ground raised is purely legal in nature and, therefore, deserves admission for consideration on merits. The decision of the Hon'ble Supreme Court in the case of Jute Corpn. of India Ltd. (supra) is inapplicable as no investigation of facts is involved in this case.
We respectfully following the Special Bench decision of the Tribunal in Indo Java & Co. v. IAC [1989] 30 ITD 161 (Delhi) admit the additional ground No. 2 which is purely legal in nature.
9. We now proceed to dispose of this additional ground of appeal on merits. We may state at the cost of repetition that the assessment in this case was made on 29-3-1985 and the CIT (Appeals) disposed of the appeal filed by the assessee against that order on 23-1-1987. Though admittedly the grounds on which the CIT (Administration) has invoked jurisdiction under Section 263 were not subject-matter of appeal before the CIT (Appeals), yet the Hon'ble Allahabad High Court which is the jurisdictional High Court in this case in J.K. Synthetics Ltd. (supra) held that the entire order of assessment gets merged with the appellate order even on points which are not subject-matter of appeal before the first appellate authority. If the law laid down by their Lordships of the Allahabad High Court in the case of J.K. Synthetics Ltd. (supra) is applied in this case there is no escape from the view that the order passed by the CIT (Administration) under Section 263 was patently without jurisdiction. However, before we held so we shall have to deal with the objection raised on behalf of the revenue by the learned departmental representative.
10. According to Sri D.K. Singh, the learned departmental representative Section 263 has been amended with effect from 1-6-1988 by virtue of which it has been specifically provided that the CIT (Administration) shall have jurisdiction to such matters as had not been considered and decided in an appeal. According to the learned departmental representative, the amendment is retrospective in nature and, therefore, the decision of the Allahabad High Court would be inapplicable to the facts of this case. In this connection reliance was placed on the decision of the Calcutta High Court in the case of Hamilton & Co. (P.) Ltd. v. CIT [1991] 187 ITR 568.
11. In counter reply the learned counsel for the assessee contended that the order of the CIT (Administration) passed under Section 263 was patently invalid and the amended law could not induce life in the illegal order for two reasons. Firstly the amendment does not operate prior to 1st June, 1988 and secondly the powers under Section 263 would be exercised by the Commissioner within two years from the end of the assessment year in which the order sought to be revised was passed. It is accordingly pleaded that the order passed by the Commissioner under Section 263 may be cancelled.
12. We have given our careful consideration to the rival contentions.
The assessment order passed by the Assessing Officer is dated 29th March, 1985 and accordingly the CIT (Administration) could invoke jurisdiction under Section 263 in a case where the order sought to be revised is considered to be erroneous and prejudicial to the interest of the revenue by ending March 1987. The CIT has passed an order within the period of limitation, that is before 31st March, 1987. The question raised before us which is crucial for deciding the fate of this appeal is as to whether the amended provisions of Section 263 relating to partial merger are applicable retrospectively and if so whether the order passed by the CIT (Administration) is valid in accordance with law. As already stated Section 263 was amended with effect from 1-6-1988 extending the powers of the Commissioner (Admn.) in respect of such matters as had not been considered and decided in an appeal against the order sought to be revised. This is provided under Section 263(c). However, the Finance Act, 1989 inserted the words "shall be deemed always to have extended to such matters as had not been considered and decided in such appeal, with retrospective effect from 1 -6-1988". There is divergence of opinion amongst the High Courts about the date from which the retrospective amendment would come into force.
Bombay High Court in the case of CIT v. International Computers Indian Manufacture Ltd. [1991] 187 ITR 580 has held that under Section 263 Sub-clause (c) shall not operate before 1-6-1988. Whereas Calcutta High Court in the case of Hamilton & Co. (P.) Ltd. (supra) has taken a contrary view by holding that section is retrospective in nature. For the purpose of present controversy we shall have to keep in mind the view which is favourable to the assessee relying upon the decision of the Hon'ble Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. That being so the decision of the CIT under Section 263 in a case where the order of assessment sought to be revised had been the subject-matter of appeal before the CIT (Appeals) was clearly without jurisdiction as per the decision of the Allahabad High Court in the case of J.K. Synthetics Ltd. (supra). We may point out that a contrary view has been taken by several other High Courts and we are also parties to some of the decisions of the Tribunal holding the view that the CIT has the power to invoke powers under Section 263 subject to other conditions being satisfied in such matters which had not become subject-matter of appeal. In this case, however, the position is entirely different. The authorities working under the jurisdiction of a particular High Court are bound to follow its decisions. Neither the CIT nor the Tribunal working within the jurisdiction of the Allahabad High Court could take a different view in view of the binding nature of the decision. We are accordingly of the considered view that the CIT had exceeded his jurisdiction by passing an order under Section 263 in a matter where the assessment order had been the subject-matter of appeal before the CIT (Appeals).
13. We may also point out that the amendment in Section 263 having been made with effect from 1-6-1988 the law would not be applicable in such matters where time limit for exercise of jurisdiction under Section 263 had already expired as on 1-6-1988. Thus the controversy as to whether Section 263(c) applies retrospectively or from 1-6-1988 is of no consequence as the CIT could not have exercised his jurisdiction under Section 263 in this case beyond 31-3-1987. This amendment could not revive a matter in respect of which the Commissioner had no jurisdiction at a time when the law was amended.
14. Since we have cancelled the order passed under Section 263 on legal grounds we do not consider it necessary to deal with the merits of the case.