ORDER
Matter not subject matter of appeal
Catch Note:
Assessee's contention that Commissioner had no power to exercise his revisional jurisdiction in view of alleged merger of assessment order with appellate order, in respect of matters not considered in appeal was without substance, since Commssioner is competent to revise an order of assessment passed by assessing officer on all matters except those which have been considered and decided in appeal--Fact that Commissioner (Appeals) had not decided the question with respect to bonus, incentive, interest, depreciation incentive allowance, Commissioner had rightly exercised his jurisdiction for the purpose of revising the order of Income Tax Officer.
Ratio:
Principle of merger will not be applied where a decision of an inferior authority does not come in for consideration of the appellate authority and there is no decision of the appellate authority either by way of affirmance or by way of reversal or modification on the point decided by the inferior authority.
Case Law Analysis:
CIT v. Shri Arbuda Mills Ltd. (1998) 231 ITR 50 (SC) followed.
Application:
Also to current assessment year.
Decision:
In favour of revenue.
Income Tax Act 1961 s.263(1)
In the Rajasthan High Court N.N. Mathur & D.N. Joshi, JJ.
N.N. Mathur, J.
The Tribunal, Jaipur, has made the instant reference under section 256(2) of the Income Tax Act for the opinion of this court on the following question :
'Whether, on the facts and circumstances of the case, the Tribunal was justified in cancelling the order passed by Commissioner under section 263 ?'
2. The necessary facts are that the respondent-assessee is sole distributor of Mico products for Jodhpur Division. The Income Tax Officer, C-Ward, Jodhpur, made an ex parte assessment undertion 144 on 27-3-1985. It was reopened under section 146 by order, dated 30-3-1985. The assessee filed the returns of the income for the period 1-4-1980, to 10-12-1980, and from 11-12-1980, to 31-3-1981. The assessing authority by order, dated 27-3-1985, computed the total income of the assessee. The assessee preferred the appeal to the Commissioner (Appeals), which was decided by order, dated 8-8-1985. The Commissioner (Appeals) discussed the disallowance on seven different heads. Subsequent thereto, the Commissioner, Jodhpur, on scrutiny of records found the order of Income Tax Officer erroneous and prejudicial to the interest of the revenue inasmuch as that he failed to add the bonus, incentive and interest to partners which is a disallowable amount, allowed depreciation on generator @ 30 per cent and further allowed Rs. 7,554 as incentive allowance to the firm, which did not fulfil the conditions laid down in section 32(A). Accordingly, a show-cause notice was issued to the assessee. In response to the show-cause notice, the assessee put in appearance and raised the objection inter alia on the ground that there has already been order of the Commissioner (Appeals) against the assessment order in question having the effect of full merger of the order of Income Tax Officer in the appellate order of Commissioner (Appeals). Thus, it was contended that the Commissioner had no jurisdiction to revise the order of the Income Tax Officer. The contention did not find favour with the Commissioner. He finally set aside the order of the 'Income Tax Officer with the direction that Income Tax Officer should add the claim of assessee regarding claim of bonus, incentive and interest to the partners and further he calculated the depreciation at the rate of 10 per cent instead of 30 per cent on generator. The assessee preferred an appeal before the Tribunal. The Tribunal was of the opinion that as there was diversion in judicial pronouncement by the different High Courts, a view favouring the assessee is required to be taken. Accordingly, the Tribunal cancelled the order of assessment made by the Income Tax Officer in pursuance of the order of the Commissioner by order, dated 4-11-1988. However, the Tribunal on the application filed by the revenue expressed that as there was no decision of the jurisdictional court, it was a fit case to make a reference for the opinion on the question formulated, which has been referred to above.
3. It is contended by Mr. Sandeep Bhandawat, learned counsel appearing for the revenue that the controversy involved is now concealed by the decision of the Hon'ble Apex Court in CIT v. Shri Arbuda Mills Ltd. : [1998]231ITR50(SC) .
4. Section 263 of the Income Tax Act, enables the Commissioner to call for and examine the record of any proceedings under the Act and pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment, if he considers that any order passed by the assessing officer is erroneous, insofar as it is prejudicial to the interest of the revenue.
5. There was conflict in judicial opinion as to whether after an order has been subjected to the first appellate order, the points that were neither raised in appeal nor dealt with by the first appellate authority do, or do not, merge in the appellate order and thus, may or may not be, subjected to that extent, by the Commissioner, to an order of variation or direction therefor under section 263(1) order. Some of the High Courts took the view that the doctrine of merger would operate only on matters which were subject-matter of decision of the first appellate authority and has no application to the matters which have not been touched by that authority. It was expressed that such untouched matters may be subjected to an order under section 263(1). The other view was that the entire order passed by the assessing officer merges in the first appellate order and no part of it can be subjected to an order under section 263(1) irrespective of the points urged by the party or decided by the appellate authority.
However, the controversy has been, now, resolved by introducing explanation to sub-clause (c) to section 263(1) of the Income Tax Act by way of amendment. The Explanation was substituted by the Finance Act, 1988, where retrospective effect from 1-6-1988, in clause (c) of the Explanation was amended by the Finance Act, 1989. The amendment is retrospective in nature (with effect from 1-6-1988), as is clear from the reading of the said Explanation). We may refer the amendment made in section 263(1) of the Income Tax Act, which reads as follows :
'Explanation.For the removal of doubts, it is hereby declared that, for the purposes of this sub-section, ..........
(c) where any order referred to in this sub-section and passed by the assessing officer had been the subject-matter of any appeal filed on or before or after 1-6-1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.'
6. Thus, it is evident that the principle of merger applies to the income-tax cases where a decision reached by an inferior authority has been reversed, modified or have been confirmed by the appellate authority. But, the same principle will not be applied where a decision of an inferior authority does not come in for consideration of the appellate authority and there is no decision of the appellate authority either by way of affirmance or by way of reversal or modification on the point decided by the inferior authority.
7. The Hon'ble Apex Court in CIT v. Shri Arbuda Mills Ltd. (supra) has held that the consequence of the amendment made with retrospective effect is that the powers under section 263 of the Commissioner shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in an appeal. In the instant case, it is not in dispute that the Commissioner (Appeals) had not decided the question with respect to bonus, incentive and interest to the partners, the depreciation on generator at the rate of 30 per cent and incentive allowance of Rs. 7,554 to the firm in order to fulfil the conditions laid down under section 32(A). Thus, the Commissioner has rightly exercised the jurisdiction under section 263 of the Income Tax Act for the purpose of revising the order of Income Tax Officer on the aforesaid items.
8. Thus, the question referred is decided in favour of the revenue and against the assessee.