1. During the previous year relevant to the assessment year 1966-67, the petitioner-company installed machinery to commence manufacture of Nylon-6. The petitioner-company claimed that this was a petro-chemical industry to which Section 33(i)(b)(B)(i) of the Income-tax Act, 1961, was applicable. It was a priority industry and was entitled to depreciation under Section 80E of the Act. The Income-tax Officer examined this claim and finding that the petitioner-company was engaged in petro-chemical industry upheld the claim. It allowed 35 per cent. development rebate under Section 33(1)(b)(B)(i) and also allowed depreciation at 15 per cent. under Section 80E of the Act for the assessment year 1967-68. Since some of the deductions claimed by the assessee had been disallowed, the assessee riled an appeal which was partly allowed by the Appellate Assistant Commissioner on 14th December, 1972, with the result that the assessment was modified.

2. On 20th December, 1973, the Additional Commissioner of Income-tax served a notice upon the assessee intimating that it intended to revise the order of the Income-tax Officer for the assessment year 1967-68, on the ground that the said order was prejudicial to the interest of the revenue inasmuch as it granted development rebate at the rate of 35 per cent. instead of 20 per cent. and depreciation under Section 80E was also wrongly allowed. According to the Commissioner the petitioner-company was not a priority industry.

3. At the hearing before the Commissioner the assessee took a preliminary objection that since the Income-tax Officer's order had merged in the appellate order of the Appellate Assistant Commissioner, the Commissioner had no jurisdiction under Section 263(1) of the Act to revise the same. The Commissioner overruled this objection, primarily on the strength of the decision given by the Gujarat High Court in Karsandas Bhagwandas Patel v. Income-tax Officer, [1975] 98 ITR 255 (Guj).

4. Proceeding on the merits, the Commissioner held that the petitioner-company was not engaged in petro-chemical industry and was hence not entitled to the deductions. Accordingly, the assessment order was appropriately modified. Aggrieved, the petitioner has come to this court under article 226 of the Constitution.

5. Mr. S.C. Khare, appearing for the petitioner, has reiterated the preliminary objection raised before the Commissioner that he had no jurisdiction to touch the order of the Income-tax Officer after it had merged in the appellate order.

6. In the assessment order the Income-tax Officer observed that:

"The assessee has claimed that in view of the provisions of Section 33(1)(b)(B)(i) of the Income-tax Act, 1961, it was entitled to development rebate at the rate of 35 per cent. as the company was covered by item No. 18 of the Fifth Schedule. In support of this claim of the assessee, the assessee referred to the case of M/s. Nirlon Synthetics Fibre and Chemical Ltd., Bombay, and stated that the factory was manufacturing nylon yarn from caprolactum and was being allowed this benefit. The assessee's claim is allowed in view of the assertions made by it. The assessee has also claimed that in view of the same fact the benefit under Section 80I should also be allowed. The claim as made by the assessee is allowed. "

7. It appears that the assessee had claimed depreciation on extra price which had to be paid because of devaluation. This claim was rejected by the Income-tax Officer. In its appeal, the assessee challenged this finding. In paragraph 10 of the appellate order it was observed :

"10. The ground regarding development rebate on the sum of Rs. 8,24,919 representing increase in payment of plant and machinery required for expansion was not pressed before me. The action of the Income-tax Officer in not allowing development rebate on this amount is sustained"

8. The finding of the Income-tax Officer that it was a priority industry and was entitled to 35 per cent. development rebate and 15 per cent. depreciation was neither questioned by the department nor considered by the Appellate Assistant Commissioner while deciding the appeal.

9. Section 263 of the Income-tax Act, 1961, authorises the Commissioner to call for and examine the record of any proceeding under the Act, in so far as it relates to the order passed by the Income-tax Officer, and if he considers that the order of the Income-tax Officer is erroneous and prejudicial to the interest of revenue he can revise it. Under this provision the Commissioner has no power to modify or to touch an appellate order. It is equally clear that if the order of the Income-tax Officer has merged in the appellate order, it in law ceases to exist and will be outside the purview of Section 263 of the Act.

10. The question for consideration is whether the assessment order merged in the appellate order in its entirety ? For the department Dr. Misra urged that since the points decided by the Income-tax Officer in favour of the assessee were not the subject-matter of appeal by the assessee and since those points had not been agitated before the Appellate Assistant Commissioner by the department, the decision of the Income-tax Officer on those points was not the subject-matter of any appeal, and hence, the order in relation to those points would not merge in the appellate order.

11. Dr. Misra relied on State Of Madras v. Madurai Mills Co., Ltd. ., [1967] 19 STC 144 (SC) where the Supreme Court held that:

"The doctrine of merger is not a doctrine of rigid and universal application, and it cannot be said that wherever there are two orders, one by an inferior tribunal and the other by a superior tribunal, passed in an appeal or revision, there is a fusion or merger of the two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute."

12. In Commissioner Of Income Tax, Bombay v. Amritlal Bhogilal & Co.. [1958] 34 ITR 130 (SC).

the question was:

"Where the appeal preferred by an assessee against his assessment had been decided by the Appellate Assistant Commissioner, does the order of registration along with, the subsequent order of assessment merge in the appellate order,"

13. The Supreme Court held that there can be no doubt that, if an appeal is provided against an order passed by a tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the tribunal, it is obvious that it is the appellate decision that is effective and can be enforced. In law the position would be just the same even if the appellate decision merely confirms the decision of the tribunal. As a result of the confirmation or affirmance of the decision of the tribunal by the appellate authority the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement. But if an order is specifically non-appealable it would remain in operation although an appeal in the same proceedings has been taken and decided.

14. Thus, if there is in law confirmation or affirmance of the decision, it merges in the appellate order. The question whether confirmation or affirmance results is dependent upon the scope and extent of the appellate jurisdiction.

15. Section 251 of the Act confers appellate jurisdiction upon the Appellate Assistant Commissioner. Under Clause (a) of Sub-section (1) of Section 251 it has been provided that in an appeal against an order of assessment, the Appellate Assistant Commissioner may confirm, reduce, enhance or annul the assessment. The appellate power thus extends to the enhancement of an assessment. Dealing with the appellate powers the Supreme Court in Commissioner of Income-tax v. Shapoorji Pallonji Mistry, [1962] 44 ITR 891 (SC) held that the Appellate Assistant Commissioner cannot go outside the record and so he cannot discover new sources of income which are not disclosed either in the return of the assessee or in the assessment order. Barring this limitation the appellate powers are as wide and as extensive as those of the assessing officer. It quoted with approval the observations of Chagla C. J. in Narrondas Manordass v. Commissioner of Income-tax, [1957] 31 ITR 909, 919 (Bom) to the following effect:

"It is clear that the Appellate Assistant Commissioner has been constituted a revising authority against the decisions of the Income-tax Officer; a revising authority not in the narrow sense of revising what is the subject-matter of the appeal, nor in the sense of revising those matters about which the assessee makes a grievance, but a revising authority in the sense that once the appeal is before him he can revise not only the ultimate computation arrived at by the Income-tax Officer but he can revise every process which led to the ultimate computation or assessment. In other words, what he can revise is not merely the ultimate amount which is liable to tax, but he is entitled to revise the various decisions given by the Income-tax Officer in the course of the assessment and also the various incomes or deductions which came in for consideration of the Income-tax Officer. "

16. The scope of the appellate powers was also considered by the Supreme Court in Commissioner of Income-tax v. Rai Bahadur Hardutroy Motilal Chamaria, [1967] 66 ITR 443, 449 (SC). It was held that:

"It would be wholly erroneous to compare the powers of the Appellate Assistant Commissioner with the powers possessed by a court of appeal, under the Civil Procedure Code. The Appellate Assistant Commissioner is not an ordinary court of appeal. It is impossible to talk of a court of appeal when only one party to the original decision is entitled to appeal and not the other party, and in view of this peculiar position the statute has conferred very wide powers upon the Appellate Assistant Commissioner once an appeal is preferred to him by the assessee. It is necessary also to emphasise that the statute provides that, once an assessment comes before the Appellate Assistant Commissioner, his competence is not restricted to examining those aspects of the assessment which are complained of by the assessee; his competence ranges over the whole assessment and it is open to him to correct the Income-tax Officer not only with regard to a matter raised by the assessee but also with regard to a matter which has been considered by the Income-tax Officer and determined in the course of the assessment."

17. It is thus apparent that the appellate authority can look into and adjudicate upon findings recorded by the Income-tax Officer not only against the assessee which may expressly be the subject matter of the appeal but also those which may have gone in favour of the assessee and which may not have been challenged by the assessee. In the present case, the Income-tax Officer upheld the claim of the assessee with regard to the development rebate and depreciation on the finding that it was a petrochemical industry. This finding could, in our opinion, be canvassed before the Appellate Assistant Commissioner if the department or the Commissioner chose to do so. Simply because the department did not have a right to file an appeal, it cannot be said that the findings against the revenue were not capable of being challenged or being adjudicated upon in the appeal filed by the assessee. In view of the scope and nature of the appellate powers, the entire subject-matter of the assessment order was within the jurisdiction of the Appellate Assistant Commissioner. That being so, the entire assessment order will merge in the appellate order, irrespective of the points urged by the parties or decided by the appellate authority.

18. The decision of the Gujarat High Court referred to by the Commissioner holds that for the purposes of determining the applicability of the principle of merger the test is whether the decision of the Income-tax Officer on a particular point is the subject-matter of appeal before the Appellate Assistant Commissioner. It may not be the subject-matter of appeal for two reasons, either because the Appellate Assistant Commissioner has no jurisdiction to consider that subject-matter, or because the Appellate Assistant Commissioner though having jurisdiction to examine that subject-matter does not do so. In either case there being no decision of the Appellate Assistant Commissioner on the point, the decision of the Income-tax Officer remains untouched and it is open to the Commissioner in exercise of powers under Section 33B to revise it or to the Income-tax Officer in exercise of the power under Section 35, Sub-section (1), to rectify it if there is a mistake apparent from the record of the assessment. With respect, we are unable to agree with the distinction drawn by the Gujarat High Court or with the view that if the Appellate Assistant Commissioner does not expressly give a finding or decision on a particular point the order of the Income-tax Officer with regard to it does not merge in the appellate order.

19. In Sheodan Singh v. Daryao Kunwar (Smt) ., AIR 1966 SC 1332, 1337 the Supreme Court held :

"We are therefore of opinion that where a decision is given on the merits by the trial court and the matter is taken in appeal and the appeal is dismissed on some preliminary ground, like limitation or default in printing, it must be held that such dismissal when it confirms the decision of the trial court on the merits itself amounts to the appeal being heard and finally decided on the merits whatever may be the ground for dismissal of the appeal."

20. So when the dismissal of an appeal without having an occasion to enter into the merits of the case, like dismissal for limitation or default in printing amounts to final decision on the merits, it cannot, in our opinion be validly said that in cases where the appeal is decided on the merits, the affirmance will be confined to only those points which are expressly dealt with in the appellate order and not to those which are not challenged or canvassed before the appellate authority, even though they could be so canvassed. From the point of view of the applicability of the doctrine of merger the fact that some points decided by the inferior authority were or were not canvassed before the superior authority is not material. Once an appeal is taken and is decided the original order merges in the appellate order and thereafter it is the appellate order which is operative and enforceable. In this view, after the appeal has been decided on December 14, 1972, the Income-tax Officer's order merged in it; and the Commissioner of Income-tax lost jurisdiction to act under Section 263 of the Act. In the present case the notice under Section 263 was issued on 22nd December, 1973, that is to say, about one year after the decision of the appeal. The notice was without jurisdiction.

21. Dr. Misra appearing for the revenue relied on the cases of Yercand Coffee Curing Works v. State of Madras,[1974] 33 STC 170 (Mad), Central Indian Insurance Co. Ltd. v. Income-tax Officer[1963] 47 ITR 895 (MP) and Kalooram Tirasilal v. Income-tax Officer, [1966] 59 ITR 308 (MP). In the first case the Madras High Court and in the other two the Madhya Pradesh High Court took the same view as was taken by the Gujarat High Court. For reasons mentioned above, we are unable to subscribe to this view.

22. In Satish Chandra Nirmesh Kumar v. Additional Judge (Revisions), Sales Tax, [1974) 34 STC 304 (All) a Division Bench of this court held that as the appeal was dismissed as barred by time and not on merits, therefore, the original assessment order did not merge in the appellate order. In view of the decision of the Supreme Court in Sheodan Singh's case we doubt whether the decision in Satish Chandra Nirmesh Kuamr's case has been correctly rendered. Moreover, since in the presejil case an appeal was taken and decided on merits, the decision in Satish Chandra Nirmesh Kumar's case is distinguishable.

23. In our opinion the impugned order dated December 29, 1973, passed under Section 263 of the Income-tax Act is not sustainable. In the result the writ petition is allowed. The impugned orders dated 29th December, 1973, and 24th January, 1974, are quashed. The petitioner would be entitled to costs.