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Saran Engineering Co. Ltd. v. Commissioner Of Income-Tax, Kanpur.

Allahabad High Court

Oct 11, 1982

Judgment

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Judicial Opinion Summary — K.N. Seth, J.

Factual and Procedural Background

The assessee is a limited company engaged in the manufacture and sale of sugar machinery. The original assessment for the assessment year 1964-65 was completed on 29 March 1965. The original assessment for the assessment year 1965-66 was completed on 24 February 1966. Reassessment proceedings under section 147 of the Income-tax Act were initiated for the assessment year 1964-65 and the reassessment order was passed on 3 December 1968. For the assessment year 1965-66, the Commissioner passed an order dated 23 August 1968 under section 264 allowing a deduction of Rs. 4,800 (income-tax fees paid to M/s P.L. Tandon & Co.). The two assessments were later rectified on 17 October 1968 and 30 April 1970 (as recorded in the opinion). On 30 December 1970 the assessee applied to the Income-tax Officer under section 154 seeking relief under section 80‑I on the ground that the manufacture of sugar machinery fell under "Priority industry." The ITO rejected the s.154 applications as barred by the limitation in sub-section (7) of section 154. The AAC upheld the ITO, treating the applications as time-barred because the mistake was said to have been committed in the original assessment orders dated 29 March 1965 and 24 February 1966. The Income-tax Appellate Tribunal (the Tribunal) held that the application for 1964-65 was in time because limitation should run from the date of reassessment (3 December 1968), but held that the 1965-66 claim was time-barred because the revisional order of the Commissioner only amended the ITO order to the limited extent of the deduction allowed and the rest of the ITO order stood as originally passed on 24 February 1966. The Tribunal, on applications by the assessee and the Department under section 256(1), referred the question whether the s.154 applications for the two assessment years were in time.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the assessee's applications under section 154 of the Income-tax Act for the assessment year 1964-65 were within time.
Whether, on the facts and in the circumstances of the case, the assessee's applications under section 154 of the Income-tax Act for the assessment year 1965-66 were within time.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee sought relief under section 80‑I on the basis that sugar machinery manufacture is a "Priority industry" and therefore relief should be granted by rectification under section 154.
For assessment year 1965-66 the assessee contended that the entire order of the ITO merged in the revisional order of the Commissioner dated 23 August 1968 (passed under section 264) and therefore limitation for a section 154 application should be computed from the date of the Commissioner's order rather than from the date of the original ITO assessment.
In support of the merger contention, the assessee relied on authority (Shankar Ramchandra Abhyankar v. Bapat) addressing merger of orders following revisional jurisdiction being exercised.

Revenue's Arguments and Proceedings Below

The ITO rejected the section 154 applications as barred by the limitation in section 154(7).
The Assistant Commissioner of Income-tax (AAC) rejected the appeals on the ground that the alleged mistake was in the original assessment orders dated 29 March 1965 and 24 February 1966, and therefore the section 154 applications filed on 30 December 1970 were time-barred.
The Revenue relied on Sir Shadi Lal and Sons v. CIT to contend (as recorded) that on reassessment the entire assessment is not opened and that the controversy on reassessment is confined to matters relevant to the income which had escaped assessment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
V. Jaganmohan Rao v. CIT, [1970] 75 ITR 373	Once reassessment proceedings are validly initiated, the earlier assessment is set aside and the whole assessment proceedings start afresh; the officer may assess the entire income which had escaped assessment.	The court applied this principle to hold that the reassessment order dated 3 December 1968 for AY 1964-65 wiped out the earlier order, and consequently the time-limit under s.154(7) for that year runs from the reassessment date.
Sir Shadi Lal and Sons v. CIT, [1973] 92 ITR 453	On reassessment the entire assessment is not opened; reassessment controversy is confined to matters relevant to the income that escaped assessment during the original assessment.	The Revenue relied on this decision, but the court distinguished it as concerned with the scope of inquiry in reassessment and not with the question whether reassessment wiped out the original order for computing limitation under s.154.
Shankar Ramchandra Abhyankar v. Krishnaji Dattatraya Bapat, (1969) 2 SCC 74 : AIR 1970 SC 1	Where revisional jurisdiction is invoked and the superior court dismisses revision after hearing, the order of the inferior appellate court becomes merged with the revisional order; principle of merger of orders of inferior courts.	The assessee relied on this case to argue merger of orders; the court reviewed the principle but held it not automatically applicable to a Commissioner’s revisional order under s.264 in the facts of this case.
J.K. Synthetics Ltd. v. Addl. CIT, [1976] 105 ITR 344	Under s.251 (appellate authority) the entire subject-matter of an assessment order may be within the appellate jurisdiction, and consequently the appellate order may result in merger of the assessment order.	The court observed that the principle of merger as applied under s.251 (AAC) does not extend to an order passed by the Commissioner under s.264, which is of a more limited revisional scope.
State of Madras v. Madurai Mills Co. Ltd., [1967] 19 STC 144; AIR 1967 SC 681	The doctrine of merger is not of universal application; its applicability depends on the nature and scope of the appellate or revisional order under the particular statute.	The court cited this authority to support the proposition that the doctrine of merger must be applied according to the scope of the particular revisional jurisdiction; on that basis the Commissioner’s limited order under s.264 did not effect a full merger of the ITO’s assessment order.

Court's Reasoning and Analysis

The court addressed the two assessment years separately and analyzed the effect of subsequent orders (reassessment or revisional order) on the computation of limitation under section 154(7).

Analysis for Assessment Year 1964-65

The original assessment was on 29 March 1965; reassessment proceedings were validly initiated and the reassessment order was passed on 3 December 1968.
The court relied on V. Jaganmohan Rao to conclude that once reassessment is validly initiated the earlier assessment is set aside and the assessment proceedings start afresh; the previous order ceases to exist for the purposes specified by that principle.
The court also referred to the language of section 148 (1961 Act) which requires service of a notice and treats the reassessment procedure as, so far as may be, applying provisions as if the notice were issued under sub-section (2) of section 139; this supports the view that reassessment reopens the assessment afresh.
Because reassessment wiped out the earlier order, the limitation period under section 154(7) must be computed from the date of the reassessment order (3 December 1968). Applying that computation, the assessee’s application of 30 December 1970 was within time for AY 1964-65.

Analysis for Assessment Year 1965-66

The original ITO assessment was on 24 February 1966. The Commissioner passed a revisional order under section 264 dated 23 August 1968 which merely allowed a deduction of Rs. 4,800 — to that limited extent only the ITO's order was amended.
The assessee argued that the whole ITO order merged into the revisional order and limitation should run from the Commissioner’s revisional date. The court examined authorities on the doctrine of merger (including Shankar Abhyankar, J.K. Synthetics and State of Madras v. Madurai Mills) to determine whether merger applied.
The court observed that the revisional power under section 264 is limited in scope and not as wide as the appellate power under section 251 (or the revisional power of a superior court addressed in Shankar Abhyankar). Because the Commissioner’s order was confined to allowing a specific deduction, it did not effect a merger of the entire assessment order of the ITO.
Relying on the principle that the doctrine of merger is not universally applicable but depends on the nature and scope of the revisional jurisdiction, the court held that the limited revisional order under section 264 did not merge the ITO's original order for the purposes of computing limitation under section 154(7).
Accordingly, limitation for the section 154 application in respect of AY 1965-66 had to be computed from the date of the original ITO order (24 February 1966), and the application filed on 30 December 1970 was beyond four years and therefore time-barred.

Holding and Implications

Holding:

The court answered the referred question as follows:

For assessment year 1964-65: The s.154 application filed on 30 December 1970 was within time — in favour of the assessee and against the Revenue.
For assessment year 1965-66: The s.154 application filed on 30 December 1970 was time-barred — in favour of the Revenue and against the assessee.

Implications / Consequences:

Direct effect: The assessee's section 154 application succeeds for AY 1964-65 (being in time) and fails for AY 1965-66 (being time-barred). The parties were directed to bear their own costs.
On broader law: The court applied and explained existing principles (notably that reassessment proceedings can wipe out the earlier assessment, and that merger of an inferior order into a revisional order depends on the scope of the revisional jurisdiction). The opinion distinguishes between the wider appellate/revisional jurisdictions that may produce merger and the limited revisional power under section 264, but it does not announce a novel legal rule beyond the application of those principles to the facts; no distinct new precedent is set in language asserting departure from prior authorities.

This summary is derived exclusively from the provided opinion text and does not add or infer facts beyond that source.

Show all summary ...

K.N Seth, J.:— The assessee is a limited company engaged in the manufacture and sale of sugar machinery. The original assessment for the assessment year 1964-65 was completed on March 29, 1965. The assessment for the assessment year 1965-66 was made on February 24, 1966. For the assessment year 1964-65, reassessment proceeding was initiated under s. 147 of the I.T Act and completed on December 3, 1968. For the assessment year 1965-66 the Commissioner of Income-tax by his order dated August 23, 1968, passed under s. 264 of the Act allowed a deduction of Rs. 4,800, being income-tax fees paid to M/s. P.L Tandon & Co. Thereafter, these two assessments were rectified on April 30, 1970, and 17th October, 1968. On 30th December, 1970, the assessee made an application to the ITO under s. 154 claiming relief under s. 80-I on the ground that the assessee manufactured sugar machinery which comes under the head “Priority industry”. The ITO rejected the claim on the ground that the applications were barred by limitation provided under sub-s. (7) of s. 154. The AAC rejected the appeals of the assessee on the reasoning that the mistake was committed in the original assessment order dated March 29, 1965, and 24th February, 1966, for the assessment years 1964-65 and 1965-66 respectively and the applications under s. 154 moved on December 30, 1970, were clearly time-barred. The Income-tax Appellate Tribunal took the view that the time limit prescribed under s. 154(7) for the assessment year 1964-65 would start from December 3, 1968, when the order of reassessment was passed and the application made by the assessee on December 30, 1970, was in time. As regards. the assessment year 1965-66 the Tribunal took the view that the revisional order of the Commissioner dated August 23, 1968, by which he allowed a deduction of Rs. 4,800, amended the order of the ITO only to the extent of the deduction allowed and to that limited extent the order of the ITO merged with the order of the Commissioner and the rest of the order of the ITO stood as it was on February 24, 1966, when the assessment order was passed by the ITO. Since the entire order of the ITO did not merge with the order of the Commissioner passed on August 23, 1968, limitation for the application under s. 154 should be computed from the date of the original assessment order and not from the date of the order of the Commissioner and consequently the claim for the assessment year 1965-66 was barred by time. On the applications of the assessee and the Department under s. 256(1) of the Act, the Tribunal has referred the following question for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the assessee's applications under section 154 of the Act for the assessment year 1964-65 and 1965-66 were in time?”

2. As noted earlier, the original assessment for the assessment year 1964-65 was made on March 29, 1965. Thereafter, proceeding for reassessment was initiated and the order of reassessment was passed on December 3, 1968.

3. The assessment was rectified on April 30, 1970. The application for seeking the relief under s. 80-I was made on December 30, 1970. Even if the order dated April 30, 1970, is ignored, the effect of the order of reassessment was that the earlier assessment was wiped out. The effect of reassessment proceedings came up for consideration before the Supreme Court in V. Jaganmohan Rao v. CIT, [1970] 75 ITR 373. The Supreme Court observed (p. 380):

“…… once proceedings under section 34 are taken to be validly initiated with regard to two-thirds share of the income, the jurisdiction of the Income-tax Officer cannot be confined only to that portion of the income. Section 34 in terms states that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous under-assessment is set aside and the whole assessment proceedings start afresh. When once valid proceedings are started under section 34(1)(b) the Income-tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year.”

4. The language of s. 1.48 of the 1961 Act also requires that before making the assessment, reassessment or. recomputation under s. 147 the ITO shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-s. (2) of s. 139; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section. It is thus obvious that once the reassessment proceedings are started the earlier order ceases to exist and the ITO starts the assessment proceedings afresh. For the Revenue, reliance was placed on the decision of this court in Sir Shadi Lal and Sons v. CIT, [1973] 92 ITR 453. In that case it was held that on reassessment the entire assessment is not opened. A claim for expenditure which has been disallowed during the original assessment cannot be re-agitated on the assessment being re-opened for bringing to tax income which has escaped assessment. The controversy on reassessment is confined to matters which are relevant in respect of the income which had not been brought to tax during the course of the original assessment. The controversy was confined to the question of the scope of inquiry in reassessment proceedings. It was not concerned with the question raised in the present case. In our opinion, the time-limit prescribed under s. 154(7) would start, for the assessment year 1964-65, from December 3, 1968, and the application made by the assessee on December 30, 1970, for that assessment year must beheld to be in time.

5. As regards the assessment year 1965-66, the original assessment was made on February 24, 1966. The Commissioner by his order dated August 23, 1968, passed under s. 264 of the Act merely allowed a deduction of Rs. 4,800 and to that extent only the order of the ITO was amended. Learned counsel for the assessee contended that the entire order of the ITO merged in the order of the Commissioner and consequently limitation for the application under s, 154 should be computed from the date of the order of the Commissioner. In support of the proposition that the order of the ITO merged in the revisional order of the Commissioner, reliance was placed on Shankar Ramchandra Abhyankar v. Krishnaji Dattatraya Bapat, (1969) 2 SCC 74 : AIR 1970 SC 1. In that case the Supreme Court held that where, on its revisional jurisdiction being invoked against the order of the appellate court, the High Court dismisses the revision, after hearing both the parties, the order of the appellate court becomes merged with the order made in revision and, thereafter, the appellate order cannot be challenged or attacked by another set of proceedings in the High Court under arts. 226 and 227 of the Constitution. The principle of merger of orders of inferior courts would not become affected or inapplicable by making any distinction between a petition for revision and an appeal. It was further observed that the revisional jurisdiction is a part of the general appellate jurisdiction of the High Court as a superior court. It is only one of the modes of exercising power conferred by the statute; basically and fundamentally it is the appellate jurisdiction of the High Court which is being invoked and exercised in a wider and larger sense. These observations were made while dealing with the nature of the revisional power of the High Court under s. 115, CPC, and the question of maintainability of a petition under arts. 226 and 227 of the Constitution challenging the legality of the appellate order.

6. Reliance was also placed on the decision of this court in J.K Synthetics Ltd. v. Addl. CIT, [1976] 105 ITR 344. In that case, analysing the scope of s. 251 of the I.T Act, it was observed that once an assessment comes before the AAC, the appellate authority can look into and adjudicate upon findings recorded by the ITO 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 view of the scope and nature of the appellate orders, the entire subject-matter of the assessment order was within the jurisdiction of the AAC. That being the position, the entire assessment order merged in the appellate order and consequently the Addl. Commissioner under s. 263(1) had no jurisdiction to revise the order of the ITO. The principle of merger was held applicable in view of the wide scope of the appellate power under s. 251 of the Act. That principle, in our opinion, would not be applicable in the case of an order passed by the Commissioner under s. 264 of the Act.

7. The doctrine of merger came up for consideration before the Supreme Court in State Of Madras v. Madurai Mills Co., Ltd. , [1967] 19 STC 144; AIR 1967 SC 681, arising out of proceedings under the Madras General Sales Tax Act. The Supreme Court laid down the principle thus (p. 683 of AIR 1967 SC):

“But 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 the 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. In our opinion, the application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction.”

8. In the present case the order of the Commissioner dated August 23, 1968, was confined to allowing a deduction of Rs. 4,800, being income-tax fees paid to M/s. R.P.L Tandon & Co. The revisional power under s. 264 is of a limited nature and is not as wide as that conferred on the appellate authority under s. 251 of the Act. From the nature and scope of the revisional power and the subject-matter of the revisional order, it is not possible to infer that the order of assessment passed by the ITO merged in the order of the Commissioner. The assessee, therefore, could not claim limitation from the date of the order of the Commissioner. The application under s. 154 in respect of assessment year 1965-66 was clearly beyond four years from the order of the ITO which was sought to be amended.

9. Our answer to the question referred is in the affirmative, in favour of the assessee and against the Revenue for the assessment year 1964-65 and in the negative for the assessment year 1965-66, in favour of the Revenue and against the assessee. The parties shall bear their own costs.