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Commissioners Of Income-Tax, Visakhapatnam v. East Coast Marine Products (P) Ltd.
Structured Summary of the Opinion (Jeevan Reddy, J.)
Factual and Procedural Background
This opinion arises from references made by the Income‑tax Appellate Tribunal, Hyderabad under Section 256(1) of the Income‑tax Act, 1961 in R.C. No. 165/1984 and R.C. No. 177/1984. The Tribunal referred four questions in R.C. No. 165/1984 concerning (a) whether an assessing officer's order merges with an appellate order even in respect of matters not the subject‑matter of the appeal and thereby precludes the Commissioner from exercising revisionary powers under Section 263; and (b) whether an assessing officer's order passed following directions from the Inspecting Assistant Commissioner under Section 144‑B should be treated as the order of the Inspecting Assistant Commissioner, with consequences for the Commissioner’s jurisdiction under Section 263.
In R.C. No. 165/1984 the court disposed of question Nos. 2, 3 and 4 in the negative (i.e., in favour of the revenue and against the assessee) following an earlier decision cited as Ram Das Deo Ki Nandan. The Court then addressed question No. 1 — whether a partially‑appealed assessment merges entirely into the appellate order, thereby ousting the Commissioner’s power under Section 263 with respect to issues not appealed — and answered it in the negative (again in favour of the revenue and against the assessee). No costs were awarded.
In R.C. No. 177/1984 the referred question was answered in the negative (in favour of the revenue and against the assessee), following the decision in Torson Products Ltd. No costs were awarded.
Legal Issues Presented
- Whether the Appellate Tribunal was right in holding that the order of the Income‑tax Officer merged with the order of the Commissioner of Income‑tax (Appeals) even in respect of matters not covered by the appeal before the Commissioner of Income‑tax (Appeals) and consequently the Commissioner of Income‑tax has no jurisdiction to invoke the powers under Section 263 of the Income‑tax Act, 1961?
- Whether the Appellate Tribunal was justified in holding that the Commissioner has no jurisdiction under Section 263 to review that portion of the Income‑tax Officer's order covered by the directions given by the Inspecting Assistant Commissioner under Section 144‑B(4) of the Act?
- Whether the Appellate Tribunal was justified in holding that the order passed by the Income‑tax Officer following the directions of the Inspecting Assistant Commissioner under Section 144‑B is not the order of the Income‑tax Officer but the order of the Inspecting Assistant Commissioner and consequently the Commissioner cannot exercise jurisdiction under Section 263?
- Whether the Appellate Tribunal is correct in law in holding that inasmuch as the Income‑tax Officer passed the order following directions of the Inspecting Assistant Commissioner under Section 144‑B there cannot be any error in the order of the Income‑tax Officer and the Commissioner cannot exercise his power under Section 263?
Arguments of the Parties
Assessee's Arguments
- The assessee contended before the Tribunal that once an appeal is filed, even though against only a portion of the assessment order, the entire assessment order merges with the appellate order.
- On this basis the assessee argued that the Commissioner is precluded from exercising powers under Section 263(1) because that power is available only against orders of the Income‑tax Officer (Assessing Officer), and the original order was said to have merged into the appellate order.
The opinion does not contain a detailed account of any other specific arguments advanced by the revenue or by other parties; therefore those arguments are not summarized here.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ram Das Deo Ki Nandan, 173 ITR P. 64 | Where an Income‑tax Officer passed an order after receiving directions from the Inspecting Assistant Commissioner under Sec. 144‑B, the order is still that of the Income‑tax Officer and cannot be characterised as an order made by the Inspecting Assistant Commissioner. | The Court followed this decision to answer Questions 2, 3 and 4 in the negative (in favour of the revenue), holding that such orders remain assessors' orders and are amenable to revision under Section 263. |
| State of U.P. v. Mohammad Nooh, AIR 1958 SC 86 | Filing an appeal does not necessarily suspend the finality or operation of the original order; an original decree/order remains effective until reversed or modified on appeal; merger of an original decree in an appellate decree occurs only for limited purposes. | The Court relied on this principle to reject the broad contention that mere filing of an appeal merges the entire assessing officer's order into the appellate order and thereby ousts Section 263 jurisdiction. |
| Jowad Hussain v. Gadan Singh, 53 Ind. App 197; AIR 1926 PC 93 | Cited as an example where merger has limited application (for certain procedural purposes such as periods of limitation), supporting the broader rule quoted from Mohammad Nooh. | Used as supporting authority in the passage quoted from State of U.P v. Mohammad Nooh to show limited scope of merger doctrine under Indian law. |
| Juscurn Boid or Pirthichand Lal, 46 Ind. App 52; ILR46 Cal. 670; AIR 1918 PC 151 | Authority quoted to show that under Indian law an original decree is not suspended by presentation of an appeal and remains effective until reversed. | Quoted within the discussion of Mohammad Nooh to support the proposition that filing an appeal does not automatically render the original order ineffective. |
| Commissioner of Income‑tax v. K.J. Rajput, 164 ITR P. 197 (Full Bench, Madhya Pradesh High Court) | The doctrine of merger applies to income‑tax proceedings only to the extent of the scope and subject‑matter of the appeal; items not agitated or decided on appeal remain part of the assessing officer's order and permit revision under Section 263. | The Court expressly agreed with and followed this Full Bench view to hold that where an appeal challenges only some items, the assessing officer's order in respect of other items survives and is susceptible to revision under Section 263. |
| Torson Products Ltd. v. Commissioner of Income‑Tax, 173 ITR P. 611 | Authority cited in R.C. No. 177/1984 to answer the referred question. | The Court followed this decision in R.C. No. 177/1984, answering the reference in the negative (in favour of the revenue against the assessee). |
Court's Reasoning and Analysis
The Court proceeded in two principal strands of analysis corresponding to the referred questions.
First, addressing Questions 2, 3 and 4 (concerning orders made by an Income‑tax Officer after directions from the Inspecting Assistant Commissioner under Section 144‑B), the Court followed the decision in Ram Das Deo Ki Nandan. That decision holds that an order passed by an Income‑tax Officer after receiving directions under Section 144‑B remains the order of the Income‑tax Officer and cannot be characterised as the order of the Inspecting Assistant Commissioner. On that basis the Commissioner’s revisionary jurisdiction under Section 263 is available in respect of such orders. The Court therefore answered Questions 2–4 in the negative (in favour of the revenue and against the assessee).
Second, on Question 1 (whether the filing of an appeal, even against only part of an assessment, results in merger of the entire assessment order and thus precludes the Commissioner from exercising powers under Section 263), the Court rejected the broad merger argument advanced by the assessee. The Court relied on State of U.P. v. Mohammad Nooh to explain that, under Indian law, the filing of an appeal does not automatically suspend or render ineffective the original order; the original order remains effective until it is reversed or modified. The Court further explained that, even if the merger theory were applied, merger would operate only to the extent of the matters that were actually the subject of the appeal. To support this conclusion the Court expressly adopted the Full Bench decision in Commissioner v. K.J. Rajput, which held that the doctrine of merger in income‑tax proceedings applies only to the extent of matters considered and decided on appeal; items not considered or agitated on appeal remain intact and are open to revision by the Commissioner under Section 263.
The Court noted that although some High Courts have taken a contrary view, the Court saw no principled basis for that view and observed that allowing broad merger could enable tax evaders to use appeals as a device to defeat revision under Section 263. The Court also observed that the Legislature subsequently introduced clause (c) in the Explanation to Section 263 (by the Taxation Laws Amendment Act, 1984, and amended by the Direct Taxes (Amendment) Laws, 1987), explicitly declaring that where an assessing officer's order had been the subject‑matter of any appeal, the Commissioner’s powers under sub‑section (1) would extend to matters that had not been considered and decided in such appeal. Although that legislative amendment did not apply retroactively to the assessment under consideration, the Court treated it as manifesting legislative intent consistent with the Court’s conclusion.
Applying these principles, the Court answered Question No. 1 in the negative (in favour of the revenue and against the assessee), holding that Section 263 remains available to the Commissioner in respect of portions of an assessing officer's order that are not the subject of appeal.
In R.C. No. 177/1984 the Court followed the decision in Torson Products Ltd. and answered the reference in the negative (in favour of the revenue and against the assessee).
Holding and Implications
Holding:
- Questions 2, 3 & 4 (R.C. No. 165/1984): Answered in the negative — in favour of the revenue and against the assessee. The Court held that an order passed by an Income‑tax Officer following directions under Section 144‑B remains the order of the Income‑tax Officer and is amenable to revision under Section 263.
- Question 1 (R.C. No. 165/1984): Answered in the negative — in favour of the revenue and against the assessee. The Commissioner may exercise powers under Section 263 in respect of those parts of an assessing officer's order which were not the subject of the appeal.
- R.C. No. 177/1984: The referred question was answered in the negative — in favour of the revenue and against the assessee — following Torson Products Ltd.
Implications:
- The direct effect is that the Commissioner retains the power under Section 263 to revise portions of an assessing officer's order that were not considered or decided on appeal. A partial appeal does not automatically oust Section 263 jurisdiction in respect of issues not appealed.
- Orders made by an Income‑tax Officer in obedience to directions under Section 144‑B are treated as orders of the Income‑tax Officer (not as independent orders of the Inspecting Assistant Commissioner) and therefore remain subject to revision under Section 263.
- The Court noted a later legislative clarification (clause (c) in the Explanation to Section 263) which aligns with and confirms the Court’s view that the Commissioner’s powers extend to matters not considered on appeal, although that amendment did not apply to the specific assessment before the Court.
- No costs were awarded in the references disposed of.
The Court relied on prior judicial authorities and legislative clarification in reaching its conclusions; the opinion does not purport to announce a novel rule distinct from those authorities it followed.
Jeevan Reddy, J.:—
R.C No. 165/1984:
The following four questions are referred by the Income-tax Appellate Tribunal, Hyderabad under Sec. 256(1) of the Income-tax Act, 1961:
“1. Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in holding that the order of the Income-tax Officer merged with the order of the Commissioner of Income-tax (Appeals) even in respect of matters not covered by the appeal before the Commissioner of Income-tax (appeals) and consequently the Commissioner of Income-tax has no jurisdiction to invoke the powers under Section 263 of the Income-tax Act, 1961?
2. Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in holding that the Commissioner has no jurisdiction under Section 263 to review that portion of the Income-tax Officer's order covered by the directions given by the Inspecting Assistant Commissioner under Section 144-B (4) of the Act”.
3. Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in holding that the order passed by the Income-tax Officer following the directions of the Inspecting Assistant Commissioner u/s. 144-B is not the order of the Income-tax Officer but the order of the Inspecting Assistant Commissioner and consequently the Commissioner of Income-tax cannot exercise jurisdiction under Section 263 of the Act”.
4. Whether on the facts and in the circurnsiances of the case the Appellate Tribunal is correct in law in holding that inasmuch as the income-tax Officer passed the order following the directions of the Inspecting Asst. Commissioner under Section 144-B there cannot be any error in the order of the Income-tax Officer and the Commissioner of income-tax cannot exercise his power under Section 263 of the Act”.
2. So far as question Nos. 2, 3 & 4 are concerned, these questions are to be answered in the negative, that is, in favour of revenue and against the assessee, following the decision of this Court reported in Ram Das Deo Ki Nandan v. Commissioner of Income-tax 173 ITR P. 64. where it has been held that where an income-tax Officer passed an order after receiving directions from the inspecting Asst. Commissioner under Sec. 144-B of the Income-tax Act, it is still an order made by him and that it cannot be characterised as an order made by the Inspecting Asst. Commissioner. Now remains question No I, The issue is where an order of assessment is made by the assessing authority and the assessee files an appeal, is the Commissioner precluded from exercising bis powers of revision even with respect to the issues which are not the subject-matter of the appeal? Sec. 263(1) of The Income-tax Act, 1961 which is relevant for the purpose, reads as under:
“Revision of orders prejudicial to revenue.
263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, 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.
(Explanation:— For the removal of doubts it is hereby declared that, for the purposes of this sub-section, an order passed by the Income-tax Officer shall include—
(a) an order of assessment made on the basis of directions issued by the Inspecting Assistant Commissioner under Section 144-A or Section 144-B; and
(b) an order made by the Inspecting Assistant Commissioner in exercise of the powers or in performance of the functions of an Income-tax Officer conferred on, or assigned to, him under clause (a) of sub-section (]) of Section 125 or under sub-section (1) of Section 125(A)”.
3. The contention urged on behalf of the assessee before the Tribunal was that once an appeal is filed even though against a portion of the order of assessment the entire order of assessment merges with the appellate order and that, thereafter, it is the appellate order alone that is relevant and available. It is on this reasoning, it is argued, the Commissioner is precluded from exercising bis powers under Sec. 263(1) of the Act because that power is available only against the orders of the Income-tax Officer/Assessing Officer. We are not prepared to agree. In State Of U.P v. Mohammad Nooh . AIR 1958 SC P. 86. it was held by the Supreme Court that an order passed by a Tribunal or an appellate/revisional order passed by another Tribunal cannot be equated with the orders or appellate/revisional orders of Civil Courts. It was observed that even in the case of Civil Courts mere filing of an appeal does not interfere with the finality of original order. The following observations may usefully be extracted:
“While it is true that a decree of a court of first instance may be said to merge in the decree passed on appeal therefrom or even in the order passed in revision, it does so only for certain purposes namely for the purposes of computing the period of limitation for execution of the decree or for computing the period of limitation for an application for final decree in a mortgage suit, as in Jowad Hussain v. Gadan Singh, 53 Ind. App 197 : (AIR 1926 PC 93) (I). But as pointed cut by Sir Lawrence Jenkings in delivering the judgment of the Privy Council in Juscurn Boid or Pirthichand Lal, 46 Ind. App 52 : ILR46 Cal. 670 at pp 678 and 679 : (AIR 1918 PC 151 at pp. 152-153) (J), whatever be the theory under other systems of law, under the Indian Law and procedure an original decree is not suspended by the presentation of an appeal nor is its operation interrupted where the decree on appeal is merely one of dismissal. There is nothing in the Indian Law to warrant the suggestion that.the decree or order of the Court or tribunal of the first instance becomes final only on the termination of all proceedings by way of appeal or revision. The filing of appeal or revision may put the decree or order in jeopardy but until it is reversed or modified, it remains effective.”
4. Furthermore, even if we apply the theory of merger, it would be evident that where an appeal is filed only against a portion of the order of assessment, the merger is only to that extent. The remaining portion of the assessment order remains intact. The part whica is not carried in appeal is still the order of the assessing authority and the power of the Commissioner under Sec. 263 is unquestionably available in that behalf. This is the view taken by a Full Bench of the Madhya Pradesh High Court in a case reported in Commissioner of Income-tax v. K.J Rajput 164 ITR P. 197.. It was held therein that the doctrine of merger applies to income-tax proceedings but the extent of its application depends on the scope and the subject-matter of the appeal and the decision rendered by the appellate authority. It was held that where an appeal is preferred by the ussessee to the appellate Asst. Commissioner from an order of assessment made by the Income-tax Officer's in respect of only some of the items covered by the Income-tax Officer order and the remaining items, forming part of the Income-tax Officer's assessment order, were not agitated or the Appellate Assistant Commissioner did not consider them suo motu and no decision of the Appellate Assistant Commissioner is, therefore, made in respect of the remaining items, the Income-tax Officer's order merges with the appellate order of the Appellate Assistant Commissioner only to the extent it was considered and decided by the Appellate Asst. Commissioner. Matters which are not covered by the appellate order are left untouched and to that extent, the Income-tax Officer's assessment order survives permitting exercise of revtsional jurisdiction by the Commissioner under Section 263 of the Income-tax Act, 1961-it was held.
5. We respectfully agree with the said decision. It is brought to our notice that certain High Courts have taken a contrary view but we are unable to see any principle in the contrary view. Moreover, such a view tends to help the evaders to employ the right of appeal as a device to ward off proceedings u/s 263. It is not brought to our notice that this Court has taken a view contrary to the proposition affirmed by us.
6. We may also mention that the Legislature has since stepped in with a view to remove any controversy. It has introduced clause (c) in the Explanation to Sec. 263 of the Income-tax Act. This explanation introduced by the Taxation Laws Amendment Act, 1984 and amended by the Direct Taxes (Amendment) Laws, 1987, in so far as it is relevant, reads as follows:
“For the removal of doubts, it is hereby declared that, for the purposes of this sub-section, an order passed by the Income-tax Officer shall include—
(c) Where any order referred to in this sub-section and passed by the Assessing Officer had been the subject-matter of any appeal, the powers of the Commissioner for this sub-section shall extend to such matters as had not been considered and decided in such appeal)”.
7. This amendment though not applicable to the assessment order concerned herein, manifests the legislative intent. It is really clarificatory in nature. We have, of course, held that even without such an explanatory clause, the position is the same.
8. For the above reasons, question No. 1 is answered in the negative that is in favour of the revenue and againt the assessee. No costs.
R.C No. 177 of 1984
(Judgment of the Bench delivered by Jeevan Reddy, J)
9. In this case, the question referred to has to be answered in the negative, that is, in favour of the revenue against the assessee following the decision in Torson Products Ltd. v. Commissioner Of Income-Tax. 173 ITR P. 611.. The reference is answered, accordingly. No costs.
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