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Income-Tax v. Ratilal Bacharilal & Sons
Judgment Summary (Per V.C. Daga, J.)
Factual and Procedural Background
The assessee is a registered firm whose assessment for the year 1980-81 was completed by the Income‑tax Officer (I.T.O.) by an assessment order dated 23.2.1981. In that assessment order the I.T.O. allowed a weighted deduction under section 35B on Rs. 5,63,350/-, whereas the assessee had claimed Rs. 8,90,676/-. The assessee appealed against the assessment; the Commissioner of Income‑tax (Appeals) by order dated 25.11.1981 upheld the I.T.O.'s decision. Subsequently the Commissioner of Income‑tax (CIT) considered the assessment order dated 23.2.1981 to be erroneous and prejudicial to the interests of revenue because the weighted deduction under section 35B had been allowed on reassortment charges without detailed enquiry. The CIT, invoking his revisional powers under section 263, by order dated 11.1.1983 set aside the assessment insofar as the section 35B claim was concerned and remanded the matter to the I.T.O. for fresh assessment after giving the assessee an opportunity. The assessee appealed to the Tribunal against the CIT's order under section 263; the Tribunal allowed the appeal, holding that the CIT(A) had expressly or impliedly applied his mind to the section 35B issue and that the assessment merged in the appellate order, thus excluding the CIT's section 263 jurisdiction. The Revenue referred two questions of law to this Court under section 256(1) for opinion.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the Commissioner of Income‑tax (Appeals) expressly or impliedly applied his mind on the issue of allowance of relief under section 35B on reassortment charges where the claim for deduction had already been allowed by the Income‑tax Officer and consequently did not figure in the appeal before the Commissioner of Income‑tax (Appeals).
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that after an appeal was decided by the Commissioner of Income‑tax (Appeals) against the assessment order, the assessment order merged in the order of the Commissioner of Income‑tax (Appeals) and thereafter the Commissioner of Income‑tax could not exercise his jurisdiction under section 263 of the Income‑tax Act, 1961, for revising the assessment on the ground of its being erroneous and prejudicial to the interest of the revenue.
Arguments of the Parties
Revenue's Arguments (as advanced by Shri Kotangale)
- The assessee could not have appealed against that part of the assessment order which was in its favour; the assessee was not aggrieved by the allowance of weighted deduction on Rs. 5,63,350/-. Therefore that part could not be the subject-matter of the appeal before the CIT(A).
- At most the assessee could contend before the appellate authority that weighted deduction should have been allowed on the excluded part (Rs. 3,27,326/-) and that disallowance of that portion was erroneous.
- The Tribunal was not justified in invoking the doctrine of merger and could not have set aside the order of the Commissioner passed under section 263.
Assessee's Arguments
- The assessee's counsel submitted that once the CIT(A) expressed an opinion on the weighted deduction under section 35B with respect to reassortment charges, then jurisdiction under section 263 for revising the assessment on the ground of error and prejudice to the revenue was not available to the CIT.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| C.I.T. v. P. Muncherji & Co. (1987) 167 ITR 671 (Bom.) | Doctrine that once an assessment order is confirmed by the appellate court the assessment order merges in the appellate order and becomes final (pre‑amendment position). | The Court noted this principle but observed that this legal position stands abrogated by the amendment to section 263 effected by Finance Act, 1989; it was cited to describe the pre‑amendment merger doctrine. |
| Ritz Ltd. v. Union of India (1990) 184 ITR 599 (Bom.) | Interpretation that the amendment to section 263 applies only where action under section 263 is taken on or after 1 June 1988, confining merger to issues actually considered and decided in appeal. | The Court recorded the Ritz view as a ruling of this Court on the scope of the amendment but then examined subsequent authorities and the Supreme Court's decision which addressed the retrospective effect; Ritz was considered and contrasted with later binding authority. |
| C.I.T. v. International Computers Indian Manufacturer Ltd. (1991) 187 ITR 580 (Bom.) | Reiteration (by this Court) of the narrower view of the amendment's operation (as in Ritz). | The Court listed this decision as an instance where a similar view was reiterated, but later held that such earlier views have lost binding force in light of subsequent Supreme Court authority. |
| C.I.T. v. Godavari Sagar Mills Ltd. (1992) 198 ITR 196 (Bom.) | Another decision of this Court reiterating the view mentioned in Ritz regarding the amendment's scope. | The Court cited it among earlier decisions of this Court whose binding force was displaced by later Supreme Court authority. |
| C.I.T. v. Bombay Burmah Trading Corporation Ltd. (1992) 107 CTR (Bom.) 53 | Further High Court authority (Bom.) aligned with the narrower interpretation of the amendment. | The Court listed it as one of the precedents whose earlier view is no longer good law following the Supreme Court decision discussed later in the judgment. |
| Hindustan Aluminium Corporation Ltd. v. C.I.T. (1989) 178 ITR 74 (Cal.) | Calcutta High Court view that clause (c) merely made explicit what was already implicit and that the doctrine of partial merger had judicial recognition. | The Court noted this contrary High Court view as part of the spectrum of authorities interpreting amendment (c) and contrasted it with other High Court decisions and with the Supreme Court decision ultimately followed. |
| Hamilton & Co. Pvt. Ltd. v. C.I.T. (1991) 187 ITR 568 (Cal.) | Held that the amendment clarifies that clause (c) must be deemed to have always been in existence. | The Court recorded this as supporting the Calcutta High Court's position that the amendment merely clarified existing law. |
| C.I.T. v. Techno Electric & Engg. Co. (1994) 76 Taxman 212 (Cal.) | Calcutta High Court commentary that clause (c) is not an innovation of Parliament. | The Court cited it to demonstrate the Calcutta High Court's reasoning that the amendment clarified prior law. |
| C.I.T. v. Printers House (1998) 233 ITR 666 (Del.) | Delhi High Court view that the amendment clarifies the law and brings statutory law into conformity with the Calcutta High Court's approach. | The Court mentioned this as a supporting High Court authority for the view that the amendment clarifies an existing position. |
| CIT v. Magbool Alam & Co. (1998) 231 ITR 77 (Patna) | Patna High Court view that clause (c) is retrospective and includes appeals filed on or before or after 1.6.1988. | The Court recorded this as demonstrating that some High Courts considered the clause retrospective in nature; it formed part of the survey of conflicting authorities. |
| CXT. v. Shri Arbuda Mills Ltd. (1998) 231 ITR 0050 (Supreme Court) | Supreme Court ruling applying the amended section 263(1) (Explanation (c)) retrospectively: the powers of the Commissioner under section 263 extend to matters which had not been considered and decided in appeal. | The Court treated this Supreme Court decision as binding and followed its clear pronouncement that the powers under section 263 extend and shall be deemed always to have extended to matters not considered and decided in appeal; the Court applied that principle to the present facts and held that the CIT's powers extended to the part of the allowance not the subject of appeal. |
Court's Reasoning and Analysis
The Court proceeded in the following logical steps, based solely on the material and authorities referenced in the opinion:
- The factual question before the CIT(A) and on appeal was whether the assessee was entitled to weighted deduction under section 35B on the whole claim of Rs. 8,90,676/- or only on Rs. 5,63,350/-, i.e., whether the I.T.O. was justified in refusing deduction on Rs. 3,27,326/-. The Court observed that the assessee was not aggrieved by the allowance on Rs. 5,63,350/- and therefore that part was not the subject of appeal.
- The Court reviewed the pre‑existing doctrine of merger (as stated in C.I.T v. P. Muncherji & Co.) which treated an appellate order as the final assessment and causing merger of the original order, but then identified that the amendment to section 263 by Finance Act, 1989 (Explanation (c), w.e.f. 1 June 1988) altered the legal landscape.
- The statutory amendment (Explanation (c)) was quoted: it declares that where any assessing officer's order had been the subject‑matter of any appeal filed on or before or after 1 June 1988, the powers of the Commissioner under section 263 "shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal."
- The Court surveyed conflicting decisions: this Court's earlier decisions (Ritz Ltd. and others) had taken a narrower view that the amendment applied only where action under section 263 was taken on or after 1 June 1988. Several High Courts (notably Calcutta, Delhi and Patna) had taken differing positions, some treating the clause as declaratory and retrospective.
- The Court placed decisive reliance on the Supreme Court's decision in CXT. v. Shri Arbuda Mills Ltd., where the Supreme Court applied the amended provision of section 263(1) to items that were not the subject of appeal and held that the powers of the Commissioner under section 263 extend and shall be deemed always to have extended to matters that had not been considered and decided in the appeal.
- The Court explained that it must treat the Supreme Court's pronouncement as binding not only for the explicit declaration but also for the logical consequences flowing from it. Consequently, earlier contrary views of this Court (referred to at para 13 of the opinion) have lost their binding force.
- Applying the binding Supreme Court principle to the facts, the Court concluded that the portion of the weighted deduction allowed by the I.T.O. (Rs. 5,63,350/-) was not the subject of the assessee's appeal and therefore the powers of the CIT under section 263 extended to that matter. In short, the doctrine of merger could not be invoked by the Tribunal to exclude revisional jurisdiction with respect to parts of the assessment that were not appealed against by the assessee.
Holding and Implications
Holding: The two questions referred by the Tribunal are answered in the negative, i.e., against the assessee and in favour of the Revenue. The Court held that the Commissioner of Income‑tax's revisional powers under section 263 extended to matters not considered and decided in appeal (in light of the amendment and the Supreme Court's ruling), and therefore the Tribunal was not justified in applying the doctrine of merger to bar the CIT's action.
Direct Implications for the Parties:
- The reference stands answered in the terms indicated by the Court.
- The matter is remitted back to the Appellate Tribunal for decision in accordance with law (i.e., with the understanding that the CIT's section 263 jurisdiction extended to matters not decided in appeal).
- No order as to costs was made.
Note: This summary is confined to and based exclusively on the content of the provided opinion. No additional facts or inferences beyond the opinion text have been introduced.
JUDGMENT: (Per V.C Daga, J.)
By this reference under section 256(1) of the Income-tax Act, 1961, the Income Tax Appellate Tribunal has referred the following questions of law for the opinion of this Court:
1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the Commissioner of Income-tax (Appeals) expressly or impliedly applied his mind on the issue of the allowance of relief under section 35B on reassortment charges when the claim for deduction on this account had already been allowed by the Income-tax Officer in the assessment order and consequently did not figure in the appeal before the Commissioner of Income-tax (Appeals).
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that after an appeal was decided by the Commissioner of Income-tax (Appeals) against the assessment order, the assessment order merged in the order of the Commissioner of Income-tax (Appeals) and thereafter the Commissioner of Income-tax could not exercise his jurisdiction under section 263 of the Income-tax Act, 1961 for revising the assessment on the ground of its being erroneous and prejudicial to the interest of the revenue.
FACTS:
2. The factual matrix reveals that the assessee is a registered firm. The assesment for the 1980-81 was made by the Income-tax Officer by assessment order dated 23.2.1981 In the said assessment order, the I.T.O allowed weighted deduction under section 35-B on Rs. 5,63,350/- instead of Rs. 8,90,676/- claimed by the Assessee.
3. Appeal was preferred against the said assessment order which was decided by the Commissioner of Income-tax(Appeals) by order dated 25.11.1981 upholding the order of the I.T.O
4. Subsequently, the Commissioner of Income-tax was of the view that the assessment order dated 23.2.1981 was erroneous and prejudicial to the interest of the Revenue inasmuch as weighted deduction under section 35B was allowed on reassortment charges without going into the details of these charges and enquiry as to whether these charges were justified so as to allow weighted deduction under section 35-B of the Act. The Commissioner of Income-tax, finding the order erroneous and prejudicial to the interest of the Revenue, in exercise of his powers under section 263, by an order dated 11.1.1983, set aside the assessment order dated 23.2.1981 with respect to the claim made by the assessee for weighted deduction under section 35-B and remanded the assessment proceeding to the I.T.O with direction to make the assessment afresh, keeping in view his observations made in the order, after giving sufficient opportunity to the assessee to meet its case before completing the assessment.
5. Being aggrieved by the aforesaid order of the Commissioner of Income-tax under section 263, dated 11.1.1983, the assessee invoked appellate jurisdiction of the Tribunal, contending that the powers under section 263 could not have been invoked by the Commissioner of Income-tax since the assessment order with respect to the weighted deduction under section 35-B was a subject matter of appeal before the C.I.T (Appeals) as such order in original merged in the order of the appellate authority. The Tribunal came to the conclusion that the Commissioner of Income-tax (Appeals) having expressed its views impliedly applied its mind to the question of grant of allowance under section 35B. The Tribunal, further held that assessment order passed by the I.T.O emerged in the order of the Commissioner of Income-tax (Appeals) and, therefore, Commissioner of Income-tax could not have assumed jurisdiction u/s 263 of the Income-tax Act so as to revise the assessment order, on the ground of it being erroneous and prejudicial to the interest of the revenue.
6. The Appellate Tribunal, on the above findings, cancelled the order of the Commissioner under section 263 and allowed the appeal of the assessee-firm.
7. Based on the above facts, questions of law as extracted in the opening part of this order are the subject-matter of this reference made under section 256(1) at the instance of the Revenue for the opinion of this Court.
Submissions:
8. Learned Counsel appearing for the Revenue Shri Kotangale submitted that the assessee could not have preferred appeal against that part of the order which was in favour of the assessee. The assessee could not be said to be aggrieved by that part of the order which was in favour of the assessee. In otherwords, he submits that weighted deduction which was allowed on Rs. 5,63,350/- could not have been the subject matter of appeal before the CI.T(A), the first appellate authority. He submitted that at the most it was open for the assessee to contend before the appellate Tribunal that the weighted deduction under section 35B of the Income-tax Act ought to have been allowed on the excluded part of the reassortment charges amounting to Rs. 3,27,326/- and that disallowance to that extent was erroneous.
9. Shri Kotangale, submits that the Tribunal was not justified in invoking doctrine of merger and could not have set aside the order of the Commissioner of Income-tax passed under section 263.
10. Per Contra, learned Counsel appearing for the assessee submitted that once the opinion is expressed by the C.I.T (A) on the weighted deduction under section 35-B with respect to the reassortment charges, then the jurisdiction under section 263 for revising assessment order on the ground of it being erroneous and prejudicial to the interest of the Revenue; was not available to the C.I.T(A).
Consideration:
11. Having heard the rival parties, it appears that the main contention of the assessee, which was considered by the C.I.T(A), was whether or not the assessee was still entitled to claim weighted deduction on the entire amount of Rs. 8,90,676/- instead of Rs. 5,63,350/-. In otherwords, whether or not the I.T.O was justified in refusing to allow weighted deduction on Rs. 3,27,326/-, was the question raised before the 1st appellate Court. However, in view of the judgment of this Court in the case of C.I.T v. P. Muncherji & Co. (1987) 167 ITR 671 (Bom.) once the order of assessment is confirmed by the appellate Court or any order with regard to assessment has been made by it, that becomes a final order of assessment and only right the department has is the right of appeal to the Appellate Tribunal. In otherwords, whether or not the issue is raised, once the assessment order is carried in appeal, the entire order merges with the appellate order. However, this legal position stands abrogated in view of the amendment to section 263 of the Act, as amended by Finance Act, 1989. It has, thus, become necessary to examine the effect of this amendment to section 263 of the Act.
12. Amendment to section 263 of the Income-tax Act, 1989, has been made by FINANCE ACT, 1989 with retrospective effect w.e.f 1 June, 1988. Relevant part of the amendment reads as under:
“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 June 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.” (Emphasis supplied)
13. This Court while dealing with scope of amendment to section 263, in Ritz. Ltd. v. Union of India (1990) 184 ITR 599 603 (Bom.) ruled that only in cases where action under section 263 is taken on or after 1 June, 1988, the merger of the assessment order in the appellate order will be treated as confined to the issues actually considered and decided in appeal in terms of clause (c) of the newly substituted (w.e.f 1.6.1988) Explanation to section 263(1). In that view of the matter, where the action under section 263 is taken prior to 1 June 1988, the provisions of said clause (c) of the Explanation cannot be invoked because irrespective of the language in which the amending provisions are couched, the amendment cannot be retrospective with effect from a date earlier to the date on which the amended provision itself was brought on the statute book. The similar view has been reiterated by this Court in number of cases viz. C.I.T v. International Computers Indian Manufacturer Ltd., (1991) 187 ITR 580 (282) (Bom.); C.I.T v. Godavari Sagar Mills Ltd. (1992) 198 ITR 196.200-01(Bom.); C.I.T v. Bombay Burmah Trading Corporation Ltd (1992) 107 CTR (Bom.) 53, 54;
Some of the leading High Courts have taken a contrary view. Let us notice the same.
14. According to the Calcutta High Court, the said clause (c) has tried to make explicit what was already implicit in the Act (see Hindustan Aluminium Corporation Ltd. v. C.I.T (1989) 178 ITR 74, 93 (Cal.). The very same High Court has further held that the amendment to clause (c) by the Finance Act, 1989, clarifies that the said clause (c) must be deemed to have always been in existance (see Hamilton & Co. Pvt. Ltd. v. C.I.T (1991) 187 ITR 568 (Cal.). Thus, according to Calcutta High Court the doctrine of partial merger has judicial recognition for quite long. This clause (c) is no innovation of Parliament (see C.I.T v. Techno Electric & Engg. Co. (1994) 76 Taxman, 212, 220 (Cal.).
15. According to Delhi High Court such amendment to section 263 clarifies the law and brings the Statutory Law in conformity with the judicial opinion noticed in the judgment of the Calcutta High Court. (see CIT v. Printers House (1998) 233 ITR 666, 669 (Del).
16. According to Patna High Court clause (c) is retrospective in nature. It also includes an appeal filed on or before or after 1.6.198 (see CIT v. Magbool Alam & Co. (1998) 231 ITR 77, 80 (Patna).
17. At this juncture, it will be useful to refer to the portion of the departmental Circular No. 550 dated 1 January 1990 which reads as under:
“The above Explanation was incorporated in the Finance Act, 1998, to clarify this legal position to have always been in existence.
Some appellate authorities have, however, decided that the Explanation will apply only prospectively, i.e only to those orders which are passed by the Commissioner after 1 June 1988. Such an interpretation is against the legislative intent and section 263 of the Income-tax Act has been amended so as to clarify that the provisions of the Explanation shall be deemed to have always been in existence.”
18. In the case of CXT. v. Shri Arbuda Mills Ltd. (1998) 231 ITR 0050; the apex Court also had an occasion to consider above issue. The relevant facts reveal that the assessment year in that case was 1975-76 ending on 31.12.1974 The assessment was completed under section 143(3) r/w section 144-B, on March 31, 1978 in which net business loss was computed at Rs. 3,61,086/- and the income under the head “Capital gains” at Rs. 38,874/-. The Income-tax Officer had made certain additions and disallowances while computing the loss and income as above and had also accepted, inter alia, the following three claims:
(i) Deduction of a sum of Rs. 23,82,621/- by way of provision for gratuity.
(ii) Depreciation on Rs. 4,21,000/- which was paid by the assessee to United Textile Industries as consideration for transfer of installed property of 17,480 spindles and 400 looms of Old Manek Chowk Mills;
(iii) Loss on account of difference in exchange rate which was referable to the purchase of machinery, etc. as revenue expenditure. For the purposes of the present matter, it is only these three items of claim which are relevant.
In the appeals filed by the assessee, the items in respect of which the decision was in its favour were not the subject-matter of appeals. In respect of above three items, the Commissioner exercised its power under section 263 of the Income-tax Act.
The main contention of the assessee considered by the Tribunal was whether or not the order of the Income-tax Officer regarding the said three items in respect of which the assessee had no occasion to prefer an appeal had merged in that of the Commissioner (Appeals) so as to exclude the jurisdiction of the Commissioner of Income-tax under section 263 of the Act. The Apex Court on reference under section 257 of the Income-tax Act, 1961 was required to deal with the following question referred to it.
“Whether, on the facts and in the circumstances of the case, the order of assessment passed by the Income-tax Officer under section 143(3) read with section 144b on July 31, 1978, had merged with that of the Commissioner (Appeals) dated December 15, 1979, in respect of the three items in dispute so as to exclude the jurisdiction of the Commissioner of Income-tax under section 263?”
The Apex Court while dealing with the above question applied the amended provision of section 263(1) of the Act to the aforesaid three items which were not the subject matter of appeal and held as under:
“The consequence of the said amendment with retrospective effect is that the powers under section 263 of the Commissioner shall extend and shall be deemed always to have extended tosuch matters as had not been considered and decided in an appeal. Accordingly, even in respect of the aforesaid three items, the powers of the Commissioner under section 263 shall extend and shall be deemed always to have extended to them because the same had not been considered and decided in the appeal filed by the assessee.”
19. Learned Counsel appearing for the assessee tried to canvas, since there is no discussion in the aforesaid judgment of the Apex Court with respect to the length of the retrospectivity of the amendment to section 263, it need not be followed. We do not agree with this submission made. The submission made is liable to be rejected outrightly. The Courts including High Court have to treat a decision of the Supreme Court as an authority not only for what it declares or decides by express enunciation but also what follows from such declaration by clear implication by way of logical deduction. So far as case of Shri Arbuda Mills Ltd. (supra), is concened, the pronouncement is clear on a point and suffers from no ambiguity. Needless to mention that once the point is finally decided by the Supreme Court it becomes binding precedent. The binding effect of a decision does not depend upon whether a particular argument was considered therein or not, provided that the point with reference to which an argument was subsequently advanced was actually decided. Merely because, there is no discussion in the judgment that does not mean that the issue in question was not considered by the Apex Court and that it has no binding force. On the contrary, earlier views of this Court referred to in para 13 (supra) have lost their binding force. They are no longer good law.
20. The consequence of the aforesaid clause (c) introduced 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 matter as had not been considered and decided in the order passed in appeal on or, before or after 1.6.1988 The very fact that Explanation (c) was given retrospective effect by using the words “On or before or after” itself denotes that the intention of legislation is to embrace all orders whether passed on or after or before 1.6.1988 The use of the phrase “on or before or after” is no doubt little uncommon. The phrase “on or before” denotes immediately at or at any time before. The phrase “on or before and after” to our mind means either immediately at or in the past or future. It means at any time during the continuance of the Act, if it is to be understood in the context of the legislation.
21. Having said so, turning to the facts of this case, so far as allowance under section 35-B to the extent it was allowed by the I.T.O is concerned, the powers of the Commissioner under section 263 shall extend and shall be deemed always to have extended to such matter because the same had not been considered and decided in the appeal filed by the assessee. At the instance of the assessee, the allowance on the sum of Rs. 5,63,350/- could not have been the subject matter of appeal before the CI.T(A) as the assessee was never aggrieved with that part of the order. In otherwords, so far as weighted deduction under section 35-B in the sum of Rs. 5,63,350/- is concerned, the same was not a subject-matter of the appeal before the CI.T(A). Factually, in this case, the doctrine of merger could not have been applied by the Tribunal to that part of the order; which was not a subject matter of appeal as indicated, so as to exclude revisional jurisdiction of the Commissioner of Income-tax under section 263 of the Act.
22. In the above view of the matter, both the questions referred for our opinion are liable to be answered in the negative i.e.against the assessee and in favour of Revenue.
Reference in terms of this order stands answered and matter stands remitted back to the Tribunal for decision in accordance with law.
No order as to costs.
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