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Commissioner Of Income-Tax, Tamil Nadu Iv v. Indian Auto Stores
Summary of Judgment delivered by Sethuraman, J.
Factual and Procedural Background
The assessee is a firm that filed its return of income for the assessment year 1968-69 on 22 January 1969, although the return was due in August 1968. The Income-tax Officer (ITO) concluded there was no proper explanation for the delay and by order dated 17 February 1969 levied a penalty of Rs. 706 under s. 271(1)(a) of the Income-tax Act, 1961. The assessee appealed to the Appellate Assistant Commissioner (AAC), who dismissed the appeal by order dated 28 May 1969, confirming the ITO's order.
Subsequently, the ITO formed the view that s. 271(2) of the Act (requiring registered firms to be treated for computation of penalty as if they were unregistered) had not been applied; had it been applied, the minimum penalty would have been Rs. 8,588. The ITO issued a notice under s. 154 and, by order dated 12 June 1969, enhanced the penalty to Rs. 8,588. The assessee appealed that s. 154 order to the AAC, who cancelled the s. 154 order on the ground that the mistake sought to be rectified was not a patent or glaring mistake of law.
The ITO appealed to the Income-tax Appellate Tribunal (Tribunal). The Tribunal dismissed the departmental appeal on the ground that the original penalty order had merged in the AAC's order and, therefore, the ITO was not competent to amend the penalty after the appeal had been disposed of by the AAC; the Tribunal also considered that the proper authority to rectify any error in the levy of penalty was the AAC. The department's appeal was dismissed by the Tribunal, and in consequence four questions were referred to this Court under s. 256(2) of the Income-tax Act, 1961 in T.C.P. No. 118 of 1974 (dated 24 March 1975).
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income-tax Officer had no power left with him to amend his original order because that order of penalty has been confirmed by the Appellate Assistant Commissioner?
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 154(1A) would not apply to the assessee's case?
- Whether the Appellate Tribunal was right in upholding the order of the Appellate Assistant Commissioner on a ground not raised or argued before it?
- Whether the Appellate Tribunal was right in dismissing the departmental appeal without going into the main question raised before it?
Arguments of the Parties
Revenue's Arguments
- The revenue contended there was no merger because nothing in the AAC's order showed that the AAC had considered and decided the question of the quantum of penalty (i.e., whether the AAC had considered the applicability of s. 271(2)).
- Before the Tribunal the department relied on s. 154(1A) of the Act as authority for the ITO to amend his order despite the appeal having been disposed of by the AAC.
- Learned counsel for the revenue drew attention to the decision in L.K. Shaik Mohammed Brothers v. Commissioner of Income-Tax, Madras [1978] 112 ITR 622 (Mad), though the court noted this decision did not deal with the scope of merger or s. 154(1A) in a manner relevant to the present controversy.
Assessee's Arguments
The opinion does not contain a detailed account of the assessee's separate legal submissions beyond the procedural steps of the appeals and the fact that the assessee challenged the ITO's enhancement under s. 154 and succeeded before the AAC.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. City Palaycot Company (T.C. No. 378 of 1975), judgment dated 6 July 1979; reported as [1980] 122 ITR 430 (Mad) | Doctrine of merger: the merger principle must be considered in light of what was in controversy before the appellate authority or what could have been considered by it. | The court relied on this principle to hold that because the AAC could and did consider the penalty (including reasonable cause), the ITO's original order merged into the AAC's order; hence the ITO could not thereafter amend the penalty order under s. 154. |
| State of Madras v. Madurai Mills Co., Ltd. [1967] 19 STC 144 (SC) | Authority on the doctrine of merger (as cited by the court in the context of what an appellate authority considered). | Referred to in support of the merger doctrine; used as antecedent authority underpinning the court's merger analysis. |
| Karsandas Bhagwandas Patel v. G.V. Shah, ITO, [1975] 98 ITR 255 (Gujarat High Court) | Permitted ITO to rectify a mistake in that part of an assessment order which was not the subject-matter of review by the AAC (i.e., where the particular matter had not been the subject of appeal). | Distinguished: the court held this authority was not applicable because it concerned assessment matters where particular matters were left untouched by the AAC; in the present penalty appeal the quantum was involved and the AAC had confirmed the order. |
| L.K. Shaik Mohammed Brothers v. Commissioner of Income-Tax, Madras, [1978] 112 ITR 622 (Mad) | Decision cited by revenue; the court observed it did not address the applicability of the doctrine of merger or the scope of s. 154(1A) for the present issues. | The court stated there was no occasion to analyze that decision further and did not place reliance on it for resolving the present questions. |
Court's Reasoning and Analysis
The court identified the principal question as whether the ITO's order dated 17 February 1969 (levying penalty of Rs. 706) was open to rectification after the AAC's disposal of the appeal (AAC order dated 28 May 1969). The statutory framework considered by the court included s. 154 (rectification of mistakes apparent from the record) and its sub-section s. 154(1A) (which limits rectification where a matter has been considered and decided on appeal), plus the list of appealable orders in s. 246 and the AAC's powers under s. 251(1)(b) (which include confirming, canceling or varying a penalty).
The court examined the AAC's order and noted that, although the grounds of appeal to the AAC were not before the court, the AAC's order explicitly confirmed the ITO's penalty after considering whether there was reasonable cause for the delay. The court reasoned that because the AAC confirmed the entire penalty order and had statutory power to enhance or reduce the penalty but did not exercise such power, the quantum of penalty was a matter that had been considered and decided by the AAC.
Relying on the doctrine of merger as explained in CIT v. City Palaycot Company and related authority, the court held that the doctrine must be applied in light of what was in controversy or could have been considered by the appellate authority. Here, the quantum of the penalty was necessarily involved in the appeal and could have been examined by the AAC in the light of s. 271(2). Given the AAC's confirmation, the ITO's original order merged in the AAC's order.
The court distinguished Karsandas (Gujarat High Court) on the ground that that case concerned an assessment where a particular matter had not been the subject of appeal and therefore could be rectified by the ITO; by contrast, in the present penalty appeal there was no realistic possibility of some unrelated ground remaining unraised so as to permit an ITO rectification. The court observed that unlike assessments (where multiple additions may exist and some may not be challenged), in penalty appeals where the assessee objects to the levy of penalty, the quantum is effectively before the appellate authority.
Because the Tribunal's reasoning was that the ITO's power to rectify was not available in respect of matters considered and decided by the appellate authority, the court found it unnecessary to determine separately whether the error was an apparent error from the record; once the ITO was held not competent to rectify a penalty order that had merged, the question whether the specific error was patent became immaterial.
Holding and Implications
Holding: The Court answered all four referred questions in the affirmative and in favour of the assessee. In short, the Tribunal was correct in holding that the ITO had no power to amend the original penalty order after that order had been considered and confirmed by the AAC; the provisions of s. 154(1A) were not available to permit the ITO to make the enhancement in the circumstances; the Tribunal's upholding of the AAC's order on the merger ground (a question of law) was proper; and the Tribunal was justified in dismissing the departmental appeal without further consideration of the main question.
Implications (direct effect): The ITO's attempt to enhance the penalty by an order under s. 154 (from Rs. 706 to Rs. 8,588) was held impermissible because the original order had merged in the AAC's confirming order. The departmental appeal was therefore correctly dismissed by the Tribunal. The court awarded costs to the assessee and fixed counsel's fee at Rs. 500.
The opinion does not state any broader constitutional or doctrine-extending precedent beyond applying and distinguishing existing decisions on the doctrine of merger and the scope of s. 154(1A).
The Judgment of the Court was delivered by
Sethuraman, J.:— Under s. 256(2) of the I.T Act, 1961, the following questions have been referred in pursuance of the direction of this court in T.C.P No. 118 of 1974, dated March 24, 1975.
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income-tax Officer had no power left with him to amend his original order because that order of penalty has been confirmed by the Appellate Assistant Commissioner?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 154(1A) would not apply to the assessee's case?
3. Whether the Appellate Tribunal was right in upholding the order of the Appellate Assistant Commissioner on a ground not raised or argued before it?
4. Whether the Appellate Tribunal was right in dismissing the departmental appeal without going into the main question raised before it?
2. The assessee is a firm and it filed its return of income for the assessment year 1968-69 on January 22, 1969. The return was due in August, 1968. There was thus a delay in the filing of the return. The ITO was of the opinion that there was no proper explanation for not filing the return in time and he, therefore, levied a penalty of Rs. 706 under s. 271(1)(a) of the Act by his order dated February 17, 1969. The assessee contested this penalty before the AAC. The appeal was dismissed by him on May 28, 1969. Subsequently, the ITO took the view that the penalty of Rs. 706 had been computed without applying the provisions contained in s. 271(2) of the I.T Act, 1961. The assessee is a registered firm and under s. 271(2) of the Act, penalty had to be computed on the same footing as if the firm were an unregistered firm. If s. 271(2) of the Act had been applied, the minimum penalty that could have been imposed was Rs. 8,588 as against Rs. 706 actually levied. The ITO issued a notice under s. 154 of the Act and by his order dated June 12, 1969, he enhanced penalty to Rs. 8,588.
3. The assessee preferred an appeal to the AAC objecting to the order passed under s. 154 of the Act levying a penalty of Rs. 8,588 as against Rs. 706 originally levied. The AAC was of the opinion that the mistake which the ITO sought to rectify was not a patent or glaring mistake of law. He, therefore, cancelled the order under s. 154 of the Act.
4. The ITO appealed against this order of the AAC to the Tribunal. The Tribunal did not go into the question whether the failure of the ITO to apply the provisions of s. 271(2) of the Act in the first instance could be treated as a mistake apparent from the record. In the view of the Tribunal, the order of the ITO under s. 154 of the Act was obviously incompetent because the original order of penalty was the subject-matter of an appeal before the AAC and had subsequently merged in the order of the AAC dated May 28, 1969. In the view of the Tribunal, the proper authority to rectify any error in the matter of levy of penalty could only be the AAC. Before the Tribunal, s. 154(1 A) of the Act was relied on for the department. But the Tribunal's view was that the ITO's power to rectify was not available in respect of matters which had been considered and decided by the appellate authority. The result was that the department's appeal came to be dismissed. It is against this order that the questions extracted already have been referred.
5. The main question that requires to be considered is whether the order of the ITO dated February 17, 1969, is open for rectification after the disposal of the appeal against the order passed by the AAC on May 28, 1969. The power available to the ITO for rectification is contained in s. 154 of the I.T Act, 1961. Under that provision with a view to rectifying any mistake apparent from the record, the ITO may amend any order of assessment or of refund or any other order passed by him. Sub-section (1A) of s. 154 of the Act provides:
“Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in subsection (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided.”
6. Section 246 of the Act contains a list of appealable orders. One of these orders is the order under s. 271 [see s. 246(o)(iii)]. The powers of the AAC in disposing of an appeal are set out in s. 251 of the Act. For the present case, it is enough to note s. 251(1)(b) which, so far as it is material, runs as follows:
“In disposing of an appeal, the Appellate Assistant Commissioner shall have the following powers
(b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty.”
7. In the order that the AAC passed on May 28, 1969, in the appeal against the levy of penalty, the AAC held “I must hold, therefore, that reasonable cause for the failure to comply with the terms of the notice under section 139(2) has not been proved in the case, and the penalty was hence rightly levied. The Income-tax Officer's order is accordingly confirmed and the appeal dismissed.”
8. The point to be considered at this stage is whether the quantum of penalty is one which had been considered and decided by the AAC. Unfortunately, we do not have before us the grounds of appeal filed before the AAC against the order of levying penalty. However, the terms of the order are clear to show that he considered the existence of reasonable cause and ultimately confirmed the entire order of levying penalty. Though he had power of enhancement or reduction, he did not exercise such power in this case. The consequence is as a result of the AAC's order, the penalty as levied by the ITO by his order dated February 17, 1969, got confirmed. The order of the ITO thus got merged in the order of the AAC.
9. Learned counsel for the revenue contended that there is no merger in this case because there is nothing to show that the AAC has considered and decided the question of the quantum of penalty. We had recently an occasion to go into the question of the applicability of the doctrine of merger of an order of inferior authority in an order of superior authority in CIT v. City Palaycot Company (T.C No. 378 of 1975, in the judgment dated July 6, 1979) [since reported in [1980] 122 ITR 430 (Mad)]. In that case, the ITO had not levied any amount as and by way of interest under s. 217 of the Act in the assessment order. There was an appeal against the assessment order, and the appeal was disposed of by the AAC. Later on, the CIT took proceedings under s. 263 of the Act and the question was whether the order of the ITO had got merged in the order of the AAC so that the Commissioner could not exercise his jurisdiction under s. 263 of the Act. In dealing with this aspect, we observed, after referring to the decision of the Supreme Court in State Of Madras v. Madurai Mills Co., Ltd. , [1967] 19 STC 144 (SC) and also of the Gujarat High Court in Karsandas Bhagwandas Patel v. G.V Shah, ITO, [1975] 98 ITR 255, as follows:
“The principle of this decision is that the doctrine of merger will have to be taken into account in the light of what was in controversy before the appellate authority or what could have been considered by the appellate authority” (see p. 449 of 122 ITR).
10. In the present case, the AAC could have gone into the question of the quantum of penalty that was levied. The quantum of penalty was involved in the appeal. He could have examined the quantum of penalty in the light of the provisions contained in s. 271(2) of the Act. He has confirmed the penalty. In such a case, we consider that the question of the amount of penalty leviable is a matter which has been considered and decided, as any other view would involve the assumption that the Assistant Commissioner did not exercise his powers properly. This would be wrong. There could have been no other ground in the appeal against the order of penalty. For instance, in the case of assessment, there may be a number of additions made in the assessment. But the assessee may object to only a few of them. In such a case with reference to the matters not touched upon by the assessee in the memorandum of appeal, the ITO will have jurisdiction to consider and determine the question of rectification in the light of s. 154(1 A) of the Act. But in the case of penalty, there is no possibility of any other ground being left out of consideration by the assessee in the memorandum of appeal especially where the assessee objects to the levy of penalty. What the ITO has virtually done by the order under consideration is to enhance the penalty as sustaind by the AAC. This he had no power to do.
11. In Karsandas Bhagwandas Patel v. G.V Shah, ITO, [1975] 98 ITR 255 the Gujarat High Court pointed out that even after an appeal from an order of assessment is decided by the AAC, a mistake in that part of the order of assessment which was not the subject-matter of review by the AAC and was left untouched by him, could be rectified by the ITO because the mistake would be his own mistake which he could always correct under the section. The position is not the same in the present case, because the Gujarat High Court dealt with the matter relating to the assessment where a particular matter which was considered for rectification by the’ ITO had not been the subject-matter of appeal before the AAC. That decision has, therefore, no scope for application.
12. Learned counsel for the revenue drew our attention to a decision in L.K Shaik Mohammed Brothers v. Commissioner Of Income-Tax, Madras, [1978] 112 ITR 622 (Mad). In that case, this court had no occasion to go into the question of applicability of the doctrine of merger or the scope of s. 154(1A) of the Act. We do not, therefore, think it necessary to go into this decision any further. The result is that the first and the second question referred to this court are answered in the affirmative and in favour of the assessee. As regards the third question, learned counsel for the revenue was not in a position to dispute the fact that the ground on which the Tribunal decided the appeal was a pure question of law, the ground being whether the order of the ITO got merged in the order of the AAC so that the ITO could not, after the disposal of the appeal by the AAC, rectify the penalty order. Therefore, the third question has also to be answered in the affirmative and in favour of the assessee.
13. As regards the fourth question the point sought to be raised is that the Appellate Tribunal should have gone into the nature of the error to find out whether it was an apparent error or not. When the Tribunal has pointed out that the ITO was not competent to rectify the order of penalty, there was no need to consider further the question whether the error sought to be rectified was an apparent error or not. In this view, the fourth question is also answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 500.
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