Carborundum Universal Ltd. v. Income Tax Officer.

Per Shri George Cheriyan, Accountant Member - This appeal has been preferred by the assessee and relates to the assessment year 1978-79. In this case, the original assessment for the accounting period ended 31-8-1977 was completed on 24-7-1981. The assessment was made under the provisions of section 143(3), read with section 144B, of the Income-tax Act, 1961 (the Act), i.e., after reference to the IAC and on due consideration of the directions issued by him. We would set out certain facts. The assessment order insofar as the computation of business income is concerned, starts with the income as per the adjustment statement as filed by the assessee which was Rs. 79,74,913. This figure was arrived at by the assessee after making certain additions to the profit as per the profit and loss account of Rs. 72,11,960 and making certain deductions therefrom. In the printed accounts for the year in Schedule 10 under the head Manufacturing and other expenses, and amount of Rs. 1,70,07,139 stands exhibited as salaries, wages and bonus. Thereafter details were furnished by the assessee in the course of the assessment proceedings of this amount. Two of the components thereon were bonus of Rs. 20,16,925 and productivity bonus of Rs. 11,77,658. In an order sheet entry dated 23-10-1980, the ITO had referred to the handing over to the authorised representative of the assessee, the usual questionnaire and of his having further request for particulars, in particular, apart from other items, regarding productivity bonus. A letter was filed by the assessee dated 29-10-1980, in which the following appeared :

"6. To say why productivity bonus of Rs. 11,77,658 and terminal payments of Rs. 28,216 were paid :

The productivity bonus of Rs. 11,77,658 was paid by my clients under the terms of an agreement entered into by them with the employees. The details for the payment of Rs. 28,216 referred to as terminal payments are not readily available, but these represent only other payments made to the employees."

After this, there were other hearings and further details were called for. Another letter was filed on 12-3-1981 and the following appeared regarding productivity bonus :

"9. To furnish details of productivity bonus :

It is submitted that productivity bonus has been paid in the earlier years also and the amount of such bonus had been included under the head Salaries. It is, therefore, submitted that this is not a new item of expenditure incurred particularly in the previous year relevant to the above assessment."

The draft assessment order was sent to the assessee on 23-3-1981 in which there was no reference to any item of bonus and the assessee sent a reply dated 31-3-1981 to the draft assessment order furnishing objections which were duly considered by the IAC in the memo dated 16-7-1981. Here again bonus did not figure in the directions issued by the IAC. On receipt of the order of the IAC giving specific directions, the ITO completed the assessment on 24-7-1981 and in making the assessment there was no addition or discussion regarding bonus payments. Subsequently, the assessee appealed to the Commissioner (Appeals). Because there was no disallowance in respect of bonus payments, this item did not figure in the grounds of appeal. On 22-1-1983, the Commissioner (Appeals) decided the appeal preferred under by the assessee. On 28-3-1983 a notice was issued by the ITO under section 148 of the Act for reopening the assessment. While this notice was pending on 7-6-1983, the Commissioner issued notice to the assessee to show cause why proceedings should not be taken under section 263 of the Act for bringing to tax bonus allowed in excess of the limits under section 36(1) (ii) of the Act. On 6-7-1983, the ITO passed an order stating that the proceedings initiated under section 147(b) are hereby dropped.

2. The Commissioner thereafter considered the assessees reply and stated that the assessee had paid annual bonus of Rs. 20,16,925 and productivity bonus of Rs. 11,77,658 making a total of Rs. 31,94,593. While completing the assessment the Commissioner observed that the ITO had not applied the limits prescribed under section 36(1) (ii) of the Act had allowed the payment of bonus in its entirety as a deduction and excess of bonus allowed was to the extent of Rs. 8,21,738. The Commissioner did not accept the contention of the assessee that because the assessment had been made after obtaining the IACs directions under section 144B, he was precluded from exercising his powers, under section 263. The Commissioner stated that since the issue of allowance of bonus in full or disallowance of a portion thereof was not the subject matter of reference to the IAC under section 144B, the Commissioners jurisdiction was not shut out to rectify any error regarding such item. The Commissioner on merits did not agree with the assessee that productivity bonus was not hit by the ceiling prescribed under section 36(1) (ii). Eventually, therefore, in exercise of his powers under section 263, the Commissioner directed the ITO to withdraw excess allowance of bonus amounting to RS. 8,21,738, which was allowed in the assessment.

3. Before us, the learned counsel for the assessee put forth were propositions in support of the contention that the Commissioner had no jurisdiction to exercise powers under section 263.

4. The first contention was that since the assessment was made after obtaining instructions of the IAC under section 144B, the Commissioner could not revise the assessment order as passed by the ITO. For this, the learned Counsel sought to rely on the decision of the Special Bench of the Tribunal in East Coast Marine Products (P.) Ltd. v. ITO [1983] 4 ITD 73 (Hyd). The learned departmental representative opposed the plea and submitted that on the aspect of bonus no specific directions had been sought from or had been given by the IAC and, therefore, the Commissioners jurisdiction was not shut out. The Special Bench in the order referred to had repelled the contention that the IACs directions got merged in the order of the ITO. This finding has been given in paragraph 13 of the order of the Special Bench. Thereafter, after discussing the contentions in extenso, the Special Bench came to the conclusion that the Commissioner had no jurisdiction under section 263 to revise that portion of the order covered by the directions given by the IAC under section 144B (4). This finding is contained in paragraph 24 of the aforesaid order. In the present case, in the draft assessment order, the ITO had not proposed any addition nor had he sought for any instruction from the IAC regarding the admissibility as a deduction of payment of bonus. The IAC had not also given any directions in that regard. Therefore, the admissibility of bonus was not a matter covered by the directions given by the IAC specifically under section 144B (4). Hence, the Commissioners jurisdiction under section 263 to consider this aspect regarding the admissibility as a deduction of bonus paid was not shut out merely because the assessment was made after referring the draft assessment order to the IAC under section 144B (4).

5. For the sake of convenience, we will take up the third aspect on which the jurisdiction of the Commissioner under section 263 was challenged. The learned counsel submitted that proceedings under section 147 had been initiated by the issue of notice under section 148 on 28-3-1983 and the ITO has passed an order on 6-7-1983, dropping the proceedings under section 147(b). According to the learned counsel, this order of 6-7-1983 should be construed as an order of assessment under section 147 and, therefore, the Commissioner was shut out from exercising his powers under section 263 because it would be tantamount to revising an order of reassessment made under section 147. This plea was also opposed by the learned departmental representative who submitted that the dropping of proceedings under section 147 could not be equated with passing an order of assessment under section 147.

6. The learned counsel for the assessee in support of the aforesaid proposition had relied on a judgment of the Punjab and Haryana High Court in CIT v. Damyanti Mehta and Yash Raj Mehta [1972] 83 ITR 502. That was a case in which proceedings under section 34(1) (a) of the Indian Income-tax Act, 1922 (the 1922 Act) were initiated but the ITO dropped the proceedings by his order proceedings filed. The Commissioner thereafter acting under section 33b of the 1922 act, cancelled the order of the ITO filing the proceedings and directed him to continue proceedings under section 34(1) (a). The High Court had held that on the facts, the Commissioner was precluded from revising the aforesaid order by reason of section 33b (2) (a), viz., that provision precluded the Commissioner from revising an order of reassessment made under the provisions of section 34. In the aforesaid decision, their Lordships had stated that in every case it had to be determined, on the facts and circumstances thereof, as to what the expression used by the ITO, i.e., proceedings filed or proceedings disposed of or filed connotes or means. Their Lordships observed that in one set of circumstances it may not amount to an order of assessment or reassessment whereas in another set of circumstances it may so amount. In the case of Esthuri Aswathiah v. ITO [1961] 41 ITR 539 where a nil return was filed and the ITO wrote no proceedings, the Supreme Court held that it had to be construed that the assessed income was nil. In the case of CIT v. Bidhu Bhusan Sarkar [1967] 63 ITR 278, where the expression used was filed, the Supreme Court observed that it meant that the case was disposed of and nothing remained and their Lordships further observed :

"..... In effect, therefore, what he did was to terminate the proceedings before him without making any order of assessment, on the ground that the order of assessment in respect of the income in question would be made by the ITO in the proceedings before him."

(p. 284) From the aforesaid observations, it is clear that proceedings could be terminated without making any order of assessement. The statute itself contemplates dropping of proceedings when action is taken under section 147(b) in certain cases without making of an assessment. The relevant provision in this regard is section 152(2) of the Act, which reads as under :

"Where an assessment is reopened in circumstances falling under clause (b) of section 147, the assessee may, if he has not impugned any part of the original assessment order for that year either under section 246 to 248 or under section 264, claim that the proceedings 147 shall be dropped on his showing that he had been assessed on an amount or to a sum not lower than what he would be rightly liable for even if the income alleged to have escaped assessment had been taken into account, or the assessment or computation had been properly made :

Provided that in so doing he shall not be entitled to reopen matters c oncluded by an order under section 154, 155, 260, 262 or 263."

Therefore, the use of the terminology dropped is recognised by the statute also as resulting in the termination of the proceedings but not being tentamount to the making of an assessment in appropriate cases. In the present case, the ITO had issued notice under section 148. It was ascertained by us that there was no written submissions made by the assessee in response to this notice; but after certain discussion, the ITO passed the order that the proceedings were dropped. On the facts, all that has happened is that the ITO had terminated the action initiated by him under section 148 but such termination would not tentamount to the action initiated under section 148 being equated by making of an order of reassessment under section 147. The order dropping proceedings is not synonymous, on the facts of the present case, with an order of reassessment made under section 147. Therefore, the bar prescribed by the provisions of section 263(2) (a) does not operate and the Commissioner was not precluded from exercising his powers under section 263.

7. The next contention of the learned counsel was that since there was an appeal to the Commissioner (Appeals), in view of the ratio of the decision of the Special Bench of the Tribunal in the case of Dwarkadas & Co. (P.) Ltd. v. ITO [1982] 1 ITD 303 (Bom) the jurisdiction under section 263 stood ousted. The learned departmental representative, on the other hand, submitted that the question of admissibility of bonus paid as a deduction did not figure in the grounds of appeal before the Commissioner (Appeals) and was, hence, not a matter considered by him. In view of the ratio of the judgments of the Madras High Court in the cases of CIT v. City Palayacot Co. [1980] 122 ITR 430, Puthuthotam Estates (1943) Ltd. v. State of Tamil Nadu [1980] 12 ITR 41 and CIT v. Eimco-K. C. P. Ltd. [1984] 147 ITR 603, he stated shut out. He also submitted that there were decisions of other High Courts which were to the effect that unless a point was specifically taken up and considered by the Commissioner (Appeals), the jurisdiction of the Commissioner to pass an order of revision under section 263 was not shut out.

8. We have considered the rival submissions. The Special Bench of the Tribunal in the case of Dwarkadas & Co. (P.) Ltd. (supra) had held that for purposes of jurisdiction under section 263, the ITOs order merged with that of the first appellate authority not only to the extent to which the first appellate authority as a matter of fact dealt with it but also to the extent to which he had power to look into it with a view to enhancement within the limits prescribed by the Supreme Court in its decision in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443. As to what these limits were, the observations of the supreme Court are contained, which read as under :

".... As we have already stated, it is not open to the Appellate Assistant Commissioner to travel outside the record, i.e., the return made by the assessee or the assessment order of the Income-tax Officer with a view to find out new sources of income and the power of enhancement under section 31(3) of the Act is restricted to the sources of income which have been the subject-matter of consideration by the Income-tax Officer from the point of view of taxability. In this context consideration does not mean incidental or collateral examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection...."

(p. 451) The restrictions in the first appellate authority exercising the powers of enhancement are (a) that he cannot travel outside the record, i.e., the return made by the assessee or the assessment order to find out new source of income, and (b) that the enhancement is restricted to the sources of income which were the subject-matter of consideration of course had to be direct and not merely incidental or collateral. In the present case, we have set out the facts elaborately to show that the payments described as bonus of Rs. 20.16 lakhs as well as productivity bonus of Rs. 11.77 lakhs had been claimed as expenditure in the profit and loss account. The ITO had asked for details about the productivity bonus and the assessee had made clarifications regarding the item on two occassions. It is, therefore, clear that the ITO had considered the taxability of the payment in question expressly by calling for specific details and it was not a mere indicental or collateral examination of a matter in the process of assessment. What the ITO did was to directly consider the admissibility of the bonus claim as a deduction. It was the case where the ITO had applied his mind to the subject-matter and because he took the view that the entire amount was admissible, no specific further discussion appeared in the assessment order. This is, therefore, a matter on which the first appellate authority could have exercised the powers of enhancement if it was considered called for. Therefore, according to the ratio of the decision of the Special Bench of the Tribunal in the case of Dwarkadas & Co. (P.) Ltd. (supra), the jurisdiction of the Commissioner to effect the revision in exercise of power under section 263 stood shut out.

9. We have now to see whether the decision of the Madras High Court relied on by the learned departmental representative alter the position on the facts of the present case. In City Palayacot Co.s case (supra), the Madras High Court has clearly laid down that the doctrine of merger would have to be considered in the light of what was in controversy before the the appellate authority or what could have been considered by the appellate authority. In the present case, the admissibility of bonus was not in controversy before the first appellate authority, but certainly on the facts stated by us and the ratio of the judgment of the Supreme Court in Rai Bahadur Hardutroy Motilal Chamarias case (supra), it was a matter which could have been considered by the first appellate authority. Therefore, according to the ratio of the decision of the Madras High Court also in the aforesaid case, the Commissioners jurisdiction to exercise his powers under secitn 263 stood shut out. Since the ratio of the aforesaid case is directly on the point, it will really be superfluous to discuss the other decisions of the Madras High Court where the circumstances are different. But for the sake of completeness, we may point out that the decision in the case of Eimco-K. C. P. Ltd. (supra) is a decision which states that the mere pendency of an appeal before the first appeal authority is not sufficient to shut out the jurisdiction of the Commissioner under section 263. The present is not a case where there was merely an appeal pending before the first appellate authority. The case Puthuthotam Estates (1943) Ltd. (supra) is a case under a Tamil Nadu Agricultural Income-tax Act, 1955, which deals with provisions akin to section 264 and not the provisions of section 263, which are now under consideration. Therefore, the ratio of that case also does not apply here.

10. The Special Bench of the Tribunal in the case of Dwarkadas & Co. (P.) Ltd. (supra) has considered the decisions of other High Courts as to what extent there would be merger and has enunciated the ratio to which we have referred and in the light of which we have examined the facts of the present case.

11. In view of this, we would hold that the jurisdiction of the Commissioner to exercise his powers under section 263 stood shut out because the question of admissibility as a deduction of bonus was a matter which could have been considered by the first appellate authority in the appeal filed before him which he disposed of by his order dated 22-1-1983 which was even prior to the date of issue of notice of notice under section 263 by the Commissioner, which even took place only on 7-6-1983.

12. In the view that we have taken on the question of jurisdiction, the appeal of the assessee succeeds and the order of the Commissioner under section 263 is set aside. We, therefore, do not go into the merits of the disallowance as directed by the Commissioner.

13. In the result, the appeal is allowed.