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The Commissioner Of Income-Tax v. Hotel Rama Pvt. Ltd.

Karnataka High Court

Sep 2, 1997

Judgment

Subsequent
References

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Factual and Procedural Background

The assessee is a private limited company carrying on a hotel business for the assessment years 1982-83, 1983-84 and 1984-85. For the assessment year 1982-83 the assessee claimed depreciation on the banquet hall of the hotel building at 10% and for the succeeding two years (1983-84 and 1984-85) at 15%. These claims were allowed by the Income Tax Officer in assessment orders passed on 24.1.1985 under Section 143(3) of the Income Tax Act, 1961.

The assessee appealed to the Commissioner (Appeals) against aspects of those assessments; the appeal was disposed of on 27.3.1986. Subsequently, on 17.2.1987 the Commissioner of Income-Tax invoked suo-moto revisional jurisdiction under Section 263 of the Act, contending that the orders were prejudicial to the Revenue because depreciation on the building should have been allowed at 2.5% (and lower rates for particular years).

The Tribunal set aside the Commissioner’s Section 263 order on two grounds: (i) the revisional order was without jurisdiction because the original assessment orders had already merged with the appellate order prior to invocation of revision; and (ii) on the merits the Income Tax Officer was correct in treating the hotel building as a "tool of trade" (plant) and allowing depreciation at the relevant plant rates.

Pursuant to a reference by the Commissioner, this Court called for a statement of case under Section 256(2) of the Act, framing two questions of law for determination.

Legal Issues Presented

“Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in coming to the conclusion that the order of the Commissioner under Section 263 is without jurisdiction?”
“Whether in the facts and circumstances of the case, the Appellate Tribunal is right in law in holding that even on merits the view of Commissioner that depreciation on banquet hall in the hotel building should have been allowed at 2.5% (for A.Ys 82-83 and 83-84) and 5% (for A.Y. 84-85) does not stand?”

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
C.I.T v. Amritlal Bhogilal, AIR 1958 SC 868	Principles of merger of original and appellate orders: (i) an appellate decision is the operative decision and the original order merges in it; (ii) pendency of an appeal does not suspend the operation of the original order.	The Court relied on Amritlal to explicate merger principles and set out the two key propositions from the decision as foundational for the subsequent analysis.
Collector of Customs v. East India Commercial Company, AIR 1963 SC 1124	Followed the principles laid down in Amritlal Bhogilal (approval of merger principles).	Cited as a Supreme Court decision that followed Amritlal, supporting the view that appellate orders operate as the effective orders in law.
S.S. Rathore v. State of M.P., 1989 4 SCC 582	Followed the principles in Amritlal Bhogilal (approval).	Used to show subsequent Supreme Court approval of the Amritlal position on merger.
State of Madras v. Madurai Mills Co., Ltd., AIR 1967 SC 681	Holds that the doctrine of merger is not rigid or universally applicable; application depends on subject-matter and statutory scope of appeal/revision.	Cited as a contrary Supreme Court authority establishing that merger depends on the nature and scope of the appellate/revisional jurisdiction, supporting a view that not all aspects necessarily merge.
J.K. Synthetics Ltd. v. Addl. CIT, 1976 105 ITR 344 (Allahabad HC)	Applied the Amritlal view that the entire assessment order merges in the appellate order.	Referred to as one of several High Court authorities that held the entire assessment order merges irrespective of issues actually argued or decided on appeal.
CCT v. Rameshwar Das Panna Lal, 1974 34 STC 296 (Patna HC)	Applied the Amritlal principle of full merger of assessment order into appellate order.	Referred to as another High Court adopting the view that the entire assessment order merges in the appellate order.
Jeewanlal Ltd. v. Addl. C.I.T., 1977 108 ITR 407 (Calcutta HC)	Applied the Amritlal merger principle (full merger view).	Cited among High Courts following the full-merger approach.
Commissioner Of Income-Tax, M.P v. Narpat Singh Malkhan Singh, 1981 128 ITR 77 (M.P. HC)	Applied the Amritlal full-merger approach.	Listed as another authority preferring full merger of assessment orders into appellate orders.
CIT v. Mandsaur Electric Supply Company Ltd., 1983 140 ITR 677 (FB)	Applied the full-merger approach in assessing the scope of appellate orders.	Included among authorities that treated appellate orders as wholly superseding original assessment orders.
Karsandas Bhagwandas Palel v. Shah (G.V) ITO, 1975 98 ITR 255 (Gujarat HC)	Held that parts of assessment order which were not disturbed or considered on appeal do not merge.	Cited as an example of High Courts adopting the contrary view to full merger, following Madurai Mills principle that merger depends on subject-matter.
Commissioner Of Income-Tax, Bombay City-II v. Sakseria Cotton Mills Ltd., 1980 124 ITR 570 (Bombay HC)	Adopted the view that untouched parts of the assessment order do not merge in the appellate order.	Cited among authorities taking the narrower view of merger.
Singho Mica Mining Co Ltd. v. CIT, 1978 111 ITR 231 (Calcutta HC)	Held that parts of the assessment order not interfered with remain open and do not merge.	Listed as another High Court decision adopting the limited-merger approach.
Puthuthotam Estates (1943) Ltd. v. State Of Tamil Nadu, 1980 125 ITR 41 (Madras HC)	Applied the principle that merger is not universal; untouched parts remain open.	Cited as supporting the restricted application of merger.
New Diwan Oil Mills v. CIT, 1981 129 ITR 224 (Punjab & Haryana HC)	Adopted the limited-merger view that undisturbed parts do not merge.	Referred to among High Courts taking the contrary view to full merger.
CIT v. Hindustan Aeronautics Ltd., 1986 57 ITR 315 (Full Bench of this Court)	Opted for the full-merger view — entire order merges when appeal has been disposed and appellate order becomes final.	The Court relied on this Full Bench decision of the same Court to justify preferring the full-merger approach in its analysis.
RIZ Ltd. v. Union of India, 1990 184 ITR 601 (Bombay HC)	Held that only where action under Section 263 is taken after 1.6.1988 will merger be confined to issues considered/decided in appeal (i.e., effect of subsequent Explanation (c) to s.263).	Cited for the proposition that the effect of Explanation (c) (Finance Act, 1988) applies only where Section 263 action is taken after 1.6.1988.
CIT v. International Computers India Manufacture Ltd., 187 ITR 580 (Bombay HC)	Affirmed the view in RIZ Ltd. about post-1.6.1988 effect of Explanation (c) to s.263.	Referred to as affirming the Bombay High Court position on the temporal application of the legislative amendment.
CIT v. M.S.P. Spices Pvt. Ltd., WA No. 712 of 1991, Dated 5.3.1992 (unreported)	Followed the legal position that where both disposal of appeal and initiation of Section 263 proceedings were before 1.6.1988 the full-merger rule applied.	Noted as an unreported decision of this Court following the Bombay High Court view where relevant events occurred before 1.6.1988.
CIT v. Woodland Hotel Pvt. Ltd., I.T.R.C. 48-49 of 1993, Dated 16.6.1997	Held that the building in which hotel business is carried on has to be treated as a "plant" for the purpose of grant of depreciation.	Applied in the present case to answer the second question against the Revenue: the banquet hall (part of the hotel building) is to be treated as plant for depreciation purposes.

Court's Reasoning and Analysis

The Court’s analysis proceeded in two main strands: first, legal principles governing the doctrine of merger and the scope of revisional jurisdiction under Section 263; and second, the treatment of a hotel building for depreciation purposes.

Merger and revisional jurisdiction:

The Court began by discussing the doctrine of merger as explained in C.I.T. v. Amritlal Bhogilal: where an appeal is provided, the appellate decision becomes the operative decision and the original order merges into it; and the pendency of an appeal does not suspend the operation of the original order.
The Court recognized that subsequent Supreme Court authority (State of Madras v. Madurai Mills) qualified the doctrine by holding that merger is not rigid and its application depends on the subject-matter and statutory scope of appeal or revision.
High Courts were split: several High Courts had applied Amritlal to hold that the entire assessment order merges into the appellate order regardless of specific points decided on appeal, while other High Courts followed the Madurai Mills approach that only those parts considered/decided on appeal merge.
A Full Bench of this Court in CIT v. Hindustan Aeronautics Ltd. preferred the full-merger view and declined to depart from that position for reasons of consistency in law.
The Parliament, noting this divergence, amended the law by inserting clause (c) in the Explanation to Section 263(1) by the Finance Act, 1988 (effective 1.6.1988), with further retrospective clarifying words added by Finance Act, 1989. Explanation (c) provides that where an order passed by the Assessing Officer had been the subject matter of an appeal filed on or before/after 1.6.1988, the Commissioner’s powers under Section 263 extend to such matters as had not been considered and decided in such appeal.
Interpreting the amendment, the Court held: (a) if the appeal had been disposed of prior to 1.6.1988, the original assessment order merges in the appellate order in its entirety and the Commissioner cannot invoke Section 263 in respect of the merged matters even if he considers the order prejudicial to revenue; (b) if an appeal was pending on 1.6.1988, Explanation (c) authorises the Commissioner to invoke revisional jurisdiction in respect of matters not considered and decided in the appeal; and (c) because Explanation (c) came into force only on 1.6.1988, the Commissioner could validly exercise the expanded revisional power only on or after that date — proceedings initiated earlier were without jurisdiction for matters covered by Explanation (c).
Applying these principles to the facts, the Court noted that the Commissioner (Appeals) disposed of the appeal on 27.3.1986 and the Commissioner invoked Section 263 on 17.2.1987 — both events preceding 1.6.1988. Accordingly, the Court concluded that the assessment orders had merged with the appellate order prior to the date when Explanation (c) came into force and, therefore, the Commissioner had no jurisdiction under Section 263 to disturb those merged matters. The Court answered the first question against the Revenue on this basis.

Depreciation / treatment of hotel building:

On the second question (merits), the Court relied on its earlier opinion in CIT v. Woodland Hotel Pvt. Ltd. (I.T.R.C. 48-49 of 1993, dated 16.6.1997) that the building in which hotel business is carried on has to be treated as a "plant" for the purpose of grant of depreciation.
Applying that principle, the Court held that the Tribunal was correct to conclude that the Income Tax Officer was right in treating the hotel building (including the banquet hall) as plant for depreciation, and therefore the Commissioner’s contention that depreciation should have been allowed at 2.5% (lower building rate) did not stand. The second question was therefore answered against the Revenue.

Holding and Implications

REFERENCE DISPOSED — Both questions answered against the Revenue.

Direct effect on the parties:

The Court held that the Commissioner’s order under Section 263, dated 17.2.1987, was without jurisdiction because the appeal had been disposed of on 27.3.1986, prior to the operative date of Explanation (c) (1.6.1988). Thus the Tribunal was correct to set aside the Commissioner’s revisional order.
On the merits, the Court held (following CIT v. Woodland Hotel Pvt. Ltd.) that the hotel building (including the banquet hall) is to be treated as a "plant" for depreciation purposes; accordingly, the Commissioner’s claim that depreciation should be restricted to low building rates (2.5% / 5%) did not succeed.
The reference cases were disposed of in the terms stated and the Court ordered no costs.

Broader implications: The opinion interprets the effect of Explanation (c) to Section 263 as operative from 1.6.1988 and explains when the expanded revisional power of the Commissioner applies. The decision resolves the two specific questions in the reference; the opinion does not purport to lay down a new general precedent beyond applying and reconciling existing authority and the statutory amendment.

Show all summary ...

G.C Bharuka, J.:—

The assessee, which is a Private Limited Company, was carrying on hotel business during the assessment years in question namely 1982-1983, 1983-1984 and 1984-1985. During the first two assessment years, the assessee had claimed depreciation on the banquet hall of the hotel building at the rate of 10% for the assessment year 1982-1983 and for the succeeding two years 1983-1984 and 1984-1985 at the rate of 15%. The said claim was allowed by the Income Tax Officer in the assessment made under Section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’). The said orders were passed on 24.1.1985

2. The assessee went in appeal before the Commissioner (Appeals) against the said assessment orders on certain issues which was ultimately disposed of on 27.3.1986 Subsequently, on 17.2.1987, the Commissioner of Income Tax invoked his suo-moto revisional jurisdiction under Section 263 of the Act against the said assessment orders on the ground that, those were prejudicial to the interest of the Revenue in as much as the assessee was entitled to the depreciation on the building only at the rate of 2.5%.

3. The above order of the Commissioner of Income-Tax was subjected to appeal before the Tribunal which set aside the same by holding that, (i) the order was without jurisdiction in as much as the original assessment order had already merged with the appellate order much before the suo-moto revisional jurisdiction was invoked, and (ii) Income Tax Officer was right in holding that assessee was entitled to the depreciation on hotel building at the rates applicable to plants since the hotel building was the tool of trade of the assessee.

4. In the backdrop* of the said facts, at the instance of the Commissioner, a statement of case was called from the Tribunal under Section 256(2) of the Act by this Court, on the following questions of law:

(1) “Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in coming to the conclusion that the order of the Commissioner under Section 263 is without jurisdiction?”

(2) “Whether in the facts and circumstances of the case, the Appellate Tribunal is right in law in holding that even on merits the view of Commissioner that depreciation on banquet hall in the hotel building should have been allowed at 2.5% (for A.Ys 82-83 and 83-84) and 5% (for A.V 84-85) does not stand?”

5. So far as the first question is concerned, it requires a little detailed deliberations on principles of merger or fusion of original and appellate orders and the consequent amendment in the Act to overcome certain aspects thereof for empowering the Commissioner to initiate suo moto revisional proceedings under Section 263 of the Act to safeguard the interest of the revenue.

6. In the case of C.I.T v. Amritlal Bhogilal . AIR 1958 SC 868. the Supreme Court delved into various aspects of merger of orders. In this case, a composite order of assessment as well as registration was passed by the Income Tax Officer against the assessee firm. The assessee went in appeal before the Appellate Assistant Commissioner of Income Tax (in short, ‘AAC’) questioning the assessment which was partly allowed. The Commissioner despite the said appellate order, initiated revisional proceedings in respect of the order granting registration. On these facts, the question which arose before the Supreme Court was as to whether the order passed by the I.T.O granting registration to the assessee firm continued to be order passed by the Income Tax Officer even after the assessee's appeal against the assessment made by the I.T.O on the basis that the assessee was a registered firm, had been disposed by the AAC. The assessee, in order to dispute the jurisdiction of the Commissioner, invoked the principle of merger. The Supreme Court, after elaborately considering the provisions of the Act, took the view that the order granting registration to an assessee firm is an order separate and independent of the assessment order and not even appealable, so as to become subject-matter on an appeal before the AAC, accordingly, it was held that the order of registration had not merged with the appellate order which was passed in respect of order of assessment so as to deprive the Commissioner of revisional powers. While holding so, the Supreme Court had laid down two important facts of the Principles of merger which are:—

(i) There can be no doubt that, if an appeal is provided against an order passed by a tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the Tribunal, it is obvious that it is the appellate decision that is effective and can be enforced. In law the positi would be just the same even if the appellate decision merely confirms the decision of the tribunal. As a result of confirmation or affirmance of the decision of the Tribunal by the appellate authority the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement. (See para. 10)

(ii) There can be no doubt that even on the theory of merger the pendency of an appeal may put the order under appeal in jeopardy but until the appeal is finally disposed of the said order subsists and is effective in law. It cannot be urged that the mere pendency of an appeal has the effect of suspending the operation of the order under appeal. (See para. 16)

7. The above decision in the case of C.I.T v. Amritlal Bhogilal has been followed with approval by two subsequent five-judges bench of the Supreme Court in the cases of Collector of Customs v. East India Commercial Company . AIR 1963 SC 1124. and S.S Rathore v. State of M.P . 1989 4 SCC 582. But, in the case of State Of Madras v. Madurai Mills Co., Ltd. . AIR 1967 SC 681., the Supreme Court, in the facts of the case before it, took the view that there was not merger of the order of assessment with the order of the revisional authority on the question of exemption on the value of yarn purchased from outside the State of Madras since this aspect of the assessment order was not the subject matter of revision before the Deputy Commissioner of Commercial Taxes. Therefore, according to the Supreme Court, the said question of exemption was open to be agitated before the Board of Revenue. The Supreme Court, in para. 6 of the report, had held that:—

“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 authority and the other by a superior authority, passed in an appeal or revision, there is a fusion or merger of 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. 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. Since, under the provisions of the Act, the entire order of assessment can be assailed before the Appellate Authority, therefore, some of the High Courts following the law laid down by the Supreme Court in the case of C.I.T v. Amritlal Bhogilal (supra) took the view that the entire assessment order will merge in the appellate order irrespective of the points urged by the parties or decided by the appellate authority. This view was taken by the Allahabad High Court in J.K Synthetics Ltd. v. Addl. CIT . 1976 105 ITR 344. the Patna High Court in CCT v. Rameshwar Das Panna Lal . 1974 34 STC 296. the Calcutta High Court in Jeewanlal Ltd. v. Addl. C.I.T . 1977 108 ITR 407. and the Madhya Pradesh High Court in Commissioner Of Income-Tax, M.P v. Narpat Singh Malkhan Singh . 1981 128 ITR 77. and CIT v. Mandsaur Electric Supply Company Ltd. . 1983 140 ITR 677 FB..

9. A contrary view was taken by other High Courts by following the decision of the Supreme Court in Madurai Mills' case (supra) holding that the part of the order of assessment which has not been disputed and interfered with by the appellate authority and remained untouched will not merge in the appellate order. This view has been shared by the Gujarat High Court in Karsandas Bhagwandas Palel v. Shah (G.V) ITO . 1975 98 ITR 255., the Bombay High Court in Commissioner Of Income-Tax, Bombay City-Ii v. Sakseria Cotton Mills Ltd. . 1980 124 ITR 570. the Calcutta High Court in Singho Mica Mining Co Ltd. v. CIT . 1978 111 ITR 231. the Madras High Court in Puthuthotam Estates (1943) Ltd. v. State Of Tamil Nadu. . 1980 125 ITR 41. and the Punjab and Haryana High Court in New Diwan Oil Mills v. Commissioner Of Income-Tax, Patiala . 1981 129 ITR 224..

10. A full Bench of this Court in the case of CIT v. Hindustan Aeronautics Ltd. . 1986 57 ITR 315. on being called upon to choose between the above noticed divergent views opted to prefer the first one. It was held that (at pg. 324):—

“Amid this diversity of opinions, this High Court in Vijayalakshmi Lorrry Service's case without much fuss over the matter had held that the entire order merges when the order was taken in appeal and was modified by the Appellate Assistant Commissioner. Such an order becomes final and the Commissioner was precluded from taking proceedings under Section 263 of the Act to revise the order of the Income-Tax Officer on another ground. That decision was rendered on September 17, 1975, and is being followed by the authorities in the State. The view taken in that decision is neither unreasonable nor erroneous. Similar view has been taken, as earlier noticed, by the High Courts of Allahabad, Calcutta, Madhya Pradesh, etc. There is, therefore, no compelling reason to review that decision. It is not proper for us to reverse that decision, merely because another is also possible. Consistency in law should be hallmark in the administration of justice.”

11. The Parliament, on visualising the cleavage of judicial opinions on the aspect of the principle of merger pertaining to such matters which had not been considered and decided in appeals preferred against orders passed by the assessing officer came out with an amendment in the Act by inserting Cl. (c) in the explanation to sub-section (1) of Section 263 of the Act by Finance Act, 1988 with effect from 1.6.1988 Subsequently, by Finance Act, 1989, in the said Cl. (c) the words filed on or before or after the 1st day of June, 1988 and “and shall be deemed always to have been extended” were inserted making the same retro-active from 1.6.1988 The said Cl. (c) to the explanation as stood from 1.6.1988 reads as under:—

“Explanation Cl. (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 the 1st day of 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.”

12. Keeping in view the binding judicial pronouncements noted above and the statutory provisions contained in Cl. (c) of the Explanation to Section 263 of the Act, it can safely be held that if an appeal filed agisnt an order of the assessing officer had already been disposed of prior to 1.6.1988, then irrespective of the fact whether any particular aspect of the order appealed against was decided or not, the entire original order merges with the appellate order thereby denuding the Commissioner from interfering with the original order in his revisional powers under Section 263 of the Act even if he felt that the same was prejudicial to the interest of the revenue.

13. But, keeping in view the legislative intent, it has further to be held that if any appeal was pending on 1st of June, 1988, irrespective of its date of filing then despite passing of any appellate order, Cl. (c) to the Explanation will authorise the Commissioner to invoke his revisional jurisdiction in respect of such matters which has not been considered and decided in such appeal.

14. Another important aspect to be noticed and which goes even without saying is that, since the impugned Cl. (c) of the Explanation has been brought in force by the Legislature with effect from 1.6.1988, therefore, in respect of the matters covered thereby, the Commissioner could have exercised its revisional power only on and after 1.6.1988 and any proceeding drawn by him earlier to the said date was without jurisdiction. In substance, for a valid exercise of revisional jurisdiction by the Commissioner under Section 263(1) of the Act read with Cl. (c) of the Explanation thereto, the order in the concerned appeal should have been passed on or after 1.6.1988 and, (ii) the Commissioner should have initiated the proceedings on or after the said date.

15. In the case of RIZ Ltd. v. Union of India . 1990 184 ITR 601. the learned Single Judge of the Bombay High Court had taken a similar view by holding that:—

“thus, only in cases where action under Section 263 is taken after June 1, 1988, the merger of the assessment order will be treated as confined to the issues actually considered and decided in appeal in terms of Explanation (c).”

Subsequently, this view was affirmed by a Division Bench of that court in CIT v. International Computers India Manufacture Ltd. . 187 ITR 580.. A bench of this Court, in an unreported judgment, in the case of CIT v. M.S.P Spices Pvt. Ltd. . WA No. 712 of 1991, DD. 5.3.1992 on being conceded by the department about the correctness of the law laid down by the Bombay High Court followed the same with approval. In that case, the appeal was disposed of on 1.10.1986 and thereafter, on 1.3.1988, the Commissioner passed an order under Section 263 of the Act. Therefore, both the disposal of the appeal as also initiation of proceedings under Section 263 of the Act were interior to 1.6.1988

16. Coming to the facts of the present case, here also, the appeal preferred before the Commissioner (Appeals) was disposed of on 27.6.1986 and the revisional jurisdiction under Section 263(1) of the Act has been invoked by the Commissioner, on 17.2.1987 In this view of the matter, since the assessment orders had already merged in entirety with the appellate order before the coming into force of Clause (c) of the Explanation under Section 263 of the Act, nothing was left for the Commissioner to examine and interfere with in its revisional jurisdiction under Section 263 of the Act. Accordingly, the first question is answered against the revenue.

17. Similarly, as far as the second question is concerned, in I.T.R.C 48-49 of 1993 DD. 16.6.1997 in the case of CIT v. Woodland Hotel Pvt. Ltd., we have opined that, the building in which the hotel business is carried on, has to be treated as a ‘plant’ for the purpose of grant of depreciation. Accordingly, the said question is also answered against the Revenue.

18. The present reference cases are accordingly disposed of in the above terms. No costs.