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Jeewanlal (1929) Ltd. v. Additional Commissioner Of Income-Tax And Others.
Factual and Procedural Background
The petitioner challenged a notice issued under section 263 of the Income-tax Act, 1961, dated in March 1972, by the Additional Commissioner of Income-tax, West Bengal II, Calcutta, for assessment year 1965–66. The original assessment (completed on 18 March 1970) treated the petitioner-company as a company in which the public were not substantially interested and applied the tax rate for such companies. The petitioner applied under section 154 on 7 April 1970 to have the assessment rectified, arguing that the company was one in which the public were substantially interested. An appeal was filed on 21 April 1970; ground No. 10 in that appeal challenged the Income-tax Officer's treatment of the petitioner as a company in which the public were not substantially interested.
By order dated 12 May 1970 the Income-tax Officer rectified the assessment under section 154 and treated the petitioner as a company in which the public were substantially interested. The petitioner did not press ground No. 10 before the Appellate Assistant Commissioner on 15 January 1972 because of that rectification, and the Appellate Assistant Commissioner disposed of the appeal on 3 February 1972 without deciding ground No. 10 as it was not pressed. The Additional Commissioner issued a notice under section 263 to show cause why the section 154 order should not be rectified as prejudicial to revenue. The petitioner showed cause and moved this application on 10 April 1972 and obtained a rule nisi.
Legal Issues Presented
- Whether, once the Income-tax Officer had rectified the original assessment under section 154 (so that the operative assessment was the rectified order) and the Appellate Assistant Commissioner thereafter disposed of the petitioner's appeal, the Income-tax Commissioner retained jurisdiction under section 263 to revise or rectify the section 154 order (i.e., whether the rectified original order had merged in the appellate order such that section 263 could not be invoked against it).
- Whether the Additional Commissioner exercised a proper quasi-judicial discretion under section 263 or acted mechanically at the suggestion of the audit department (and therefore whether the notice issued under section 263 was vitiated for want of proper exercise of discretion).
Arguments of the Parties
Petitioner's Arguments
- The order originally passed by the Income-tax Officer was rectified on 12 May 1970 under section 154; after that rectification the operative order was the rectified order. When the Appellate Assistant Commissioner disposed of the appeal on 3 February 1972, the rectified order was before him and, having disposed of the appeal, the rectified original order merged in the Appellate Assistant Commissioner's order. Consequently, the Commissioner did not have jurisdiction under section 263 to rectify the section 154 order which had become part of the appellate order.
- The Additional Commissioner acted mechanically at the suggestion of the audit department and did not genuinely exercise the quasi-judicial discretion vested in him under section 263; therefore the notice under section 263 was not a valid exercise of power.
Respondent's Position (as reflected in the opinion)
- The opinion notes an averment in paragraph 4(d) of the affidavit-in-opposition by Madan Mohan Lal filed on behalf of the respondents, from which the court infers that the Additional Commissioner acted at the suggestion of the audit department. The opinion treats that averment as supporting the contention that the Commissioner did not exercise independent discretion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Vedantham Raghaviah v. Third Addl. Income-tax Officer, Madras [1963] 49 ITR 314 (Mad) | Support for the proposition that an order under section 154 rectifying the original order operates to rectify the original order so that the rectified order is the operative assessment order. | The court relied on observations in this case to hold that the section 154 order rectified the original order and that the rectified order was the operative order thereafter. |
| S. Arthanari v. First Income-tax Officer, Salem [1972] 83 ITR 828 (Mad) | Reiteration of the view that a section 154 rectification makes the rectified order the operative order. | The court cited this subsequent Madras High Court decision as confirmation of the same principle applied to the facts. |
| State Of Madras v. Madurai Mills Co., Ltd. [1967] 1 SCR 732; 19 STC 144 (SC) | The doctrine of merger depends on the nature of the appellate or revisional order and the scope of the statutory provision conferring appellate or revisional jurisdiction. | The court relied on the Supreme Court's observation to explain that whether merger occurs depends on the character and scope of the appellate order; this supported the conclusion that the Income-tax Officer's order merged in the Appellate Assistant Commissioner's order. |
| Commissioner Of Income Tax, Bombay v. Amritlal Bhogilal & Co. [1958] 34 ITR 130 (SC) | Authority on how appellate/revisional jurisdiction and merger should be understood (as part of the discussion with State of Madras case). | Cited alongside the State of Madras authority to reinforce the legal proposition about merger and scope of appellate/revisional jurisdiction. |
| Commissioner of Income-tax v. Tejaji Farasram Kharawala [1953] 23 ITR 412 (Bom) | Support for the proposition that once the appellate order becomes the effective order, the original assessment order may be regarded as merged and beyond revisional power. | The court relied on an observation of Chagla C.J. in this case to support the conclusion that the Commissioner was incompetent to revise the order which had merged in the appellate order. |
| Sirpur Paper Mills Ltd. v. Commissioner Of Wealth Tax, Hyderabad [1970] 77 ITR 6 (SC) | Principles concerning improper or mechanical exercise of quasi-judicial powers by revenue authorities. | The court relied on the Supreme Court's principles in this case to hold that the notice under section 263 could not be sustained if issued merely at the suggestion of the audit department without independent exercise of discretion. |
Court's Reasoning and Analysis
The court divided its analysis into two main strands, corresponding to the two points urged by the petitioner.
-
Scope of section 263 and effect of section 154 rectification:
The court observed that section 263 empowers the Commissioner to call for and examine the record of any proceeding under the Act and, if an order passed by the Income-tax Officer is considered erroneous and prejudicial to revenue, to pass such order as circumstances justify. The court emphasised that the power under section 263 is directed at orders passed by the Income-tax Officer and not at orders passed by an appellate authority.
The court held that an order under section 154, "in so far as it rectifies the original order", has the effect of rectifying the original order so that the rectified order becomes the operative order. Relying on Madras High Court decisions (Vedantham Raghaviah; S. Arthanari) and on Supreme Court guidance regarding the doctrine of merger (State of Madras v. Madurai Mills; Amritlal Bhogilal), the court concluded that where the matter (here, the question whether the company was one in which the public were substantially interested) was before the Appellate Assistant Commissioner and the appellate authority passed an order, the Income-tax Officer's order on that aspect merged in the appellate order.
Given that merger, the court concluded that the Commissioner was incompetent to revise the matter under section 263. The court also observed that permitting the Commissioner to revisit a section 154 rectification in these circumstances would be prejudicial to the assessee because the assessee had foregone pressing the ground before the Appellate Assistant Commissioner in reliance on the section 154 rectification; to allow revision would effectively deprive the assessee of the appellate forum.
-
Whether the Commissioner exercised independent discretion under section 263:
The court examined whether the Additional Commissioner genuinely exercised quasi-judicial discretion or acted mechanically at the suggestion of the audit department. The court referred to an averment in paragraph 4(d) of the respondents' affidavit-in-opposition indicating that the action was suggested by the audit department. Accepting that description of events, the court concluded that the Additional Commissioner did not exercise independent discretion or judgment required by section 263.
The court relied on the Supreme Court's principles in Sirpur Paper Mills Ltd. to hold that a notice issued on mere suggestion from the audit department, without the Commissioner's independent exercise of discretion, could not be sustained.
Holding and Implications
Holding: The court quashed and set aside the notice issued under section 263 (described in the opinion as issued in March 1972) and restrained the respondent-Commissioner from giving effect to it. The court further ordered that if any order had been passed by the Commissioner pursuant to that notice, such order was also set aside and quashed. The rule nisi was made absolute to the extent indicated. There was to be no order as to costs. The court stayed the operation of its order for a period of six weeks from date.
Implications:
- The direct effect is that the specific notice under section 263 and any consequential order of the Commissioner in this matter were quashed and declared void; the Commissioner was restrained from implementing that notice.
- The court's reasoning limits the scope of revision under section 263 in circumstances where (a) a rectification under section 154 has produced the operative assessment, and (b) the matter has become the subject of an appellate order such that the Income-tax Officer's order has merged in that appellate order. In such circumstances the Commissioner cannot exercise section 263 to revise the merged order (as applied on these facts).
- The court also reinforced that an exercise of section 263 must reflect independent, quasi-judicial discretion by the Commissioner and cannot rest on merely following suggestions by the audit department; a mechanically prompted exercise will not be sustained.
- The opinion does not state that it creates a novel binding principle beyond applying existing authorities; it grounds its decision on cited precedents and the facts of the case. No new precedent is announced beyond the application of the cited authorities to the facts before the court.
Sabyasachi Mukharji, J.:— In this application under article 226 of the Constitution, the petitioner challenges the notice dated the 23rd of March, 1972, issued under section 263 of the Income-tax Act, 1961, by the Additional Commissioner of Income-tax, West Bengal II, Calcutta, for the assessment year 1965-66. In order to appreciate the contentions urged in this application it is necessary to refer to certain facts. On the 18th of March, 1970, assessment of the petitioner-company was completed in the status of a company in which it was held the public were not substantially interested. The Income-tax Officer accordingly applied the rate of tax applicable to such a company to the petitioner. The petitioner on the 7th of April, 1970, made an application under section 154 of the Income-tax Act, 1961, requesting the Income-tax Officer to rectify the assessment order by recomputing the tax on the basis that the petitioner was a company in which the public were substantially interested. The petitioner also on the 21st of April, 1970, filed an appeal before the Appellate Assistant Commissioner contending, inter alia, that the petitioner-company being one in which the public were substantially interested, the Income-tax Officer without assigning any reason treated the petitioner-company as one in which the public were not substantially interested. The said ground was taken as ground No. 10 in the appeal preferred before the Appellate Assistant Commissioner. On the 12th of May, 1970, by an order the Income-tax Officer rectified the assessment order and treated the petitioner-company as a company in which the public were substantially interested. The appeal came up for hearing before the Appellate Assistant Commissioner on the 15th of January, 1972. At the time of hearing of the appeal before the Appellate Assistant Commissioner the petitioner did not press ground No. 10 in view of the fact that the Income-tax Officer had already made his order under section 154 of the Act rectifying the original assessment order and had treated the petitioner-company as one in which the public were substantially interested. Thereafter, on the 3rd of February, 1972, the Appellate Assistant Commissioner by an order disposed of the appeal without deciding ground No. 10 as it was not pressed before him. The Additional Commissioner of Income-tax, West Bengal-II, Calcutta, on the 26th of March, 1970, issued a notice under section 263 of the Income-tax Act, 1961, to show cause why the order as passed by the Income-tax Officer under section 154 of the Income-tax Act, 1961, should not be rectified as being prejudicial to the interest of the revenue. The petitioner showed cause on the 7th of April, 1972, and on the 10th of April, 1972, moved this application and obtained the rule, nisi.
2. Two points were urged in support of the application. It was contended, firstly, that in the facts and circumstances of the case the original order having been amended on the 12th of May, 1970, by an order under section 154 rectifying the original order what was in operation thereafter was the original order as rectified. When the Appellate Assistant Commissioner disposed of the appeal on the 3rd of February, 1972, the order which was the subject-matter of the appeal was the order as amended. Therefore, the Appellate Assistant Commissioner having disposed of the appeal the original order as rectified became merged in the order of the Appellate Assistant Commissioner. In the premises it was submitted that the Commissioner could not in the exercise of his power under section 263 rectify that order under section 154 of the Income-tax Act, 1961, in view of the fact that the operative order was the order of the Appellate Assistant Commissioner. It was, secondly, contended that in the facts and circumstances of the case the Commissioner had acted mechanically at the suggestion of the audit department and the exercise of power by the Additional Commissioner was not a proper exercise of power under section 263 of the Income-tax Act, 1961. Section 263 gives power of revision to the Commissioner. The section is to the following effect:
“263. Revision of orders prejudicial to revenue.—(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
(2) No order shall be made under sub-section (1)—
(a) to revise an order of reassessment under section 147, or
(b) after the expiry of two years from the date of the order sought to be revised.
(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.
Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”
3. The section gives the Commissioner the power to call for and examine the record of any proceeding under the Act and if he considers that any order passed by the Income-tax Officer, in so far as it is prejudicial to the interest of the revenue, he might after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary pass such order thereon as the circumstances of the case might justify. Therefore, the power that he exercises under the section is a power in respect of the order of the Income-tax Officer. He has no power to rectify the order passed by the Appellate Assistant Commissioner. In this case the question is, whether at the time when the impugned notice was issued the order under section 154 stood by itself as an order of the Income-tax Officer or not. In my opinion section 154, in so far as it rectifies the original order, has the effect of rectifying the original order and, therefore, after the order under section 154 of the Income-tax Act, 1961, was passed the order was the order as rectified by the order under section 154. In support of this proposition reliance may be placed on the observations of the Madras High Court in the case of Vedantham Raghaviah v. Third Addl. Income-tax Officer, Madras [1963] 49 ITR 314 (Mad) and the observations appearing at page 320 of the report. The same view was reiterated by the Madras High Court in the case of S. Arthanari v. First Income-tax Officer, Salem [1972] 83 ITR 828 (Mad). The application of the doctrine of merger, however, depends on the nature of the appellate or revisional order in each case and the scope of the statutory provision conferring the appellate or revisional jurisdiction. Reliance in this connection may be placed on the observations of the Supreme Court in the case of State Of Madras v. Madurai Mills Co., Ltd. [1967] 1 SCR 732, 736 : 19 STC 144 (SC) and in the case of Commissioner Of Income Tax, Bombay v. Amritlal Bhogilal & Co. [1958] 34 ITR 130 (SC). In the instant case whether the petitioner was a company in which the public were substantially interested or not is a point which could have been the subject-matter of appeal and decision by the Appellate Assistant Commissioner under clause (c) of section 246 of the Income-tax Act, 1961. In the aforesaid view of the matter the order of the Income-tax Officer on this aspect, namely, whether the public were substantially interested in the company, merged in the order of the Appellate Assistant Commissioner. Thereafter, the Commissioner was incompetent to revise the said order. Reliance in this connection may be placed on the observation of Chagla C.J in the case of Commissioner of Income-tax v. Tejaji Farasram Kharawala [1953] 23 ITR 412, 420 (Bom). If the original assessment order as rectified was the effective and operative order, the same was the subject-matter of appeal before the Appellate Assistant Commissioner and the Appellate Assistant Commissioner having passed the order thereafter, that was the only effective order and the original order had merged in that order. In the premises, in the facts and circumstances of the case, in my opinion, it cannot be said that the Commissioner had jurisdiction to rectify this order. Furthermore, to give the Commissioner power to rectify the order under section 154 in the facts and circumstances of the case would be highly prejudicial to the assessee in this case. The Income-tax Officer originally had held that the assessee was a company in which the public were not substantially interested. That was one of the grounds taken in the appeal. The assessee did not press that ground because before the appeal came up for hearing the Income-tax Officer had rectified that part of the order. If that was the position now, to allow the Income-tax Officer to go back on that position would deprive the assessee of a forum of appeal before the Appellate Assistant Commissioner.
4. The second ground of attack was, as I mentioned before, that this order was passed at the suggestion of the audit department of the revenue and not by the Additional Commissioner in exercise of his quasi-judicial discretion. I have noticed the terms of section 263 of the Act which empowers the Commissioner to call for examination of the record and thereafter to make an order. In this case the Commissioner purported to exercise the power at the suggestion of the audit department. This position would be clear if one refers to the averment made in paragraph 4(d) of the affidavit-in-opposition, by one Madan Mohan Lal, filed on behalf of the respondents. From the facts it is apparent that the Additional Commissioner did not exercise his discretion and judgment. In the aforesaid view of the matter, on the basis of the principles enunciated by the Supreme Court in the case of Sirpur Paper Mills Ltd. v. Commissioner Of Wealth Tax, Hyderabad† [1970] 77 ITR 6 (SC), this notice cannot also be sustained. The notice, therefore, issued on the 24th of March, 1972, is hereby quashed and set aside. The respondent-Commissioner is restrained from giving effect to the same. If any order has been passed by the Commissioner, the same is also set aside and quashed. The rule is made absolute to the extent indicated above. There will be no order as to costs.
5. Let the operation of this order be stayed for a period of six weeks from date.
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