Income-tax Reference No. 17 of 1980

Decided on May 9, 1989

The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court for the assessment year 1972-73:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Commissioner of Income-tax had not lost jurisdiction to initiate proceedings under section 263 of the Income-tax Act, 1961?”.

2. Shortly stated, the facts are that aggrieved by certain disallowances made by the Income-tax Officer in the assessment for the year under reference made on March 15, 1975, the assessee had preferred an appeal before the Appellate Assistant Commissioner and challenged the disallowance Of Rs. 15,493 out of general charges account, Rs. 11,778 claimed as bad debt and Rs. 28,214 under section 40(c) of the Act. The Appellate Assistant Commissioner, in his order dated July 30, 1976, upheld the action of the Income-tax Officer in respect of the first two items and, accepting the assessee's submissions, deleted Rs. 28,214 from the total income of the assessee. On a scrutiny of the income-tax records, the Commissioner of Income-tax observed that (1) the Income-tax Officer had not included Rs. 68,386 in the total income of the assessee, representing the profit under section 41(2) of the Act in respect of the house property situated at 8, Old Court House Street, Calcutta, which was sold by the assessee in the relevant accounting year, (ii) the capital gains that arose to the assessee in respect of the said house property was Rs. 3,29,788 and not Rs. 3,00,000 as worked out by the Income-tax Officer, and (iii) the Income-tax Officer had wrongly allowed deduction of Rs. 1,200 per annum being entertainment allowance paid to each of the three directors of the assessee which should have been disallowed under section 37(2B) of the Act. He, therefore, concluded that the order passed by the Income-tax Officer on March 15, 1975, was erroneous and prejudicial to the interests of the Revenue. Under the circumstances, on February 22, 1977, the Commissioner of Income-tax issued a notice under section 263 of the Act on the assessee calling upon it to show cause why a suitable order under that section should not be passed.

3. The only point urged by the assessee in its letter dated February 25, 1976, addressed to the Commissioner of Income-tax as well as at the time of hearing before him was that since the assessee had gone in an appeal before the Appellate Assistant Commissioner against the order of the Income-tax Officer and the Appellate Assistant Commissioner had passed his appellate order on July 30, 1976, the order of the Income-tax Officer merged with the order of the Appellate Assistant Commissioner and, therefore, the Commissioner of Income-tax had no jurisdiction to pass an order under section 263 of the Act. This contention was negatived by the Commissioner of Income-tax on the ground that the Appellate Assistant Commissioner did not consider the points which are the subject-matter of the proceedings under section 263. The Income-tax Officer was, therefore, directed to revise the assessment by (1) including the income of Rs. 68,386 being the profit under section 41(2); (2) revising the capital gains to Rs. 3,29,788 in place of Rs. 3,00,000 and disallowing the entertainment allowance paid to the three directors.

4. Being aggrieved by the said order of the Commissioner of Income-tax, the assessee came up in appeal before the Tribunal and reiterated the submissions made before the Commissioner of Income-tax. The Tribunal, after considering the facts and circumstances and the decisions relied on before it, came to the conclusion that the order of the Income-tax Officer had not merged with the order of the Appellate Assistant Commissioner and that the Commissioner of Income-tax had the jurisdiction to initiate the proceedings under section 263 of the Act.

5. On the aforesaid facts, the question set out hereinbefore has been referred to this court.

6. At the hearing, Mr. Roy, learned advocate appearing for the assessee, contended that the Commissioner has no jurisdiction to set aside an order of assessment passed by the Income-tax Officer when that order is the subject-matter of appeal preferred by the assessee before the Appellate Assistant Commissioner. In support of his contention, learned counsel for the assessee relied on a Full Bench decision of the Madhya Pradesh High Court in CIT v. Mandsaur Electric Supply Co. Ltd., [1983] 140 ITR 677. There, the assessee, a limited company, carried on the business of supplying electrical energy at Mandsaur. The undertaking of the assessee was, however, taken over by the Madhya Pradesh Electricity Board on March 5, 1973, and compensation under the provisions of the Indian Electricity Act, 1910, became payable to the assessee. While making an assessment for the assessment year 1973-74, the Income-tax Officer did not examine the chargeability of profits and capital gains. The Income-tax Officer, while making assessment, did not allow certain deductions claimed by the assessee and, hence, aggrieved by the order of assessment, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Commissioner also issued a notice under section 263 of the Act to the assessee to show cause why the order of assessment passed by Income-tax Officer should not be revised, inasmuch as it appeared to be prejudicial to the interests of the Revenue as the Income-tax Officer had failed to examine the chargeability of profits and capital gains. The assessee showed cause but the Commissioner set aside the order of assessment and directed the Income-tax Officer to make a fresh assessment in accordance with law. Aggrieved by the order passed by the Commissioner, the assessee preferred an appeal before the Tribunal. It was urged on behalf of the assessee before the Tribunal that as the order of assessment passed by the Income-tax Officer had been the subject-matter of an appeal before the Appellate Assistant Commissioner, the order of the Income-tax Officer had merged in the order passed by the Appellate Assistant Commissioner and the Commissioner had no jurisdiction to set aside the order of assessment passed by the Income-tax Officer. This contention was not upheld by the Tribunal but the Tribunal held that, on the facts and in the circumstances of the case, no case was made out for interference with the, order of Income-tax Officer. In this view of the matter, the Tribunal allowed the appeal and set aside the order passed by the Commissioner.

7. The Full Bench, after referring to several decisions including a decision of this court in Singho Mica Mining Co. Ltd. v. CIT, [1978] 111 ITR 231, held as follows (p. 683):

“The question which has arisen in this case directly arose for consideration in Commissioner Of Income-Tax, M.P v. Narpat Singh Malkhan Singh, [1981] 128 ITR 77 (MP). In that case, though the Appellate Assistant Commissioner had dealt with the order of the Income-tax Officer on a limited point, the Commissioner, in exercise of his revisional powers, set aside the order of assessment passed by the Income-tax Officer. The effect of the order of the Commissioner, as rightly observed in Commissioner Of Income-Tax, M.P v. Narpat Singh Malkhan Singh, [1981] 128 ITR 77 (MP), was to set aside the order of the Appellate Assistant Commissioner, even though the Commissioner had no jurisdiction to set aside the order of the Appellate Assistant Commissioner. We may usefully refer to the following observations of the Division Bench (p. 80):

‘Setting aside of the order of assessment as was done in the revision by the Additional Commissioner necessarily resulted in the setting aside of the order of the Appellate Assistant Commissioner, and, as the power of revision was not available against the order of the Appellate Assistant Commissioner, the order of assessment could not be set aside by the Additional Commissioner. Learned standing counsel relied upon the case of Singho Mica Mining Co. Ltd. v. CIT, [1978] 111 ITR 231 (Cal). In this case, the Income-tax Officer had omitted to charge interest under section 217 and the Commissioner in revision directed the Income-tax Officer to compute and recover interest although in the meantime the order of assessment had been the subject-matter of appeal before the Appellate Assistant Commissioner. The Calcutta High Court held that the merger of the order of assessment was only in respect of matters which were taken up in appeal and as the question of charging interest was not involved in the appeal, the Commissioner could direct the Income-tax Officer to charge interest under section 217. It will be noticed that in this case the Commissioner had not set aside the order of assessment passed by the Income-tax Officer which was the subject-matter of appeal. The order of the Commissioner directing the Income-tax Officer to compute and recover interest was passed without disturbing the order of assessment. In the instant case, the Additional Commissioner in revision set aside the order of assessment passed by the Income-tax Officer. The case of the Calcutta High Court is, therefore, distinguishable and is not applicable.’

We respectfully agree with the aforesaid observations.”

8. Thus, the Full Bench fully agreed with the aforesaid observations in Narpat Singh Malkhan Singh's case, [1981] 128 ITR 77 (MP), and held that the Commissioner of Income-tax had no jurisdiction under section 263 of the Income-tax Act, 1961, to set aside the order of assessment passed by the Income-tax Officer.

9. Reference has also been made to a decision of the Karnataka High Court in the case of Additional Commissioner Of Income-Tax v. Vijayalakshmi Lorry Service Service, [1986] 157 ITR 327. In that case, the Income-tax Officer made the assessment on March 25, 1969, but, by the said order, no interest was charged under section 139(1)(iii) of the Act. Against the order of assessment, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, by his order dated April 21, 1970, reduced the assessable income by Rs. 12,000. The Income-tax Officer was directed to modify the assessment suitably. The said order became final. After the order of the Appellate Assistant Commissioner made in the appeal, the Additional Commissioner of Income-tax issued a notice to the assessee on May 29, 1970, purporting to be one under section 263 of the Act, proposing to revise the order of the Income-tax Officer on the ground that it is prejudicial to the Revenue as the Income-tax Officer had failed to charge interest under section 139(1)(iii). The assessee raised various objections. One of the objections was that the Income-tax Officer had waived the interest. The other objection was that since the order of assessment had merged in the order of the Appellate Assistant Commissioner, the Additional Commissioner had no jurisdiction to revise the order of assessment under section 263 of the Act. The Additional Commissioner overruled the objections and directed the Income-tax Officer to revise his order. Against the said order, the assessee preferred an appeal before the Tribunal. The Tribunal upheld the contention of the assessee that inasmuch as the order of assessment passed by the Income-tax Officer had merged in the order of the Appellate Assistant Commissioner, the Additional Commissioner was precluded from taking proceedings under section 263 of the Act.

10. There, the court has held as follows (p. 329):

“Levy of interest under the proviso to sub-section (1) of section 139 is not to be made by a separate order; it forms part of the assessment order. Interest, if any levied, forms part of the amount for which a notice of demand has to be issued under section 156. If the tax assessed is reduced by the Appellate Assistant Commissioner, then it naturally follows that, as a consequence, the interest levied by the assessing authority has also to be reduced.

In the instant case, as stated earlier, the Appellate Assistant Commissioner; reduced the assessable income by Rs. 12,000. If any interest had to be levied, then the same could be only on the amount of tax as determined by the Appellate Assistant Commissioner. The order of assessment that has become final is the order of the Appellate Assistant Commissioner. That being the case, the Additional Commissioner had no jurisdiction to take proceedings under section 263 of the Act.”

11. Reliance has also been placed on a decision of this court in the case of General Beopar Co. (Pvt.) Ltd. v. Commissioner Of Income-Tax, [1987] 167 ITR 86. In that case, the assessee was assessed to income-tax in the assessment year 1973-74, the accounting year ending on June 30, 1972: In the said year, the total income of the assessee was assessed at Rs. 1,84,399 of which Rs. 50,083 was found to have arisen from the business of the assessee. The rent from the sub-lease of the said property which was accruing in the hands of the assessee was calculated at Rs. 94,808 and income from dividend was calculated to be Rs. 34,508 aggregating to Rs. 1,343.16. Business losses suffered by the assessee in the earlier assessment years 1969-70 and 1970-71 were carried forward to the said assessment year for set off against the total income of the assessee, in the year involved, and the taxable income after such set off was computed as nil. The assessee preferred an appeal against this assessment before the Appellate Assistant Commissioner. It was contended that the Income-tax Officer had disallowed deduction under section 80M of the Income-tax Act, 1961, in respect of the dividend earned by the assessee. The Appellate Assistant Commissioner accepted the contention of the assessee and by his order dated May 26, 1975, directed the Income-tax Officer to allow deduction under section 80M as claimed. It was also pointed out to the Appellate Assistant Commissioner that in computing the income arising from dividend and house rent, the Income-tax Officer had made a typographical mistake and had arrived at a total of Rs. 1,34,316 whereas the correct figure would be Rs. 1,29,316. The Appellate Assistant Commissioner further directed the Income-tax Officer to rectify this typographical mistake in the assessment and give relief to the assessee accordingly. Thereafter, the Income-tax Officer issued a notice to the assessee on September 3, 1975, stating that there had been a mistake in setting off the carried forward business losses against the assessee's income under the head “Other sources” and that it was proposed to set off the carried forward business losses only against the income arising from the business of the assessee. The assessee in the proceedings before the Income-tax Officer appeared and contended that apart from the admitted business income of the assessee, the rent earned by the assessee under the sublease should also have been assessed under the head “Business” as such income arose out of the business activities of the assessee and the carried forward business losses should also be set off against the said income. The Income-tax Officer accepted the contentions of the assessee and held that only the income by way of dividend should not be considered to be the assessee's business income and set off the carried forward business loss against the business income of the assessee as also the rent realised from the sub-lease. The assessment was corrected accordingly by the order of the Income-tax Officer dated October 1, 1975. Subsequently, by a notice issued under section 148 of the Income-tax Act, 1961, dated November 11, 1976, the assessment for the said assessment year 1973-74 was sought to be reopened. During the pendency of the said proceedings, the Commissioner of Income-tax issued a notice dated December 13, 1976, under section 263 of the Income-tax Act, 1961, stating, inter alia, that the original order of assessment dated February 13, 1975, and the subsequent order passed under section 154 of the Income-tax Act, 1961, dated October 1, 1975, appeared to be erroneous and prejudicial to the interests of the Revenue inasmuch as business losses of earlier years had been set off against income from other sources in the said assessments. The assessee was asked to appear in the proceedings and show cause why an order under section 263 of the Act should not be passed revising the assessment. The Commissioner has set aside both the original order of assessment dated February 13, 1975, as also the order dated October 1, 1975, passed under section 154 of the Act and directed the Income-tax Officer to enquire into the relevant facts and come to a finding whether the activity of the assessee in sub-letting the said property constituted a business activity and thereafter decide whether the brought forward losses could be set off against such income. The assessee came up in appeal before the Tribunal. One of the contentions raised was that, as on the date the Commissioner passed under section 263 of the Act, viz., January 25, 1977, the assessment order of the Income-tax Officer had merged in the order of the Appellate Assistant Commissioner, the only effective order which was in force at the relevant time and the Commissioner had no jurisdiction under section 263 to revise the order of the Appellate Assistant Commissioner and, therefore, the order of the Commissioner passed under section 263 was void and without jurisdiction. The Tribunal held that merely because an appeal was filed before the Appellate Assistant Commissioner, it could not be held that a question which was neither raised by the assessee in the appeal nor adjudicated upon by the appellate authority was the subject-matter of the appeal. On the question of set off of the carried forward business losses of earlier years against the different items of income of the assessee, no appeal had been preferred by the assessee nor had the same been considered by the Appellate Assistant Commissioner. Therefore, there could not be any merger of the order of assessment in the order of the Appellate Assistant Commissioner on this question. Accordingly, the Tribunal held that the Commissioner retained his jurisdiction to exercise his powers of revision under section 263 of the Act.

12. The Division Bench of this court, after considering the several decisions relied on before it, held as follows (at p. 99):

“This court, following the decision of the Supreme Court in Amrit-lal Bhogilal and Co., [1958] 34 ITR 130, had taken a consistent view that when an order of assessment was appealed against and an order was passed by the appellate authority, there was merger of the assessment order with the appellate order in all respects, including matters which were merely affirmed by the appellate authority. The law is also settled that in an appeal preferred from an order of assessment, the entire assessment is at large before the Appellate Assistant Commissioner who has jurisdiction and power also to go into the questions which are not the subject-matter of appeal. The exceptions which have been considered by this court are cases where the question involved cannot be the subject-matter of appeal before the appellate authority.

From the facts in the instant case, the question of setting off of carried forward business losses of earlier years was considered in the assessment and, therefore, it Was a matter which was within the purview of the appellate authority when an appeal was preferred from the assessment order. To that extent, it appears on the view which has been taken and followed by this court that there has been merger in the instant case of the order of assessment with the order of the Appellate Assistant Commissioner. That being so, the Commissioner could have no further jurisdiction to revise the assessment under section 263.”

13. According to the assessee, this decision in General Beopar Co. P. Ltd., [1987] 167 ITR 86 (Cal) has settled the controversy so far as this court is concerned and, accordingly, when the original assessment order was taken on appeal, though the question involved in the revision by the Commissioner was not adjudicated in the appeal, the Commissioner had no jurisdiction to revise such original order of assessment.

14. It appears to us that there is, apparently, a conflict between the decision of this court in Singho Mica Mining Co. Ltd., [1978] 111 ITR 231 and the decision in General Beopar Co. P. Ltd., [1987] 167 ITR 86 (Cal). In Singho Mica Mining Co. Ltd., [1978] 111 ITR 231, this court held that where the Income-tax Officer omitted to charge interest under section 217 and the Commissioner, in revision, directed the Income-tax Officer to compute and recover interest, although, in the meantime, the order of assessment was the subject-matter of appeal before the Appellate Assistant Commissioner, the merger of the order of assessment was only in respect of matters which were taken up in appeal. The question of charging interest was not involved in the appeal. Accordingly, the Commissioner could direct the Income-tax Officer to charge interest under section 217. It appears that this decision was distinguished in General Beopar Co. P. Ltd., [1987] 167 ITR 86 (Cal) in the following manner (at p. 94):

“(g) Singho Mica Mining Co. Ltd. v. CIT, [1978] 111 ITR 231 (Cal). In this case, it was held by a Division Bench of this court to which I was a party that where there was an appeal from an order of assessment and the question of levy of interest could not have been the subject-matter of the appeal, the order appealed from could not be held to have merged with the order passed in the appeal on the question of levy of interest. Even after the order was passed in appeal, the Commissioner would be competent to revise the assessment on the question of interest.”

15. In Singho Mica Mining Co. Ltd., [1978] 111 ITR 231 (Cal), the Income-tax Officer did not charge interest in the assessment. The assessment order was taken up in appeal. Even after the appellate order was made, this court held that the Commissioner of Income-tax retained the jurisdiction to revise the order of assessment since the question of levy of interest could not have been the subject-matter of appeal and the order appealed from could not have merged with the appellate order. This is how in General Beopar Co. P. Ltd., [1987] 167 ITR 86 (Cal), the decision of Singho Mica Mining Co. Ltd., [1978] 111 ITR 231 (Cal) was distinguished. According to the Madhya Pradesh High Court in Mandsaur Electric Supply Co. Ltd., [1983] 140 ITR 677 [FB], the Calcutta High Court in Singho Mica Mining Co. Ltd., [1978] 111 ITR 231, held that the merger of the order of assessment was only in respect of matters which were taken up in appeal and as the question of charging interest was not involved in the appeal, the Commissioner could direct the Income-tax Officer to charge interest. According to the Madhya Pradesh High Court, another distinguishable feature in Singho Mica Mining Co. Ltd., [1978] 111 ITR 231 (Cal) was that the Commissioner directed the Income-tax Officer to compute and recover interest without disturbing the order of assessment.

16. In General Beopar Co. P. Ltd., [1987] 167 ITR 86, this court held that once the order of assessment was under appeal before the Appellate Assistant Commissioner and order is passed by the appellate authority, there is merger of the assessment order with the appellate order in all respects. It was also laid down that when an appeal is preferred from an order of assessment, the entire assessment is at large before the Appellate Assistant Commissioner who has jurisdiction and power to go into the questions which are not the subject-matter of appeal. The exceptions are only where the question involved cannot be the subject-matter of appeal before the appellate authority.

17. Thus, in General Beopar Co. P. Ltd., [1987] 167 ITR 86, this court has in fact recognised the exceptions where there will be no merger.

18. It is now well-settled that an appeal lies against an order imposing interest if the appellant limits himself to the ground that he is not liable to the levy at all. In the case of Central Provinces Manganese, Ore Co. Ltd. v. CIT, [1986] 160 ITR 961, the Supreme Court held that inasmuch as the levy of interest is a part of the process of assessment, it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all.

19. This court has also held in CIT v. Bengal Jute Mills Co. Ltd. (No. 1), [1987] 165 ITR 631, that the assessee could raise the question regarding levy of interest under section 139 before the Appellate Assistant Commissioner. It has also been held in Commissioner Of Income-Tax v. United Provinces Electric Supply Co. Ltd., [1987] 166 ITR 565 (Cal) that the assessee is entitled to raise an objection to the charging of interest under section 215 in the appeal before the Appellate Assistant Commissioner.

20. Therefore, the charging of interest can be the subject-matter of appeal before the appellate authority. In our view, the question is not whether the question involved before the Commissioner of Income-tax could be the subject-matter of appeal before the appellate authority or whether the Commissioner directed the inclusion of certain income originally omitted from the assessment. Where the assessee is not aggrieved by a part of the order of the Income-tax Officer, such determination would not be the subject-matter of appeal. Therefore, in such a case, if it is to be held that the Commissioner loses his jurisdiction to revise the assessment simply because an appellate order has been passed even without touching on the matter where the assessee did not prefer an appeal, the intention of the Legislature in enacting section 263 would be frustrated.

21. In our view, this apparent conflict has to be resolved harmoniously. That apart, the recent amendments to which we shall presently refer have set at rest the controversy or conflict, if any.

22. Where the assessee is not aggrieved by any part of the assessment order and in fact derives a benefit from an erroneous assessment order, he will not prefer an appeal to the Appellate Assistant Commissioner. The Department has got no right to prefer an appeal against the order of the Income-tax Officer. The only way in which an erroneous order in so far as it is prejudicial to the interests of the Revenue as made by the Income-tax Officer either in not charging interest or by not including some income, which ought to have been included or by allowing deductions or reliefs which ought not to have been allowed can be set right by the Commissioner of Income-tax by resorting to his revisional power. The power of rectification under section 154 or reopening of the assessment under section 147 has to be exercised by the Income-tax Officer. It is not open to the Commissioner of Income-tax to direct the Income-tax Officer either to rectify the assessment or reopen the assessment. In such a case, in our view, when the order of assessment passed by the Income-tax Officer is made the subject-matter of appeal before the first appellate authority, and an order is passed by such appellate authority, the Commissioner of Income-tax is not competent to set aside the entire assessment order in exercise of his revisional jurisdiction. He can only revise the assessment to the extent which was not the subject-matter of appeal before the first appellate authority. The omission to charge interest is a matter which the Commissioner of Income-tax may hold to be erroneous in so far as it is prejudicial to the interests of the Revenue. An assessee would not prefer an appeal against that part of the order which was in his favour. In such a case, preferring an appeal regarding the order of assessment before the Appellate Assistant Commissioner would not take away the jurisdiction of the Commissioner to revise the assessment. The doctrine of merger can only operate on matters which are subject-matters of decision by the first appellate authority. It cannot have any application to matters which are not being taken on appeal either by the assessee or which had not been considered by the Income-tax Officer which, in other words, have not or could not have been touched by the appellate authority.

23. A narrow construction of the power of the Commissioner under section 263 will defeat the purpose for which the provision was enacted. In our judgment, the order of the Income-tax Officer will merge with the order of the first appellate authority only with respect to that part of the order of the Income-tax Officer which relates to the matters considered and decided by the appellate authority. Thus, there will be partial merger and not the merger of the whole order.

24. By the Finance Act, 1988, the provisions of section 263 have been amended to clarify that the Commissioner would be competent to revise an order of assessment passed by an Assessing Officer on all matters except those that have been considered and decided in appeal. The Explanation which was added to section 263 with effect from June 1, 1988, has been further amended by the Finance Act, 1989, to clarify that the said Explanation incorporated in the Finance Act, 1988, must be deemed to have always been in existence.

25. For the reasons aforesaid, we are of the view that the Tribunal was right in holding that the Commissioner of Income-tax had jurisdiction to initiate proceedings under section 263 of the Income-tax Act, 1961, as there was only a partial merger. The revision will relate only to those matters which had not been considered and decided by the Appellate Assistant Commissioner. We, therefore, answer the question referred to this court in the affirmative and in favour of the Revenue. There will be no order as to costs.

Bhagabati Prosad Banerjee, J.:— I agree.