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Case Number
Attorney(S)
  • For Appellant/Petitioner/Plaintiff: B.K. Rawat
  • Adv.; For Respondents/Defendant: B.L. Nema
  • Adv.
Judges
  • G Sohani
Acts
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Citation Codes
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citation codes
Case Number
Attorney(S)
  • For Appellant/Petitioner/Plaintiff: B.K. Rawat
  • Adv.; For Respondents/Defendant: B.L. Nema
  • Adv.
Judges
  • G Sohani
Acts
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Smart Summary

Judgment Summary: G.G. Sohani, Acting Chief Justice

Factual and Procedural Background

The Income-tax Appellate Tribunal, Jabalpur Bench, referred a question to this Court under Section 256(1) of the Income-tax Act, 1961. The assessee (an individual contractor who also derived income from plying trucks) was assessed for the year 1973-74. The Income-tax Officer (ITO) estimated the assessee's income from P.W.D. contracts using a net profit rate of 15% and allowed depreciation on a truck purchased on a hire-purchase basis.

The assessee appealed to the Appellate Assistant Commissioner (AAC), challenging the 15% net profit rate and the ITO's use of estimated receipts. The AAC upheld the assessee's computations: he held that receipts should not have been estimated where certificates of receipts were produced and that a 12.5% net profit rate should have been applied. The assessment order was modified accordingly.

Subsequently, the Commissioner of Income-tax exercised revisional powers under Section 263 and held that the assessee was not entitled to depreciation on the hire-purchase truck. By order dated March 18, 1978, the Commissioner set aside the assessment order and directed the ITO to make a fresh assessment.

The assessee appealed to the Tribunal. The Tribunal accepted the assessee's contention that the ITO's order had merged with the AAC's appellate order and, consequently, the Commissioner lacked jurisdiction under Section 263 to revise the assessment. The Revenue sought a reference of the legal question to this Court, leading to the present opinion. A larger Bench was constituted after parties pointed to what they described as two Full Bench decisions of this Court; the matter was heard by this larger Bench.

Legal Issues Presented

  1. The question originally referred by the Tribunal: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the Income-tax Officer's order had merged with the order of the Appellate Assistant Commissioner and, therefore, the Commissioner was not competent to revise the order under Section 263 of the Income-tax Act, 1961?"
  2. The question re-framed by this Court for clearer focus: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Commissioner was not competent under Section 263 of the Act to set aside the entire order of assessment passed by the Income-tax Officer when that order was the subject-matter of an appeal preferred by the assessee before the Appellate Assistant Commissioner?"

Arguments of the Parties

Assessee's Arguments

  • The assessee argued that the Income-tax Officer's order had merged with the Appellate Assistant Commissioner's order (the AAC having modified parts of the assessment on appeal), and therefore the Commissioner had no jurisdiction under Section 263 to revise the assessment — in particular, could not set aside the assessment order which had already been the subject of appellate decision.

Revenue's Arguments

  • The Revenue (as described) contended that the Tribunal had jurisdiction to modify the Commissioner's order so that only that part of the ITO's assessment which was not touched by the AAC would be set aside; in other words, the Tribunal could alter the Commissioner's order to limit the operation of the revisional order to items not covered by the appellate decision. (The Court noted that this aspect was not referred for decision and therefore did not express an opinion on it.)

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. R.S. Banwarilal [1983] 140 ITR 3 (MP) The Full Bench principle that the doctrine of merger applies in income-tax proceedings, but only to the extent the appellate authority considered and decided specific items; items not considered by the Appellate Assistant Commissioner remain part of the ITO's order and are open to revision under Section 263. The Court reproduced and accepted the stated principle but held that the Banwarilal decision did not correctly deal with a situation where the Commissioner set aside the entire assessment including parts already modified by the AAC. The present Court concluded that Banwarilal was wrong insofar as it implied the Commissioner could set aside the entire assessment even when parts of it had been finally dealt with on appeal by the AAC.
CIT v. Mandsaur Electric Supply Co. Ltd. [1983] 140 ITR 677 (MP) The Full Bench holding that the Commissioner has jurisdiction under Section 263 to revise those parts of an ITO's order that were not the subject-matter of appeal before the AAC; and that when the Commissioner, in exercise of revised powers, sets aside the entire assessment which has been appealed, the effect is to set aside the AAC's order — which the Commissioner cannot do. The Court expressed full agreement with this view, relying on it to support the conclusion that the Commissioner cannot set aside those parts of an assessment that have been decided by the AAC on appeal.

Court's Reasoning and Analysis

The Court examined the doctrine of merger as applied in income-tax proceedings: the ITO's order merges with the appellate order only to the extent the appellate authority (the AAC) has considered and decided particular items. Items not agitated or decided on appeal survive as part of the ITO's order and remain open to revision by the Commissioner under Section 263.

The Court noted that the two Full Bench decisions cited by the parties were consistent in holding that the Commissioner may exercise revisional jurisdiction over parts of the assessment not covered by the AAC's decision. The Court expressly endorsed the view in Mandsaur that if the Commissioner sets aside the entire ITO order after the AAC has decided part of it, that would amount to setting aside the AAC's order — an action beyond the Commissioner's jurisdiction.

The Court critiqued the Banwarilal Full Bench for not sufficiently addressing the situation where the Commissioner set aside the entire assessment including parts modified by the AAC. The Court reasoned that when the AAC has finally decided certain items on appeal, the Commissioner cannot, under Section 263, set aside the entire assessment and thereby disturb the AAC's appellate decision. Therefore, any revisional exercise must be confined to those parts of the ITO's order that were not the subject of the AAC's decision.

The Court re-framed the Tribunal's referred question to focus on whether the Tribunal was correct in holding that the Commissioner lacked competence to set aside the entire ITO assessment when that assessment had been the subject of appeal to the AAC. The Court limited its consideration to that question and declined to express any opinion on whether the Tribunal could or could not modify the Commissioner's order to confine its scope (as that question was not referred).

On the facts and circumstances of the case before it, the Court concluded that the Tribunal was justified in holding the Commissioner was not competent to set aside the entire order of assessment passed by the ITO where parts of that assessment had been the subject-matter of an appeal decided by the AAC.

Holding and Implications

Holding: The Tribunal was justified and the Commissioner was not competent under Section 263 of the Income-tax Act to set aside the entire order of assessment passed by the Income-tax Officer where that order (or parts of it) had been the subject-matter of an appeal decided by the Appellate Assistant Commissioner.

Implications:

  • The direct effect is in favour of the assessee: the Court answered the referred question in the affirmative and held for the assessee on the point of revisional competence.
  • The Court clarified that the Commissioner may exercise revision only in respect of parts of the ITO's order not covered or decided by the AAC; the Commissioner cannot disturb or set aside appellate decisions of the AAC by setting aside the entire assessment order.
  • The Court did not express any view on whether the Tribunal itself could modify the Commissioner's order to limit its operation to only those items not touched by the AAC, because that question was not referred to the Court.
  • Costs: Each party was directed to bear its own costs of the reference.

This summary is prepared strictly from the text of the provided opinion. No information has been added that does not appear in the opinion.

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    Commissioner Of Income Tax v. K.L. Rajput

    JUDGMENT G.G. Sohani, Actg. C.J.

    1. By this reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the Income-tax Appellate Tribunal, Jabalpur Bench, has referred the following question of law to this court for its opinion :

    "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the Income-tax Officer's order had merged with the order of the Appellate Assistant Commissioner and, therefore, the Commissioner was not competent to revise the order under Section 263 of the Income-tax Act, 1961 ?"

    The material facts giving rise to this reference briefly are as follows : The assessee, who was assessed in the status of an individual, carried on the business of a contractor. The assessee also derives income from plying trucks. While framing the assessment for the assessment year 1973-74, the Income-tax Officer estimated the income of the assessee from P.W.D. contracts by applying a net profit rate of 15%. The Income-tax Officer also allowed depreciation on the cost of the truck purchased on hire purchase basis. Aggrieved by the order passed by the Income-tax Officer, the assessee preferred an appeal before the Appellate Assistant Commissioner. In that appeal, the assessee assailed the adoption of net profit rate of 15% and computation of income on the basis of estimate of receipts. The Appellate Assistant Commissioner upheld the computation of the assessee and held that the receipts should not have been estimated when the assessee had produced certificates from the Government Departments showing receipts. The Appellate Assistant Commissioner also held that a net profit rate of 12.5% should have been applied by the Income-tax Officer. The order of assessment was accordingly modified. Thereafter, the Commissioner of Income-tax, exercising powers under Section 263 of the Act, found that the assessee was not entitled to depreciation on the cost of the truck purchased on hire purchase basis. The Commissioner of Income-tax, therefore, by order dated March 18, 1978, set aside the order of the assessment and directed the Income-tax Officer to make a fresh assessment according to 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 the order of the Income-tax Officer had merged with the order of the Appellate Assistant Commissioner and the Commissioner had, therefore, no jurisdiction to revise the order of assessment. This contention was upheld by the Tribunal. Aggrieved by the order passed by the Tribunal, the Revenue sought a reference and it is at the instance of the Revenue that the aforesaid question of law had been referred to this court for its opinion.

    2. When this reference came up for hearing before a Division Bench of this court on April 7, 1983, it was urged by learned counsel for the parties that there was a conflict between the two Full Bench decisions of this court in CIT v. R.S. Banwarilal [1983] 140 ITR 3 (MP) and CIT v. Mandsaur Electric Supply Co. Ltd. [1983] 140 ITR 677 (MP). It was in these circumstances that a larger Bench was constituted for hearing this reference. That is how the matter has come up before us for consideration.

    3. At the time of hearing, learned counsel for the parties conceded that on the question of the applicability of the doctrine of merger to the power of the Commissioner under Section 263 of the Act to revise the order of the Income-tax Officer when that order was the subject-matter of an appeal before the Appellate Assistant Commissioner, there was no conflict in the two Full Bench decisions of this court in CIT v. R.S. Banwarilal [1983] 140 ITR 3 (MP) and CIT v. Mandsaur Electric Supply Co. Ltd. [1983] 140 ITR 677 (MP). Both these decisions lay down correctly, if we may say so with respect, that the Commissioner has jurisdiction under Section 263 of the Act to revise that part of the order of assessment which was not the subject-matter of appeal before the Appellate Assistant Commissioner and was not touched by him in appeal. It has further been held in CIT v. Mandsaur Electric Supply Co. Ltd. [1983] 143 IXR 677 (MP), that when the Commissioner in exercise of revisional powers, sets aside the entire order of assessment which has been the subject-matter of an appeal preferred before the Appellate Assistant Commissioner, the effect of the order of the Commissioner is to set aside the order of the Appellate Assistant Commissioner which the Commissioner has no jurisdiction to do. We are in full agreement with this view.

    4. In CIT v. R.S. Banwarilal [1983] 140 ITR 3 (MP), the Full Bench correctly enunciated the following principle as regards the applicability of the doctrine of merger to the power of the Commissioner under Section 263 of the Act (at p. 15) :

    The result, therefore, is that the doctrine of merger applies to income-tax proceedings but the extent of its application depends on the scope and subject-matter of the appeal and the decision rendered by the appellate authority. Where an appeal has been preferred by the assessee to the Appellate Assistant Commissioner from an order of assessment made by the Income-tax Officer in respect of only some of the items covered by the Income-tax Officer's order and the remaining items, forming part of the Income-tax Officer's assessment order, were not agitated by either party, though it was open also to the Revenue to agitate them or the Appellate Assistant Commissioner to consider them suo motu and no decision of the Appellate Assistant Commissioner is, therefore, made in respect of the remaining items, the Income-tax Officer's order merges with the appellate order of the Appellate Assistant Commissioner only to the extent it was considered and decided by the Appellate Assistant Commissioner but the matters which are not covered by the appellate order of the Appellate Assistant Commissioner are left untouched and to that extent, the Income-tax Officer's assessment order survives, permitting exercise of revisional jurisdiction by the Commissioner under Section 263 of the Income-tax Act, 1961. It necessarily follows that the items considered and decided by the Appellate Assistant Commissioner in his appellate order are beyond the scope of the revisional power of the Commissioner of Income-tax under Section 263 inasmuch as the Income-tax Officer's order merges to that extent with that of the Appellate Assistant Commissioner and the Commissioner has no revisional power over the Appellate Assistant Commissioner. The question whether the Income-tax Officer's order has merged with that of the Appellate Assistant Commissioner has to be answered on this basis.

    It seems that after correctly enunciating the aforesaid principle, the Full Bench, with respect, failed to notice that, in that case, the Commissioner had set aside the entire order of assessment a part of which had been modified by the Appellate Assistant Commissioner on appeal. In such a case, in our opinion, the Commissioner is not competent to set aside the entire order of assessment, because in doing so, the Commissioner, in effect, disturbs the order of the Appellate Assistant Commissioner which he has no jurisdiction to do. In our opinion, therefore, whenever a question arises as to whether the Commissioner is or is not competent to revise under Section 263 of the Act, the order of assessment framed by the Income-tax Officer which has been the subject-matter of appeal before the Appellate Assistant Commissioner, it has to be ascertained as to whether the Commissioner has set aside the entire order of assessment or only that part of the order of assessment which was not the subject-matter of an appeal either because the Appellate Assistant Commissioner had no jurisdiction to consider that matter or because the Appellate Assistant Commissioner, though having jurisdiction to examine that subject-matter, did not do so. If the Commissioner has set aside the entire order of assessment, then it could not be held that he has exercised power conferred upon him because he has no power under Section 263 of the Act to revise the order of the Appellate Assistant Commissioner. In this view of the matter, the decision in CIT v. R.S. Banwarilal [1983] 140 ITR 3 (MP) does not lay down the correct law in so far as it impliedly holds that the Commissioner could, in exercise of revisional power, set aside the entire order of assessment passed by the Income-tax Officer though it had been the subject-matter of an appeal before the Appellate Assistant Commissioner.

    5. In the instant case, the question framed by the Tribunal is too wide and it does not bring out the real issue which arose before the Tribunal for consideration. We, therefore, reframe that question as follows :

    "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Commissioner was not competent under Section 263 of the Act to set aside the entire order of assessment passed by the Income-tax Officer when that order was the subject-matter of an appeal preferred by the assessee before the Appellate Assistant Commissioner ?"

    Learned counsel for the Revenue contended that the Tribunal had jurisdiction to modify the order passed by the Commissioner so that only that part of the order of assessment passed by the Income-tax Officer which was not touched by the Appellate Assistant Commissioner, would be set aside. This aspect of the matter, however, as to whether, in the circumstances of the case, the Tribunal could or could not modify the order passed by the Commissioner does not arise out of the order passed by the Tribunal and a question in that behalf has not been referred to us. We, therefore, refrain from expressing any opinion in that behalf. The only question which arose before the Tribunal and which arises in this reference is whether, in the circumstances of the case, the Tribunal was right in holding that the Commissioner was not justified in setting aside the entire order of assessment passed by the Income-tax Officer in exercise of his revisional powers under Section 263 of the Act when the order of assessment passed by the Income-tax Officer was the subject-matter of an appeal before the Appellate Assistant Commissioner. In our opinion, on the facts and in the circumstances of this case, the Tribunal was justified in holding that the Commissioner was not competent to set aside the entire order of assessment passed by the Income-tax Officer.

    6. For the aforesaid reasons, our answer to the question framed by us is in the affirmative and in favour of the assessee.

    7. In the circumstances of the case, parties shall bear their own costs of the reference.

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    Comments

    Commissioner Of Income Tax v. K.L. Rajput
    (Oct 1, 1986)