1. In the assessment proceedings for the assessment year 1952-53, the ITO made an order on November 23, 1956, determining the total income of the assessee at Rs. 26,72,720. While computing the tax payable by the assessee, the ITO gave a rebate of Rs. 78,372 in accordance with cl.(i) of the proviso to para. 3 of Pt. I of the First Schedule to the Finance Act, 1951, which reads as follow :
'Where the total income, as reduced by seven annas in the rupee and by the amount, if any, exempt from income-tax exceeds the amount of any dividends (including dividends payable at a fixed rate) declared in respect of the whole or part of the previous year for the assessment for the year ending on March 31, 1952, and no order has been made under subsection (1) of section 23A of the Income-tax Act, a rebate shall be allowed at the rate of on the amount of such excess.'
2. In order to qualify for the rebate permitted to be given by the clause reproduced above, one of the conditions which was required to be satisfied by the assessee-company was that no order should have been made under s. 23A of the India I.T. Act, 1922. In the case of the assessee, admittedly, even though the amount of dividends declared by the assessee was only Rs. 2,40,000, on November 23, 1956, there was no order made in respect of the assessee-company under s. 23A(1). The assessee having thus qualifies for the rebate contemplated by clause (i) of the proviso to para. 3 of Pt. I of the First Schedule of the Finance Act, 1951, the ITO found that the undistributed surplus after reducing the total income by 7 annas in a rupee and the amount of dividends declared as also the sums spent for charity was Rs. 12,53,405 on which rebate of Rs. 78,337 was given at the rate of one anna in the rupee.
3. The assessee had filed an appeal before the AAC under s. 30 of the Indian I.T. Act, 1922, but the appeal was restricted only to certain matters which related to fine levied on the company under the textile control order, bonus, gratuity, income-tax paid for non-resident shareholders, legal expenses, conveyance, travelling and s. 18A interest. The AAC decided the appeal on January 10, 1961, and gave relief to the order of the AAC recomputed the tax on income as reduced in appeal. Even while giving effect to the order of the AAC, the ITO allowed the rebate of one anna in a rupee though, as a result of the appellate order, the undistributed surplus came to Rs. 9,19,067. The rebate now worked out to Rs, 57,441.
4. It appears that the ITO then decided to proceed against the assessee under s. 23A(1) if the Indian I.T. Act, 1922, and on September 16, 1964, informed the assessee by a letter that he was going to take action under s. 23A. In spite of the assessee objecting to the action proposed by the ITO, the ITO proceeded to make an ordef under s. 23A February 26, 1965. The object of the ITO in making an order under s. 23A was not, according to the ITO, to assess deemed dividends in the hands of the shareholders but to withdraw the rebate given to the assessee-company. Thereafter, on March 8, 1965, the ITO proceeded to rectify his order dated March 10, 1961. The rectification was purported to be made under s. 154 of the I.T. Act, 1961.
5.The assessee challenged the action of the ITO withdrawing the rebate, by an appeal before the AAC mainly on the ground of limitation because according to the assessee, the period of four years referred to in s. 154(7) has to be computed not from the second order of the ITO dated March 10, 1961, but from the first order dated November 23, 1956. The AAC, however, took the view that the order of the ITO dated November 23, 1956, got merged in the order dated March 10, 1961, and that the prescribed period of limitation of four years had to be reckoned from March 10, 1961. The AAC having dismissed the appeal filed by the assessee the assessee carried a second appeal to the Income-tax Appellate Tribunal. The Tribunal took the view that since the assessee had agitated the correctness of the order of the ITU only on certain points before the AAC and the AAC had not touched that part of the order of the ITO by which the assessee was granted a rebate which was sought to be withdrawn, the ITO's order giving rebate of income-tax cannot be said to have merged with the order of the AAC. The Tribunal found that the ITO had not made any mistake in computing the tax while giving effect to the reductions ordered by the AAC and if he had made any mistakes, then only be could have rectified the order dated March 10, 1961. The Tribunal took the view that if at all any mistake was committed when the original order of assessment was passed in 1956 when the ITO gave the rebate under the Finance Act the right to rectify that mistake had lapsed after four years. In other words, the Tribunal had taken the view that the period of four years had to be computed from November 23, 1956, and consequently the rectification order made on March 8, 1966, was made beyond limitation and was, therefore, no valid. The rectification order was, therefore, cancelled by the Appellate Tribunal.
6. On this order of the Tribunal, the following question has been referred to this court under s. 256(1) of the I.T. Act, 1961, at the instance of the revenue :
'Whether, on the facts and in the circumstances of the case, the order under section 154 of the Act passed by the Income-tax Officer on March 8, 1965, was valid ?'
7. Mr, Joshi on behalf of the revenue has contended that the order which was sought to be rectified by the ITO in the exercise of his jurisdiction under s. 154 was the order dated March 10, 1961, because, according to him, once the AAC had exercised his appellate jurisdiction, the first order of assessment dated November 23, 1956, has ceased to survive. That order, according to the learned counsel, had really merged in the order of the AAC dated January 10, 1961.
8. It is not possible for us to accept this contention, the power to rectify a mistake in an order of assessment or of refund or any other order passed by the ITO is given to the ITO by s. 154(1) of the I.T. Act, 1962. This power is, however, circumscribed by the provisions of s. 154(7) of the Act and has to be exercised before the expiry of four years from the date of the order sought to be amended. Sub-section (7) of s. 154 reads as follows :
'Save as otherwise provided in section 155 or sub-section (4) of section 186 no amendment under this section shall be made after the expiry of four years from the date of the order sought to be amended.'
9. The provisions of s. 155 or s. 186(4) ars not relevant for the purposes of the present case. The question which arises is, from which date the period of four years referred to in sub-s. (7) of s. 154 has to be computed, such computation has to be made under sub-s. (7) 'from the date of the order sought to be amended'. According to the ITO, he was amending the order dated March 10, 1961, while according to the assessee, the amendment was sought to be made of an order dated November 23, 1956. The argument on behalf of the revenue that the ITO while withdrawing the rebate was exercising his power of rectification in respect of the order dated March 10, 1961, is based on the theory of merger because what is contended is that after the assessee had filed his appeal before the AAC, the order dated November 23, 1956, ceased to have any independent existence and that it had merged into the order of the AAC dated January 10, 1961. The direction given by the AAC in his order dated January 10, 1961, were given effect to by the order of the ITO dated March 10, 1961. It is, therefore, contended that the only order of the ITO which can be said to be operative is the order dated March 10, 1961, and consequently since the order of rectification has been passed on March 8, 1965, it is passed within the prescribed period of four years from March 10, 1961.
10. The argument raised on behalf of the revenue necessitates a consideration of the basic question as to whether the theory of merger which contemplated the merger of an order of a subordinate authority into the order of a higher authority which may be existing appellate or revisional jurisdiction can be made wholly applicable in the case of orders governed by the provisions of the I.T. Act. If it is possible to hold that the order dared November 23, 1956, had merged wholly in the order of the AAC, them obviously the rectification order made on March 8, 1965, would be within the prescribed period of four years counted from March 10, 1961, on which day the ITO passed his consequential order giving effect to the direction made by the AAC. But if the theory of merger does not apply fully to orders under the I.T. Act and that part of the order which granted rebate to the assessee continued to be operative independently of the order of the AAC, them it would be difficult to accept the contention of the revenue that what was being rectified was the order dated March 10, 1961, and not the order dated November 23, 1956.
11. The doctrine of merger is not a doctrine which applies universally in all cases where the orders of a subordinate authority are subjected to appellate to revisional jurisdiction of higher authorities or Tribunals. Whether an order of a subordinate authority has merged partially or wholly into the orders to the superior appellate or revisional authority will have to be decided on the relevant provisions dealing with the appellate jurisdiction or revisional jurisdiction of the superior authority under the relevant enactment.
12. Dealing with the doctrine of merger and its scope and applicability, the Supreme Court in State of Madras v. Madurai Mills Co. Ltd. : 1SCR732 , has observed as follows :
'But the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that whatever there are two orders, one by the inferior Tribunal and the other by a superior Tribunal, passes in an appeal or revision, there is a fusion or merger of two orders irrespective of the subject-matter of the appellate of revisional order and the scope of the appeal or revision contemplated by the particular statute. In our opinion, the application of the doctrine depends on the mature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction.'
13. In order to decide whether an order passed by the ITO gets merged wholly into the order of the AAC passed in appeal against the order of the ITO, it is necessary to refer to the relevant provision dealing with the appellate jurisdiction of the AAC. The order of the ITO in the instant case was made on November 23, 1956. We are, therefore, concerned with the provisions of the Indian I.T. Act, 1922, and the appeal filed by the assessee, was under s. 30 of that Act. An order of assessment made under s. 23 of the Indian I.T. Act, 1922, is made appealable under s. 30 of that Act and the appeal is to be filed before the AAC. We are not concerned with the other provision of s. 30 Which deal with the manner of and limitation for filing such an appeal. The power of the AAC and the procedure which he is required to follow are given in s. 31. Sub-section (3) of s. 31. In so far as it is relevant, reads as follows :
'In disposing of an appeal the Appellate Assistant Commissioner may, in the case of an order of assessment, -
(a) confirm, reduce, enhance or annual the assessment, or (b) set aside the assessment and direct the Income-tax Officer to make a fresh assessment after making such further inquiry as the Income-tax Officer thinks fit to the Appellate Commissioner may direct, and the Income-tax Officer shall thereupon proceed to make such fresh assessment and determine where necessary to amount of tax payable on the basis of such fresh assessment......
Provided that the Appellate Assistant Commissioner shall not enhance an assessment or a penalty unless the appellant has had a reasonable opportunity of showing cause against such enhancement.....'
14. The powers which the AAC exercises are not merely appellate powers which a normal appellate authority exercise because normally an appellate authority is called upon to deal with the grievance of the appellate which he makes is respect of the order passed by the subordinate authority. In addition to the general powers which an appellate authority possesses, that is, either confirming modifying or setting aside an order which in the case of an assessment has been described as the power to confirm, reduce or annual the assessment, the AAC has also been given the power to enhance the assessment. This power to enhance the assessment is, however, made subject to the proviso that the appellate should be given a reasonable opportunity of showing cause against such enhancement. Thus, under sub-s. (3) of s. 31, apart from dealing with the grievance which has been made by an assessee against the order of the ITO, the AAC can go further and look into the correctness of the order of assessment made by the ITO and if the AAC is satisfied that there was a case for enhancing the assessment he can make an order enhancing the assessment, Thus, if the AAC's satisfied that the ITO has granted either excessive relief or the assessment of income and tax is in any way erroneous, he has the power to make on order enhancing the assessment while deciding the appeal filed by the assessee. In that sense, it is possible to say that the entire assessment proceedings are open before the AAC. It is common knowledge that while making as assessment and bringing the income of the assessee to tax, the ITO has to deal with several contentions made by the assessee for determining the taxable income and the tax payable having regard to the several provisions of the I.T. Act. It is only in respect of claims with regard it which the ITO passes an order adverse to the assessee that the assessee goes in appeal to the AAC. If the assessee is satisfied with a part of the assessment order, he does not make that part a subject of appeal. It is thus open to the AAC deals with the appeal, it is mainly that part of the order of the ITO which has been challenged by the assessee which is dealt with by the AAC. The exercise of his appellate jurisdiction is normally limited to the grievance made by the assessee unless of course the AAC choose to exercise his power of enhancing the assessment, it the AAC disposes of the appeal and deals with the grievance made by the assessee and confirms the assessment, nothing more is required to be done further by the ITO after the order of the AAC. But if the ACC, while disposing of the appeal, reduces the assessment, then the ITO has to give effect to the directions of the AAC. These directions are restricted to the order made by the AAC because a part of the assessment has not been made the subject of appeal by the assessee, in a given case, if the AAC wishes to enhance the assessment, even though the assessee has not made any part of the assessment order the subject of appeal, in view of the special provisions in s. 31(3), it is permissible for him to interfere with that part of the order of the ITO. The scheme of the provision of s. 31(3) is, however, clear that the assessee is entitled to challenge a part of the assessment order by which he feels aggrieved and where the AAC does not decide to scrutinise the remaining part or any other aspect of the assessment. Which has not been made the subject of appeal, the AAC is not called upon to deal with that part made the subject of appeal the AAC is not called upon to deal with that part of the assessment order. Only that part of the order of the ITO is, therefore, affected by the order of the AAC in respect of which the AAC has exercised his appellate jurisdiction which may consist of confirming, reducing, enhancing or annulling the assessment. If the AAC has not been called upon or has not actually dealt with any part of the assessment order made by the ITO. There is no question of that part of the order merging or being superseded by the order of the AAC. The effect of s. 31(3), therefore, appears to us, having regard to the provisions of the I.T. Act, to be that only that part of the order of the ITO merges or stands superseded by the order of the AAC in respect of which the AAC has exercised his appellate jurisdiction. So far as the remaining part of the order of assessment is concerned to have its independent existence unaffected by the AAC. The doctrine of merger, therefore is not wholly applicable in the case of such orders made the I.T. Act.
15. It is important to noticed another aspect of the provisions relating to rectification of mistakes, the provisions of s. 35 of the Indian I.T. Act, 1922, and the corresponding provisions of s. 154 of the I.T. Act, 1961, give a power of rectification to the Commissioner, the AAC and the ITO only in respect of the orders passed by them. The ITO can exercise his power of rectification in respect of the order made by him. The AAC can exercise the powers of rectification only in respect of the orders made by him, when the statute has given powers of rectification to the ITO in respect of his own order, the position is that he is able to rectify his own order within the prescribed period if the whole of the order or a part of the order has not been subjected to appeal. If the theory of merger is accepted as being attracted wholly, the provision relating to rectification of mistake by the ITO in a case where even a part of the assessment order is made the subject of appeal is likely to become nugatory. It, therefore, clearly appears to us that the provisions of the I.T. Act contemplates that in a case where an assessment is made the subject of an appeal, the assessment orders made by the ITO do not wholly merge with the orders of the appellate authority but that the merger would take place only in respect of that part of the order in respect of which the AAC has exercised his appellate jurisdiction.
16. We are supported in the view which we have taken by a decision of the Gujarat Court in Karsandas Bhagwandas Patel. v. G. V. Shah, ITO : 98ITR255(Guj) . The Gujarat High Court has in that case taken the view that the order of assessment made by the ITO mergers in the order of the AAC only so far as it relates to items considered and decided by the AAC and that part of the order of assessment which relates to items not forming the subject-matter of the appellate order is left untouched and does not merge in the order of the AAC. This decision was followed by the same court later in Poonjabhai Vanmalidas v. WTO : 114ITR38(Guj) . That was no doubt a case arising out of an assessment under the W.T. Act. After referring to the provisions of s. 23(5A) of the W.T. Act, 1957, the Division Bench has pointed out that while disposing of the appeal under s. 23 of the W.T. Act, the entire assessment is before the AAC and he has the power, if he chooses, to examine any particular decision of the ITO and to correct it if he finds it wrong, but there is no obligation on him to do so, it was pointed out that it is only that part of the order of assessment which consists of decisions reviewed by the AAC, that is, considered and examined by him irrespective of whether ultimately affirmed, modified or reversed that is superseded by the order of the AAC and it is only in respect of points which were touched by the AAC that it can be said that the AAC's order and the consequential order necessitated by the AAC's order will be the orders that can be subsequently considered for rectification proceeding from the date of those orders. It was expressly pointed out in that case that in so far as the AAC has not dealt with or touched the points which were originally decided by the WTO, it is the date of the original order of assessment by the WTO that will be the starting point for limitation for rectification thereof. It may be pointed out that the provisions of s. 35(7) of the W.T. Act are analogous to the provisions of s. 35 of the Indian I.T. Act, 1922, and s. 154 of the I.T. Act, 1961.
17. The is no doubt that a contrary view has been taken by the Allahabad High court in J. K. Synthetics Ltd. v. Addl. CIT : 105ITR344(All) , where a Division Bench of that court has taken the view, referring to the provisions of s. 251 of the I.T. Act, 1961, 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 that is effective and can be enforced even if the appellate decision has merely confirmed the decision of the Tribunal. Thus, if there is in lab confirmation or affirmation of the decision, it mergers in the appellate order, the learned judges of the Allahabad High Court have dissented from the view taken by the Gujarat High Court in Karsandas Bhagwandas Patel v. G. V. Shah, ITO : 98ITR255(Guj) , and have declined to accept the distinction drawn by the Gujarat High Court between a part of the assessment order which is made the subject of appeal and the order part in respect of which the AAC has not exercised his jurisdiction. We are unable to agree with the view taken by the Allahabad High court because, as already pointed out earlier, the distinction between apart of the assessment order not subjected to appeal and the part in respect of which the appellate jurisdiction hab been exercised is an important distinction having regard to the fact that the ITO is called upon to decide several contentions of the assessee when he goes into the question of determining the taxable income of the assessee.
18. We are, therefore, of the view that in so far as the grant of rebate to the assessee was concerned. The order of the ITO dated November 23, 1956, was not in any way affected by the order of the AAC dated January 10, 1961. That part of the order of the ITO remained intact. It continued to have an independent existence. It had not merged with the order of the AAC. Any rectification made in respect of that part of the order was required to be made within four years from November 23, 1956. The limitation for exercising powers of rectification under s. 154 could not, therefore, commence from March 10, 1961, when the ITO made an order which was restricted only to carrying out the directions given by the AAC. It is obvious, therefore, that the rectification order made on March 8, 1965, was clearly beyond a period of four years provided by s. 154(7) of the I.T. Act, 1961.
19. The Tribunal was, therefore, right in setting aside order of the ITO dated March 8, 1965. In the view which we have taken, the question referred to us must be answered in the negative and in favour of the assessee, revenue to pay costs of this reference.