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Alok Paper Industries Vs. Commissioner of Income-tax M.P. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case Number Miscellaneous Civil Case No. 142 of 1978
Reported in[1983]139ITR1064(MP)
AppellantAlok Paper Industries
RespondentCommissioner of Income-tax M.P.
Cases ReferredKarsandas Bhagwandas Patel v. G. V. Shah
Excerpt:
.....agony suffered by him - ' on behalf of the assessee, it was contended that the view of the gujarat high court, that there was no obligation on the aac to examine the correctness of every decision recorded by the ito in the process of assessment, was not well founded......show cause. the assessee pointed out to the commissioner that the order of the ito was the subject-matter of appeals before the aac and the tribunal, and hence, the order of the ito had merged in the order of the appellate authorities as a result of which the commissioner had no power to revise the order of the ito under s. 263 of the act. this contention was not upheld by the commissioner on the ground that the question of deduction allowable to to the assessee by way of interest was not the subject-matter for consideration before the aac or the tribunal. the commissioner, accordingly, set aside the order passed by the ito to the extent indicated in the order dated january 18, 1977, passed by the commissioner. aggrieved by the order passed by the commissioner, the assessee preferred an.....
Judgment:

SOHANI J. - By this reference under s. 256(1) of the I.T. Act, 1961, hereinafter referred to as 'the Act', the I.T. Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its opinion :

'Whether, once an appeal against the original assessment having been decided by the AAC and the ITAT, the order of assessment merges with the subsequent order passed in appeal and, therefore, the Commissioner is not competent to pass an order under s. 263 of the Income-tax Act enhancing or setting aside the assessment in a matter over which there was no controversy in the appeal ?'

The material facts giving rise to this reference, briefly, are as follows : The assessee is a firm carrying on business of a manufacture and sale of paper. While framing the assessment for the assessment year 1974-75, the ITO allowed a deduction of a sum of Rs. 1,24,217 paid by the assessee as interest. Certain other deductions claimed by the assessee were, however, not allowed by the ITO, and, hence, an appeal was preferred by the assessee before the AAC, which was partly allowed. A further appeal preferred by the assessee was partly allowed by the Tribunal. On scrutiny of the assessment record of the assessee for the assessment year 1974-75, the Commissioner noticed that during the accounting year, relevant to the assessment year 1974-75, one if the partners of the assessee-firm had overdrawn sums from out of the borrowed funds on which interest had been paid and that a part of the borrowed fund had thus been utilised for purposes other than that of business. The Commissioner was, therefore, of the opinion that in allowing deduction of the entire amount of Rs. 1,24,217 claimed to have been paid by the assessee by way of interest, the assessment order passed by the ITO appeared to be erroneous in so far as it was prejudicial to the interest of the Revenue. A notice under s. 263 of the Act was, accordingly, issued to the assessee to show cause. The assessee pointed out to the Commissioner that the order of the ITO was the subject-matter of appeals before the AAC and the Tribunal, and hence, the order of the ITO had merged in the order of the appellate authorities as a result of which the Commissioner had no power to revise the order of the ITO under s. 263 of the Act. This contention was not upheld by the Commissioner on the ground that the question of deduction allowable to to the assessee by way of interest was not the subject-matter for consideration before the AAC or the Tribunal. The Commissioner, accordingly, set aside the order passed by the ITO to the extent indicated in the order dated January 18, 1977, passed by the Commissioner. Aggrieved by the order passed by the Commissioner, the assessee preferred an appeal before the Tribunal. The Tribunal held that the order of the ITO, in respect of allowance of interest on the overdrawings by a partner of the assessee-firm, did not merge in the orders of the AAC and the Tribunal, as, that matter was never the subject-matter of appeal before the AAC and the Tribunal. Aggrieved by the order passed by the Tribunal, the assessee submitted an application for making a reference to this court and that is how, at the instance of the assessee, the aforesaid question of law has been referred to this court for its opinion.

Shri Chaphekar, learned counsel for the assessee, contended that the assessee having preferred an appeal before the AAC, the assessment itself became the subject-matter of appeal. It was urged that in view of the scope and nature of the powers conferred on the AAC by s. 25(1)(a) of the Act, the entire subject-matter of the assessment order was within the jurisdiction of the AAC, and that being so, the entire assessment order merged in the appellate order irrespective of the points urged by the parties or decided by the appellate order irrespective of the points urged by the parties or decided by the appellate authority. It was, therefore, contended that the Commissioner had no jurisdiction under s. 263 of the Act to revise the order passed by the appellate authority. Reliance was mainly placed on the decision in J. K. Synthetics Ltd. v. ITO : [1963]47ITR895(MP) and Kalooram Tirasilal v. Addi. CIT : [1976]105ITR344(All) . Learned counse l for the assessee further contended that the Tribunal erred in holding that the matter was concluded by the decisions of this court in Central Indian Insurance Co. Ltd. v. ITO : [1963]47ITR895(MP) and Kadooram Tirasilall v. ITO [1966] ITR 308.

In reply, Shri Bagadiya, learned counsel for the Department, submitted that the order of the ITO relating to allowance of interest was not the subject-matter of appeal before the appellate authority and that part of the order passed by the ITO was in fact left untouched by the appellate authority and, hence, it did not merge in the order of the AAC or the Tribunal. Relying upon the decision in Karsandas Bhagwandas Patel v. G. V. Shah, ITO : [1975]98ITR255(Guj) , learned counsel for the Department contended that the Commissioner had jurisdiction under s. 263 if the Act to revise that part of the order of assessment which was not the subject-matter of appeal before the AAC.

The real question for consideration in the case is whether the Tribunal was justified in holding that the order passed by the ITO in respect of the allowance of interest did not merge in the order passed by the AAC. The question framed by the Tribunal does not, in out opinion, bring out the real issue which arose before the Tribunal for consideration and we have, therefore, reframed the question as follows :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the order of the Income-tax Officer in respect of the allowance of interest it the assessee did not merge in the orders of Appellate Assistant Commissioner and the Tribunal passed in appeal preferred by the assessee ?'

Now, it is true that the aforesaid question arising in this case has not been decided by this court in Central Indian Insurance Co. Ltd., ITO : [1963]47ITR895(MP) , Kalooram Tirasilal v. ITO : [1966]59ITR308(MP) , as observed by the Tribunal. In Central Indian Insurance Co. Ltd. v. ITO, the question for consideration was whether the AAC had no power to rectify the order of his predecessor after it had merged in the order passed by the Tribunal in the further appeal preferred by the assessee. Learned counsel for the assessee rightly pointed out that in the case of an appeal before the Tribunal, the powers of the Tribunal were not as wide as that of an AAC under s. 25(1)(a) of the Act, and in that view of the matter, if the decision of the AAC on any particular point was not the subject-matter of appeal before the Tribunal and was not actually considered in appeal, the decision of the AAC on that point could not be held to have merged in the order of the Tribunal. The observation in Kalooram Tirasilal v. ITO : [1966]59ITR308(MP) that the question, as to whether the ITOs jurisdiction of rectify the mistake is taken away when the AAC has passed an order in an appeal preferred before him by the assessee, is concluded by the decision of this court in Central Indian Insurance Co. Ltd. v. ITO : [1963]47ITR895(MP) , is, with respect, slightly inaccurate. The question which arose for consideration in Central Indian Insurance Co. Ltd. v. ITO was, as already pointed out, different. The decision in Central Indian Insurance Co. Ltd. v. ITO is, therefore, distinguishable and is not attracted in the instant case. But we had occasion to consider the question arising in this case in Jaora Sugar Mills Ltd. v. Union of India (M.P. No. 55 of 1978 decided on October 12, 1979 (reported in : [1982]134ITR385(MP) ). The facts of that case were that while framing an assessment, the ITO had allowed a rebate of Rs. 3,98,290. In the appeal preferred by the assessee before the AAC, the claim for rebate made by the petitioner and allowed by the ITO was not the subject-matter of the appeal and hence, was not considered by the AAC. Subsequently, the Commissioner, in exercise of the powers under s. 263 if the Act, set aside the order of assessment passed by the ITO with regard to the claim of the assessee for the amount of rebate. The petitioner challenged the order of the Commissioner before this court contending that the Commissioner had no jurisdiction to proceed under s. 263 of the Act and to revise the order of assessment passed by the ITO, because the order of assessment passed by the ITO had merged in the order passed by the AAC in the appeal preferred by the assessee. This contention was not upheld by us relying on the following observations of the Supreme Court in State of Madras v. Madurai Mills Co. Ltd. : [1967]1SCR732 :

'But the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior Tribunal and the other by a superior Tribunal, passed in an appeal or revision, there is a fusion or merger of two orders, irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision as contemplated by the particular statute. In our opinion, the application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction. For example, in Amritlal Bhogilal and Co.s case : [1958]34ITR130(SC) , it was observed by this court that order of registration made by the Income-tax Officer did not merge in the appellate order of the Appellate Commissioner, because the order of registration was not the subject-matter of appeal before the appellate authority. It should be noticed that the order of assessment made by the Income-tax Officer in that case was a composite order, viz., an order granting registration of the firm and making an assessment on the basis of the registration. The appeal was taken by the assessee to the Appellate Commissioner against the composite order of the Income-tax Officer. It was held by the High Court that the order of the Income-tax Officer granting registration to the respondent must be deemed to be merged in the appellate order and that the revisional power of the Commissioner cannot, therefore, be exercised in respect of it. The view taken by the High Court was overruled by this court for the reason that the order of the Income-tax Officer granting registration cannot be deemed to have merged in the order of the Appellate Commissioner in an appeal taken against the composite order of assessment. Similarly, in State of Uttar Pradesh v. Mohammad Nooh : [1958]1SCR595 , it was held by this court, that the principle of merger cannot apply in the case of an order of dismissal of a public servant which was made by the departmental Tribunal on April 20, 1948, and against which the appeal was dismissed by the appellate authority on May 7, 1949, and the revisional application was rejected on April 22, 1950. In the circumstances of the present case, it cannot be said that there was a merger of the order of assessment made by the Deputy Commercial Tax Officer dated November 28, 1952, with the order of the Deputy Commissioner of Commercial Taxes dated August 26, 1954, because the question of exemption of the value of yarn purchased from outside the State of Madras was not the subject-matter of the revision before the Deputy Commissioner of Commercial Taxes.'

Our decision in the Jaora Sugar Mills Ltd. v. Union of India (M.P. No. 55 of 1978 : [1982]134ITR385(MP) has not been shown to be overruled by the Supreme Court or by a larger Bench of this court. Learned counsel for the assessee, however, contended that in M.P. No. 55 of 1978, it was conceded on behalf of the assessee that the claim for rebate allowed by the ITO was not the subject-matter of appeal and it was on that basis that this court proceeded to consider the question. It was urged that as the decision in M.P. No. 55 of 1978, proceeded on a concession made by the assessee in that case, that decision was not attracted in the instant case. Learned counsel for the assessee further urged that the decision in M.P. No. 55 of 1978, required reconsideration, because the scope of the provisions of s. 251(1)(a) of the Act was not considered in that decision.

We may, in this connection, usefully refer to the decision of the Gujarat High Court in Karsandas Bhagwandas Patel v. G. V. Shah, ITO : [1975]98ITR255(Guj) . In that case, the order of assessment was rectified by the ITO and the order of rectification was assailed on the ground that the order of assessment passed by the ITO had merged in the order of the AAC in appeal and, hence, the ITO had no jurisdiction to rectify the order of assessment. The contention advanced on behalf of the assessee was that when an appeal was preferred against an order of assessment passed by the ITO and the appeal was disposed of by the AAC, the order of assessment made by the ITO merged in the order of the AAC not only in respect of items considered and decoded by the AAC but in respect of all items arising out of the order of assessment. Dealing with this contentions, it was observed as follows (p. 262) :

'The Appellate Assistant Commissioner may, therefore, examine the correctness of the decision of the Income-tax Officer in regard to a particular item even if it does not form the subject-matter of the appeal preferred by the assessee. Now, obviously, if the Appellate Assistant Commissioner does so, his decision in regard to that particular item would supersede or replace that of the Income-tax Officer, irrespective of whether it be a decision of affirmance or variation or reversal. But the question is : what would be the position if no grievance is made by an assessee in respect of a particular item, whether originally in the memorandum of appeal or with leave granted under section 31, sub-section (2A), and the Appellate Assistant Commissioner also does not choose to consider that particular item suo motu There would not, in such a case, be any decision of the Appellate Assistant Commissioner in regard to that particular item. Then how can it be said that the decision of the Income-tax Officer is superseded or replaced by the decision of the Appellate assistant Commissioner is far as that particular item is concerned It is true that the Appellate Assistant Commissioner could, suo motu, revise the decision of the Income-tax Officer in regard to that particular item but so long as he does not do so, the decision of Income-tax Officer stands and there is no merger of fusion of it with the decision of the superior authority. If the Appellate Assistant Commissioner were under an obligation to examine the correctness of every decision recorded by the Income-tax Officer in the process of assessment, it might be possible to contend that when the Appellate Assistant Commissioner does not say anything about a particular decision recorded by the Income-tax Officer, he may be presumed to have assented to it and an inference of implied affirmance may be raised, but it cannot be disputed that, though the Appellate Assistant Commissioner has undoubted power to revise any decision of the Income-tax Officer suo motu, there is no obligation on him to do so and in the absence of such obligation, there can be no scope for the application of the doctrine of implied decision.'

On behalf of the assessee, it was contended that the view of the Gujarat High Court, that there was no obligation on the AAC to examine the correctness of every decision recorded by the ITO in the process of assessment, was not well founded. It has, however, to be borne in mind that, as observed in Karsandas Bhagwandas Patel v. G. V. Shah, ITO : [1975]98ITR255(Guj) for the purpose of determining the applicability of the principle of merger, the test which has to be applied is whether the decision of the ITO on a particular point was the subject-matter of appeal before the AAC. It might not have been the subject-matter of appeal either because the AAC had no jurisdiction to consider that matter or because the AAC though having jurisdiction to examine that subject-matter did not do so, but in either case there being no decision of the AAC on the point, the decision of the ITO remains untouched. This question was also considered from a slightly different angle in Karsandas Bhagwandas Patel v. G. V. Shah, ITO : [1975]98ITR255(Guj) , where is was observed as follows (p. 264) :

'We may also consider the question from a slightly different stand-point. If the order of assessment made by Income-tax Officer merges wholly in the order of the Appellate Assistant Commissioner whenever there is an appeal, irrespective of what matters are considered and decided by the Appellate Assistant Commissioner, the order of the Appellate Assistant Commissioner, would not only comprise decisions reached by the Appellate Assistant Commissioner on matters raised in appeal by the assessee or considered suo motu by the Appellate Assistant Commissioner by would also incorporate by necessary implication the decisions recorded by the Income-tax Officer in respect of other matters not considered and decided by the Appellate Assistant Commissioner. Every decision recorded by the Income-tax Officer in making assessment, though not forming the subject-matter of consideration and decision by the Appellate Assistant Commissioner, would by reason of merger, be deemed to become a part of the order of the Appellate Assistant Commissioner and if the assessee is unhappy about it, he would be entitled to object to it by preferring an appeal to the Tribunal, even though he has not challenged it in the appeal to the Appellate Assistant Commissioner. The Revenue also would be entitled to object to such decision by preferring an appeal to Tribunal even though it has not invited the Appellate Assistant Commissioner to revise it suo motu in the appeal preferred by the assessee. That would be contrary to the basic scheme of the Income-tax Act...'

We respectfully agree with the aforesaid observations.

The decision of the Allahabad High Court in J.K. Synthetics Ltd. v.Addl. CIT : [1976]105ITR344(All) , on which reliance was placed by the learned counsel for the assessee, no doubt lays down that once an appeal is taken and decided, the original order merges in the appellate order which us operative and enforceable. That decision, with respect, does not take into account the fact that if the AAC had no occasion at all to consider a particular point as it was not raised before him, the AAC could not be held to have decided that point either expressly or impliedly and no question of merger would arise in such a case. Having given our anxious consideration to the matter, we see no reason to take a view different from that taken by us in M.P. No. 55 of 1978.

For all these reasons, the answer to the question framed by us is in the affirmative and against the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.


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