1. The assessee is a private limited company carrying on business of processing marine products and exporting them to foreign countries. It claimed weighted deduction under Section 35B of the Income-tax Act, 1961 ('the Act') to the extent of Rs. 2,08,196, which included ocean freight of Rs. 2,05,266 incurred for carriage of goods towards their destination outside India. In the course of the assessment proceedings, the ITQ allowed the assessee's claim. No doubt he allowed the same on the basis of proportionate turnover. The order of the ITO is dated 20-9-1978.
2. The Commissioner on perusal of the records felt that the order of the ITO is erroneous in so far as it is prejudicial to the interests of the revenue as according to him weighted deduction in respect of ocean freight was wrongly allowed by the ITO and that the ITO adopted a higher percentage in allocating the deduction in respect of other items. Accordingly, the Commissioner initiated proceedings under Section 263 of the Act. The assessee raised several objections but all of them have been overruled. The Commissioner set aside the assessment and directed the ITO to pass a fresh order in regard to the allowance of weighted deduction but, however, holding that the assessee is not entitled to the weighted deduction in respect of ocean freight.
3. The order of the Commissioner is in appeal. One of the grounds raised is that since the assessment was made in accordance with the directions of the IAC under Section 144B of the Act the Commissioner has no jurisdiction to revise such an assessment. This point has arisen in a number of appeals in the country. Since it was considered to be important and repetitive and since there is also conflict of views expressed by different Benches, the President of the Tribunal was pleased to constitute a Special Bench to decide the matter. Having learnt about the hearing by the Special Bench several assessees whose appeals are pending before the different Benches of the Tribunal, came as interveners as similar point is involved in their appeals. That is how we had the benefit of hearing not only the counsel of the appellant, Shri Ramachandran, but also other counsels appearing for other assessees, who appeared before us as interveners.
1. The ITO's order is in fact and in law, the order passed by the IAC. 2. The IAC having directed the ITO to pass appropriate orders, the ITO's order merged with the order of the IAC. 3. Harmonious construction requires that when the IAC exercises judicial functions giving directions, revisional powers of the Commissioner cannot be exercised as otherwise it would lead to conflict of jurisdiction.
Mr. Ramachandran also referred to the provisions of Section 28(1)(c) of the 1922 Act, which contemplated approval of the AAC in regard to the levy of penalty. He made reference to the following decisions in support of his propositions: Ramlal Kishore Lal v. CIT  84 ITR 138 (All.), CIT v. Christian Mica Industries Ltd.  120 ITR 627 (Cal), Esthuri Aswanthiah v. CIT  3 SCR 681 and Nuruddin & Brothers v. CIT  116 ITR 704 (Cal).).
Mr. Ramachandran also in his appeal has taken up another point, which is unconnected with the above point and that is that since the assessee filed an appeal before the Commissioner (Appeals) against the assessment, the order of the ITO got merged with the order of the appellate authority and therefore the Commissioner cannot exercise his revisional powers under Section 263. He no doubt also argued on merits regarding weighted . deduction.
5. Mr. Anjaneyulu for one of the interveners apart from adopting the arguments of Mr. Ramachandran, took up an altogether different line of approach. He pointed out that there cannot be any error in the order of the ITO when he followed the directions of the IAC under Section 144B(iv) since the jurisdiction of the Commissioner can be exercised only when the order of the ITO is erroneous in so far as it is prejudicial to the interests of the revenue. In other words he laid stress on the point that the order of the ITO cannot be said to be erroneous when he follows the order of the IAC which he is bound to follow in view of the language of Section 144B. In fact this argument is advanced to support the broader proposition that the Commissioner cannot revise an order of the ITO when the ITO follows the directions of the IAC.6. Mr. Swaminathan for another assessee also endorsed the arguments advanced by his predecessors. He, however, wanted us to take into account the scope of the revisional jurisdiction under Section 263 bearing in mind the scheme of the Act especially with reference to Sections 264, 123 and 144A. According to him Section 144B is a sort of mini-appeal conferring revisional jurisdiction prior to the passing of the final order. He called it an appeal preponed. In this connection he referred to the memorandum explaining the introduction of Section 144B in the Parliament. Mr. Swaminathan further stated that once the IAC exercises power under Section 144B(iv), the revisional power gets exhausted. He also relied on the decision of the Supreme Court in 48 STC 375. He further referred to the explanatory note to the Finance (No. 2) Bill, 1977 whereby creation of new appellate authority, namely, the Commissioner (Appeals), was contemplated.
7. Mr. Abrol for an assessee in Srinagar apart from adopting the earlier arguments further took us to the meaning of the word 'directions' and pointed out that the word 'directions' is used synonymous with the word 'orders' in various Sections of the Act.
Therefore, he pointed out that the directions contemplated under Section 144B(iv) would amount to an order by the IAC and therefore it cannot be revised by the Commissioner. He then referred to the provisions of Section 246(1)(a) of the Act which speaks of orders while various Sections mentioned therein speak of directions. He further contended that it is not enough that we should see the order as if it is passed by the ITO merely because he is the signatory to that order.
We must go beyond that to find out whose order is exactly that. He gave the instance of an order giving effect to an appellate order. Though the order giving effect to the appellate order is held to be appealable as if it is an order of assessment, the Commissioner cannot revise it on the ground that it is an order passed by the ITO. His only power is to find out whether in giving effect to the order of the appellate authority, the ITO acted correctly. Mr. Abrol argued that in finding out the jurisdiction of the Commissioner under Section 263, one has therefore naturally to go behind the order. Similarly in a case where the IAC gives directions which are to be followed by the ITO, one has to see whose order is actually this to find out whether the Commissioner has jurisdiction. According to Mr. Abrol, the ITO is merely authenticating the orders of the IAC. He referred to some of the observations contained in the case of Dwarkadas & Co. (P.) Ltd. v. ITO  1 ITD 303(Bom.)(SB).
8. Mr. Raghavendra counsel for another assessee from Coimbatore did not make any fresh arguments and he adopted the arguments of his learned friends already made. He has made reference to the decision of the Tribunal in the case of Bela Singh Pabla v. ITO  1 1TD 370 (DelhiXXSB).
9. Before adverting to the arguments of the learned standing counsel, Shri M. Suryanarayanamurthy, it may be necessary to point out that it is common ground that the IAC is not subordinate to the Commissioner in order that bis orders are subject to the revisional jurisdiction of the Commissioner. This is apart from the language of Section 263 which speaks of revision of orders of the ITO. Section 264 is differently worded and an IAC is deemed to be a subordinate only for the purpose of that section.
10. The learned standing counsel replied that the fact that Section 144B comes into play if the conditions therein are fulfilled does not mean that the assessment is not made under Section 143(3) by the ITO.The ITO alone will be dealing with the assessment and he is the person to complete it, no doubt he gets the guidance from the IAC in accordance with the provisions of Section 144B(4) but they are only for guidance and nothing else. The assessment is to be made by the ITO only and that the provisions of Section 144B are merely procedural and they form a part in the assessment-making process. Section 144B does not curtail the power of the ITO to pass an assessment order. This is the sum and substance of his arguments. He further referred to Section 263 and laid stress on the word 'proceedings'. The 'proceedings' according to him are conducted by the IAC partly and the other part is by the ITO culminating in the final order of assessment. The learned standing counsel stated that the IAC is only taking part in the proceedings and nothing alse. He also referred to Section 246(2)(b) and (f). He brought to our notice the decision in the case of H.H. Maharaja Raja Power Dew as v. CIT  138 ITR 518 (MP). Mr. M. Suryanarayanamurthy also contended that following the directions of the IAC by an ITO would not detract from the real character of the assessment which is by the ITO himself. He relied on CIT v. R.S. Banwarilal  140 ITR 3 (MP) (FB) and Sivalal Sogaiji, In re.  140 ITR 39 (AP). In regard to merger the learned standing counsel submitted that there can be merger only of an inferior Tribunal's order with a superior Tribunal's order and in this case it is the reverse and in such a situation there cannot be a merger. On the second contention raised by Mr. Ramachandran in the present appeal the learned departmental representative referred to the decision in the case of CIT v. Eldee Wire Ropes Ltd.  114 ITR 485 (Bom.) and contended that there cannot be a merger unless on the same point an appeal was preferred.
11. At the outset it would be better to dispose of the minor grounds raised in the assessee's appeal. Admittedly the assessee carried the matter in appeal against the assessment. In such a situation the order of the ITO got merged with the order of the first appellate authority.
It is true that the question relating to weighted deduction under Section 35B was not and could not be the subject-matter of appeal before the Commissioner (Appeals) as that was decided in favour of the assessee. Even so, the learned counsel for the assessee contended that there is a merger of the order of the ITO with the order of the Commissioner (Appeals) and, therefore, the Commissioner cannot exercise powers under Section 263. This is sought to be repelled by the learned departmental representative by referring to a number of decisions by contending that there can be merger only in respect of matters under challenge before the appellate authorities and not in respect of matters not taken up in appeal. This issue has come up for consideration before the Special Bench of the Tribunal long back and after a threadbare discussion of the entire issue by referring to catena of case law on the point, the Tribunal held in the case of Dwarkadas (supra) that once an assessment order has been taken up in appeal the order gets merged with the appellate order, whether an appeal has been taken up in respect of a particular point covered by the assessment order or not. If that principle is applied, we find that there is merger of the order of the ITO in the order of the Commissioner (Appeals). If that is so, the Commissioner cannot exercise his powers under Section 263. On this ground the assessee would succeed in this case.
12. So far as the claim for weighted deduction on merits is concerned, the matter is fully covered by the decision of the Tribunal for an earlier year and the assessee would not be entitled to the weighted deduction relating to ocean freight and that it would be entitled only to weighted deduction in respect of the balance but in the view we have taken on the question of merger, the decision on merits loses its importance so far as this year is concerned.
13. The above discussion will dispose of the appeal, but in fairness to all the parties it is proper to decide the main controversy for which the Special Bench is constituted. First of all we may dispose of the point raised by Mr. Ramachandran, namely, that there is a merger of the ITO's order with the order of the IAC. It does not appeal to us. We entirely agree with the learned standing counsel that the principle of merger has no application to a situation covered by the provisions of Section 144B. There cannot be a merger of an order of an appellate authority with the order of the original authority. It can be only the reverse. One cannot say that the IAC's directions got merged with the order of the ITO. We are unable to extend the principle of merger to a situation arising out of the directions given by the IAC under Section 144B resulting in a final assessment made by the ITO.14. So far as the contentions of Mr. Ramachandran, which have been mentioned by us in para 4 as (a) and (c), both go together and they constitute the main issue to be decided in this case and argued by him as well as by the counsels for the interveners. In the light of the submissions made by them and in the light of the provisions of the Act, we would like to deal with the issue. But before doing so, it is necessary to have a conspectus of the various provisions of the Act which have a bearing on the question. The Income-tax Act envisages different authorities in charge of the administration of the Act. The Board is at the apex of the department. The Commissioner is in charge of administration of a particular area. He is appointed in accordance with the provisions of Sub-section (1) of Section 117 of the Act. The IAC also means a person appointed to be so under Sub-section (1) of Section 117. It is also the same with the ITO. The persons, who are responsible to make an assessment are basically ITOs. In fact this is the normal position. By the Finance (No. 2) Act, 1967, Section 125 was amended so as to entrust the powers of an ITO on the IAC. In other words, the IACs may act as assessing officers in respect of cases or class of cases specified by an order of the Commissioner. Section 125A of the Act has been brought into the statute book with effect from 1-10-1975 giving concurrent jurisdiction to the IAC along with the ITO in respect of certain class of persons or class of cases. No doubt the Board under Section 126 has got the overriding authority in regard to entrusting of the functions to be performed by the IAC. More significant changes by which the IAC is brought directly into the process of assessment have been made by the Taxation Laws (Amendment) Act, 1975. Sections 144A and 144B have been inserted by the said Act, which came into force from 1-1-1976. The two Sections may be reproduced as under: 144A. (1) An Inspecting Assistant Commissioner may, on his own motion or on a reference being made to him by the Income-tax Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Income-tax Officer to enable him to complete the assessment and such directions shall be binding on the Income-tax Officer: Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard.
Explanation: For the purposes of this sub-section, no direction as to the lines on which an investigation connected with the assessment should be made, shall be deemed to be a direction prejudicial to the assessee. (2) The provisions of this section shall be in addition to, and not in derogation of, the provisions contained in Sub-section (3) of Section 119.
144B. (1) Notwithstanding anything contained in this Act, where, in an assessment to be made under Sub-section (3) of Section 143, the Income-tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under Sub-section (6), the Income-tax Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.
(2) On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the Income-tax Officer within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the Income-tax Officer may allow on an application made to him in this behalf.
(3) If no objections are received within the period or the extended period aforesaid, or the assessee intimates to the Income-tax Officer the acceptance of the variation, the Income-tax Officer shall complete the assessment on the basis of the draft order, (4) If any objections are received, the Income-tax Officer shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the Income-tax Officer to enable him to complete the assessment: Provided that no directions which are prejudicial to the assessee shall be issued under this sub-section before an opportunity is given to the assessee to be heard.b2 (5) Every direction issued by the Inspecting Assistant Commissioner under Sub-section (4) shall be binding on the Income-tax Officer.
(6) For the purposes of Sub-section (1), the Board may, having regard to the proper and efficient management of the work of assessment, by order, fix, from time to time, such amount as it deems fit: Provided further that the amount fi,xed under this sub-section shall, in no case, be less than twenty-five thousand rupees.
(7) Nothing in this section shall apply to a case where an Inspecting Assistant Commissioner exercises the powers or performs the functions of an Income-tax Officer in pursuance of an order made under Section 125 or Section 125A.15. Section 263 is the only section by which the orders of the Income-tax Officer can be rectified in case an error is committed which is prejudicial to the interests of the revenue. One is aware that if an ITO passes an order and he commits an error which results in loss of revenue, there is no appeal, the reason being that the Income-tax Officer not only represents the revenue but is the sole arbiter. There are no two parties before him. If he commits an error and the assessee is affected, a right of appeal is provided under the Act as per the provisions of Section 246. But if an error is committed by the ITO himself, there is no right of appeal as such. It is for this purpose and rightly so, that power of revision is vested in the Commissioner under Section 263. The said section reads as follows: 263.(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
(b) after the expiry of two years from the date of the order sought to be revised.
(3) Notwithstanding anything contained in Sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.
Explanation: In computing the period of limitation for the purposes of Sub-section (2), the time taken in giving an opportunity to the assessee to be re-heard under the proviso to Section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.
It is fundamental that in order that the Commissioner can exercise power of revision, there must be an error which results in prejudice to the interests of the revenue. This would indicate that there should be not only an error but the error must result in prejudice so far as the interest of the revenue is concerned. If either of the two elements is absent, the power cannot be exercised by the Commissioner. There are no doubt certain other limitations as enjoined under Sub-section (2).
Apart from these limitations which are ex facie found, there are other limitations read into the powers to be exercised by the Commissioner for instance where an order of the Income-tax Officer is subject to an appeal and that order merges in the appellate order, the Commissioner cannot exercise power of revision because what ultimately remains is the order of the appellate authority, which the Commissioner cannot touch. No doubt there is some controversy as to whether every order of an ITO would get merged with the order of an appellate authority, even if a particular point was the subject-matter of appeal or not but that aspect need not trouble us so far as the present controversy is concerned though we have already held that there would be a merger once an order of the ITO is taken in appeal by following the Special Bench decision of the Tribunal.
16. Then we have a look at the provisions of Section 264. This section gives right to an assessee to file a revision before the Commissioner.
However, there are certain limitations for exercising that power as mentioned in Section 264(4) of the Act. The wording of Section 264(1) is necessary to be seen: 264. (1) In the case of any order other than an order to which Section 263 applies passed by an authority subordinate to him, the Commissioner may, either of his own motion or on an application by the assessee for revision, call for the record of any proceeding under this Act in which any such order has been passed and may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, may pass such order thereon, not being an order prejudicial to the assessee, as he thinks fit.
The Commissioner can revise an order subordinate to him and for the purpose of Section 264 the AAC is considered to be subordinate to the Commissioner as per Explanation 2 to that section. A perusal of Sections 263 and 264 reveals that Section 263 is invoked in favour of the revenue while Section 264 can be invoked for giving relief to assessees if on account of the mistake committed by subordinate authorities the assessee is deprived of some benefit. Section 263 contemplates revision of orders of the ITO only and none else.
17. In the light of the above, we may now analyse the provisions of Section 144B. In this context we would like to see first the object for which Section 144B has been enacted. From the memorandum explaining the provisions of the Taxation (Amendment) Bill, 1975, it is clear that the object is to minimise the appeals. The Parliament took note of the fact that there has been a lot of tax litigation and in order to reduce the same, it felt that even at the assessment stage if a superior officer deals with the matter, the assessees might be satisfied about it and further the enthusiasm of an assessing officer to make some additions or disallow deductions will be tested objectively and judicially by an officer superior to the ITO. With that object Section 144B has been enacted. The section starts with non obstante clause and it overrides all the other provisions of the Act. The ITO is duty bound to make a draft assessment order in case the variation proposed by him exceeds Rs. 1 lakh as prescribed by the Board in accordance with the provisions of Sub-section (6). The ITO has no option qnce he wants to make the variation between the income returned and the income sought to be assessed and that variation exceeds Rs. 1 lakh. Then what happens after such a draft is issued to the assessee is contained in the subsequent provisions. If the assessee is satisfied with the variation by specific intimation to the ITO then the draft becomes final but the ITO has to complete the assessment in accordance with the draft in order to attach finality to it. The ITO can also complete the assessment on the basis of the draft order if no objections are received within the period contemplated under Sub-section (2). So far there is no difficulty. But if the objections are received by the ITO from the assessee, then the ITO has nothing else to do in the matter. He has to send the draft order of assessment along with the objections received from the assessee by him to the IAC. The matter will then be before the IAC who has to decide the controversies arising out of the objections. In other words, he will resolve the dispute that arises between the ITO on the one band which is reflected in his draft assessment order and the assessee on the other, which is projected in the objections. In a way he acts like an officer deciding a dispute between the two parties.
Undoubtedly the IAC has to act judicially and objectively in deciding the matter in the light of what the ITO has stated in his draft assessment order and in the light of what the assessee has stated in his objections. The decision so arrived at by the IAC is conveyed to the ITO in the form of directions which are to be taken into account for the purpose of completing the assessments, inasmuch as, till then the assessment is not completed and it remained only at a proposal stage. The moment the ITO receives the directions from the IAC, he will be entitled to complete the assessment in accordance with the directions or decision given by the IAC. In order to make the decision or the directions of the IAC sacrosanct Sub-section (5) of Section 144B specifically lays down that every direction issued by the IAC shall be binding on the ITO. This clearly shows that the ITO cannot go beyond what the IAC has directed him to do in a matter covered by the objections raised by the assessee. The ITO cannot act on his own in respect of such matter any longer. Whatever he had done earlier was in the shape of a draft and thereafter it will be an order in accordance with the directions of the IAC in so far as the matters covered by the objections contemplated under Section 144B(2). To put it in a different manner, in a matter covered by the objections filed by the assessee, the ITO can be said to befunctus officio, though perhaps the use of that expression may not be completely apt since the ITO will have to pass an order of assessment after he receives the directions from the IAC but it is only for the purpose of conveying the idea forcefully that that expression is used. In this connection, we would like to refer to the original Bill by which Section 144B was introduced. It contemplated the assessment to be made by the the IAC but the Select Committee changed it in the manner which is now in the statute book.
Perhaps the Select Committee felt that it would be unnecessary for the IAC to make an assessment merely because there are some objections to the proposed order as in most of the cases the objections might cover a few issues whereas in respect of all other issues, the order of the ITO is not disputed. All the same even as the provisions that exist now, it is abundantly clear that the order of assessment in a case covered by the provisions of Section 144B, it cannot be said to be an order of assessment passed by the ITO wholly. It is true as contended by the learned standing counsel that Section 144B is essentially procedural in nature and it comes into process of assessment making--H.H. Maharaja Raja Pawar Dewas (supra). Such assessment is to be made both by the IAC and by the ITO. To the extent covered by the objections coupled with the directions given by the IAC certainly the order is that of the IAC and the rest of the order is that of the ITO but then one question may be asked as to why the order of assessment is to be ultimately made by the ITO. The answer to this according to us is very simple. An order of assessment should be one to be made by one officer Tor all practical purposes. But the content of the order has to be seen. Once the content is seen, it is clear that it is made by two officers, one part by the IAC and the other by the ITO. It is only as a matter of convenience that it is authenticated by the ITO as if it is made by him alone. If one looks at an order of assessment passed by the ITO where there are directions given by the IAC, which the ITO is bound to follow, one cannot say that it is an order passed by the ITO alone. In reality and in substance such an order can be said to have been passed both by the IAC as well as the ITO. In many cases, and rightly so, the directions of the IAC are attached to the order of assessment. The ITO, as already pointed out, has no say in the matter at all once the directions come from the IAC. They become part and parcel of the assessment order. In such a situation it is difficult to accept that the order of assessment is that of the ITO alone.
18. Once the assessment has passed the test of the IAC, some sort of sanctity and finality is attached to it in so far as the revenue is concerned. Otherwise the very purpose of creating one more hierarchy in the process of assessment is lost. At this stage it is worthwhile comparing the powers that have been given to the IAC by the insertion of Section 144A which has come into the statute book along with Section 144B. The IAC is either on his own notion or on the reference made by the ITO or on the application made by the assessee can examine any assessment proceedings which are pending and can act. This is a sort of revisional power but only with one difference, namely, that this power is exercised before the assessment is completed. That is how it is different from the revisional power to be exercised by the Commissioner under Section 263 but otherwise the power giveu to the IAC is of a wide amplitude. In a way it is wider than that is given under Section 263 to the Commissioner. This again shows that more trust and confidence is reposed on the IAC in the matter of assessment. There is, however, one more fundamental difference between Sections 144A and 144B. Section 144A contemplates general directions in regard to assessment and any matter connected therewith whereas under Section 144B the IAC has to decide the matters covered by the specific objections. Therefore, the order of the ITO on the directions issued under Section 144A may still be his order but we are not really concerned in this appeal with the difference between Section 144A and Section 144B. Our attempt is only to show that the IAC has been given wide powers in the matter of assessment so that the assessment is put to judicial scrutiny by a superior officer and that would naturally create a feeling of trust among the taxpayers.
19. It may also be worthwhile mentioning that the Legislature has made it clear as to when the orders of the IAC in the matter of assessment can be treated as orders of assessment passed by the ITO if we look to the provisions of Section 125. Section 125 contemplates conferring of powers of the ITO on an IAC. In such a case reference to the ITO under the Act would mean reference to the IAC. In other words, if an assessment is made by an IAC because of conferring such powers on him under Section 125, reference to the ITO under Section 263 would mean reference to the IAC and such an order of assessment may be subject to revision by the Commissioner. But for the specific mention, the Commissioner may not be able to revise. Similarly Section 125 deals with conferring of concurrent jurisdiction to the IAC along with the ITO. Similar provisions as are made in Section 125 have been made under Section 125A also. In view of these provisions contained in Section 125 and Section 125A, Sub-section (7) of Section 144B envisages that that section will not apply where the IAC exercises the powers or performs the functions of an ITO under Section 125 or 125A. All this would show that wherever an order is passed by the IAC, it is treated as an order of an ITO specifically for the purpose of the Act so that the revisional authority can exercise its powers. But in no other case, it is possible. That means in a case where the IAC exercises his power in the matter of assessment, other than those that are covered by the provisions of Section 125 or 125A or 144A, the order of the IAC cannot be the subject-matter of revision by the Commissioner. Positively the directions given under Section 144B which amount to an order passed by him cannot be the subject-matter of revision by the Commissioner. Mr.
Abrol is right when he pointed out that the word 'direction' is used synonymous with 'order' at different places. Though the word 'directions' is used in Section 144B and they are to be given for the guidance of the ITO, in the context it is used it would amount to an order passed by the IAC. The ITO merely authenticates that order under his signature.
20. The argument of the learned standing counsel that the assessment order bears the signatures of the ITO and, therefore, the order is made by the ITO alone may look ex facie alright but that is not the correct approach. One has to go behind the order and find out the content of it. It is not enough if we just go by the signatory with the designation to the order. One has to see what the order consists of. If once that is done, it comes to surface that the order is partly made by the IAC. One cannot shut his eyes to the actuality. This approach can be further demonstrated with reference to a situation arising in a case where an ITO passes an order in conformity with the decision of the Tribunal. Suppose the ITO purporting to act in accordance with the decision of the Tribunal passes an order. In this order the ITO cannot do anything other than what the Tribunal envisages him to do. Such an order is definitely an order passed by the ITO. Is it open to revision by the Commissioner under Section 263 Obviously it is not. Why do we say that he cannot revise, because the order is not that of the ITO. It is the order of the Tribunal which the ITO is giving effect to. Where of course the ITO does more than what the Tribunal contemplated and if it is erroneous so as to be prejudicial to the interests of the revenue, to that limited extent alone the Commissioner may be able to revise. Otherwise he cannot revise even though the order of the ITO is erroneous according to the Commissioner. This would show that one has to go behind the order of the ITO to find out whose order is that. The powers of the Commissioner under Section 263 are limited by their very nature and by the scheme of the Act.
21. The argument advanced by Mr. Anjaneyulu that there is no error by the ITO when he follows the directions of the IAC is worth considering.
We have already mentioned that this is another aspect of the same matter, namely, whether the Commissioner can exercise his powers under Section 263 in a matter covered by Section 144B(4). We have also pointed out that under the provisions of Section 144B, the ITO has to comply with the directions of the IAC. Those directions are binding on him. If once he follows those directions, which are binding on him, the ITO complies with the statutory requirements. When he complies with the statutory requirements, i.e., he is acting under the provisions of the Act, how can it be said that there is an error Section 263 allows the Commissioner to revise only when there is an error in the order. It is not possible to say that the ITO's order is erroneous when he complies with the provisions of Section 144B and passes an order in accordance with the directions issued by the IAC. Such an order by an ITO cannot be said to be erroneous so as to clothe jurisdiction with the Commissioner. The matter may be expressed in a slightly different language. The Commissioner is precluded from contending that such an order of the ITO is erroneous. Take for instance, a case where the ITO is refusing to comply with the directions of the IAC issued under Section 144B. The assessee then goes to the Commissioner. The Commissioner cannot say that the ITO is right and he need not follow the directions. The Commissioner will have to say that the directions issued by the IAC are to be followed. When such is the position, how can the Commissioner say that the order of the ITO is erroneous when he complies with the directions issued by the IAC and completes the assessment The Commissioner, in our opinion, cannot exercise his powers under Section 263 in a case where the ITO follows the directions of the IAC under Section 144B and completes the assessment. This would further strengthen the arguments of the assessee that an order of assessment passed by the ITO in accordance with the directions issued by the IAC under Section 144B cannot be the subject of revision by the Commissioner under Section 263.
22. Reference was made to the provisions of Section 246 whereby the right of appeal is given to the assessees against specified orders of the ITO. The learned standing counsel pointed out that even where the assessment is made by the ITO in accordance with the directions of the IAC given under Section 144B, appeal lay to the AAC before the amendment of Section 246(2) (brought about with effect from 10-7-1978).
It is true there was some anomaly but the Legislature felt that it had to be removed and immediately it brought about the amendment by inserting Sub-section (2) to Section 246 whereby such appeals lay to the Commissioner (Appeals). In fact all orders of the IAC touching upon the assessments are made appealable to the Commissioner (Appeals).
Section 246(2)(f) specifically deals with appeals in the cases covered by Section 144B. This would only show that the IAC is treated on a different footing and is not equated with that of the ITO in all cases.
Whenever he is to be treated as an ITO, specific provision is made.
Further the provisions of Section 246 dealing with appeals do not throw light on the competency of the Commissioner to revise which has to be tested with reference to the provisions of that section as well as the provisions of Section 144B coupled with the entire scheme of the Act.
23. We have not discussed any of the decisions cited by the parties as in our opinion, they really do not touch the fringe of the question decided by us.
24. For the foregoing reasons, we hold that the Commissioner has no jurisdiction under Section 263 to revise that portion of the order covered by the directions given by the IAC under Section 144B(4).
1. I have gone through very carefully the order proposed by my learned brother, Shri P.V.B. Rao, Vice President (NZ), lucidly explaining how an order passed by the ITO by making reference to Section 144B is not amenable to the revisional jurisdiction of the Commissioner under Section 263. I found a little difficulty in the beginning to agree with the conclusion reached, although I have myself in certain other cases taken a similar view on the basis that it is not open to the Commissioner to exercise his power of revision under Section 263 if the ITO was implementing a direction given by an appellate authority, for in such a case it would well nigh be impossible to say that the order passed by the ITO was erroneous and caused prejudice to the interests of the revenue, for, then the ITO is only giving effect to an appellate direction, which he is bound to give under the Act. The direction given by the IAC under Section 144B is also now being elevated to the same status as that of an appellate direction. It is in this area I had some initial difficulty. But I came over it by reconciling that when the ITO was performing a duty, which he was bound to do under the Act, be it giving effect to an appellate direction or implementing any other direction given by any authority superior to him, it should not be open for any other authority to say at that stage he committed an error and thereby caused prejudice to the interests of the revenue. On a closer examination at the direction, that the ITO had to give effect to, and in the light of certain other considerations or material it might appear to be erroneous, but the point to be seen for the assumption of jurisdiction by the Commissioner under Section 263 is whether at the point of time when the ITO was giving effect to a direction given by the IAC, did he or did he not commit an error. Surely it is not possible for any one to say that at that stage the TTO was committing an error which has caused prejudice to the interests of the revenue. On the contrary, the interests of the revenue are not served if the ITO refused to obey the direction given by the IAC. This discussion leads me to opine that the power to be exercised by the Commissioner under Section 263 is confined only to the orders passed by the ITO acting on his own, and not when he is implementing the directions given to him by the IAC by which he is bound. I derive support for my opinion from what followed next in Sub-section (2) of the said section. Sub-section (2) provided that the revisional powers of the Commissioner are not to be exercised in the case of a reassessment made under Section 147. A reassessment made [under Section 147 is made when there is escapement of income. Such reassessments are excepted because the loss that is caused to the revenue by making an underassessment is made good by the reassessment. When the loss caused to the revenue is thus made good by the reassessment, no revision is necessary, even if such a reassessment still causes prejudice to the interests of the revenue. This shows that the revisional power of the Commissioner is only to protect the interests of the revenue in case the ITO, who is the assessing officer under the Income-tax Act, made a mistake resulting in causing prejudice to the interests of the revenue. Whether the ITO realised the mistake committed by him on his own, and reopened the assessment under Section 147, thus making good the loss to the revenue, or the Commissioner acts under Section 263, the result is the same, viz., securing to the revenue what is due to the revenue. Such a reassessment, even if made as per a direction given by the IAC under Section 144B, falls outside the revisional jurisdiction of the Commissioner under Section 263.
2. But the Act contemplated certain circumstances where the IAC can be authorised by the Commissioner to make the assessment. The Act further stipulates that all references to the ITO in Section 263, etc., shall be deemed to be references to the TAC (Section 125). In such an event, the assessment made by the IAC can be revised by the Commissioner under Section 263 if it is erroneous and caused prejudice to the interests of the revenue. The reason is obvious. In this case, the IAC is given specifically the power of making assessment like an ITO. He does not receive instructions or seek the same under Section 144B as the ITO does. There is every possibility that errors may have been committed by the IAC acting as an assessing officer. There should be a way to correct such erroneous assessments. Therefore, power is taken to revise such assessments Under Section 263, by making a specific provision for this purpose, by deeming the references to the ITO as references to the IAC. The absence of a provision enabling the Commissioner to act under Section 263 even under the present circumstances of Section 144B is an indication, that such a revision is not contemplated. It is not necessary also, because the IAC hears the objection of the assessee, and after considering the material and the objections, arrives at his own conclusion. Such a conclusion is akin to a conclusion reached in an appellate proceeding. When under the Act, the conclusions reached in appellate proceedings are specifically put beyond the revisional jurisdiction of the Commissioner, the same consequence is to be given to a direction under Section 144B, which has the effect of appellate direction. Thus, both of them can be said to be more or less on a par.
This would show that the Commissioner's power of revision can be exercised only when the assessment made by the ITO resulted in prejudice to the interests of the revenue, and not when he followed the directions of a superior authority as well as an appellate authority.
Conceding the power of revision to the Commissioner in such circumstances would only mean conceding to the Commissioner the power to review the direction given by the IAC under Section 144B at that stage or the appellate direction given either by the Tribunal, High Court or even the Supreme Court. Since this could lead to disastrous results, the construction, which would lead to that result, should in all fairness be avoided.
3. Section 143(3) is the section under which the ITO has to make an assessment and it is while making an assessment under that sub-section that he has to follow the procedure prescribed under Section 144B, should the circumstances mentioned therein happen to exist. That sub-section says that the ITO: (b) such other evidence as the ITO may require on specified points, and (c) after taking into account all relevant material which he has gathered, may make the assessment of the total income or loss of the assessee and determine the sum payable by him or refundable to him on the basis of such assessment.
In my view, if the direction given by the IAC under Section 144B falls within any one of these categories of evidence that the ITO is authorised to make use of in framing an assessment, can it be said that the Commissioner may interfere in exercise of his revisional jurisdiction. The evidence produced by the assessee nor the evidence gathered by the ITO on specified points cannot come from the direction given by the IAC under Section 144B. That leaves only the third category of evidence that 'after taking into account all relevant material which he has gathered'. The expression 'taking into account all relevant material which he has gathered', would refer to the evidence that the assessee has produced and the evidence that the ITO has gathered, but does not refer to or take into account the instruction given by the IAC under Section 144B. If this is the meaning of Sub-section (3) of Section 143 under which the ITO may make an assessment, obviously the instruction given by the IAC falls outside the scope of evidence to be considered under Section 143(3), in which case that stands totally on a different footing, and to revise that direction treating it as causing prejudice to the interests of the revenue falls beyond the scope of the revisional jurisdiction of the Commissioner. It was perhaps the reason why Section 144B is started with a non obstante clause by stating that "notwithstanding anything contained in this Act, where, in an assessment to be made under Sub-section (3) of Section 143, the ITO proposes to make any variation in the income or loss returned . . .". This shows that on the basis of the material gathered by the ITO, if he comes to the conclusion that there was a scope to vary the income returned by the assessee, then only the material will be put before the IAC, for his direction subject to the satisfaction of the conditions laid down in Section 144B. Then on the basis of such evidence gathered by the ITO and placed before the IAC, it is the satisfaction of the IAC, which comes to the ITO, by way of a direction, and because that is going to affect the interests of the assessee, obviously the principle of natural justice of hearing the assessee has been provided for. Since it is the satisfaction of the IAC that comes in the shape of an assessment made by the ITO, that perhaps is certainly beyond the scope of the Commissioner in his revisional jurisdiction under Section 263. It is quite possible that in an assessment there are additions made by the ITO on his own to which the provisions of Section 144B are not applicable and additions made to which the provisions of Section 144B are applicable. If the Commissioner happens to find an error in the conclusions arrived at by the ITO on his own, which has caused prejudice to the interests of the revenue, it may perhaps be open to the Commissioner to interfere, but, certainly not with regard to those additions where the procedure under Section 144B is followed' and the instructions of the IAC are implemented.
4. It is for the above reasons I felt that more rational view would be to agree with the view expressed by my learned brother Shri P.V.B. Rao, Vice President (NZ), while I only added a few lines to give expression to the thoughts that were passing in my mind.