Merger of Inspecting Assistant Commissioner's order with that of Commissioner(Appeal's)'s, order extended only to the extent of points which were subject-matter of appeal before commissioner(Appeals)'s The assessment order of the Inspecting Assistant Commissioner, against which an appeal has been preferred before the Commissioner(Appeal's)'s, merges with the order of the Commissioner(Appeals) only in respect of those points which were subject-matter of such appeal and cannot be revised under section 263 to that extent. However, when the Commissioner(Appeal's)'s has not considered a particular matter, the Inspecting Assistant Commissioner's order cannot be deemed to have merged in respect of that matter in the order of the Commissioner(Appeal's)'s. Therefore, the Commissioner can exercise his revisionary jurisdiction in respect of the issues which were not subject-matter of such appeal.
1. This appeal has been filed against an order of the Commissioner passed under Section 263 of the Income-tax Act, 1961 ('the Act'). The assessee is a tea company and the original assessment was made by the IAC on 5-3-1980 at an income of Rs. 65,04,573. The Commissioner was, however, of the opinion that the amount disallowable under Section 44C of the Act did not appear to have been correctly computed inasmuch as such disallowance ought to have been higher than Rs. 47,486. Similarly he noticed that in the profit and loss account a sum of Rs. 5,15,762 bad been debited under the head 'provision for obsolete stores'. In the computation of in come, bank interest, replanting subsidy and surplus on disposal appeared to have been separately deducted from the profit.
The IAC who had made the assessment had failed to apply his mind to the issue inasmuch as the provision had been allowed as an admissible deduction in addition to the actual amount of deduction which resulted in consequent underassessment. He, therefore, issued a show-cause notice under Section 263 in response to which the argument of the assessee was that the Commissioner (Appeals) had already heard an appeal against the IAC's order and, therefore, the said order could not be the subject-matter of revision under Section 263. The Commissioner was, however, of the opinion that in the appeal the assessee had only disputed the applicability of Section 44C and not the amount disallowable thereunder. Regarding the provision for obsolete stores, the asses see's contention was that it really represented the cost of obsolete stores actually written off during the year. This was evidenced by the fact that no such provision appeared as a separate item on the liability side nor as a deduction from the cost of stores appearing in the asset side of the balance sheet. The Commissioner in this behalf was of the opinion that the IAC had not verified the items which had been written off and a considerable amount was involved therein. He, therefore, was of the opinion that the assessment order should be set aside and directed the assessing authority to redo the assessment after going into the details of the two items mentioned above and after giving sufficient opportunity to the assessee. The assessee has come up in appeal before us.
2. We have heard the representatives of the parties at length in this appeal. The first and the most important point argued before us was that the order of the IAC having been the subject-matter of appeal before the Commissioner (Appeals) had merged therein and, therefore, the Commissioner had no jurisdiction to revise that order. In support thereof a number of the authorities were referred to, the most important of them being a judgment of the Allahabad High Court in J.K.Synthetics Ltd. v. Addl. CIT  105 ITR 344, a judgment of the Bombay High Court in CIT v. Tejaji Farasmm Kharawala  23 ITR 412 and a judgment of the Special Bench of the Tribunal at Bombay in Dwarkadas & Co. (P.) Ltd. v. ITO  1 SOT 495. It was also urged that these judgments were already being followed by the other Benches of the Tribunal and for this purpose, reliance was placed upon a decision of Bench 'B' of the Tribunal in IT Appeal Nos. 566 and 567 (Cal.) of 1981 in the case of Electric Lamp Mfrs. (I.) (P.) Ltd. 3. On behalf of the department, reliance was placed upon the fact that the authorities relied upon by the assessee did not consider the effect of the Supreme Court decision in CIT v. Rai Bahadur Hardutroy Motilal Chamaria  66 ITR 443 which, according to the departmental representative, has been correctly interpreted by the Gujarat High Court in Karsandas Bhagwandas Patel v. G. V. Shah, ITO  98 ITR 255. It was also contend ed that the view of the Calcutta High Court is to the contrary and for this purpose reference was made to several decisions of the Calcutta High Court namely Jeewanlal (1929) Ltd. v.CIT  106 ITR 33, Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT  109 ITR 229, Premchand Sitanath Roy v. Addl. CIT  109 ITR 751 and Singho Mica Mining Co. Ltd. v. CIT  111 ITR 231. Lastly, it was contended that after the decision of the Special Bench, a Full Bench of the Madhya Pradesh High Court in CIT v.R.S. Banwarilal  140 ITR 3 had clearly held that the ITO's order which has been appealed against to the AAC only merges in respect of those matters, which have been considered by the AAC and not in respect of other matters.
4. In reply, it was contended on behalf of the assessee that the Calcutta High Court judgments were not directly in point. The two authorities, namely, Jeewanlal (1929) Ltd.'s case (supra) and Russell Properties (P.) Ltd.'s case (supra) were not concerned with the question of merger in the sense that the appeal had not been decided at the time the Commissioner (Appeals) had initiated proceedings and so far as the other two authorities, namely Premchand Sitanath Roy's case (supra) and Singho Mica Mining Co. Ltd.'s case (supra) are concerned, they had already been considered by the Special Bench in the case of Dwarkadas & Co. (P.) Ltd. (supra) and notwithstanding these authorities, the Special Bench had taken a decision in favour of the assessee on the ground that in both these cases the question involved was only of interest under Section 217 of the Act, which could not be the subject-matter of appeal before the AAC. As regards the Madhya Pradesh High Court decision, it was contended that a Full Bench of the same High Court had come to a contrary decision in CIT v. Mandsaur Electric Supply Co. Ltd.  140 ITR 677.
5. We have carefully gone through all these authorities and to our mind the contention of the assessee should fail. Normally there is no reason not to follow the decision of the Special Bench of the Tribunal which had been given in face of the apparent controversy arising in the matter. But we are sitting in Calcutta while the Special Beuch was sitting in Bombay. As pointed out above, there is a clear-cut judgment of the Bombay High Court in Tejaji Farasram Kharawaia's case (supra) and prima facie the Bench of the Tribunal constituted at Bombay was bound by that decision of the High Court. It is correct that the Bench has discussed the other authorities on the subject but so far as we are concerned the fact remained that the judgments of the Calcutta High Court go to support the revenue and in none of them has any view been expressed in favour of the assessee. For example, in Jeewanlal (1929) Ltd.'s case (supra) the AAC had already disposed of the appeal filed before him and had directed the ITO to check up the question of certain rebates as may be admissible. Thereafter the ITO had passed an order under Section 251 of the Act which was revised by the Additional Commissioner. The argument of the assessee before the High Court in the writ was that the ITO had passed an order to give effect to the order of the AAC and, therefore, the said order could not be revised. Their Lordships held: ... that there could not be any merger of the order of the appellate authority with the order of the subordinate authority. What the Appellate Assistant Commissioner had done was to direct the Income-tax Officer to consider the claim of the petitioner and to grant him such rebate and allowance which the petitioner was entitled to under the law. To what extent, if at all, the petitioner was entitled to such relief and rebate, the Appellate Assistant Commissioner had not directed. While passing the order in consequence of the Appellate Assistant Commissioner's direction, if the Income-tax Officer acts erroneously or contrary to the provisions of law, it could not be said that the same formed part of the order of the Appellate Assistant Commissioner as it was an independent order and was, therefore, subject to the revisional power of the Commissioner. (p. 33) Again, in Russell Properties (P.) Ltd.'s case (supra) it was held that the Commissioner was empowered to revise an order of the ITO against which an appeal was pending. The argument in favour of merger adopted in the authorities which hold in favour of the assessee is that the whole assessment becomes open before the appellate authority who can also enhance the same. Therefore, the Commissioner cannot revise the same. This argument is certainly contrary to some of the observations in these decisions of the Calcutta High Court. Again in Premchand Sitanath Roy's case (supra), the actual observations of their Lordships are that the interest which was sought to be charged in the order of the Commissioner under Section 263 was not the subject-matter of appeal before the A AC. Therefore, there could be no question of merger of that order. In Singho Mica Mining Co. Ltd.'s case (supra) the direct question referred to their Lordships in this behalf reads as under: Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer's order got merged with that of the Appellate Assistant Commissioner only in respect of those issues which had been adjudicated upon by the Appellate Assistant Commissioner? (p. 234) The answer to this question was in the affirmative and in favour of the revenue. What we mean to emphasize is that if the question is to be considered in the light of the decisions of the Calcutta High Court, only the answer would most probably go against the assessee. At any rate, now that two Full Benches of the Madhya Pradesh High Court have considered the matter again, the whole thing can be looked into afresh by the Benches of the Tribunal as well. As between the two decisions of the Madhya Pradesh High Court, we find that the decision in R.S.BanwarilaVs case (supra) was delivered on a later date, i.e., 8-3-1982, as against the decision in Mandsaur Electric Supply Co. Ltd.'s case (supra), which was delivered on 25-2-1982. Moreover, the reason for taking a view in this case contrary to the view in the earlier decision in Alok Paper Industries v. CIT  139 ITR 1064 (MP) as can be gathered from the later half of page 683 of the report, was that in this case the Commissioner had set aside the entire order of the ITO even in relation to certain matters in respect of which the AAC had considered and decided the issue. The said order of the Commissioner was, therefore, certainly wrong in law. However, in the present case the Commissioner has set aside the assessment in respect of two specific points and not in relation to the entire assessment, part of which had certainly merged in the order of the Commissioner. As against this, in the later decision in R.S. BanwarilaVs case (supra), all the authorities on the subject have been thoroughly considered and the following answer has been specifically given to the question referred to their Lordships: The Appellate Tribunal was not correct in law in holding that the entire assessment orders of the ITO had merged in the order of the AAC irrespective of the points urged by the parties or decided by the AAC and, therefore, the Commissioner was not competent to revise those orders under Section 263 of the Income-tax Act, 1961, even in respect of the points not considered and decided by the AAC. (p. 15) 6. Even otherwise, while it is technically correct that an AAC hearing an appeal filed before him under Section 246 of the Act can enhance the assessment. With due respect we may humbly submit that normally it is never done. The appellate Court is expected to decide only such matters as arc raised in the appeal before it. It is only in connection with hearing of those matters that it may interefere with the order to the disadvantage of the appellant. It does not look into matters which the appellant never agitates. The ITO otherwise has no right to appeal against his own order. It is the AA'C sole discretion to enhance an assessment. He need not do so and if he does not do it the ITO cannot come in appeal against his refusal to do so. In fact the ITO, if he has made an underassessment, is not legally entitled as of right to ask the AAC to enhance the same. He can only reopen the assessment in circumstances justifying an action under Section 147 or 154 of the Act so that if he has formed an erroneous opinion on any matter, he cannot get it corrected in the appeal before the AAC and if the AAC does not choose to do the same suo moto, he cannot come before the Tribunal against the AAC's order refusing to do so. Therefore, apparently when the AAC has not considered the matter, there is no reason why the order should be deemed to have merged in respect of that matter also.
7. It was argued before us that the question of allowance under Section 44C had been the subject-matter of consideration before the Commissioner (Appeals). At the time of the hearing of this appeal, we had directed the representative of the assessee to produce the order of the Commissioner (Appeals) so that we could find out for ourselves as to what extent the matter had been canvassed before him. But except for pointing out to certain observations of the Commissioner (Appeals) in relation to Section 44C, the representative of the assessee was not in a position to do so and the copy of the order asked for was not produced by him in respect of the fact that the matter was held up for a number of days after the hearing. In these circumstances, we got hold of the relevant part of the order from the file of the department.
Therein we noticed that the question of applicability of Section 44C was certainly in dispute before the Commissioner (Appeals) because the assessee had challenged the applicability of this section altogether.
The Commissioner (Appeals) upheld the applicability but did not interfere in the amount disallowable because, according to him, there was no dispute about the calculation of the amount. However, even if the Commissioner (Appeals) has not considered this, the fact remains that the question of applicability of Section 44C being in dispute the Commissioner (Appeals) could have considered the correctness of calculation also and the ITO could have pointed it out to him since the dispute was before him. The Calcutta High Court judgments do not go to the extent of holding that an issue, which was the subject-matter of appeal, would be still open to revision if it was not considered in the light in which the Commissioner (Appeals) proposed to revise it. As stated above, the Special Bench of the Tribunal has already decided this issue in favour of the assessee. We are, therefore, of the opinion that at least to that extent, i.e., the mistake in calculating the disallowable amount, the order of the ITO should be deemed to have merged in the order of the Commissioner (Appeals) and, therefore, the Commissioner had no jurisdiction to initiate proceedings under Section 8. However, so far as the other dispute is concerned, the assessee's contention before the Commissioner was that the amount debited to the profit and loss account under the head 'provision for obsolete stores', really represented the cost of obsolete stores actually written off during the year. The Commissioner has not come to any conclusion about this matter. He only observed that it was a fact that the IAC had not verified the items which had been written off and constituted a considerable amount. It has been held in Gee Vee Enterprises v. Addl.
CIT  99 ITR 375 (Delhi) that it is not necessary for the Commissioner to make further enquiries before cancelling the assessment order of the ITO. The Commissioner can regard the order as erroneous on the ground that in the circumstances of case the ITO should have made further enquiries before accepting the statements made by the assessee in his return because the ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further enquiry. The order becomes erroneous because such an enquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. The Commissioner (Appeals) had no occasion to consider this aspect of the matter and, therefore, it cannot be held that the ITO's order in this behalf had merged in the order of the appellate authority.
9. Since the Commissioner has already directed the assessing authority to redo the assessment after going into the details of the items mentioned and after giving sufficient opportunity to the assessee to put forward its case in this behalf, we do not find any ground to interfere with this order in this behalf.
10. In the result, the appeal is partly allowed and the Commissioner order in respect of the first count is quashed.