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Himson Textile Engg. Industries Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1985)14ITD393(Ahd.)
AppellantHimson Textile Engg. Industries
Respondentincome-tax Officer
Excerpt:
1. these are appeals against the orders of the commissioner, surat, under section 263 of the income-tax act, 1961 ('the act') dated 10-8-1982 and 3-8-1982, respectively. as common points are involved and as they were posted and heard together, a common order is being passed.2. for the years under appeal, the commissioner has held under section 263 that the ito's orders dated 6-8-1980 and 16-8-1980, respectively were erroneous insofar as they were prejudicial to the interests of the revenue on the question of allowance of weighted deduction under section 35b of the act. the commissioner has held that the ito has failed to take note of the provisions of section 35b(1)(a) coming into effect in respect of expenditure incurred from 1-4-1978.3. the assessee claimed weighted deduction under.....
Judgment:
1. These are appeals against the orders of the Commissioner, Surat, under Section 263 of the Income-tax Act, 1961 ('the Act') dated 10-8-1982 and 3-8-1982, respectively. As common points are involved and as they were posted and heard together, a common order is being passed.

2. For the years under appeal, the Commissioner has held under Section 263 that the ITO's orders dated 6-8-1980 and 16-8-1980, respectively were erroneous insofar as they were prejudicial to the interests of the revenue on the question of allowance of weighted deduction under Section 35B of the Act. The Commissioner has held that the ITO has failed to take note of the provisions of Section 35B(1)(a) coming into effect in respect of expenditure incurred from 1-4-1978.

3. The assessee claimed weighted deduction under Section 35B on various items of expenditure as below :Export freight 1,00,472* 1,13,465*Bank commission 17,894* -Foreign travelling 1,15,308 x 17,241 xExport service charges - 3,000 xExport commission 1,46,662 x 1,12,188 x(possibly The ITO accepted the claim of the assessees on items marked 'x' and rejected the claim on items marked '*'. In respect of the items on which the ITO disallowed the weighted deduction, the assessee went in appeal to the Commissioner (Appeals), who by his order dated 4-6-1982 confirmed the ITO's action. The Commissioner was not, however, made aware of the existence of the order of the Commissioner (Appeals), even in reply to the show-cause notice issued. Before us, it was explained that this omission on the part of the assessee was on account of genuine oversight and should not be taken as acquiescence in the matter of vesting of legal jurisdiction in the Commissioner which the law does not vest. As this is purely a question of law requiring examination of no additional material and as the existence of the order of the Commissioner (Appeals) is not in dispute, I admit the contention for examining this aspect of the case. The learned representative of the assessee submitted that the Commissioner has no jurisdiction under Section 263 in view of the doctrine of merger. It was, however, admitted that there is no common item of expenditure considered both by the Commissioner (Appeals) and the Commissioner. In support of the argument, great reliance was placed on a Special Bench judgment in Shree Arbuda Mills Ltd. v. ITO [1983] 3 SOT 311 (Ahd.). 4. The question now for consideration is whether the ITO's order dated 6-8-1980 and 16-8-1980 is totally merged in the order of the Commissioner (Appeals) dated 4-6-1982 so as to oust the jurisdiction of the Commissioner for Section 263 action. The doctrine of merger as is well known derives its inspiration from the legal principle that there cannot be at one and the same time more than one operative order covering the same subject-matter. Further, in view of the observations of the Supreme Court in State of Madras v. Madurai Mills Co. Ltd. [1967] 19 STC 144 it cannot be seriously disputed that the doctrine of merger is not of rigid and universal application. The question of fusion or merger of two orders, one of the lower authority and one of the higher appellate authority depends upon the subject-matter of the appellate order and the scope of appeal or revision provisions contemplated by the statute under, which the two orders are passed. The decided cases have also a common undercurrent, viz., if a point could not at all have become the subject matter of appeal, there is no merger-CIT v. Amritlal Bhogilal & Co. [1958] 34 ITR 130 (SC) and CIT v. City Palayacot Co. [1980] 122 ITR 430 (Mad.). The snag, however, comes in cases where a point or item could have become the subject-matter of decision by the appellate authority but actually did not, as in the case now before us, where, if the Commissioner (Appeals) had been made aware of the facts and legal position emerging from Section 35B(1A) which came to the notice of the Commissioner, the weighted deduction already allowed by the ITO could perhaps have been withdrawn by the Commissioner (Appeals) himself if the Commissioner (Appeals) could record his satisfaction on merits after hearing the assessee that such weighted deduction is in fact not admissible. Actually in this case, the Commissioner (Appeals) rejected the claim of the assessee in respect of items marked 'x' in paragraph 2 above, whereas present Section 263 action is in respect of items marked '*'. The Commissioner (Appeals) confirmed the action of the ITO on the ground that the provisions of Section 35B(1) themselves even without Section 35B(1A) being attracted. Thus, the question of further examining the restrictions on allowances under Section 35B(1A) did not and could not have arisen before the Commissioner (Appeals). The question of applicability of Section 35B(1A) was, therefore, purely academic as far as the Commissioner (Appeals) was concerned. In other words, the Commissioner (Appeals) had no occasion to examine the applicability of Section 35B(1 A) which is precisely the provision looked into by the Commissioner in the course of Section 263 action.

Thus, both in respect of provisions of law and inclusion of items of expenditure the Commissioner (Appeals) and the Commissioner have been functioning in mutually exclusive fields.

5. The Special Bench of the Tribunal, in the case of Shree Arbuda Mills Ltd. (supra), has examined the question of applicability of doctrine of merger, in the light of decided cases made available at the relevant time. The Special Bench concluded that the earlier Special Bench decision in Dwarkadas & Co. (P.) Ltd. v. ITO [1982] 1 ITD 303 (Bom.) warrants no departure particularly in the light of the ratio of CIT v.Tejaji Farasram Kharawala [1953] 23 ITR 412 (Bom.) which had a binding effect in the Gujarat High Court. The Special Bench also considered the impact of the two other Gujarat High Court's judgments, viz., Karsandas Bhagwandas Patel v. G.V. Shah, ITO [1975] 98 ITR 255 and Poonjabhai Vanmalidas v. WTO [1978] 114 ITR 38. The Special Bench held that the Gujarat High Court's judgments mentioned here also do not affect the conclusion of the earlier Special Bench in Dwarkadas & Co. (P.) Ltd.'s case (supra). Certain arguments were raised regarding the difficulties that might arise for the income-tax authorities if the doctrine of total merger is adopted in income-tax proceedings. The argument was that the powers of the first appellate authority may not meet the requirements for holding that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the revenue on aspects not considered by the AAC/Commissioner (Appeals). This argument was also carefully examined by the Special Bench, which held that the department would not be remedyless even if the doctrine of total merger is accepted as correct. The availability of remedies to the Income-tax Department was, thus, one of the factors which weighed in the mind of the Special Bench.

6. The Special Bench did not have before it a series of the Madhya Pradesh High Court's judgments which have far-reaching consequences on the case law relied upon by it. In Alok Paper Industries v. CIT [1983] 139 ITR 1064, it was held that there is no total merger. This case was examined in CITv. Mandsaur Electric Supply Co. Ltd. [1983] 140 ITR 677 by a Full Bench of the Madhya Pradesh High Court which also examined the ratio of the two other Madhy^a Pradesh High Court's judgments, viz., CIT v. Narpat Singh Malkhan Singh [1981] 128 ITR 77 and Jaora Sugar Mills Ltd. v. Union of India [1982] 134 ITR 385. It was held that that Commissioner has no jurisdiction and that the Jaora Sugar Mills Ltd.'s case (supra) does not lay down correct law. This judgment was delivered on 25-2-1982.

7. Later on, another Full Bench was constituted by the same Madhya Pradesh High Court and the entire gamut of merger was re-examined threadbare by the Full Bench in CIT v. KS. Banwarilal [1983] 140 ITR 3 in the judgment dated 8-3-1982. In this case, it was held in no uncertain terms that the ITO's order merges with the appellate order of the AAC only to the extent it was considered and decided by the AAC but the matters which are not covered by the appellate order of the AAC are left untouched and to that extent the ITO's assessment order survives, keeping open exercise of revisional jurisdiction under Section 263 in such matters. It was further held that only specific items considered and decided by the AAC in his appellate order are beyond the scope of Section 263.

8. In R.S. Banwarilal's case (supra), the Madhya Pradesh High Court had occasion to critically examine the case law on which the Special Bench of the Tribunal had based its decision. It was held by their Lordships that Tejaji Farasram Kharawala's case (supra) and CIT v. Amritlal Bhogilal & Co. [1953] 23 ITR 420 (Bom.) [modification by the Supreme Court in Amritlal Bhogilal & Co. 's case (supra) being not relevant] is no longer good law because of the observation of the same Bombay High Court in its later judgment in CIT v. Sakseria Cotton Mills Ltd. [1980] 124 ITR 570. Further, their Lordships specifically agreed with the observations of the Gujarat High Court in Karsandas Bhagwandas Paters case (supra) as confirmed in Poonjabhai Vanmalidas'' case (supra).

9. Thus we have to examine in some detail Karsandas Bhagwandas Patel's case (supra), Bhagwati, CJ. (as he then was) observed as below : It would thus be seen that for the purpose of determining the applicability of the principle of merger in a case like the present, the test which has to be applied is whether the decision of the Income-tax Officer on a particular point is the subject-matter of appeal before the Appellate Assistant Commissioner. It may not be the subject-matter of appeal for two reasons, either because the Appellate Assistant Commissioner has no jurisdiction to consider that subject-matter as in the case before the Supreme Court or because the Appellate Assistant Commissioner though having jurisdiction to examine that subject-matter does not do so. In either case there being no decision of the Appellate Assistant Commissioner on the point, the decision of the Income-tax Officer remains untouched and it is open to the Commissioner in exercise of power under Section 33B to revise it or to the Income-tax Officer in exercise of power under Section 35, Sub-section (1), to rectify it if there is a mistake apparent from the record of the assessment.

10. It will be seen from the above that although their Lordships were primarily concerned with the observations regarding rectification, their Lordships have specifically referred to the powers of the Commissioner under Section 33B of the Indian Income-tax Act, 1922 ('the 1922 Act'), which on this issue are in pari materia with those under Section 263 of the 1961 Act. It is, thus, specifically clear that according to their Lordships, there is no unconditional total merger on .all issues.

11. Now, the question arises as to the concept of point or subject-matter covered by the appellate decision. Does 'a point' cover all items covered by a particular section of the Act irrespective of sub-sections or other overriding sections, or does it confine itself to a particular item of receipt or expenditure in respect of which the matter has been adjudicated upon by the ITO/AAC The word 'point' would suggest that one cannot consider a provision of law in general and cover in its sweep all independent and disjoined items of expenditure on which the assessee had claimed a particular relief. One has to consider each class of expenditure separately. In this case, as mentioned above, the assessee claimed under Section 35B weighted deduction on certain classes of itemwised expenditure and there is no single class or item of expenditure examined both by the Commissioner (Appeals) and the Commissioner. I, therefore, hold that in this case there is no merger so as to oust the jurisdiction of Commissioner under Section 263 and that Commissioner has correctly assumed jurisdiction.

In the above reasoning I have incorporated the arguments of the departmental representative.

12. On merits, the learned representative submitted that the appellant is still a small-scale industry and has been registered as such with the Directorate of Industries, Gujarat. He further submitted that in their objection letter dated 14-7-1982, it was contended that the appellants still fell in the category of small-scale industry, the value of machinery being Rs. 9,92,620 in the case of Panna Knitting Industries and Rs. 9,33,700 in the case of Hindustan Textile Engg.

Industries. It was explained that the balance sheet figures are not correct in that they do not take note of adjustments required, on account of sales, revenue expenditure wrongly capitalised, etc. The figures in Himson Textile Engg. Industries given in letter dated 14-7-1982 to the Commissioner was Rs. 9,66,589.

13. I find from the order of the Commissioner that the balance sheet figures have been taken by the Commissioner who held that the authorised representative at the relevant time could not fully prove his version. It was explained at the time of hearing before us that the assessee could not give full details of its figure as the time available was short as the statement had to be prepared with proper care. I find considerable force in this contention. Accordingly, I hold that in the interest of justice, the appellant should be given some time for proving their contentions. Accordingly, I set aside the order of the Commissioner with a direction to pass a fresh order after giving,^, reasonable opportunity to the assessee about the correct value of plant and machinery for the purpose of determining whether the appellant is a small-scale industry for the purpose of Section 35B(1A).

1. I have gone through the order of my learned brother. However, I arn not able to persuade myself to subscribe to the conclusion arrived at by him, for the reasons stated below : 2. The facts as stated in the order my learned brother are not in dispute. However, the relevant dates are tabulated below for the sake of my arriving at different conclusion :Assessment order 16-8-1980 6-8-1980Commissioner (Appeals)'s order 4-6-1982 4-6-1982Commissioner's order 10-8-1982 3-8-1982 3. Under Section 251(1)(i) of the Act, the Commissioner (Appeals) has not only a power to confirm, reduce or annul the assessment but has also a power to enhance the assessment. The ITO had accepted the assessee's claim for weighted deduction under Section 35B on certain items mentioned in the order of my learned brother. When the ITO had framed the assessments on 6-8-1980 and 16-8-1980, Sub-section (1A) of Section 35B had already been brought on the statute by the Finance Act, 1978 with effect from 1-4-1978. For the sake of completing the narration of the facts, it may be mentioned that the said sub-section was omitted by the Finance Act, 1979, with effect from 1-4-1980.

However, since the year under appeal is 1979-80, the provisions of the said sub-section were very much there when the ITO framed the assessments on the dates mentioned above. That provision reads as under : (1A) Notwithstanding anything contained in Sub-section (1), no deduction under this section shall be allowed in relation to any expenditure incurred after the 31st day of March, 1978, unless the following conditions are fulfilled, namely :- (i) the business of export of goods and is either a small-scale exporter or a holder of an Export House Certificate ; or (ii) the business of provision of technical know-how, or the rendering of services in connection with the provision of technical know-how, to persons outside India ; and (b) the expenditure referred to in that sub-section is incurred by the assessee wholly and exclusively for the purposes of the business referred to in Sub-clause (i) or, as the case may be, Sub-clause (ii) of Clause (a).

(a) 'small-scale exporter' means a person who exports goods manufactured or produced in any small-scale industrial undertaking or undertakings owned by him ; Provided that such person does not own any industrial undertaking which is not a small-scale industrial undertaking ; (b) 'Export House Certificate' means a valid Export House Certificate issued by the Chief Controller of Imports and Exports, Government of India ; (c) 'provision of technical know-how' has the meaning assigned to it in Sub-section (2) of Section 80MM ; (d) 'small-scale industrial undertaking' has the meaning assigned to it in Clause (2) of the Explanation below Sub-section (2) of Section 32A.4. In spite of the aforesaid provisions, the ITO had allowed the weighted deduction on certain items to the assessee as mentioned in the order of my learned brother. On the items on which the ITO had not accepted the assessee's claim for weighted deduction, the assessees had preferred appeals before the Commissioner (Appeals), who, on 4-6-1962, confirmed the order of the ITO in this regard. In other words, both the ITO as well as the Commissioner (Appeals) had failed to take into consideration the provisions of Sub-section (1A) of Section 35B. If the Commissioner (Appeals) had felt that by virtue of the provisions of that sub-section, the assessees were not entitled to weighted deduction under Section 35B, inasmuch as they were not 'small-scale exporters', nothing prevented him to enhance the assessment in the cases of both the assessees, as it cannot be disputed that once an appeal comes before the Commissioner (Appeals) the entire assessment comes for his review and the Commissioner (Appeals) is required to pass his appellate order on the basis of the relevant provisions of the Act as they were applicable to the assessment year under consideration. The Commissioner (Appeals), however, gave his decision without considering the provisions of Section 35B(1 A), which he ought to have considered.

Therefore, in my opinion what the Commissioner had done in the instant case is to sit in judgment over the orders of the Commissioner (Appeals). It is in this situation I am of the opinion that the assessment orders of the ITO had merged with the orders of the Commissioner (Appeals). It is for this limited purpose I am of the view that the assessees' cases are covered by the orders of the Special Bench of the Tribunal referred to in the order of my learned brother.

Again, I am of the view that the ratio laid down in the case of Karsandas Bhagwandas Patel (supra), more particularly, the relevant paragraph reproduced by my learned brother in paragraph No. 9 of his order has no application on the facts and circumstances obtaining^in the instant case. For all these reasons, I am, therefore, of the view that the Commissioner had no jurisdiction to initiate the proceedings under Section 263. In view of the conclusion, thus, arrived at by me, it is not necessary to go into the merits of the case.

Difference of opinion has arisen amongst the Members, who constituted the Bench. The following point of difference is referred to the Hon'ble President of the Tribunal under Section 255(4) of the Act: Whether, on the facts and in the circumstances of the case, the Commissioner, Surat, was right in law in assuming jurisdiction to pass the order under Section 263 of the Income-tax Act, 1961 1. These two appeals though relate to the different assessees are taken up together as the issues involved in these matters are identical. It may be stated that these appeals were heard by a Division Bench of two Members. However, there had been a difference of opinion between the two Members who originally heard these appeals and, therefore, they referred the following point of difference to the learned President under Section 255(4) : Whether, on the facts and in the circumstances of the case, the Commissioner, Surat, was right in law assuming jurisdiction to pass the order under Section 263 of the Income-tax Act, 1961 The learned President has directed me to deal with the above point of difference as a Third Member, and it is in these circumstances, that these appeals had come up for hearing before me.

2. Before proceeding further in the matter, I would like to set out the relevant facts leading to the controversy at issue. The original assessments in the case of the aforesaid assessees were completed by the ITO on 6-8-1980 and 16-8-1980, respectively. Thereafter the learned Commissioner called for and examined the records of the said assessee and found that the ITO's order to allow weighted deduction under Section 35B was not justified inasmuch as the assessee had failed to satisfy the conditions laid down in Section 35B(1A). Therefore, the assessments as made by the ITO were prejudicial to the interests of the revenue. The learned Commissioner, therefore, called upon the assessee to show cause as to why an order(s) under Section 263 should not be made so as either to set aside the order of the assessment of the ITO or to modify the same, in order to remedy the error committed by the ITO. The learned Commissioner after hearing the assessee's learned representative was of the opinion that the claim of the assessees for weighted deduction under Section 35B was not tenable. He, therefore, for the reasons recorded in his order dated 10-8-1982, directed the ITO to withdraw the relief allowed to both the assessees in course of the original assessment.

3. As against the said orders as made by the learned Commissioner in case of the respective assessees, the assessees came up in appeal before the Tribunal. It was pointed out that the assessees had claimed weighted deduction on various items of expenditure as indicated below :Export freight 1,00,472* 1,13,465*Bank commission 17,894* -Foreign travelling 1,15,308 x 17,241 xExport service charges - 3,000 xExport commission 1,46,662 x 1,12,188 x (possibly The ITO had accepted the claim of the said assessees in regard to the items marked 'x' and had rejected the claim in regard to the items marked '*'. The assessees had challenged the decision of the ITO to disallow the claim for weighted deduction before the Commissioner (Appeals) who by his order dated 4-6-1982 had confirmed the action of the ITO. It is an admitted fact that the learned Commissioner who had initiated the revisionary proceedings was not made aware of the existence of the orders of the Commissioner (Appeals). However, in the appeal filed before the Tribunal it was claimed that the jurisdiction of the learned Commissioner in revision was ousted as the order of the ITO had merged with that of the Commissioner (Appeals). This ground was admitted by the Tribunal on the footing that it was purely a question of law requiring examination of no additional evidence. In this connection, it was contended on behalf of the assessee that the learned Commissioner had no jurisdiction under Section 263 in view of the doctrine of merger though it was admitted that there was no common item of expenditure considered both by the Commissioner (Appeals) and the learned Commissioner in revision. The learned Accountant Member observed that the doctrine of merger is a well known doctrine and is based on the legal principle that there cannot be at one and the same time more than one operative order covering the same subject-matter.

Relying on the decision of the Supreme Court in the case of Madurai Mills Co. Ltd. (supra), it was stated that the doctrine of merger is not of rigid and universal application. Thus, the question of fusion or merger of two orders, one of the lower authority and the other of the higher appellate authority depended upon the subject-matter of the appellate order and the scope of appeal or revision provisions contemp lated by the statute under which the two orders are passed. It is well settled that if a point could not at all have become the subject-matter of appeal, there is no merger-Amntlal Bhogilal & Co's case (supra) and City Palayacot Co.'s case (supra). However, the difficulty arose in cases where a point or item could have become the subject-matter of decision by the appellate authority but in fact and truth it did not become so. In the instant case, had the Commissioner (Appeals) been made aware of the facts and legal position emerging from Section 35B(1A), the weighted deduction already allowed by the ITO might perhaps, have been withdrawn by the Commissioner (Appeals). In the instant case, the Commissioner (Appeals) had rejected the claim of the assessee in regard to the items marked 'x' above whereas action under Section 263 in revision was in regard to the items marked '*'. Thus, it was clear that the question of examining the restrictions on allowance under Section 35B(1A) did not and could not have arisen before the Commissioner (Appeals). In other words, the Commissioner (Appeals) had no occasion to examine the applicability of the said provisions and that was precisely the reason why the learned Commissioner was required to take recourse to Section 263. To put it differently both the Commissioner (Appeals) and the learned Commissioner have functioned in mutually exclusive fields. The learned Accountant Member thereafter considered the decision of the Special Bench in the case of Shree Arbuda Mills Ltd. (supra). In that case, the Special Bench had concluded that the earlier Special Bench decision in the case of Dwarkadas & Co. (P.) Ltd. (supra) was correctly decided in the light of the ratio of Tejaji Farasram Kharawala's case (supra) and the said decision had a binding effect in the Gujarat High Court. The Special Bench had also considered two other judgments of the Gujarat High Court in the cases of Karsandas Bhagwandas Patel (supra) and Poonjabhai Vanmalidas (supra). The Special Bench had held that the said two judgments did not affect the conclusion reached in Dwarkadas & Co. (P.) Ltd.'s case (supra). The learned Accountant Member then observed that the Special Bench did not have an occasion to consider a series of judgments which have far-reaching consequences on the case-law relied upon by it. He, thus, referred to the decisions in the cases of Alok Paper Industries (supra), Mandsaur Electric Supply Co. Ltd. (supra) and R.S. Banwarilal (supra). In the last mentioned decision it was held that the ITO's order merged with the appellate order of the AAC only to the extent it was considered and decided by the AAC and, therefore, it was open to the learned Commissioner while exercising revisional jurisdiction to deal with the matters which were left untouched by the AAC. It was further held in the said decision that the decision in Tejaji Farasram Kharawala's case (supra) and Amritlal Bhogilal & Co.'s case (supra) was no longer good law because of the observation in the case of Sakseria Cotton Mills Ltd. (supra) and it had agreed with the observations of the Gujarat High Court in Karsandas Bhagwandas Patel's case (supra) as confirmed in Poonjabhai Vanmalidas's case (supra). In light of these decisions, he held that there was no merger so as to oust the jurisdiction of the learned Commissioner under Section 263.

The learned Accountant Member then examined the assessee's claim on merit, namely, that being a small-scale industry, the relief was due to it under Section 35B. He agreed with the assessees' contention on merits by observing that the assessees did not have enough time to give full details of the figures to establish that it was a small-scale industry and in this view of the matter, he set aside the orders of the learned Commissioner with a direction to pass fresh order after giving a reasonable opportunity to the assessees.

4. The learned Judicial Member, however, disagreed with the above view of the learned Accountant Member. He first recorded the following particularsAssessment order 16-8-1980 6-8-1980Commissioner (Appeals)'s order 4-6-1982 4-6-1982Commissioner's order 10-8-1982 3-8-1982 and then observed that Section 251 (1)(i) empowers the Commissioner (Appeals) not only to confirm, reduce or annul the assessment but has also power to enhance the assessment. Now in the instant case, the ITO had accepted the assessees' claim for weighted deduction under Section 35B on certain items (as stated earlier) when he made the respective assessment. Now the provisions of Section 35B(1 A) were already on the statute book and were operative for the assessment year under appeal though the same stood deleted with effect from 1-4-1980. Thus, in spite of the provisions contained in Section 35B(1A), the ITO had allowed weighted deduction on certain items as aforesaid. However, in respect of the items on which the assessees' claim stood rejected, the assessees went in appeal before the Commissioner (Appeals) who confirmed the order of the ITO by his order dated 4-6-1982. Thus, it was clear that both the ITO as well as the Commissioner (Appeals) had failed to take into consideration the provisions of Section 35B(1A). If the Commissioner (Appeals) had felt that by virtue of the said provisions the assessee was not entitled to weighted deduction inasmuch as they were not 'small-scale exporters', nothing prevented him to enhance the assessment in case of both the assessees. It is well settled that when an appeal comes before the Commissioner (Appeals), the entire assessment comes for his review and the Commissioner (Appeals) was required to pass his appellate order on the basis of the relevant provisions of the Act. He had, however, failed to consider the provisions of Section 35B(1A) which he ought to have considered but did not consider. Thus, in effect, the learned Judicial Member observed, that the learned Commissioner while exercising his revisional jurisdiction had sat in judgment over the orders of the Commissioner (Appeals). In this situation, the only inevitable conclusion was that the order of the ITO had merged with that of the Commissioner (Appeals). As a consequence, the decision of the Special Bench in Shree Arbuda Mills Ltd.'s case (supra) referred to by the learned Accountant Member was clearly applicable and that the decision in the case of Karsandas ' Bhagwandas Patel (supra) had no application on the facts of the present case. He, therefore, held that the learned Commissioner had no jurisdiction to initiate the proceedings under Section 263. As a corollary it was not necessary to go into the merits of the claim as made by the respective assessee. It is in the above circumstances that the matter has come up for hearing before me.

5. The learned representative of the assessee relying on the order of the learned Judicial Member submitted before me that the question for consideration is in regard to the merger of the order of the ITO with that of the Commissioner (Appeals). In this connection, it was pointed out that the Full Bench decision in the case of R.S. Banwarilal (supra) in which it is stated that the doctrine of merger applies to income-tax proceedings but the extent of its application depends on the scope and subject-matter of appeal and the decision rendered by the appellate authority. If any item covered by the ITO's order is not agitated by either party though it was open also to the revenue to agitate them or the A AC to consider them suo motu and no decision of the AAC is, therefore, made in respect of the remaining items, the ITO's order merges with the appellate order of the AAC only to the extent it was considered and decided by the AAC. Thus, the items which are left over untouched by the AAC the ITO's order would survive which would permit the Commissioner to exercise revisional jurisdiction under Section 263.

This decision of course deals with the partial merger of the order of the ITO to the extent the matter is considered and decided upon by the AAC. The decision in Tejaji Farasram Kharawala's case (supra) was held to be no longer good law. However, the decision in Tejaji Farasram Kharawala's case (supra) is not expressly overruled by any decision of the Gujarat High Court and as rightly observed by the Special Bench in the case of Shree Arbuda Mills Ltd. (supra), Tejafi Farasram Kharawala's case (supra) is still good law and is binding as the said decision was rendered before the bifurcation of the erstwhile State of Bombay. He next pointed out that in Karsandas Bhagwandas Patel's case (supra), the decision in Tejaji Farasram Kharawala's case (supra) was not considered ; of course, there is a reference to provisions of Section 33B. In that decision, the observations were in the nature of obiter dicta inasmuch as the revisional jurisdiction of the learned Commissioner did not call for consideration direct in that case. Again the decision of the Full Bench of the Madhya Pradesh High Court in the case of Mandsaur Electric Supply Co. Ltd. (supra) does not directly deal with the controversy. Therefore, so long as the decision in Tejaji Farasram Kharawala's case (supra) holds the field in accordance with the decision of the Special Bench in Dwarkadas & Co. (P.) Lid's case (supra), it must be held that there was merger of the ITO's order with that of the Commissioner as a result of which the decision of the Commissioner under Section 263 would be ousted. Shri Vepari then submitted that on merits, the provisions of Section 263 were not applicable. The subject-matter of appeal, according to Shri Vepari, was that the export markets development allowance as claimed by the assessee, the claim related to four items out of which in respect of two items the assessee's claim was allowed by the ITO and in respect of two items the claim stood rejected and the decision of the ITO was upheld in appeal by the Commissioner (Appeals) in respect of the two items. Now when the matter was considered by the Commissioner (Appeals), the provisions of Section 35B(1A) were on the statute book and the said provisions restricted the scope of relief under Section 35B. Since the Commissioner (Appeals) had considered the question of relief due to the assessee under provisions of Section 35B, he must be deemed to have looked into the said provisions and, therefore, the claim of relief under Section 35B as a whole was impliedly covered by the decision of the Commissioner (Appeals). In this connection, reliance was placed on the decision in the case of Oil India Ltd. v.CIT [1982] 138 ITR 836 (Cal.). He next pointed out that even if the provisions of Section 35B(1A) were to be applied, the same were not applicable on the facts of the case as the assessee was a 'small-scale industry' as per the certificate obtained by the Director of Industries of Gujarat State and, therefore, application of fiction was not called for in regard to the definition of the small-scale industry.

6. The learned departmental representative pointed out that so far as the question of determination of the assessee's claim regarding small-scale industry, the matter has not been finally adjudicated upon by the Commissioner in revision and the matter, therefore, is not subject-matter of final decision. The real controversy is whether the provisions of Section 263 were rightly invoked emphasising observations in the case of Karsandas Bhagwandas Patel (supra). The learned departmental representative pointed out that the said decision bearing a latter decision should be followed more so when the said decision was a binding decision. The submission made on behalf of the assessee that the Karsandas Bhagwandas Patel's case (supra) covered the case for rectification and not revision was without substance inasmuch as the consideration which applied to rectification proceedings would apply with equal force to revision proceedings also. In other words, their Lordships of the Gujarat High Court have placed both the proceedings on the same footing or the same pedestal. Now the decision in Karsandas Bhagwandas PateVs case (supra) has been followed by the Full Bench of the Madhya Pradesh High Court in R.S. Banwarijal's case (supra). Again the decision in Karsandas Bhagwandas Patel's case (supra) was followed by their Lordships of the Gujarat High Court in the case of Poonjabhai Vanmalidas (supra). Therefore, according to the latest judicial trend, the position was quite clear that the decision of the lower authorities, namely, the ITO would merge with that of the appellate authority to the extent to which the items have been considered and decided upon by the appellate authority. The items which are left untouched by the appellate authority could be subjected to revisional jurisdiction by the Commissioner under Section 263. The learned departmental representative further submitted that the view canvassed on behalf of the assessee that by implication of the provisions of Section 35B(1A) have been considered by the Commissioner (Appeals) was without force because the Commissioner (Appeals) was never called upon to consider the above provisions in the light of the decision that he reached, viz., to uphold the decision of the ITO rejecting the claim of the assessee. The decision of the Commissioner (Appeals) was based on the decision of the Special Bench in the case of J.H. & Co. v. Second ITO [1982] 1 SOT 150 (Bom.). Thus, the two items which were agitated in appeal before the Commissioner (Appeals) and which formed the subject-matter of the appeal were decided upon by the Commissioner (Appeals) against the assessee and, therefore, to that extent, namely, the said two items, the order of the ITO could be said to have been merged. As regards the other two items, for the reasons stated in his order as also by the learned Accountant Member, the revisional powers were rightly exercised by the Commissioner under Section 263.

7. I have considered the rival submissions. The point of difference referred to me for decision has two aspects. The broader aspect is whether the jurisdiction of the learned Commissioner under Section 263 was barred in the instant case and the narrower aspect is whether on the facts of the case, the learned Commissioner could have exercised jurisdiction under Section 263. Now so far as the broader aspect is concerned, the issue in my opinion, is fairly covered by the decision of the Special Bench in the case of Shree Arbuda Mills Ltd. (supra). In that case, the Tribunal had considered in detail the decision in Tejaji Farasram Kharawala's case (supra) and Karsandas Bhagwandas Patel's case (supra) and had come to the conclusion that the decision in Tejaji Farasram Kharawala's case (supra) was binding in view of the decision of the Gujarat High Court in the case of Anand Municipality v. Union of India AIR 1960 Guj. 40. It was also decided that the decisions in Karsandas Bhagwandas Patel's case (supra) as also in the case of Poonja-bhai Vanmalidas (supra) were distinguishable inasmuch as the said decisions dealt with rectification proceedings. Therefore, what is good in regard to rectification cannot be said to be good in the context of proceedings under Section 263. That apart it was also decided that where an authority has power er discretion to do something for which appropriate circumstances exist, whether or not that authority has, as a matter of fact, exercised that power, such an authority should be deemed to have exercised that power. That apart, it was pointed out that if the view canvassed by the revenue were to be accepted, then it would lead to anomalous position as pointed out in paragraph No. 21 of the said order. Now to persuade me to take a different view, the learned departmental representative strongly relied on the following observations in Karsandas Bhagwandas Patel's case (supra) : It would thus be seen that for the purpose of determining the applicability of the principle of merger in a case like the present, the test which has to be applied is whether the decision of the Income-tax Officer on a particular point is the subject-matter of appeal before the Appellate Assistant Commissioner. It may not be the subject-matter of appeal for two reasons, either because the Appellate Assistant Commissioner has no jurisdiction to consider that subject-matter as in the case before the Supreme Court or because the Appellate Assistant Commissioner though having jurisdiction to examine that subject-matter does not do so. In either case there being no decision of the Appellate Assistant Commissioner on the point, the decision of the Income-tax Officer remains untouched and it is open to the Commissioner in exercise of power under Section 33B to revise it or to the Income-tax Officer in exercise of power under Section 35, Sub-section (1), to rectify it if there is a mistake apparent from the record of the assessment.

(p. 267) On the first blush, the above observations prima facie support the case for the revenue. However, it may be noted that the above observations in the said decision insofar as they relate to applicability of Section 33B are concerned, the same-I may say with all humility and utmost respect- are in the nature of obiter dicta and as pointed out in Shree Arbuda Mills Ltd.'s case (supra) the issue for consideration in Karsandas Bhagwandas Patel's case (supra) was in regard to exercise of rectification powers under Section 35 of the 1922 Act. This aspect of the matter has been dealt with at length in Shree Arbuda Mills Ltd.'s case (supra) and I do not wish to burden this order with the reasons set out in the said decision.

8. Even if I were wrong in the above view and assuming for the sake of argument that the relevant observations in Karsandas Bhagwandas Patel's case (supra) as stated aforesaid constituted a part of ratio deddendi are of general application, in my opinion, since there are two decisions of binding nature rendered by the Bombay High Court and the Gujarat High Court constituted by the Benches of equal strength [namely, Tejaji Farasram Kharawala's case (supra) and Karsandas Bhagwandas Paters case (supra)] conflict with one another and the later decision does not allude to and/or dissent from the earlier, it is open to me to choose which ratio deddendi to follow and in doing so the opinion which is more convincing can be adopted. The above proposition is found in the decision of their Lordships of the Gujarat High Court in the case, of CITv. Madhukant M. Mehta [1981] 132 ITR 159 at p. 180.

The decision in Shree Arbuda Mills Ltd.'s case (supra) which has preferred the view in Tejaji Farasram Kharawala's case (supra) as against the decision in Karsandas Bhagwandas Patel's case (supra) is a decision of the Special Bench (three Members) to which I was a party and, therefore, following the said decision and for the reasons recorded therein, I would hold that the Commissioner's jurisdiction in the light of the facts which I shall presently state was clearly ousted. Now coming to the narrower aspect in the instant case, the facts show that the assessee had made claim for export development allowance in regard to four items (referred to earlier) and in respect of two items the claim was allowed by the ITO and in regard to other two items, the claim was rejected by the ITO and his decision was upheld in appeal by the Commissioner (Appeals). As rightly pointed out by the learned Judicial Member, the provision of Section 35B(1A) is an overriding provision. In spite of the said provision, the ITO had allowed the claim for weighted deduction on certain items as aforesaid.

The point at issue for decision of the Commissioner (Appeals) related to the claim for export markets development allowance under Section 35B and the claim fell for examination related to the allowability of the claim in light of the provisions contained in the said section which included the provisions of Section 35B(1A). If the assessee was not a 'small-scale exporter' the power of enhancement was clearly exercisable by the Commissioner (Appeals) when the assessment came before him. In other words, the jurisdiction for enhancement qua the items allowed by the ITO was clearly exercisable by the Commissioner (Appeals) though not actually exercised. He should be deemed to have exercised that power as observed in Shree Arbuda Mills Ltd.'s case (supra). Therefore, for the reasons recorded in Shree Arbuda Mills Ltd.'s case (supra), I agree with the opinion of the learned Judicial Member that the learned Commissioner had no jurisdiction to initiate proceedings under Section 263, on the facts of these cases.

9. This matter now should go back to the original Bench, which heard the appeals for disposal of the same in accordance with the majority view.


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