Income Tax Act 1961 s.263
T. Kochu Thommen, J.
1. The following question has been at the instance of the Revenue referred to us by the Income-tax Appellate Tribunal, Cochin Bench :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment order had totally merged in the order of the Appellate Assistant Commissioner and that consequently the order by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961, is not legally sustainable ?'
2. In respect of the assessment year 1977-78, relevant to the accounting period ending on December 31, 1976, the Commissioner of Income-tax (the 'Commissioner') in exercise of his power under Section 263 of the Income-tax Act, 1961, revised the order of assessment, although that order had been already appealed against by the assessee and the appeal had been allowed by the Commissioner of Income-tax (Appeals) by his order dated January 16, 1982. The Commissioner directed the Income-tax Officer to make a fresh assessment after giving the assessee a reasonable opportunity of being heard. Aggrieved by the order of the Commissioner, the assessee appealed to the Tribunal. The Tribunal, following the decision of the Special Bench of the Income-tax Tribunal in Dwarkadas & Co. (P.) Ltd. v. ITO, in ITA No. 1852 (Bom) 1977-78 dated July 27, 1979 (reported in Selected Orders of Tribunal, Vol. I, page 495), held that the entire order of assessment had merged in the order of the Commissioner of Income-tax (Appeals) and the Commissioner was, therefore, not entitled to exercise any power under Section 263 in regard to the order of the Income-tax Officer. Upholding the assessee's contention, the Tribunal stated that, although the appeal was taken by the assessee only in regard to certain matters and the appellate authority did not deal with the other matters arising from the order, the entire order of the Income-tax Officer had merged in the appellate order.
3. The fundamental point which arises for our consideration in regard to the exercise of power under Section 263 is whether the order of the Income-tax Officer had merged in the order of the appellate authority, not only in respect of the matters considered and decided by theappellate authority, but also in respect of the other matters arising fromthe order of the Income-tax Officer.
4. It is contended by Shri Ravindranatha Menon, on behalf of theRevenue, that the doctrine of merger in so far as it is applicable to income-tax law must be understood, as stated by the Supreme Court in State of Madras v. Madurai Mills Co. Ltd.  19 STC 144, with reference to the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the statute. Shri Menon submits that only in respect of matters which are the subject-matter of the decision of the appellate authority, can there be a merger, and in respect of the other matters arising from the order of the Income-tax Officer or forming part of the records, there is no merger and to that extent the power of the Commissioner under Section 263 remains in full force. Counsel refers to various decisions, including the decision of the Supreme Court in State of Madras v. Madurai Mills Co. Ltd.  19 STC 144 and the decision of the Gujarat High Court in Karsandas Bhagwandas Patel v. G. V. Shah, ITO : 98ITR255(Guj) .
5. Counsel for the assessee, Shri Jose Joseph, on the other hand, submits that once an appeal is taken from the decision of the Income-tax Officer, the entire order appealed against is deemed to have merged in the order of the appellate authority, even when some of the matters arising from the assessment order had not been dealt with by the appellate authority and the Commissioner can no longer exercise in respect of any matter arising from the order of the Income-tax Officer the power under Section 263, for, in law the entire order of the Income-tax Officer has ceased to exist after its merger in the appellate order. Counsel relies on the decisions in CIT v. Tejaji Farasram Kharawala : 23ITR412(Bom) , CIT v. P. Muncherji & Co. : 167ITR671(Bom) , J.K. Synthetics Ltd. v. Addl. CIT : 105ITR344(All) and other decisions.
6. Section 263, in so far as it is material, reads :
' 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 freshassessment ...'
7. The Commissioner can exercise his power under this section only in relation to an order of the Income-tax Officer. To the extent that the order of the Income-tax Officer has merged in the order of the appellate authority, Section 263 cannot operate. The scope of Sections 33B and 33A of the Indian Income-tax Act, 1922 (the 'old Act'), which, in scope, are identical respectively to Sections 263 and 264 of the present Act was considered by the Supreme Court in CIT v. Amritlal Bhogilal & Co. : 34ITR130(SC) . The Supreme Court stated (pp. 139 and 140):
'The Commissioner's revisional power under Section 33A cannot be exercised to the prejudice of the assessee in any case. It can be exercised in respect of orders passed by any authority subordinate to the Commissioner; but in no case can the revisional order prejudicially affect the assessee. It is significant that the Explanation to Section 33A expressly provides that the Appellate Assistant Commissioner shall be deemed to be an authority subordinate to the Commissioner. In other words, in exercise of this revisional power, the Commissioner may modify or reverse in favour of the assessee even the orders passed by the Appellate Assistant Commissioner. The position under Section 33B, however, is different. The Commissioner's revisional power under Section 33B can be exercised only in respect of orders passed by the Income-tax Officer. The appellate orders are outside the purview of Section 33B. That is one important distinction between the two revisional powers. The other important distinction is that, whereas under Section 33A the revisional jurisdiction cannot be exercised to the prejudice of the assessee, under Section 33B the Commissioner can, in exercise of his revisional power, make orders to the prejudice of the assessee. It is not disputed that under Section 33B erroneous orders passed by the Income-tax Officer which are prejudicial to the revenue can be revised by the Commissioner.'
8. The exercise of this power is possible only so long as the order of the Income-tax Officer remains in existence. This court has held that the pendency of an appeal is not a bar to the exercise of jurisdiction under Section 263, for there is no question of merger of the Income-tax Officer's order until the appellate authority has disposed of the appeal: See Kelpunj Enterprises v. CIT : 108ITR294(Ker) . The appellate authority is empowered under Section 251 not only to confirm, reduce or annul the assessment, but also to enhance the assessment. This power to enhance is conferred on him in an appeal by the assessee for the reason that the Revenue has no right to appeal against the order of the Income-tax Officer. Nevertheless, as stated by the Supreme Court inCIT v. Shapoorji Pallonji Mistry : 44ITR891(SC) and CIT v. Rai Bahadur Hardutroy Motilal Chamaria : 66ITR443(SC) , the appellate poweris confined to the matters on record. The appellate authority cannotfind new sources of income which are not mentioned in the return filed by the assessee or considered by the Income-tax Officer.
9. In CIT v. Tejaji Farasram Kharawala : 23ITR412(Bom) , Chagla C.J., speaking for the Division Bench, stated (p. 418):
'Once an appeal was preferred from the order of the Income-tax Officer and an order was passed in that appeal, the order of the Income-tax Officer became merged in the order of the Appellate Assistant Commissioner ... '
10. Following that decision, the same Division Bench held in CIT v. Amritlal Bhogilal & Co. 0043/1954 : 23ITR420(Bom) that even when a composite order of the Income-tax Officer dealt with the assessment and also the grant of registration of a firm and that order was the subject-matter of an appeal, which was disposed of, the entire order became merged in the order of the appellate authority. Overruling that decision, the Supreme Court in CIT v. Amritlal Bhogilal & Co. : 34ITR130(SC) , stated (p. 136):
'There can be no doubt that, if an appeal is provided against an orderpassed by a Tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses thedecision of the Tribunal, it is obvious that it is the appellate decisionthat is effective and can be enforced. In law the position would be justthe same even if the appellate decision merely confirms the decision ofthe Tribunal. As a result of the confirmation or affirmation of the decision of the Tribunal by the appellate authority, the original decisionmerges in the appellate decision and it is the appellate decision alonewhich subsists and is operative and capable of enforcement; but the question is whether this principle can apply to the Income-tax Officer'sorder granting registration to the respondent.'
11. So stating, the court held that inasmuch as the Income-tax Officer's order granting registration to the firm did not, and could not, form the subject-matter of the appeal, the order of the appellate authority against the composite order of the Income-tax Officer resulted in the merger of the original order only in regard to matters of assessment and not registration. The order of the appellate authority disposing of the appeal against the composite order was not wide enough to result in the merger of the entire order of the Income-tax Officer, but only that part of the order which was, and which in law, could have been, appealed against. This decision is relied on by various High Courts in answering thequestion as to whether or not there is a merger of the Income-tax Officer's order in respect of matters not considered and decided in the appellate order and the courts have expressed divergent views.
12. In State of Madras v. Madurai Mills Co. Ltd. : 1SCR732 , the question arose whether the notice dated August 4, 1954, issued by the Board of Revenue proposing revision of the order of the assessing authority dated November 28, 1952, allowing the exclusion of certain items from the turnover of the assessee was barred by limitation in terms of Section 12(4)(b) of the Madras General Sales Tax Act, 1939, which prescribed a period of four years. The Supreme Court stated that since the exclusion of the items in question was not raised before the Deputy Commissioner and the only point raised before him was the inclusion of tax collected by the assessee on the taxable turnover, the subject-matter of the proposed revision by the Board, being the assessment order dated November 28, 1952, which had not merged in the order of the Deputy Commissioner, was barred by limitation. The court pointed out (p. 150):
'In the circumstances of the present case, it cannot be said that there was a merger of the order of assessment made by the Deputy Commercial Tax Officer dated the 28th November, 1952, with the order of the Deputy Commissioner of Commercial Taxes dated the 21st August, 1954, because the question of exemption of the value of yarn purchased from outside the State of Madras was not the subject-matter of revision before the Deputy Commissioner of Commercial Taxes. The only point that was urged before the Deputy Commissioner was that the sum of Rs. 6,57,971-4-9 collected by the respondent by way of tax should not be included in the taxable turnover. This was the only point raised before the Deputy Commissioner and was rejected by him in the revision proceedings. On the contrary, the question before the Board of Revenue was whether the Deputy Commercial Tax Officer, Madurai, was right in excluding from the net taxable turnover of the respondent the sum of Rs. 7,74,62,706-1-6 which was the value of the cotton purchased by the respondent from outside the State of Madras. We are, therefore, of opinion that the doctrine of merger cannot be invoked in the circumstances of the present case. '
13. Dealing with the contention of the State with reference to the observation of Gajendragadkar J.. in CIT v. Amritlal Bhogilal and Co. : 34ITR130(SC) , as regards the doctrine of merger, the Supreme Court stated (p. 149 of 19 STC):
'But the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, oneby the inferior tribunal, and the other by a superior tribunal, passed in an appeal or revision, there is a fusion or merger of two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. In our opinion, the application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction.'
14. Following this decision, the Gujarat High Court in Karsandas Bhagwandas Patel v. G.V. Shah, ITO : 98ITR255(Guj) considered the scope of merger in the context of Section 35 of the Indian Income-tax Act, 1922, and held that the order of the Income-tax Officer was available for rectification by him even after the decision of the appellate authority in regard to matters which had not been dealt with by the appellate authority, for, in respect of these matters, there was no merger, Speaking for the Bench, Bhagwati C. J. (as he then was) stated (p. 265):
' The order of assesssment made by the Income-tax Officer merges in the order of the Appellate Assistant Commissioner only in so far as it relates to items considered and decided by the Appellate Assistant Commissioner. That part of the order of assessment which relates to items not forming the subject-matter of the appellate order is left untouched and does not merge in the order of the Appellate Assistant Commissioner. If there is any mistake in this part of the order which is apparent from the record of the assessment, the Income-tax Officer can rectify such mistake because the mistake would be his own mistake which he can always correct under Section 35, Sub-section (1). '
15. The rationale of these decisions is that the doctrine of merger, whatever be its scope in general law, when considered in the context of the provisions of the taxing statute, can have application only in respect of matters considered and decided by the appellate authority, and not matters falling outside his decision. See also the decision of the Gujarat High Court in Poonjabhai Vanmalidas v. WTO : 114ITR38(Guj) following the decision in Karsandas Bhagwandas Patel v. G. V. Shah, ITO : 98ITR255(Guj) . This view of the Gujarat High Court was followed by various other High Courts in a number of decisions. See CIT v. Sakseria Cotton Mills Ltd. : 124ITR570(Bom) , Jeewanlal (1929) Ltd. v. CIT : 106ITR33(Cal) , Singho Mica Mining Co. Ltd. v. CIT : 111ITR231(Cal) , CIT v. City Palayacot Co. : 122ITR430(Mad) , Puthuthotam Estates v. State of Tamil Nadu : 125ITR41(Mad) , Jaora Sugar Mills Ltd. v. Union of India : 134ITR385(MP) , Alok Paper Industries v. CIT : 139ITR1064(MP) , CIT v. R. S. Banwari-lal : 140ITR3(MP) , CIT v. Mandsaur Electric Supply Co. : 140ITR677(MP) , CIT v. Rajput (K. L.) : 164ITR197(MP) and Ganga Devi v. CWT 0043/1985 . In Jeewanlal (1929) Ltd. v. Addl. CIT : 108ITR407(Cal) , Sabyasachi Mukharji J. (as he then was) adopted a line of reasoning which, we respectfully think, was in conformity with the view expressed by the Gujarat High Court. The learned judge stated that even when an appeal had been disposed of without the appellant urging a point that had been conceded by the Income-tax Officer by rectifying the order of assessment, the rectified order had merged in the appellate order on the point, and the Commissioner was no longer entitled to exercise his power under Section 263 in regard to that point. The learned judge pointed out (p. 410):
'When the Appellate Assistant Commissioner disposed of the appeal on the 3rd of February, 1972, the order which was the subject-matter of the appeal was the order as amended. Therefore, the Appellate Assistant Commissioner having disposed of the appeal, the original order as rectified became merged in the order of the Appellate Assistant Commissioner.'
16. In Oil India Ltd. v. CIT : 138ITR836(Cal) , the same learned judge held that inasmuch as the quantum of depreciation was the subject-matter of the appeal and the appellate authority directed the Income-tax Officer to fix depreciation at a certain percentage, in regard to the same matter, the Commissioner had no jurisdiction under Section 263. This view, in our view, is also consistent with the Gujarat High Court's view. As opposed to this view, which appears numerically to be the dominant view of the High Courts, there is a view favourable to the assessee, as expressed by the Allahabad High Court in J.K. Synthetics Ltd. v. Addl. CIT : 105ITR344(All) and followed by the Bombay High Court in Remex Construction/Remex Electricals v. ITO : 166ITR18(Bom) and CIT v. P. Muncherji & Co. : 167ITR671(Bom) , by the Calcutta High Court in General Beopar Co. Pvt. Ltd. v. CIT : 167ITR86(Cal) and by the Karnataka High Court in Addl. CIT v. Vijayalakshmi Lorry Service : 157ITR327(KAR) . The view expressed by the Allahabad High Court is clear from the following observation of that court in J. K. Synthetics Ltd. v. Addl. CIT : 105ITR344(All) :
'In the present case, the Income-tax Officer upheld the claim of the assessee with regard to the development rebate and depreciation on the finding that it was a petro-chemical industry. This finding could, in our opinion, be canvassed before the Appellate Assistant Commissioner if the Department or the Commissioner chose to do so. Simply because the Department did not have a right to file an appeal, it cannot be said thatthe findings against the Revenue were not capable of being challenged or being adjudicated upon in the appeal filed by the assessee. In view of the scope and nature of the appellate powers, the entire subject-matter of the assessment order was within the jurisdiction of the Appellate Assistant Commissioner. That being so, the entire assessment order will merge in the appellate order, irrespective of the points urged by the parties or decided by the appellate authority.'
17. If this were the correct view, the result would be that once an appeal is filed by the assessee, the entire order of the Income-tax Officer, notwithstanding the ambit of the appeal or the matters considered and decided in appeal, is deemed to have merged in the order of the appellate authority. The Commissioner is thus divested of his power under Section 263 even in regard to matters not appealed against or decided by the appellate authority. The result would be the divestiture or dilution of an effective power conferred under Section 263 to bring to assessment what had escaped assessment. As stated by the Supreme Court in CIT v. Rai Bahadur Hardutroy Motilal Chamaria : 66ITR443(SC) , the power under Section 33B of the 1922 Act (section 263 of the present Act) is, like the power under Section 34 of that Act (sections 147 and 148 of the present Act), conferred with a view to bringing to tax income which had escaped assessment. Referring to Sections 34 and 33B, the Supreme Court stated (p. 448):
'The question is whether we should accept the interpretation suggested by the Commissioner in preference to the one which has held the field for nearly 37 years. In view of the provisions of Sections 34 and 33B by which escaped income can be brought to tax, there is reason to think that the view expressed uniformly about the limits of the powers of the Appellate Assistant Commissioner to enhance the assessment has been accepted by the Legislature as the true exposition of the words of the section.'
18. This being the main object of Section 263, a narrow construction of thatprovision limiting or diluting its scope would be a serious inroad into theobject of the legislative conferment of power to subserve the publicinterest in bringing to tax escaped income. It must be emphasised thatan order under Section 263 is an appealable order as provided under Section 253(1). The assessee who is truly aggrieved by the exercise of powerby the Commissioner is, therefore, not without remedy.
19. The argument on behalf of the assessee, however, is that if the Revenue were aggrieved by the order of the Income-tax Officer, it would be open to it to challenge that part of the order which was contrary to its interest in an appeal filed by the assessee, and once such an appealhas been presented, and the machinery has been thus set in motion, the assessee would no longer be in a position to stop its operation by withdrawing the appeal. In the assessee's appeal, the Revenue can challenge any part of the order of the Income-tax Officer in so far as it is prejudicial to the interest of the Revenue. Against the order of the appellate authority, the Revenue, like the assessee, is equally entitled to file an appeal to the Tribunal. On this line of reasoning, Shri Jose Joseph contends that the Revenue should be contented with that procedure rather than interfere summarily with the Income-tax Officer's order under Section 263.
20. The fact that the Revenue has, under the relevant provisions, a right to agitate matters in the assessee's appeal against the Income-tax Officer's order, or that it has a further right of appeal to the Tribunal, is no answer to the contention of the Revenue that the assessee cannot legitimately complain if, apart from there provisions, the Legislature has in its wisdom provided an easier and more efficacious procedure under Section 263, and that the assessee, if truly aggrieved, is not without remedy by way of appeal to the Tribunal. See the principle stated by Beaumont C.J. in CIT v. Naik (D. R.)  7 ITR 362.
21. If Section 263 confers a certain power on the Commissioner, which it does, the fact that the Revenue has recourse also to other provisions of the Act for correcting the errors of the Income-tax Officer does not in any way lessen the efficacy of the power under Section 263. With great respect, we do not accept the narrower construction of Section 263 as adopted by the Allahabad High Court in J. K. Synthetics Ltd. v. Addl. CIT : 105ITR344(All) , and we gratefully adopt the construction of that provision as suggested by the Gujarat High Court in Karsandas Bhagwandas Patel v. G. V. Shah, ITO : 98ITR255(Guj) .
22. In our view, therefore, the power of the Commissioner under Section 263 remains in full force, notwithstanding the order of the appellate authority, in respect of matters not considered and decided in appeal. Accordingly, we answer the question in the negative, that is, in favour of the Revenue and against the assessee.
23. We direct the parties to bear their respective costs in this tax referred case.
24. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.