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Karsandas Bhagwandas Patel Vs. G.V. Shah, Income-tax Officer, Rajkot and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberSpecial Civil Application No. 17 of 1967
Judge
Reported in[1975]98ITR255(Guj)
ActsIncome Tax Act, 1961 - Sections 33B, 154(1A), 155, 250 and 297(2); Income Tax Act, 1922 - Sections 35(1) and 35(5)
AppellantKarsandas Bhagwandas Patel
RespondentG.V. Shah, Income-tax Officer, Rajkot and ors.
Appellant Advocate K.G. Vakharia, Adv.
Respondent Advocate K.H. Kaji and; M.G. Doshit, Advs.
Cases ReferredC) and Mandal Ginning and Pressing Co. Ltd. v. Commissioner of Income
Excerpt:
direct taxation - rectification in assessment - section 154 of income tax act, 1961 - where decision of income-tax officer on particular point not challenged by assessee before appellate assistant commissioner - appellate assistant commissioner does not suo motu choose to examine its correctness - it can be rectified by income-tax officer - assessee cannot agitate that point in an appeal before tribunal. - - 1. this petition raises an interesting question of law relating to the power of the income-tax officer to rectify a mistake apparent from the record of the assessment after an appeal against a part of the assessment is disposed of by the appellate assistant commissioner. the period of four years must, therefore, be counted from the date of the order of the appellate assistant.....bhagwati, c.j. 1. this petition raises an interesting question of law relating to the power of the income-tax officer to rectify a mistake apparent from the record of the assessment after an appeal against a part of the assessment is disposed of by the appellate assistant commissioner. the question arises under section 35, sub-section (1), of the indian income-tax act, 1922. in order to appreciate the question it is necessary to state a few facts giving rise to the petition. 2. the petitioner was at all material times a partner in a firm called m/s. steel and forms work co. the assessment of the petitioner as an individual for the assessment year 1959-60 for which the relevant account year was the financial year ending 31st march, 1959, was completed by the income-tax officer on 9th.....
Judgment:

Bhagwati, C.J.

1. This petition raises an interesting question of law relating to the power of the Income-tax Officer to rectify a mistake apparent from the record of the assessment after an appeal against a part of the assessment is disposed of by the Appellate Assistant Commissioner. The question arises under section 35, sub-section (1), of the Indian Income-tax Act, 1922. In order to appreciate the question it is necessary to state a few facts giving rise to the petition.

2. The petitioner was at all material times a partner in a firm called M/s. Steel and Forms Work Co. The assessment of the petitioner as an individual for the assessment year 1959-60 for which the relevant account year was the financial year ending 31st March, 1959, was completed by the Income-tax Officer on 9th March, 1960, and since the firm of M/s. Steel and Forms Work Co. had not been assessed at that time, the Income-tax Officer took the share of the petitioner in the profits of the said firm at nil subject to rectification and assessed the petitioner on a total income of Rs. 71,920. The firm of M/s. Steel and Forms Work Co. was thereafter assessed for the assessment year 1959-60, by an order of assessment, dated 16th April, 1960. The said firm being aggrieved by the order of assessment preferred an appeal against it to the Appellate Assistant Commissioner. There were four items in dispute before the Appellate Assistant Commissioner. One item related to expenditure of Rs. 1,600 in the miscellaneous expenses account and the other related to expenditure of Rs. 2,517 in the car and motor vehicles maintenance account. Both these items of expenditure were disallowed by the Income-tax Officer, and the Appellate Assistant Commissioner affirmed the disallowance. The third item related to an addition of Rs. 45,000 to the book profits made by the Income-tax Officer. The Appellate Assistant Commissioner in appeal reduced the addition by 'a round of Rs. 8,000'. The last item challenged in appeal comprised two sums, namely, Rs. 600 spent on printing and stationery and Rs. 400 spent on electric fittings account. The Income-tax Officer had disallowed both these amounts at the Appellate Assistant Commissioner held that the disallowance was not correct and must be deleted. The Appellate Assistant Commissioner accordingly, by an order dated 18th May, 1961, partially allowed the appeal and directed the Income-tax Officer to modify the assessment in accordance with his decision. This decision was presumably carried out by the Income-tax Officer. Thereafter, on 25th February, 1963, the Income-tax Officer, after following the procedure prescribed by section 35, sub-section (1), rectified the assessment of the firm by adding back certain additional depreciation on motor car and motor-cycle which had been erroneously allowed in the original assessment. With a view to including the petitioner's share in the profits of the firm in the individual assessment of the petitioner, the Income-tax Officer issued a notice dated 7th December, 1965, calling upon the petitioner to show cause why the assessment should not be rectified as there was a mistake apparent from the record 'within the meaning of section 154/155 of the Income-tax Act, 1961'. The petitioner by his reply, dated 16th December, 1965, objected against the rectification of his assessment but the objection was in vain and the Income-tax Officer passed an order dated 9th March, 1966, rectifying the assessment of the petitioner by including a sum of Rs. 64,414 representing the petitioner's share in the profits of the firm. This order was headed 'Order under section 35 of the Indian Income-tax Act, 1922/Order under section 155 of the Income-tax Act, 1961'. The petitioner preferred an appeal against this order on the footing that it was an order under section 155. The Appellate Assistant Commissioner who heard the appeal took the view that by reason of section 297(2)(a), an order of rectification could be made by the Income-tax Officer only under section 35, sub-section (5), and not under section 155 and the order of rectification passed by the Income-tax Officer under section 155 was, therefore, invalid and he accordingly set aside the order of rectification. This led to the filing of an appeal to the Tribunal by the revenue. During the pendency of the appeal, however, the Income-tax Officer issued another notice dated 23rd September, 1966, calling upon the petitioner to show cause why his assessment should not be rectified under section 35, sub-section (5), with a view to including his share in the profits of the firm in his individual assessment. This show-cause notice was issued ex majore cautela on the assumption that the order passed by the Appellate Assistant Commissioner was correct and the original order of rectification dated 9th March, 1966, was invalid as one made under section 155. The petitioner showed cause but all the objections raised by him were overruled and the Income-tax Officer by an order dated the 6th December, 1966, rectified the assessment of the petitioner under section 35, sub-section (5). The petitioner thereupon filed the present petition challenging the validity of the order of rectification dated 6th December, 1966.

3. Whilst the petition was pending, the appeal preferred by the revenue against the order of the Appellate Assistant Commissioner came to be heard by the Tribunal. The Tribunal held that the order of rectification dated 9th March, 1966, was really an order under section 35, sub-section (5), and not under section 155 and no appeal, therefore, lay against it to the Appellate Assistant Commissioner and the Appellate Assistant Commissioner had no power to set it aside and on this view, the Tribunal reserved the order of the Appellate Assistant Commissioner and restored the order of rectification dated 9th March, 1966, passed by the Income-tax Officer. Having regard to this subsequent development, the petitioner applied for leave to amend the petition and, with leave of the court, amended the petition so as to include a challenge to the validity of the order of rectification dated 9th March, 1966. The petitioner also applied for a reference of the questions of law arising out of the order of the Tribunal and, on the application of the petitioner, two questions of law were referred by the Tribunal to this court in Income-tax Reference No. 28 of 1970. Both the questions of law were answered against the assessee by this court by a judgment delivered on 28th July, 1972, in Income-tax Reference No. 28 of 1970 and it was held that the view taken by the Tribunal was correct. The result is that we have now two orders of rectification under section 35, sub-section (5), one dated 9th March, 1966, and the other dated 6th December, 1966. Obviously, if the first order of rectification was valid, the second must be held to be ineffective. If, however, the first order of rectification is invalid on any ground, the second would also equally be invalid for the validity of both is challenged on the same grounds.

4. We may now set out the grounds on which the validity of the two orders of rectification is challenged on behalf of the petitioner in the petition. They are :

'(A) The order of assessment passed by the Income-tax Officer against the firm of M/s. Steel and Forms Work Co. on 16th April, 1960, was merged in the order of the Appellate Assistant Commissioner dated 18th August, 1961, and the Income-tax Officer had, thereafter, in view of the merger, no jurisdiction to rectify the assessment of the said firm and the order of rectification dated 25th February, 1963, passed by the Income-tax Officer rectifying the assessment of the said firm was null and void. The final order passed in the case of the said firm was accordingly the order of the Appellate Assistant Commissioner dated 18th August, 1961, and since both the impugned orders of rectification were made more than four years after the date of the orders of the Appellate Assistant Commissioner, they were without jurisdiction and void as being outside the time limit provided in section 35, sub-section (5).

(B) The final order in the case of the firm which the period of four years is to be computed within which an order of rectification can be passed under section 35, sub-section (5), does not include an order of rectification passed under section 35, sub-section (1), rectifying the assessment of the firm. The period of four years must, therefore, be counted from the date of the order of the Appellate Assistant Commissioner, namely, 18th August, 1961, and not from the date of the order of rectification of the firm's assessment, namely, 15th February, 1963. If that be so, the two impugned orders of rectification made by the Income-tax Officer are clearly beyond the time limit prescribed under section 35, sub-section (5), and must be held to be invalid.'

5. We shall examine these grounds in the order in which we have set them out.

6. Re : Ground (A) :- This ground is based on the hypothesis that when an appeal is preferred against an order of assessment by the Income-tax Officer and the appeal is disposed of by the Appellate Assistant Commissioner, the order of assessment made by the Income-tax Officer merges in the order of the Appellate Assistant Commissioner, not only in respect of items considered and decided by him and it ceases to exist altogether. Now, if this hypothesis is correct and there is complete merger or fusion of the order of assessment made by the Income-tax Officer with the order of the Appellate Assistant Commissioner, so that the order of assessment made by the Income-tax Officer ceases to have existence, it would indeed be a very strong argument that the Income-tax Officer cannot thereafter rectify the assessment. It is clear on a plain reading of the language of section 35, sub-section (1), that the power to rectify a mistake in an order is conferred only on the authority which passed the order. The Income-tax Officer can rectify a mistake only if it is a mistake in the order of assessment made by him and similarly the Appellate Assistant Commissioner can rectify a mistake only if it is in the order passed him in appeal. It would, therefore, seem that if the order of assessment made by the Income-tax Officer has ceased to exist by reason of having merged wholly in the order of the Appellate Assistant Commissioner, the Income-tax Officer cannot rectify a mistake in the order of assessment; the mistake, if any, which vitiated the order of assessment would then be a mistake in the order of the Appellate Assistant Commissioner who alone would be entitled to rectify it. The question is whether this hypothesis is correct. Does the doctrine of merger apply in all its fulness so that an order of assessment made by the Income-tax Officer could be said to merge in the order of the Appellate Assistant Commissioner wholly, not only in respect to items considered and decided by the Appellate Assistant Commissioner but also in respect of items not considered and decided by him

7. Now, the doctrine of merger is a well-known doctrine in law and there have been recently a number of pronouncements of the Supreme Court as to the true scope and extent of this doctrine. The following passage from the judgment of the Supreme Court in Commissioner of Income-tax v. Amritlal Bhogilal & Co. : [1958]34ITR130(SC) may be cited as an adequate statement of the doctrine :

'.....if an appeal is provided against an order passed by a tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the tribunal, it is obvious that it is the appellate decision that is effective and can be enforced. In law the position would be just the same even if the appellate decision merely confirms the decision of the tribunal. As a result of the confirmation of affirmance of the decision of the tribunal by the appellate authority, the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement;.....'

8. The question is whether this doctrine applies in income-tax proceedings and, if so, to what extent. The first part of the question is not susceptible of a straight answer, 'yes' or 'no'. Having regard to principle as well as authority it is not possible to say that the doctrine of merger does not apply at all in income-tax proceedings. Take for example a case like Mather & Co. (P.) Ltd. v. Income-tax Officer : [1969]71ITR247(Ker) , where an order was made by the Income-tax Officer under section 23A and it was appealed against by the company and the Appellate Assistant Commissioner affirmed it. The order under section 23A made by the Income-tax Officer would in such a case be replaced wholly by the order of the Appellate Assistant Commissioner : there would be complete merger or fusion of the order of the Income-tax Officer with the order of the Appellate Assistant Commissioner. The same would be the position where an appeal is preferred by a member of a Hindu undivided family against an order made by the Income-tax Officer refusing to record a partition under section 25A and in the appeal, the Appellate Assistant Commissioner affirms the order. If an order made by the Income-tax Officer under section 23A or 25 is set aside by the Appellate Assistant Commissioner in the appeal, there can be no doubt that the order of the Income-tax Officer would merge in the order of the Appellate Assistant Commissioner : the order of the Appellate Assistant Commissioner would be the only effective order. Equally, the same consequence would follow where the order of the Income-tax Officer under section 23A or 25 is affirmed by the Appellate Assistant Commissioner; the order of the Appellate Assistant Commissioner would in such a case completely substitute the order of the Income-tax Officer. So also where an appeal is preferred by an assessee against an order of assessment in respect of all the items considered and decided by the Income-tax Officer so that the whole of the order of assessment made by the Income-tax Officer is for consideration by the Appellate Assistant Commissioner, the effect of the decision of the Appellate Assistant Commissioner would be to substitute his determination for that of the Income-tax Officer in respect of all items considered and decided by the Income-tax Officer and the order of the Income-tax Officer would be merged wholly in the order of the Appellate Assistant Commissioner. But, what would be the position when an appeal is preferred against an order of assessment in respect of some only out of several items considered and decided by the Income-tax Officer

9. There can be no doubt that the decision of the Appellate Assistant Commissioner in respect of the items which form the subject-matter of the appeal would supersede the decision of the Income-tax Officer qua these items, irrespective of whether the decision of the Appellate Assistant Commissioner is one of affirmance or modification or reversal. But the items in respect of which the appeal is preferred are not the only items which can be considered and decided by the Appellate Assistant Commissioner. It is now well-settled as a result of several decisions of this court as well as the Supreme Court that if an assessee does not choose to appeal, the order of assessment becomes final, subject to any power of revision which the Commissioner may have under section 33B but once an appeal is preferred by the assessee, the assessment is opened up and the Appellate Assistant Commissioner can examine all aspects of the assessment, not only those which are complained of by the assessee but also those in regard to which the assessee is satisfied and has not preferred an appeal. This court pointed out in Commissioner of Income-tax v. Karamchand Premchand Private Ltd. : [1969]74ITR254(Guj) , after quoting with approval the observations of Chagla C.J. in Narrondas Manordass v. Commissioner of Income-tax : [1957]31ITR909(Bom) :

'The powers of the Appellate Assistant Commissioner are not confined to the subject-matter of the appeal but extend to the subject-matter of the assessment. The entire assessment is thrown open before the Appellate Assistant Commissioner and so long as he does not travel outside the matters considered and determined by the Income-tax Officer, he can correct any decision of the Income-tax Officer in the course of the assessment even if the assessee is satisfied with it and has not challenged it in the appeal.'

10. The Appellate Assistant Commissioner may, therefore, examine the correctness of the decision of the Income-tax Officer in regard to a particular item even if it does not form the subject-matter of the appeal preferred by the assessee. Now, obviously, if the Appellate Assistant Commissioner does so, his decision in regard to that particular item would supersede or replace that of the Income-tax Officer, irrespective of whether it be a decision of affirmance or variation or reversal. But the question is : what would be the position if no grievance is made by an assessee in respect of a particular item, whether originally in the memorandum of appeal or with leave granted under section 31, sub-section (2A), and the Appellate Assistant Commissioner also does not choose to consider that particular item suo motu There would not in such a case be any decision of the Appellate Assistant Commissioner in regard to that particular item. Then how can it be said that the decision of the Income-tax Officer is superseded or replaced by the decision of the Appellate Assistant Commissioner so far as that particular item is concerned It is true that the Appellate Assistant Commissioner could suo motu revise the decision of the Income-tax Officer in regard to that particular item but so long as he does not do so, the decision of the Income-tax Officer stands and there is no merger or fusion of it with the decision of the superior authority. If the Appellate Assistant Commissioner were under an obligation to examine the correctness of every decision recorded by the Income-tax Officer in the process of assessment, it might be possible to contend that when the Appellate Assistant Commissioner does not say anything about a particular decision recorded by the Income-tax Officer, he may be presumed to have assented to it and an inference of implied affirmance may be raised, but it cannot be disputed that, though the Appellate Assistant Commissioner has undoubted power to revise any decision of the Income-tax Officer suo motu, there is no obligation on him to do so and in the absence of such obligation, there can be no scope for the application of the doctrine of implied decision. We may in this connection quote the following passage from the judgment of this court in Commissioner of Income-tax v. Karamchand Premchand Pvt. Ltd. : [1969]74ITR254(Guj) :

'....we fail to see how it can be said that there was any decision of the Appellate Assistant Commissioner in regard to the disallowance of the third claim when that was admittedly not a matter considered and decided by him. It is no doubt true that even if the assessee did not carry this matter in appeal by originally including it in the memorandum of appeal or with leave of the Appellate Assistant Commissioner under section 250, sub-section (5), the Appellate Assistant Commissioner was entitled to consider and decide it since the entire assessment was open before him. But he was not bound to do so and if in fact he did not consider it, it is difficult to see how it can be said that he decided it against the assessee. It is only if the Appellate Assistant Commissioner was under an obligation to examine the correctness of the entire assessment irrespective of the grounds of appeal taken by the assessee, that it could conceivably be urged that the Appellate Assistant Commissioner must be presumed to have examined the correctness of the decision of the Income-tax Officer as regards the disallowance of the third claim and since he did not reverse that decision, he must be held to have accepted it as correct. But it is apparent, and this indeed was not disputed on behalf of the assessee, that the Appellate Assistant Commissioner was under no obligation to examine the correctness of every decision recorded by the Income-tax Officer in the course of the assessment. The entire assessment was of course before him and he had the power, if he so chose, to examine any particular decision of the Income-tax Officer and to correct it if he found it wrong but there being no obligation on him to do so, no inference can be drawn from his omission to reverse the decision of the Income-tax Officer on any particular matter.'

11. There being no decision of the Appellate Assistant Commissioner, express or implied, in regard to the particular item, we have to turn to the order of assessment made by the Income-tax Officer in order to see what is the decision in regard to that matter in the process of assessment. The ultimate assessment in such a case consists partly of decisions of the Appellate Assistant Commissioner and partly of decisions of the Income-tax Officer. The collective effect of these decisions results in the computation of total income and determination of tax. The order of assessment made by the Income-tax Officer thus does not merge wholly in the order made by the Appellate Assistant Commissioner. It is only that part of the order of assessment which consists of decisions reviewed by the Appellate Assistant Commissioner - and when we use the word 'reviewed', we mean, considered and examined irrespective of whether ultimately affirmed, modified or reversed - that is superseded by the order of the Appellate Assistant Commissioner. In fact, as pointed out by this court in Commissioner of Income-tax v. Karamchand Premchand Pvt. Ltd. : [1969]74ITR254(Guj) , the order of Appellate Assistant Commissioner consists 'of various decisions on matters which may be raised in appeal by the assessee or considered suo motu by the Appellate Assistant Commissioner' and, therefore, it supersedes the order of assessment only to the extent the order of assessment deals with those matters and, so far as the other matters dealt with by the order of assessment are concerned, it leaves the order of assessment untouched.

12. We may also consider the question from a slightly different stand-point. If the order of assessment made by the Income-tax Officer merges wholly in the order of the Appellate Assistant Commissioner whenever there is an appeal, irrespective of what matters are considered and decided by the Appellate Assistant Commissioner, the order of the Appellate Assistant Commissioner would not only comprise decisions reached by the Appellate Assistant Commissioner on matters raised in appeal by the assessee or considered suo motu by the Appellate Assistant Commissioner but would also incorporate by necessary implication the decisions recorded by the Income-tax Officer in respect of other matters not considered and decided by the Appellate Assistant Commissioner. Every decision recorded by the Income-tax Officer in making assessment, though not forming the subject-matter of consideration and decision by the Appellate Assistant Commissioner, would, by reason of merger, be deemed to become a part of the order of the Appellate Assistant Commissioner and if the assessee is unhappy about it, he would be entitled to object to it by preferring an appeal to the Tribunal, even though he has not challenged it in the appeal to the Appellate Assistant Commissioner. The revenue also would be entitled to object to object to such decision by preferring an appeal to the Tribunal even though it has not invited the Appellate Assistant Commissioner to revise it suo motu in the appeal preferred by the assessee. That would be contrary to the basic scheme of the Income-tax Act and would run counter to the decision of this court in Commissioner of Income-tax v. Karamchand Premchand Pvt. Ltd. : [1969]74ITR254(Guj) , where this court stated the law in the following terms :

'It is...imperative that there must be a decision of the Appellate Assistant Commissioner by which the assessee or the revenue is aggrieved before he can prefer an appeal against that part of the order of the Appellate Assistant Commissioner consisting of such decision. A fortiori, if a particular matter is not considered and decided by the Appellate Assistant Commissioner and the decision on it does not form part of the order of the Appellate Assistant Commissioner, there can be no appeal against it.'

13. and proceeded to hold that where the decision of the Income-tax Officer on a particular point is not challenged by the assessee before the Appellate Assistant Commissioner and the Appellate Assistant Commissioner also does not suo motu choose to examine its correctness, there is no decision of the Appellate Assistant Commissioner on that point which forms part of the order of the Appellate Assistant Commissioner and the assessee is accordingly not entitled to agitate that point in an appeal before the Tribunal. It is thus abundantly clear from the aforesaid discussion that the order of assessment made by the Income-tax Officer does not merge wholly in the order of the Appellate Assistant Commissioner, unless the entire order of assessment, that is, all decisions reached by the Income-tax Officer in the process of assessment, form the subject-matter of consideration and decision by the Appellate Assistant Commissioner. Whether there is merger or not and if there is, to what extent, depends on the subject-matter of the appellate order. The order of assessment made by the Income-tax Officer mergers 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 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). The legal position may, therefore, be summarized by stating that even after an appeal from an order of assessment is decided by the Appellate Assistant Commissioner, a mistake in that part of the order of assessment which was not the subject-matter of review by the Appellate Assistant Commissioner and was left untouched by him can be rectified by the Income-tax Officer. This principle is now given statutory effect by sub-section (1A) introduced by way of amendment in section 154 of the Income-tax Act, 1961, by the Direct Taxes (Amendment) Act, 1964. This sub-section provides :

'Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided.'

14. The provision enacted in this sub-section does not lay down any new law. It merely reiterates the law as it always was under the old Act as well as under the new Act prior to the amendment.

15. Having said so much on principle, we may now refer to some of the decided cases. The first case on which reliance was placed on behalf of the petitioner was Commissioner of Income-tax v. Amritlal Bhogilal & Co. : [1958]34ITR130(SC) The question which arose for consideration in that case was whether it was open to the Commissioner in exercise of power under section 33B to revise an order granting registration to a firm after the appeal of the firm against the order of assessment is decided. The argument of the assessee was that when the appeal is decided by the Appellate Assistant Commissioner, the order of registration along with the subsequent order of assessment merges in the appellate order and thereafter there being no order of the Income-tax Officer in existence granting registration, it is not competent to the Commissioner to exercise revisional power in respect of it. While examining the validity of this argument the Supreme Court made the following observations which were strongly relied upon on behalf of the petitioner :

'There can be no doubt that, if an appeal is provided against an order passed by a tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the tribunal, it is obvious that it is the appellate decision that is effective and can be enforced. In law the position would be just the same even if the appellate decision merely confirms the decision of the tribunal. As a result of the confirmation or affirmance of the decision of the tribunal by the appellate authority the original decision merges in the appellate decision and it is the appellate decision alone with subsists and is operative and capable of enforcement.'

16. The petitioner contended that these observations clearly showed that the principle of merger is applicable in income-tax proceedings and when an appeal is decided by the Appellate Assistant Commissioner, the order of assessment made by the Income-tax Officer merges wholly in the order of the Appellate Assistant Commissioner irrespective of the subject-matter of the appeal. Now it is true that these observations recognised the applicability of the principle of merger in income-tax proceedings but if we scrutinise these observations closely, it will be apparent that they do not lay down any absolute rule that in every case where there is an appeal, the original order made by the inferior authority merges wholly in the order of the appellate authority regardless of the subject-matter of the decision in the appeal. The principle of merger does undoubtedly apply but that is only where a decision reached by an inferior authority is reversed, modified or even confirmed by the appellate authority. The decision of the inferior authority in such a case is superseded by or merged in the decision of the appellate authority. But this principle has no application where a decision of an inferior authority does not come in for consideration by the appellate authority and there is no decision of the appellate authority either by way of affirmance or by way of reversal or modification on the point decided by the inferior authority. The decision of the inferior authority in such a case stands intact for there is no decision of the appellate authority on the point in which the decision of the inferior authority can be regarded as having merged. These observations are thus not at all inconsistent with the view we are taking. This is the true ratio of the above observations and it completely supports the view we are taking. As a matter of fact the Supreme Court applied this very ratio in coming to the conclusion that when an appeal preferred by a firm against the order of assessment is decided by the Appellate Assistant Commissioner, the order made by the Income-tax Officer granting registration to the firm does not merge in the order of the Appellate Assistant Commissioner. The Supreme Court pointed out that the order granting registration to the firm is an independent and separate order from the order of assessment and it : [1958]34ITR130(SC) -

'stands outside the jurisdiction of the Appellate Assistant Commissioner and does not strictly form part of the proceedings before the appellate authority. Even after the appeal is decided and in consequence the appellate order is the only order which is valid and enforceable in law, what merges in the appellate order is the Income-tax Officer's order under appeal and not his order of registration which was not and could never become the subject-matter of an appeal before the appellate authority. The theory that the order of the Tribunal merges in the order of the appellate authority cannot, therefore, apply to the order of registration passed by the Income-tax Officer in the present case.'

17. 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.

18. The petitioner then relied on the decision of the Calcutta High Court in Indra Co. Ltd. v. Income-tax Officer : [1971]80ITR400(Cal) , but we do not see how this decision is of any help to the petitioner. The assessee in this case claimed a loss of Rs. 2,41,472 in its business as a dealer in shares. This loss of Rs. 2,41,472 was computed after taking into account the profit arising to the assessee from the sale of 1,393 bonus shares of Hastings Mills Ltd. and for calculating this profit the cost of the bonus shares was taken to be the face value of Rs. 100 for each bonus share. The Income-tax Officer disallowed the entire loss of Rs. 2,41,472 claimed by the assessee as in his view it was not a loss sustained by the assessee in the normal course of its business as a dealer in shares. The assessee appealed against the order of assessment and in the appeal the Appellate Assistant Commissioner held that there was nothing to show that the loss of Rs. 2,41,472 did not arise to the assessee in the course of its business and he accordingly allowed the entire loss. Some two and a half years after the order made by the Appellate Assistant Commissioner, the Income-tax Officer issued a notice to the assessee calling upon it to show cause why its assessment should not be rectified under section 154 of the new Act as the profit on the sale of 1,393 bonus shares of Hastings Mills Ltd. was wrongly computed by taking the cost at the face value of Rs. 100 per share and this constituted a mistake apparent on the record of the assessment. The assessee immediately filed a petition in the High Court of Calcutta challenging the validity of this notice. There were two grounds on which the challenge was based. We are not concerned with the first ground. The second ground was that the order of assessment made by the Income-tax Officer having merged in the order of the Appellate Assistant Commissioner, the Income-tax Officer had no jurisdiction to rectify the assessment. So far as this ground was concerned, the learned counsel for the revenue conceded that unless be could bring the case of the department within section 154(1A) of the new Act, the Income-tax Officer could not rectify the assessment because the order of assessment made by the Income-tax Officer must be taken to have merged in the order of the Appellate Assistant Commissioner. It was on the basis of this concession that the Calcutta High Court observed :

'Action under section 35 of the old Act would be barred because the assessment order has merged in the order of the Appellate Assistant Commissioner.'

19. These observations cannot, therefore, be read as laying down the considered view of the court on the point. Moreover, it is clear from the facts that the concession was rightly made by the counsel for the revenue. The item in respect of which rectification was sought to be made by the Income-tax Officer formed the subject-matter of appeal before the Appellate Assistant Commissioner and it was considered and adjudicated upon by the Appellate Assistant Commissioner. The Income-tax Officer had actually disallowed the loss of Rs. 2,41,472 claimed by the assessee and it was allowed for the first time by the Appellate Assistant Commissioner in the appeal and, therefore, if there was any mistake in the quantum of the loss allowed, it was the Appellate Assistant Commissioner who could rectify such mistake and not the Income-tax Officer. This decision is, therefore, clearly in conformity with the view we have taken.

20. We may then refer to the decision of the Kerala High Court in Mather & Co. (P.) Ltd. v. Income-tax Officer : [1969]71ITR247(Ker) , which was the next decision relied upon on behalf of the petitioner. What happened in this case was that an order was made by the Income-tax Officer under section 23A levying super-tax on the assessee at the rate of 37 per cent. on the amount of difference between 60 per cent. of the distributable surplus and the sum actually distributed by way of dividend. The assessee appealed against this order, but the appeal failed and the order was confirmed by the Appellate Assistant Commissioner. The Income-tax Officer thereafter sought to rectify the order because he found that by mistake super-tax was levied only on the amount of difference between 60 per cent. of the distributable surplus and the dividend actually declared whereas it should have been really levied on 'the full distributable income less actual dividend declared'. This attempt was resisted by the assessee but in vain and an order of rectification was ultimately passed by the Income-tax Officer enhancing the amount of super-tax payable by the assessee. The Kerala High Court held that the Income-tax Officer had no jurisdiction to rectify the order made by him under section 23A because that order had merged in the order of the Appellate Assistant Commissioner and in this view of the matter the Kerala High Court quashed the order of rectification. We have carefully examined this decision but we do not find anything in it which runs counter to the view taken by us. Here the entire order made by the Income-tax Officer under section 23A formed the subject-matter of appeal before the Appellate Assistant Commissioner but the Appellate Assistant Commissioner examined all the grounds on which it was claimed by the assessee that the order under section 23A should be made and held, rejecting those grounds, that the order under section 23A was rightly made. The order made by the Income-tax Officer under section 23A was, therefore, superseded by the order of the Appellate Assistant Commissioner and the Income-tax Officer could not thereafter make any rectification. If there was a mistake it was in the order of the Appellate Assistant Commissioner and the Appellate Assistant Commissioner alone could rectify it.

21. But, quite apart from all these decisions, there is one decision of the Supreme Court which completely supports the view we are taking and it would be no exaggeration to say that it clinches the decision on this point in favour of the revenue. That is the decision in State of Madras v. Madurai Mills Co. Ltd. : [1967]1SCR732 The assessee in that case was assessed to sales tax under the Madras General Sales Tax Act, 1939, and the original order of assessment was made by the Deputy Commercial Tax Officer. The assessee preferred an appeal before the Commercial Tax Officer in regard to two items which according to the assessee were wrongly included in the taxable turnover and the Commercial Tax Officer allowed the appeal in regard to the first item but rejected it in regard to the other. The Deputy Commercial Tax Officer then made a revised assessment in accordance with the decision of the Commercial Tax Officer. The assessee presented as application for revision against the assessment made by the Deputy Commercial Tax Officer to the Deputy Commissioner on the ground that a sum of Rs. 6,57,971-4-9 collected by it by way of tax was wrongly included in its taxable turnover. That was the only objection raised in the revision application to the Deputy Commissioner. The Deputy Commissioner by his order dated 21st August, 1954, dismissed the revision application. Thereafter, on 4th August, 1958, the Board of Revenue issued a notice to the assessee stating that it proposed to revise the assessment made by the Deputy Commercial Tax Officer by including in the net turnover a sum of Rs. 7,74,62,706-1-6 as that amount was wrongly excluded by the assessing authority. The assessee objected to the proposed revision, inter alia, on the ground that the proceeding was barred by limitation under section 12 of the Madras General Sales Tax Act, 1939. The assessee also resisted the proposed revision on merits and contended that the exclusion of the sum of Rs. 7,74,62,706-1-6 by the Deputy Commercial Tax Officer was not wrong. The Board of Revenue, however, by an order dated 25th August, 1958, rejected both these contentions and revised the assessment by including the sum of Rs. 7,74,62,706-1-6 in the taxable turnover of the assessee. The assessee preferred an appeal to the Madras High Court against the order of the Board of Revenue and the Madras High Court allowed the appeal holding that the Board of Revenue had no jurisdiction to revise the assessment made by the Deputy Commercial Tax Officer because a period of more than four years had elapsed from the date when the order of assessment made by the Deputy Commercial Tax Officer was communicated to the assessee. The State of Madras being aggrieved by the decision of the Madras High Court preferred an appeal to the Supreme Court. The only question argued before the Supreme Court was whether the order of the Board of Revenue dated 25th August, 1958, was illegal on the ground that it was made after the expiration of the period of four years from the date on which the order sought to be revised was communicated to the assessee. The argument of the State of Madras was that when the Deputy Commissioner by his order dated 21st August, 1954, dismissed the revision application of the assessee, the order of assessment made by the Deputy Commissioner Tax Officer merged in the order of the Deputy Commissioner dated 21st August, 1954, and the order sought to be revised by the Board of Revenue was, therefore, the order of the Deputy Commissioner dated 21st August, 1954, and not the original order of assessment made by the Deputy Commercial Tax Officer and since the order of the Deputy Commissioner dated 21st August, 1954, was communicated to the assessee after 25th August, 1954, the order of the Board of Revenue dated 25th August, 1958, was within the requisite period of four years. This argument required the Supreme Court to consider whether the order of assessment made by the Deputy Commercial Tax Officer merged in the order of the Deputy Commissioner dated 21st August, 1954, when the Deputy Commissioner dismissed the revision application preferred by the assessee. If it merged, the order of the Board of Revenue dated 25th August, 1958, would be in time but not so if it did not merge. The Supreme Court, therefore, proceeded to consider the true scope and ambit of the principle of merger and made the following very illuminating observations on the subject :

'But the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior tribunal and the other by a superior tribunal, passed in an appeal or revision, there is a fusion or merger of two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. In our opinion, the application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction. For example in Amritlal Bhogilal and Co.'s case : [1958]34ITR130(SC) , it was observed by this court that the order of registration made by the Income-tax Officer did not merge in the appellate order of the Appellate Commissioner, because the order of registration was not the subject-matter of appeal before the appellate authority.....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 26th August, 1954, because the question of exemption on 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 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.'

22. These observations leave no doubt that the view we have taken is the correct view.

23. Now, in the present case, additional depreciation on motor-car and motor-cycle was allowed by the Income-tax Officer in the original order of assessment. This being an allowance in favour of the assessee, it was obviously not complained of in the appeal preferred by the assessee before the Appellate Assistant Commissioner. It was not included in the four items in respect of which the appeal was preferred. The Appellate Assistant Commissioner also did not suo motu consider and decide whether the allowance was rightly given by the Income-tax Officer. The decision of the Income-tax Officer allowing additional depreciation on motor-car and motor-cycle did not, therefore, merge in the order of the Appellate Assistant Commissioner and if the disallowance of such additional depreciation was patently erroneous, the Income-tax Officer was entitled to rectify the mistake under section 35, sub-section (1), by adding back the amount of such additional depreciation. The order of rectification dated 25th February, 1963, passed by the Income-tax Officer was, therefore, valid and effective and if that be so, ground (A) urged on behalf of the petitioner must be rejected.

24. Re : Ground (B) :- It is clear on a plain reading of the language of section 35, sub-section (5), that an order of rectification under that sub-section must be made within four years from the date of the final order passed in the case of the firm. Now, in the present case, if the period of four years is counted from the date of the order of rectification of the firm's assessment, namely, 25th February, 1963, the impugned orders of rectification made under section 35, sub-section (5), would be within time but they would be beyond time if the period of four years is counted from the date of the order of the Appellate Assistant Commissioner, namely, 18th August, 1961. The question, therefore, is : which is the final order passed in the case of the firm within the meaning of section 35, sub-section (5) Is it the order the Appellate Assistant Commissioner dated 18th August, 1961, or is it the order of rectification dated 25th February, 1963 The answer can only be : the order of rectification dated 25th February, 1963. The final order passed in the case of the firm means the order which effects the final assessment of the firm. It is now well established that a proceeding for rectification of an assessment is a proceeding for assessment : it is part of the procedure of ascertainment and imposition of tax liability on the assessee. When an assessment is rectified by an order of rectification, what was wrong quantification of tax liability is rectified and a correct quantification of tax liability is substituted for it : Vide S. Sankappa v. Income-tax Officer : [1968]68ITR760(SC) and Mandal Ginning and Pressing Co. Ltd. v. Commissioner of Income-tax [1973] 90 ITR. The order of rectification thus corrects the assessment and the corrected assessment is the final assessment, unless it is followed by a subsequent order disturbing the corrected assessment. Where, therefore, the order of rectification under section 35, sub-section (1), is not followed by a subsequent order disturbing the corrected assessment, it would be the final order passed in the case of the assessee and where the assessee is a firm, it would be the final order passed in the case of the firm within the meaning of section 35, sub-section (5). So far as the present case is concerned, it is clear from the facts that the final assessment of the firm was not affected by the order of the Appellate Assistant Commissioner dated 18th August, 1961. The order of rectification dated 25th February, 1963, was passed subsequent to the order of the Appellate Assistant Commissioner dated 19th August, 1961, and it affected the final assessment of the firm. We must, therefore, hold that the order of rectification dated 25th February, 1963, was the final order passed in the case of the firm and the period of four years within which an order of rectification could be passed under section 35, sub-section (5), was liable to be counted from the date of the order of rectification, namely, 25th February, 1963, and not from the date of the order of the Appellate Assistant Commissioner, namely, 18th August, 1961. If that be so, the impugned orders of rectification made by the Income-tax Officer must be held to be within the time limit prescribed by section 35, sub-section (5).

25. These were the only grounds urged on behalf of the petitioner and since there is no substance in them, the petition fails and the rule is discharged with costs.


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