1. Under Section 256(2) of the I.T. Act, 1961, the following questions have been referred in pursuance of the direction of this court in T.C.P. No. 118 of 1974, dated March 24. 1975.
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income-tax Officer had no power left with him to amend his original order because that order of penalty has been confirmed by the Appellate Assistant Commissioner ?
2. Whether, on the facts and in the circumstances of the case, the Appellte Tribunal was right in holding that the provisions of Section 154(1A) would not apply to the assessee's case ?
3. Whether the Appellate Tribunal was right in upholding the order of the Appellate Assistant Commissioner on a ground not raised or argued before it ?
4. Whether the Appellate Tribunal was right in dismissing the departmental appeal without going into the main question raised beforeit?
2. The assessee is a firm and it filed its return of income for the assessment year 1968-69 on January 22, 1969. The return was due in August, 1968. There was thus a delay in the filing of the return. The ITO was of the opinion that there was no proper explanation for not filing the return in time and he, therefore, levied a penalty of Rs. 706 under Section 271(1)(a) of the Act by his order dated February 17, 1969, The assessee contested this penalty before the AAC. The appeal was dismissed by him on May 28, 1969.
3. Subsequently, the ITO took the view that the penalty of Rs. 706 had been computed without applying the provisions contained in Section 271(2) of the I T. Act, 1961. The assessee is a registered firm and under Section 271(2) of the Act, penalty had to be computed on the same footing as if the firm were an unregistered firm. If Section 271(2) of the Act had been applied, the minimum penalty that could have been imposed was Rs. 8,588 as against Rs. 706 actually levied. The ITO issued a notice under Section 154 of the Act and by his order dated June 12, 1969, he enhanced penalty to Rs. 8,588.
4. The assessee preferred an appeal to the AAC objecting to the order passed under Section 154 of the Act levying a penalty of Rs. 8,588 as against Rs. 706 originally levied. The AAC was of the opinion that the mistake which the ITO sought to rectify was not a patent or glaring mistake of law. He, therefore, cancelled the order tinder Section 154 of the Act.
5. The ITO appealed against this order of the AAC to the Tribunal. The Tribunal did not go into the question whether the failure of the ITO to apply the provisions of Section 271(2) of the Act in the first instance could be treated as a mistake apparent from the record. In the view of the Tribunal, the order of the ITO under Section 154 of the Act was obviously incompetent because the original order of penalty was the subject-matter of an appeal before the AAC and had subsequently merged in the order to the AAC dated May 28, 1969. In the view of the Tribunal, the proper authority to rectify any error in the matter of levy of penalty could only be the AAC. Before the Tribunal, Section 154(1A) of the Act was relied on for the department. But the Tribunal's view was that the ITO's power to rectify was not available in respect of matters which had been considered and decided by the appellate authority. The result was that the department's appeal came to be dismissed. It is against this order that the questions extracted already have been referred.
6. The main question that requires to be considered is whether the order of the ITO dated February 17, 1969, is open for rectification after the disposal of the appeal against the order passed by the AAC on May 28, 1969. The power available to the ITO for rectification is contained in Section 154 of the I.T. Act, 1961. Under that provision with a view to rectifying any mistake apparent from the record, the ITO may amend any order of assessment or of refund or any other order passed by him. Sub-section (1A) of Section 154 of the Act 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.'
7. Section 246 of the Act contains a list of appealable orders. One of these orders is the order under Section 271 [see Section 246(o)(iii)]. The powers of the AAC in disposing of an appeal are set out in Section 251 of the Act. For the present case, it is enough to note Section 251(1)(b) which, so far as it is material, runs as follows:
'In disposing of an appeal, the Appellate Assistant Commissioner shall have the following powers.........
(b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty.'
8. In the order that the AAC passed on May 28, 1969, in the appeal against the levy of penalty, the AAC held 'I must hold, therefore, that reasonable cause for the failure to comply with the terms of the notice under Section 139(2) has not been proved in the case, and the penalty was hence rightly levied. The Income-tax Officer's order is accordingly confirmed and the appeal dismissed.'
9. The point to be considered at this stage is whether the quantum of penalty is one which had been considered and decided by the AAC. Unfortunately, we do not have before us the grounds of appeal filed before the AAC against the order of levying penalty. However, the terms of the order are clear to show that he considered the existence of reasonable cause and ultimately confirmed the entire order of levying penalty. Though he had power of enhancement or reduction, he did not exercise such power in this case. The consequence is as a result of the AAC's order, the penalty as levied by the ITO by his order dated February 17, 1969, got confirmed. The order of the ITO thus got merged in the order of the AAC.
10. Learned counsel for the revenue contended that there is no merger in this case because there is nothing to show that the AAC has considered and decided the question of the quantum of penalty. We had recently an occasion to go into the question of the applicability of the doctrine of merger of an order of inferior authority in an order of superior authority in CIT v. City Palaycot Company (T.C. No. 378 of 1975, in the judgment dated July 6, 1979) [since reported in : 122ITR430(Mad) ]. In that case, the ITO had not levied any amount as and by way of interest under s, 217 of the Act in the assessment order. There was an appeal against the assessment order, and the appeal was disposed of by the AAC. Later on, the CIT took proceedings under Section 263 of the Act and the question was whether the order of the ITO had got merged in the order of the AAC so that the Commissioner could not exercise his jurisdiction under Section 263 of the Act. In dealing with this aspect, we observed, after referring to the decision of the Supreme Court in State of Madras v. Madurai Mills Co. Ltd. : 1SCR732 and also of the Gujarat High Court in Karsandas Bhagwandas Patel v. G.V. Shah, ITO : 98ITR255(Guj) , as follows :
'The principle of this decision is that the doctrine of merger will have to be taken into account in the light of what was in controversy before the appellate authority or what could have been considered by the appellate authority' 122 ITR 449 .
11. In the present case, the AAC could have gone into the question of the quantum of penalty that was levied. The quantum of penalty was involved in the appeal. He could have examined the quantum of penalty in the light of the provisions contained in Section 271(2) of the Act. He has confirmed the penalty. In such a case, we consider that the question of the amount of penalty leviable is a matter which has been considered and decided, as any other view would involve the assumption that the Assistant Commissioner did not exercise his powers properly. This would be wrong. There could have been no other ground in the appeal against the order of penalty. For instance, in the case of assessment, there may be a number of additions made in the assessment. But the assessee may object to only a few of them. In such a case with reference to the matters not touched upon by the assessee in the memorandum of appeal, the ITO will have jurisdiction to consider and determine the question of rectification in the light of Section 154(1A) of the Act. But in the case of penalty, there is no possibility of any other ground being left out of consideration by the assessee in the memorandum of appeal especially where the assessee objects to the levy of penalty. What the ITO has virtually done by the order under consideration is to enhance the penalty as sustaind by the AAC. This he had no power to do.
12. In Karsandas Bhagwandas Patel v. G.V. Shah, ITO : 98ITR255(Guj) the Gujarat High Court pointed out that even after an appeal from an order of assessment is decided by the AAC, a mistake in that part of the order of assessment which was not the subject-matter of review by the AAC and was left untouched by him, could be rectified by the ITO because the mistake would be his own mistake which he could always correct under the section. The position is not the same in the present case, because the Gujarat High Court dealt with the matter relating to the assessment where a particular matter which was considered for rectification by the ITO had not been the subject-matter of appeal before the AAC. That decision has, therefore, no scope for application.
13. Learned counsel for the revenue drew our attention to a decision in L.K. Shaik Mohammed Brothers v. CIT : 112ITR622(Mad) . In that case, this court had no occasion to go into the question of applicability of the doctrine of merger or the scope of Section 154(1A) of the Act. We do not, therefore, think it necessary to go into this decision any further. The result is that the first and the second question referred to this court are answered in the affirmative and in favour of the assessee.
14. As regards the third question learned counsel for the revenue was not in a position to dispute the fact that the ground on which the Tribunal decided the appeal was a pure question of law, the ground being whether the order of the ITO got merged in the order of the AAC so that the ITO could not, after the disposal of the appeal by the AAC, rectify the penalty order. Therefore, the third question has also to be answered in the affirmative and in favour of the assessee.
15. As regards the fourth question the point sought to be raised is that the Appellate Tribunal should have gone into the nature of the error to find out whether it was an apparent error or not. When the Tribunal has pointed out that the ITO was not competent to rectify the order of penalty, there was no need to consider further the question whether the error sought to be rectified was an apparent error or not. In this view, the fourth question is also answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 500.