1990 PLP 90 (PTD)

The issue before the Court in the above case was whether, after the Income-tax Officer had reopened an assessment proceeding, the Commissioner could exercise his revisional power during the pendency of the reopening proceeding? The effect of issue of a notice under section 148 is to reopen the entire assessment proceeding. The previous assessment is set aside and the whole assessment proceedings start afresh. The passage extracted above appears to be the ratio of the decision in the case of General Beopar Co. (Pvt.) Ltd. This principle of law was also enunciated by the Supreme Court in the case of V. Jaganmohan Rao v. CIT and EPT (1970) 75 ITR

373. It was really not necessary for the Court to examine the scope of the doctrine of merger in the context of the observations made which have been set out hereinabove. In fact, the attention of this Court was not drawn to the judgment of the Supreme Court in the case of State of Madras v. Madurai Mills Co. Ltd. (1967) 19 STC

144. The principles laid down in that case set at rest the controversy about the doctrine of merger. The principles laid down in the case of State of Madras v. Madurai Mills Co. Ltd. (1967) 19 STC 144 have been applied by the Gujarat, Madhya Pradesh and Bombay High Courts in the cases of Karsandas Bhagwandas Petel v. G.V. Shah, ITO (1975) 98 ITR 255 (Guj); Taora Sugar Mills Ltd. v. Union of India (1982) 134 ITR 385 (MP); Alok Paper Industries v. CIT (1983) 139 ITR 1064 (MP) and CIT v. Sakseria Cotton Mills Ltd. (1980) 124 ITR 570 (Bom). The principles enunciated by the Supreme Court in the case of State of Madras v. Madurai Mills Co. Ltd. (1967) 19 STC 144 leave no room for doubt that what merges in the order of the appellate or revisional authority is not entire appealable order of the lower authority but only that part of the order of the lower authority which was under consideration of the higher authority in revision or in appeal. It is also to be noted from the judgment of the Supreme Court that for the purpose of application of the doctrine of merger, no distinction can be made between an order passed in revision and an order passed in appeal. In the case of Shankar Ramchandra Abhyankar v. Krishnaji Dallatraya Bapat, AIR .1970 SC 1, the Supreme Court pointed out that the principle of merger of orders of inferior courts would not become affected or inapplicable by making any distinction between a petition for revision and an appeal. Therefore, the judgment of the Supreme Court in the case of State of Madras v. Madurai Mills Co. Ltd. (1967) 19 STC 144 cannot be distinguished on the ground that the question that arose in that case was application of the doctrine of merger in a case where the lower Court's decision had been modified in exercise of revisional jurisdiction. The scheme of the Income‑tax Act has also to be seen. If the doctrine of merger is rigorously applied, then the Income‑tax Officer will not be able to reopen a case under section 147 after the assessment order has been affirmed or modified by the appellate authority. In fact, under the scheme of the Income‑tax Act, a lower authority cannot possibly reopen an order of higher authority. If the assessment order is treated as having lost its identity in its entirety and completely merged in the order of the appellate authority, then the power off reopening of an assessment under section 147 will have to be confined only to such orders against which no appeals have been preferred. The effect of a notice under section 148 is to reopen the entire assessment. After a valid notice under section 148 has been issued, the entire assessment proceedings will have to start afresh from the stage of a notice under section 139(2). This aspect of the matter was explained by the Supreme Court in the case of V. Jaganmohan Rao v. CIT and E.P.T. (1970) 75 ITR

373. Ramaswamy, J. observed in that case (at p. 380): "Once valid proceedings are started under section 34 (1)(b), the Income‑tax officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year:" There is also another aspect of the case. Whenever an order of the Income‑tax officer is modified by the order of an appellate authority, the Income‑tax Officer has to give effect to the order of the appellate authority by passing a fresh order in accordance with the decision given by the appellate authority. Therefore, it is ultimately the order of the Income‑tax Officer which has to be revised under section 263 or reopened under section 148, as the case may be. It has been held that the order passed by the Income‑tax Officer to give effect to an appellate order is also an order of assessment and is also appealable under section 246 of the Act, Kooka Sidhwa and Co. v. CIT (1964) 54 ITR 54 (Cal.). Therefore, in my view, having regard to the scheme of the Income‑tax Act, it cannot be said that the issues decided in the assessment order which were left untouched by the appellate authority have merged in the order of the appellate authority irrespective of the grounds of appeal and the points canvassed before the appellate authority. The question of merger was examined in extenso by the Supreme Court in the case of Gojer Bros. (Pvt.) Ltd. v. Shri Ratan Lai Singh, AIR 1974 SC 1380. In that case, the Supreme Court, after referring to its earlier decision in the case of State of Madras v. Madurai Mills Co. Ltd. (1967) 19 STC 144, observed (at p. 1388, 1389): "These observations cannot justify the view that in the instant case there can be no merger of the decree passed by the trial Court in the decree of the High Court. The Court, in fact, relied on Amritlal Bhogilal's case (1958) 34 ITR 130; (1959) SCR 713; AIR 1958 SC 808, while pointing out that if the subject‑matter of the two proceedings is not identical, there can be no merger. Just as in Amritlal Bhogilal's case (1958) 34 ITR 130 (SC), the question of registration of the assessee‑firm was not before the appellate authority and, therefore, there could be no merger of the order of the Income‑tax Officer in the appellate order, so in the case of Madurai Mills (1967) 19 STC 144; (1967) 1 SCR 732; AIR 1967 SC 681, there could be no merger of the assessment order in the revisional order as the question regarding exclusion of the value of yarn purchased from outside the State was not the subject‑matter of revision before the Deputy Commissioner of Commercial Taxes. In the instant case, the subject‑matter of the suit and the subject‑matter of the appeal were identical. The entire decree of the trial Court was taken in appeal to the first appellate Court and then to the High Court. We are, accordingly, of the opinion that the decree of the trial Court dated November 24, 1958, merged in the decree of the High Court dated January 8, 1969." The aforesaid observation makes it clear that unless the subject‑matter of the suit and the subject‑matter of the appeal were identical, there could not be any merger of the decree of the trial Court in the decree of the appeal Court entirely. As has been stated earlier in the judgment, the scheme of the Income‑tax Act also cannot justify the conclusion that the entire order of the Income‑tax Officer has merged in the order of the Appellate Assistant Commissioner or the Tribunal even though only some specific points decided in the assessment order were taken up in appeal and all other points were left untouched by the appeal Courts. This aspect of the matter was also emphasised by Sabyasachi Mukharji, J. in the case of Premchand Sitanath Roy v. Addl. CIT (1977) 109 ITR 751 (Cal.) where the question of right of the Commissioner to interfere in revision with an assessment order after an appellate order had been passed was considered. It was observed in that case, after referring to the decision of the Supreme Court in the case of State of Madras v. Madurai Mills Co. Ltd. (1967) 19 STC 144 (at p. 758); "The question, whether the interest that was liable to be charged had been properly waived or not, is a question which was not the subject matter of appeal before the Appellate Assistant Commissioner. Therefore, there cannot be any question of merger of the order of the Income‑tax Officer on this aspect of the matter and on the theory of merger, it cannot be said that the Commissioner lost his jurisdiction in this case after the order of the Appellate Assistant Commissioner. In the aforesaid view of the matter, I am unable to accept the first contention urged in support of this application." The Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT (1986) 100 ITR 961, held that levy of interest was part of the process of assessment. Although sections 143 and 144 did not specifically provide for the levy of interest and the levy was, in fact, attributable to section 139(8) or section 215, it was nevertheless a part of the process of assessing the tax liability of the assessee. Inasmuch as the levy of interest was a part of the process of assessment, it was open to an assessee to dispute the levy in appeal provided he limited himself to the ground that he was not liable to the levy at all. The judgment of this Court in the case of Premchand Sitanath Roy v. Addl. CIT (1977) 109 ITR 751 was specifically approved. Lastly, I was referred to a judgment of the Bombay High Court in the case of CIT v. P. Muncherji and Company (1987) 167 ITR 671 in which a view contrary to the view earlier taken by that Court in the case of CIT v. Sakseria Cotton Mills Ltd. (1980) 124 ITR 570 was adopted. It was observed, after referring to the case of State of Madras v. Madurai Mills Co. Ltd. (1967) 19 STC 144, that superficially looked at, this decision might appear to support the stand of the Department that when appeal was not preferred on all the questions decided by the Income‑tax Officer, the entire assessment order could not be said to have merged in the appellate order and in such circumstances, the Commissioner was not robbed of his jurisdiction to revise the assessment. It was emphasised that in the Madras case, the Deputy Commissioner had exercised powers of revision under clause (?) of section 12 of the Madras General Sales Tax Act, 1939. In that context, the Supreme Court made its observations regarding merger. It was observed that it was difficult to accept that the Supreme Court in the case of Madurai Mills Co. Ltd. (19X7) 19 STC 144 had expressed a view different from its decision in the case of CIT v. Amritlal Bhogilal and Co. (1958) 34 ITR 130 (SC). In my judgment, the decision of the Supreme Court in the case of Madurai Mills Co. Ltd. (1907) 19 STC 144 cannot be distinguished on the ground that it was only a case of revision under clause (2) of section 12 of the Madras General Sales Tax Act, 1939. Section 12(2) of the Act, as it stood al that time, was as under (at p. 148): "12(2) The Deputy Commissioner may‑‑ (i) suo motu, or (ii) in respect of any order passed or proceeding recorded by the Commercial Tax Officer under subsection (1) or any other provision of this Act and against which no appeal has been preferred to the Appellate Tribunal under section 12‑A, on application, call for and examine the record or any order passed or proceeding recorded under the provisions of this Act by any Officer subordinate to him, for the purpose of satisfying himself as to the legality or propriety of such order, or as to the regularity of such proceeding, and may pass such order with respect thereto as he thinks fit." Therefore, it was open to the Deputy Commissioner to call for records and examine the order passed by the Commercial Tax Officer and "pass such order with respect thereto as he thinks fit". The Deputy Commissioner could exercise the power under section 12(2) suo motu or on the basis of an application. But the power was not confined or limited to any part of the assessment order. The entire assessment order could be revised by the Deputy Commissioner in exercise of this power of revision. It does not appear that the power of revision of the Deputy Commissioner under the Madras General Sales Tax Act, 1939, is in any way less extensive than the power of the Appellate Assistant Commissioner under the Income‑tax Act. I do not find any conflict between the principles `laid down in Amritlal Bhogilal and Co.'s case (1958) 34 ITR 130 (SC) and in the case of Madurai Mills Co. Ltd. (1967) 19 STC

144. All these cases were considered by the Supreme Court in the case of Gojer Bros. (Pvt.) Ltd. v. Shri Ratan Lai Singh, AIR 1974 SC 1380, where it was emphasised that only if the subject‑matter of the two proceedings was identical, the merger of the order in the order of higher appellate authority could take place. It was observed in Gojer Bros. (Pvt.) Ltd.'s case, AIR 1974 SC 1380, that in Amritlal Bhogilal and Co.'s case (1958) 34 ITR 130 (SC), the question of registration of the assessee‑firm was not before the appellate authority and, therefore, there could be no merger of the entire order of the Income‑tax Officer in the appellate order. In Madurai Mills Co. Ltd. (1967) 19 STC 144, there could be no merger of the entire assessment order in the revisional order as the question regarding exclusion of the value of yarn purchased from outside the State was not the subject‑matter of revision before the Deputy Commissioner of Commercial Taxes. In the case of CIT v. R.S. Banwarilal (1983) 140 ITR 3, a Full Bench of the Madhya Pradesh High Court held that the doctrine of merger applied to income tax proceedings; but the extent of its application depended on the scope and the subject‑matter of the appeal and the decision rendered by the appellate authority. Where an appeal had been preferred by the assessee to the Appellate Assistant Commissioner from an order of assessment made by the Income‑tax Officer in respect of only some of the items covered by the Income‑tax Officer's order and the remaining items, forming part of the Income‑tax Officer's assessment order were not agitated by either party, though it was open to the Revenue to agitate them or the Appellate Assistant Commissioner to consider them suo motu and no decision of the Appellate Assistant Commissioner was, therefore, made in respect of the remaining items, the Income‑tax Officer's order merged with the appellate order only to the extent it was considered and decided by the Appellate Assistant Commissioner. The Income‑tax Officer's assessment order survived in respect of the matters, which were not covered by the appellate order and were left untouched. The revisional jurisdiction of the Commissioner under section 263 of the Income‑tax Act, 1961, could be exercised on those aspects of the assessment matters, which were left untouched by the Appellate Assistant Commissioner. The Full Bench agreed with the decision of the Gujarat High Court in the case of Karsandas Bhagnvandas Patel v. GA'. Shah, ITO (1975) 98 ITR 255, wherein it was held that merger of the order of the lower authority in order of the higher authority took place when the order under appeal had been reversed, modified or even confirmed by the appellate authority. But that principle had no application where the decision of an inferior authority did not come in for consideration before the appellate authority and there was no decision of the appellate authority either by way of affirmance or by way of reversal or modification on the points decided by the inferior authority. Therefore, the order of assessment made by the Income‑tax Officer merged in the order of the Appellate Assistant Commissioner only in so far as it related to the items which were considered and decided by the Appellate Assistant Commissioner. It was not material that the Appellate Assistant Commissioner could suo motu consider all the points involved in the assessment order or the Revenue could agitate all the points before the Appellate Assistant Commissioner. The real test was whether any such point was actually considered and decided by the Appellate Assistant Commissioner. I respectfully agree with the test propounded in that case. If the Appellate Assistant Commissioner does not take into consideration any aspect of the assessment order because that particular aspect of the order was not appealable or for any other reason, it cannot be said that the assessment order has wholly merged in the appellate order irrespective of the subject‑matter of the appeal or the scope of the appellate order. The same principle has been reiterated by the Gujarat High Court in another case of Poonjabhai Vanmalidas v. WTO (1978) 114 ITR

38. The principles of law enunciated by the Supreme Court in the cases of State of Madras v. Madurai Mills Co. Ltd. (1967) 19 STC 144, Gojer Bros. (Pvt.) Ltd. v. Shri Ratan Lai Singh, AIR 1974 SC 1380 and CIT v. Amritlal Bhogilal and Co. (1958) 34 ITR 130, make it abundantly clear that the entire assessment order made by the Income‑tax Officer did not merge in the order of the Appellate Assistant Commissioner irrespective of the issues raised by the parties or decided suo motu by the appellate authority. The scope and the subject‑matter of the appellate order cannot be ignored in deciding the question whether the assessment order had entirely merged in the appellate order. In Amritlal Bhogilal's case (1958) 34 ITR 130 (SC) a part of the Income‑tax Officer's order did not merge in the appellate order because that part of the order was not appealable. In the case of Madurai Mills Co. Ltd. (1.967) 19 STC 144, the assessment order made by the Deputy Commercial Tax Officer did not merge in the order of the Deputy Commissioner of Commercial Taxes because the question of exemption of the value of yarn purchased front outside the State of Madras was not the subject‑matter of the revisional order. In the case of Gojer Bros. (Pvt.) Ltd, AIR 1974 SC 1.380, there was a merger because, as pointed out by the Supreme Court, "in the instant case, the subject‑matter of the suit and the subject‑matter of the appeal were identical." The aforesaid three judgments of the Supreme Court (cave no room for doubt that unless it can be established that the subject‑matter of the appeal and the subject‑matter of the order by the Court of first instance are identical, the lower Court's order cannot be said to have merged entirely in the order of the appeal Court. If the appeal Court could not have dealt with a part of the order of the lower Court because it was non‑appealable, then the question of merger of the non‑appealable part of the order in the appellate order cannot arise at all. But even if the entire order is appealable but an appeal is preferred only on certain issues and the appellate order has not travelled beyond `those issues which have actually been raised before it, it cannot be said that even in such a case, the lower Court's order has entirely merged in the appeal Court's order and lost its identity. In view of the aforesaid principles of law laid down by the Supreme Court and also having regard to the scheme of the Income‑tax Act, I am unable to uphold the first contention advanced on behalf of the assessee in this case. It was next argued that there has been no prejudice to the Revenue in this case. Assuming that exchange fluctuation resulted in increase of liability on the capital account and the Income‑tax Officer had erred in allowing the liability on the trading account, no prejudice has really been suffered by the Revenue because the increased liability on the capital account will have the result of enhancement of the cost of the capital assets. That means, there will be higher depreciation and in the long run, there was no real loss of revenue. Butt in the instant case the Commissioner of Income‑tax is not concerned with the long‑term view of the matter. Each assessment year is a self‑contained unit. If any loss or any depreciation is to be allowed or income is to be assessed in a particular year, it must be done so in that year. Therefore, if any increased liability incurred on the capital account has been allowed to be deducted against business income, then it cannot be said that the Revenue has not been prejudiced by such an order. The case was‑ heard at, length on August 25, 1987, September 9, 1987, September 15, 1987, December 11,1987, and January 15, 1988, and when bearing was completed the matter was fixed for judgment on January 22, 1988. Dr. Pal sought to make further submissions when the matter was fixed for judgment on January 22, 1988; and a further hearing took place on ‑February 26, 1988. Thereafter, it has appeared for judgment today. It has now been stated on behalf of the ‑petitioner that it does not want to press this writ petition but the matter should be heard .on merits: before the Commissioner. I have decided to leave open all questions on merits. But, In my view, the notice issued cannot be struck down on the ground of merger because of, the reasons stated hereinabove. Dr; Pal then drew my attention to the amendment proposed by the Finance., Bill,.1988, (section 263) by which an Explanation is sought to be substituted with effect from June 1, 1988. The Explanation is as follows (see.(1988) :170 ITR.(SL) 55): "In section 263 of the Income‑tax Act, in 'subsection' (1), for the Explanation the following Explanation shall be substituted with effect grit from the Ist day of June, 1988, namely:-- Explanation‑‑-For the removal of doubts, it is hereby declared that, for the purposes of this subsection, (a) an order passed by the Assessing Officer shad include‑‑ (i) an order of assessment made by the Assistant Commissioner or the Income‑tax Officer on the basis of the directions issued by the Deputy Commissioner under section 144‑A; (ii) an order made by the Deputy Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director‑General or Commissioner authorised by the Board in this behalf under section 120; (b) "record" includes' all records relating to Any proceeding under this Act available at the time of examination by the Commissioner, (c) where any order referred to in this subsection and Assessing Officer had been the subject‑matter of any appeal, the powers of the Commissioner under this subsection shall extend to such matters as had not been considered and decided in such appeal." In the Memorandum explaining the Finance Bill, the controversy which has led to the amendment has been noted. Therefore, it is argued by the petitioner that this Finance Bill has really recognised the fact that no revision was possible before this amendment was made effective. I am unable to uphold this contention. The proposed amendment will not have the effect of introducing something which was not already there in the Act. Amendments, very often, are clarificatory. In my opinion, the proposed amendment has tried to make explicit what was already implicit in the Act. The writ petition is dismissed. All interim orders are vacated. There will be no order as to costs. It is made clear that I have not expressed any opinion on the petitioner's right to get depreciation. That question is left open to be decided by the appropriate authority. Z.S./699/T Petition dismissed.