2015 (3) TMI 1066 - AT - Income Tax

Disallowance u/s 14A - revision u/s 263 - Held that - The order of the CIT u/s 263 is subsequent to the order of the CIT (A) on the very same issue. Once a particular matter has been considered and decided in appeal, on the issue of inclusion of processing fee incurred during the year for inclusion of disallowance u/s 14A of the Act the order of A.O has got merged with the order of the CIT (A) and the CIT has no jurisdiction to invoke the provisions of section 263 on the very same issue. Respectfully following the decision of the Hon ble Bombay High Court in the case of CIT vs. Tejaji Farasram Kharawala (1953 (3) TMI 29 - BOMBAY HIGH COURT), we hold that the jurisdiction assumed u/s 263 of the Act is erroneous on the ground that the order of the AO has merged with the order of the CIT (A) and the CIT has no jurisdiction to revise u/s 263 of the Act.

Summary

Issues:
- Jurisdiction of CIT under section 263 of the Act in revising assessment order
- Consideration of processing fee in disallowance u/s 14A
- Doctrine of merger of orders by AO and CIT (A)

Analysis:
1. Jurisdiction of CIT under section 263 of the Act:
The appeal was filed against the order of the CIT-III Hyderabad, which assumed jurisdiction under section 263 of the Act. The CIT found the assessment erroneous and prejudicial to revenue due to the disallowance made by the AO under section 14A. The assessee contended that the assessment order was not erroneous, and the CIT had no justification to invoke section 263. The Tribunal noted that the order of the CIT under section 263 was subsequent to the order of the CIT (A) on the same issue. Citing precedents, the Tribunal held that once a matter has been decided in appeal, the CIT cannot revise the assessment order on the same issue. Therefore, the Tribunal allowed the appeal, emphasizing that the CIT had no jurisdiction to revise the assessment under section 263.

2. Consideration of processing fee in disallowance u/s 14A:
The CIT-III Hyderabad directed the AO to rework the disallowance under section 14A by including the processing fee incurred by the assessee. The assessee challenged this direction, arguing that the processing fee was not considered by the AO while making the disallowance. The Tribunal observed that the issue of disallowance under section 14A had already been considered and decided by the CIT (A). As per the doctrine of merger, once an issue has been addressed in appeal, the order of the AO merges with the order of the CIT (A). Therefore, the Tribunal concluded that the CIT had no jurisdiction to revisit the disallowance issue, and the direction to include processing fee in disallowance u/s 14A was not justified.

3. Doctrine of merger of orders by AO and CIT (A):
The Tribunal extensively discussed the doctrine of merger in tax assessments. Referring to the decision of the Bombay High Court in the case of CIT vs. Tejaji Farasram Kharawala, the Tribunal highlighted that once an order of assessment is confirmed by the Appellate Assistant Commissioner (CIT (A)), it becomes final, and the Department's right is limited to appeal to the Tribunal. The Tribunal emphasized that the CIT's jurisdiction ceases once the order of the AO merges with the order of the CIT (A). Relying on this principle, the Tribunal held that the jurisdiction assumed under section 263 by the CIT was erroneous due to the merger of orders, and the CIT had no authority to revise the assessment under section 263. Consequently, the Tribunal allowed the appeal, following the doctrine of merger as established in legal precedents.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the principle of merger of orders between the AO and the CIT (A), which restricted the jurisdiction of the CIT under section 263 of the Act. The Tribunal held that once an issue has been decided in appeal, the CIT cannot revise the assessment order on the same issue, thereby upholding the doctrine of merger in tax assessments.