2009 (9) TMI 675 - HC - Income Tax

Doctrine of merger - Rectification of assessment order u/s 154 despite the fact that CIT(A) has passed an order - issue of deduction under section 80HHD - Order of CIT(A) - held that - while on a legal principle, the merger doctrine operates only in respect of the subject-matter of the appeal and not on an aspect which was not made the subject-matter, the legal position has also found statutory expression under section 154 of the Act. A perusal of the original assessment order dated March 31, 1999, and the computation as indicated at the end of the assessment order obviously does not show any application of mind on the part of the assessing authority to the intricacies of working out the benefit available to an assessee doing the hotel business or such other business mentioned in the section, getting foreign exchange receipts as part of its business and for qualifying all that the manner of arriving at the figure. - Therefore, the argument of the question being a debatable point does not even arise - Rectification order passed u/s 154 sustained. Deduction under section 80HHD of the Act method of computation of deduction whether deduction under section 80HHD of the Act should be computed based on each approved hotel individually and out of the profit derived from each such hotel - Deduction in respect of earnings in convertible foreign exchange Held that - in section 80HHD of the Act the reference is to the business of the assessee which is the business as a whole and as one unit and not by sub- dividing the total income of the business into unit-wise total income and then arriving at the unit-wise overall profit proportionate profit and then adding up the same for arriving at the benefit under section 80HHD of the Act In favor of Revenue.

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer under Section 154 of the Income-tax Act.
2. Computation of deduction under Section 80HHD of the Income-tax Act.
3. Application of the principle of merger.
4. Determination of profits attributable to foreign exchange receipts.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Assessing Officer under Section 154 of the Income-tax Act:
The Tribunal held that the Assessing Officer lacked jurisdiction to rectify the order under Section 154 of the Income-tax Act because the original assessment order had merged with the appellate order. The High Court disagreed, stating that the principle of merger applies only to the aspects of the order that were the subject of the appeal. Since the computation of the deduction under Section 80HHD was not part of the appeal, the Assessing Officer retained jurisdiction to rectify the order. The court cited the case of *Addl. CIT v. India Tin Industries P. Ltd.* and the statutory provision under Section 154A to support this view.

2. Computation of Deduction under Section 80HHD of the Income-tax Act:
The core dispute was whether the deduction under Section 80HHD should be computed based on the profits of each approved hotel individually or the entire business of the assessee. The Tribunal had accepted the assessee's view that the computation should be unit-wise. However, the High Court held that the computation should be based on the overall profits of the business, including all units, not just the approved ones. The court emphasized that the statutory language of Section 80HHD(3) required considering the total receipts from the business, which includes all units, not just the certified ones.

3. Application of the Principle of Merger:
The Tribunal had applied the principle of merger, suggesting that the Assessing Officer could not rectify the order because it had merged with the appellate order. The High Court rejected this application, clarifying that the principle of merger applies only to the aspects of the order that were subject to appeal. Since the method of computing the deduction under Section 80HHD was not appealed, it did not merge with the appellate order, allowing the Assessing Officer to rectify it.

4. Determination of Profits Attributable to Foreign Exchange Receipts:
The Tribunal had concluded that the computation should be unit-wise, based on the profits of individual approved hotels. The High Court disagreed, stating that the statutory scheme of the Income-tax Act envisages computing the total income of the business as a whole, not unit-wise. The court held that the overall profits of the business should be considered for the computation of the deduction under Section 80HHD, aligning with the statutory language and legislative intent.

Conclusion:
The High Court allowed the Revenue's appeal, set aside the Tribunal's order, and restored the Assessing Officer's order as affirmed by the first appellate authority. The court emphasized that the computation of deductions under Section 80HHD should be based on the overall profits of the business, including all units, and not restricted to individual approved hotels. The principle of merger does not apply to aspects not appealed, and the Assessing Officer retained jurisdiction to rectify the order under Section 154.