1985 (6) TMI 200 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income-tax Act, 1961.
2. Applicability of the doctrine of merger.
3. Merits of the assessee's claim for weighted deduction under Section 35B.
4. Determination of the assessee's status as a small-scale industry.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income-tax Act, 1961:
The Commissioner, Surat, exercised jurisdiction under Section 263 to revise the Income Tax Officer's (ITO) orders dated 6-8-1980 and 16-8-1980, which allowed weighted deduction under Section 35B. The Commissioner found these orders erroneous and prejudicial to the revenue's interests, as they failed to consider Section 35B(1A) provisions. The ITO had allowed weighted deductions on various items, which the Commissioner believed were not justified under the law.

2. Applicability of the Doctrine of Merger:
The primary question was whether the ITO's orders merged with the Commissioner (Appeals)' orders dated 4-6-1982, thereby ousting the Commissioner's jurisdiction under Section 263. The doctrine of merger, as discussed, is not rigid and depends on the subject matter and scope of the appellate order. The Commissioner (Appeals) had only considered items marked 'x' and not those marked ';'. Hence, the Commissioner (Appeals) and the Commissioner were functioning in mutually exclusive fields. The Special Bench in Shree Arbuda Mills Ltd. v. ITO held that the doctrine of merger did not apply universally and that the Commissioner could exercise revisionary powers if the appellate authority did not consider specific items.

3. Merits of the Assessee's Claim for Weighted Deduction under Section 35B:
The Commissioner had disallowed the weighted deduction on the grounds that the assessee did not meet the conditions laid out in Section 35B(1A). The assessee argued that they were still a small-scale industry, which the Commissioner had not fully considered. The Tribunal found merit in the assessee's contention that they did not have enough time to provide full details and set aside the Commissioner's order, directing a fresh order after giving the assessee a reasonable opportunity to prove their status as a small-scale industry.

4. Determination of the Assessee's Status as a Small-Scale Industry:
The assessee claimed to be a small-scale industry, which was crucial for the applicability of Section 35B(1A). The Tribunal noted that the balance sheet figures used by the Commissioner might not be accurate and that the assessee should be given another opportunity to prove their status. The Tribunal directed the Commissioner to pass a fresh order after considering the correct value of the plant and machinery.

Separate Judgments Delivered:
Accountant Member's View:
The Accountant Member held that there was no merger of the ITO's orders with the Commissioner (Appeals)' orders regarding the items not considered by the appellate authority. Therefore, the Commissioner had the jurisdiction to revise the ITO's orders under Section 263. On merits, the Accountant Member found that the assessee should be given another opportunity to prove their status as a small-scale industry.

Judicial Member's View:
The Judicial Member disagreed, holding that the Commissioner (Appeals) had the power to enhance the assessment and should have considered Section 35B(1A). Since the Commissioner (Appeals) did not consider this, the ITO's orders merged with the appellate orders, ousting the Commissioner's jurisdiction under Section 263. The Judicial Member would have allowed the appeals without going into the merits.

Third Member's Decision:
The Third Member agreed with the Judicial Member, holding that the Commissioner (Appeals) had the jurisdiction to consider Section 35B(1A) and should have done so. Therefore, the ITO's orders merged with the appellate orders, and the Commissioner had no jurisdiction under Section 263. The Third Member also noted that the Special Bench decision in Shree Arbuda Mills Ltd. supported this view.

Conclusion:
The majority view held that the Commissioner had no jurisdiction to revise the ITO's orders under Section 263 due to the doctrine of merger. The appeals were allowed, and the matter was to be disposed of in accordance with the majority view.