2019 (4) TMI 64 - HC - Income Tax

Power of CIT u/s 263 - Doctrine of merger - AO denied exemption u/s 11 to Slum Rehabilitation Authority stating that it is not Local Authority u/s 10(20) - Appeal against that order allowed by CIT(A) - CIT issued SCN to denies exemption u/s 11 in light of proviso to Section 2(15) - principle of merger - HELD THAT - Tribunal was correct in drawing a conclusion that on the principle of merger, it was not open for the Commissioner to take the order of assessment in revision. Once the entire claim of the assessee for exemption under Section 11 of the Act was at large before the Appellate Commissioner, the Commissioner (Appeals) had wide powers and jurisdiction to examine all aspects of the such a claim. It is well settled that the Commissioner (Appeals) has even the power of enhancement of assessment once an appeal is filed by the assessee. The present case was not even one of the enhancement of assessment, it was a case where the claim of the assessee was rejected by the Assessing Officer on one ground. If the Revenue was of the opinion that such order could have been sustained not on the ground on which the Assessing Officer had rejected it, but on some other legal ground, it was open for the Revenue to argue the same before the Appellate Commissioner. Nothing prevented the Revenue from persuading the Appellate Commissioner to reject the claim of the assessee on such legal ground. At any rate, the Commissioner in exercise of the revisional powers cannot initiate fresh inquiry about the same claim on the ground that one of the aspects of such a claim was not considered by the Assessing Officer. Clause (c) of Explanation 1 may be worded in a manner as suggesting the extent of the powers of the Commissioner for taking an order in revision, its effect is of circumscribing such powers in cases where the order passed by the Assessing Officer has been subject matter of any appeal and such subject matter has been considered and decided in such appeal. This provisions thus statutorily recognizes the principle of merger and avoids any conflict of opinion between two quasi judicial authorities of the same rank.

Summary

Issues Involved:
1. Applicability of Section 263 of the Income Tax Act.
2. Principle of merger concerning appellate orders.
3. Examination of the applicability of the proviso to Section 2(15) of the Income Tax Act.

Detailed Analysis:

1. Applicability of Section 263 of the Income Tax Act:
The primary issue is whether the Tribunal was right in holding that the order passed by the Director of Income Tax (Exemptions) [DIT(E)] is beyond the scope of Section 263 of the Income Tax Act. The Tribunal concluded that the order sought to be revised was not prejudicial to the interest of the Revenue, even though the order was passed without necessary verification, which should have been made, thus deemed erroneous as per Explanation 2 to Section 263.

2. Principle of Merger Concerning Appellate Orders:
The Tribunal's decision was based on the principle of merger, which states that once an appellate authority has adjudicated on an issue, the original order merges into the appellate order. The Tribunal noted that the Commissioner (Appeals) had set aside the entire assessment order, and this was confirmed by the Tribunal. Therefore, the assessment order no longer existed for the Commissioner to revise under Section 263. The Tribunal cited several precedents, including CIT Vs. Smt. A.S. Narendrakumari and CIT Vs. Nirma Chemicals Works P Ltd, to support the principle of merger, emphasizing that the Commissioner could not exercise revisional jurisdiction over an order that had already been appealed and adjudicated upon.

3. Examination of the Applicability of the Proviso to Section 2(15) of the Income Tax Act:
The Tribunal also addressed whether the Assessing Officer had examined the applicability of the proviso to Section 2(15) of the Act. The Revenue argued that the assessee's activities were not charitable as they involved trade, commerce, or business, and the Assessing Officer failed to consider this aspect, making the assessment order erroneous and prejudicial to the Revenue's interest. However, the Tribunal found that the Assessing Officer had indeed raised queries regarding the applicability of the proviso to Section 2(15) during the assessment proceedings, and the assessee had responded to these queries. The Tribunal concluded that the absence of explicit reasons in the assessment order for accepting the assessee's explanation did not imply that no inquiry was made.

Conclusion:
The Tribunal held that the Commissioner erred in exercising revisional powers under Section 263 because the assessment order had merged with the appellate order, and the Assessing Officer had considered the applicability of the proviso to Section 2(15). The Tribunal's decision was upheld, and the appeal by the Revenue was dismissed.