1974 (5) TMI 10 - HC - Income Tax

Issues Involved:
1. Jurisdiction of the Commissioner under Section 263(1) of the Income-tax Act, 1961.
2. Doctrine of Merger in the context of appellate orders.
3. Entitlement to development rebate and depreciation under the Income-tax Act, 1961.
4. Applicability of judicial precedents on the doctrine of merger.

Detailed Analysis:

1. Jurisdiction of the Commissioner under Section 263(1) of the Income-tax Act, 1961:
The petitioner-company contended that the Commissioner had no jurisdiction to revise the order of the Income-tax Officer (ITO) after it had merged in the appellate order of the Appellate Assistant Commissioner (AAC). The court held that Section 263 of the Income-tax Act authorizes the Commissioner to call for and examine the record of any proceeding under the Act, and if he considers that the order of the ITO is erroneous and prejudicial to the interest of revenue, he can revise it. However, the Commissioner has no power to modify or touch an appellate order. If the order of the ITO has merged in the appellate order, it ceases to exist in law and is outside the purview of Section 263 of the Act.

2. Doctrine of Merger in the context of appellate orders:
The court examined whether the assessment order merged in the appellate order in its entirety. The court referred to the Supreme Court's decision in State of Madras v. Madurai Mills Company Limited, which held that the doctrine of merger is not rigid and universal. The court also referred to Commissioner of Income-tax v. Amritlal Bhogilal & Co., where the Supreme Court held that if an appeal is provided against an order, the decision of the appellate authority is the operative decision in law. The court concluded that the entire assessment order merges in the appellate order, irrespective of the points urged by the parties or decided by the appellate authority.

3. Entitlement to development rebate and depreciation under the Income-tax Act, 1961:
The petitioner-company claimed it was a priority industry engaged in petro-chemical manufacturing and was entitled to a 35% development rebate under Section 33(1)(b)(B)(i) and 15% depreciation under Section 80E of the Act. The ITO initially upheld this claim. However, the Commissioner, upon revision, held that the petitioner-company was not engaged in a petro-chemical industry and thus not entitled to the deductions. The court found that the finding of the ITO that it was a priority industry was not questioned by the department nor considered by the AAC in the appeal, hence it merged into the appellate order.

4. Applicability of judicial precedents on the doctrine of merger:
The court disagreed with the Gujarat High Court's decision in Karsandas Bhagwandas Patel v. Income-tax Officer, which held that the doctrine of merger applies only if the particular point was the subject-matter of appeal. The court preferred the Supreme Court's broader interpretation in Commissioner of Income-tax v. Shapoorji Pallonji Mistry and Commissioner of Income-tax v. Rai Bahadur Hardutroy Motilal Chamaria, which held that the appellate authority's competence ranges over the whole assessment, not just the points raised in the appeal. The court also referred to Sheodan Singh v. Daryao Kunwar, where the Supreme Court held that dismissal of an appeal on preliminary grounds amounts to a decision on the merits, thus confirming the trial court's decision.

Conclusion:
The court concluded that the entire assessment order merged in the appellate order dated December 14, 1972, and thus, the Commissioner of Income-tax lost jurisdiction to act under Section 263 of the Act. Consequently, the notice issued under Section 263 on December 22, 1973, was without jurisdiction. The writ petition was allowed, and the impugned orders dated December 29, 1973, and January 24, 1974, were quashed. The petitioner was entitled to costs.

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