1988 (4) TMI 90 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Inspecting Assistant Commissioner (IAC) to rectify assessment orders.
2. Exclusion of interest income from chargeable profits under Rule 1(x) of the First Schedule to the Companies (Profits) Surtax Act, 1964.
3. Validity of rectification orders passed after the statutory limitation period.
4. Doctrine of merger of IAC's order with the order of the Commissioner of Income-tax (Appeals).

Detailed Analysis:

1. Jurisdiction of the Inspecting Assistant Commissioner (IAC) to Rectify Assessment Orders:
The assessee-company contended that the IAC did not have jurisdiction to rectify the original assessment orders passed by the Income-tax Officer (ITO). The Commissioner of Income-tax (Appeals) did not address this ground in his appellate order. The Appellate Tribunal previously held that the rectification orders of the IAC could not be upheld, and the appeals were allowed.

2. Exclusion of Interest Income from Chargeable Profits under Rule 1(x) of the First Schedule:
The assessee-company argued that the IAC omitted to exclude interest income from chargeable profits as per Rule 1(x) of the First Schedule, despite applications for rectification being filed within the statutory time limit. The IAC, in compliance with the Appellate Tribunal's order, excluded interest received from Indian parties but not from the First National City Bank, as it was not considered an Indian concern. The Commissioner of Income-tax (Appeals) held that the IAC's orders were invalid and without jurisdiction. However, the Tribunal noted that there was enough material on record to support the exclusion of interest income from Indian banks and parties, and thus the IAC's rectification was justified.

3. Validity of Rectification Orders Passed After the Statutory Limitation Period:
The Commissioner of Income-tax (Appeals) held that rectification orders passed on 15-3-1984 were invalid as they were beyond the five-year limitation period from the original assessment orders dated 30-7-1974. The Tribunal disagreed, citing that the applications for rectification were filed within the statutory time limit, and the right to have an order on the application cannot be extinguished due to the authority's delay.

4. Doctrine of Merger of IAC's Order with the Order of the Commissioner of Income-tax (Appeals):
The Commissioner of Income-tax (Appeals) opined that the IAC's order had merged with his own order, thus precluding further rectification. The Tribunal, referencing the Bombay High Court's ruling in Sakseria Cotton Mills Ltd., clarified that the doctrine of merger applies only to the parts of the order actually dealt with by the appellate authority. Since the Commissioner of Income-tax (Appeals) did not address the exclusion of interest income, the IAC's order on this issue had not merged and remained subject to rectification.

Conclusion:
The Tribunal concluded that the IAC had jurisdiction to rectify the assessment orders and that the applications for rectification were timely. The rectification orders excluding interest income from Indian banks and parties were valid, while the exclusion of interest from the First National City Bank was not warranted. The orders of the Commissioner of Income-tax (Appeals) were reversed to the extent they annulled the IAC's rectification orders, and the IAC's orders were restored. The appeals were partly allowed.