1986 (12) TMI 70 - AT - Income Tax

Accounting Year, Assessment Order, Assessment Year, Deduction In Respect, Orders Prejudicial To Interests, Purchase Tax, Subject Matter, Trading Liability

Issues Involved:
1. Applicability of Section 41(1) of the Income-tax Act, 1961.
2. Effective date of the Government notification for tax exemption.
3. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act.
4. Doctrine of merger in appellate orders.

Detailed Analysis:

1. Applicability of Section 41(1) of the Income-tax Act, 1961:
The Commissioner observed that the assessee had been claiming deductions for purchase tax liabilities, which were allowed for the assessment years 1977-78 and 1978-79. However, the Government of Kerala granted an exemption for these taxes for the period from 1-4-1977 to 31-3-1979. The Commissioner believed that the Income Tax Officer (ITO) failed to apply Section 41(1) of the Act regarding the remission of this liability, making the assessment order for 1979-80 erroneous and prejudicial to the revenue's interests. Consequently, the Commissioner directed the ITO to add the amount of Rs. 3,53,398 to the assessee's income for the assessment year 1979-80.

2. Effective Date of the Government Notification for Tax Exemption:
The assessee argued that the notification dated 29-3-1979 was published in the Gazette on 3-4-1979 and became effective only from that date. The assessee contended that the amount should be considered for the assessment year 1980-81, not 1979-80. The Tribunal referred to the Madras High Court's decision in the case of Asia Tobacco Co. Ltd., which held that the effective date of a notification is when it is made available to the public. Following this precedent, the Tribunal concluded that the notification dated 29-3-1979 was effective from 3-4-1979, falling within the accounting year 1979-80 relevant to the assessment year 1980-81. Therefore, the Commissioner was incorrect in directing the ITO to tax the amount in the assessment year 1979-80.

3. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act:
The assessee contended that the assessment order dated 7-9-1982 for the assessment year 1979-80 had merged with the order of the Commissioner (Appeals) dated 20-10-1983 on other issues, and thus, the Commissioner lacked jurisdiction under Section 263 to revise the ITO's order. The Tribunal examined various judicial precedents and concluded that the entire order passed by the ITO merges with the first appellate order, and no part of it can be subjected to an order under Section 263, irrespective of whether the points were urged by the party or decided by the appellate authority. Therefore, the Commissioner had no jurisdiction to pass the order under Section 263.

4. Doctrine of Merger in Appellate Orders:
The Tribunal considered the doctrine of merger, which posits that when an appellate authority reviews an order, the original order merges with the appellate order. The Tribunal referred to several High Court decisions supporting this view, including J.K. Synthetics Ltd. v. Addl. CIT, CIT v. Tejaji Farasram Kharawala, and others. The Tribunal favored the view that the entire assessment order merges with the appellate order, and hence, the Commissioner could not revise the ITO's order under Section 263.

Conclusion:
The Tribunal allowed the appeal, holding that the Commissioner was not justified in directing the ITO to tax the amount in the assessment year 1979-80. The notification became effective from 3-4-1979, relevant to the assessment year 1980-81. Additionally, the Commissioner lacked jurisdiction under Section 263 due to the doctrine of merger. The appeal was thus allowed in favor of the assessee.

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