1988 (8) TMI 134 - AT - Income Tax

Summary

Issues Involved:

1. Validity of the Commissioner's revision of the Income Tax Officer's (ITO) orders under section 263.
2. Retrospective application of the Explanation to section 263(1).
3. Doctrine of merger concerning the assessment orders and the Commissioner of Income-tax (Appeals) [CIT(A)] orders.

Detailed Analysis:

1. Validity of the Commissioner's Revision under Section 263:

The assessee challenged the Commissioner of Income-tax's (CIT) authority to revise the ITO's orders for the assessment years 1981-82 and 1982-83 under section 263 of the Income-tax Act, 1961. The CIT had set aside the ITO's assessment orders, deeming them erroneous and prejudicial to the revenue's interests, particularly regarding the allowance of weighted deduction under section 35B. The CIT directed the ITO to recompute the allowance after giving due opportunity to the assessee. The assessee argued that the ITO's orders, passed in accordance with the directions of the Inspecting Assistant Commissioner (IAC) under section 144B, could not be revised by the CIT under section 263. The assessee relied on the Special Bench decisions in Dwarkadas & Co. (P.) Ltd. v. ITO and East Coast Marine Products (P.) Ltd. v. ITO. The department countered, arguing that the Explanation to section 263(1), inserted by the Taxation Laws (Amendment) Act, 1984, and later substituted by the Finance Act, 1988, clarified that an order passed by the assessing officer included an assessment made on the basis of directions issued by the IAC under section 144A or 144B, thus giving the CIT the authority to revise such orders.

2. Retrospective Application of the Explanation to Section 263(1):

The department contended that the Explanation to section 263(1), being of a clarificatory nature, had retrospective effect. The Bombay Bench 'C' in Agro Exports Ltd. v. ITO supported this view. However, the assessee argued that the amendment was not explicitly retrospective and cited the Bombay High Court's decision in CWT v. Mahavirprasad Bubna, which held that a clarificatory provision is prospective unless expressly stated otherwise. The Tribunal agreed with the assessee, noting that retrospective effect is not to be lightly inferred, especially in substantive provisions. The Tribunal emphasized that the Explanation to section 263(1) did not specifically state retrospective effect, thereby concluding it was prospective.

3. Doctrine of Merger:

The assessee argued that the CIT lacked jurisdiction to revise the ITO's orders because they had merged with the CIT(A)'s orders dated 13-3-1984. This raised the question of complete versus partial merger. The assessee cited several cases supporting complete merger, including Oil India Ltd. v. CIT and General Beopar Co. (P.) Ltd. v. CIT. The department, however, argued for partial merger, citing cases like CIT v. Tejaji Farasram Kharawala and CIT v. K. L. Rajput. The Tribunal, after considering the rival submissions and the decisions cited, concluded that there was a complete merger of the ITO's orders with the CIT(A)'s orders. The Tribunal noted that the Explanation to section 263(1) regarding partial merger, inserted by the Finance Act, 1988, was prospective and not applicable to the present case. Thus, the CIT could not revise the assessment orders under section 263.

Conclusion:

The Tribunal allowed the appeals, holding that the CIT lacked the authority to revise the ITO's orders under section 263 due to the prospective nature of the Explanation to section 263(1) and the complete merger of the ITO's orders with the CIT(A)'s orders. The Tribunal appreciated the able arguments presented by both sides.