1981 (9) TMI 189 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Commissioner under section 263 of the Income-tax Act.
2. Merger of the ITO's order with the appellate authority's order.
3. Validity of the ITO's decision to allow deduction under section 35.
4. Applicability of section 154 to rectify the Commissioner's order.

Detailed Analysis:

1. Jurisdiction of the Commissioner under Section 263:
The primary issue was whether the Commissioner had jurisdiction under section 263 to revise the ITO's assessment order. The assessee argued that the ITO's order merged into the appellate order of the Commissioner (Appeals), thus nullifying the Commissioner's jurisdiction under section 263. The Tribunal concluded that, based on precedents and the Special Bench of the Tribunal, the ITO's order merged into the appellate order, and hence, the Commissioner ceased to have jurisdiction under section 263 to revise the assessment order.

2. Merger of the ITO's Order with the Appellate Authority's Order:
The Tribunal examined whether the ITO's order merged completely into the order of the appellate authority or only partially. The Tribunal referred to various High Court decisions and concluded that the entire order of the ITO merges into the order of the Commissioner (Appeals) upon the appellate order's passing. Consequently, the ITO's order ceases to exist, and the Commissioner loses jurisdiction under section 263.

3. Validity of the ITO's Decision to Allow Deduction under Section 35:
The ITO had allowed a deduction of Rs. 5,82,010 under section 35 for scientific research, which the Commissioner later contested. The Tribunal found that the ITO had sufficient material and had applied his mind to the assessee's claim, thus making a proper and justified decision. The Tribunal held that the Commissioner's view that the assessee merely copied the prototype was incorrect, and the ITO's order was not erroneous or prejudicial to the revenue.

4. Applicability of Section 154 to Rectify the Commissioner's Order:
Since the Tribunal canceled the Commissioner's order under section 263, it also annulled the subsequent order under section 154, which was intended to rectify the earlier order. The Tribunal stated that if the order under section 263 was invalid, any rectification under section 154 flowing from it must also be invalid.

Conclusion:
The Tribunal ruled in favor of the assessee, canceling both the Commissioner's orders under sections 263 and 154. The ITO's original assessment was upheld, and the appeals by the assessee succeeded.