Merger of orders in order of higher authority of court a discussion in view of recent Supreme Court ruling and a lesson for learning.

[C.A. DEV KUMAR KOTHARI]

Relevant links and references:

Commissioner of Central Excise, Delhi Versus M/s Pearl Drinks Ltd. - 2010 TMI - 76689 (SC)

S. Shanmugavel Nadar Versus State Of Tamil Nadu And Another - 2008 TMI - 40353 - SUPREME Court

Kunhayammed And Others Versus State Of Kerala And Another - 2008 TMI - 40239 - SUPREME Court

Commissioner Of Sales Tax, Uttar Pradesh Versus Vijai Int. Udyog  - 2008 TMI - 40034 - SUPREME Court.

Section 35(L) (b) of the Central Excise Act, 1944.

Section 35(E)(1) of the Central Excise

S.263 of Income Tax Act, 1961.

Merger of order:

In simple terms and as per common understanding we can say that a decision on any issue considered in any order of a lower authority or court stands merged in the order of higher authority or higher court if that higher authority or court has considered the issue. In case a decision on a particular issue contained in order of lower authority has not at all been considered by higher authority or court then decision on that issue cannot be considered as to have been merged in the order of higher authority or court.

When higher authority has power of enhancement:

When higher authority has power to enhance assessment made by lower authority, in that case also if the higher authority has not at all considered any other issue, except those on which assessee ahs preferred appeal, it is not proper to say that the higher authority has considered that issue. However, if the higher authority has issued a notice of show cause as to why an enhancement should not be made and then the higher authority has not passed any order of enhancement, then it can be said that the decision of lower authority on the issue about which higher authority issued SCN and then did not made enhancement, stands confirmed by higher authority and hence order on that issue stands merged in order of higher authority.

Thus the issues on which an appeal has been made by any party and considered by higher authority, and the issues on which higher authority issues a SCN and passes order of enhancement or drop proceedings of enhancement can be considered as to have merged in the order of higher authority.

Merger of original order in order of revisionary authority:

In case an original order has been passed by say AO, and the CIT issues notice of revision u/s 263 of IT Act, on say seven issues. After allowing hearings to the assessee, the CIT does not pass any order of revision to direct the AO to enhance assessment or he simply drops proceedings of revision then order of the AO on all seven issues contained in the SCN of CIT will be considered as merged in the order of CIT to drop proceedings meaning that the order of the AO was not erroneous and prejudicial to the interest of revenue.

Suppose the CIT make directions on five issues to reassess the matter and leave aside two issues, Then it can be said that the order of the AO has been merged on those two issues in the order of the CIT. And on five issues the matter is still open as the CIT has given directions to reexamine and reassess on those issues. In respect of those five issues also suppose the CIT has given particular directions and particular circumstances in which an addition can be made, then it can be said that the order on those five issues has also merged with order of CIT in respect of all other contentions, except the contentions on which the AO is directed to make enquiry or to take a fresh decision.

Specific provisions about merger:

The law may provide specific circumstances in which entire order or order on particular issue can be considered to have merged in order of higher authority or court. For example, in case of provisions of revision by CIT u/s 263 of the IT Act we find the following provisions which is relevant in the context of this write-up:

Revision of orders prejudicial to revenue.

263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the 1[Assessing] Officer is erroneous in so far as it is prejudicial xxxxxx

 (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.

Thus according to the provision the matters which have not been considered by the CIT(A) can be considered by the CIT and he can pass revision orders.

Consideration is important:

As discussed earlier what is relevant is consideration of matter and order on that matter is not essential. If the CIT (A) has considered any matter and he has not passed any order on that issue, then also it can be said that the order of the AO has merged with the order of the CIT(A). If a appellate authority has considered an issue either on the basis of grounds of appeal, or in course of examination of the issue and related evidence, that matter can generally been considered as having been considered thought there may not be any specific order on the issue. Particularly so, when the authority has also power to enhance the basis of assessment or liability. However, when the appellate authority has no power to enhance, then the matter may have to be viewed differently.

Recent judgment of the Supreme Court:

In Commissioner of Central Excise, Delhi Versus M/s Pearl Drinks Ltd. 2010 TMI - 76689 (SC), again the doctrine of merger was considered in context of provisions of Central Excise.

The revenue, vide the show cause notice issued proposed to make disallowances under 8 eight heads. Finally commissioner of central excise disallowed deductions in respect of two heads and allowed deductions in respect of six heads. Aggrieved by the order, taxpayer filed an appeal before CESTAT which dismissed the appeal on the issue of two items.

Taxpayer appealed before the Supreme Court without success. This was on two issues only.

Later on revenue filed an appeal before the CESTAT against the order of commissioner of central excise against relief allowed on six issues. The Tribunal dismissed the appeal of revenue on the ground that the order under challenge had merged in the earlier order dated 24th January, 2002 passed by the Tribunal in the taxpayers appeal whereby disallowance of two of the eight deductions in dispute had been upheld.

On further appeal by the revenue before the Supreme Court, it was held that the Tribunal was in the appeal of taxpayer concerned only with the question whether the adjudicating authority was justified in disallowing deductions under the said two heads. Tribunal had no occasion to examine the admissibility of the deductions under the remaining six heads obviously because the assessee's appeal did not question the grant of such deductions.

Only revenue could have been raised objection on those issues.

The supreme Court held that the Tribunal obviously failed to notice this distinction and proceeded to apply the doctrine of merger in a mechanical manner.

Therefore the order of the tribunal dismissing revenue's appeal was set aside and now the Tribunal has to consider the appeal of revenue on those six issues.

Point missing:

In view of author a vital point might have missed by the counsels of tax payer. After consideration of facts, date wise events, etc. if it could be pointed out and established that when appeal of assessee was filed the revenue could also file an appeal or appeal by way of cross objections or even otherwise, could have pleaded that the order of Commissioner was wrong. Or it the decision as to filing of cross appeal was in process of making at relevant levels, the Tribunal could have been informed about the same and in that situations, as per usual practice, the appeal of assessee could be kept pending for consideration of appeal along with the appeal of revenue, filed/ to be filed.

In case there was no such appeal or even pleadings, or even contemplation of filing of an appeal it could be said that the order of Commissioner was accepted on six issues and had attained finality on those issues and that in any case the subsequent filing of the appeal is an afterthought and is in nature of an attempt to unsettle settled things. However, there appears no such pleadings before the Supreme Court and the sole contention raised by taxpayer was that there was merger of order of CCE in order of CESTAT. By other circumstantial evidences also it could be pointed out that the order of CESTAT on six issues was reasonable, correct, and followed by revenue.

Lesson: all possible contentions should be raised and one should not rely on some technical points.