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TMI Blog1981 (9) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... ifficulty, the assessee-company started manufacture and sale of a sophisticated foreign printing machine, high speed automatic letter press, mercedes super, in collaboration with a Dutch firm. Thereafter, in 1973 the assessee-company decided to develop another two types of printing machines---one web-effect and the other sheet-fed-effect---in view of the growing demand for these machines in India. Till then, these machines had not been manufactured in India. To achieve this purpose, there were two ways, one was to collaborate with some foreign concern and the second was to import a prototype new machine from abroad and then, after understanding the technique and mechanism, to develop its own machine. The company obtained approval and necessary licences from the Government of India and imported one web-effect machine from USA at a cost of Rs. 5,82,910 in June 1974. After considerable study, analysis and research on the prototype, by the end of 1975, the assessee developed its own web-effect in the name of 'Orient web-effect' and the first machine was sold in 1976. The assessee also imported in April 1974, one rapids machine from West Germany for Rs. 2,38,972. Total expenditure on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prototype machine received in June 1974. A final study was made of the prototype machine and the alterations proposed in the drawings as well as of the raw materials to be used, and the further alterations that may be needed to make use of the indigenous talent and indigenous material needed for finally evolving the indigenous machine. (7) Development to suit the Indian market --- The major hurdle in making the components was the fact that the original machine made in America was manufactured in inch specifications as per American standards. This was unsuitable. Hence, the design introduced by us was appropriately altered as per the metric system conforming to ISI standards." Considering the material placed before him the ITO came to the conclusion that the assessee had done considerable research in connection with the manufacture of its own web-effect machine and on that view he allowed deduction for Rs. 5,82,010 under section 35 of the 1922 Act. With regard to the amount of Rs. 2,38,972, he however took a different view, after taking the approval of the IAC under section 144B of the Act, which was that the said machinery, i.e., rapids machine, had not, in fact, been uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in such circumstances the order of the ITO can be held to be erroneous and also prejudicial to the revenue, the learned Commissioner cited the Supreme Court decision in the cases of Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 and Tara Devi Aggarwal v. CIT [1973] 88 ITR 323. Dealing with the argument of the learned counsel that the assessment order having been passed under section 143(3) read with section 144B, it could not be the subject-matter of section 263, the learned Commissioner observed that even if the order was passed after reference to the IAC under section 144B, the final order which the ITO passed under section 143(3) was the order of the ITO and it could be dealt with by the Commissioner under section 263. In any case, the expenditure in question having been allowed by the ITO himself, it did not receive the consideration of the IAC under section 144B and, therefore, it could not be said that on this issue, the order of the ITO had merged into that of the IAC. Relying upon the Supreme Court decision in the case of Gojar Bros. v. Ratanlal AIR 1974 SC 1380, the learned Commissioner held that there was no question of a merger of the ITO's order in the order of the IAC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only partial so that the Commissioner could deal with that part of the assessment order passed by the ITO which remained undisturbed. 8. A vital issue thus arises for our consideration and it is, whether the learned Commissioner had jurisdiction under section 263 with reference to the assessment order of the ITO. Against the assessment order, appeal had been filed by the assessee and before the learned Commissioner passed the order under section 263, the appeal had been disposed of by the learned Commissioner (Appeals). The contention of the assessee is that immediately on the passing of the appellate order, the ITO's order of assessment merged completely into that of the appellate order and, therefore, it ceased to exist and hence the learned Commissioner had no jurisdiction under section 263 with reference to the assessment order of the ITO. In support of this view, reference has been made to the Bombay High Court decision in CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412 and the decision of the Allahabad High Court in J.K. Synthetics Ltd. v. Addl. CIT [1976] 105 ITR 344, As against that the revenue's contention is that only that part of the ITO's assessment order merges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal. On the other hand, there are the decisions of the Bombay High Court in the case of Tejaji Farasram Kharawala and the Allahabad High Court in the case of J. K. Synthetics Ltd. wherein, the view taken up was that, even if the appeal filed before the appellate authority does not cover the entire order of the AAC, on the passing of the appellate order, the entire order of assessment merges with the order of the AAC or the Commissioner (Appeals). This being the position, the issue was taken up for consideration by a Special Bench of the Tribunal, Bombay in the case of Dwarkadas Co. (P.) Ltd. v. ITO [1982] 1 ITD 303. The Tribunal held, following the aforesaid Bombay and Allahabad High Courts' decisions, that the entire order of the ITO merges into that of the AAC or the Commissioner (Appeals), and after the passing of such appellate order the ITO's order ceases to exist and hence the Commissioner has no jurisdiction under section 263 to interfere with the assessment order of the ITO. We reproduce below the relevant extracts from the said Tribunal's order: "12. Again, the Bombay High Court in the case of Blue Star and the Gujarat High Court in the case of Karsandas, were consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Hon'ble Calcutta High Court in the case of Singho Mica Mining Co. Ltd. v. CIT [1978] 111 ITR 231 and the Madras High Court in CIT v. City Palayacot Co. [1980] 122 ITR 430, clarified that where the ITO did not levy interest under section 217 at the time of making the assessment, the question of merger with the order of the learned AAC or the Commissioner (Appeals) did not arise, as the ITO had failed to levy the interest and no appeal having been provided under the Act, the appellate authority, by itself, also could not go into it. Hence, the Commissioner could modify the order under section 263, with regard to non-levy of the interest under section 217. 11. Respectfully, following the view taken by the Special Bench of the Tribunal, Bombay and the other later decisions afore-mentioned, we hold that the ITO's assessment order in the present case merged into the order of the learned AAC/Commissioner (Appeals) and, therefore, the learned Commissioner ceased to have jurisdiction under section 263 with reference to the ITO's assessment order. 12. In this context, the argument was raised for the revenue that the Commissioner did have jurisdiction under section 263, on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be suitably modified. After dismantling the machine, and a detailed study and research by the assessee-company's own Research and Development cell, a new machine was evolved which was suitable for Indian conditions. This being the factual position, we hold that the learned Commissioner proceeded on the incorrect basis that the assessee had merely copied the prototype and, therefore, no scientific research was involved. 15. The order of the ITO was not erroneous. The assessee had placed sufficient material before him in support of his claim. The ITO did apply his mind to the assessee's claim, inasmuch as he allowed deduction for a part of it, i.e., for Rs. 5,82,010, while the other part, i.e., Rs. 2,38,972, was disallowed after obtaining directions from the learned IAC under section 144B. It could not, therefore, he said that the ITO had not applied his mind to the issue or that he had not properly considered the material which had been placed before him. 16. Before closing we might say a few words about the scope of section 35(3) also. A plain reading of this provision would show that the ITO is required to make reference to the prescribed authority only if a controversy arise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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