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TMI Blog1973 (6) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer took the share of the petitioner in the profits of the said firm at nil subject to rectification and assessed the petitioner on a total income of Rs. 71,920. The firm of M/s. Steel and Forms Work. Co. was thereafter assessed for the assessment year 1959-60, by an order of assessment, dated 16th April, 1960. The said firm being aggrieved by the order of assessment preferred an appeal against it to the Appellate Assistant Commissioner. There were four items in dispute before the Appellate Assistant Commissioner. One item related to expenditure of Rs. 1,600 in the miscellaneous expenses account and the other related to expenditure of Rs. 2,517 in the car and motor vehicles maintenance account. Both these items of expenditure were disallowed by the Income-tax Officer, and the Appellate Assistant Commissioner affirmed the disallowance. The third item related to an addition of Rs. 45,000 to the book profits made by the Income-tax Officer. The Appellate Assistant Commissioner in appeal reduced the addition by "a round sum of Rs. 8,000". The last item challenged in appeal comprised two sums, namely, Rs. 600 spent on printing and stationery and Rs. 400 spent on electric fittings ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified under section 35, sub-section (5), with a view to including his share in the profits of the firm in his individual assessment. This show-cause notice was issued ex majore cautela on the assumption that the order passed by the Appellate Assistant Commissioner was correct and the original order of rectification dated 9th March, 1966, was invalid as one made under section 155. The petitioner showed cause but all the objections raised by him were overruled and the Income-tax Officer by an order dated the 6th December, 1966, rectified the assessment of the petitioner under section 35, sub-section (5). The petitioner thereupon filed the present petition challenging the validity of the order of rectification dated 6th December, 1966. Whilst the petition was pending, the appeal preferred by the revenue against the order of the Appellate Assistant Commissioner came to be heard by the Tribunal. The Tribunal held that the order of rectification dated 9th March, 1966, was really an order under section 35, sub-section (5), and not under section 155 and no appeal, therefore, lay against it to the Appellate Assistant Commissioner and the Appellate Assistant Commissioner had no power to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided in section 35, sub-section (5). (B) The final order in the case of the firm from which the period of four years is to be computed within which an order of rectification can be passed under section 35, sub-section (5), does not include an order of rectification passed under section 35, sub-section (1), rectifying the assessment of the firm. The period of four years must, therefore, be counted from the date of the order of the Appellate Assistant Commissioner, namely, 18th August, 1961, and not from the date of the order of rectification of the firm's assessment, namely, 15th February, 1963. If that be so, the two impugned orders of rectification made by the Income-tax Officer are clearly beyond the time limit prescribed under section 35, sub-section (5), and must be held to be invalid." We shall examine these grounds in the order in which we have set them out. Re: Ground (A):-This ground is based on the hypothesis that when an appeal is preferred against an order of assessment by the Income-tax Officer and the appeal is disposed of by the Appellate Assistant Commissioner, the order of assessment made by the Income-tax Officer merges in the order of the Appellate Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellate decision that is effective and can be enforced. In law the position would be just the same even if the appellate decision merely confirms the decision of the tribunal. As a result of the confirmation or affirmance of the decision of the tribunal by the appellate authority, the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement; ........" The question is whether this doctrine applies in income-tax proceedings and, if so, to what extent. The first part of the question is not susceptible of a straight answer, "yes" or "no". Having regard to principle as well as authority it is not possible to say that the doctrine of merger does not apply at all in income-tax proceedings. Take for example a case like Mather Co. (P.) Ltd. v. Income-tax Officer, where an order was made by the Income-tax Officer under section 23A and it was appealed against by the company and the Appellate Assistant Commissioner affirmed it. The order under section 23A made by the Income-tax Officer would in such a case be replaced wholly by the order of the Appellate Assistant Commissioner: there would be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral decisions of this court as well as the Supreme Court that if an assessee does not choose to appeal, the order of assessment becomes final, subject to any power of revision which the Commissioner may have under section 33B but once an appeal is preferred by the assessee, the assessment is opened up and the Appellate Assistant Commissioner can examine all aspects of the assessment, not only those which are complained of by the assessee but also those in regard to which the assessee is satisfied and has not preferred an appeal. This court pointed out in Commissioner of Income-tax v. Karamchand Premchand Private Ltd., after quoting with approval the observations of Chagla C.J. in Narrondas Manordass v. Commissioner of Income-tax : "The powers of the Appellate Assistant Commissioner are not confined to the subject-matter of the appeal but extend to the subject-matter of the assessment. The entire assessment is thrown open before the Appellate Assistant Commissioner and so long as he does not travel outside the matters considered and determined by the Income-tax Officer, he can correct any decision of the Income-tax Officer in the course of the assessment even if the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ltd. : "........ we fail to see how it can be said that there was any decision of the Appellate Assistant Commissioner in regard to the disallowance of the third claim when that was admittedly not a matter considered and decided by him. It is no doubt true that even if the assessee did not carry this matter in appeal by originally including it in the memorandum of appeal or with leave of the Appellate Assistant Commissioner under section 250, sub-section (5), the Appellate Assistant Commissioner was entitled to consider and decide it since the entire assessment was open before him. But he was not bound to do so and if in fact he did not consider it, it is difficult to see how it can be said that he decided it against the assessee. It is only if the Appellate Assistant Commissioner was under an obligation to examine the correctness of the entire assessment irrespective of the grounds of appeal taken by the assessee, that it could conceivably be urged that the Appellate Assistant Commissioner must be presumed to have examined the correctness of the decision of the Income-tax Officer as regards the disallowance of the third claim and since he did not reverse that decision, he mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Appellate Assistant Commissioner whenever there is an appeal, irrespective of what matters are considered and decided by the Appellate Assistant Commissioner, the order of the Appellate Assistant Commissioner would not only comprise decisions reached by the Appellate Assistant Commissioner on matters raised in appeal by the assessee or considered suo motu by the Appellate Assistant Commissioner but would also incorporate by necessary implication the decisions recorded by the Income-tax Officer in respect of other matters not considered and decided by the Appellate Assistant Commissioner. Every decision recorded by the Income-tax Officer in making assessment, though not forming the subject-matter of consideration and decision by the Appellate Assistant Commissioner, would, by reason of merger, be deemed to become a part of the order of the Appellate Assistant Commissioner and if the assessee is unhappy about it, he would be entitled to object to it by preferring an appeal to the Tribunal, even though he has not challenged it in the appeal to the Appellate Assistant Commissioner. The revenue also would be entitled to object to such decision by preferring an appeal to the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order which is apparent from the record of the assessment, the Income-tax Officer can rectify such mistake because the mistake would be his own mistake which he can always correct under section 35, sub-section (1). The legal position may, therefore, be summarized by stating that even after an appeal from an order of assessment is decided by the Appellate Assistant Commissioner, a mistake in that part of the order of assessment which was not the subject-matter of review by the Appellate Assistant Commissioner and was left untouched by him can be rectified by the Income-tax Officer. This principle is now given statutory effect by sub-section (1A) introduced by way of amendment in section 154 of the Income-tax Act, 1961, by the Direct Taxes (Amendment) Act, 1964. This sub-section provides: " Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erger in income-tax proceedings but if we scrutinise these observations closely, it will be apparent that they do not lay down any absolute rule that in every case where there is an appeal, the original order made by the inferior authority merges wholly in the order of the appellate authority regardless of the subject-matter of the decision in the appeal. The principle of merger does undoubtedly apply but that is only where a decision reached by an inferior authority is reversed, modified or even confirmed by the appellate authority. The decision of the inferior authority in such a case is superseded by or merged in the decision of the appellate authority. But this principle has no application where a decision of an inferior authority does not come in for consideration by the appellate authority and there is no decision of the appellate authority either by way of affirmance or by way of reversal or modification on the point decided by the inferior authority. The decision of the inferior authority in such a case stands intact for there is no decision of the appellate authority on the point in which the decision of the inferior authority can be regarded as having merged. These observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record of the assessment. The petitioner then relied on the decision of the Calcutta High Court in Indra Co. Ltd. v. Income-tax Officer, but we do not see how this decision is of any help to the petitioner. The assessee in this case claimed a loss of Rs. 2,41,472 in its business as a dealer in shares. This loss of Rs. 2,41,472 was computed after taking into account the profit arising to the assessee from the sale of 1,393 bonus shares of Hastings Mills Ltd. and for calculating this profit the cost of the bonus shares was taken to be the face value of Rs. 100 for each bonus share. The Income-tax Officer disallowed the entire loss of Rs. 2,41,472 claimed by the assessee as in his view it was not a loss sustained by the assessee in the normal course of its business as a dealer in shares. The assessee appealed against the order of assessment and in the appeal the Appellate Assistant Commissioner held that there was nothing to show that the loss of Rs. 2,41,472 did not arise to the assessee in the course of its business and he accordingly allowed the entire loss. Some two and a half years after the order made by the Appellate Assistant Commissioner, the Income-tax Officer issued a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P.) Ltd. v. Income-tax Officer, which was the next decision relied upon on behalf of the petitioner. What happened in this case was that an order was made by the Income-tax Officer under section 23A levying super-tax on the assessee at the rate of 37 per cent. on the amount of difference betwen 60 per cent. of the distributable surplus and the sum actually distributed by way of dividend. The assessee appealed against this order, but the appeal failed and the order was confirmed by the Appellate Assistant Commissioner. The income-tax Officer thereafter sought to rectify the order because he found that by mistake super-tax was levied only on the amount of difference between 60 per cent. of the distributable surplus and the dividend actually declared whereas it should have been really levied on "the full distributable income less actual dividend declared". This attempt was resisted by the assessee but in vain and an order of rectification was ultimately passed by the Income-tax Officer enhancing the amount of super-tax payable by the assessee. The Kerala High Court held that the Income-tax Officer had no jurisdiction to rectify the order made by him under section 23A because that orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , on 4th August, 1958, the Board of Revenue issued a notice to the assessee stating that it proposed to revise the assessment made by the Deputy Commercial Tax Officer by including in the net turnover a sum of Rs. 7,74,62,706-1-6 as that amount was wrongly excluded by the assessing authority. The assessee objected to the proposed revision, inter alia, on the ground that the proceeding was barred by limitation under section 12 of the Madras General Sales Tax Act, 1939. The assessee also resisted the proposed revision on merits and contended that the exclusion of the sum of Rs. 7,74,62,706-1-6 by the Deputy Commercial Tax Officer was not wrong. The Board of Revenue, however, by an order dated 25th August, 1958, rejected both these contentions and revised the assessment by including the sum of Rs. 7,74,62,706-1-6 in the taxable turnover of the assessee. The assessee preferred an appeal to the Madras High Court against the order of the Board of Revenue and the Madras High Court allowed the appeal holding that the Board of Revenue had no jurisdiction to revise the assessment made by the Deputy Commercial Tax Officer because a period of more than four years had elapsed from the date when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction. For example in Amritlal Bhogilal and Co.'s case, it was observed by this court that the order of registration made by the Income-tax Officer did not merge in the appellate order of the Appellate Commissioner, because the order of registration was not the subject-matter of appeal before the appellate authority...... In the circumstances of the present case it cannot be said that there was a merger of the order of assessment made by the Deputy Commercial Tax Officer dated the 28th November, 1952, with the order of the Deputy Commissioner of Commercial Taxes dated the 26th August, 1954, because the question of exemption on the value of yarn purchased from outside the State of Madras was not the subject-matter of revision before the Deputy Commissioner of Commercial Taxes. The only point that was urged before the Deputy Commissioner was that the sum of Rs 6,57,971-4-9 collected by the respondent by way of tax should not be included in the taxable turnover. This was the only point raised before the Deputy Commissioner and was rejected by him in the revision proceedings. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the final order passed in the case of the firm within the meaning of section 35, sub-section (5)? Is it the order the Appellate Assistant Commissioner dated 18th August, 1961, or is it the order of rectification dated 25th February, 1963 ? The answer can only be, the order of rectification dated 25th February, 1963. The final order passed in the case of the firm means the order which effects the final assessment of the firm. It is now well established that a proceeding for rectification of an assessment is a proceeding for assessment: it is part of the procedure for ascertainment and imposition of tax liability on the assessee. When an assessment is rectified by an order of rectification, what was wrong quantification of tax liability is rectified and a correct quantification of tax liability is substituted for it: Vide S. Sankappa v. Income-tax Officer and Mandal Ginning and Pressing Co. Ltd. v. Commissioner of Income-tax. The order of rectification thus corrects the assessment and the corrected assessment is the final assessment, unless it is followed by a subsequent order disturbing the corrected assessment. Where, therefore, the order of rectification under section 35, sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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