Commissioner of Income Tax vs Mahindra and Co.

V.K. Singhal, J.—The Tribunal has referred the following questions of law arising out of its order dated 10-9-1981 in respect of the assessment year 1972-73 u/s 256(1) of the income tax Act, 1961 (''the Act''): 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the finding of the Commissioner (Appeals) that provisions of section 52(2) of the income tax Act, 1961 could not be invoked in this case and in deleting the addition made on this account?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Commissioner (Appeals) deleting the addition of Rs. 4,29,593 made by the ITO on account of profit on amalgamation of the companies Eastern Trading Syndicate, Jaipur and Shree Vijay Laxmi Trading Ltd., Pali Marwar, with the assessee-company?

The brief facts of the case are that the assessment of the assessee in respect of the period ending on 31-12-1971 was completed by the ITO u/s 143(3) of the Act and deduction u/s 47(vi) of the Act was claimed for a sum of Rs. 4,25,415, which was the profit arising out of amalgamation of Eastern Trading Syndicate (P.) Ltd. with Shree Vijay Laxmi Trading Co. Ltd. The ITO was of the view that this surplus which has been claimed u/s 47(vi) is allowable and the claim appears to be proper. Besides allowing this item as not liable to tax, the tax was levied in respect of different sources of income including the tax on capital gain and income from rent, etc.

The assessee has challenged the liability of the capital gains and the rental income which was determined by the ITO before the AAC. The AAC set aside the assessment order for the purpose of recomputing the capital gains after affording the proper opportunity to the assessee and for the purpose of recomputing the rental income of the property known as 4-Fairlie Place, Calcutta. In respect of other grounds of appeal, relief of Rs. 445 was given to the assessee. In pursuance of the direction given by the AAC, the ITO framed the assessment order and referred the same to the IAC u/s 144A of the Act. The assessee was given the opportunity and after hearing the assessee, a direction was given by the IAC that the profit arising out of amalgamation is liable to tax. The present controversy is only with regard to this addition which was made by the ITO on the directions being given by the IAC as to whether the IAC could have given such a direction u/s 144A in respect of a source of income which was considered by him as exempt and not liable to tax in the original assessment order and for which no appeal was filed by the assessee and the directions by the appellate authority were only in respect of capital gains and income from rent.

Mr. Bafna has relied the decisions of this Court in the case of Rambilas Chandram Vs. Commissioner of Income Tax, wherein it was observed that where a case is sent back to the ITO without any restrictions, then the ITO can make additions of such source of the income of the assessee in the first assessment, he can make such addition in the fresh order of assessment.

The learned counsel for the assessee had relied the decision in the case of Surrendra Overseas Ltd. Vs. Commissioner of Income Tax, wherein the Calcutta High Court has observed that the ITO has no jurisdiction to consider on question which was not connected or covered or related to any grounds of appeal. If the IAC has set aside the assessment with direction to the ITO, the ITO has no jurisdiction to conduct an enquiry beyond the said direction and make a fresh assessment without reference to the earlier assessment. Reliance has also been placed on the decision of the Calcutta High Court in Income Tax Officer, "C" Ward and Others Vs. Ryam Sugar Company Ltd., wherein the mistake committed in the original assessment order was tried to be rectified while giving effect to the appeal order and the Calcutta High Court was of the view that such correction could not be made. Reliance has also been placed in the case of CIT v. Fundilal Likhabchand [1994] (1) Tax World 353, wherein, it was held that where the AAC has only set aside the assessment then a fresh assessment has to be made in accordance with the directions given by the appellate authority and the ITO is bound by those directions.

The decision of the Allahabad High Court in the case of Cawnpore Chemical Works Pvt. Ltd. (No. 1) Vs. Commissioner of Income Tax, has also been relied to show that where the order of the AAC is specific, it is not open to the ITO to conduct a fresh enquiry beyond the said directions and to proceed to make a fresh assessment without any reference to the earlier assessment.

The decision in the case of Commissioner of Income Tax Vs. Kamla Town Trust, has been relied on the proposition that even if an erroneous decision given it operates as res judicata between the parties and the ITO cannot travel beyond the directions and recompute the income of the assessee. We have considered over the matter. From the perusal of the record of the assessee, it is evident that initially the question of claiming the deduction u/s 47(vi) of the Act was made by the assessee in respect of surplus which has arisen on account of amalgamation between the Eastern Trading Syndicate (P.) Ltd. and Shree Vijay Laxmi Trading Ltd. This order of the ITO had become final and was not challenged either by the assessee or by the revenue. Even no steps were taken u/s 263 of the Act for cancellation of the assessment order on this point. The assessee has challenged the liability with regard to capital gains and rental income besides other income which does not include the income from profit on account of amalgamation from the two companies. The AAC has given specific direction in this case that the capital gains and rental income is to be recomputed. While giving effect to the order of AAC, the ITO was bound by the direction given by the AAC and his jurisdiction does not extend beyond recomputation of income from these two sources. The power which has been given to the IAC u/s 144A cannot be exercised so as to extend the jurisdiction of the ITO. The power u/s 144A is meant only for the guidance of the ITO and in a fresh assessment, the IAC may be justified in giving the direction to the ITO for making assessment in respect of any source of income which has not even been considered by the ITO. In a case where the matter has travelled before the appellate authority may be the AAC/Commissioner (Appeals) or the Tribunal, the ITO is bound by the directions given by such authority. The power u/s 144A could not be invoked for extending the jurisdiction of the ITO which is limited to the extent of the directions being given by such an appellate authority. The IAC cannot annul or extend the scope of the order of the appellate authority. If this interpretation is taken that the IAC has the power to extend the jurisdiction of ITO, the result would be that in a particular case even the order passed by the Tribunal on a particular point may be considered by the IAC on being referred by the ITO and directions contrary to the Tribunal could be given in such, a case. This is not intended even by the Legislature and as such the only reasonable conclusion which can be arrived in the facts and circumstances of the case or which could be taken is that the jurisdiction of the ITO as well as the IAC in respect of matter where the assessment order has been set aside by the appellate authority is limited to the extent of the directions being given by such an authority. The jurisdiction of the IAC is co-terminus the jurisdiction of the ITO and the IAC cannot exercise jurisdiction on matters on which ITO has no jurisdiction. In respect of additions being made on account of capital gains or rental income directions could have been given but such directions cannot be given in respect of any other source of income. In this case another important fact which has to be taken note of is that initially while framing assessment u/s 143(3), the ITO had already considered the said claim and allowed it by way of deduction. Such an order even if it is illegal then the proper remedy for the revenue was to get it cancelled in the proceeding u/s 263 and not to cover that point in the proceeding u/s 143(3), read with section 250, of the Act. In these circumstances, we are of the view that the Tribunal was justified in holding that the scope of assessment made by the ITO in pursuance of directions issued u/s 250 of the Act by the AAC was limited and the ITO was not competent to tax a sum of Rs. 4,29,593 when at the time of original assessment, the same was not subject-matter of appeal. In view of this position of law, we answer the first question in favour of the assessee and against the revenue. The Tribunal was justified in upholding the finding of the Commissioner (Appeals) that provisions of section 52(2) of the Act, could not be invoked in this case and in deleting the addition made on this account. There is no necessity to answer the second question. Accordingly, the reference is answered in favour of the assessee and against the revenue.