Commissioner of Wealth Tax vs A. Nageswara Rao

Krishna Saran Shrivastav, J.—Pursuant to the order passed by the High Court under s. 27(3) of the WT Act in WTC Nos. 16, 19, 29 and 31 of 1984, dt. 20th September, 1982, the Tribunal has referred the following two questions to the High Court for its opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessment orders for the asst. yrs. 1971-72 to 1974-75 had got merged with the AAC''s order and as such the CWT had no jurisdiction to invoke s. 25(2) of the WT Act ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the report of the Valuation Officer did not constitute material for the CWT to revise the assessment by invoking s. 25(2) of the WT Act ?"

The facts of the case lie in a narrow compass. The WTO passed four separate orders for the asst. yrs. 1971-72, 1972-73, 1973-74 and 1974-75, on 29th December, 1978, wherein it has accepted the valuation of a residential building of the assessee situated in Banjara Hills, Hyderabad, at Rs. 2,39,946, Rs. 2,78,300, Rs. 2,78,300 and Rs. 3,00,000, respectively, but disallowed the liability to the Life Insurance Corporation to the extent of Rs. 11,000 and passed the assessment orders accordingly. The respondent-assessee had instituted four separate appeals before the AAC challenging the disallowance of the liability to the Life Insurance Corporation. The appeals were dismissed by the AAC vide his order dt. 18th August, 1979. The CWT exercising powers under s. 25(2) of the WT Act and taking the view that the values of the property of the assessee as given by him and accepted by the WTO were erroneous and prejudicial to the Revenue because the values were underestimated, directed the WTO for fresh assessment. The assessee took the matter to the Tribunal which allowed the appeal holding that the order of the WTO has merged with the order of the AAC dt. 18th August, 1979, and the subsequent report of the Valuation Officer could not constitute material for revising the assessments, set aside the order of the CIT.

Mr. S. R. Ashok, learned standing counsel for the applicant-Department, has taken us through the impugned orders passed by the CWT under s. 25(2) of the WT Act and by the Tribunal and urged that the Tribunal has wrongly observed in para 5 of its order that the CIT had relied on the subsequent report of the Valuation Officer, because, actually he had relied on the report which was already on record of the WTO at the time of passing the assessment order and, therefore, the second question framed is liable to be reframed because the words "did not constitute material" are unnecessary to decide the real question in controversy.

On the other hand, Shree C. Kodandaram, learned counsel for the respondent-assessee, has argued that the High Court cannot reassess the facts of the case and should accept the facts reached by the Tribunal as correct and, therefore, the second question should not be reframed.

A bare perusal of the order of the CWT reveals that it has relied on the report of the engineers of the valuation cell who had inspected the building in question in the year 1972 only. There is no material on record which indicates that the CIT has relied on the valuation report which was subsequent to the order passed by the WTO on 29th December, 1978. Thus, it is crystal clear that the finding of the Tribunal in para 5 of its order that the CIT had relied on the subsequent report of the Valuation Officer, is based on surmise and, therefore, it is perverse. Under these circumstances, the wrong statement of the fact by itself makes it a question of law to be investigated by this Court and it necessitates reframing of the second question which we reframe as stated below :

"Question No. 2. - Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the report of the Valuation Officer constituted the basis for the CWT to revise the assessment by invoking s. 25(2) of the WT Act ?"

Relying on the cases of State of Madras Vs. Madurai Mills Co., Ltd., and Kaliki Veera Reddy and Co. Vs. State of Andhra Pradesh, , it has been contended by learned standing counsel for the applicant-Department that the WTO has accepted the valuation of the property in question as given by the assessee-respondent and has disallowed the liability to the Life Insurance Corporation, therefore, the assessee-respondent has challenged only that part of the orders of assessment in the appellate Court, which had dismissed the appeals. Therefore, it cannot be said that the orders of the WTO had merged with the order of the AAC dt. 18th August, 1979, with the result the CWT had jurisdiction to revise the order of the AO and to pass appropriate orders. It has been further contended that the CIT has based his finding only on the valuation report of the engineers which was already on record before the WTO at the time of passing the impugned orders of assessment and, therefore, it cannot be said that he had relied on any material which was brought on record subsequent to the passing of the impugned orders. Even otherwise, Expln. (b) to s. 25(2) of the WT Act defines the word "record" as "record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner", and, therefore, even if it is assumed for the sake of arguments, that the CWT had taken into consideration the subsequent report of the Valuation Officer the impugned order passed by the CWT cannot be attacked on this count.

On the other hand, learned counsel for the respondent-assessee has urged that the WT Act is a complete code. The CWT has no jurisdiction and power to go into the question of assessment of the properties in question, because, when the appeal was filed by the assessee, it was open to the Department to raise before the AAC any matter including the alleged wrong valuation of the building in question, because, the AAC had got powers to consider that question also which had not been raised by the assessee. Once that has not been done, the impugned order passed by the WTO stands merged with the order of the AAC and, therefore, the CWT had no jurisdiction to order reassessment. It has also been urged on behalf of the respondent-assessee that the Tribunal has correctly observed that the CWT had based his opinion on the subsequent report of the Valuation Officer. The impugned Expln. to s. 25(2) of the WT Act has been substituted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st June, 1988 and, therefore, this Court cannot travel beyond that date as the legislature has made the Explanation operative prospectively by words expressed therein. Parliament has limited the retrospectivity of the Explanation w.e.f. 1st June, 1988, and it cannot be given further retrospectively as it is impermissible in law. It has lastly been urged that both the questions should be answered in favour of the assessee. Reliance has been placed on the case of Commissioner of Income Tax Vs. Rajasthan Mercantile Co. Ltd., India Tourism Development Corporation Ltd. and Gulshan Kumar Vijay Ku, and on the case of CIT vs. Patel Brothers & Co. Ltd. AIR 1995 SC 1829.

Relying on the case of Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co., , and State of Madras Vs. Madurai Mills Co., Ltd., , it has been held in the case of State of Madras vs. Madurai Mills (supra) :

"The doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior authority and the other by a superior authority, passed in an appeal or revision, there is a fusion or merger of the two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. The application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction".

Reproducing the aforementioned doctrine of merger ruled in the case of State of Madras vs. Madurai Mills (supra), a Division Bench of this Court in the case of Kaliki Veera Reddy (supra), has observed that the doctrine of merger depends upon the nature of the appellate orders and the scope of the appellate jurisdiction. In this case, the revised order of final assessment passed by the CTO was found to be one relating to two disputed items and, therefore, it was held in this case that the assessing authority had no jurisdiction to reopen the assessment in respect of the admitted turnover which was the subject-matter of dispute before the High Court.

A Full Bench consisting of three judges of this Court, in which one of us (P. Venkatarama Reddi, J.) was a member, in the case of Commissioner of Income Tax Vs. Late Begum Noor Banu Alladin and Another, , has observed that, it is difficult to conclude that the entire assessment order in that case became an integral part of the appellate order and that, therefore, any part thereof could be challenged irrespective of the subject-matter of the dispute in first appeal and had added that in view of the legal position clarified by the Supreme Court in State of Madras vs. Madurai Mills (supra), the application of the doctrine of merger cannot be readily assumed.

In the case of Commissioner of Income Tax Vs. K.L. Rajput, ,a Full Bench consisting of five judges of the Madhya Pradesh High Court, has held that whenever a question arises as to whether the CIT is or is not competent to revise under s. 263 of the Act, the order of assessment framed by the ITO which has been the subject-matter of an appeal before the AAC, it has to be ascertained as to whether the CIT has set aside the entire order of assessment or only that part of the order of assessment which was not the subject-matter of an appeal either because the AAC had no jurisdiction to consider the matter or because the AAC, though having jurisdiction to examine that subject-matter, did not do so. If the CIT has set aside the entire order of assessment, then, it could not be held that he has exercised power conferred upon him because he has no power under s. 263 of the Act to revise the order of AAC.

The principles laid down by the Full Bench of the Madhya Pradesh High Court in the case of CIT vs. K. L. Rajput (supra), have been quoted with approval by a Division Bench of this Court in the case of Commissioner of Income Tax Vs. East Coast Marine Products (P.) Ltd. and Another, and the Division Bench of this Court has also disapproved the contrary view taken by certain other High Courts.

In the case of S.S. Rathore Vs. State of Madhya Pradesh, , the cause of action in the case of a service dispute was considered and it was held that the cause of action arises not from the date of the original adverse order but on the date when the order of the higher authority where a statutory remedy is provided entertaining the appeal or representation is made and where no such order is made, though the remedy has been availed of, a six months'' period from the date of preferring of the appeal or making of the representation shall be taken to be the date when the cause of action shall be taken to have first arisen. It has been further held that the distinction made between Courts and Tribunals as regards the applicability of the doctrine of merger is without any legal justification. Powers of adjudication ordinarily vested in Courts are being exercised under the law by Tribunals and other constituted authorities. It has also been held that the appellate authority''s order is the operative order even though it confirms the order of the original authority. But in this case, this point has not been considered as to what extent the order of the lower Court merges with the order of the appellate Court when a certain portion of the order of the trial Court has not been challenged by any party to the appeal and it also remained untouched by the appellate Court.

The power conferred upon the CWT under s. 25(2) of the WT Act to revise an order passed by the WTO is in identical terms with the power conferred under s. 263 of the IT Act, 1961, to revise an order passed by the ITO under the IT Act, 1961. The position of law that emerges from the law laid down by the apex Court and the High Courts of Andhra Pradesh and Madhya Pradesh is that although the doctrine of merger applies to the WT Act proceedings, the extent to which it applies depends upon the scope and subject-matter of appeal and the decision rendered by the appellate authority. In case the order of assessment passed by the WTO has been challenged by the assessee before the AAC in respect of only some of the items covered by the WTO''s assessment order and the remaining items forming part of the impugned order of assessment have neither been raised nor decided by the appellate Court suo motu and no decision has been given by the appellate authority in respect of those items, only that portion of the order of assessment merges with the appellate order which has been considered and decided by the appellate authority. In other words, the matters which are not covered by the appellate order of the AAC and are left untouched, the impugned order of assessment to that extent survives permitting the exercise of revisional jurisdiction by the CWT under s. 25(2) of the WT Act.

In the case of Jiyajeerao Cotton Mills Ltd. Vs. Commissioner of Income Tax and Others, , a learned single judge of the Calcutta High Court, relying on the earlier decision of the Division Bench of the Calcutta High Court and on the case of Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co., , has held that, once an appeal is preferred by the assessee, it is open to the CIT to raise before the AAC any matter dealing with the assessment of the assessee and there is nothing left for any authority which passed the initial order to reopen in the manner sought to be done as in that case. Similarly, a Division Bench of the Orissa High Court, in the case of COMMISSIONER OF INCOME TAX Vs. ORISSA OIL INDUSTRIES LTD., , has held that where an appeal has been filed against the order of assessment, such order merges with the appellate order and there is no scope for the CIT to revise the order of assessment made by the ITO. On the facts of the case, the Calcutta and the Orissa High courts reached the conclusion that the orders of assessment passed by the assessing authority had been merged with the appellate orders respectively and, therefore, there was no scope for the CIT to revise the order of assessment made by the assessing authority. The principles laid down in the case of CIT vs. Amritlal Bhogilal (supra) has been referred to and explained by the apex Court in the case of State of Madras vs. Madurai Mills (supra). With respect, if the aforesaid observations made by the learned single judge of the Calcutta High Court and the Division Bench of the Orissa High Court are intended to cover the cases of the present kind and to hold that the order of assessment made by the AO merged with the order of the AAC, even though certain items were left untouched and not appealed against and no finding has been given by the appellate Court, then, we find ourselves unable to concur in that view and the aforesaid views expressed by the said two High Courts do not appear to be good law.

As noted above, we get from the order of the CWT passed in revision that he had found from the record that as early as 1972, the assessing authority had formed the opinion on the basis of local enquiries that the cost of construction and the value of the premises in question have been greatly underestimated by the approved valuer relied upon by the assessee and, therefore, the case should be referred to the valuation cell and thereafter the engineers of the cell had actually inspected the building in that year and had come to the conclusion that the cost of construction and the market value of the building as also the value of the land is much higher than returned by the assessee. However, the WTO accepting the figures returned by the assessee had made the assessment in 1978. This fact makes the observations of the Tribunal incorrect and wrong that the CWT had revised the assessment order on the basis of the subsequent report of the Valuation Officer.

In order to appreciate the rival contentions of learned counsel for the parties to the reference regarding the retrospectively of the impugned Explanation, it appears beneficial to reproduce the relevant Explanation of the IT Act, 1961, as also the WT Act. Expln. 2 to s. 37(2A) of the IT Act, 1961, reads as under :

"For the removal of doubts, it is hereby declared that for the purposes of this sub-section and sub-s. (2B), as it stood before the 1st day of April, 1977, ''entertainment expenditure'' includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work".

Expln. 2 was inserted by the Finance Act, 1983, w.e.f. 1st April, 1976. Expln. (b) to sub-s. (2) of s. 25 of the WT Act, reads as under :

"Explanation. - For the removal of doubts, it is hereby declared that, for the purposes of this sub - section, - ...

(b) ''record'', shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the CIT : ..."

In clause (b) after the word "record", the words "shall include and shall be deemed always to have included" have been inserted by the Finance Act, 1989, w.e.f. 1st June, 1988.

It is pertinent to note that the words "shall include and shall be deemed always to have included" do not find place in Expln. 2 to s. 37(2A) of the IT Act and for this reason only, the Division Bench of the Delhi High Court in the case of Commissioner of Income Tax Vs. Rajasthan Mercantile Co. Ltd., India Tourism Development Corporation Ltd. and Gulshan Kumar Vijay Ku, , has held that when the statute, enacting an amendment or introducing a new provision, states that the provision is to be read "with effect from" a particular date, normally the Court cannot travel beyond the said date along with the said provision, while interpreting the words used prior to the said date, unless the natural meaning of the relevant words was totally ignored earlier and the newly added declaratory provision embodies the ordinary and natural meaning of the said words. And for that reason only, it appears that the said view has been approved by the apex Court in the case of CIT vs . Patel Brothers & Co. Ltd. : [1995]215ITR165(SC) , wherein it is held that the widened meaning cannot be extended to past periods when the amended Expln. 2 was not in operation. If the aforementioned amendment in Expln. (b) to s. 25(2) of the WT Act is not to be read with retrospective effect and it is to be read as applicable w.e.f. 1st June, 1988, then the deeming provision would become redundant.

In the case of South India Steel Rolling Mills, Madras Vs. Commissioner of Income Tax, Madras, , the assessee which was a partnership firm had four partners. This partnership had been constituted on 1st September, 1960. Two of the partners subsequently retired from the partnership and the partnership was reconstituted with the remaining two partners, but continued the same business which had been done by the partners before its reconstitution. On 3rd March, 1968, one of the two partners had died and the partnership stood dissolved. On the next day, a new partnership was constituted to carry on the business previously carried on by the partnership firm, of which one of the two partners of the new firm was a partner. The assessment in question related to the partnership firm which had existed prior to its dissolution on 3rd March, 1968. The assessee-firm had obtained the benefit of development rebate under s. 33(1)(a) of the IT Act during the assessment years in question. Since the partnership stood dissolved on 3rd March, 1968, before the expiry of the period of eight years, the CIT in exercise of the powers conferred on him under s. 263 of the Act, withdrew the development rebate that had been granted to the assessee for the said assessment years. The apex Court held that in Expln. (b) to s. 263, there is an express provision wherein it is prescribed that "record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the CIT"; therefore, due to the death of one of the two partners resulting in the dissolution of the assessee-firm on account of the said death which took place prior to the passing of the order by the CIT it could, therefore, be taken into consideration by him for the purposes of exercising his power under s. 263 of the IT Act. The event subsequent to the passing of the order by the ITO had been taken into consideration by virtue of Expln. (b) to s. 263 referred to above. Expln. (b) in s. 263 of the IT Act is in pari materia with Expln. (b) to sub-s. (2) of s. 25 of the WT Act and in spite of a specific date given for enforcement of the provision on the strength of the deeming clause, the subsequent events had been taken into consideration.

For the foregoing reasons, even if it is assumed that the CWT had taken the subsequent valuation report into consideration while invoking the provisions of s. 25(2) of the WT Act, no fault can be found with the order because it has jurisdiction and power to do so, vide Expln. (b) to sub-s. (2) of s. 25 of the WT Act. Viewed from any angle, the second question as reframed by us deserves to be answered in the affirmative.

In the result, we answer the first question in the negative and the second question as reframed by us in the affirmative, that is to say we answer both the questions in favour of the applicant-Department and against the assessee. The referred case is thus disposed of. However, in the circumstances of the case, we leave the parties to bear their own costs.