M.S.P Spices Pvt. Ltd. vs Commissioner of Income Tax

K. Shivashankar Bhat, J.—The petitioner seeks the quashing of the order of the respondent whereby the latter set aside the order of assessment made against the petitioner by the Income Tax Officer for the assessment year 1983-84; the respondent exercised his power u/s 263 of the Income Tax Act to revise the order of the Income Tax Officer and directed the Income Tax Officer to make a fresh order of assessment after considering the taxability of the sales tax amount refunded to the petitioner during the relevant year. Applicability of the doctrine of merger is the question involved.

The petitioner is doing business in the export of coffee; it also derives interest on deposits and divided incomes. While computing the total income of the petitioner, the Inspecting Assistant Commissioner had disallowed certain expenses incurred by the petitioner against which the petitioner filed an appeal before the Commissioner of Income Tax (Appeals) who allowed the appeal partly by his order dated October 1, 1986. Thereafter, the respondent issued a notice u/s 263 of the Act, proposing to revise the order of assessment made by the Inspecting Assistant Commissioner on the ground that a sum of Rs. 19,93,855 obtained by the petitioner as refund of the amount paid earlier by the petitioner as sales tax was omitted to be brought to tax by the Inspecting Assistant Commissioner.

The petitioner challenged this notice initially; during the pendency of the writ petition, final order was passed by the respondent and hence the writ petitioner was amended questioning the said order (annexure-D).

The short question is whether the order of assessment made by the Inspecting Assistant Commissioner stood merged with the order of the Commissioner of Income Tax (Appeals) when the latter allowed the appeal of the petitioner partly and if so, whether the respondent is barred from exercising his power u/s 263 to revise the order of the Inspecting Assistant Commissioner (the original authority).

Learned counsel for the Revenue contended that there was no merger in the instant case, because the taxability of the sales tax amount refunded to the petitioner was not the subject-matter of appeal before the Commissioner of Income Tax (Appeals) and therefore the question of merger did not arise. Learned counsel cited two decisions, Commissioner of Income Tax Vs. Travancore Tea Estates Co. Ltd., of the Commissioner of Income Tax Vs. K.L. Rajput, of the Madhya Pradesh High Court, while Sri Sarangan strongly relied on a Full bench Decision of this Court in Commissioner of Income Tax, Karnataka-I Vs. Hindustan Aeronautics Ltd., .

It is not disputed before me that, in the appeal before the Commissioner of Income Tax (Appeals), the said appellate authority could have dealt with the question of the taxability of the sales tax amount refunded to the petitioner. When this position is not disputed, it follows that the said amount has to be treated as part of the subject-matter of assessment.

In the Full bench decision of this court in Commissioner of Income Tax, Karnataka-I Vs. Hindustan Aeronautics Ltd., , Hakeem J., speaking for the Full Bench, observed, at page 13 Commissioner of Income Tax Vs. Hindustan Aeronautics Ltd., :

"It is thus apparent that the Appellate Assistant Commissioner can look into and adjudicate upon findings recorded by the Income Tax Officer not only against the assessee which may expressly be the subject-matter of the appeal but also a matter which has been considered and determined by the Income Tax Officer in the course of the assessment. In other words, the entire subject-matter of the assessment would be within the jurisdiction of the Appellate Assistant Commissioner.

Since the entire subject-matter of the assessment is within the jurisdiction of the Appellate Assistant Commissioner, some High Courts, in the light of the observations made by the Supreme Court in State of Madras Vs. Madurai Mills Co., Ltd., have held that the entire assessment order will merge in the appellate order irrespective of the points urged by the parties or decided by the Appellate Assistant Commissioner."

After referring to divergent views on this question amongst various High Court, the learned judge held at page 15 (at p. 324 of 157 ITR) :

"Amid this diversity of opinion, this High Court in Vijayalakshmi Lorry Service''s case [1986] 157 IRE 327, without much fuss over the matter, has held that the entire order merges when the order was taken in appeal and was modified by the Appellate Assistant Commissioner. Such an order becomes final and the Commissioner was precluded from taking proceedings u/s 263 of the Act to revise the order of the Income Tax Officer on another ground. That decision was rendered on September 17, 1975, and is being followed by the authorities in this State. The view taken in that decision is neither unreasonable nor erroneous. Similar view has been taken, as earlier noticed, by the High Courts of Allahabad, Calcutta, Madhya Pradesh, etc. There is, therefore, no compelling reason to review that decision."

Earlier, at page 12 (157 ITR 323), the Full Bench had noticed that the controversy was in relation to the doctrine of merger of such issues "which could have been dealt with by the appellate authority within its jurisdiction but in fact had not been dealt with by the said authority", and also in relation to such issues which were in fact raised before the appellate or revisional authority but no dealt with by the said authority."

The controversy was laid to rest in this State by the Full Bench by extending the doctrine of merger to all issues which necessarily arise in an assessment proceedings as part of its subject-matter.

In view of the above decision, the petitioner is entitled to succeed; the order of the respondent is liable to be set aside as without jurisdiction.

The writ petitioner is, accordingly, allowed. Rule made absolute. No costs.