Commissioner of Income Tax Vs Mandsaur Electric Supply Co. Ltd.

Sohani, J.

By this reference u/s 256(1) of the I.T. Act, 1961, (hereinafter referred to as "the Act"), the Income Tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the amount of compensation became payable to the assessee on the promulgation of the Indian Electricity (Madhya Pradesh) Amendment Ordinance, 1974, published in the M.P. Gazette (Extraordinary) dated March 2, 1974, and the provisions of the Gwalior Electricity Act, and the Indian Electricity Act, 1910, were not applicable to the assessee''s case ?

(2) Whether, on the facts and in the circumstances of-the case, the Tribunal was correct in law in holding that there was no case for interference u/s 263 with the assessment order of the ITO ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that when the assessment order, which had been the subject-matter of an appeal to the AAC and the Tribunal, had not merged in the order of the appellate authorities on points which were not canvassed and agitated in the appeal and, therefore, could be reyised by the CIT u/s 263 of the I.T. Act, 1961 ?

The material facts giving rise to this reference briefly are as follows :

The assessee, a limited company, carried on the business of supplying electrical energy at Mandsaur. The undertaking of the assessee was, however, taken over by the Madhya Pradesh Electricity Board on March 5, 1973, and compensation under the provisions of the Indian Electricity Act, 1910, became payable to the assessee. While making an assessment for the assessment year 1973-74, the ITO did not examine the chargeability of profits and capital gains. The ITO, while making assessment, did not allow certain deductions claimed by the assessee and, hence, aggrieved by the order of assessment, the assessee preferred an appeal before the AAC. The Commissioner also issued a notice u/s 263 of the Act to the assessee to show cause why the order of assessment passed by the ITO should not be revised, inasmuch as it appeared to be prejudicial to the interests of the Revenue as the ITO had failed to examine the chargeability of profits and capital gains. The assessee showed cause but the Commissioner set aside the order of assessment and directed the ITO to make a fresh assessment in accordance with law. Aggrieved by the order passed by the Commissioner, the assessee preferred an appeal before the Tribunal. It was urged on behalf of the assessee before the Tribunal that as the order of assessment passed by the ITO had been the subject-matter of an appeal before the AAC, the order of the ITO had merged in the order passed by the AAC and the Commissioner had no jurisdiction to set aside the order of assessment passed by the ITO. This contention was not upheld by the Tribunal but the Tribunal held that, on the facts and in the circumstances of the case, no case was made out for interference with the order of the ITO. In this view of the matter, the Tribunal allowed the appeal and set aside the order passed by the Commissioner. Aggrieved by the order passed by the Tribunal, the Department sought a reference and the first two questions have been referred at the instance of the Department. The assessee was also aggrieved by the finding of the Tribunal that the order of the ITO had not merged in the order passed by the AAC and, hence, at the instance of the assessee, question No. 3 has been referred by the Tribunal. When the reference came up for consideration before a Division Bench of this court, the Division Bench held that on the question of merger of the order passed by the ITO with that passed by the AAC on appeal, there were conflicting decisions of Division Benches of this court in Misc. Civil Case No. 142 of 1978 ( ALOK PAPER INDUSTRIES Vs. COMMISSIONER OF Income Tax M.P., ) and Miscellaneous Petition No. 55 of 1978 ( JAORA SUGAR MILLS LTD. Vs. UNION OF INDIA AND ANOTHER, ), on the one hand and in Commissioner of Income Tax Vs. Narpat Singh Malkhan Singh, , on the other, and that different opinions were expressed by different High Courts on this important question. The Division Bench, therefore, referred the matter to a larger Bench. That is how this Full Bench has been constituted to hear the reference.

Shri Mukati, learned counsel for the Department, raised a preliminary objection that the Tribunal had no jurisdiction to refer question No. 3 at the instance of the assessee, because the assessee had not filed any application for reference u/s 256(1) of the Act, but had only made an application at the time of finalisation of the statement of the case by the Tribunal, praying that question No. 3 be also referred to this court for its opinion. This objection was raised by the Department before the Tribunal but the Tribunal overruled it and the aforesaid question No. 3 was referred to this court. The objections raised by Shri Mukati on behalf of the Department that the Tribunal was not competent to refer to this court question No. 3 for its opinion, is not well founded. In Commissioner of Income Tax, Kerala Vs. V. Damodaran, , the Supreme Court has held as follows (pp.578, 579):

"In this connection, two categories of cases can be envisaged. One consists of cases where the order of the Tribunal u/s 254 has decided the appeal partly against one party and partly against the other. This may be so whether the appeal consists of a single subject-matter or there are more than one independent claim in the appeal. In the former, one party may be aggrieved by the grant of relief, even though partial, while the other may be aggrieved by the refusal to grant total relief. In the latter, relief may be granted or refused with reference to individual items in dispute, and accordingly one party or the other will be aggrieved. In either case, the party who is aggrieved and who desires a reference to the High Court must file a reference application for that purpose. It is not open to him to make a reference application filed by the other party the basis of his claim that a question of law sought by him should be referred. The second category consists of cases where the order made by the Appellate Tribunal u/s 254 operates entirely in favour of one party, although in the course of making the order, the Appellate Tribunal may have negatived some points of law raised by that party. Not being a party aggrieved by the result of the appeal, it is not open to that party to file a reference application. But on a reference application being filed by the aggrieved party it is open to the non-applicant, in the event of the Appellate Tribunal agreeing to refer the case to the High Court, to ask for a reference of those questions of law also which arise on its submissions negatived in appeal by the Appellate Tribunal. It is, as it were, recognising a right in the winning party to support the order of the Appellate Tribunal also on grounds raised before the Appellate Tribunal but negatived by it."

In the instant case, the submission of the assessee on the question of merger was negatived by the Tribunal though the appeal preferred by the assessee was allowed. Hence, in view of the aforesaid decision of the Supreme Court, it must be held that the Tribunal was competent to refer question No. 3 to this court for its opinion.

Learned counsel for the parties conceded that if our answer to question No. 3 was in favour of the assessee, then it would not be necessary to answer the first two questions. It is for this reason that, first, we take up for consideration question No. 3. As regards that question, the learned counsel for the assessee contended that the assessee having preferred an appeal before the AAC the entire assessment became the subject-matter of appeal. It was urged that in view of the scope and nature of the powers conferred on the AAC by Section 251(1)(a) of the Act, the entire subject-matter of the assessment order was within the jurisdiction of the AAC and that being so, the entire assessment order merged in the appellate order irrespective of the points urged by the parties or decided by the appellate authority. It was, therefore, contended that the Commissioner had no jurisdiction u/s 263 of the Act to revise the order of assessment passed by the ITO as that order had ceased to exist and had merged in the order passed by the appellate authority. Reliance was placed on the decisions in Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co., , J.K. Synthetics Ltd. Vs. Additional Commissioner of Income Tax and Another, and Commissioner of Income Tax Vs. Narpat Singh Malkhan Singh, . The learned counsel for the assessee further contended that the decision of a Division Bench of this court in CIT v. Narpat Singh Malkhan Singh, laid down the correct law and that the decisions in Miscellaneous Civil Case No. 142 of 1978 ( ALOK PAPER INDUSTRIES Vs. COMMISSIONER OF Income Tax M.P., ) and Misc. Petition No. 55 of 1978 ( JAORA SUGAR MILLS LTD. Vs. UNION OF INDIA AND ANOTHER, ), to the contrary deserve to be overruled. In reply, Shri Mukati, learned counsel for the Department, placed reliance on the decision in Karsandas Bhagwandas Patel Vs. G.V. Shah, Income Tax Officer, Rajkot and Others, , and contended that the Commissioner had jurisdiction u/s 263 of the Act to set aside the order of assessment.

Before we proceed to appreciate the contentions urged on behalf of the parties, it is necessary to bear in mind that in the instant case, the Commissioner, in exercise of his powers u/s 263 of the Act, has set aside the order of assessment even though the assessee had preferred an appeal before the AAC. It is true that in that appeal, the AAC had dealt with only some points arising out of the order of assessment. But the order of the ITO to that extent, must, in any case, be held to have merged in the order of the AAC. We may usefully refer to the following observations of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co., :

"There can be no doubt that, if an appeal is provided against an order passed by a Tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the Tribunal, it is obvious that it is the 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....."

Now, the result of the order passed by the Commissioner u/s 263 of the Act in the instant case is to set aside the order passed by the AAC even though the Commissioner has no jurisdiction to do so u/s 263 of the Act. This is not a case where the Commissioner has revised only a part of the order of assessment, which was not the subject-matter of appeal before the AAC and was also not dealt with by the AAC. In our opinion, therefore, the question framed by the Tribunal is too wide and does not bring out the real issue, which arose before the Tribunal for consideration. We have, therefore, reframed the question as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Commissioner had jurisdiction u/s 263 of the Act to set aside the order of assessment passed by the ITO, when that order was the subject-matter in appeal preferred by the assessee before the Appellate Assistant Commissioner ?"

On the question as to whether the entire order of assessment passed by the ITO merges with the order of AAC or the merger is only with respect to that part of the order of the ITO, which relates to items considered and decided by the AAC, there are conflicting decisions. In Karsandas Bhagwandas Patel Vs. G.V. Shah, Income Tax Officer, Rajkot and Others, the Gujarat High Court, in Singho Mica Mining Co. Ltd. Vs. Commissioner of Income Tax, Central, the Calcutta High Court, in Puthuthotam Estates (1943) Ltd. Vs. State of Tamil Nadu, the Madras High Court and in New Diwan Oil Mills Vs. Commissioner of Income Tax, the Punjab and Haryana High Court, have taken the view that the doctrine of merger would operate only on matters which were the subject-matter of decisions by the appellate authority and has no application to matters which have not been touched by the appellate authority. The Allahabad High Court, on the other hand, has in J.K. Synthetics Ltd. Vs. Additional Commissioner of Income Tax and Another, , held that the entire assessment order passed by the ITO merges in the appellate order irrespective of the points urged by the parties or decided by the appellate authority. In Commissioner of Income Tax, Bombay North Vs. Tejaji Farasram, , the Bombay High Court held that once the assessment order was confirmed by the AAC or that any order with regard to the assessment had been made by the AAC, that became a final order of assessment and the Commissioner thereafter could not deal with the assessment at all, in exercise of his powers u/s 263 of the Act. Relying upon this decision, the Bombay High Court held in Commissioner of Income Tax, Bombay North Vs. Amritlal Bhogilal and Co., , that the order of the ITO granting registration to the assessee would be assumed to have merged in the appellate order, even though it was not the subject-matter of appeal before the AAC. In Durgabati and Another Vs. Commissioner of Income Tax, , the majority judges of the Patna High Court followed the decision of the Bombay High Court in Commissioner of Income Tax, Bombay North Vs. Amritlal Bhogilal and Co., . But the decision in Commissioner of Income Tax, Bombay North Vs. Amritlal Bhogilal and Co., was overruled by the Supreme Court in Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co., . In State of Madras Vs. Madurai Mills Co., Ltd., , the Supreme Court held that there could be no merger of the assessment order in the revisional order as the question regarding exclusion of the value of yarn purchased from outside the State was not the subject-matter of revision before the Deputy Commissioner of Commercial Taxes. Relying upon this decision of the Supreme Court, a Division Bench of this court held in Miscellaneous Civil Case No. 142 of 1978 ( ALOK PAPER INDUSTRIES Vs. COMMISSIONER OF Income Tax M.P., ), that the Commissioner had jurisdiction u/s 263 of the Act to revise that part of the order of assessment, which was not the subject-matter of appeal before the AAC and was not touched by him in appeal. In Misc. Civil Case No. 142 of 1978 ( ALOK PAPER INDUSTRIES Vs. COMMISSIONER OF Income Tax M.P., ) the Commissioner had not set aside the entire order of assessment passed by the ITO but had set aside the order of the ITO only to the extent to which it was indicated in the order of the Commissioner. However, in the instant case, the Commissioner has set aside the entire order of assessment and hence the question arising in this case is not the same as was decided in Misc. Civil Case No. 142 of 1978 ( ALOK PAPER INDUSTRIES Vs. COMMISSIONER OF Income Tax M.P., ). Therefore, it is not necessary for us in this case to decide as to whether the decision in Misc. Civil Case No. 142 of 1978, which takes the same view as has been taken in Karsandas Bhagwandas Patel Vs. G.V. Shah, Income Tax Officer, Rajkot and Others, , Singho Mica Mining Co. Ltd. Vs. Commissioner of Income Tax, Central, , Puthuthotam Estates (1943) Ltd. Vs. State of Tamil Nadu, and New Diwan Oil Mills Vs. Commissioner of Income Tax, is or is not the correct view. The question, which has arisen in this case, directly arose for consideration in Commissioner of Income Tax Vs. Narpat Singh Malkhan Singh, . In that case, though the AAC had dealt with the order of the ITO on a limited point, the Commissioner, in exercise of the revisional powers, set aside the order of assessment passed by the ITO. The effect of the order of the Commissioner, as rightly observed in CIT v. Narpat Singh Malkhan Singh, was to set aside the order of AAC, even though the Commissioner had no jurisdiction to set aside the order of AAC. We may usefully refer to the following observations of the Division Bench (p. 80):

"Setting aside of the order of assessment as was done in the revision by the Addl. Commissioner necessarily resulted in the setting aside of the order of the AAC, and, as the power of revision was not available against the order of the AAC, the order of assessment could not be set aside by the Addl. Commissioner. The learned standing counsel relied upon the case of Singho Mica Mining Co. Ltd. Vs. Commissioner of Income Tax, Central, . In this case, the ITO had omitted to charge interest u/s 217 and the Commissioner in revision directed the ITO to compute and recover interest although in the meantime the order of assessment had been the subject-matter of appeal before the AAC. The Calcutta High Court held that the merger of the order of assessment was only in respect of matters which were taken up in appeal and as the question of charging interest was not involved in the appeal, the Commissioner could direct the ITO to charge interest u/s 217. It will be noticed that in this case the Commissioner had not set aside the order of assessment passed by the ITO which was the subject-matter of appeal. The order of the Commissioner directing the ITO to compute and recover interest was passed without disturbing the order of assessment. In the instant case, the Addl. Commissioner in revision set aside the order of assessment passed by the ITO. The case of the Calcutta High Court is, therefore, distinguishable and is not applicable."

We respectfully agree with the aforesaid observations.

In our opinion, therefore, there is no conflict between the two decisions of this court in Misc. Civil Case No. 142 of 1978 ( ALOK PAPER INDUSTRIES Vs. COMMISSIONER OF Income Tax M.P., and Commissioner of Income Tax Vs. Narpat Singh Malkhan Singh, . In the other decision in Miscellaneous Petition No. 55 of 1978 ( JAORA SUGAR MILLS LTD. Vs. UNION OF INDIA AND ANOTHER, , referred to in the order of reference, the facts were these : The ITO had allowed the claim of the assessee for rebate. The assessee, however, preferred an appeal against the other part of the order of assessment, with which the assessee was aggrieved. The question as to whether the claim for rebate was or was not rightly allowed by the ITO was not the subject-matter of appeal before the AAC and was not also considered by the AAC. The Commissioner, instead of merely reviewing the order of the ITO, with regard to the claim of the assessee for rebate, set aside the order of assessment passed by the ITO. The appeal preferred by the assessee before the Tribunal against the order of the Commissioner was dismissed. Instead of filing an application before the Tribunal for making a reference u/s 256(1) of the Act, the assessee filed a petition under Article 226 of the Constitution. In that petition, the assessee made a false averment that no alternative remedy was available to the petitioner. The petition was, therefore, dismissed on the ground of averment of alternative remedy. During the course of hearing before us, a reference was made to the decision of the Supreme Court in L. Hirday Narain Vs. Income Tax Officer, Bareilly, , to show that the Division Bench erred in dismissing Misc. Petition No. 55 of 1978 ( JAORA SUGAR MILLS LTD. Vs. UNION OF INDIA AND ANOTHER, ), on the ground of availability of alternative remedy. Now in L. Hirday Narain v. ITO, the Supreme Court observed that if the High Court had not entertained the petition, the petitioner could have moved the Commissioner in revision because at the date on which the petition was moved, the period prescribed for filing a revision petition had not expired. In Misc. Petition No. 55 of 1978 ( JAORA SUGAR MILLS LTD. Vs. UNION OF INDIA AND ANOTHER, ), the impugned order of the Tribunal was passed on November 15, 1977, while the petition under Article 226 of the Constitution was presented on January 28, 1978, when the period of sixty days for filing an application u/s 256(1) of the Act had expired. It was in these circumstances that Miscellaneous Petition No. 55 of 1978 ( JAORA SUGAR MILLS LTD. Vs. UNION OF INDIA AND ANOTHER, ), was dismissed with the following observations (pp. 391 to 392):

"The learned counsel for the petitioner contended that as this petition was initially entertained, it is not open to this court to dismiss it on the ground of availability of alternative remedy because the petitioner would not now be able to pursue the said remedy and would suffer great hardship. There is no merit in the said submission. It may be that in an appropriate case if it is shown that a party not at fault may suffer hardship on account of dismissal of a petition on the ground of availability of alternative remedy by lapse of time, the court may in its discretion give relief to the petitioner in spite of the fact that an alternative remedy was available to him and may not dismiss the petition at the final hearing only on that ground. But such is not the case on hand. As stated above, on the material placed on record when this petition was filed, an application u/s 256(1) of the Act probably was already barred by limitation. Moreover, the petitioner falsely stated in the petition that no alternative remedy was available to the petitioner. In the circumstances, we see no valid reason why this petition should not be dismissed on the ground of availability of an alternative remedy."

In view of the aforesaid observations, it would be clear that the reference to the decision of the Supreme Court in L. Hirday Narain Vs. Income Tax Officer, Bareilly, , would not be appropriate. As already observed, Misc. Petition No. 55 of 1978 ( JAORA SUGAR MILLS LTD. Vs. UNION OF INDIA AND ANOTHER, , was dismissed on the ground of availability of alternative remedy, but it is true that certain observations in the decision in Misc. Petition No. 55 of 1978 do seem to indicate that the Commissioner would have power to set aside the order of assessment when some aspects of that order were assailed in appeal before the AAC. To that extent, it must be held that the decision in Misc, Petition No. 55 of 1978 ( JAORA SUGAR MILLS LTD. Vs. UNION OF INDIA AND ANOTHER, does not lay down correct law. As already observed, in such a case, the result of setting aside by the Commissioner of the order of assessment passed by the ITO is to set aside the order of the AAC as well, which the Commissioner has no jurisdiction to set aside u/s 263 of the Act. We, therefore, affirm the decision of the Division Bench of this court in that behalf in Commissioner of Income Tax Vs. Narpat Singh Malkhan Singh, .

For all these reasons, our answer to question No. 3, as framed by us, is that on the facts and in the circumstances of the case, the Tribunal was not justified in holding that the Commissioner had jurisdiction u/s 263 of the Act to set aside the order of assessment passed by the ITO. Our answer is in favour of the assessee and against the Department.

In view of our answer to question No. 3, as already observed, it is not necessary to answer the first two questions referred to this court by the Tribunal.

In the circumstances of the case, parties shall bear their own costs of this reference.

Reference answered accordingly.

Mishra, J.

I have had the advantage of going through the order proposed by my brother, Sohani J.

According to me, after having observed in para. 6 to the effect that "it is not necessary for us in this case to decide as to whether the decision in Misc. Civil Case No. 142 of 1978 ( ALOK PAPER INDUSTRIES Vs. COMMISSIONER OF Income Tax M.P., ) which takes the same view as has been taken in Karsandas Bhagwandas Patel Vs. G.V. Shah, Income Tax Officer, Rajkot and Others, , Singho Mica Mining Co. Ltd. Vs. Commissioner of Income Tax, Central, , Puthuthotam Estates (1943) Ltd. Vs. State of Tamil Nadu, and New Diwan Oil Mills Vs. Commissioner of Income Tax, , is or is not the correct view", it does not appear to be necessary to express further opinion as per para. 8 that "there is no conflict in the two decisions of this court in Misc. Civil Case No. 142 of 1978 ( ALOK PAPER INDUSTRIES Vs. COMMISSIONER OF Income Tax M.P., ) and Commissioner of Income Tax Vs. Narpat Singh Malkhan Singh, ".

Subject to this reservation, I agree with the order proposed.