Allahabad High Court
M/S Mehra Brothers Partnership Firms ... vs Commissioner Of Income Tax And 3 Others on 11 March, 2015
Bench: Sudhir Agarwal, Shashi Kant
HIGH COURT OF JUDICATURE AT ALLAHABAD AFR Court No. - 34 Case :- WRIT TAX No. - 185 of 2015 Petitioner :- M/S Mehra Brothers Partnership Firms Filling Respondent :- Commissioner Of Income Tax And 3 Others Counsel for Petitioner :- Suyash Agarwal,S.P. Gupta Counsel for Respondent :- C.S.C. Hon'ble Sudhir Agarwal,J.
Hon'ble Shashi Kant,J.
1. Heard Sri S.P. Gupta, learned Senior Advocate assisted by Sri Suyash Agarwal , learned counsel appearing for petitioner and Sri Bharatji Agarwal, learned Senior Advocate assisted by Sri Dhananjay Awasthi, learned counsel appearing for respondents.
2. This writ petition under Article 226 of Constitution of India has arisen from notice issued by Commissioner, Income Tax - I, Kanpur (hereinafter referred to as 'CIT'), in purported exercise of power under Section 263 of Income Tax Act, 1961 (hereinafter referred to as 'Act, 1961), proposing revision of assessment order dated 19th March, 2014 (assessment year 2011-12), passed by Income Tax Officer - N (II), Kanpur, under Section 143(3) of Act, 1961, computing income of petitioner-assessee at Rs.35,37,980/-, after allowing exemption under Section 10B of Act, 1961.
3. Petitioner is a partnership firm. There are two partners, namely Anoop Kumar Mehra and Ashok Kumar Mehra. The firm is engaged in business of manufacture and export of 'saddlery' goods and allied items. Petitioner's unit is a 100% Export Oriented Unit (hereinafter referred to as 'EOU'). It commenced business and submitted return since Financial Year 2000-01 (Assessment Year 2001-02). Being a 100% EOU, petitioner was exempted from liability of tax under Section 10B of Act, 1961 to the extent of total income derived from export articles or things or computer software for a period of 10 consecutive assessment years. It was allowed exemption consistently for 10 years, commencing from financial year 2000-01 (assessment year 2001-02) to financial year 2009-10 (assessment year 2010-11).
4. For 11th year i.e. financial year 2010-11 (assessment year 2011-12), again assessee filed return on 19th September, 2011, declaring 'nil' income, claiming exemption under Section 10B of Act, 1961. Petitioner declared total sales turnover at Rs.157088434.12 and profit of Rs.4,66,16,547.45. It claimed exemption on the entire amount of profit under Section 10B of Act, 1961. Assessing Officer passed assessment order dated 9th March, 2014, reducing export turnover of Rs.15,70,88,434.12 by a sum of Rs.1,11,76,289.37. In the result, export turnover determined by Assessing Officer for the purpose of Section 10B came to Rs.14,59,12,144.75. The taxable income of petitioner-assessee thus was assessed at Rs.35,37,980/-. Against this assessment of taxable income Rs.35,37,980/-, petitioner-assessee preferred appeal before Commissioner of Income Tax (Appeals) - II, Kanpur (hereinafter referred to as 'CIT(A)') on 28th March, 2014, which was allowed vide order dated 9th May, 2014. The Appellate Authority accepted return of assessee and determination of taxable income of Rs.35,37,980/- was set aside.
5. Revenue preferred appeal before Tribunal vide memo of appeal dated 15th September, 2014. It was registered as ITA No. 734/LKW/2014. While appeal was pending before Tribunal, Assessing Officer issued notice dated 25.09.2014, under Section 154/155 of Act, 1961, stating that petitioner firm was not entitled for any exemption under Section 10B, since 10 years' period had already completed with assessment year 2010-11 and it has wrongly claimed exemption under Section 10B for assessment year 2011-12, which is a manifest error and need be rectified.
6. It is not clear whether petitioner submitted any reply or not, but admittedly no rectification order was passed by Assessing Officer. In the meantime appeal pending before Tribunal came to be decided vide judgment dated 13th January, 2015. With regard to issue of deduction under Section 10B of Act, 1961, which resulted in reduction of turnover and determination of taxable income, Tribunal found that for assessment year 2008-09, matter was already remanded by Tribunal to Assessing Officer to consider in the light of Karnataka High Court's judgment in Commissioner of Income Tax Vs. Tata Elxsi Ltd. [2012 (247) CTR 334], thus, findings of CIT(A) on the issue of deduction for assessment year 2011-12 was set aside and Tribunal remanded the matter to Assessing Officer. It allowed the appeal of Revenue for statistical purposes. Paragraphs no. 9, 10 and 11 of order of Tribunal are reproduced hereunder:
"9. With regard to the other issue relating to deduction under section 10B of the Act is concerned, we find that in the assessment year 2008-09, the Tribunal has set aside this issue and restored the matter to the file of the Assessing Officer with a direction to re-compute the deduction allowable to the assessee under section 10B of the Act in the lght of the judgment of the Hon'ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd., 17 taxmann.com 100. The ld. D.R. has further contended that in the impugned assessment year, the issue is same, therefore, the order of the ld. CIT(A) may kindly be set aside with a direction to re-adjudicate the issue afresh in the light of the judgment of the Hon'ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd. (supra).
10. Having carefully examined the order of the ld. CIT(A), we find that an identical issue was restored back to the Assessing Officer with a direction to re-adjudicate the same in the light of the judgment of the Hon'ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd. (supra) in assessment year 2008-09, therefore, following the same, we set aside this issue in this assessment year and restore the matter back to the file of the Assessing Officer to re-adjudicate the same in the light of the aforesaid judgment of the Hon'ble Karnataka High Court.
11. Accordingly, the appeals of the Revenue stand allowed for statistical purposes." (emphasis added)
7. Assessing Officer thereafter dropped the notice issued under Section 154, vide order dated 13th January, 2015.
8. Now, CIT has issued notice dated 25th February, 2015, under Section 263, requiring petitioner to show-cause as to how it was entitled to claim exemption under Section 10B for assessment year 2011-12 and to this extent assessment order dated 19th March, 2014 is erroneous and pre-judicial to the interest of Revenue.
9. Sri S.P. Gupta, learned Senior Advocate assisted by Sri Suyash Agarwal, contended that assessment order, passed by Assessing Officer, was set aside in appeal by CIT(A). It thus stood merged in appellate order. There existed no order of assessment of Assessing Officer in respect where to CIT could have exercised power under Section 263 of Act, 1961. He further, contended that in any case, appeal of Revenue against order of CIT(A) has been allowed by Tribunal and the matter has been remanded to Assessing Officer, whereafter, no further assessment has been made by Assessing Officer. In law, presently there does not exist any order of assessment and in absence of any order of assessment, power under Section 263 of Act, 1961 cannot be exercised. Therefore, impugned notice is patently without jurisdiction.
10. He next submitted that the question in respect to applicability of Section 10B of Act, 1961 for assessment year 2011-12 was never raised by respondents at any stage. Even Assessing Officer, though issued notice, under Section 154/155 of Act, 1961 but dropped proceedings. Therefore, respondents are estopped from raising plea of inapplicability of Section 10B in the assessment year in question. In any case CIT has no foundation, basis or stage whereat it could have validly exercised power under Section 263 of Act, 1961. The impugned notice ex-facie lacks jurisdiction and therefore is a nullity in the eyes of law.
11. Learned Standing Counsel per contra submitted that entire order of assessment has not disappeared. Only question of deduction of income of Rs.35,37,980/- was subject matter of appeal before CIT(A) as well as Tribunal. Both appellate authorities have touched only that part of matter. Otherwise, order of Assessing Officer is continuing. The issue of applicability of Section 10B, as such, for assessment year 2011-12 has not been touched by appellate authorities. Therefore, CIT is well within jurisdiction to issue impugned notice and it is protected by explanation 'C', Section 263 of Act, 1961.
12. The questions up for consideration are :
(i) Whether there exists any order of assessment in respect whereof impugned notice has been issued, so as to attract Section 263?
(ii) Whether doctrine of merger would apply to the case in hand so as to hold that order of assessment merged in the appellate order and after decision of Tribunal in appeal filed by Revenue, there did not exist any order of assessment, whatsoever?
(iii) Whether the notice dated 23.02.2015 is a valid exercise of power by CIT?
13. In order to attract Section 263 of Act, 1961, there must exist an erroneous order of assessment of Assessing Officer, prejudicial to the interest of Revenue.
14. In Malabar Industrial Company Ltd. Vs. CIT [2000 (243) ITR 83 (SC)], Court considered Section 263(1) of Act, 1961 and held that pre-requisite to exercise of jurisdiction by Commissioner, suo motu, under Section 263 is that order of Income Tax Officer is erroneous and prejudicial to the interest of Revenue. Commissioner has to be satisfied on existence of twin conditions i.e.
(i) Order of Assessing Officer sought to be revised is erroneous, and
(ii) It is prejudicial to the interest of Revenue.
15. If any one of them is absent, Section 263 of Act, 1961 would not be attracted. It was also held in Malabar Industrial Co. Ltd. (supra) that this power of revision cannot be invoked in respect to each and every mistake or error committed by Assessing Officer. It is only when an order is erroneous and prejudicial to the interest of Revenue,, then Section 263 of Act, 1961 will be attracted. An incorrect assumption of fact or an incorrect application of law will satisfy the requirement of order being 'erroneous'. Court further said that orders passed without applying principles of natural justice or without application of mind, would also come within category of "erroneous orders".
16. Coming to the phrase "prejudicial to the interest of Revenue", Court said in Malabar Industrial Co. Ltd. (supra) that it is not an expression of art and not defined in Act, 1961. When considered with its ordinary meaning, it is of wide import and not confined to mere loss of tax. Court was of the view that scheme of Act was to levy and collect tax in accordance to the provisions of Act and this task is entrusted to the Revenue. If, due to erroneous order of Income Tax Officer, Revenue is loosing tax, lawfully payable by a person, it will certainly be prejudicial to the interest of Revenue. However, every loss of revenue, as a consequence of an order of Assessing Officer, cannot be treated as prejudicial to the interest of Revenue. For example, when Income Tax Officer adopted one of the course permissible in law and it has resulted in loss of revenue, or where two views are possible and Income Tax Officer has taken one view with which Commissioner does not agree, it cannot be treated erroneous order, prejudicial to the interest of Revenue, unless view taken by Income Tax Officer is unsustainable in law.
17. Aforesaid view taken in Malabar Industrial Company Ltd. (Supra) has been followed in CIT Vs. Max India Ltd. [2007 (295) ITR 282], where also Court has reiterated that expression 'erroneous' should be read in conjunction with phrase "prejudicial to the interest of Revenue".
18. Looking to the case in hand, we find that exemption under Section 10B of Act, 1961 was admissible to assessee for 10 consecutive years. Admittedly it has availed the said exemption for 10 consecutive years i.e. from assessment year 2001-02 to assessment year 2010-11.
19. Having exhausting the period of exemption available under Section 10B of Act, 1961, still assessee sought to claim exemption under Section 10B(1) for 11th year i.e. assessment year 2011-12. It was apparently not permissible under Section 10B of Act, 1961. Assessing Officer, under some misconception of fact or law, as the case may be, did not address himself to the applicability of Section 10B and proceeded on assumption that assessee has rightly claimed exemption under Section 10B(1) of Act, 1961. This wrong assumption on the part of Assessing Officer whether of fact or law, apparently was erroneous and also caused prejudice to the interest of Revenue, for the reason that tax lawfully payable to department on previous income, earned by assessee in the assessment year 2011-12 would stand lost, if assessment order is not revised. We therefore, have no hesitation in holding that the twin conditions for attracting Section 263(1) of Act, 1961, exist in the case in hand and therefore, to that extent Commissioner was justified in exercising power under Section 263(1) of Act, 1961 by issuing notice in question. The Question No. 3, thus is answered against petitioner.
20. However, further validity of notice would depend upon questions no. 1 and 2 which we have formulated above. Now we have to examine, what is the concept of 'merger' which has been recognised in Act, 1961. Ordinarily, when a judicial or quasi-judicial order becomes subject matter of appeal and is confirmed by Appellate Court or body, as the case may be, the order of Court below/Authority merges with the order passed in appeal.
21. The above general concept of 'merger' in respect to judicial and quasi-judicial orders has been considered and recognised time and again.
22. In Chandi Prasad and Others Vs. Jagdish Prasad and Others [2004 (8) SCC 724], the Court said :
"It is trite that when an Appellate Court passes a decree, the decree of the trial court merges with the decree of the Appellate Court and even if and subject to any modification that may be made in the appellate decree, the decree of the Appellate Court supersedes the decree of the trial court. In other words, merger of a decree takes place irrespective of the fact as to whether the Appellate Court affirms, modifies or reverses the decree passed by the trial court." (emphasis added)
23. In Gangadhara Palo Vs. The Revenue Divisional Officer & Another [2011 (4) SCC 602), the Court said :
"According to the doctrine of merger, the judgment of the lower court merges into the judgment of the higher court. Hence, if some reasons, however meagre, are given by this Court while dismissing the special leave petition, then by the doctrine of merger, the judgment of the High Court merges into the judgment of this Court and after merger there is no judgment of the High Court. Hence, obviously, there can be no review of a judgment which does not even exist." (emphasis added)
24. However, in taxing statutes like Act, 1961, the Legislature has not thought it fit to apply general 'Doctrine of Merger', but 'Doctrine of 'Partial Merger' has been adopted. Once the issue of merger is governed by statutory provisions, then, obviously, it is the statute which shall prevail over general doctrine of 'merger'. Herein general 'doctrine of partial merger' and to the extent it would apply for the purpose of Section 263 of Act, 1961, we find relevant provisions in Explanation 'C' of Section 263(1) of Act, 1961.
25. Explanation to Section 263(1) of Act, 1961, having sub clauses (a) and (b) was inserted by Taxation Laws (Amendment Act, 1984) with effect from 01.10.1984. Thereafter, entire explanation was substituted by Finance Act, 1988 with effect from 01.06.1988, which had Clause (c) also. Some minor amendments came to be made in Explanation (c) by Finance Act, 1989, which was given effect from 01.06.1988. Section 263(1) with explanation as it stands after aforesaid amendments, read as under:
"263. (1) The Commissioner may call for and examine the record of any proceedings under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment (Explanation.- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-
(a) an order passed [on or before or after the 1st day of June, 1988] by the Assessing Officer shall include-
(i) an order of assessment made by the Assistant Commissioner [or Deputy Commissioner] or the Income-tax Officer on the basis of the4 directions issued by the [Joint] Commissioner under section 144A;
(ii) an order made by the [Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120;
(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 Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal [filed on or before or after the 2st day of June, 1988], the powers of the Commissioner under this sub-section shall extend [and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal]"
26. Words "filed on or before or after 1st day of June, 1988" and further words "and shall be deemed always to have extended" came to be inserted in Clause (c) by Finance Act, 1989, which was given effect from 01.06.1988.
27. Amended Explanation initially came up before a three Judge Bench in CIT Vs. Sri Arbuda Mills Ltd. [(1998) 231 ITR 50 (SC)]. Therein for the assessment year 1975-76 ending on 31st December, 1974, assessment was completed under Section 143(3) read with Section 144B of Act, 1961, on 31st March, 1978. The net business loss computed at Rs.3,61,086/- and income under head 'capital gains' at Rs.38,844/-. Assessing Officer made certain additions and denied two deductions and one loss, as disclosed by assessee. Assessee preferred appeal to the extent Assessing Officer made additions and disallowance and refused to accept income and loss disclosed by assessee. Appeal was decided by Commissioner (A) on 15th December, 1979. In respect of three items which the assessee declared and were accepted by assessing officer, substantially there was no appeal since finding with respect to those items was in favour of assessee. It is in respect of these three items, Commissioner sought to exercise revisional power under Section 263 of Act, 1961. An argument was advanced firstly, that amendment has come into force w.e.f. 01.06.1988, therefore, would not apply to assessment order and order of appeal, finalised long back. Secondly, that after merger of order of assessment in the appellate order, Section 263 cannot be invoked. Relying on Explanation Clause (c) and holding that it will cover all earlier matters, the Court in CIT Vs. Sri Arbuda Mills Ltd. (Supra) said as under :
"The consequence of the said amendment made with retrospective effect is that the powers under section 263 of the Commissioner shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in an appeal. Accordingly, even in respect of the aforesaid three items, the powers of the Commissioner under Section 263 shall extend and shall be deemed always to have extended to them because the same had not been considered and decided in the appeal filed by the assessee. This is sufficient to answer the question which has been referred." (emphasis added)
28. Matter again came to be considered in CIT Vs. Jai Kumar B. Patil [(1999) 236 ITR 469 (SC)], the two questions up for consideration before the Court were as under :-
"The Revenue sought the reference of the following two questions :
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law, in holding that the commissioner of Income-tax had no jurisdiction and powers to initiate proceedings under section 263 of the Income Tax Act, 1961, in respect of issues not touched by the Commissioner of Income-tax (Appeals) in his appellate order?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that not only the issues dealt with in the assessment order but also the other issues were merged in the Commissioner of Income-tax (Appeals)'s order ignoring the provisions contained in clause (c) of Explanation to sub-section (1) of section 263 of the Income-tax Act, 1961?"
Relying on CIT Vs. Abuda Mills Ltd. (Supra), the Court answered both the aforesaid questions in negative i.e. in favour of Revenue and against Assessee.
29. In EIMCO K.C.P. Ltd. Vs. C.I.T. [(2000) 242 ITR 659 (SC)], a question arose whether Commissioner can exercise power under Section 263 of Act, 1961, while agreeing with the order of assessment against which appeal is pending before Commissioner (A), involving the point upon which notice under Section 263 is issued, the Court up held the notice issued under Section 263 and held that such notice can be issued.
30. The decision in CIT Vs. Abuda Mills Ltd. (Supra) has also been followed by this Court in CIT Vs. Dhampur Sugar Mills Co. Ltd. [(2004) 270 ITR 576 (All)], CIT Vs. Indo Persian Rugs [(2008) 299 ITR 300 (All)] and CIT Vs. Span International [(2004) 270 ITR 538 (All)].
31. In CIT Vs. Amrit Banaspati Co. Ltd. [(2005) 277 ITR 559 (All)], Court held that in respect of items which have not been considered in appeal, power of Commissioner under Section 263(1) shall be extended to that extent.
32. Now looking to the facts of present case, in the light of exposition of law discussed above, we find that claim of assessee seeking exemption under Section 10B of Act, 1961 for assessment year 2011-12, was not doubted by Assessing Officer. Applicability of Section 10B of Act, 1961 for assessment year 2011-12, as claimed by assessee, was accepted by him. Thus, this aspect was not in appeal at any stage. It is only on the question of "quantum of profit" for which exemption was claimed that the appeal was filed. The Assessing Officer discussed the matter and found that instead of Rs.4,97,28,163.45 which was claimed by assessee, it was entitled to exemption to the extent of Rs.4,61,90,179.58 under Section 10B and there is taxable income of Rs.3537980/-. On taxability of aforesaid amount, assessee preferred appeal and only that aspect was considered by CIT(A) as also Tribunal. At no stage, the issue whether assessee was entitled to claim exemption under Section 10B at all or not, having already exhausted beyond the period of exemption permissible under Section 10B, was not a subject matter of consideration before appellate authorities. Hence, this question was open to be looked into by Commissioner. In our view, he has rightly exercised power under Section 263 of Act, 1961, by taking aforesaid view we find support from a decision in CIT Vs. Ratilal Bacharilal And Sons [(2006) 282 ITR 457 (Bom.)], wherein almost in similar circumstances, the Court said as under :-
"........... At the instance of the assessee, the allowance on the sum of Rs. 5,63,350 could not have been the subject matter of appeal before the Commissioner of Income-tax (Appeals) as the assessee was never aggrieved with that part of the order. In other words, so far as weighted deduction under section 35B in the sum of Rs. 5,63,350 is concerned, the same was not a subject matter of the appeal before the Commissioner of Income-tax (Appeals). Factually, in this case, the doctrine of merger could not have been applied by the Tribunal to that part of the order ; which was not a subject matter of appeal as indicated, so as to exclude revisional jurisdiction of the Commissioner of Income-tax under section 263 of the Act."
33. On behalf of petitioner, reliance has been placed on a Division Bench decision of Karnataka High Court in CIT Vs. Tata Elxsi Ltd. [2012 (247) CTR 334], but having gone through the aforesaid decision, we find no application thereof to the issues which which we are concerned in this writ petition. The aforesaid decision therefore renders no help to petitioner at all.
34. In the circumstances, questions no. 1 and 2, are answered against petitioner. The question no. 3 is returned in favour of Revenue, holding that notice issued by Commissioner under Section 263 of Act, 1961, impugned in this writ petition is perfectly valid and in accordance to law.
35. In the result writ petition lacks merit. Dismissed.
Order Date :- 11.3.2015 A. Verma