Income Tax Appellate Tribunal - Ahmedabad
Assistant Commissioner Of Income-Tax vs Laxmi Vishnu Silk Mills on 18 March, 1994
Equivalent citations: [1994]51ITD207(AHD)
ORDER
--Applicability of doctrine.
Ratio:
Doctrine of merger is not attracted where the appellate authority adjudicated and gave a finding on an issue which was not before him.
Held:
The contention that the Commissioner was not justified in invoking the provisions of section 263 as the Commissioner had given a finding on the applicability or otherwise of section 43B and as such the order of the Income Tax Officer stood merged with that of the Commissioner cannot be accepted. The Commissioner transgressed his jurisdiction and adjudicated upon a non-issue. If the appellate authority has not been called upon or has not actually dealt with any part of the assessment order by the Income Tax Officer, there is no question of that part of the order merging or being superseded by the order of the appellate authority and that the effect of section 31(3) of the old Act is that only that part of the order of the Income Tax Officer merges or stands superseded by the order of the appellate authority in resepct of which the appellate authority has exercised his appellate jurisdiction, and so far as the remaining part of the order of assessment is concerned, that continues to be unaffected by the decision of the appellate authority and thus the doctrine of merger is not wholly applicable, in the case of such orders made under the Act.
Case Law Analysis:
CIT v. Sakeseria Cotton Mills Ltd. (1980) 124 ITR 570 (Bom), Ganga Devi v. CWT (1987) 166 ITR 325 (Raj) and Madras v. Madurai Mills Co. Ltd. (1967) 19 STC 144 (SC) relied on.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263 ORDER B.L. Chhibber, Accountant Member
1. The following grounds have been raised in the appeal filed by the revenue:
1. On the facts and in the circumstances of the case and law, the learned CIT(A), Surat has erred, while deleting the additions of Rs. 26,31,243, in observing that the ITO's action for making addition of Rs. 26,31,243 under Section 43B of the Income-tax Act is found to be not proper, as the addition was not at all made under Section 43B of the Act.
2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) ought to have upheld the order of the ITO.
3. It is, therefore, prayed that the order of the CIT (Appeals) be set aside and that of the ITO be restored.
2. The assessee is a partnership firm deriving income from business of dyeing and printing of cloth on job work basis. During the year under appeal, the assessee-firm collected Excise Duty amounting to Rs. 26,31,243 and credited the same under an account called "Majoori Excise Account". The learned ITO held that the collection of Excise Duty was in the nature of trading receipts and accordingly assessed the same in the hands of the assessee under Section 41(1) of the Income-tax Act, 1961 observing as under :
On scrutiny of the balance sheet, it is found that the assessee has shown as reserves and surplus of Majoori Excise of Rs. 26,31,243 and the assessee was asked that why this should be treated as business income under Section 43B of the Act. The assessee has also given a written submission in reply. However, after careful consideration, it is observed that it is taxable in the hands of the assessee under Section 41(1) of the Income-tax Act, 1961, as the same pertains to his trading receipts. Every year the assessee has taken the amount of excise duty received from the customers as trading receipt and has been shown in the Profit & Loss Account. Thus, the same is treated as trading receipts and the said amount of Rs. 26,31,243 is added to the total income of the assessee.
3. The assessee preferred an appeal before the CIT(A) and during the course of hearing before the CIT(A) detailed written submissions were filed which have been reproduced by the CIT (Appeals) verbatim in his order. The crux of the arguments was that the amount of Rs. 26,31,243 was neither taxable under Section 41(1) or Section 43B of the Act, though the ITO had made addition specifically under Section 41(1) and not at all even mentioned Section 43B in his order. The CIT(A) held that the provisions of Section 41(1) were not applicable and hence he deleted the impugned addition of Rs. 26,31,243 observing as under:
In view of the facts and circumstances of the case narrated above and also the decisions of various judiciaries on the same point, particularly in the case of CIT v. Hindustan Housing & Land Development Trust Limited 161 ITR 524 and Supreme Court decision in the case of J.K. Synthetics Ltd. reported in 105 ITR (SC) I am of the opinion that Section 41(1) of the Act is not applicable to the facts of the appeal before me.
4. The above findings of the CIT(A) have been accepted by the revenue. But the CIT(A) went ahead and though the ITO had not at all invoked the provisions of Section 43B, he held that the provisions of Section 43B were also not applicable observing as follows:
As far as Section 43B is concerned, it can only be applied when the assessee claims any Government liability is payable and thereby reduces the profit of the relevant year, but does not make actual payment to the Government for one or the other reason. In the instant case, excise collected on behalf of Excise Department is not claimed by the appellant as expenditure. It is simply collected and credited to Excise Collection Account. The same has to be paid when it become payable in the eyes of law. Merely because excise is disputed and not paid it cannot be treated as 'income' of the appellant.
In the present case, the appellant is certainly not the owner of cloth received by it for the purpose of processing. Thus, excise duty collected by it is in a fiduciary capacity or as a trustee. It is to be paid over to the Government of India, through Central Excise Department or in case of success in Supreme Court, it is to be refunded to the customers. Excise duty on majoori receipts (job works) have been paid over to the Central Excise Department. In the peculiar facts and circumstances of the case, I hold that the provisions of Section 43B are also not applicable in the present case. The ITO's action for making addition of Rs. 26,31,243 under Section 41(1)/43B is found to be not proper in the present case and hence it is deleted.
It is the above finding of the CIT(A) which the Revenue has challenged in the grounds of appeal reproduced supra.
5. Shri P.N. Dixit, learned DR submitted that the CIT(A) has erred in giving a finding that the provisions of Section 43B are not applicable to the facts and circumstances of the case when the ITO had made the addition specifically under Section 41(1) of the Act. The learned DR further submitted that the ITO obviously had made the addition by invoking the wrong section, i.e., Section 41(1) and since the department had initiated proceedings under Section 263 the assessee argued before the CIT(A) regarding applicability of Section 43B and it was a deliberate attempt to pre-empt the department to proceed under Section 263 and further that the CIT(A) adjudicated upon a non-issue. The learned DR therefore prayed that the aforesaid observation of the CIT(A) regarding the non-applicability of Section 43B should be deleted.
6. Shri Rasesh B. Shah, learned counsel for the assessee submitted that the assessee-firm derived income only from dyeing and printing of art silk cloth onjob work basis, i.e., it carries out the operations of dyeing, printing, finishing, etc., of "Grey Fabrics" on "job work" basis against the payment of processing charges to them by the customers who are owners of Grey Fabrics. The ownership of the cloth rests with the customers who get these processes done to their specifications from the processor on payment of processing charges. The grey fabric, after processing, is returned by the processing house to customers. According to the learned counsel for the assessee, the Excise Authorities on the basis of certain notifications and relevant provisions of Excise Laws interpreted the relevant provisions in such a way that according to them excise duty was leviable not only on the job work carried on by the assessee on the cloth entrusted by various customers but also on the value of the said cloth belonging to the various customers regardless of the fact that the assessee was not the owner of the said cloth. The various process houses filed the Writ Petitions in the Gujarat High Court and it was held by the Gujarat High Court in the case of Vijay Textiles v. Union of india 1979 ELT (J181) that the processors were liable to pay duty under tariff entry 68 only on the value added by the processing. The Bombay High Court on the contrary took a view different from the one that commended itself to the Gujarat High Court. As a result, the Union of India filed number of Civil Appeals in Supreme Court challenging the view of the Gujarat High Court. According to the learned counsel, the aggrieved processors filed number of Civil Appeals in Supreme Court challenging the view of Bombay High Court and some of the processors like the assessee filed the Writ Petitions under Article 32 directly in the Supreme Court challenging the impost on grounds that commended themselves for acceptance to the Gujarat High Court. The assessee-firm obtained interim stay order from the levy of the excise duty vide the order of Supreme Court dated 27-4-1984. The relevant portion of the stay order is reproduced as under :
Pending notice, the respondents, their servants and their agents are restrained from levying & recovering the disputed portion of the duty of excise i.e., duty on difference between the ultimate price charged from the customer and the value of the processing work done by the petitioner, on the condition that petitioner shall furnish the bank guarantee to the full extent in regard to aforesaid difference to the satisfaction of the respondent. The bank guarantee shall be furnished by the petitioner within four weeks of the clearance of demands as the case may be.
The learned counsel for the assessee further submitted that the assessee-firm therefore furnished bank guarantee from time to time for the full amount of disputed duty to the satisfaction of the Excise Authorities. The learned counsel further submitted that the Supreme Court ultimately gave a judgment in favour of the Excise Department vide its order dated 4-11-1988. The main judgment was delivered in the case of Ujagar Prints v. Union of India [1989] 179 ITR 317 (SC). The said order was made applicable in the case of other process houses also including the assessee-firm. The learned counsel for the assessee therefore submitted that under the circumstances, it cannot be said that the Excise Duty collected from the customers was in the nature of trading receipts and neither the provisions of Section 41(1) nor those of Section 43B will be applicable in the case of the assessee. He further submitted that the CIT(A) was right in holding that neither the provisions of Section 41(1) nor those of Section 43B were applicable to the facts and circumstances of the case as the CIT(A) enjoys wide powers under Section 251 of the Act. In support of his contentions, he relied upon the decisions in the cases of CIT v. Rai Bdhadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC) and CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC).
7. We have considered the rival submissions. From the facts of the case as reproduced suprait is evident that the ITO while disallowing the amount of Excise Duty (Rs. 26,31,243) invoked the provisions of Section 41(1) of the Act. Thus, the addition was made under the specific provisions of Section 41(1). On appeal, the CIT(A) rightly held that the provisions of Section 41(1) were not applicable and this finding of the CIT(A) has been accepted by the Revenue. But having done so the CIT(A) transgressed his jurisdiction and went on suo motu to give a finding that the provisions of Section 43B were also not applicable to the facts of the case. This in our opinion was done apparently to pre-empt the revenue to initiate revision-ary proceedings under Section 263. In fact, the CIT(A) proceeded to adjudicate upon a non-issue before him which is not tenable under the provisions of law. Here it will be relevant to reproduce the grounds of appeal taken before the CIT(A) :
(1) The learned ITO erred in passing the order under Section 143(3) of the Income-tax Act.
(2) The Appellant firm is a Registered Partnership firm and having business of job work in Dyeing & Printing Majuri.
(3) The Appellant firm has received an Excise amount from his customers, which is payable to Government. Hence, it is not an income of the Appellant.
(4) The Presentation articles amount of Rs. 2,070 is added in the total income. Such type of Expenses are essential for our type of business.
(5) As such the Appellant Prays that the addition of Rs. 26,33,313 may please be deleted.
(6) Further Grounds if any will be urged at the time of the hearing of the Appeal.
From the above it is evident that no ground was taken on the applicability of Section 43B of the Act.
8. The two decisions cited by the learned counsel for the assessee (supra) no doubt, give wide powers to the Appellate Authorities and we do agree that while disposing of an appeal, the First Appellate Authority has a wide power; but the power has to be wide and not wild as the Appellate Authority cannot transgress his jurisdiction and give a finding on a non-issue before him and that too in favour of the assessee to pre-empt the department to initiate proceedings under Section 263 of the Act. In the case of V.C. Rangaduri v. D. Gopalan AIR 1979 (SC) 281 it has been held by the Supreme Court that "wide means wide as the power may be the order must be germane of the Act and its purposes and latitude cannot transcend those limits". We accordingly hold that the CIT(A) was not justified to adjudicate upon a non-issue before him and accordingly his observations with regard to the non-applicability of Section 43B as reproduced in para 4 above are deleted.
9. The appeal filed by the revenue is accordingly allowed.
10. The appeal filed by the assessee is directed against the order of the CIT, Surat under Section 263 of the Act. Since the ITO had disallowed the sum of Rs.26,31,243 under Section 41(1) without making proper enquiries, the CIT invoked revisionary jurisdiction under Section 263 of the Act and set aside the order of the ITO under Section 143(3) as according to him it was erroneous and prejudicial to the interests of revenue. During the course of proceedings before the CIT it was contended by the assessee that the CIT(A) during the appellate proceedings had given a clear finding that the provisions of Section 43B were not applicable and as such the order of the ITO had merged with that of the CIT(A). The CIT rejected the contention of the assessee on the ground that applicability of Section 43B was never the subject-matter of appeal before the CIT(A) because the ITO had not made the addition under that section; that the addition was made under Section 41(1) against which the assessee had gone in appeal before the CIT(A) and the CIT(A) had held that the unpaid Excise Duty was not taxable under Section 41(1) of the Act.
11. On merits of the case it was submitted before the CIT that the assessee had never claimed Excise liabilities as expenditure and the same is not taxable as the assessee is merely custodian on behalf of the Government of India. It was further submitted that the amount received as Excise Duty was a matter of dispute before the Supreme Court. The CIT rejected the assessee's contention on merits also on the basis of decision of Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 and held that the duty levied by the Government and collected from the customers is a part of trading receipts. He accordingly set aside the order passed by the ITO.
12. Shri Rajesh B. Shah, learned counsel for the assessee submitted that Section 263 could be invoked only when the order passed by the ITO was erroneous and prejudicial to the interests of revenue. According to the learned counsel for the assessee, both the conditions are cumulated and if either of these conditions is not fulfilled, the order becomes bad in law and liable to be cancelled. According to the learned counsel for the assessee, the ITO had applied his mind to provisions of Section 43B and the nature of receipts of Excise collection. The assessee had made detailed submissions in relation to applicability of Section 43B in the course of assessment proceedings itself and after carefully considering the facts and circumstances and the submissions made by the assessee the ITO had come to the conclusion that the provisions of Section 43B were not applicable. Hence, the CIT was not justified in invoking the provisions of Section 263. The assessee's counsel further submitted that the powers of the CIT under Section 263 cannot extend to the matters as had been considered and decided in appeal and since the CIT(A) had adjudicated upon the applicability or otherwise of Section 43B, the order of the ITO merged with that of the CIT(A) and hence the CIT was not justified in invoking his jurisdiction under Section 263 of the Act.
13. On merits of the case the assessee's counsel submitted that the Excise Duty collected from the customers was not payment receivable by the assessee in the course of trading and the same was received purely under fiscal transaction and there was no business relation of any kind between the assessee and the Excise Department. He further submitted that on delivery of the goods, excise duty is immediately collected and the bill for the job charges is raised afterwards for which the payment is received within one month on normal condition of the trade. According to the learned counsel for the assessee it is the real income which can be taxed and not the notional income as held by the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521. The learned counsel further submitted that in view of the stay order of the Supreme Court which was given vide order dated 27-4-1984 the excise duty collected from the traders related to the value of the grey cloth should be excluded from the trading receipts and as such should be excluded from the purview of Section 43B of the Act. The assessee's counsel further submitted that since the assessee had given bank guarantee against the excise duty collected such bank guarantee should be treated as payment of excise duty in view of the decision of the Tribunal in the case of Nuchem Plastic Ltd. v. DCIT [1992] 44 TTJ (Delhi) 261 and Sunil Silk Mills Ltd. v. Dy. CIT [1993] 46 ITD 4 (Bom.). The learned counsel also cited unreported decision of the Tribunal in the case of Happy Trust v. ITO [IT Appeal No. 1450 (Ahd.) of 1986] where according to him on the similar facts of the case it was held that the Excise Duty collected is not trading receipt and the order under Section 263 in this regard was cancelled. The learned counsel for the assessee further relied upon the decisions in the cases of Indian Carbon Ltd. v. IAC [1993] 200 ITR 759 (Gauhati) and ITO v. Thakersi Babubhai [1986] 18 ITD 593 (Ahd.).
14. The learned DR on the other hand relied upon the order of the CIT.
15. We have considered the rival submissions and perused the facts on record. We do not agree with the contention of the assessee's counsel that the CIT was not justified in invoking the provisions of Section 263 as the CIT(A) had given a finding on the applicability or otherwise of Section 43B and as such the order of the ITO stood merged with that of the CIT(A), in view of our findings in the revenue's appeal (supra) where we have held that the CIT(A) transgressed his jurisdiction and adjudicated upon a non-issue. In the State of Madras v. Madurai Mills Co. Ltd. [1967] 19 STC 144 (SC) while considering Section 12(4) of the Madras General Sales Tax Act, 1939 (No. IX of 1939) and dealing with the doctrine of merger, it was observed (at pp. 149 and 150) :
But 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 Tribunal and the other by a superior Tribunal, 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. In our opinion, the application of the doctrine depends on the nature of the appellate or revlsional order in each case and the scope of the statutory provisions conferring the appellate or revlsional jurisdiction.
After referring to the Madurai Mills Co. Ltd.'s case (supra) and following Karsandas Bhagwandas Patel v. G.V. Shah [1975] 98 ITR 255 (Guj.) it was held by the Division Bench of the Bombay High Court in CIT v. Sakseria Cotton Mills Ltd. [19801 124 ITR 570, that if the AAC has not been called upon or has not actually dealt with any part of the assessment order by the ITO, there is no question of that part of the order merging or being superseded by the order of the AAC and that the effect of Section 31(3) of the old Act is that only that part of the order of the ITO merges or stands superseded by the order of the AAC in respect of which the AAC has exercised his appellate jurisdiction and so far as the remaining part of the order of assessment is concerned, that continues to be unaffected by the decision of the AAC and thus the doctrine of merger, is not wholly applicable, in the case of such orders made under the Act.
16. The Rajasthan High Court in the case of Smt. Ganga Devi v. CWT [1987] 166 ITR 325 has held as under :
If the Appellate Assistant Commissioner has not been called upon or has not sua motu dealt with a part of the assessment order passed by the Wealth-tax Officer, there is no question of that part of the order merging or being superseded by the order of the Appellate Assistant Commissioner. The Commissioner of Wealth-tax would be entitled to revise that part of the order.
We also do not agree with the contention of the assessee's counsel that during the assessment proceedings the ITO had applied his mind to the applicability of Section 43B because the order of the ITO is very clear that he has applied only the provisions of Section 41(1) of the Act.
17. As regards reliance of the assessee on unreported decision of the Tribunal we may state that the Tribunal in the case of M/s. Mugat Dyeing & Printing Mills, Surat in IT Appeal Nos. 1802 & 1803/Ahd/1989, the Tribunal (Ahd.) has upheld the order of the CIT under Section 263 under similar circumstances. In fact, we find that the facts of the case were such that the ITO should have made detailed investigation regarding the Excise Duty collected and instead of summarily invoking the provisions of Section 41(1), should have recorded a clear finding whether the amounts in question were liable to be included in the income of the assessee. The Assessing Officer has failed to make necessary investigation. It is well-settled that the CIT may treat the order of the ITO as erroneous not only because it contains some definite error of reasoning or of law or of fact but also because the ITO simply accepts what the assessee has stated in his return and fails to make necessary enquiries which are called for in the circumstances of the case. In the present case, the original assessment order clearly indicates that the Assessing Officer has not made necessary investigation regarding the Excise Duty collected by the assessee-firm. Consequently, the CIT was justified in invoking revisionary jurisdiction under Section 263 of the Act. We do not express any opinion at this stage on the various observations made by the CIT in his order on the merits of the case. We hold that the CIT was right in setting aside the assessment as the Assessing Officer has failed to make necessary investigation. We accordingly uphold his order.
18. In the result, the revenue's appeal is allowed and the assessee's appeal is dismissed.