Income-tax---

----Revision---Commissioner---Doctrine of merger ---Assessee importing two items of machinery---Deduction for scientific research allowed by I.T.O. in respect of one machine only---Deduction in respect of the other allowed by CIT (Appeals)---Deduction allowed by I.T.O. not subject of appeal-- Commissioner has power to revise assessment order in respect of machine for which deduction allowed by I.T.O.---Amendment of S. 263 w.e.f. 1-4-1968---Effect---Indian Income Tax Act, 1961, Ss.35 & 263.

The assessee imported two items of machinery from abroad and claimed deduction under section 35 of the Income Tax Act, 1961. The Income-tax Officer accepted the claim of the assessee in respect of machine No. (1) on the ground that the same was imported for scientific research but disallowed a similar claim in respect of machine No.(2). To the extent of the disallowance of its claim in respect of machine No.(2), the assessee carried the matter in appeal to the Commissioner (Appeals). While the assessee's appeal was pending before the Commissioner (Appeals), the Commissioner of Income-tax initiated proceedings under section 263 of the Income-tax Act for withdrawal of deduction under section 35 in respect of machine No. (1). By order, dated February 19, 1980, the Commissioner (Appeals) allowed the assessee's claim in respect of machine No.(2). On February 21, 1980, the Commissioner of Income-tax, passed an order under section 263 setting aside the assessment order and directing the Income-tax Officer to refer the assessee's claim under section 35 in respect of both the machines to the prescribed authority under section 35(3). However, on March 22, 1980, the Commissioner of Income-tax passed another order under section 154 of the Act, limiting his order, dated February 21, 1980, to machine No. (1) alone. On appeal to the Tribunal by the assessee, it contended that the order of the income-tax Officer having merged in the order of the Commissioner (Appeals), the Commissioner of Income-tax. did not have jurisdiction to pass an order under section 263 in respect of machine No.(1). The Tribunal allowed the appeal and set aside the order, dated February 21, 1980, passed by the Commissioner of Income-tax. On a reference at the instance of the Revenue:

Held, reversing the order of the Appellate Tribunal, that. the part of the order by which the Income-tax Officer had allowed the assessee's claim in respect of machine No.(1) was not the subject-matter of appeal before the Commissioner (Appeals) and, therefore, the exercise of power under section 263 by the Commissioner in respect of that order was not excluded, Parliament has amended section 263 itself with effect from June 1, 1988, whereby it has been declared that for the-purpose of section 263(1) where an order referred to therein and passed by the Assessing Officer has been the subject-matter of any appeal filed on or before or after June 1, 1988, the powers of the Commissioner under the subsection shall extend and shall be deemed always to have extended to such matter as had not been considered and decided in such appeal, The amendment, thus, clarifies the law and brings the statutory law in conformity with judicial opinion.

CIT v. Eurasia Publishing House (P.) Ltd. (1998) 232 ITR 381 (Delhi) fol.

CIT v. Paushak Ltd. (1997) 227 ITR 216 (Guj.) and Mirza Muzamdar Hussain v. Dodla Bhaskara Reddy AIR 1988 AP 13 ref.

R. D. Jolly and Ms. Prem Lata Bansal for the Commissioner.

Nemo for the Assessee.

JUDGMENT

R. C. LAHOTI, J.---This is a reference under section 256(1) of the Income Tax Act. 1961., seeking the opinion of the High Court on the following question of law arising out of the assessment year 1975-76:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer's order merged with the order of the Commissioner of Income-tax (Appeals) and, therefore, the Commissioner of Income-tax, Delhi, did not have jurisdiction under section 263?"

The assessee is a private limited company carrying on business of supply of imported high speed rotary machines on its own account and as commission agent. In the relevant accounting year, the assessee had imported two machines, namely, (i) Web offset machine imported in June, 1974, for Rs.5,82,010, and (ii) Repida machine imported in April, 1974, from West Germany for Rs.2,38,972. The assessee claimed deduction under section 35 of the Act. The Income-tax Officer accepted the claim of the assessee in respect of machine No. (i) on the ground that the same was imported for scientific research but disallowed similar claim in respect of machine No.(ii).

To the extent of the claim of the assessee having been disallowed in respect of machine No.(ii), the assessee carried the matter to the Commissioner of Income-tax (Appeals). While the assessee's appeal was pending before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax, Delhi-I, initiated proceedings under section 263 of the Income-tax Act for withdrawal of deduction under section 35 in respect of machine No. (i). Vide order dated February 19, 1980, the Commissioner of Income-tax (Appeals) allowed the assessee's claim in respect of machine No. (ii). On February 21, 1980, the Commissioner of Income-tax Delhi-1, passed an order under section 263 setting aside the assessment order and directing the Income-tax Officer to refer the assessee's claim under section 35 in respect of both the machines to the prescribed authority under section 35(3). However, on March 22, 1980, the Commissioner of Income-tax, Dehli-I, passed another order under section 154 of the Act limiting his order, dated February 21, 1980, to machine No. (i) alone.

The assessee preferred an appeal to the Tribunal raising a plea that the order of the Income-tax' Officer having merged in the order of the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax, Delhi-I, did not have jurisdiction to pass an order under section 263 in respect of machine No.(i). The appeal has been allowed setting aside the order, dated February 21, 1980, passed by the Commissioner of Income-tax, Delhi-I.

The answer to the question is to be found in the theory of merger. Learned Counsel for the Department has placed reliance on Mirza Muzamdar Hussain v. Dodla Bhaskara Reddy, AIR 1988 AP 13, and CIT v. Paushak Ltd. (1997) 227 ITR 216 (Guj). In both the decisions the view taken is that whether there is fusion or merger of the order of the inferior Tribunal into the order of the superior Tribunal, shall have to be determined by finding out the subject-matter of the appellate order or revisional order and the scope of the appeal or revision contemplated by the particular statute. The view of the Andhra Pradesh High Court was followed by a Division Bench of this Court in CTT v. Eurasia Publishing House (P.) Ltd. (1998) 232 ITR 381. In CIT v. Puashak Ltd. (1997) 227 ITR 216, the Gujarat High Court has held that in the appeals which are filed by an assessee against any order that is adverse to him, the assessee would not be challenging any finding regarding deduction or depreciation, which might have been in his favour. Therefore, such aspects would not figure in the appellate order. To that extent the order of assessment would not merge in the appellate order and the exercise of power under section 263 by the Commissioner cannot be doubted.

In the case at hand, that part of the order by which the Income-tax Officer had allowed the assessee's claim in respect of machine No.(i), i.e., Web offset machine, was not the subject-matter of appeal before the Commissioner of Income-tax (Appeals) and, therefore, the exercise of power under section 263 by the Commissioner was not excluded. We may mention that Parliament has amended section 263 itself with effect from June 1, 1988, whereby it has been declared that for the purpose of section 263(1) where any order referred to therein and passed by the Assessing Officer has been the subject-matter of any appeal filed on or before or after June 1, 1988, the powers of the Commissioner under this subsection shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. The amendment, thus, clarifies the law and brings the statutory law in conformity with the judicial opinion noticed hereinabove.

For the foregoing reasons, the question is answered in the negative, i.e., in favour of the Department and against the assessee.

M.B.A./3374/FCReference answered.