Commissioner Of Income Tax, Delhi ... vs Tony Electronics Limited
2009 Latest Caselaw 4065 Del

                                  Reportable

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                          ITA No. 196 of 2009

%                                        Reserved on : September 24, 2009
                                         Pronounced on : October 09, 2009

Commissioner of Income Tax, Delhi -IV                  . . . Appellant

                    through :              Ms. Prem Lata Bansal, Advocate

              VERSUS

Tony Electronics Limited                               . . . Respondent

                    through :              Mr. Satyen Sethi with
                                           Mr. Manu K. Giri, Advocates


CORAM :-
    THE HON‟BLE MR. JUSTICE A.K. SIKRI
    THE HON‟BLE MR. JUSTICE VALMIKI J. MEHTA

       1.     Whether Reporters of Local newspapers may be allowed
              to see the Judgment?
       2.     To be referred to the Reporter or not?
       3.     Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J.

1. An interesting question of law relating to the limitation of correcting

error under Section 154 of the Income Tax Act, 1961 (hereinafter

referred to the „Act‟) arises in this appeal. The issue is: from which

date the period of limitation provided under Section 154 of the Act is

to be reckoned.

2. The assessment order was framed by the Assessing Officer (AO)

under Section 143(3) of the Act on 24.11.1998 framing the income at

Rs.8.77 crores. While doing so, the AO had made various additions,

which were not palatable to the respondent/assessee. The

respondent/assessee filed appeal against that order. The

Commissioner of Income Tax (Appeal), vide his order dated

20.5.1999, gave partial relief to the assessee. The matter had gone to

the CIT (A) again and, therefore, order recording appeal effects had

to be passed three times. The relevant dates in this behalf are

tabulated as under :-

24.11.1998 Assessment under Section 143(3) was completed.

20.5.1999 Appeal against assessment order dated 24.11.1998 was disposed of by the CIT(A).

8.5.2003 First appeal effect order under Section 143(3)/250 was made and thereby income was assessment at Rs.1,26,57,100/-.

28.6.2004 Appeal against 2nd appeal effect order dated 8.5.2003 was disposed of by the CIT (A).

23.7.2004 Order under Section 143(3)/250 giving effect to order of CIT(A) dated 28.6.2001 was passed. For the purposes of giving effect, income determined vide order dated 27.5.1999, i.e. Rs.1,26,57,100/- was taken as the starting point and income was reduced to Rs.32,12,675/-.

30.1.2006 Notice under Section 154 of the Act, alleging that there was mistake in the order dated 23.7.2004 was issued. Mistake pointed out was that opening income for giving appeal effect taken at Rs.1,26,57,100/- should have been taken at Rs.1,39,14,788/-.

26.4.2006 Order under Section 154 of the Act was passed.

3. On 30.1.2006, however, the AO issued notice under Section 154 of

the Act to the assessee stating that the opening amount of the income

was wrongly taken at Rs.1,26,57,100/- instead of correct amount of

Rs.1,39,14,788/-. He also stated that in the order dated 8.5.2003,

giving appeal effect to the orders of the CIT(A), the figure was

wrongly taken at Rs.1,26,57,100/- as double deduction was allowed

on account of depreciation. He stated that the depreciation of

Rs.6,28,842/- with respect to Unit-I and Namoli Unit was not

available to the assessee. Therefore, the same was to be reduced

from the total amount of depreciation of Rs.54,86,162/- and only

the balance depreciation of Rs.48,57,200/- was allowable to the

assessee. However, instead of doing so, the then AO had allowed

total depreciation of Rs.54,86,162/- and again reduced the same i.e.,

Rs.6,28,842/- from the profits of the business and, thus, had allowed

deduction of Rs.6,28,842/- twice, which had resulted into under

assessment by Rs.12,57,688/-.

4. The assessee questioned the jurisdiction of the AO to pass the

rectification order under Section 154 of the Act on the ground that in

view of sub-section (7) of Section 154, such a rectification order

could be passed within four years "from the end of the financial year

in which the order sought to be amended was passed". According to

the assessee, since the assessment was framed on 24.11.1998, the

period of four years had lapsed long ago and, therefore, the

proposed action on the part of the AO was time barred. The AO did

not accept this plea while passing the orders dated 26.4.2006.

According to him, the period of four years was to be calculated from

23.7.2004 when the AO had given appeal effect and passed revised

assessment order on that date, on the basis of decision of the

Tribunal.

5. The assessee questioned this wisdom of the AO by filing appeal

before the CIT(A). The CIT(A) confirmed the action of the AO and

dismissed the appeal on 4.12.2006. Still aggrieved, the assessee

approached the Income Tax Appellate Tribunal (for short, the

„Tribunal‟) by filing further appeal. The assessee has succeeded in its

effort before the Tribunal, as vide impugned orders dated 25.4.2008

the Tribunal has quashed the AO‟s order on the ground that the

same was barred by limitation. Now, it is the turn of the Revenue to

feel dissatisfied with the order of the Tribunal.

Hence, the present appeal.

6. It is in this backdrop the appeal was admitted on the following

substantial question of law :-

"Whether the Tribunal misdirected itself in law by calculating limitation under Section 154(7) of the Income Tax Act, 1961 with reference only to the date of the original order of assessment?"

7. The submission of learned counsel for the revenue is twofold,

namely:

(i) The mistake occurred in the present case was not related to any

legal dispute, but was a totaling mistake and the AO had

inherent power to rectify such a mistake which crept in while

computation. For this purpose, limitation prescribed under

sub-section (7) of Section 154 of the Act was not even

applicable. Dilating this submission, it was argued that

determination of assessed income under Section 143(3) of the

Act presupposes the computation to be made by the AO

correctly. If any error has been committed then the AO has the

inherent power to rectify the same. The rectification does not

require any argument from the assessee nor require any

permission from the assessee. As admitted by the assessee and

recorded by the Tribunal, the assessee had not filed any appeal

against withdrawal of depreciation of Rs.6,28,842/- pertaining

to Unit-I and Namoli Unit before CIT(A).

In the case of ITO v. M.K. Mohammad Kunhi, the

Supreme Court had discussed that where an Act confers a

jurisdiction, it impliedly also grants the power of doing all such

acts, or employing such means, as are essentially necessary to

this execution. Thus, once the power is granted to determine

the assessed income, it is the inherent power vested in the same

authority to rectify a mistake which has been occurred in

making computation. Totaling mistake, as occurred in the

present case, is outside the scope of Section 154 of the Act and,

therefore, the limitation prescribed in sub-section (7) of Section

154 is not applicable.

(ii) Alternate submission was that even if it is held that the error

committed in the present case falls within the ambit of Section

154, then also the limitation prescribed therein may not be

made applicable to such cases. Otherwise, it would frustrate

the object and purpose of determining the taxable income and

to collect the tax thereon. Again, even if it is held that

limitation under sub-section (7) of Section 154 of the Act is

applicable, then also it is contended that it would start to run

from the last order, i.e. order dated 23.7.2004, and not from

the order dated 27.5.1999, i.e. the first appeal effect.

In the case of Hind Wire Industries Limited v. CIT, 212

ITR 639, the Supreme Court has held that the word „order‟ in

the expression "from the date of the orders sought to be

amended" in Section 154(7) of the Act, is not qualified in any

way, it does not necessarily mean the original order; it could

be any order including the amended order or rectified order.

The Court relied upon the judgment in the case of International

Cotton Corporation (P) Ltd. v. CTO, (1975) 2 SCR 345, in

which it is held that after rectification, the original assessment

order no longer remains in force. What was sought to be

rectified by the Officer was the assessment order as rectified by

him. There is no doubt that the rectified order is also „any

order‟ which can be rectified under Rule 38.

8. The contention of the Revenue is that the original order of

assessment, assessing the income at Rs.8.77 crores, had been merged

into the order of CIT(A) and the order of CIT(A) stood merged with

the order of Tribunal, which was passed on 28.6.2004. Giving

appeal effect to this order of the Tribunal, when the revised

assessment orders were passed on 23.7.2004, it would be this date

which would be relevant for the purpose of ticking up the clock

insofar as limitation is concerned. Submission of the

respondent/assessee, on the other hand, is that the orders of CIT(A)

as well as the Tribunal dealt with altogether different aspects,

namely, issues regarding deductions under Sections 80-H, 80-I and

80-IA of the Act and it is those aspects which were determined by the

CIT(A) as well as the Tribunal. The doctrine of Merger would,

therefore, be applicable only in respect of those issues before the

appellate authorities. However, the purported mistake, which is

taken note of by the AO, had crept in the original order dated

24.11.1998 and was not the subject matter of appeals. The

submission of the respondent/assessee, therefore, is that for correcting

such an error, the starting point would be the original assessment

order dated 24.11.1998 and umbrage under the orders passed by the

Tribunal cannot be taken and doctrine of Merger, on this issue, shall

not apply.

9. In this manner, thus, the learned counsel for the Revenue sought to

invoke the doctrine of Merger and submitted that since the mistake

had occurred at the time of passing orders dated 28.6.2004, while

giving effect to the decision of the CIT(A), limitation should start

from that date.

10. According to the respondent, the error in regard to the computation

of depreciation had occurred while computing total income in the

original assessment order passed on 24.11.1998 and the figure of

Rs.1,26,57,100/- had been arrived at by the AO in his order dated

27.5.1999. Thus, it was not a mistake in the opening income

occurred in the order under Section 250 dated 23.7.2004, as stated

in his notice by the AO under Section 154 of the Act, but it was a

mistake that had taken place in the order dated 27.5.1999. Thus,

rectification made by the AO on 26.4.2006 was barred by limitation.

11. Refuting the aforesaid contended learned counsel for the Revenue,

Mr. Satyan Sethi argued that sub-section (1) of Section 154 of the Act

categorically provided that the AO could amend any order passed by

it "with a view to rectifying any mistake apparent from the record".

The mistake which was sought to be rectified, as appearing on the

record, was regarding alleged double depreciation which occurred

while giving appeal effect to the orders of CIT(A), but while passing

the first appeal effect order dated 27.5.1999. He, thus, argued that

mistake was not in the order dated 23.7.2004, rather the same was

in original assessment order dated 24.11.1998. This fact is not in

dispute. Both CIT(A) and the Tribunal has recorded a finding that

mistake was in order dated 24.11.1998. Mistake was that

depreciation instead of being added to the income was reduced from

the assessee income resulting in double deduction.

12. Countering the submission of the Revenue predicated on the doctrine

of Merger, the learned counsel submitted that the purpose for

passing appeal effect order was altogether different. He argued that

the effect of reassessment is to set aside original order and substitute

in its place the order made in reassessment proceedings. The initial

order of assessment does not survive in any manner or to any extent

{See - CIT v. K. Kesava Reddiar, (1989) 178 ITR 457) and Sharda

Trading Company v. CIT, (1984) 149 ITR 19 (Del)}. However,

rectification order under Section 154 of the Act does not obliterate

the original order. After the order rectifying the mistake is passed,

what remains is not the rectification order but the assessment order

as rectified {See - S. Arthanari v. First ITO, (1972) 83 ITR 828 (Mad),

Jeewanlal v. ACIT, (1977) 108 ITR 407, and J.N. Sahni v. ITAT,

(2002) 257 ITR 16}. Since order under Section 154 is confined to

amendment carried out and what survives is the assessment as

rectified, therefore, though the mistake in the original order

continues. But, for the purposes of amendment, rectification order

cannot be the order sought to be amended because rectification

order has no independent existence.

13. We find substance in the submissions of learned counsel for the

Revenue. In fact, answer to the issue at hand is provided by the

judgment of the Supreme Court in Hind Wire Industries (supra).

Dealing with the same provision, namely, sub-section (7) of Section

154 of the Act, the Court was of the view that the answer rested on

the word „Order‟ used in the expression "from the date of the order

sought to be amended" occurring in sub-section (7) of Section 154 of

the Act. The Court categorically opined that the word „Order‟ had

not been qualified in any way and it does not necessarily mean the

original order. It can be any order, including the amended or

rectified order. The Court was further of the view that once a

reassessment order or rectification order was passed giving effect to

the order of the appellate forum, the original order ceases to

operate. Following discussion on this aspect is relevant for our

purpose :-

""A similar expression in rule 38 of the Mysore sales Tax Rules fell for consideration in International Cotton Corporation (P) Ltd. v. Commercial Tax Officer, (1975) 35 STC 1; (1975) 2 SCR 345. Dealing with the point raised, this court held as under :

"The other attack that the rectification order is beyond the point of time provided in rule 38 of the Mysore Sales Tax Rules is also without substance. What was sought to be rectified was the assessment order rectified as a consequence of this court‟s decision in Yaddalam‟s case (1965) 16 STC 231. After such rectification the original assessment order was no longer in force and that was not the order sought to be rectified. It is admitted that all the rectification orders would be within time calculated from the original rectification order. Rule 38 itself speaks of „any order‟ and there is no doubt that the rectified order is also „any order‟ which can be rectified under rule 38."

This decision was endorsed in Deputy Commissioner of Commercial Taxes v. H.R. Sri Ramulu, (1977) 39 STC 177 when this court observed there as follows :

"The reason for that is that once an assessment is reopened, the initial order for assessment ceases to be operative. The effect of reopening the assessment is to vacate or set aside the initial order for assessment and to substitute in its place the order made on reassessment. The initial order for reassessment cannot be said to survive, even partially, although the justification for reassessment arises because of turnover escaping assessment in a limited field or only with respect to a part of the matter covered by the initial assessment order. The result of reopening the assessment is that a fresh order for reassessment would have to be made including for those matters in respect of which there is no allegation of the turnover escaping assessment. As it is, we find that in the present case, the assessment orders made under section 12A were comprehensive orders and were not confined merely to matters which had escaped assessment earlier. In the circumstances, the only orders which could be

the subject matter of revision by the appellant were the orders made under section 12A of the Act and not the initial assessment orders.

(Emphasis supplied)"

14. What follows from the aforesaid is that after the rectification order,

initial order of assessment ceases to operate. It is no more in

existence and is substituted by the fresh assessment order passed. The

Court, thus, categorically held that the word „any‟ in the expression

"order sought to be amended" would mean even the rectified order.

15. Legal position with which there cannot be any quarrel is that once an

appeal against the order passed by an authority is preferred and is

decided by the appellate authority, the order of the said authority

merges into the order of the appellate authority. With this merger,

order of the original authority ceases to exist and the order of the

appellate authority prevails, in which the order of the original

authority is merged. For all intent and purposes, it is the order of the

appellate authority that would be seen. Doctrine of Merger has been

explained by the courts in number of judgments. Our purpose will

suffice by referring to one judgment where this doctrine is explained

along with the rationale behind it. It is in the case of Gojer Bros.

(Pvt.) Ltd. Vs. Shri Ratan Lal Singh (1974)2SCC453, which reads as

under:

"11. The juristic justification of the doctrine of merger may be sought in the principle that there cannot be, at one and the same time, more than one operative order governing the same subject-matter. Therefore the judgment of an inferior court, if subjected to an examination by the superior court, ceases to have existence in the eye of law and is treated as being superseded by the judgment of the superior court. In other words, the judgment of the inferior court loses its identity by its merger with the judgment of the superior court."

In another case of Commissioner of Income-tax Bombay v. Amritlal

Bhogilal & Co. [1958] 34 ITR 130(SC), the position in regard to the

doctrine of merger was stated thus by Gajendragadkar J. who spoke for

the Court:

"16. 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."

16. Once we understand the Doctrine of Merger in its true sense, as

explained above, and relying upon the interpretation given to the

word „any‟ or „order‟ given to sub-section (7) of Section 154 of the

Act by the Apex Court in Hind Ware Industries (supra), the

inescapable conclusion would be that the original order of assessment

had ceased to operate on the decision given by the CIT(A) and had

merged with the orders of the appellate authority. The final orders

passed by the appellate authority were dated 28.6.2004 and acting

thereupon the AO passed assessment order, giving appeal effect

thereto, on 23.7.2004. Thus, it is the order of 28.6.2004 passed by

the CIT(A) which remains on record for all intent and purposes as the

original order of assessment has been merged. Once the matter is

viewed from this angle, it is no explanation that the error which is

sought to be rectified occurred in the original assessment order and

was not subject matter of appeal. Obviously, it was a calculation

error which could not have been the subject matter of appeal.

17. There appears to be some substance in the submission of learned

counsel for the Revenue that such error could be corrected by the

AO exercising the inherent power as, otherwise, the assessee is let off

by getting double depreciation, which is not permissible under the

Act. In any case, once we opine that the assessment order had

merged with the order of CIT(A) passed on 28.6.2004, the limitation

for the purpose of sub-section (7) of Section 154 is to be counted

from this date. Interestingly, even the learned counsel for the

assessee agreed to the extent that when the order is passed during the

re-assessment of proceedings, initial order of proceedings does not

survive in any manner or to any extent. This principle would be

applicable also when the assessment order is challenged in the appeal

and appellate authority passes order at variance with the orders

passed by the AO, on the basis of which fresh order under Section

143(3) read with Section 250 of the Act is required to be passed by

the AO giving effect to the order of the appellate authority.

18. No doubt, the rectification order passed under Section 154 would

mean the assessment order as rectified and the assessment order is

not obliterated thereby. However, what would be the position

when assessment order is not challenged and amended by the

appellate authority. Once rectification order under Section 154 of

the Act is passed it would mean that the appeal effect order is

rectified.

19. We, thus, answer the question, as formulated, in favour of the

Revenue and against the assessee holding that the Tribunal

misdirected itself in law by calculating limitation under Section 154(7)

of the Act with reference only to the date of original order of

assessment. As a consequence, order of the Tribunal is set aside and

the rectification order, as passed by the AO and affirmed by the

CIT(A), is upheld and restored. There shall, however, be no order as

to costs.

(A.K. SIKRI) JUDGE

(VALMIKI J. MEHTA) JUDGE

October 09, 2009 nsk