Rajasthan H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that as a result of the order of the AAC, the original assessment order is supposed to have merged in the appellate order and, therefore, the ITO could not have started rectification proceedings under s. 154 of the IT Act, 1961?

Counsel Appeared

J.K. Singhi, for the Revenue : N.M. Ranka, for the Assessee

JUDGMENT

RAJESH BALIA, J. :

Heard learned counsel for the parties.

2. This reference relates to the asst. yr. 1976-77. The assessee has claimed deduction under s. 80J of the IT Act, 1961, (for short ‘the Act’). In the first instance, the return submitted by the assessee-respondent was not accompanying with the audit report as required by sub-s. 6A of s. 80J of the Act. However, before the assessment was made, the assessee-respondent submitted a revised return claiming greater benefit under s. 80J. The audit report was available with the respondent-assessee at the time when he filed the original return but it could not be filed along with the original return. On the basis of the revised return, computation of deductions under s. 80J of the Act was made by the AO by excluding the borrowed capital from Rajasthan Finance Corporation and other Scheduled Banks amounting to Rs. 6,01,635 and deductions was computed accordingly.

Aggrieved with the lesser allowance of deductions than claimed under s. 80J of the Act, the assessee filed an appeal before the AAC of Income-tax, Range Kota, who vide his order dt. 24th Aug., 1979, accepted the appeal filed by the assessee and directed the AO to recompute the deductions allowable under s. 80J of the Act by including the borrowed capital in the fixed capital investment. On that basis, the assessment was completed. Thereafter, the AO sought to recall the allowance under s. 80J by rectification of the assessment made in pursuance of the directions of the AAC relating to the allowance of deductions under s. 80J of the Act on the ground that audit report was not submitted along with the return of the income and thus, deductions under s. 80J of the Act was not at all allowable. Against that, an appeal was filed before the CIT(A).

In the appeal, two-fold points were raised by the assessee-respondent before the CIT(A). Firstly, the matter relating to the allowance of deduction under s. 80J of the Act being subject-matter of the appeal before the AAC, the assessment order in regard to that matter merged with the order passed by the AAC and, therefore, the ITO was not at all competent to make any rectification in that order so far as the matter of allowance of deduction under s. 80J was concerned. The second contention raised before the CIT(A) was that in pursuance of the notice under s. 154 of the Act, the assessee-respondent had filed the audited accounts with the audit report. The provision regarding submission of audit report along with the return being directory in nature, mistake was not rectifiable. These contentions did not find favour with the CIT(A) and the appeal filed by the assessee-respondent was dismissed. However, on further appeal, the Tribunal, Bench at Jaipur, accepted both these contentions raised on behalf of the respondent-assessee and held that ITO had no jurisdiction to invoke the provisions of s. 154 of the Act on the principle of merger of his order with the appellate order passed by the AAC. It was further held that on the issue regarding requirement of filing of audit report being mandatory or directory, there exists difference of opinion between various High Courts and therefore, considering this issue to be debatable cannot be treated as mistake apparent from the record and hence not amenable to rectification proceedings on that ground also. One these findings, the Tribunal allowed the appeal filed by the respondent-assessee and set aside the order of rectification.

3. It is in the aforesaid facts and circumstances of this case, on an application being moved under s. 256(1) of the Act by the CIT, the following questions of law has been referred to this Court for its opinion by the Tribunal :

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that as a result of the order of the AAC, the original assessment order is supposed to have merged in the appellate order and, therefore, the ITO could not have started rectification proceedings under s. 154 of the IT Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the ITO passed the order under s. 154 due to change of opinion and that there was no mistake apparent from record within the meaning of s. 154 of the IT Act, 1961 ?

We have heard Mr. J.K. Singhi, the learned counsel appearing for the Revenue, and M/s N.M. Ranka and J.K. Ranka for the respondent-assessee. It has been contended by the learned counsel appearing for the Revenue that the Tribunal has erred in not properly appreciating the principle relating to doctrine of merger particularly keeping in view the provisions of s. 154(1A) of the Act. The doctrine of merger which inhibits the jurisdiction of an authority to rectify its own order on finding it to be suffering from a mistake apparent from the record is only confined to subject-matter of appeal and not in its entirety irrespective of the fact whether appeal is restricted to limited question or to an order in its entirety. In support of this contention, he has placed reliance on a decision of the Gujarat High Court in Karsandas Bhagwandas Patel vs. G.V. Shah ITO & Ors. (1975) 98 ITR 255 (Guj) : TC 33R.715.

Mr. N.M. Ranka, the learned counsel for the assessee-respondent, urged that subject-matter of the appeal in the present case being the claim for deductions under s. 80J of the Act, all aspects of allowability of deductions under s. 80J of the Act became subject-matter of appeal and, therefore, merely because one aspect of the matter has not been considered or argued, it could not give jurisdiction to the lower authority to rectify that order by bye-passing the appellate order on the ground that points were not raised and decided. Sec. 154 of the Act to the extent it is relevant for the present purpose reads as under : “Sec. 154. Rectification of mistake.—(1) With a view to rectify any mistake apparent from the record and income-tax authority referred to in s. 116 may,— (a) amend any order passed by it under the provisions of this Act; (b) amend any intimation or deemed intimation under sub-s. (1) of s. 143. (1A) Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-s. (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided.” Sub-s. (1A) was inserted in s. 154 of the Act vide Amendment Act No. 31 of 1964 and it was given effect to w.e.f. 6th Oct., 1964. This insertion was made with a view to resolve the existing controversy regarding scope and ambit of the authority who has passed the order to rectify his order on conditions enumerated in s. 154 of the Act being fulfilled. Where such an order has been subjected to an appeal where partly or in its entirety. One view has been that once an order has been subject to appeal in its entirety, the order merges in the appellate order and the authority making the order loses its jurisdiction to rectify the mistake apparent from his order even if such part of the order has not been made subject- matter of the appeal. Another view which has found favour with some of the Courts was that the doctrine of merger applies only with respect to subject-matter of controversy that has been made subject to appeal. Thus, sub- s. (1A) gives a statutory recognition of the principle that doctrine of merger so far as the question of rectification is concerned, operates only on the field of the subject-matter of appeal and not beyond that.

The question then arises what is meant by the expression “in relation to any matter other than the matter which has been so considered and decided” ? On a plain reading of the statutes, we find that it conveys that the subject- matter of appeal in all its aspects which can call for consideration on the dispute raised and that will always depend upon the nature of the dispute raised before the appellate authority and the answer cannot be found in abstract. Reliance has been placed on a decision of the Supreme Court [sic—Gujarat High Court] in Karsandas Bhagwandas Patel vs. G.V. Shah, ITO & Ors. (supra). It was a case which related to disallowance of certain depreciation already allowed by the AO in respect of the claims made regarding specific business assets but has been withdrawn later on by taking recourse to the rectification proceedings. The part of disallowance cannot deprive the claims relating to other items and other expenses and they were made subject-matter of appeal and those appeals were allowed by the appellate authority. Subsequently, the order accepting claim for depreciation in respect of motor-car and motor-cycle was sought to be rectified by the AO. It was in the aforesaid circumstances, when the question of merger was raised for contending that the ITO had no jurisdiction to invoke the powers under s. 35 of the Indian IT Act, 1922 (which has been replaced by the IT Act, 1961). It was in connection with that controversy, the Supreme Court (sic) concluded its opinion : “It would thus be seen that for the purpose of determining the applicability of the principle of merger in a case like the present, the test which has to be applied is whether the decision of the ITO on a particular point is the subject-matter of appeal before the AAC. It may not be the subject-matter of appeal for two reasons, either because the AAC has no jurisdiction to consider that subject-matter as in the case before the Supreme Court or because the AAC though having jurisdiction to examine that subject-matter does not do so. In either case, there being no decision of the AAC on the point, the decision of the ITO remains untouched and it is open to the CIT in exercise of power under s. 35, sub-s. (1) to rectify it if there is a mistake apparent from the record of the assessment.” Thereafter considering the controversy before it as noticed by us above, the Court further held : “Now, in the present case, additional depreciation on motor-car and motor-cycle was allowed by the ITO in the original order of assessment. This being an allowance in favour of the assessee, it was obviously not complained of in the appeal preferred by the assessee before the AAC. It was not included in the four items in respect of which the appeal was preferred. The AAC also did not suo motu consider and decide whether the allowance was rightly given by the ITO. The decision of ITO, allowing additional depreciation on motor-car and motor-cycle did not, therefore, merge in the order of the AAC and if the disallowance of such additional depreciation was patently erroneous, the ITO was entitled to rectify the mistake under s. 35, sub-s. (1) by adding back the amount of such additional depreciation.”

It may be recalled here that in the aforesaid case, the principle of merger was applied keeping in view the facts and circumstances of that case before the Court.

10. In this connection, we may refer to a recent decision of this Court in CIT vs. Shri Eklingji Trust (D.B. IT Ref. No. 16 of 1987, decided at Jodhpur, vide order dt. 23rd Feb., 2001) [reported at (2001) 167 CTR (Raj) 367] . In that case, the assessee was a public, religious and charitable trust. The claim made by it was in respect of the income derived from different sources to be exempt from income-tax under ss. 11 and 12 of the Act of 1961. The AO while invoking the provisions of s. 13 of the Act held that part of the income from the property of the trust during the previous year was applied directly or indirectly for the benefit of the one of the trustees inasmuch as some of the investments were made in a company in which managing trustee had substantial interest. This raised the issue of applicability of s. 13 of the Act in that case. In that connection, the ITO had disallowed the claim of the assessee by invoking the provisions of s. 13 of the Act and brought to tax the income from such investments. Aggrieved with disallowance of exemption invoking the provisions of s. 13 of the Act, the assessee appealed before the AAC. The AAC also rejected the claim of the assessee and held that the investment in question was such to which s. 13 applies and the income which has been added could not be disallowed. Thereafter, the AO sought to invoke the jurisdiction under s. 154 of the Act by intending to disallow exemptions from tax in entirety on all its incomes. When this matter came up before this Court, it was argued on behalf of Revenue that since at the time of original assessment applicability of s. 13(1)(v) and/or s. 13(2)(i) were not taken into consideration and, therefore, applicability of such provision was not subject of appeal, therefore, doctrine of merger could not apply. This Court opined that the subject-matter of the appeal directly related to applicability of s. 13 of the Act to the assessee due to such investment and how much income is to lose its exemption was only a consequence and, therefore, the doctrine of merger in terms of s. 154(1A) of the Act applies to the facts of the case. In coming to this conclusion, the Court said : “………..if the AO is taken to have addressed himself to those questions explicitly or impliedly and decided the question of denial of exemption on account of investment in a concern in which managing trustee had substantial interest, for an inadequate rate of return, then the claim to exemption in respect of the income of the assessee as decided by the order of ITO was subsequently subjected to appeal by the assessee. On decision of the appeal, the order of ITO merged with the order of the AAC and thereafter, the ITO could not have exercised any jurisdiction to amend the order passed by the AAC in exercise of his power under s. 154 of the Act of 1961. In such event splitting the question of applicability of ss. 13,11 and 12 could not have been made which form component part of the whole scheme, to get over the binding nature of appellate order on ITO.”

“It may be pertinent to notice, it is only on the finding that the income part of the funds of the trust has continued to be lent to M/s Lake Palace Hotel and Motels (P) Ltd. in which managing trustee of the trust has substantial interest for a period of nine months during the previous year if adequate interest on finding of that the reasonable right of interest chargeable was 10 per cent whereas money has been lent to the company for a period of nine months only at the rate of 5 per cent merely because the provision has not been referred to. It cannot be said that the additions in the income has been without reference to those provisions.”

11. Another decision which has been brought to our notice in this connection is the decision of the Gauhati High Court in P. Das & Co. vs. Dy. CIT & Ors. (1996) 132 CTR (Gau) 16 : (1996) 217 ITR 29 (Gau) : TC 53R.375. In that case, commenting on the scope and ambit of s. 154 of the Act, the Court observed as under : “The powers of the ITO under s. 154 of the Act flow from the provisions of that section only. In the present case, the authorities have imposed penalty on the assessee and the assessee had gone in appeal before the appellate authority and the appellate authority has considered all the aspects of the matter or should be taken to have considered all the aspects of the matter and found penalty imposed was rightly and correctly imposed. According to me, the appellate authority under the provisions of s. 251(1)(b) had the power to alter, or amend or even to enhance or reduce the penalty and deal with other aspects of the same matter i.e., the imposition of penalty as it would find it proper. The language of s. 154(1)(a) makes it abundantly clear that the matter which is considered or decided by the appellate authority cannot be reopened or rectified. I am of the view that matter means all facets of the matter which come within the scope of the appeal. If the appeal is filed relating to a matter, and the same was considered and decided or be treated to have been considered or decided by the appellate authority, it is no longer open for the assessing authority to reopen or reagitate or rectify the said issue or matter.” It may be noticed that before the Gauhati High Court, the question which arose was that the levy of penalty itself was made subject-matter of appeal that had been decided by the appellate authority and it was on the aforesaid circumstances, the Gauhati High Court held that the doctrine of merger cannot be avoided by merely stating that one aspect of the controversy has not been considered, which could have been raised and decided by the authority.

12. Coming to the facts of the present case, it is apparent that there was no dispute between the parties that assessee is an industrial undertaking to which provisions of s. 80J of the Act are attracted to the case of the petitioner. There was also no dispute between the parties either on the issue that he fulfils all the conditions to avail the benefit under s. 80J or has not failed to fulfil any condition which could disentitle him to relief under s. 80J notwithstanding that it is an assessee to which s. 80J was attracted. Therefore, so far as the matter relating to the applicability of the provisions of s. 80J of the Act is concerned, was considered and found in favour of the assessee. Thus, applicability of s. 80J was not at all subject-matter of the appeal. The subject-matter of the appeal was limited to the extent that by application of the provisions of s. 80J of the Act for the availing of which no impediment was found how much benefit is to be computed to which the assessee is entitled to deductions under s. 80J of the Act. That being the position, it cannot be said that matter regarding applicability of s. 80J of the Act or non-fulfilment of any condition by the assessee in any sense was subject-matter of the appeal, which would result in denuding the AO to invoke his jurisdiction under s. 154 of the Act if otherwise the case is made out that the order suffers from the mistake apparent on the face of the record on the matter regarding applicability of s. 80J of the Act as such, or non-fulfilment of any condition for availing its benefit by the eligible undertaking. In these spheres, if there exists any mistake apparent from record, the AO retain his jurisdiction to rectify his order to that extent under s. 154(1A) of the Act. We, therefore, answer question No. 1 in favour of the Revenue and against the assessee by holding that the Tribunal was not justified in holding that as a result of the order of the AAC, the original order is supposed to have merged in the appellate order and, therefore, the ITO could not have started rectification proceedings under s. 154 of the Act, even in respect of eligibility of assessee as an industrial undertaking or that the assessee became disentitled to avail the benefit though eligible under s. 80J, failed to fulfil essential condition is apparent from record.

13. Question No. 2 would rest on our quest for an answer to enquiry whether in the facts and circumstances of the case, could it be said that the original order suffered from any mistake apparent on the face of the record in respect of which the ITO could exercise his jurisdiction under s. 154 of the Act, on the ground which has weighed with him.

14. The principle is well settled that a mistake apparent from the face of the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record. Reference in this connection may be made to T.S. Balaram, ITO vs. Vokart Bros. & Ors. (1971) 82 ITR 50 (SC) : TC 53R.165, and CIT vs. Hero Cycles (P) Ltd. (1997) 142 CTR (SC) 122 : (1997) 228 ITR 464 (SC) : TC S53.4162.

15. In the present case, the question involved was with regard to requirement of sub-s. (6A) of s. 80J of the Act, which provides that where the assessee is a person other than a company or a cooperative society, the deduction under sub-s. (1) from profits and gains derived from an industrial undertaking shall not be admissible unless the accounts of the industrial undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-s. (2) of s. 288 and the assessee furnishes along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant. As stated above, in the instant case, while submitting the original return, audit report was not filed. However, it cannot be gainsaid that in view of the pronouncements made by various High Courts on the question whether requirement of filing of audit report is mandatory or directory and whether it can be cured at a later stage, there is division of opinion.

16. In CIT vs. Jaideep Industries (1989) 180 ITR 81 (P&H) : TC 25R.1186, it has been held by the Punjab High Court that requirement of filing of audit report under sub-s. (6A) of s. 80J of the Act along with the return is a mandatory in nature and filing of such audit report during the assessment proceedings would not satisfy the requirement of the aforesaid provision. However, on the other hand, the Gujarat, Madras, Bombay Allahabad, Patna and Jammu and Kashmir High Courts have held that the requirement under s. 80J(6A) that the audit report should be filed along with the return of income is not a mandatory condition and, therefore, filing of an audit report after the submission of the return but before the completion of the assessment is sufficient compliance with the said condition. Reference in this connection may be made to Addl. CIT vs. Murlidhar Mathura Prasad 1978 CTR (All) 410 : (1979) 118 ITR 392 (All) : TC 34R.358, CIT vs. Sitaram Bhagwandas (1976) 102 ITR 560 (Pat) : TC 34R.321, CIT vs. Gujarat Oil and Allied Industries (1993) 109 CTR (Guj) 272 : (1993) 201 ITR 325 (Guj) : TC 25R.1187, CIT vs. A.N. Arunachalam (1994) 122 CTR (Mad) 87 : (1994) 208 ITR 481 (Mad) : TC 25R.1196.

In a recent judgment of Jammu & Kashmir High Court in CIT vs. Trehan Enterprises (2001) 168 CTR (J&K) 274 : (2001) 248 ITR 333 (J&K), it has been held that even if the audit report is not furnished along with the return during the course of assessment proceedings before the ITO but it is produced in the appeal, the CIT(A) should have treated the requirements to have been met and then framed the assessment or remitted the case back to the ITO to proceed in accordance with law. The same view has been expressed by the Madras High Court in CIT vs. Jayant Patel (2000) 163 CTR (Mad) 367 : (2001) 248 ITR 199 (Mad).

In the aforesaid circumstances, the conclusion is not far to reach that the present alleged mistake cannot be said to be a mistake which can fall within the precincts of the mistake rectifiable under s. 154 of the Act.

Accordingly, we answer the second question in affirmative i.e., in favour of the assessee and against the Revenue.

[Citation : 250 ITR 714]