Commissioner of Income Tax vs Tube Investments of India Ltd.

N.V. Balasubramanian, J.—The Tribunal has stated a case and referred the following question of law arising out of the assessment of the

income of the assessee for the assessment year 1979-80 u/s 256(1) of the income tax Act, 1961 (""the Act""), for our consideration :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that after an assessment is made duly obtaining the

directions from the Inspecting Assistant Commissioner u/s 144B on the point of depreciation, which has been the subject-matter of appeal before

the Commissioner (Appeals) wherein an order has been passed by him, there was merger of assessment order with the appellate order and the

Commissioner of income tax had no jurisdiction to revise the assessment u/s 263 of the income tax Act, 1961 ?

Though the question referred to us is a single question, it consists of two parts both touching upon the jurisdiction of the Commissioner to invoke

his powers u/s 263 of the Act. The facts leading to the reference are that the assessee is a company and the ITO, for the assessment year 1979-

80, completed the assessment on 25-9-1982 u/s 143(3), read with section 144B of the Act on a total income of Rs. 2,03,50,430. As there were

variations between the income returned and the income proposed to be assessed, the ITO adopted the statutory formalities prescribed u/s 144B

i.e., he completed the assessment after getting the approval of the IAC of his draft assessment order. The assessee during the course of the

assessment proceedings claimed depreciation amounting to Rs. 58,52,924 and after making certain disallowance, the ITO granted depreciation at

15 per cent on the machineries employed in Cold Roll Mill.

There was an appeal by the assessee before the Commissioner (Appeals) challenging the order of assessment made by the ITO, but the

challenge against the assessment order was limited to the claim for depreciation on roads and extra-shift allowance claimed by the assessee in

respect of automatic and semi-automatic machinery. The assessee did not challenge the allowance of depreciation granted by the ITO at the rate of

15 per cent in respect of plant and machinery installed in the units of T.I. Cycles of India, Tube Products of India and Cold Roll Mill as the ITO

had granted the depreciation on those machineries as claimed by the assessee, and the assessee was satisfied with the allowance granted by the

ITO. It is unnecessary to note the order of the Commissioner (Appeals) for the purpose of the present reference or the result of the appellate

order.

The Commissioner exercising the powers of revision conferred upon him u/s 263, on a perusal of the records of the assessment of the assessee,

found that the allowance of depreciation at the rate of 15 per cent in respect of the plant and machinery installed in the Cold Roll Mill, a unit of the

assessee was erroneous and prejudicial to the interests of the revenue as the assessee would be entitled to depreciation at the rate of 10 per cent

on the machinery and plant. After issuing show-cause notice to the assessee and after hearing the objections of the assessee, the Commissioner

held that the assessee was eligible for the grant of depreciation at the rate of 15 per cent in respect of three machineries and with reference to the

fourth item of machinery, he held that the grant of depreciation at the rate of 15 per cent on the machinery was erroneous. As regards the rest of

the items, the Commissioner noticed the certificate produced by the assessee''s chartered engineer and registered valuer and held that that

machinery could not be regarded as machine tools and insofar as certain old machineries were concerned, for which the assessee had furnished

details before the Commissioner, he held that the assessee was entitled to the general rate of depreciation at the rate of 10 per cent permitting the

assessee to produce evidence before the ITO within a reasonable time in support of its claim for depreciation at the rate of 15 per cent on the

machineries and machine tools. The Commissioner thus revised the order of the ITO.

The assessee had challenged the order of the Commissioner before the Tribunal. The Tribunal has cancelled the order of the Commissioner on

two grounds, viz., (i) the Commissioner had no jurisdiction to revise the order of the ITO when the ITO had made an assessment after adopting

the statutory procedure prescribed u/s 144B after obtaining directions of the IAC, and (ii) the Commissioner had no jurisdiction to revise the order

of the ITO which was the subject-matter of appeal before the Commissioner (Appeals), as the assessee''s claim for depreciation allowance was

the subject-matter of consideration by the Commissioner (Appeals). The Tribunal held that the Commissioner lacked the jurisdiction to exercise his

power of revision and cancelled the order of revision passed by the Commissioner and allowed the appeal preferred by the assessee. The order of

the Tribunal is the subject-matter of reference before us.

The question of law referred to us is a comprehensive one as it challenges both the views expressed by the Tribunal on the jurisdiction of the

Commissioner. The first part of the question refers to the jurisdiction of the Commissioner to revise an order of assessment passed by the ITO

after obtaining the directions from the IAC and after adopting the formalities prescribed u/s 144B. In an unreported decision of this Court in

Commissioner of Income Tax Vs. V.V.A. Shanmugam, , this court has held that the Commissioner has the necessary jurisdiction u/s 263 to revise

an order of the ITO though the order was passed after obtaining the statutory formalities prescribed u/s 144B and after obtaining the directions of

the IAC on the issue of a draft assessment order, as the order passed by the ITO was regarded as an order of assessment made by the ITO and,

therefore, it was subject to the jurisdiction of the Commissioner u/s 263. We are in complete agreement with the views expressed by this Court in

V.V.A. Shanmugam''s case (supra) dated 11-1-1987 (7-1-1997) and we hold that the Commissioner has the jurisdiction u/s 263 to revise an

order of assessment though made after following the statutory formalities prescribed u/s 144B as the order of the ITO does not cease to be an

order of assessment made by him, and the contrary view expressed by the Tribunal is not legally sustainable in law.

The second part of the question refers to the question of merger. The Supreme Court in the case of COMMISSIONER OF Income Tax Vs.

SHRI ARBUDA MILLS LTD., held that the Commissioner is empowered to exercise his power to revise that part of the order of the ITO which

was not the subject-matter of consideration in appeal before the higher authority by way of appeal. The ITO in the instant case, at the time of

original assessment, granted depreciation on the items in question at a particular rate and as claimed by the assessee. The assessee was not

aggrieved either by the grant of depreciation or by the rate at which it was granted and there was no appeal before the Commissioner (Appeals)

against that part of the order of the ITO granting depreciation at the rate claimed by the assessee. The only question that was raised before the first

appellate authority was its claim for extra-shift allowance. The decision of the appellate authority on the question of grant of extra-shift allowance

would mostly depend upon the question whether the factory of the assessee had worked double shift or triple shift to claim extra-shift allowance

and the claim was justifiable or not, but the question of grant of extra depreciation is independent from the rate of depreciation granted by the ITO.

It may be true that the extra- shift allowance to be granted may depend upon and it was on the basis of the rate of depreciation granted by the

ITO, but still in the appeal preferred by the assessee before the first appellate authority, there was no occasion or inquiry and there was no

determination by the first appellate authority with reference to the rate of depreciation allowed by the ITO. Though as a consequence of the order

of the ITO granting depreciation at a particular percentage of the cost of machinery, the assessee was claiming extra-shift allowance, yet it cannot

be said that for deciding the issue as to grant of extra depreciation allowance, the Commissioner (Appeals) has to decide the question as to the rate

of depreciation to be allowed on each of the machinery employed in the factory. Therefore, we are of the opinion that it cannot (can) be regarded

that part of the order of the ITO granting the depreciation remained undisturbed even after the order passed by the Commissioner in appeal and,

hence, it could not be said that the order of the ITO granting depreciation at the particular rate had merged with the order of the Commissioner

(Appeals). Hence, we hold that the appellate order of the Commissioner (Appeals) does not in any way preclude the Commissioner from

exercising his power of revision u/s 263. It is relevant to notice that the pre-condition for merger of an order of the lower authority to get merged

with the order of the higher authority is that the matter in question decided by the lower authority should have been considered and decided by the

higher authority in the appeal preferred against the order of the lower authority, and in the instant case, it cannot be said that there was a merger of

the order of the ITO with the order of the Commissioner (Appeals) on the general theory that the Commissioner (Appeals) has wide powers over

the order of the ITO at the time of deciding the appeal preferred against the order of the ITO including the power of enhancement. In the instant

case, the Commissioner (Appeals) had no occasion to decide the question of rate of depreciation granted by the ITO in his order and, hence, the

order of the ITO cannot be said to have merged with the order of the Commissioner (Appeals) on the question of rate of depreciation granted by

the ITO. The Tribunal, in our view, was not quite justified in holding that there was a merger of the order of the ITO with the order of the first

appellate authority.

The Supreme Court in the case of Shri Arbuda Mills Ltd. (supra), held that where that part of the order of the ITO was not considered and

decided by the first appellate authority, there is no question of merger of the order of the ITO with the order of the higher authority. The

Explanation introduced in section 263 also makes the position abundantly clear, that there was no merger of the order of the ITO with the order of

the Commissioner (Appeals). Accordingly, we hold that the Tribunal was not correct in holding that there was a merger of the order of the ITO,

with the order of the Commissioner (Appeals) preventing the Commissioner from exercising his power u/s 263.

The learned counsel for the assessee submitted that the Commissioner was not justified in ignoring the report of the chartered engineer and

registered valuer of the assessee. The learned counsel submitted that the Commissioner relied upon the dictionary meanings given in certain

dictionaries to come to the conclusion that the machineries may not be regarded as machine tools. The learned counsel in support of his

submissions placed reliance on the decisions of the Calcutta High Court in the case of Russell Properties Pvt. Ltd. Vs. A. Chowdhury, Addl.

Commissioner of Income Tax and Others, 9 and the decision of the Allahabad High Court in Commissioner of Income Tax Vs. Goyal Private

Family Specific Trust, In the instant case, we find that the Tribunal has not decided the question whether there were materials for the Commissioner

to exercise the power of revision and also not decided the question on the merits of the case. Since the Tribunal has not expressed its view one

way or the other on both aspects, we are of the opinion that the Tribunal should consider the question whether the Commissioner had necessary

materials to invoke his revisional power u/s 263 and also on the merits of the case. We, accordingly, answer the question of law referred to us in

the negative and in favour of the revenue. Though we have answered the question referred to us in the manner indicated above, the Tribunal is

directed to consider the question whether there are materials for the Commissioner to invoke his power u/s 263 and also on the merits of the case.

However, in the circumstances, there will be no order as to costs.