N.N. Mathur, J. - (1.) THE Income-tax Appellate Tribunal, Jaipur, has made the instant reference under Section 256(2) of the Income-tax Act, 1961, for the opinion of this court on the following question : "Whether, on the facts and circumstances of the case, the Tribunal was justified in cancelling the order passed by the Commissioner of Income-tax under Section 263 ?"
(2.) THE necessary facts are that the respondent-assessee is the sole distributor of MICO products for Jodhpur Division. THE Income-tax Officer, C-Ward, Jodhpur, made an ex parte assessment under Section 144 on March 27, 1985. It was reopened under Section 146 by order dated March 30, 1985. THE assessee filed the returns of income for the periods April 1, 1980, to December 10, 1980, and from December 11, 1980, to March 31, 1981. THE assessing authority by order dated March 27, 1985, computed the total income of the assessee. THE assessee preferred an appeal to the Commissioner of Income-tax (Appeals), which was decided by order dated August 8, 1985. THE Commissioner of Income-tax (Appeals) discussed the disallowance on seven different heads. Subsequent thereto, the Commissioner of Income-tax, Jodhpur, on scrutiny of the records found the order of the Income-tax Officer erroneous and prejudicial to the interests of the Revenue inasmuch as he has failed to add the bonus, incentive and interest to partners which is a disallowable amount, allowed depreciation on generator at 30 per cent. and further allowed Rs. 7,554 as incentive allowance to the firm, which did not fulfil the conditions laid down in Section 32A. Accordingly, a show cause notice was issued to the assessee. In response to the show cause notice, the assessee put in appearance and raised the objection, inter alia, on the ground that there has already been an order of the Commissioner of Income-tax (Appeals) against the assessment order in question having the effect of full merger of the order of the Income-tax Officer in the appellate order of the Commissioner of Income-tax (Appeals). Thus, it was contended that the Commissioner of Income-tax had no jurisdiction to revise the order of the Income-tax Officer. THE contention did not find favour with the Commissioner of Income-tax. He finally set aside the order of the Income-tax Officer with the direction that the Income-tax Officer should add the claim of the assessee regarding claim of bonus, incentive and interest to the partners and further he calculated the depreciation at 10 per cent. instead of 30 per cent on generator. THE assessee preferred an appeal before the Income-tax Appellate Tribunal. THE Tribunal was of the opinion that as there was divergence in judicial pronouncement by the different High Courts, a view favouring the assessee is required to be taken. Accordingly, the Tribunal cancelled the order of assessment made by the Income-tax Officer in pursuance of the order of the Commissioner of Income-tax by order dated November 4, 1988. However, the Tribunal on the application filed by the Revenue expressed that as there was no decision of the jurisdictional court, it was a fit case to make a reference for the opinion on the question formulated, which has been referred to above. It is contended by Mr. Sandeep Bhandawat, learned counsel appearing for the Revenue, that the controversy involved is now concluded by the decision of the apex court in CIT v. Shri Arbuda Mills Ltd. [1998] 231 ITR 50. Section 263 of the Income-tax Act enables the Commissioner to call for and examine the record of any proceedings under the Act and pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment, if he considers that any order passed by the Assessing Officer is erroneous, in so far as it is prejudicial to the interests of the Revenue. There was conflict of judicial opinion as to whether after an order has been subjected to the first appellate order, the points that were neither raised in appeal nor dealt with by the first appellate authority do, or do not, merge in the appellate order and thus, may or may not be, subjected to that extent, by the Commissioner, to an order of variation or direction therefor under Section 263(1) order. Some of the High Courts took the view that the doctrine of merger would operate only on matters, which were the subject-matter of a decision of the first appellate authority and has no application to the matters, which have not been touched by that authority. It was expressed that such untouched matters may be subjected to an order under Section 263(1). The other view was that the entire order passed by the Assessing Officer merges in the first appellate order and no part of it can be subjected to an order under Section 263(1) irrespective of the points urged by the party or decided by the appellate authority. However, the controversy has been now resolved by introducing the Explanation Clause (c) to Section 263(1) of the Income-tax Act by way of amendment. The Explanation was substituted by the Finance Act, 1988, with retrospective effect from June 1, 1988, in Clause (c) of the Explanation was amended by the Finance Act, 1989. The amendment is retrospective in nature (with effect from June 1, 1988), as is clear from the reading of the said Explanation. We may refer to the amendment made in Section 263(1) of the Income-tax Act, which reads as follows : "Explanation.--for the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-- ... (c) Where any order referred to in this sub-section and passed by the Assessing Officer had been the subject-matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal."
(3.) THUS, it is evident that the principle of merger applies to the income-tax cases where a decision reached by an inferior authority has been reversed, modified or confirmed by the appellate authority. But, the same principle will not be applied where a decision of an inferior authority does not come in for consideration of the appellate authority and there is no decision of the appellate authority either by way of affirmance or by way of reversal or modification on the point decided by the inferior authority. The apex court in CIT v. Shri Arbuda Mills Ltd. [1998] 231 ITR 50 has held that the consequence of the amendment made with retrospective effect is that the powers under Section 263 of the Commissioner shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in an appeal. In the instant case, it is not in dispute that the Commissioner of Income-tax (Appeals) had not decided the question with respect to bonus, incentive and interest to the partners, the depreciation on generator at 30 per cent. and investment allowance of Rs. 7,554 to the firm in order to fulfil the conditions laid down under Section 32A. Thus, the Commissioner of Income-tax has rightly exercised the jurisdiction under Section 263 of the Income-tax Act for the purpose of revising the order of the Income-tax Officer on the aforesaid items. Thus, the question referred is decided in favour of the Revenue and against the assessee. ;