JUDGMENT
1. The Income-tax Appellate Tribunal, Allahabad, has referred the following question of law under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for the opinion of this Court:
Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the Income-tax Officer's orders had merged in the order of the Commissioner of Income-tax (Appeals) and, therefore, the Commissioner of Income-tax had no jurisdiction under Section 263 of the Income-tax Act, 1961, to revise those orders?
2. The reference relates to the assessment years 1980-81 to 1982-83.
3. Briefly stated the facts giving rise of the present reference are as follows:
The assessee is a registered firm and derived income from carpet business. The Income-tax Officer allowed the claim of the assessee amounting to Rs. 1,02,252 by way of provision for payment of bonus in respect of weavers who had worked for the assessee during the accounting year relevant to the assessment year 1980-81. This amount represented 4 per cent. of the total wages payable to them which amounted to Rs. 25,56,305. Similarly, in the assessment years 1981-82 and 1982-83, similar provision was made for payment of bonus which amounted to Rs. 27,224 and Rs. 99,145 respectively being 4 per cent. of the wages. Subsequently, on March 22, 1984, the Commissioner of Income-tax issued a notice under Section 263(1) of the Act to the assessee proposing to nullify the aforesaid part of the assessment made by the Income-tax Officer. In this notice, it was stated that the claim of the assessee was not allowable under Section 36(1)(ii) or under Section 37, so no deduction as mentioned above was admissible. The assessee in his reply dated nil stated that the assessee maintains regular books of account and in the past the said deductions were allowed by the Department and the assessee in the alternative contended that it was entirely business expenditure and hence, the notice issued by the Commissioner of Income-tax was incorrect. The Commissioner of Income-tax passed the order under Section 263 of the Act. He directed the Income-tax Officer to withdraw the wages in various years as mentioned:
Rs.
4. Feeling aggrieved, the assessee came up in appeal before the Tribunal. The authorised representative for the assessee contended before the Tribunal that the Commissioner of Income-tax was not justified in passing order under Section 263 of the Act and furthermore that the said order was illegal, uncalled for and without any basis. The authorised representative for the assessee in support of this contention placed reliance on various decisions and strongly contended that the decision of the Commissioner of Income-tax was against law and the same was liable to be quashed. On the other hand, the Departmental representative justified the action of the Commissioner of Income-tax relying upon the various decisions of this Court and that of the Special Bench of the Tribunal in East Coast Marine Products (P.) Ltd. v. ITO . The Tribunal, after considering the submission of both the sides and the decision relied upon by them, held as under:
7. We have considered the submission of both the parties as well as the facts on record and the case law relied upon by them. The Commissioner of Income-tax dealing with the legal aspect of the matter no doubt distinguished the case of J.K. Synthetics Ltd. v. Addl. CIT and held that the ratio of the decision of J.K. Synthetics Ltd. is not universally applicable and the question of merger is decided with reference to the facts of each case. This distinction to our mind is farfetched and we do not subscribe to this conclusion that the case of J.K. Synthetics Ltd. is distinguishable in view of the facts as mentioned in the case of Satish Chandra Nirmesh Kumar v. Additional Judge (Revisions) Sales Tax and Karsandas Bhagwandas Patel v. G.V. Shah, ITO . We would deal with the ratio of the case of J.K. Synthetics Ltd. whereby their Lordships of the Allahabad High Court held that the entire assessment order made by the Income-tax Officer merges in the appellate order of the Appellate Assistant Commissioner/Commissioner of Income-tax (Appeals) irrespective of the points urged by the parties or decided by the appellate authority. It is a fact that their Lordships of the Allahabad High Court in the case of J.K. Synthetics Ltd. did consider the facts of the Gujarat High Court decision in the case of Karsandas Bhagzvandas Patel v. G. V. Shah, ITO and the Allahabad High Court decision in the case of Satish Chandra Nirmesh Kumar v. Additional fudge (Revisions) Sales Tax [1974] 34 STC 304 and distinguished these decisions and thus, the ratio of the decision in the case of J.K. Synthetics Ltd. is still good law. It need not be repeated that the decision of the hon'ble Allahabad High Court has a binding effect on us as we are functioning within the territorial jurisdiction of U.P. For the above reasons, we come to the conclusion that the order passed by the Income-tax Officer merged in the order of the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax had no jurisdiction under Section 263 in view of the decision in the case of J.K. Synthetics Ltd. [1976] 105 ITR 344 (All) it cannot be said on this ground alone that the order passed by the Income-tax Officer was erroneous in so far as it was prejudicial under Section 263 and passing the order under appeal. Hence, we cancel the order of the Commissioner of Income-tax and restore that of the Income-tax Officer. However, at the cost of repetition, it may be made clear that the other grounds taken up by the assessee in these appeals shall remain open for adjudication as and when need may rise.
5. We have heard Sri R.K. Upadhyaya, learned standing counsel appearing for the Revenue. Nobody has appeared for the respondent-assessee.
6. We find that Section 263 of the Act had undergone a sea change in the year 1988. Earlier uncertainty regarding the question as to whether the order of the Assessing Officer had merged in appeal or not even where in respect of the part of the assessment order, which was not the subject-matter of appeal has been set at rest by the insertion of Clause (c) of the Explanation as inserted by the Finance Act, 1989, with effect from June 1, 1988. This clause came up for consideration before the apex court in the case of CIT v. Shri Arbuda Mills Ltd. , wherein the apex court has held as follows (page 52):
We may refer to the amendment made in Section 263 of the Income-tax Act by the Finance Act, 1989, with retrospective effect from June 1, 1988. The relevant part thereof for the present case is as under:
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 June 1, 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.
The consequence of the said 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. Accordingly, even in respect of the aforesaid three items, the powers of the Commissioner under Section 263 shall extend and shall be deemed always to have extended to them because the same had not been considered and decided in the appeal filed by the assessee. This is sufficient to answer the question which has been referred.
7. In the aforesaid case, the assessment order was passed on March 31, 1978, and the appeal was decided on December 15, 1979, i.e., much before the amendment in Section 263 which was made with effect from June 1, 1988, and the apex court has upheld the jurisdiction of the Commissioner of Income-tax under Section 263 of the Act. Similar is the position in the present case. The assessment order as also the order of first appeal have all been passed much before June 1, 1988, i.e., prior to the amendment of Section 263 of the Act. In this view of the matter, the jurisdiction of the Commissioner of Income-tax to take proceedings under Section 263 of the Act was very well within law even in respect of the part of that assessment order which was not the subject-matter of appeal. Therefore, the Tribunal was not justified in holding that the Income-tax Officer's order had merged in the order of the Commissioner of Income-tax (Appeals). We, accordingly, answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee. There will be no order as to costs.