C.I.T. BOMBAY. vs. M/S. RATILAL BECHARILAL and SONS.

IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION

INCOME INCOME INCOME TAX REFERENCE NO. 352 OF 1988. TAX REFERENCE NO. 352 OF 1988. TAX REFERENCE NO. 352 OF 1988.

The Commissioner of Income-tax,

Bombay City VIII

... Applicant.

V/s.

M/s Ratilal Bacharilal & Sons

... Respondent.

Shri Prayag Vyas i/b K.C.Sidhwa for the applicant.

Shri P.C.Tripathi for the respondent.

CORAM CORAM CORAM : V.C.DAGA AND A.S.AGUIAR, JJ. : V.C.DAGA AND A.S.AGUIAR, JJ. : V.C.DAGA AND A.S.AGUIAR, JJ.

DATED DATED DATED : : :

22.7.2005 22.7.2005 22.7.2005

JUDGMENT: JUDGMENT: JUDGMENT: (Per V.C.Daga,J.) (Per V.C.Daga,J.) (Per V.C.Daga,J.)

By this reference under section 256(1) of

the

Income-tax Act, 1961, the Income Tax Tribunal has referred the following questions of law

for the opinion of this Court:

Whether,

the

facts

and

the

circumstances of the case, the Appellate

Tribunal

was justified in holding

that

the Commissioner of Income-tax (Appeals)

expressly

or impliedly applied his mind

the issue of the allowance of relief

under

section

35B

reassortment

charges

when the claim for deduction on

this account had already been allowed by

the Income-tax Officer in the assessment

order and consequently did not figure in

the appeal before the Commissioner of

Income-tax (Appeals).

Whether,

the

facts

and

the

circumstances of the case, the Appellate

Tribunal

was justified in holding

that

after was

decided

the

Commissioner

Income-tax

(Appeals)

against

the

assessment

order,

the

assessment

order merged in the order of CNR No : HCBM020001621988 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(2)

the Commissioner of Income-tax (Appeals)

and

thereafter

the

Commissioner

Income-tax

could

not

exercise

his

jurisdiction

under

section 263 of

the

Income-tax

Act,

1961 for revising

the

assessment

the ground of its

being

erroneous and prejudicial to the

interest of the revenue.

FACTS: FACTS: FACTS:

The factual matrix reveals that the assessee

a registered firm.

The assesment for the

1980-81

was made by the Income-tax Officer by assessment order

dated

23.2.1981.

In the said assessment order,

the

I.T.O.

allowed weighted deduction under section 35-B

on Rs.5,63,350/- instead of Rs. 8,90,676/- claimed by

the Assessee.

Appeal was preferred against the said

assessment order which was decided by the Commissioner

of Income-tax(Appeals) by order dated 25.11.1981

upholding the order of the I.T.O.

Subsequently, the Commissioner of Income-tax

was

the

view

that the

assessment

order

dated

23.2.1981

was

erroneous

and

prejudicial

the

interest of the Revenue inasmuch as weighted deduction

under

section 35B was allowed on reassortment charges

without

going

into the details of these charges

and

enquiry

as to whether these charges were justified so

to allow weighted deduction under section 35-B

of Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(3)

the

Act.

The Commissioner of Income-tax, finding the

order erroneous and prejudicial to the interest of the

Revenue,

in exercise of his powers under section 263,

an order dated 11.1.1983, set aside the assessment

order

dated 23.2.1981 with respect to the claim

made

the assessee for weighted deduction under

section

35-B

and

remanded the assessment proceeding

the

I.T.O.

with direction to make the assessment afresh,

keeping

view his observations made in the

order,

after giving sufficient opportunity to the assessee to

meet its case before completing the assessment.

Being aggrieved by the aforesaid order of the

Commissioner

Income-tax under section 263,

dated

11.1.1983, the assessee invoked appellate jurisdiction

the

Tribunal,

contending that the

powers

under

section

263

could

not

have

been

invoked

the

Commissioner

of Income-tax since the assessment order

with

respect to the weighted deduction under

section

35-B

was a subject matter of appeal before the C.I.T.

(Appeals)

such

order in original merged

the

order

of the appellate authority.

The Tribunal

came

the conclusion that the Commissioner of Income-tax

(Appeals) having expressed its views impliedly applied

its

mind to the question of grant of allowance

under

section

35B.

The

Tribunal,

further

held

that

assessment

order passed by the I.T.O.

emerged in the

order of the Commissioner of Income-tax (Appeals) and, Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(4)

therefore,

Commissioner of Income-tax could not

have

assumed

jurisdiction u/s 263 of the Income-tax Act so

as to revise the assessment order, on the ground of it

being erroneous and prejudicial to the interest of the

revenue.

The Appellate Tribunal, on the above findings,

cancelled the order of the Commissioner under section

263 and allowed the appeal of the assessee-firm.

Based on the above facts, questions of law as

extracted

the opening part of this order are

the

subject-matter

this reference made under

section

256 (1) at the instance of the Revenue for the opinion

of this Court.

Submissions: Submissions: Submissions:

Learned Counsel appearing for the Revenue Shri

Kotangale

submitted that the assessee could not

have

preferred

appeal against that part of the order which

was in favour of the assessee.

The assessee could not

said

be aggrieved by that part of

the

order

which

was in favour of the assessee.

otherwords,

submits that weighted deduction which was

allowed

Rs.

5,63,350/- could not have been

the

subject

matter before the

C.I.T.(A),

the

first

appellate authority.

He submitted that at the most it Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(5)

was

open

for

the

assessee to

contend

before

the Tribunal that the weighted deduction

under

section

35B of the Income-tax Act ought to have

been

allowed

the

excluded part

the

reassortment

charges amounting to Rs. 3,27,326/- and that

disallowance to that extent was erroneous.

Shri Kotangale, submits that the Tribunal was

not justified in invoking doctrine of merger and could

not have set aside the order of the Commissioner of

Income-tax passed under section 263.

10.

Per Contra, learned Counsel appearing for the

assessee

submitted that once the opinion is expressed

the

C.I.T.

(A) on the weighted

deduction

under

section 35-B with respect to the reassortment charges,

then

the jurisdiction under section 263 for

revising

assessment

order on the ground of it being

erroneous

and prejudicial to the interest of the Revenue; was

not available to the C.I.T.(A).

Consideration: Consideration: Consideration:

11.

Having heard the rival parties, it appears

that

the

main contention of the assessee, which

was

considered

the C.I.T.(A), was whether or not

the

assessee

was

still

entitled

claim

weighted

deduction

the

entire

amount

Rs.8,90,676/- Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(6)

instead of Rs.

5,63,350/-.

In otherwords, whether or

not

the

I.T.O.

was justified in refusing

allow

weighted

deduction

Rs.

3,27,326/-,

was

the

question

raised

before

the

1st Court.

However,

in view of the judgment of this Court in the

case of C.I.T.

vs.P.

Muncherji & Co.

(1987) 167 ITR

671

(Bom.) once the order of assessment is

confirmed

the

appellate Court or any order with

regard

assessment

has been made by it, that becomes a

final

order

of assessment and only right the department has

the right of appeal to the Appellate Tribunal.

otherwords,

whether or not the issue is raised,

once

the

assessment order is carried in appeal, the entire

order

merges with the appellate order.

However, this

legal

position

stands

abrogated

view

the

amendment

section 263 of the Act, as

amended

Finance

Act, 1989.

It has, thus, become necessary to

examine the effect of this amendment to section 263 of

the Act.

12.

Amendment to section 263 of the Income-tax

Act,

1989,

has been made by FINANCE ACT,

1989

with

retrospective effect w.e.f. 1st June, 1988. Relevant

part of the amendment reads 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

this

sub-section

and

passed

the

Assessing Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(7)

Officer

had

been the subject-matter

any filed

on or before or after on or before or after on or before or after 1st

June

1988,

the

powers of the

Commissioner

under

this

sub-section

shall extend and

shall

deemed always to have extended to such matters

as had not been considered and decided in such

appeal." (Emphasis supplied)

13.

This Court while dealing with scope of

amendment

to section 263, in Ritz.

Ltd.

vs.

Union Ritz.

Ltd.

vs.

Union Ritz.

Ltd.

vs.

Union

of of of India

India

India (1990) 184 ITR 599 603 (Bom.)

(1990) 184 ITR 599 603 (Bom.)

(1990) 184 ITR 599 603 (Bom.) ruled that only

in cases where action under section 263 is taken on or

after

1st

June, 1988, the merger of

the

assessment

order

the

order will

treated

confined to the issues actually considered and decided terms

clause

(c)

the

newly

substituted ( w.e.f.

1.6.1988) Explanation to section

263 (1).

In that view of the matter, where the action

under section 263 is taken prior to 1st June 1988, the

provisions

said

clause (c)

the

Explanation

cannot be invoked because irrespective of the language

which

the

amending provisions are

couched,

the

amendment

cannot be retrospective with effect from

date

earlier

the

date

which

the

amended

provision itself was brought on the statute book.

The

similar

view

has

been reiterated by this

Court

number

cases

viz.

C.I.T.

vs.

International C.I.T.

vs.

International C.I.T.

vs.

International

Computers Computers Computers Indian

Indian

Indian Manufacturer Ltd., (1991) 187 ITR 580

Manufacturer Ltd., (1991) 187 ITR 580

Manufacturer Ltd., (1991) 187 ITR 580

(282) (282) (282) (Bom.) ;

C.I.T.

vs.

Godavari Sagar Mills Ltd.

(Bom.) ;

C.I.T.

vs.

Godavari Sagar Mills Ltd.

(Bom.) ;

C.I.T.

vs.

Godavari Sagar Mills Ltd.

(1992) (1992) (1992)

198 ITR 196

198 ITR 196

198 ITR 196.200-01(Bom.);

C.I.T.

vs.

Bombay 200-01(Bom.);

C.I.T.

vs.

Bombay 200-01(Bom.);

C.I.T.

vs.

Bombay

Burmah Burmah Burmah Trading Corporation Ltd (1992) 107 CTR Trading Corporation Ltd (1992) 107 CTR Trading Corporation Ltd (1992) 107 CTR Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(8)

(Bom.)53,54; (Bom.)53,54; (Bom.)53,54;

Some of the leading High Courts have taken a

contrary view. Let us notice the same.

14.

According to the Calcutta High Court, the said

clause (c) has tried to make explicit what was already

implicit

the

Act

(see

Hindustan

Aluminium

Corporation

Ltd.

vs.

C.I.T.

(1989) 178 ITR

74,93

(Cal.).

The

very same High Court has

further

held

that

the amendment to clause (c) by the Finance

Act,

1989, clarifies that the said clause (c)must be deemed

have always been in existance (see Hamilton &

Co.

Pvt.

Ltd.

vs.

C.I.T.

(1991) 187 ITR 568

(Cal.).

Thus, according to Calcutta High Court the doctrine of

partial

merger

has

judicial recognition

for

quite

long.

This clause (c) is no innovation of Parliament

(see C.I.T. vs.Techno Electric & Engg.Co. (1994) 76

Taxman, 212, 220 (Cal.).

15.

According to Delhi High Court such amendment

section

263

clarifies

the law

and

brings

the

Statutory

Law in conformity with the judicial opinion

noticed

the judgment of the Calcutta High

Court.

(see CIT vs. Printers House (1998) 233 ITR 666, 669

(Del).

16.

According to Patna High Court clause (c) is Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(9)

retrospective

in nature.

It also includes an filed on or before or after 1.6.198 (see CIT

vs.Magbool Alam & Co. (1998) 231 ITR 77, 80 (Patna).

17.

At this juncture, it will be useful to refer

to the portion of the departmental Circular No.550

dated 1st January 1990 which reads as under:

"The above Explanation was incorporated in the

Finance

Act,1998,

clarify

this

legal

position

have always been

existence.

Some authorities

have,

however,

decided

that the Explanation will apply

only

prospectively,

i.e.

only

those

orders

which are passed by the Commissioner after 1st

June

1988.

Such an interpretation is against

the

legislative intent and section 263 of the

Income-tax

Act

has

been amended

clarify that the provisions of the Explanation

shall

deemed

have

always

been

existence."

18.

In the case of C.I.T. vs. Shri Arbuda Mills C.I.T. vs. Shri Arbuda Mills C.I.T. vs. Shri Arbuda Mills

Ltd.(1998) Ltd.(1998) Ltd.(1998)

231 ITR 0050

231 ITR 0050

231 ITR 0050;

the apex Court also had

occasion

to consider above issue.

The relevant facts

reveal

that

the

assessment year in that

case

was

1975-76

ending

31.12.1974.

The

assessment

was

completed

under section 143(3) r/w section 144-B,

March 31, 1978 in which net business loss was computed

Rs.

3,61,086/-

and the income

under

the

head

"Capital

gains"

Rs.

38,874/-.

The

Income-tax

Officer

had made certain additions and

disallowances

while

computing the loss and income as above and

had

also accepted, inter alia, the following three claims: Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(10)

(i) Deduction of a sum of Rs. 23,82,621/- by way of

provision for gratuity.

(ii)

Depreciation on Rs.

4,21,000/-which was paid by

the

assessee

United

Textile

Industries

consideration

for

transfer of installed property

17,480 spindles and 400 looms of Old Manek Chowk

Mills;

(iii)

Loss on account of difference in exchange

rate

which was referable to the purchase of machinery, etc.

revenue

expenditure.

For the

purposes

the

present matter, it is only these three items of claim

which are relevant.

In the appeals filed by the assessee, the

items

respect

of which the decision was

its

favour

were

not the subject-matter of

appeals.

respect

above

three

items,

the

Commissioner

exercised its power under section 263 of the

Income-tax Act.

The main contention of the assessee considered

the

Tribunal was whether or not the order of

the

Income-tax

Officer regarding the said three items

respect

which

the assessee had

occasion

prefer had

merged

that

the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(11)

Commissioner

(Appeals)

exclude

the

jurisdiction

of the Commissioner of Income-tax

under

section

263 of the Act.

The Apex Court on

reference

under

section

257

of the Income-tax Act,

1961

was

required to deal with the following question referred

to it.

"Whether, on the facts and in the

circumstances

the

case,

the

order

assessment

passed

by the Income-tax

Officer

under section 143(3) read with section 144B on

July

31,1978,

had

merged with that

the

Commissioner (Appeals) dated December 15,1979,

in respect of the three items in dispute so as

exclude

the

jurisdiction

the

Commissioner of Income-tax under section 263?"

The

Apex Court while dealing with the above

question

applied the amended provision of section 263(1) of the

Act to the aforesaid three items which were not the

subject matter of appeal and held as under:

"The

consequence

of the said amendment

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

an appeal.

Accordingly, even

respect

the

aforesaid three

items,

the

powers

of the Commissioner under section

263

shall

extend

and shall be deemed

always

have extended to them because the same had not

been

considered

and

decided in

the filed by the assessee."

19.

Learned Counsel appearing for the assessee

tried

to canvas, since there is no discussion in

the

aforesaid

judgment of the Apex Court with respect

to Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(12)

the

length of the retrospectivity of the amendment to

section 263, it need not be followed.

We do not agree

with

this

submission made.

The submission

made

liable

rejected

outrightly.

The

Courts

including

High Court have to treat a decision of

the

Supreme

Court

as an authority not only for

what

declares

decides by express enunciation but

also

what

follows

from

such

declaration

clear

implication

way of logical deduction.

So far

case

of Shri Arbuda Mills Ltd.

(supra), is concened,

the pronouncement is clear on a point and suffers from

no ambiguity.

Needless to mention that once the point

finally

decided by the Supreme Court

becomes

binding

precedent.

The binding effect of a

decision

does not depend upon whether a particular argument was

considered

therein

or not, provided that

the

point

with

reference to which an argument was

subsequently

advanced

was actually decided.

Merely because, there

discussion in the judgment that does not

mean

that

the issue in question was not considered by

the

Apex

Court and that it has no binding force.

the

contrary,

earlier views of this Court referred to

para 13 (supra) have lost their binding force. They

are no longer good law.

20.

The consequence of the aforesaid clause (c)

introduced

with

retrospective

effect, is

that

the

powers

under

section 263 of the

Commissioner

shall Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(13)

extend

and shall be deemed always to have extended to

such

matter as had not been considered and decided in

the

order

passed

in appeal on or, before

after

1.6.1988.

The

very

fact that Explanation

(c)

was

given

retrospective effect by using the words "On

before

or after" itself denotes that the intention of

legislation is to embrace all orders whether passed on

after

or before 1.6.1988.

The use of the

phrase

"on

or before or after" is no doubt little

uncommon.

The phrase "on or before" denotes immediately at or at

any

time before.

The phrase "on or before and after"

to our mind means either immediately at or in the past

future.

means

any

time

during

the

continuance of the Act, if it is to be understood in

the context of the legislation.

21.

Having said so, turning to the facts of this

case,

far as allowance under section 35-B to

the

extent it was allowed by the I.T.O.

is concerned, the

powers

the Commissioner under section

263

shall

extend

and shall be deemed always to have extended to

such

matter because the same had not been

considered

and

decided in the appeal filed by the assessee.

the instance of the assessee, the allowance on the sum

Rs.5,63,350/-

could

not have

been

the

subject

matter

of appeal before the C.I.T.(A) as the assessee

was

never aggrieved with that part of the order.

otherwords, so far as weighted deduction under section Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10

(14)

35-B

in the sum of Rs.

5,63,350/- is concerned,

the

same was not a subject-matter of the appeal before the

C.I.T.(A).

Factually, in this case, the doctrine

merger

could not have been applied by the Tribunal to

that

part

the order;

which was

not

subject

matter indicated, so

exclude

revisional jurisdiction of the Commissioner of

Income-tax under section 263 of the Act.

22.

In the above view of the matter, both the

questions

referred

for our opinion are liable to

answered in the negative i.e.against the assessee and

in favour of Revenue.

Reference in terms of this order stands

answered

and

matter

stands

remitted

back

the

Tribunal for decision in accordance with law. No

order as to costs.

(A.S.AGUIAR, (A.S.AGUIAR, (A.S.AGUIAR, J.) J.) J.)

(V.C.DAGA, (V.C.DAGA, (V.C.DAGA, J.) J.) J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:38:10 Powered by TCPDF (www.tcpdf.org)