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March 25, 2019
All Articles by: Mr. M. GOVINDARAJAN       View Profile
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The reassessment proceedings are initiated to assess the income which had escaped assessment during the original assessment proceedings.  Originally whenever a reassessment order is made, in that eventuality the original assessment order would cease to exist.  There can be only one assessment.  Once a particular income had been assessed and subsequently it is found that certain income has escaped assessment, the Assessing Officer is empowered to issue notice under section 148 of the Income Tax Act 1961 and bring the escaped amount or other amount to tax which has been found taxable during reassessment proceedings.  In the reassessment proceeding, the income which had already been determined or assessed to tax is also added to the escaped income.

Invalid reassessment

If the reassessment proceedings are held to be invalid by the Tribunal or a Court of law, it cannot be said that the original assessment stands obliterated.  In other words, if the initiation of reassessment is held to be invalid the assessee would revert back to the situation where he original stood i.e., the original assessment order would revive.  The said doctrine would apply only in a situation where the subsequent reassessment order been held to be valid in law.               

Doctrine of merger

Normally doctrine of merger states that when an order is passed by a higher authority then the order passed by the lower authorities stands merged with the order of higher authorities but this is not universal principle for every situation.

In ‘Commissioner of Income Tax v. Shri Arbuda Mills Limited’ – 1996 (1) TMI 11 - SUPREME COURT the assessment was completed under section 143(3) of the Act.  The net business loss was computed at ₹ 3.61 lakhs and the income under the head ‘capital gains’ was determined at ₹ 38,874.  The Income Tax Officer made certain disallowances and while computing the loss and income as above but had accepted three claims as detailed below-

  • deduction of a sum of ₹ 23,82,621/- by way of provisions of gratuity;
  • depreciation on ₹ 4,21,000/- which was paid by the assessee to the United Textile Industries as consideration for transfer of installed property of 17,480 spindles and 400 looms of old Manek Chowk Mills;
  • loss on account of difference in exchange rate which was referable of the purchase of machinery etc., as revenue expenditure.

The assessee filed an appeal in respect of item for which the additions were made.  An order was passed under section 263 in respect of allowance of the above three items.  Therefore, the question arose before the Supreme Court whether these three items merged with the appellate order.  The Supreme Court referred to the amendment in section 263 of the Act by the Finance Act 1989 with retrospective effect from 01.06.1988.  According to the amended section where any order passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after 01.06.1988, the powers of Commission 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.

The Supreme Court held that it becomes clear that the doctrine of merger has limited application.   It would not lead to the conclusion that every item in one order would get merged in another order if the same is appealed or other order is passed in accordance with law.  Therefore, clearly whatever income is assessed under section 143(3) will stand and would not get merged in the reassessment order passed under section 147 if the latter reassessment order is annulled because of some reason.

Restoration of original assessment order

In ‘Patiala Improvement Trust v. Assistant Commission of Income tax and another’ – 2018 (11) TMI 272 - PUNJAB AND HARYANA HIGH COURT the assessee filed a NIL return for the assessment year 2008 – 09.  The Assessing Officer made an addition of ₹ 11,00,000/- and passed an order under section 143(3).  The assessee filed an appeal against this order.  During the pendency of the said appeal, the assessment was re-opened under section 147 of the Act by the Assessing Officer.  The Assessing Officer, vide his re-assessment order, assessed the income of the assessee at ₹ 7,45,80,229/-.  Against this order the assessee filed an appeal before the Commissioner (Appeals).  The Commissioner (Appeals) dismissed the appeal challenging the reassessment order.  At the same time the Commissioner (Appeals) allowed the appeal filed against the original assessment order.

Being aggrieved by the orders the assessee filed appeal before the Tribunal.  The Tribunal allowed the appeal and annulled the reassessment proceedings as well as the reassessment order.           Still dissatisfied, the assessee filed an appeal before the Tribunal against the setting aside of the reassessment proceedings and that of reviving the original assessment order.  The Tribunal dismissed the appeal.

The Tribunal held that if the contention of the assessee is accepted then it would lead to totally undesired wild results.  The Tribunal gave an example for this.  For example if the assessee files return declaring income of ₹ 1 crore and an addition of ₹ 25 lakhs is made then the assessed income would be ₹ 1.25 crores under section 143(3).  Let us say later on an item of income is found to have escaped for ₹ 10 lakhs and notice is issued under section 148 to bring such item of escaped income into tax.  In reassessment order the  income was assessed at ₹ 1.35 crores.   Let us further say that such reassessment is found without jurisdiction of reasons or the issue is time barred and such reassessment is annulled.  Then if it is held that since reassessment order has effaced, the original order, then the result would be that the assessee would not be lible to pay the tax on admitted income of ₹ 1 crore as well as the addition made on ₹ 25 lakhs.  This is totally against the scheme of the Act.  The assessee has a right to challenge the addition of ₹ 25 lakhs.  But if the interpretation made by the assessee is accepted, it would lead to undesired wild results which are totally against the scheme of the Act and, therefore, the same cannot be accepted.  

Against the order of the Tribunal, the assessee filed appeal before the High Court.  The assessee claimed the following substantial questions of law-

  • Whether there could be two assessment orders for one assessment year at a given point of time?
  • Whether the original assessment order could have been received by the Tribunal, once it was defaced on the date of passing of the reassessment order?
  • Whether the impugned orders are sustainable?
  • Whether the Commissioner of Income Tax (Appeals) could pass two appellate orders for the same assessment year on the same date?

The High Court, after hearing both the parties, did not find any merit in the appeals.  No illegality or perversity could be pointed out by the assessee in the findings recorded by the Tribunal.  No question of law, much less substantial question of law arise in these appeals.


By: Mr. M. GOVINDARAJAN - March 25, 2019



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