TMI Blog1993 (1) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 32A(1) and additional depreciation under section 32(1)(iia) of the Income-tax Act, 1961, on a computer purchased by the assessee during the previous year relevant to the said assessment year. The order of the Income-tax Officer was found by the Commissioner of Income-tax to be erroneous and prejudicial to the interests of the Revenue. He, therefore, revised the order of the Income-tax Officer under section 263 of the Income-tax Act, 1961, and directed the Income-tax Officer to make a fresh assessment order. The Commissioner of Incometax further issued certain guidelines for finding out if the assessee was entitled to investment allowance and additional depreciation. Being aggrieved, the assessee appealed to the Tribunal and contended that the assessment order was appealed against before the Commissioner of Income-tax (Appeals) and the appeal was decided by the Commissioner of Income-tax (Appeals) on January 17, 1984. The question of grant of investment allowance and additional depreciation on the computer, though not the subject-matter of appeal, could not survive as the entire assessment order merged in the appellate order of the Commissioner of Income-tax (Appeals) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e word 'business' used in section 32A(2)(iii) is significant. The business of manufacture cannot be restricted to the actual process of manufacture. We, therefore, find that the Income-tax Officer did not make a mistake in allowing investment allowance and additional depreciation on the computer. The order of the Commissioner of Income-tax is, therefore, reversed and that of the Incometax Officer is restored." It has been submitted on behalf of the Revenue that the doctrine of merger, it is well-settled, is not to be applied mindlessly. Its application depends upon the nature of the orders in question. In this connection reference was made to the decision of the Supreme Court in the case of State of Madras v. Madurai Mills Co. Ltd., AIR 1967 SC 681. It has been submitted on behalf of the Revenue that the Income-tax Act, 1961, does not bar the Commissioner from exercising his power under section 263 merely because the prejudicial order of the Income-tax Officer is the subject-matter of appeal. In this connection, reference was made to the decision of the Madras High Court in the case of CIT v. EIMCO K C. P. Ltd. [1984] 147 ITR 603. It has also been argued that the Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the original order of assessment loses its finality and at this stage it is no longer open to revision by the Commissioner. On behalf of the Revenue, our attention was drawn to the judgment and decision in the case of State of Madras v. Madurai Mills Co. Ltd., AIR 1967 SC 681 ; [1967] 19 STC 144. In the aforesaid case, the assessee filed a revision petition against the assessment by the Deputy Commercial Tax Officer. The Deputy Commissioner of Commercial Taxes dismissed the revision on August 21, 1954. On August 4, 1958, the Board of Revenue issued notice to assessee stating that it proposed to revise the assessment of the Deputy Commercial Tax Officer as it excluded certain taxable amounts. The assessee took an objection that the proceeding was time barred under section 12(4)(b). The defence of the Revenue was that the order revised by the Board was the revisional order of the Deputy Commissioner dated August 21, 1954, and not the assessment order of the Deputy Commercial Tax Officer, dated November 28, 1952. It was held that the subject-matter of the revisional proceedings before the Board was the assessment order dated November 28, 1952, and the revision being beyond four yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal accepted the assessee's contention that as an appeal against the assessment order was pending, the Commissioner was debarred from exercising his revisional powers. On a reference, it was held : (i) that the subscription for shares otherwise than for cash could not have the effect of making the non-cash consideration an item of the company's expenditure. Even otherwise, the admissibility of expenditure as a deduction would arise only where the company after formation gets going with its business. On the allotment of shares to the foreign company, the assessee-company could not be treated as having incurred or laid out any expenditure for the purpose of its business. As no expenditure in the trading sense of the term had arisen in the instant case, there was no question of the further issue as to whether it would be a capital or revenue expenditure. Further, the offer of the know-how by the foreign company to the assessee only represented its way of discharging its capital contribution for the floatation of the assessee-company and in that sense it could involve no expenditure. The Tribunal was, therefore, in error and the sum of Rs. 2,35,000 was not revenue expenditure. (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject-matter of appeal before the Appellate Assistant Commissioner, the merger of the order of assessment was only in respect of matters which were taken up in appeal. The question of charging interest was not involved in the appeal. Accordingly, the Commissioner could direct the Income-tax Officer to charge interest under section 217. It appears that this decision was distinguished in General Beopar Co. P Ltd.'s case [1987] 167 ITR 86 (Cal) in the following manner (at page 94) : '(g) Singho Mica Mining Co. Ltd. V. CIT [1978] 111 ITR 231 (Cal). In this case, it was held by a Division Bench of this court to which I was a party that where there was an appeal from an order of assessment and the question of levy of interest could riot have been the subject-matter of the appeal, the order appealed from could not be held to have merged with the order passed in the appeal on the question of levy of interest. Even after the order was passed in appeal, the Commissioner would be competent to revise the assessment on the question of interest.' In Singho Mica Mining Co. Ltd.'s case [1978] 111 ITR 231 (Cal), the Income-tax Officer did not charge interest in the assessment. The assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process of assessment, it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all. This court has also held in CIT v. Bengal jute Mills Co. Ltd. (No. 1) [1987] 165 ITR 631, that the assessee could raise the question regarding levy of interest under section 139 before the Appellate Assistant Commissioner. It has also been held in CIT v. United Provinces Electric Supply Co. Ltd. [1987] 166 ITR 565 (Cal) that the assessee is entitled to raise an objection to the charging of interest under section 215 in the appeal before the Appellate Assistant Commissioner. Therefore, the charging of interest can be the subject-matter of appeal before the appellate authority. In our view, the question is not whether the question involved before the Commissioner of Income-tax could be the subject-matter of appeal before the appellate authority or whether the Commissioner directed the inclusion of certain income originally omitted from the assessment. Where the assessee is not aggrieved by a part of the order of the Income-tax Officer, such determination would not be the subject-matter of appeal. Therefore, in such a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of the Commissioner to revise the assessment. The doctrine of merger can only operate on matters which are the subject-matter of decision by the first appellate authority. It cannot have any application to matters which are not being taken on appeal either by the assessee or which had not been considered by the Appellate Assistant Commissioner which, in other words, have not or could not have been touched upon by the appellate authority. A narrow construction of the power of the Commissioner under section 263 will defeat the purpose for which the provision was enacted. In our judgment, the order of the Income-tax Officer will merge with the order of the first appellate authority only with respect to that part of the order of the Income-tax Officer which relates to the matters considered and decided by the appellate authority. Thus, there will be partial merger and not merger of the whole order. By the Finance Act, 1988, the provisions of section 263 have been amended to clarify that the Commissioner would be competent to revise an order of assessment passed by an Assessing Officer on all matters except those that have been considered and decided in appeal. The Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year, it appears to us from the order of the Tribunal that there is no dispute that the computer purchased by the assessee is not part of the manufacturing machinery. According to the learned advocate for the assessee, the computer is utilised for accounting purposes, that is to say, for maintaining the stock of raw material and the finished goods and so also for other accounts of the business of the assessee-company. It is also admitted that, in the relevant order, no outside job work was done by the assessee through this computer. The only contention of the assessee was that the said computer was the tool of the trade of the assessee. It was submitted that the manufacturing process becomes easy and convenient with the help of a computer through which the accounts of raw materials and finished goods are maintained. It is also contended that a computer cannot be treated as an office appliance. The Division Bench of the Bombay High Court in the case of CIT v. IBM World Trade Corporation [1981] 130 ITR 739 held that, even if the computer is taken outside the ambit of office appliances, the assessee cannot get investment allowance unless it is established that the computer is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be employed directly in the manufacture or production of goods, etc. The courts have also made a significant distinction between tools of trade and the setting in which the trade is conducted. If a particular item can properly be called a tool of trade, then it is plant. If, on the contrary, a particular item, even though called plant in popular parlance, will not be plant if it is just a part of the setting in which the trade is conducted. For example, an air-conditioner installed in the Office premises of an assessee cannot be called a plant so as to be eligible to investment allowance and additional depreciation. If, on the contrary, an air-conditioner is indispensible for the manufacture of, say, medicines, then the air-conditioner becomes the tool of the assessee's trade and can properly be regarded as plant for purposes of investment allowance and additional depreciation. In the case of CIT v. I. B. M. World Trade Corporation [1981] 130 ITR 739, it was held by the Division Bench of the Bombay High Court that the word "apparatus" is a word of much wider import than the word "appliances" and the definition of "plant" in section 43(3) of the Incometax Act, 1961, shows that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. In view of the varied functions which the "system" is capable, of performing, data processing machines cannot be classified as "office appliances" and are eligible for allowance of development rebate under section 33(1) of the Income-tax Act, 1961 (corresponding to section 10(2)(vib) of the Indian Income-tax Act, 1922). The same principle has been reiterated and followed in the subsequent assessment order by another Division Bench of the Bombay High Court in respect of the same assessee, in the case of CIT v, I. B. M. World Trade Corporation [1986] 161 ITR 673, wherein it was held that data processing machines are not office appliances and are entitled to development rebate under section 33 of the Income-tax Act, 1961. Accordingly, section 263 of the Act could be invoked to set aside the impugned assessment order with direction to the Income-tax Officer to make a fresh assessment in accordance with law. In view of the position in law that the assessee cannot get investment allowance unless it is established that the computer is used for the purpose of business of manufacture or production of any article or thing and, in view of the admitted facts of the instant case tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld, the said proceeding would have become abortive. This was also a factor that largely weighed with that Bench in coming to the decision as it did. This factual aspect has already been stressed by my learned brother, Sen J. But, essentially, the said decision did not rule out partial application of the doctrine of merger. In Hamilton and Co.'s case [1991] 187 ITR 568, the Division Bench of this court examined threadbare the decision in General Beopar's case [1987] 167 ITR 86 (Cal) as would appear from the following extract (at page 576) : " It appears to us that there is apparently a conflict between the decision of this court in Singho Mica Mining Co. Ltd.'s case [1978] 111 ITR 231, and the decision in General Beopar Co. Pvt. Ltd.'s case [1987] 167 ITR 86 (Cal). In Singho Mica Mining Co. Ltd.'s case [1978] 111 ITR 231, this court held that where the Income-tax Officer omitted to charge interest under section 217 and the Commissioner, in revision, directed the Incometax Officer to compute and recover interest, although, in the meantime, the order of assessment was the subject-matter of appeal before the Appellate Assistant Commissioner, the merger of the order of assessment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the decision by the Full Bench of the Madhya Pradesh High Court in Mandsaur Electric Supply Co. Ltd.'s case [1983] 140 ITR 677. The said Full Bench construed the implication of the ratio in Singho Mica Mining's case [1978] 111 ITR 231 (Cal) as laying down the proposition that since the question of charging interest was not involved in the appeal, the same issue could be open for revision under section 263. Appealability or non-appealability is not a material consideration. In any case, the premise in General Beopar's case [1987] 167 ITR 86 (Cal) that chargeability of interest is not appealable has become obsolete because of the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961. The Supreme Court held that the levy of interest can be disputed in appeal provided the denial is total. My learned brother, Sen J., has already extracted a passage from the decision in State of Madras v. Madurai Mills Co. Ltd., AIR 1967 SC 681, which throws light on the essential nature of the doctrine of merger. The said passage bears repetition (headnote) : "The doctrine of merger is not a doctrine of rigid and universal application and it canno ..... X X X X Extracts X X X X X X X X Extracts X X X X
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