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CASE NO.: Appeal (civil)  3301 of 2007

PETITIONER: Commissioner of Income Tax, Chennai

RESPONDENT: M/s. Alagendran Finance Ltd.

DATE OF JUDGMENT: 27/07/2007

BENCH: S.B. Sinha & Harjit Singh Bedi

JUDGMENT: J U D G M E N T  

CIVIL APPEAL NO.  3301                OF 2007 [Arising out of  SLP (Civil) No. 18372 of 2006]

S.B. SINHA, J :          1.      Leave granted. 2.      Whether for the purpose of computing the period of limitation  envisaged under Sub-section (2) of Section 263 of the Income Tax Act, 1961  (for short "the Act"), the date of order of assessment or that of the  reassessment, is to be taken into consideration is the question involved in  this appeal which arises out of a judgment and order dated 18.01.2006  passed by a Division Bench of the High Court of Judicature at Madras  passed in Income Tax Appeal No. 1384 to 1386 of 2005. 3.      The said question arises on the following facts :         Respondent is a company incorporated under the Indian Companies  Act, 1956.  It filed its returns for assessment under the Act for the  assessment years 1994-95, 1995-96 and 1996-97 on 23.11.1994, 27.11.1995  and 26.11.1997 respectively.  Assessment for the year 1994-95 was  completed on 27.02.1997 and those of the Assessment Years 1995-96 and  1996-97 were completed on 12.05.1997 and 30.03.1998 respectively.  In the  said orders of assessment, the assessee’s return under the Head ’Lease  Equalization Fund’ was accepted.  However, proceedings for reassessment  were initiated by the assessing officer on 05.03.2004.  Orders of  reassessment were passed on 28.03.2002.  Proceedings for reassessment,  however, were initiated only in respect of three items, viz., (i), the expenses  claimed for share issue, (ii), bad and doubtful debts and (iii), excess  depreciation on gas cylinders and goods containers.   

       Although the assessee’s return in respect of lease equalization  was  not the subject matter of the reassessment proceedings, the Commissioner of  Income Tax purported to invoke his revisional jurisdiction in terms of  Section 263 of the Act and by an order dated 29.03.2004 held as under:  

"5. In short, from the example given it is the  depreciation on the leased assets that is clamed as  Book Depreciation and disallowed in the  computation of income, the assessee sought to  claim in the form of Lease Equalisation from the  lease rentals by virtue of the guidelines note of the  Institute of Chartered Accountants of India. ***             ***             *** 7. Since the assessee has not given the complete  details, the method adopted by the assessee in  arriving at the correct profit for the corresponding  year cannot be checked.  I clearly feel that the  orders by the Assessing Officer are prejudicial to  the interest of the revenue as the lease rentals had

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not been properly brought to tax.  Hence, all the  three assessments are reopened u/s 263 and the  Assessing Officer is directed to check and assess  the lease rentals from Lease equalisation fund, if  any, and to bring to tax the same for all the above  three years."

       Pursuant to or in furtherance of the said order, reassessment  proceedings were carried out in respect of the aforementioned assessment  years by the Assistant Commissioner of Income Tax only in respect of the  income on equalization reserve stating: "I have considered the various arguments of the  assessee’s representative and I am satisfied that  the deduction made from the gross lease rent is  only a provisional and not an actual expenditure  and therefore the same is to be disallowed and  added to the income returned\005"

       The matter came up for consideration before the Income Tax  Appellate Tribunal wherein the contention of the respondent that the said  purported proceedings under Section 263 of the Act were barred by  limitation, found favour with, opining: "6. We have carefully gone through the record and  considered the rival submissions.  In our view, the  contentions of the Assessee deserve to succeed.   The facts of the case clearly show the claim of  lease equalisation fund, if at all accepted, is an  error committed by the Assessing Officer in his  order passed under Sec. 143 (3) of the Act for the  Asst. Year 94-95 on 27.2.97, for the Asst. Year 95- 96 on 12.5.97 and for the Asst. Year on 30.3.98.   The Assessee, no doubt, took up these assessments  in appeal before the CIT (Appeals) and thereafter  the assessment itself was subject to proceedings  under Sec. 148 and ultimately, the orders of  reassessment were framed on 28.3.2002.  All the  subsequent events are in respect of matters other  than the allowance of lease equalization fund.  In  other words, the error, if any, has been committed,  it was done in the order of the Assessing Officer  passed Asst. the year 97-98.  Therefore, these  orders very much subsist despite the subsequent  proceedings under sec. 148 of the Act."

       The learned Tribunal referred to several decisions of this Court and  other High Courts for arriving inter alia at the following conclusion: "8. In the light of the above decisions and  authorities, we are of the opinion that the  impugned order passed under Sec. 263 on  29.03.2004 are clearly barred by limitation with  reference to the orders passed under Sec. 143 (3)  by the Assessing Officer for the above Asst. years  on 27.2.97; 25.12.97 and 30.3.98 respectively.   Accordingly, the orders of the CIT under Sec. 263  are vacated and the ground taken by the Assessee  is allowed."

       Revenue preferred an appeal thereagainst before the High Court  which was dismissed by a Division Bench stating: "2. Learned Senior Central Government Standing  Counsel submits that the very same issue has been  raised and decided by the Court against the  Revenue in the case of CWT Vs. A.K. Thanga  Pillai (252 ITR 260)."

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       Aggrieved by and dissatisfied therewith, the Revenue is before us. 4.      Mr. Rajiv Dutta, learned senior counsel appearing on behalf of the  appellant in support of the appeal inter alia would submit that having regard  to the Explanation appended to Sub-section (3) of Section 263 of the Act as  also in view of the doctrine of merger, the Tribunal committed a manifest  error in passing the impugned judgment insofar as it failed to take into  consideration that in law computation of period of limitation was to  commence from the date of passing of the order of reassessment viz.,  28.03.2002 and not from the date of the initial assessment, and as the  proceeding under Section 263 was initiated on 05.03.2004, the provision of  sub-section (2) of Section 263 would not be attracted in the instant case.   Strong reliance in this behalf has been placed on Hind Wire Industries Ltd.  v. Commissioner of Income Tax [212 ITR 639]. 5.      Mr. Anil Diwan, learned senior counsel appearing on behalf of the  respondent \026 assessee, on the other hand, submitted: (i)     The income head ’lease equalization fund’ being not the subject  matter of the reassessment proceedings, the doctrine of merger  will have no application in the instant case and in that view of  the matter, the impugned order of the Tribunal as also the High  Court is unassailable. (ii)    The issue has rightly been held by the High Court to be  squarely covered by the decision of the Madras High Court in  Commissioner of Wealth-Tax v. A.K. Thanga Pillai [252 ITR  260]. 6.      Before embarking upon the rival contentions of the parties raised  before us, we may notice the relevant part of Section 263 of the Act which is  as under: "263. Revision of orders prejudicial to revenue  -  (1) The Commissioner may call for and examine  the record of any proceeding under this Act, and if  he considers that any order passed therein by the   Assessing Officer is erroneous in so far as it is  prejudicial to the interests of the revenue, he may,  after giving the assessee an opportunity of being  heard and after making or causing to be made such  inquiry as he deems necessary, 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. Explanation.-For the removal of doubts, it is  hereby declared that, for the purposes of this sub- section,- (a) ***                 ***                     ***  (b) ***                        ***                     *** (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.   (2) No order shall be made under sub-section (1)  after the expiry of two years from the end of the  financial year in which the order sought to be  revised was passed.  (3) Notwithstanding anything contained in sub- section (2), an order in revision under this section  may be passed at any time in the case of an order  which has been passed in consequence of, or to  give effect to, any finding or direction contained in  an order of the Appellate Tribunal, the High Court  or the Supreme Court. Explanation.-In computing the period of limitation

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for the purposes of sub-section (2), the time taken  in giving an opportunity to the assessee to be  reheard under the proviso to section 129 and any  period during which any proceeding under this  section is stayed by an order or injunction of any  court shall be excluded."

7.      A bare perusal of the order passed by the Commissioner of Income  Tax would clearly demonstrate that only that part of order of assessment  which related to lease equalization fund was found to be prejudicial to the  interest of the Revenue.  The proceedings for reassessment have nothing to  do with the said head of income.  Doctrine of merger, therefore, would not  apply in a case of this nature. 8.      Furthermore, Explanation (c) appended to Sub-section (1) of Section  263 of the Act is clear and unambiguous as in terms thereof doctrine of  merger applies only in respect of such items which were the subject matter  of appeal and not which were not.  The question came up for consideration  before this Court in Commissioner of Income Tax v. Sun Engineering  Works P. Ltd. [198 ITR 297].  Therein the assessee raised a contention that  once jurisdiction under Section 147 of the Act is invoked, the whole  assessment proceeding became reopened, which was negatived by the court  opining: "Section 147, which is subject to Section 148,  divides cases of income escaping assessment into  two clauses i.e. viz. (a) those due to the non- submission of return of income or non-disclosure  of true and full facts and (b) other instances.  Explanation (1) defines as to what constitutes  escape of assessment. In order to invoke  jurisdiction under Section 147(a) of the Act, the  ITO must have reason to believe that some income  chargeable to tax of an assessee has escaped  assessment by reason of the omission or failure on  the part of the assessee either to make a return  under Section 139 for the relevant assessment year  or to disclose fully and truly material facts  necessary for the assessment for that year. Both the  conditions must exist before an ITO can proceed to  exercise jurisdiction under Section 147(a) of the  Act. Under Section 147(b) the Income-tax Officer  also has the jurisdiction to initiate proceedings for  reassessment where he has reason to believe, on  the basis of information in his possession, that  income chargeable to tax has been either under- assessed or has been assessed at too low a rate or  has been made the subject of excessive relief under  the Act or excessive loss or depreciation allowance  has been computed. In either case whether the  Income-tax Officer invokes his jurisdiction under  Clause (a) or Clause (b) or both, the proceedings  for bringing to tax an ’escaped assessment’ can  only commence by issuance of a notice under  Section 148 of the Act within the time prescribed  under the Act. Thus, under Section 147, the  assessing officer has been vested with the power to  "assess or reassess" the escaped income of an  assessee. The use of the expression "assess or  reassess such income or recompute the loss or  depreciation allowance" in Section 147 after the  conditions for reassessment are satisfied, is only  relatable to the preceding expression in Clauses (a)  and (b) viz., "escaped assessment". The term  "escaped assessment" includes both "non- assessment" as well as "under assessment". Income  is said to have "escaped assessment" within the

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meaning of this section when it has not been  charged in the hands of an assessee in the relevant  year of assessment. The expression "assess" refers  to a situation where the assessment of the assessee  for a particular year is, for the first time, made by  resorting to the provisions of Section 147 because  the assessment had not been made in the regular  manner under the Act. The expression "reassess"  refers to a situation where an assessment has  already been made but the Income-tax Officer has,  on the basis of information in his possession,  reason to believe that there has been under  assessment on account of the existence of any of  the grounds contemplated by the provisions of  Section 147(b) read with the Explanation (I)  thereto."

9.      We may at this juncture also notice the decision of this Court in Hind  Wire Industries Ltd (supra) wherein the decision of this Court in V.  Jaganmohan Rao v. CIT and CEPT [75 ITR 373] interpreting the provisions  of Section 34 of the Act was reproduced which reads as under: "Section 34 in terms states that once the Income- tax officer decides to reopen the assessment, he  could do so within the period prescribed by serving  on the person liable to pay tax a notice containing  all or any of the requirements which may be  included in a notice under section 22(2) and may  proceed to assess or reassess such income, profits  or gains.  It is, therefore, manifest that once  assessment is reopened by issuing a notice under  sub-section (2) of section 22, the previous  underassessment is set aside and the whole  assessment proceedings start afresh.  When once  valid proceedings are started under section  34(1)(b), the Income-tax Officer had not only the  jurisdiction, but it was his duty to levy tax on the  entire income that had escaped assessment during  that year."

10.     There may not be any doubt or dispute that once an order of   assessment is reopened, the previous underassessment will be held to be set  aside and the whole proceedings would start afresh but the same would not  mean that even when the subject matter of reassessment is distinct and  different, the entire proceeding of assessment would be deemed to have been  reopened.   11.     In Sun Engineering Works P. Ltd (supra) also, V. Jaganmohan Rao  (supra) was noticed stating: "The principle laid down by this Court in  Jaganmohan Rao’s case, therefore, is only to the  extent that once an assessment is validly reopened  by issuance of a notice under Section 22(2) of the  1922 Act (corresponding to Section 148 of the  Act) the previous under assessment is set aside and  the ITO has the jurisdiction and duty to levy tax on  the entire income that had escaped assessment  during the previous year\005The judgment in  Jaganmohan Rao’s case, therefore, cannot be read  to imply as laying down that in the reassessment  proceedings validly initiated, the assessee can seek  reopening of the whole assessment and claim  credit in respect of items finally concluded in the  original assessment. The assessee cannot claim  recomputation of the income or redoing of an  assessment and be allowed a claim which he either  failed to make or which was otherwise rejected at

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the time of original assessment which has since  acquired finality. Of course, in the reassessment  proceedings it is open to an assessee to show that  the income alleged to have escaped assessment has  in truth and in fact not escaped assessment but that  the same had been shown under some  inappropriate head in the original return, but to  read the judgment in Jaganmohan Rao’s case, as if  laying down that reassessment wipes out the  original assessment and that reassessment is not  only confined to "escaped assessment" or "under  assessment" but to the entire assessment for the  year and starts the assessment proceeding de novo  giving the right to an assessee to reagitate matters  which he had lost during the original assessment  proceeding, which had acquired finality, is not  only erroneous but also against the phraseology of  Section 147 of the Act and the object of  reassessment proceedings. Such an interpretation  would be reading that judgment totally out of  context in which the questions arose for decision in  that case. It is neither desirable nor permissible to  pick out a word or a sentence from the judgment of  this Court, divorced from the context of the  question under consideration and treat it to be the  complete ’law’ declared by this Court. The  judgment must be read as a whole and the  observations from the judgment have to be  considered in the light of the questions which were  before this Court. A decision of this Court takes its  colour from the questions involved in the case in  which it is rendered and while applying the  decision to a later case, the courts must carefully  try to ascertain the true principle laid down by the  decision of this Court and not to pick out words or  sentences from the judgment, divorced from the  context of the questions under consideration by  this Court, to support their reasonings\005"

       It was furthermore held: "As a result of the aforesaid discussion, we find  that in proceedings under Section 147 of the Act,  the Income Tax Officer may bring to charge items  of income which had escaped assessment other  than or in addition to that item or items which have  led to the issuance of notice under Section 148 and  where ressessment is made under Section 147 in  respect of income which has escaped tax, the  Income Tax Officer’s jurisdiction is confined to  only such income which has escaped tax or has  been under-assessed and does not extend to  revising, reopening or reconsidering the whole  assessment or permitting the assessee to reagitate  questions which had been decided in the original  assessment proceedings. It is only the under- assessment which is set aside and not the entire  assessment when reassessment proceedings are  initiated. The Income Tax Officer cannot make an  order of reassessment inconsistent with the original  order of assessment in respect of metters which are  not the subject-matter of proceedings under  Section 147\005" 12.     We may at this juncture also take note of the fact that even the  Tribunal found that all the subsequent events were in respect of the matters  other than the allowance of ’lease equalization fund’.  The said finding of

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fact is binding on us.  Doctrine of merger, therefore, in the fact situation  obtaining herein cannot be said to have any application whatsoever.  It is not  a case where the subject matter of reassessment and subject matter of  assessment were the same.  They were not. 13.     It may be of some interest to notice that a similar contention raised at  the instance of an assessee was rejected by a 3-Judge Bench of this Court in  Commissioner of Income-Tax v. Shri Arbuda Mills Ltd. [231 ITR 50].  This  Court took note of the amendment made in Section 263 of the Act by the  Finance Act, 1989 with retrospective effect from June 1, 1988, inserting  Explanation (c) to Sub-section (1) of Section 263 of the Act stating: "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."

       We, therefore, are clearly of the opinion that in a case of this nature,  the doctrine of merger will have no application. 14.     The Madras High Court in A.K. Thanga Pillai (supra), in our opinion,  has rightly considered the matter albeit under Section 17 of the Wealth Tax  Act, 1957 which is in pari materia with the provisions of the Act.  Relying  on Sun Engineering Works P. Ltd (supra), it was held: "Under section 17 of the Wealth-tax Act, 1957,  even as it is under section 147 of the Income-tax  Act, proceedings for reassessment can be initiated  when what is assessable to tax has escaped  assessment for any assessment year.  The power to  deal with underassessment and the scope of  reassessment proceedings as explained by the  Supreme Court in the case of Sun Engineering  [1992] 198 ITR 297, is in relation to that which  has escaped assessment, and does not extend to  reopening the entire assessment for the purpose of  redoing the same de novo.  An assessee cannot  agitate in any such reassessment proceedings  matters forming part of the original assessment  which are not required to be dealt with for the  purpose of levying tax on that which had escaped  tax earlier.  Cases of underassessment are also  treated as instances of escaped assessment. The order of reassessment is one which deals with  the assessment already made in respect of items  which are not required to be reopened, as also  matters which are required to be dealt with in order  to bring what had escaped in the earlier order of  assessment, to assessment.  An assessee who has  failed to file an appeal against the original order of  assessment cannot utilise the reassessment  proceedings as an occasion for seeking revision or  review of what had been assessed earlier.  He may  only question the extent of the reassessment in so  far as the escaped assessment is concerned. The Revenue is similarly bound\005"

       The same principle was reiterated by a Division Bench of the Calcutta  High Court in Commissioner of Income-Tax v. Kanubhai Engineers (P.) Ltd.  [241 ITR 665].

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15.     We, therefore, are clearly of the opinion that keeping in view the facts  and circumstances of this case and, in particular, having regard to the fact  that the Commissioner of Income Tax exercising its revisional jurisdiction  reopened the order of assessment only in relation to lease equalization fund  which being not the subject of the reassessment proceedings, the period of  limitation provided for under Sub-section (2) of Section 263 of the Act  would begin to run from the date of the order of assessment and not from the  order of reassessment.  The revisional jurisdiction having, thus, been  invoked by the Commissioner of Income Tax beyond the period of  limitation, it was wholly without jurisdiction rendering the entire proceeding  a nullity.   16.     The Tribunal and the High Court, therefore, in our opinion were  correct in passing the impugned judgment.  The appeal, therefore, being  devoid of any merit is dismissed with costs.  Counsel’s fee assessed at Rs.  25,000/-.