Introduction
Doctrine of Merger is a common law doctrine which is founded on the principles of propriety in the hierarchy of justice delivery system. The underlying logic of Doctrine of Merger is that there cannot be more than one decree or an operative order governing the same subject-matter at a given point of time. The Doctrine of Merger can be better understood from the following observations of the Supreme Court in a landmark decision in the case Kunhayammed v. State of Kerala[1].
- Where an appeal or revision is provided before a superior forum against an order passed by a Court, Tribunal or any other authority and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges with the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law.
- The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge.
With this background on the Doctrine of Merger, the author in this Article will deal with the interplay between the Doctrine of Merger and certain provisions of the Income Tax Act, 1961 (“IT Act”) namely Sections 147, 263 and 154.
Will an Order under Section 143(3) read with Section 147 merge with the whole order under Section 143(3)?
The Assessing Officer has been conferred powers under Section 147 of the IT Act to assess, reassess any income chargeable to tax if he has reasons to believe that any income chargeable to tax has escaped assessment. For example, let us take that an assessee filed his return of income for assessment year 2014-15 and the Assessing Officer makes certain additions in assessment under Section 143(3) of the IT Act on 30-03-2016. Subsequently, the assessee was subject to reassessment proceedings and additions were made on certain other issues which had no bearing on the issues that were subject matter of the original assessment order. Now, the question that comes up for consideration is whether the original order under Section 143(3) entirely merges with the subsequent order passed under Section 143(3) read with Section 147 of the IT Act.
The Supreme Court in CIT v. Alagendran Finance Ltd.[2] observed that when an order of assessment is reopened, the previous assessment 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 proceedings of assessment would be deemed to have been reopened. Following this decision of the Apex Court, the Bombay High Court in Ashoka Buildcon Ltd. v. ACIT[3] held that the Doctrine of Merger does not apply where the subject-matter of reassessment and of the original order of assessment is not one and the same. In other words, where reassessment is concluded on entirely different grounds, the original order of assessment under Section 143(3) would continue to be operative and it cannot be said that the original order would merge with the subsequent reassessment order.
Doctrine of Merger and the power conferred to the Commissioner of Income Tax under Section 263 of the IT Act
The above observation of non-application of Doctrine of Merger where the subject-matter of reassessment and of the original order of assessment is not the same has a bearing on the revisional jurisdiction that can be exercised by the Commissioner of Income tax under Section 263 of the IT Act as well.
Section 263 of the IT Act provides that the Principal Commissioner or Commissioner may call for and examine the record of any proceedings under the IT Act, and if he considers that any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may pass an order revising the same. It is also important to note that Section 263(2) provides that no order of revision shall be made after two years from the end of the financial year in which the order sought to be revised is passed.
Expanding the previously used example, let us say the order under Section 143(3) was passed on 30-03-2016 and sought to be reopened on 06-03-2017. The order under Section 143(3) read with Section 147 was passed on 28-12-2017. Subsequently, on 30-04-2019, the Commissioner issues a notice under Section 263 on the ground that the order passed on 28-12-2017 was erroneous and prejudicial to the interest of the revenue. Let us assume that the impugned notice under Section 263 adverted to issues which neither formed the subject-matter of the notice that was issued under Section 148 on 06-03-2017 nor of the order of reassessment which was passed on 28-12-2017. In other words, the jurisdiction under Section 263 was sought to be exercised with reference to issues which were unrelated to the grounds on which the original assessment was re-opened and reassessment was made.
In the above facts, the question that needs to be looked into is whether the period of limitation envisaged under Section 263(2) of the IT Act would commence from the date of order of assessment or that of the order of reassessment. The Supreme Court in Alagendran Finance (Supra) and the Bombay High Court in Ashoka Buildcon Ltd. ACIT (Supra) have held that where an assessment has been reopened under Section 147 in relation to a particular ground or in relation to certain specified grounds and subsequent to the passing of the order of reassessment, the jurisdiction under Section 263 is sought to be exercised with reference to issues which did not form the subject-matter of the order of reassessment, the period of limitation provided for in Section 263(2) would commence from the date of the order of assessment and not from the date on which the reassessment order has been passed.
Another issue that may be of relevance is that when an order of the Assessing Officer was subjected to appeal and had concluded with the order passed by the Commissioner (Appeals) for a subject-matter, will it be still open and available for the Commissioner to exercise his revisional jurisdiction under Section 263 to revise the order of the Assessing Officer on the same subject-matter.
The Guwahati High Court in PCIT v. Oil India[4] observed that, as provided under Clause (c) to Explanation 1 of Section 263(1), the Commissioner can invoke his powers conferred under Section 263 only in respect of:
- Erroneous portion of the order of the Assessing Officer which is prejudicial to the interest of the revenue and
- Such portion of the order not being a part of the consideration in any appeal filed before the Commissioner (Appeals).
Therefore, in a scenario where the Commissioner (Appeals) passes an order, the order of the Assessing Officer with respect to the said subject matter merges with the order of the Commissioner (Appeals) and therefore, Commissioner cannot exercise jurisdiction under Section 263 to revise the order of the Assessing Officer on that subject matter.
On the contrary, where an issue in the assessment order has neither been agitated before the Commissioner (Appeals) nor considered by him, in such a scenario the Doctrine of Merger will be inapplicable, i.e., that portion of the assessment order will not merge with the Order of the Commissioner (Appeals) and therefore, the Commissioner will have the jurisdiction under Section 263 to revise the assessment order with respect to that particular issue.
Doctrine of Merger and its applicability to orders passed under Section 154
Where an authority passes an order and subsequently decides to reconsider the same matter and passes a subsequent order, will the previous order merge with the subsequent order passed by the same authority? This aspect has been elaborately dealt by the High Court of Karnataka in Kothari Industrial Corporation Ltd. v. Agricultural Income Tax Officer[5] wherein it was observed that there are two circumstances where an authority has an occasion to reconsider his own order:
- By way of review; and
- By way of rectification
Normally, review is done by an authority where any new and important evidence is discovered, and rectification is done where there is any mistake apparent on the face of the record. Section 154 of the IT Act provides that with a view to rectifying any mistake apparent from record an income tax authority may amend any order passed by it under the provisions of the IT act or amend any intimation under Sections 143(1) or 200A(1) or 206CB(1) of the IT Act. When an application for rectification is accepted by the authority, the original order is ‘rectified’ or corrected. The High Court of Karnataka in Kothari Industrial Corporation made the following observations:
- ‘Rectification’ presupposes the continuance of the original order with the change incorporated and it is only a process by which an order which contains an error is set right.
- If the entire order is to be replaced by a new order by the same authority, such an order is not an ‘order of rectification’, but an ‘order of review’.
- When rectification is directed, there is no merger since there is no order into which the original order can merge into.
- When an order of rectification is made, the effect is that the original order has to be read subject to the corrections/modifications made by the rectification. The correction is incorporated in the original order, as for example, where merely a figure is altered, or typographical correction is made.
Therefore, one may infer from the decision of the High Court that when an order passed by an authority is reviewed or rectified by the self-same authority, the Doctrine of Merger will be inapplicable.
The consequence of this can be in the calculation of the period of limitation under Section 154 of the IT Act. Section 154(7) provides that no amendment under Section 154 shall be made after expiry of four years from the end of the financial year in which the order sought to be amended was passed. The High Court has given a finding in the said decision that when an order of an authority is rectified by the said authority in regard to a specified issue or subject, the period of limitation for second rectification should be reckoned from the date of the original order, if the subject matter of the second rectification is different from the subject matter of the first rectification. However, if the second rectification is in regard to the same subject-matter as that of the first rectification, then the period of limitation should be reckoned from the date of the first rectification order.
Section 246A of the IT Act provides for various Orders against which an assessee or any deductor or any collector is aggrieved against can prefer an appeal to the Commissioner of Income-Tax (Appeals). This appeal needs to be filed within 30 days from the date of service of the Order to be appealed against. As stated above, if there is a rectification order under Section 154, the question that arises is - should the time limit of 30 days be reckoned from date of the original order or the date of the rectification order. If the subject-matter in the original order against which the appeal is sought to be filed has not been considered in the rectification order, then the time limit of 30 days should be counted from the date of the original order.
On the contrary, say for example, an addition is made in the Order passed under Section 143(3) with respect to an expenditure to an extent of Rs 5 lakhs. Subsequently, an order under Section 154 enhances the expenditure to Rs.10 lakhs. If the assessee is disputing the addition itself, then the original order under Section 143(3) has to challenged and the time limit of 30 days should be reckoned from the date of the original order. However, if the assessee only wishes to dispute the enhancement from Rs. 5 lakhs to Rs. 10 lakhs, then the rectification order under Section 154 alone can be challenged and the time limit of 30 days should be counted from the date of the rectification order.
Conclusion
The Income Tax Department has been conferred with wide powers to initiate various proceedings under the IT Act by issuing notices under Section 148, 263 or exercising powers to amend any order under Section 154. However, sufficient checks and balances have been placed by the Legislature in the IT Act by incorporating the provisions relating to time limits. In addition to these checks and balances, the Courts have also been playing a vital role by applying various common law doctrines such as the Doctrine of Merger on case to case basis to determine whether or not the powers under Section 263 and 154 have been exercised within the time limits prescribed and also in certain cases to determine if the appeals have been filed within the condonable period. As observed by the Apex Court in Kunhayammed v. State of Kerala (Supra), Doctrine of Merger is not a doctrine of universal or unlimited application. Therefore, it must be kept in mind that the Doctrine of Merger is not applicable in all scenarios and to all the Orders passed under the IT Act.
[The author is an Associate, Direct Tax team, Lakshmikumaran & Sridharan Attorneys, Chennai]
[1] (2000) 113 Taxman 470 (SC)
[2] (2007) 293 ITR 1 (SC)
[3] (2010) 191 Taxman 29 (Bombay)
[4] (2019) 103 taxmann.com 339
[5] (1998) 230 ITR 306 (Kar)
