PERIOD OF LIMITATION PROVIDED IN SECTION 154(7) VIS-À-VIS DOCTRINE OF MERGER

ISSUE FOR CONSIDERATION

Section 154 empowers the income-tax
authority to amend any order passed by it under the provisions of Act with a
view to rectifying any mistake apparent from the record. Sub-section (7) of
section 154 provides for the time limit within which the order can be amended
for this purpose. It provides that no amendment u/s. 154 shall be made after
the expiry of four years from the end of the financial year in which the order
sought to be amended was passed.

Under the Act, many times, more than one
order is framed in the case of the assessee for the same assessment year, . For
instance, the reassessment order is passed u/s. 147 after the assessment order
u/s. 143(3) has already been passed, or the order is passed for giving effect
to the order passed by the appellate authorities while adjudicating the appeal
filed against the order passed by the lower authorities. Quite often, the issue
arises in such cases about the limitation period; whether it should be counted
from the date of the original order or from the date of the subsequent order.

In the case of Hind Wire Industries Ltd.
vs. CIT 212 ITR 639, the Supreme Court has dealt with an  issue where an  order was sought to be rectified for the
second time, on an issue which was not the subject matter of the first order.
The Supreme Court in the facts of the case held that the word ‘order’ in the
expression ‘from the date of the order sought to be amended’ in section 154(7)
as it stood at the relevant assessment year had not been qualified in any way,
and it did not necessarily mean the original order. It could be any order,
including the amended or rectified order. Accordingly in the facts of the case,
it was held that the time limit as provided in section 154(7) should be
reckoned from the date of rectified order, and not from the date of original
order. This finding of the Supreme Court has been relied upon by the different
high courts to support the conflicting decisions delivered by them.    

Section 263 authorising Pr. CIT or CIT to
pass the order of revision also contains an express provision whereby an order
of revision is not allowed to be passed after the expiry of two years from the
end of the financial year in which the order sought to be revised was passed.
In the case of CIT vs. Alagendran Finance Ltd. 293 ITR 1, in the context
of section 263 , the Supreme Court held that the period of limitation provided
for under sub-section (2) of section 263 would begin to run from the date of
the order of original assessment and not from the order of reassessment, if the
issue on which the order was sought to be revised was not the subject matter of
the reassessment. It was held that the doctrine of merger will have no
application in such a case. In deciding the case, the Supreme Court had
referred to its earlier decision in the case of Hind Wire Industries Ltd.
(supra).

In a situation where the order giving effect
to an appellate order has been passed subsequent to the assessment order, and
the Assessing Officer wishes to rectify the mistakes arising from his original
order, the High Courts have given conflicting decisions in so far as the period
of limitation provided in section 154(7) is concerned. The Delhi High Court has
held that the period of limitation would begin from the date of order giving
effect to that appellate order. As against this, the Allahabad High Court has
held that it would begin from the date of original order which contained the
mistake apparent from the record.

Tony Electronics’ case:The issue first came up before the Delhi High Court in the case of CIT
vs. Tony Electronics Ltd. 320 ITR 378 (Delhi).

In this case, the assessment order passed
u/s. 143(3) had been challenged by filing an appeal before the Commissioner
(Appeals). The order was also passed  by
the Assessing Officer giving effect to the Commissioner (Appeals)’ directions.
Thereafter, the notice u/s.154 was issued for rectifying the mistake apparent
from record in the latest order. The relevant dates on which different types of
orders and notices issued were as follows:

In this case, while making the assessment
originally, the AO had discussed in the order that the depreciation amounting
to Rs. 6,28,842 claimed by the assessee was to be disallowed however, in the
final computation of assessed income, had under an error failed to reduce the
said amount of disallowed depreciation. The assessee not having any grievance,
had not filed any appeal against the said order proposing for the withdrawal of
depreciation. Therefore, the same was required to be reduced from the total
amount of depreciation of Rs. 54,86,162 and only the balance depreciation of
Rs. 48,57,200 was allowable to the assessee. The lapse of the AO had resulted
into under assessment by Rs. 12,57,688. In short, the mistake was that
disallowed depreciation, instead of being added to the income, was reduced from
the income, resulting in double deduction. The notice issued u/s.154 stated
that the amount of assessed income taken as the basis while passing the latest
order dated 23-7-2004 giving effect to the Commissioner (Appeals)’s order was
mistakenly taken lower by Rs. 12,57,688.

The assessee questioned the jurisdiction of
the Assessing Officer to pass the rectification order u/s. 154 on the ground
that in view of sub-section (7) of section 154, such a rectification order
could be passed within four years “from the end of the financial year in
which the order sought to be amended was passed”. According to the
assessee, since the assessment was framed on 24-11-1998, the period of four
years had lapsed long ago and, therefore, the proposed action on the part of
the Assessing Officer was time-barred. The Assessing Officer did not accept the
plea while passing the order dated 26-4-2006. According to him, the period of four years was to be counted from
23-7-2004 when the Assessing Officer had passed an order for giving appeal
effect.

The Commissioner(Appeals) confirmed the
action of the Assessing Officer and dismissed the appeal filed by the assessee.
However, the Tribunal quashed the Assessing Officer’s order on the ground that
the action of rectification u/s. 154 was barred by limitation. The Revenue
challenged the findings of the Tribunal before the High Court.

Before the High Court, the contentions of
the Revenue were two fold namely:

1.   The Assessing Officer had inherent power to
rectify a totalling mistake which crept in computation. For correcting a
totalling mistake, limitation prescribed under sub-section (7) of section 154
was not even applicable. Otherwise, it would frustrate the object and purpose
of determining the taxable income and to collect the tax thereon.

2.   Even if it was held that
limitation under sub-section (7) of section 154 was applicable, then also it
would start to run from the last order, i.e. order dated 23-7-2004, and not
from the original order. The revenue sought to invoke the doctrine of Merger
and submitted that since the mistake had occurred at the time of passing order
dated 28-6-2004, while giving effect to the decision of the
Commissioner(Appeals), limitation should start from that date.

The assessee submitted that the appellate
orders dealt with altogether different issues while the impugned mistake sought
to be rectified had crept in the original order dated 24-11-1998 and was not
the subject-matter of appeals. It was not a mistake in the amount of income
taken to be the basis, which had occurred in the order dated 23-7-2004, as
stated in his notice by the Assessing Officer u/s. 154, but it was a mistake
that had taken place in the original order by not reducing the amount of
depreciation disallowed in computing the assesse income. The doctrine of merger
would be applicable
only in respect of those issues that were before the appellate authorities.

The High Court duly noted that both
Commissioner (Appeals) and the Tribunal had recorded a finding that the mistake
was in the original order dated 24-11-1998 and not in the order dated 23-7-2004
but hereafter went on to hold that the doctrine of merger applied to the said
order and the order merged with the latest order.

The High Court relied upon the decision of
the Supreme Court in the case of Hind Wire Industries Ltd. (supra) and
observed that, the Supreme Court, in that case, was of the view that the word
‘order’ used in the expression “from the date of the order sought to be
amended” occurring in sub-section (7) of section 154 had not been
qualified in any way and it did not necessarily mean the original order. The
Court was further of the view that once a reassessment order or rectification
order was passed giving effect to the order of the appellate forum, the
original order ceased to operate.

By relying upon
the understandings  of the Courts with regard
to the Doctrine of Merger[1],
the High Court also held that once an appeal against the order passed by an
authority is preferred and is decided by the appellate authority, the original
order merged into the order passes subsequently.With this merger, order of the
original authority ceased to exist and the subsequent order prevailed, in which
the original order merged. For all intent and purposes, it was the subsequent
order that was to be seen.

The High Court noted that the counsel for
the assessee agreed that the order of re-assessment substituted the initial
order that did not survive in any manner or to any extent. The High Court
extended the principle to a case where the assessment order wass challenged in
appeal and the appellate authority passed an order at variance with the order
passed by the Assessing Officer, on the basis of which a fresh order u/s.143(3)
r.w.s 250 was required to be passed by the Assessing Officer giving effect to
the order of the appellate authority.

Accordingly, the High Court upheld invoking
of the provisions of section 154 by the Assessing Officer in this case, on the
ground that the assessment order had merged with the order of
Commissioner(Appeals) passed on 28-6-2004, the limitation for the purpose of
sub-section (7) of section 154 was to be counted from the said date.

SHREE NAV DURGA COLD STORAGE & ICE FACTORY’S CASE

A similar issue recently came up for
consideration before the Allahabad High Court in the case of Shree Nav Durga
Cold Storage & Ice Factory vs. CIT 397 ITR 626 (Allahabad).

In this case,
for Assessment Year 2003-04, various orders were passed as explained below in
the chronological order:

This application made u/s. 154 was rejected
by the Assessing Officer. Both, the Commissioner(Appeals) and ITAT, confirmed
the order of the Assessing Officer rejecting the application of the assessee by
observing that the purpose of section 154, the limitation would commence from
assessment order dated 31.03.2006 and not subsequent orders.

On behalf of the assessee, it was contended
before the High Court that the Assessing Officer was under a statutory
obligation to allow set off of brought forward capital loss and since the last
order was passed by him on 25.01.2011, for the purpose of section 154 (7),
limitation would count from the date of the said order, and in any case, from
the date of the order dated 31.12.2009 which was passed after remand by the Tribunal.
It was argued that the order dated 31.03.2006 merged in the judgment of the
Tribunal dated 13.06.2008 whereby the matter was remanded to the Assessing
Officer. Reliance was placed on the judgment of the Supreme Court in Hind
Wire Industries Ltd. (supra) and Delhi High Court in Tony Electronics
Ltd. (supra).

On the facts, the High Court observed that
the issue of set off of brought forward capital loss had already attained
finality when assessment order dated 31.03.2006 was passed by the Assessing Officer
since in the appeal before Commissioner (Appeals) and the Tribunal, the
Assessee did not raise that plea at all. The order of remand passed by the
Tribunal was only confined to determination of long-term capital gain for the
year and not for any other purpose. It was a limited and partial remand,
confined to a particular purpose.

In the light of these facts, the High Court
observed that the legislature had not thought it fit to apply the general
doctrine of merger, but the doctrine of ‘Partial Merger’ had been adopted. The
High Court drew support from the relevant provision of section 263 which
permitted the Commissioner to exercise revisional power over such matters as
had not been considered and decided in the appeal.

Once the issue of merger was governed by
statutory provisions, then, obviously, it was the statute which shall prevail
over the general doctrine of merger. Accordingly, the High Court rejected the
appellant’s contentions and held that the order in which the amendment was
sought was the original order dated 31-3-2006 and, hence, limitation would
count from the date of that order.

With regard to the Delhi High Court’s
decision in the case of Tony Electronics Ltd.(supra), the Allahabad High
Court held that the inference drawn therein from reading of the judgement in Hind
Wire Industries Ltd. was much more then what had actually been said by the
Supreme Court. The Supreme Court had held as follows in Hind Wire Industries
Ltd.:

“word “order” has not been
qualified in any way and it does not necessarily mean the original order. It
can be any order, including the amended or rectified order.”

The aforesaid word “including”
made it very clear that an amended or rectified order would not result in
nullifying the original order and to say that the original order would cease to
exist. To read it as if, once the rectified order was passed, the original
order would disappear, would result in nullifying the effect of the word
“including” in the observations made by the Supreme Court, while
reading the meaning of the word “order” in section 154(7).
Accordingly, the Allahabad High Court disagreed with the view taken by the
Delhi High Court in the case of Tony Electronics Ltd,(supra) and held that the
rectification was barred by limitation.

OBSERVATIONS

Under the Income tax Act, an assessment
order or an order giving appeal effect 
is usually passed by an Assessing officer. This order can be later on;

?   rectified by him

?   revised by the Commissioner,

?   modified by the
Commissioner(Appeals) or other appellate authorities,

?   set aside by the
Commissioner or the appellate authorities,

?   reopened and reassessed or
specially assessed by him (only assessment order)

?   substituted by him by giving
effect to the order of the higher authorities,

?   substituted by passing fresh
order when set-aside by the higher authorities.

Unless any of the above happens, the order
passed by the AO attains finality. Once, any one of the above orders are
passed, the original order, till then final, becomes disturbed or vitiated, and
the question arises whether the order originally passed is substituted or
survives or it partially survives. The Act by itself does not provide for an
answer to this question and with that throws open challenging situations in
applying the provisions that stipulate time limits for actions w.r.t the date
of an order.

Ordinarily, where an appeal is provided
against an order passed by an authority, the decision of the appellate
authority, when passed, becomes the operative decision in law. If the appellate
authority modifies or reverses the decision of the authority, it is the
appellate decision that is effective and can be enforced. In law the position
would be just the same even if the appellate decision merely confirms the
decision of the authority. As a result of the confirmation or affirmance of the
decision by the appellate authority the original decision merges in the
appellate decision and it is the appellate decision alone which subsists and is
operative and capable of enforcement. The act of fusion of the one order in to
another is enshrined in ‘doctrine of merger’ which again is neither a doctrine
of constitutional law nor a doctrine statutorily recognised. It is a common law
doctrine founded on principles of propriety in the hierarchy of justice
delivery system. Please see Kunhayammed vs. State of Kerala, 245 ITR 360
(SC) which reiterates the position affirmed by various courts over a period
of time.

The merger doctrine in civil procedure
stands for the proposition that when the court order replaces  an order of the authority with that of the
court , it is the order of the court that prevails. The logic underlying the
doctrine of merger is that there cannot be more than one decree or operative
orders governing the same subject-matter at a given point of time. When a
decree or order passed by inferior court, tribunal or authority was subjected
to a remedy available under the law before a superior forum then, its finality
is put in jeopardy. Once the superior court has disposed of the lis before it
either way – whether the decree or order under appeal is set aside or modified
or simply confirmed, it is the decree or order of the superior court, tribunal
or authority which is the final, binding and operative decree or order wherein
merges the decree or order passed by the court, tribunal or the authority
below.

This doctrine
however is not of universal or unlimited application and is not rigid in its
application. The nature of jurisdiction exercised by the superior forum and the
content or subject-matter of challenge laid or which could have been laid shall
have to be kept in view. If the subject matter of the two proceedings is not
identical, there can be no merger. The doctrine of merger does not by default
mean that wherever there are two orders, one by the inferior authority and the
other by a superior authority, passed in an appeal or revision there is a
fusion or merger of two orders irrespective of the subject-matter of the
appellate or revisional order and the scope of the appeal or revision
contemplated by the particular statute. The application of the doctrine depends
on the nature of the appellate or revisional order in each case and the scope
of the statutory provisions conferring the appellate or revisional
jurisdiction.

The Courts are clear that the doctrine of
merger cannot be applied rigidly in all cases. Its application varies from case
to case keeping in mind the subject matter and the nature of jurisdiction
exercised by the authority. It is this flexibility of the doctrine that has
been beautifully explained by the Supreme court in the case of Hind Wires
Industries Ltd. when it stated that “word “order” has not
been qualified in any way and it does not necessarily mean the original order.
It can be any order, including the amended or rectified order.” Both
the courts, Allahabad and Delhi, have heavily relied on these findings of
flexibility to deliver conflicting decisions in some what similar
situations. 

The doctrine
may apply differently in each of the situations referred to earlier in this
part; in some cases the original order will survive and the limitation may
apply from its date; in other cases, the limitation may begin from the
substituted order while for some items in some cases, the limitation may apply
from the date of the order and for the rest of the items it may apply form the
date of the later order.  

The real issue therefore before both the
courts was whether the original order survived or not. Application of period of
limitation would begin with the date of the order that subsisted. There could
be cases where both the orders survive which happens in cases of a partial
application of doctrine whereunder a part of the order passed in respect of
some items has remained intact and undisturbed by the later events and the
other part has been unsettled by later events. In such cases, the limitation
will apply from the date of the first order in respect of settled or
undisturbed items and would apply w.r.t the date of later order in respect of
the disturbed or unsettled items of the first order. Applying this
understanding , the Allahabad high court in the case of Shree Nav Durga Cold
Storage & Ice Factory (supra) correctly held that the claim for set off
of brought forward losses could not be claimed on application u/s. 154 in as
much as the same was time barred for the reason that the issue of set –off of
losses was not the subject matter of the appeal and had become final on passing
of the first order and in that view of the matter could not have been affected
by the appellate order or the order giving effect to the appellate order.

The Allahabad High Court in the context has
observed that what has been adopted in the Income-tax Act is the doctrine of
partial merger and not the full merger on the basis of the following provisions
of the Act:

?    Even in a case where the
order of the lower authority had been the subject matter of the appeal, section
263 permits the Pr. CIT or CIT to pass the order of revision but only in
respect of such matters as had not been considered and decided in such appeal.

?    Where the earlier
assessment made has become the subject matter of any appeal, reference or
revision, the Assessing Officer is still permitted to reopen the assessment
u/s. 147 for reassessing the other incomes which are not subject matter of any
such appeal, reference or revision.

?    Sub-section (1A) of section
154 inserted w.e.f. 6^th Oct., 1964 by the Direct Taxes (Amendment)
Act, 1964 also embodies the doctrine of partial merger. It lays down that where
any matter had been considered and decided in any proceeding by way of appeal
or revision relating to an order referred to in s/s. (1), the authority passing
such order may, notwithstanding anything contained in any law for the time
being in force, amend the order under that sub-section in relation to any
matter other than the matter which had been so considered and decided.

The decision of the Supreme Court in the
case of Hind Wire Industries Ltd. which has been relied upon by the
Delhi High Court dealt with a case, wherein the original as well as amended
order were passed by the same authority i.e. the Assessing Officer. Further,
the Delhi High Court proceeded on the basis of the principle that when the
reassessment order is passed, the initial order of assessment does not survive
in any manner or to any extent and extended this principle to decide the issue
before it. Had the ratio of the decision of the Supreme Court in the case of
Hind Wire Industries Ltd. been properly explained the Delhi High Court, we are
sure that the decision could have been different in the case of Tony Electronics
wherein it ordered for rectification of a mistake contained in the original
order overlooking the fact that the mistake was not the subject matter of the
appeal and therefore that part of the order containing the mistake had become
final and did not get substituted by the order giving effect to the appellate
order. 

In view of the above, the period of
limitation provided in section 154(7) should be reckoned from the date of such
order under which the issue sought to be rectified had become final which could
either be  the original assessment order
or the subsequent order. What is important is to figure out the order in which
the mistake has occurred and to find out whether the mistake has been the
subject matter of the orders passed by the higher authorities or even by the AO
himself in some cases.  Having said this,
the limitation will have a fresh lease of life from the date of the later order
in all cases where a fresh order is passed under the provisions of the Act or
in pursuance of the set-aside of the entire order by the higher authorities or
where the direction for passing a fresh order is issued. In such a case, if the
mistake sustains in the fresh order, it will be rectified within the time limit
determined w.r.t the date of passing the fresh order.