ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is an appeal by the assessee for the assessment year 1987-88 directed against the order of the Commissioner of Income-tax (Appeals)-III, Hyderabad dated 26-11-1991.
2. The only question involved in this appeal is whether the withdrawal of depreciation on live-stock of Rs. 2,47,032 and terminal allowance on livestock of Rs. 23,26,443 granted by the Income-tax Officer by his modificatory order dated 10-9-1990 by passing the impugned rectificatory order dated 19-3-1991 is legal and proper. Few facts leading to the present appeal are the following. The assessee is a company registered under the Companies Act, 1956 for the purpose of carrying on business of running hatcheries and feed plant. It owns two hatcheries one at Shamshabad and the other at Vijayawada and has its feed plant at Shamshabad. For the purpose of hatcheries, the company purchases one-day old chicks called parent birds and rear them till they attain the egg laying stage. The eggs laid by parent birds would not be sold but would be hatched into one day old chicks which will be sold as stock-in-trade. One day old chicks would also be purchased to convert them into parent birds and one day old chicks would also be sold as stock-in-trade. However, the assessee maintains separate accounts for these two categories – (i) one day old chicks called parent birds, and (ii) one day old chicks meant to be stock-in-trade. The company has been consistently contending that the parent birds used for the purpose of laying eggs to be hatched in the hatcheries of the assessee are to be considered as plants and it has been claiming depreciation, terminal allowance and investment allowance in respect of the cost of the birds. In the statement of fixed assets prepared for assessment year 1987-88 W.D.V. of the livestock (parent birds) as on 1-4-1986 was shown at Rs. 12,84,727. The additions made in the accounting year in question to the said live stock was noted as Rs. 38,32,555 and the total of the W.D.V. of the live stock was noted as Rs. 51,17,282. On that depreciation of Rs. 27,91,696 was claimed. In the original assessment proceedings this claim for depreciation was made for and on behalf of the assessee. The original assessment order is dated 27-3-1990 a copy of which is furnished at pages 37 to 51 enclosed as annexure. At internal page No. 5 of the assessment order which is found at page No. 46 of the paper book filed on behalf of the assessee, the Income-tax Officer dealt with this claim of depreciation and rejected it on the ground that the live stock cannot be considered as plants, that the assessee is only selling one day old chicks which are the stock-in-trade and the claim of investment allowance is, therefore, to be rejected. So also, since depreciation is to be allowed only on fixed assets and not on stock-in-trade, the claim of the assessee that depreciation on live stock amounting to Rs. 27,91,696 was also rejected. The Income-tax Officer found that under Section 32 of the Income-tax Act, depreciation is admissible only on four types of assets – buildings, machinery, plant and furniture – and that stock cannot be treated as plants in the assessee’s case as it is not the tool with the help of which the assessee carries on its business. In fact it is dealing in live stock. Therefore the claim of depreciation is rejected. As against the assessment order dated 27-3-1990, the assessee went in appeal before the learned Commissioner of Income-tax (Appeals)-III, Hyderabad whose order dated 9-7-1990 was furnished at pages 19 to 35 of the paper book. Grounds of appeal preferred by the assessee before the Commissioner of Income-tax (Appeals)-III, Hyderabad were not filed before this Tribunal either on behalf of the assessee or on behalf of the Department. The grounds were also not extracted by the Commissioner of Income-tax (Appeals)-III, Hyderabad. Going by his order dated 9-7-1990, we can fairly determine what are all the grounds which must have been taken before him. Going on that premise it can be seen that rejection of the claim for depreciation on parent stock and rejection of terminal allowance were not made grounds of appeal before Commissioner (Appeals). Only the rejection of the claim for investment allowance was contested in grounds of appeal filed before the Commissioner (Appeals). However, the claim for investment allowance as well as depreciation on live stock were rejected, on the common that they are only stock-in-trade but cannot be considered as plants. At para 9 in the learned Commissioner (Appeals)’s order, the ground of attack relating to rejection of the claim of investment allowance made by the assessee can be found and they are the following:
The learned Deputy Commissioner is not correct in his observation that the one-day old chicks purchased by the Company for laying eggs used for hatching, constitute stock-in-trade. This observation of the Deputy Commissioner is without any basis and in fact is in confrontation to the earlier record.
The learned Deputy Commissioner is not justified in ignoring the order of the Income-tax Appellate Tribunal relating to the earlier years wherein it was clearly held that the parent stock purchased by the Company constitute plant and therefore, the additions to parent stock is eligible for investment allowance.
At para 10, the learned Commissioner (Appeals) pointed out that the assessee claimed investment allowance on parent stock-in-trade at Rs. 38,32,555 and the Dy. Commissioner (Assessement) disallowed the claim holding that the parent stock is not plant. He found that this point is covered by the decision of the Tribunal for assessment year 1981-82 and following the said order, he directed the Dy. Commissioner to allow investment allowance on parent birds put to use during this year after crossing the age of 20 weeks. Thus, it is enough if we note that the learned Commissioner (Appeals)-III, Hyderabad set aside the finding of the Dy. Commissioner that the parent birds are not plants and that they are mere stock-in-trade. Further it was held that the assessee is entitled to investment allowance following an earlier order of the Tribunal in Income-tax Appeal for assessment year 1981-82. The order of the learned Commissioner of Income-tax (Appeals) on quantum side became final and no further second appeal was taken against that order. Subsequent to that order, the Deputy Commissioner passed a modificatory order dated 10-9-1990. He found in his rectificatory order that consequent on relief allowed by the Commissioner (Appeals) vide his order dated 9-7-1990 the assessment for 1987-88 in the assessee’s case is modified. He allowed Rs. 2,47,032 as depreciation on live stock as per the separate working and he also allowed Rs. 23,46,443 as terminal allowance on live stock as per separate working. Thus he allowed a total of Rs. 25,73,475 towards depreciation and terminal allowance on live stock. He passed modificatory order to that effect reducing the total income of the assessee as per assessment order dated 27-3-1990 of Rs. 61,24,128 to a loss figure of Rs. 4,24,428 representing unabsorbed depreciation and he allowed this unabsorbed depreciation to be carried forward to the next year. The working given for the depreciation and terminal allowance on live stock by the Dy. Commissioner is the following:
Opening W.D.V. Rs. 6,24,912
Additions during the year Rs. 38,32,555
Total Rs. 44,57,467
Less: Below 20 weeks birds 4,84,145
Birds died 23,26,443
Rs. 28,10,588
W.D.V. for depreciation Rs. 16,46,879
He calculated the depreciation at 15 per cent thereon at Rs. 2,47,032 whereas the terminal allowance on live stock was accepted at Rs. 23,26,443. The Deputy Commissioner later found that mistakes had crept into his modificatory order dated 10-9-1990 and, therefore, he modified it further by another order passed under Section 154 of the Income-tax Act on 19-3-1991 forming the basis of the present appeal. By this modificatory order dated 19-3-1991. he withdrew the depreciation as well as terminal allowance claim totalling to Rs. 27,91,696 on live stock. The main ground on which he withdrew depreciation and terminal allowance granted by him earlier was noted in his order under Section 154 dated 19-3-1991 which is hereinafter called the second modificatory order. In the second modificatory order, the Deputy Commissioner held the following:
In the assessment completed on 27-3-1990 in the above case for the assessment year 1987-88, the assessee’s claim for depreciation of Rs. 27,91,696 on live stock was disallowed, treating the same as stock-in-trade. The assessee has not contested this disallowance in appeal before the CIT (A) and consequently, the order of the CIT (A) in I.T.A. No. 15/DC(A) III/CIT (A)III/90-91 dated 9-7-1990 is silent on this issue. However, while passing the modification order on 10-9-1990 giving effect to the said appellate order, a total sum of Rs. 25,73,475 was wrongly allowed as a deduction from the total income towards depreciation and terminal allowance on live-stock by oversight, without the CIT (A) having directed to allow any such relief in the appellate order.
He revised the total income by his second modificatory order and arrived at the total income of the assessee for assessment year 1987-88 at Rs. 21,49,050.
3. Having been aggrieved against the second modificatory order, the assessee went in appeal before the Commissioner (Appeals). The learned Commissioner (Appeals) by his impugned order dated 26-11-1991 dismissed the appeal of the assessee and confirmed the second modificatory order passed by the Dy. Commissioner specifically holding that in the original assessment the Dy. Commissioner specifically found that the assessee is not entitled to either depreciation or investment allowance in respect of live stock, that the assessee did not contest issue of depreciation before the Commissioner (Appeals) and the Commissioner (Appeals) having allowed appropriate investment allowance in favour of the assessee, the Assessing Officer was wrong in allowing depreciation on live stock since it was not granted by the Commissioner (Appeals) and, therefore, withdrawal of the relief of depreciation by the second rectificatory order is perfectly justified. Aggrieved against the second modificatory order, the assessee is in second appeal before this Tribunal.
4. We have heard Shri B. Satyanarayanamurthy of M/s. Venugopal & Chenoy, on behalf of the assessee and Shri K.T.V. Charyulu, the learned Departmental Representative. The learned Counsel for the assessee contended that the first modificatory order dated 10-9-1990 in which depreciation and terminal allowance were granted is perfectly justified and is not vitiated either for want of jurisdiction or for any other lawful cause. The first modificatory order passed by the Deputy Commissioner should be segregated into two parts – one passed in accordance with the direction of the learned Commissioner of Income-tax (Appeals) and another should be deemed to be an independent order containing findings of the Dy. Commissioner with regard to matters not dealt with by the Commissioner (Appeals) in his appellate orders. It is important to know, the learned Counsel for the assessee argued that the learned Commissioner (Appeals) while disposing of the quantum appeal did say and specifically found that parent birds are plants. The assessee had already furnished all particulars necessary for granting depreciation. In those circumstances whether the assessee categorically claims depreciation or not it should have been allowed as a consequence of the finding that the parent birds are plants. The learned Counsel for the assessee further argued that the depreciation claimed should be deemed to have been allowed to the assessee by the first modificatory order invoking suo motu powers of the Income-tax Officer given under Sub-section (2) of Section 154. He relied upon the following decisions:
(i) Chokshi Metal Refinery v. CIT [1977] 107 ITR 63 (Guj.),
(ii) Beco Engg. Co. Ltd. v. CIT [1984] 148 ITR 478 (Punj. & Har.).
5. On the other hand, the learned Departmental Representative argued that though the Dy. Commissioner while passing the original assessment order specifically disallowed the claim of depreciation made by the assessee, the assessee did not question the rejection of the claim of depreciation before the Commissioner (Appeals). The first modificatory order dated 10-9-1990 is one passed under Section 250 of the Income-tax Act, in order to give effect to the order of the Commissioner (Appeals). It is significant to note that the assessee did not file specific application seeking rectification under Section 154 asking for relief of depreciation as well as terminal allowance before the Income-tax Officer. Rectificatory order was not passed specifically under Section 154. He argued that there is a vast difference between an order passed under Section 250 implementing the appellate order and an order passed under Section 154 of the Income-tax Act. The learned Departmental Representative contended that granting depreciation on parent birds is not consequential simply because they are found to be plants. Further he argued that as soon as it is found that they are plants, depreciation should not automatically be granted inasmuch as the relief of depreciation is not mandatory but it should be allowed only when asked for. The learned Departmental Representative relied upon the following decisions:
(i) CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd. [1989] 177 ITR 443 (Bom.),
(ii) Ascharajlal Ram Parkash v. CIT [1973] 90 ITR 477 (All.), (iii) Dasaprakash Bottling Co. v. CIT [1980] 122 ITR 9 (Mad.).
6. Thus having heard both sides, fully and completely and after having perused the whole records and also having made our own investigation on the real points in controversy, we are of the opinion that the assessee should succeed in this appeal. Our reasons are as follows.
7. The agreed basis on which the arguments were advanced before us was that as against the rejection of the claim for depreciation by the Deputy Commissioner it was not contested in appeal before the Commissioner (Appeals) but it was allowed to become final. Only the claim for investment allowance was contested in appeal and it was allowed by the learned Commissioner of Income-tax (Appeals) by his orders dated 9-7-1990. Copy of the order is furnished at page 19 of the paper book filed on behalf of the assessee. The relevant question is how far the assessment order merged with the orders of the Commissioner (Appeals) and after the merger whether any part of the original assessment order passed by the Deputy Commissioner retains its identity and authority. In this connection we may immediately refer to the provisions of Section 154(1A) which is as follows:
Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in Sub-section (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 has been so considered and decided.
The above provision clearly shows that matters which were not considered and decided by the appellate authority can as well be rectified under Section 154(1) by the Income-tax Officer. In this case grant of depreciation and terminal allowance which were rejected by the Income-tax Officer in the first instance were not at all appealed against before the Commissioner (Appeals) and, therefore, they still remain as orders of the Deputy Commissioner which are amenable for rectification under Section 154(1) by the Deputy Commissioner provided his previous orders were beset with mistakes of facts or law. The Income-tax Appellate Tribunal in its order dated 17-9-1983 in this very assessee’s case for assessment years 1978-79. 1979-80 and 1980-81 considered whether the assessee is entitled to depreciation allowance or not and held the following:
We have considered the rival submissions. The order of the Tribunal refers to the method of accounting which can be employed in poultry business and which has been referred to by the Research Committee of the Institute of Chartered Accountants of India in a monograph issued in 1980. Debiting of a depreciation i.e. depletion allowance would be permissible. It was submitted that in the present case, once the utility of the bird was over, i.e. after about 18 months, under terms of agreement of purchase of the one-day old chicks, the birds were to be destroyed. Since the manner of computation of the depreciation allowance has not been gone into at any earlier stage, we consider the proper course would be to set aside the findings of the authorities below on the claim for grant of depreciation allowance. The claim will be re-examined in the light of the guidelines in the order of the Tribunal referred to as well as in the monograph brought out by the Institute of Chartered Accountants…. The matter is therefore, restored to the Income-tax Officer for each of the years and the assessee’s claim for depreciation i.e. depletion allowance would be gone into by the Income-tax Officer in the light of all evidence produced and in the light of the aforesaid observations and appropriate allowance made in each of the years.
Thus it can be seen that as a matter of principle, the depletion allowance is granted in the case of the assessee. How far it should be granted is a matter of detail with which we are not concerned. Further, the learned Commissioner (Appeals) who disposed of the quantum appeal before him had considered the parent stock as plants and directed to grant investment allowance. If parent stock is plant, then the assessee is entitled to depreciation on the ground that it was plant. If no specific percentage of depreciation is allowable, then general rate of depreciation for machinery and plant was prescribed under Appendix I III(1) of the Depreciation Chart provided under the Income-tax Rules and that depreciation was 15 per cent for the relevant assessment year and the same was granted by the Dy. Commissioner in his first modificatory order. The further question that would arise in this case is whether disregarding the ratio of the decision of the Tribunal given in the assessee’s own case for earlier years can be said to constitute a mistake or error within the meaning of Section 154(1) of the Income-tax Act. In Parshuram Pottery Works Co. Ltd. v. D.R. Trivedi, WTO [1975] 100 ITR 651 (Guj.), for assessment years 1957-58, 1958-59 and 1959-60, the petitioner-company claimed certain amount in each year as deduction in respect of provision for taxation but the claim was disallowed on the ground that the amount provided towards tax liability did not constitute debt owed from the petitioner on the relevant valuation date within the meaning of Section 2(m) of the W.T. Act, 1957. The petitioner did not prefer appeals against the order of assessment. Subsequently, however, the petitioner came to know from a decision of the Income-tax Appellate Tribunal that the amounts claimed by it in respect of provision for taxation were deductible in computing the net wealth of the petitioner. The petitioner made applications under Section 35 of the Wealth-tax Act to the Wealth-tax Officer on the ground that it was an error apparent on the face of the records. Applications were rejected and they were confirmed by the Commissioner. The petitioner filed writ petition in the High Court to quash the orders refusing to rectify the assessment orders and for a direction to rectify the assessment orders. The Gujarat High Court held that as decided in CWT v. Raipur Mfg. Co. Ltd. [1964] 52 ITR 482 by the same High Court and in Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 by the Supreme Court it has to be held that provision for taxation was a debt owed within the meaning of Section 2(m) of the Act and, therefore, it was deductible in computing the net wealth of the assessee and, therefore, there was clearly an error of law apparent on the face of the records for the assessment years in question. Thus it can be seen that the mistake in the assessment order can be found out even on the basis of the ITAT’s orders either in the case of this very assessee or in the case of other assessees. We have already seen the Tribunal specifically holding that the assessee is entitled to depletion allowance and, therefore, the order of the Income-tax Appellate Tribunal was not followed by the Deputy Commissioner (Assessements). The original assessment order was passed on 27-3-1990 and by the date of that assessment order, the order of the Tribunal dated 17-9-1983 holding that the assessee is entitled to depletion allowance was very much there. Still the Assessing Officer did not follow the Tribunal’s order but held that parent stock is only stock-in-trade and hence it is not entitled to depreciation and depletion allowance. Subsequently, after the order of the Commissioner of Income-tax (Appeals) dated 9-7-1990 was received, it was found by the Deputy Commissioner (Assessements) that his view is wrong that the parent stock can no longer be considered as stock-in-trade and that parent stock is to be considered as plant and investment as well as depletion allowance are allowable and thus having realised the mistake on record, he should be deemed to have passed the first rectificatory order dated 10-9-1990 and as such it is perfectly justifiable order. The power and authority to pass such order clearly vests within the jurisdiction of the Deputy Commissioner (Assessements). In this connection we may refer to the Karnataka High Court’s decision in Addl. CIT v. India Tin Industries (P.) Ltd. [1987] 166 ITR 454. In that case the total development rebate granted to the assessee by the Income-tax Officer was Rs. 16,781 out of which the development rebate claimed on dyes and tools was Rs. 5,740. The Income-tax Officer while framing the assessment for assessment year 1963-64 disallowed the claim for development rebate in respect of dyes and tools but allowed development rebate of Rs. 11,011. The assessee appealed against the disallowance of Rs. 5,740 only which represents the development rebate claimed on dyes and tools and that claim was allowed to the assessee in the appeal by the Appellate Assistant Commissioner. Subsequently the Income-tax Officer by his order under Section 154 holding that since the assessee had created development rebate reserve of Rs. 7,172 only, the maximum development rebate that may be allowed was Rs. 9,563. Therefore, the Income-tax Officer restricted the Development Rebate to be allowed to Rs. 9,550 in respect of machinery only. The Appellate Asstt. Commissioner as well as the Tribunal held the order of rectification as not valid. The High Court on a reference held that part of the order of the Income-tax Officer allowing development rebate of Rs. 11,011 was not the subject-matter of appeal before the Appellate Asstt. Commissioner and was, therefore, left untouched by his order. The Income-tax Officer was, therefore, held competent to rectify that part of his order. The facts of the Karnataka High Court’s order appears to be very near to or similar to the facts of this case. The Karnataka High Court while disposing of the above case had the occasion to consider the scope of Sections 154, 154(1A) as well as the doctrine of merger. It held the following as regards the three topics mentioned in part of the head-note at pages 454 and 455:
In order to attract the provisions of Section 154 of the Act, there must be a mistake and it must be a mistake apparent from the record. Overlooking a mandatory provision of law which leaves no discretion to the taxing authorities is a mistake which can be rectified. Allowing the concession of development rebate to an assessee who has not fulfilled the conditions specified is a mistake which can be rectified under Section 154.
Sub-section (1A) of Section 154 specifically provides that any matter which has not been considered and decided in any proceedings by way of appeal or revision filed against an order referred to in Sub-section (1) of Section 154 of the Act may be amended by the authority passing such an order in exercise of its power under Sub-section (1) of Section 154 of the Act.
The doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by an inferior Tribunal and the other by a superior Tribunal passed in an appeal or revision, there is a fusion or merger of the two orders irrespective of the subject-matter of the appeal. The order of assessment made by the Income-tax Officer merges in the order of the Appellate Assistant Commissioner only in-so-far as it relates to items considered and decided by the Appellate Assistant Commissioner. That part of the order of assessment which relates to items not forming the subject-matter of the appellate order and left untouched does not merge in the order of the Appellate Assistant Commissioner. Even after an appeal from an order of assessment is decided by the Appellate Assistant Commissioner, a mistake in that part of the order of assessment which was not the subject-matter of the appeal and was thereafter left untouched by the Appellate Assistant Commissioner can be rectified by the Income-tax Officer.
Here in this case, the disallowance of depreciation and depletion allowance on the parent stock in the original assessment order were not subjected to in appeal before the Commissioner of Income-tax (Appeals) and hence they remain to be fit matters which can be rectified by the Deputy Commissioner (Assessements) who had passed the original order. He has full authority and competence to exercise that jurisdiction under Section 154(1) whenever he realises that there are mistakes apparent from record in his original assessment order in granting depreciation and depletion allowance. It can be seen that from the earlier orders of the Tribunal in this very assessee’s case, it was held that the assessee is entitled to depletion allowance and, therefore, there was clear mistake apparent on the face of the record.
8. Another decision to which we may refer is the decision of the Delhi High Court in Rohtak & Hissar Districts Electric Supply Co. (P.)Ltd. v. CIT [1981] 128 ITR 52. In that case, the depreciation and development rebate were granted by the Income-tax Officer for assessment year 1962-63. This was done on the basis of written down value under Section 10(5) of the Indian Income-tax Act, 1922. However, an appeal had been taken to the Appellate Assistant Commissioner against the assessment order and in the memorandum of grounds of appeal, a ground relating to the determination of depreciation and development rebate was received, raised. However, the Appellate Assistant Commissioner who passed the appellate order did not give any decision on the correctness or otherwise of depreciation and development rebate allowed on service lines. The Income-tax Officer rectified his assessment order under Section 154 holding that he had wrongly allowed depreciation and development rebate on service lines in regard to which the assessee received full reimbursement by contributions from the consumers. Since the proper provision applicable was Section 43(1) of the Income-tax Act, 1961 under which in computing the written down value, the actual cost had to be reduced by that portion of the cost as had been made, met directly or indirectly by any other person or authority, he withdrew these two allowances. The question is whether the Income-tax Officer retains jurisdiction to rectify the order, when once the quantum of depreciation and development rebate were made grounds of appeal before the Appellate Assistant Commissioner. The Delhi High Court held that even though grounds regarding the quantum of depreciation and development rebate were not decided upon by the Appellate Asstt. Commissioner since they constitute grounds before him they should be deemed to have been decided against the assessee and on that premise it held that the Income-tax Officer lacks jurisdiction to rectify the assessment order granting depreciation and development rebate. Therefore, the fact that no appeal was preferred against rejection of the claim of depreciation and depletion allowance gives adequate authority and jurisdiction for the Dy. Commissioner (Assessements) to rectify his earlier order under Section 154(1). For the above reasons, we hold that there is no inherent lack of Jurisdiction in the Dy. Commissioner (Assessements) for passing the first modificatory order and there is nothing illegal in his order while granting depreciation and depletion allowance. In fact they have to be granted according to the correct position as laid down by the Income-tax Appellate Tribunal in earlier years and also by the Commissioner (Appeals) in this very order. Thus the second modificatory order according to us is illegal and can or be upheld.
9. Three decisions were cited by the learned Departmental Representative. Out of them the Bombay High Court’s decision in Shri Someshwar Sahakari Sakhar Karkhana Ltd.’s ease (supra) is one. In that case the claim for depreciation though originally made in the income-tax return was later not only withdrawn but also specifically stated in the covering letter accompanying the revised return that the depreciation claim made in the original return was withdrawn and that no depreciation was claimed for assessment year 1969-70. However, in this case it was not stated by the assessee that depreciation was not intended to be claimed. Further the assessee not only made depreciation claim but also gave all particulars necessary to determine his claim. For instance he filed balance-sheet as well as list of fixed assets held by the company as on the last day of the previous year. The amount of W.D.V. on the 1st day of the year, the addition made during the year, depreciation claimed or W.D.V. at the end of the year all were clearly mentioned in that statement which was one of the annexures to the income-tax return filed by the assessee. Thus full particulars necessary for granting depreciation were already on record. Thus the case on hand is quite different on facts from the Bombay High Court’s decision cited by the learned Departmental Representative. Other decision also do not apply and they are clearly distinguishable and as such they need not be specifically dealt with here.
10. In the result, the impugned orders of the Commissioner of Income-tax (Appeals) as well as the second modificatory order are set aside and the first modificatory order is restored. The appeal of the assessee is allowed.