ORDER
S. Rajaratnam, Accountant Member
1. These two appeals are filed by Torsion Products Ltd. of Hyderabad relating to the assessment year 1977-78.
2. The assessee is a company manufacturing automobile leaf springs. An assessment under Section 143(3) read with Section 144B of the Income-tax Act, 1961 (‘the Act’) was made on the assessee on 30-1-1979. This assessment was the subject-matter of appeal before the Commissioner (Appeals) on certain disallowances made in the assessment. Meanwhile, the Commissioner was of the view that there was prejudice to the revenue inasmuch as the assessee’s status was taken as that of a company in which public are substantially interested ignoring certain facts on record. The assessee objected to the proposed action on the ground that Section 263 of the Act action is barred as the assessment was practically in pursuance of the order of the IAC and that Section 263 does not authorise any revision of such effective order by the IAC. His proposal was also questioned on merits. The Commissioner did not agree with the objections and passed the impugned order setting aside the assessment with a direction to treat the company as one in which public are not substantially interested and the assessee’s appeal in IT Appeal No. 352 (Hyd.) of 1981, is against this order.
3. The learned counsel repeated the arguments presented before the Commissioner both as regards jurisdiction and merits and drew our attention to Special Bench decision in East Coast Marine Products (P.) Ltd. v. ITO [1983] 4 ITD 73 (Hyd.). The learned departmental representative claimed that the Special Bench decision is easily distinguishable as it was a case where the issue was specifically the subject-matter of the order of IAC under Section 144B while it is not so here. He also relied upon the decision of the Karnataka High Court in CWT v. B. Kempanna [1980] 126 ITR 825, where it was held that there is no complete merger of order of the ITO even on appeal. He also relied upon the order of the Madhya Pradesh High Court in CWT v. Smt. Gulab Bai Mittal [1983] 141 ITR 755, where it was held that the partial waiver of penalty under Section 18B of the Act does not take away jurisdiction of the AAC against the order of the ITO imposing the penalty. He contended that a Commissioner under Section 263 could not be in a worse position merely because the draft order was the subject-matter of the IAC’s order on some other issues.
4. As for the question relating to the scope of action under Section 263 in respect of an assessment made in pursuance of an order under Section 144B, this was the subject-matter of a Special Bench decision of this Tribunal in the case of East Coast Marine Products (P.) Ltd. (supra), wherein it was held that Commissioner could exercise revisionary powers under Section 263 only in respect of items which were not the subject-matter of the order under Section 144B. The learned counsel for the asses-see had relied on this decision as, according to him, any order which is in pursuance of directions or proceedings under Section 144B cannot be liable for action under Section 263. After careful reading of the decision, we are of the view that the learned counsel is not justified in presuming that the Special Bench decision was to that effect. This Tribunal found that where a particular issue had become the subject-matter of instructions of the IAC, it could not again be a matter for action under Section 263. We found with reference to records of East Coast Marine Products (P.) Ltd.’s case (supra) that in this case the assessce had made a claim for certain reliefs under Section 35B of the Act and this was disallowed by the ITO in the draft order, but deleted by the IAC on objection by the assessee. This disallowance was sought to be restored by the Commissioner purportedly under Section 263. It is in this context that the Special Bench of this Tribunal, upheld the assessee’s objection to the jurisdiction of the Commissioner inasmuch as he was seeking to disturb a finding of the IAC and he was not entitled to do so. It actually found that where an IAC passes an order under Section 144B, there is no total merger of the ITO’s order with that of the IAC’s order. It is found that Section 144B is intended to “resolve the dispute that arises between the ITO on one hand which is reflected in his draft assessment order and the assessee, on the other which is projected in the objections”. His direction is binding on the ITO. The Tribunal proceeded to observe :
to put it in a different manner, in a matter covered by the objections filed by the assessee, the Income-tax Officer can be said to be functus officio, though perhaps the use of that expression may not be completely apt since the Income-tax Officer will have to pass an order of assessment after he receives the directions from the Inspecting Assistant Commissioner but it is only for the purpose of conveying the idea forcefully that that expression is used.
Where an issue is covered by objections before the IAC, the order is that of the IAC and not the ITO. In other words, this Tribunal took the view that in a case of an assessment passed in pursuance of an order under Section 144B, it is actually made by two officers (one part by the 1AC and the other by the ITO). “It is only as a matter of convenience that it is authenticated by the ITO as if it is made by him alone.” It further observed : “Possibly, the directions given under Section 144B which amount to an order passed by him cannot be the subject-matter of revision by the Commissioner”. The operative part of the order also clearly mentions “for the foregoing reasons, we hold that the Commissioner has no jurisdiction under Section 263 to revise that portion of the order covered by the directions given by the IAC under Section 144B(4)“. [Emphasis supplied].
This has further been clarified in the concurring judgment of the learned Vice President in the following words :
It is quite possible that in an assessment there are additions made by the Income-tax Officer on his own to which the provisions of Section 144B are not applicable and additions made to which the provisions of Section 144B are applicable. If the Commissioner happens to find an error in the conclusions arrived at by the Income-tax Officer on his own, which has caused prejudice to the interests of the revenue, it may perhaps be open to the Commissioner to interfere, but certainly not with regard to those additions where the procedure under Section 144B is followed and the instructions of the Inspecting Assistant Commissioner are implemented.
It is, therefore, clear that the Special Bench case covers an instance where the ITO had made an addition or had taken a stand against the assessee and the assessee had got redressal from the IAC under Section 144B. Only in respect of such items where he had obtained the necessary relief from the IAC, there cannot be jurisdiction under Section 263. This is what we understand to be the effect of the decision of the Special Bench. In fact, we are of the view that the Special Bench decision actually supports the revenue’s case on the facts before us because the Special Bench had not countenanced the theory that there is a total merger so as to make any order subject to Section 144B an order of the IAC thereby ousting jurisdiction of the Commissioner under Section 263. It took care to spell out and confine the Commissioner’s limitation to cases where a particular issue is the subject-matter of instructions of the IAC under Section 144B. In the facts and circumstances of the assessee’s case, the assessee had returned the status as a company in which public are substantially interested. The ITO accepted the status in the draft order. The directions under Section 144B also did not contain any instructions as regards the status. In fact, this was never the subject-matter even of discussion before him. Hence, a notice of the Commissioner under Section 263 confining itself to the status of the assessee cannot be considered to be outside the purview of his jurisdiction. The Commissioner was only revising the order of the ITO though this order was subject to instructions on other matters under Section 144B and these other matters were not proposed to be dealt with by the Commissioner in his notice.
5. Once we hold that the notice under Section 263 is within the Commissioner’s jurisdiction, we have to follow the order for the immediately preceding year wherein we have modified the Commissioner’s order as one setting aside the assessment only on question of status for being redone in accordance with law on this question and that the ITO will be free to consider all the facts and legal objections on merits as to the proposed change in status without being bound by observations in the nature of findings in the Commissioner’s order. We, therefore, hold that the order of the Commissioner is within jurisdiction and, accordingly, we modify his order in the manner hereinbefore stated. The question as to whether the assessee would really be entitled to the claim has to be considered after bringing on record all the relevant facts in the light of the case law cited by both sides and any further question which may arise on this issue. We direct the ITO, accordingly.
6. As for the assessee’s appeal in IT Appeal No. 353 (Hyd.) of 1981, the first appellate authority did not entertain the same on the ground that the assessment has been set aside by the Commissioner. It may be doubtful as to how far he was justified in the course adopted by him as the issues before him were independent and unconnected with the issue raised in the order of the Commissioner. As noticed by us, though the Commissioner’s order purported to set aside the assessment, it was concerned only with the ‘status’ assigned to the assessee. At any rate, after the present order which has modified his order, it is only the question of status that is now before the ITO. The appeal on other points, by the assessee is valid and should have been dealt with by him. The Karnataka High Court in the case of B. Kempanna (supra) and the Madhya Pradesh High Court in Smt. Gulab Bai Mittal’s case (supra) had pointed out that an appeal could lie to the AAC even in the matter of penalty which was subject to partial waiver. Hence, the first appellate authority was in error in assuming that he had no jurisdiction on issues which were not the subject-matter of the Commissioner’s order under Section 263. At any rate, his jurisdiction is now patent after the present order which modifies the Commissioner’s order as one setting aside the ITO’s order only on the question of status. Since the first appellate authority did not go into merits, the appeal has to be restored to him so that he could deal with the same afresh in accordance with law.
7. In the result, the appeal in IT Appeal No. 352 (Hyd.) of 1981 will be treated as partly allowed for statistical purposes. The appeal in IT Appeal No. 353 (Hyd.) of 1981, is allowed.