Rectification by ITAT was barred by principle of finality & doctrine of merger – High Court

Rectification by ITAT was barred by principle of finality and doctrine of merger. The High Court imposes cost of Rs. 1.5 lakhs on assessee for being speculative

ABCAUS Case Law Citation:
ABCAUS 2804 (2019) (02) HC

Important Case Laws Cited/relied upon by the parties
Commissioner of Income-tax, Bombay V/s. M/s. Amritlal Bhogilal & Co., AIR 1958 SC 868
M/s. Gojer Brothers Pvt. Ltd. v. Shri Ratanlal, AIR 1974 SC 1380
Kunhayammed and Others Vs. State of Kerala & Another [(2000) 6 SCC 359]
Honda Siel Power Products Ltd Vs. Commissioner of Income Tax Delhi, 295 ITR 466
State of Madras v Madurai Mills Co. Ltd., AIR 1967 SC 681
Mitsubishi Corporation v Commissioner of Income Tax 337, ITR 498 (Del)

The Commissioner of Income tax (the Revenue) had challenged the order passed by the Income Tax Appellate Tribunal rejecting the Revenue’s request to rectify its order assessee/petitioner’s cross objections, on the issue of legality of reassessment proceedings.

The assessee/respondent’s returns was subjected to re-assessment in the course of which the Assessing officer (AO) disallowed certain amounts, under Section 68 of the Income Tax Act, 1961 (the Act).

The AO also rejected the assessee’s contentions with respect to the validity of the reassessment notice, under Section 147/148 of the Act.

The assessee appealed to the Commissioner of Appeals [CIT(A)] who allowed the assessee’s contentions and deleted the additions. however, the CIT(A) rejected the assessee’s arguments regarding validity of the reassessment notice u/s 148.

In first round of litigation, the ITAT upheld the order of the CIT(A) on both count. The Revenue challenged the order and the High Court allowed it and added back the amounts brought to tax under Section 68.

The assessee challenged the High Court’s judgment, through special leave petition (SLP) before the Hon’ble Supreme Court.

Meantime the assessee also approached the ITAT by filing an application for rectification contending that since the rejection of its cross objection about the validity of reassessment notice was not on merits, it ought to consider that ground and revive the cross objections. The ITAT allowed this application. What weighed with the ITAT was that the this issue was not adjudicated by the ITAT for the reason that the issue on merit was decided in assessee’s favour and the Cross Objection filed by the assessee was dismissed, treating the same as infructuous. Bit since the decision of the ITAT on merit had been reversed by the Jurisdictional High Court, therefore, the Cross Objection filed by the assessee was no longer infructuous and was required to be adjudicated.

The revenue sought to get a rectification of this order by filing a Miscellaneous Application which was however rejected by the Tribunal.

Aggrieved, the Revenue had filed the instant Writ Petition contending that the Hon’ble High Court set aside the first ITAT order and the assessee had chosen not to file any Appeal or get any question framed against the rejection of its Cross Objections by the ITAT therefore, the rejection of Cross Objections had attained finality.

The case of the Revenue was that the order of the ITAT allowing adjudication of cross objections was ex-facie beyond the jurisdiction of the ITAT, patently illegal and liable to be set aside.

The case of the Revenue was that the principle of merger, enunciated by the Supreme Court in several judgments applied clearly to the facts of this case, since the substratum of the assessee’s grievance was with respect to additions made in the reassessment proceedings and that issue was plainly the subject matter of the decision of the High Court, under Section 260A, consequently the ITAT’s order merged with the judgment of the High Court.

The Hon’ble High Court observed that the power of rectification is conferred upon the Assessing Officer and any income tax authority under Section 154 while the power of the ITAT to make and rectify its own order is contained in Section 254 of the Act.

The Hon’ble High Court observed on the doctrine of merger, a full bench of the Supreme Court in decision relied upon by the Revenue, had considered several previous ruling and stated the principle that had been followed by the High Court in a large number of decisions.

The Hon’ble Supreme Court had laid down that 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. However, the doctrine is not of universal or unlimited 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.

The Hon’ble High Court stated that it quite discernible that if an appeal is provided against an order passed by a tribunal, the decision of the appellate authority is the operative decision in law. If the appellate authority modifies or reverses the decision of the tribunal, it is obvious that it is the appellate decision that is effective and can be enforced.

The Hon’ble High Court added that undoubtedly, there are cases and causes where issues that were not the subject matter of appeals were sought to be made the content of a later litigation before the lower court or tribunal. As emphasized in another decision of the Hon’ble Supreme Court as to what was that issue or matter may at times be decisive to consider whether the previous binding order of the appellate or revisional authority prevailed over the lower court or authority’s order.

The assessee sought to distinguish the decisions cited by the revenue, and relied upon several decisions. This court does not find any decision that has facts parallel to the present case.

One of such case, involved involving rectification by the AO, after the decision of the ITAT. The facts in that case were that while considering the issue of tax deduction, the AO computed said shortfall on account of tax and interest on part of the assessee; however the AO did not include tax payment by employer to exchequer on behalf of the employee as a part of salary for computing the value of rent free accommodation perquisite. The said order was contested by the assessee in appeal, which went up to the Tribunal. The Tribunal quashed the order of the AO and directed the AO to re-compute the tax liability. An order giving effect to the Tribunal’s direction was passed. A show cause notice was issued to the assessee requiring it to explain as to why the value of perquisite in respect of rent free accommodation should not be recomputed after including the tax element in gross salary and therefore, order be rectified under Section 154 of the Act. The assessee’s objections were brushed aside. The original order was thus rectified by re-computing perquisites for rent free accommodation by including tax element in the gross salary. The assessee appealed without success, to the CIT(A) and the ITAT stating that the original order of the AO had merged with the order of the Tribunal. The High Court however held that the principle of merger did not apply, on the ground that the question of including the tax paid on the perquisite, while grossing up, was not considered.

The High Court held that the power of the ITAT was not concurrent and therefore, the derivative power of the CIT to make additions could be of no avail to the revenue, which had authority under Section 154 of the Act the rectify the previous order, even while giving effect to the ITAT’s remand.

In the present case, the Hon’ble High Court opined that the issue sought to be urged by the assessee in the first ITAT order was in its cross objection, concerning the legality of reassessment which  undoubtedly, can be a matter of substance. The merits of the additions made after considering the assessee’s contentions were deleted by the CIT (A). He however upheld the reassessment proceeding. The assessee had two courses: either appeal or cross object against that part of the order, to the ITAT. It chose the latter, when the revenue appealed to the tribunal. The ITAT rejected the revenue’s appeal and also dismissed the assessee’s cross objections as infructuous.

The Tribunal was of the view that at this stage, the assessee could have cross objected before this court, or filed independent appropriate proceedings to protect its interest. however the assessee was sanguine about the case on the merits and unfortunately, did not choose to appeal or question the dismissal of its cross objections. However the assessee sought to challenge the judgment of the High Court reversing the ITAT (on merits of the addition) by appeal through special leave to the Supreme Court. Further, it chose to approach the ITAT after 2 years after the judgment of the High Court.

The Hon’ble High Court opined that the assessee’s claim for rectification was precluded by the doctrine of finality and not merely merger. Once the additions were upheld on merits, the second innings as it were before the tax authorities which have the effect of unsettling binding decisions of higher courts, cannot be countenanced. In that sense the issue of merger applies.

The Hon’ble High Court held that in the facts of the case, the Court was of opinion that the doctrine of finality applied as well. The assessee by conduct in not seeking remedy for the dismissal of its cross objection and speculatively waiting for the outcome of the revenue’s appeal, cannot be heard to complain that its grievance with respect to reassessment remained unaddressed specially when the assessee was a limited company and not an uninformed litigant; instead it was advised by counsel.

The Hon’ble High Court further stated that there is a difference in the structure of the power of rectification conferred upon tax authorities, such as the AO and the CIT on the one hand, and the ITAT, on the other. The AO- as well as lower revenue authorities have an overriding power to rectify, in Section 154(1A). However, such overriding power is absent, in the case of the ITAT, whose authority to amend or rectify its order is confined by the language of Section 254 (2).

Further, the Hon’ble High Court held that the conduct of the assessee was speculative as it calculatedly chose not to question the rejection of its cross objection on grounds of its having been rendered infructuous. Having waited more than a year after the decision of the High Court to approach the ITA. It offered no explanation why it did not seek the rectification earlier, during the pendency of the revenue’s appeal- in that event, if the ITAT had rejected its application this court would have given suitable directions. Instead, waiting for the time till the two members who decided the first ITAT orders were not available and choosing to prefer the rectification application at a convenient time, the assessee no doubt technically was compliant, but stood exposed to the odium of forum shopping.

Accordingly the Hon’ble High Court held that the rectification application filed by the assessee before the ITAT was barred by the principle of finality, and to an extent the doctrine of merger.

The Hon’ble High Court allowed writ petition and directed the assessee to bear the costs of the proceedings, quantified at Rs. 1.5 lakhs.

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