A reassessment was done in between. Does the two-year clock for s.263 restart from it?
Not for an item the reassessment never touched. For that item, limitation runs from the ORIGINAL assessment order, because the doctrine of merger does not apply where the subject matter is different.
Decided by the Supreme Court (S.B. Sinha J and Harjit Singh Bedi J) on 2007-07-27, reported as (2007) 293 ITR 1 (SC); (2007) 162 Taxman 465 (SC); (2007) 211 CTR 69 (SC); Civil Appeal No. 3301 of 2007. It bears on section 263, section 147, section 148 of the Income Tax Act 1961, in Revision & Rectification matters.
Revision notices arriving years after the original assessment usually rely on a later reassessment to restart the clock. This is the arithmetic that defeats that, and it is a pure limitation point — no merits argument needed.
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The assessee company's assessments for 1994-95, 1995-96 and 1996-97 were completed under s.143(3) on 27 February 1997, 12 May 1997 and 30 March 1998, accepting its treatment of the lease equalisation fund together with claims for share issue expenses, bad and doubtful debts and depreciation on gas cylinders and containers. Reassessment orders were passed on 28 March 2002 confined to three items — share issue expenses, bad and doubtful debts, and excess depreciation on gas cylinders and containers. The lease equalisation fund formed no part of the reassessment. By order dated 29 March 2004 the Commissioner invoked s.263, holding that the lease rentals had not been properly brought to tax because the assessee had not furnished complete details, and directed the Assessing Officer to check and assess the lease rentals from the lease equalisation fund for all three years. The Tribunal vacated that order as barred by limitation and the Madras High Court upheld the Tribunal, following its own decision in CWT v. A.K. Thanga Pillai. The Revenue appealed, relying on the Explanation to s.263 and on the doctrine of merger to argue that limitation ran from the reassessment order.
The Revenue's appeal was dismissed with costs. Where the item revised was not the subject matter of the reassessment, the doctrine of merger does not apply, and the two-year period under s.263(2) runs from the date of the original assessment order and not from the reassessment order. The Commissioner having invoked his revisional jurisdiction beyond that period, the exercise was wholly without jurisdiction and rendered the entire proceeding a nullity (paras 7, 13 and 15).
The Commissioner had found only the lease equalisation fund part of the assessment prejudicial to the Revenue, and the reassessment had nothing to do with that head of income, so no question of merger arose (para 7). Explanation (c) to s.263(1), inserted retrospectively by the Finance Act 1989, is clear: merger operates only in respect of items that were the subject matter of appeal, and the Commissioner's powers extend to matters not considered and decided (paras 8 and 13, following the three-Judge Bench in CIT v. Shri Arbuda Mills Ltd.). The Court accepted that once an assessment is reopened the previous underassessment is set aside and proceedings start afresh, as V. Jaganmohan Rao and Hind Wire Industries hold, but held that this does not mean the entire assessment is deemed reopened where the subject matter of the reassessment is distinct and different (paras 9 and 10). Sun Engineering Works was applied for the proposition that in s.147 proceedings the officer's jurisdiction is confined to income that has escaped tax and does not extend to revising or reconsidering the whole assessment (para 11). The Tribunal's finding of fact that all subsequent events concerned matters other than the lease equalisation fund was binding (para 12), and the Madras High Court's decision in A.K. Thanga Pillai, under the pari materia s.17 of the Wealth-tax Act, was approved (para 14).
Doctrine of merger, therefore, would not apply in a case of this nature.
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Handle my notice → Ask a CA on WhatsAppNot for an item the reassessment never touched. For that item, limitation runs from the ORIGINAL assessment order, because the doctrine of merger does not apply where the subject matter is different. This was decided by the Supreme Court (S.B. Sinha J and Harjit Singh Bedi J) and bears on section 263, section 147, section 148 of the Income Tax Act 1961. It is reported as (2007) 293 ITR 1 (SC); (2007) 162 Taxman 465 (SC); (2007) 211 CTR 69 (SC); Civil Appeal No. 3301 of 2007. Revision notices arriving years after the original assessment usually rely on a later reassessment to restart the clock. This is the arithmetic that defeats that, and it is a pure limitation point — no merits argument needed. If it applies to you, the first step is this: Identify the exact item the Commissioner proposes to revise, then check whether the reassessment dealt with that item.
The assessee company's assessments for 1994-95, 1995-96 and 1996-97 were completed under s.143(3) on 27 February 1997, 12 May 1997 and 30 March 1998, accepting its treatment of the lease equalisation fund together with claims for share issue expenses, bad and doubtful debts and depreciation on gas cylinders and containers. Reassessment orders were passed on 28 March 2002 confined to three items — share issue expenses, bad and doubtful debts, and excess depreciation on gas cylinders and containers. The lease equalisation fund formed no part of the reassessment. By order dated 29 March 2004 the Commissioner invoked s.263, holding that the lease rentals had not been properly brought to tax because the assessee had not furnished complete details, and directed the Assessing Officer to check and assess the lease rentals from the lease equalisation fund for all three years. The Tribunal vacated that order as barred by limitation and the Madras High Court upheld the Tribunal, following its own decision in CWT v. A.K. Thanga Pillai. The Revenue appealed, relying on the Explanation to s.263 and on the doctrine of merger to argue that limitation ran from the reassessment order. The matter was decided on 2007-07-27 by the Supreme Court (S.B. Sinha J and Harjit Singh Bedi J). On those facts the Supreme Court held as follows. The Revenue's appeal was dismissed with costs. Where the item revised was not the subject matter of the reassessment, the doctrine of merger does not apply, and the two-year period under s.263(2) runs from the date of the original assessment order and not from the reassessment order. The Commissioner having invoked his revisional jurisdiction beyond that period, the exercise was wholly without jurisdiction and rendered the entire proceeding a nullity (paras 7, 13 and 15).
The Commissioner had found only the lease equalisation fund part of the assessment prejudicial to the Revenue, and the reassessment had nothing to do with that head of income, so no question of merger arose (para 7). Explanation (c) to s.263(1), inserted retrospectively by the Finance Act 1989, is clear: merger operates only in respect of items that were the subject matter of appeal, and the Commissioner's powers extend to matters not considered and decided (paras 8 and 13, following the three-Judge Bench in CIT v. Shri Arbuda Mills Ltd.). The Court accepted that once an assessment is reopened the previous underassessment is set aside and proceedings start afresh, as V. Jaganmohan Rao and Hind Wire Industries hold, but held that this does not mean the entire assessment is deemed reopened where the subject matter of the reassessment is distinct and different (paras 9 and 10). Sun Engineering Works was applied for the proposition that in s.147 proceedings the officer's jurisdiction is confined to income that has escaped tax and does not extend to revising or reconsidering the whole assessment (para 11). The Tribunal's finding of fact that all subsequent events concerned matters other than the lease equalisation fund was binding (para 12), and the Madras High Court's decision in A.K. Thanga Pillai, under the pari materia s.17 of the Wealth-tax Act, was approved (para 14). In the words reproduced by the source cited on this page: "Doctrine of merger, therefore, would not apply in a case of this nature." The decision followed or applied CIT v. Shri Arbuda Mills Ltd. [1998] 231 ITR 50 (SC) — followed and relied upon; CWT v. A.K. Thanga Pillai [2001] 252 ITR 260 (Mad.) — approved; CIT v. Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297 (SC) — applied.
It was decided by the Supreme Court on 2007-07-27 and is reported as (2007) 293 ITR 1 (SC); (2007) 162 Taxman 465 (SC); (2007) 211 CTR 69 (SC); Civil Appeal No. 3301 of 2007. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 263, section 147, section 148, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed with costs. Where the item revised was not the subject matter of the reassessment, the doctrine of merger does not apply, and the two-year period under s.263(2) runs from the date of the original assessment order and not from the reassessment order. The Commissioner having invoked his revisional jurisdiction beyond that period, the exercise was wholly without jurisdiction and rendered the entire proceeding a nullity (paras 7, 13 and 15). It arises in Revision & Rectification matters, on section 263, section 147, section 148 of the Income Tax Act 1961, and was decided by S.B. Sinha J and Harjit Singh Bedi J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If it did not, count two years from the end of the financial year in which the ORIGINAL order was passed. Take limitation as your first ground; it is jurisdictional and disposes of the notice entirely.
Still good law. Followed and applied by the Bombay High Court in Ashoka Buildcon Ltd. v. ACIT [2010] 191 Taxman 29 (Bombay), decided 23 April 2010, which held that the order of assessment is not subsumed in the order of reassessment in respect of items that formed no part of the reassessment. No decision doubting or overruling it was located. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
One date in the report does not hold together: para 3 says reassessment proceedings were initiated on 5 March 2004 while the reassessment orders were passed on 28 March 2002, whereas para 4 records 5 March 2004 as the date the s.263 proceeding was initiated. Take the reassessment orders as dated 28 March 2002 and the revision order as dated 29 March 2004, which is what the reasoning turns on. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed with costs. Where the item revised was not the subject matter of the reassessment, the doctrine of merger does not apply, and the two-year period under s.263(2) runs from the date of the original assessment order and not from the reassessment order. The Commissioner having invoked his revisional jurisdiction beyond that period, the exercise was wholly without jurisdiction and rendered the entire proceeding a nullity (paras 7, 13 and 15).
TaxSphere, “CIT v Alagendran Finance Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-alagendran-finance/ (validity last checked 2026-08-19)
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