s.263 Expl. 1(c) — Doctrine of merger in revision
When a first appeal is decided, the assessment merges in the appellate order only on what the appeal considered and decided; everything else stays open to revision by the Revenue.
Explanation 1(c) to section 263(1) applies to appeals filed "on or before or after the 1st day of June, 1988" and deems the power always to have extended to matters not decided in appeal; the Supreme Court recorded in 1996 that the amendment was made by the Finance Act, 1989 with retrospective effect from 1 June 1988. The Finance Act, 2022 added the Transfer Pricing Officer's order to the clause from 1 April 2022. The clause still names only the Principal Commissioner or Commissioner, although sub-section (1) has named four ranks since 1 November 2020; section 377(2)(c) of the Income-tax Act, 2025 speaks of the Competent Authority.
Income-tax Act, 1961
s.263 Expl. 1(c)
Income-tax Act, 2025
s.377(2)(c)
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Merger is the rule that when an appellate authority reverses, modifies or affirms an order, the order below merges in the appellate order, which alone remains operative (Kunhayammed & Ors v. State of Kerala & Anr, Supreme Court, 19 July 2000). Section 263 of the Income-tax Act, 1961 reaches only an order of the Assessing Officer or the Transfer Pricing Officer, so what has merged is beyond it. Explanation 1(c) to section 263(1) fixes the extent: where the order "had been the subject matter of any appeal", the power extends, and is deemed always to have extended, "to such matters as had not been considered and decided in such appeal". Before any such clause, in Commissioner of Income-tax, Bombay v. M/s. Amritlal Bhogilal & Co. (Supreme Court, 28 April 1958), under section 33B of the 1922 Act, an order granting registration, which could not be the subject of the assessee's appeal, was held revisable although the assessment had been modified in appeal. Shri Arbuda Mills Ltd. (Supreme Court, 23 January 1996) applied clause (c) to three claims that the officer had allowed and that were not in the assessee's appeal, and Jaykumar B. Patil (Supreme Court, 13 December 1996) followed it on a question about "issues not touched by the CIT(A)". Merger is therefore issue by issue. The same idea governs limitation after a reassessment: in Commissioner of Income Tax, Chennai v. M/s. Alagendran Finance Ltd. (Supreme Court, 27 July 2007) an item outside the reassessment did not merge in the reassessment order, and the two years ran from the original order. The assessee's own revision is treated differently: section 264(4)(c) bars it where the order "has been made the subject of an appeal", and how far that bar reaches for a point outside the appeal is disputed. Under the Income-tax Act, 2025 the counterparts are section 377(2)(c), which speaks of "the powers of the Competent Authority", and section 378(5)(c).
What the provision does
Sets the boundary between what a decided first appeal has taken out of the Revenue's reach and what remains revisable under section 263 or section 377. A matter the Commissioner (Appeals) considered and decided cannot be revised; the Revenue's remedy on it is an appeal to the Tribunal. A matter he did not consider and decide stays revisable, within two years from the end of the financial year of the Assessing Officer's order. The doctrine does not extend that period, does not protect an item merely because the appellate authority could have examined it, and is not applied in the same terms to the assessee's revision under section 264, where the reach of the bar is disputed.
Threshold questions
- Whether the first appeal has been decided, or is pending, withdrawn or dismissed without a decision on merits
- Whether the matter the Revenue seeks to revise was a ground of the appeal
- Whether, if it was not a ground, the appellate authority had to pass on it in order to decide the ground that was before him
- Whether the appellate order shows that the matter was considered and decided, or is silent on it
- Whether the revising authority is a Principal Commissioner or Commissioner, the only ranks that Explanation 1(c) names
- Whether two years from the end of the financial year of the Assessing Officer's order have expired, since the appeal does not extend that period
In practice
The recurring disputes.
What considered and decided means for an issue bound up with the one appealed
The assessee's case is that a matter is considered and decided when the appellate authority could not dispose of the ground before him without passing on it. In Commissioner of Income Tax v. Shashi Theatre (P) Ltd. (Gujarat High Court, 5 September 2000, para 4) the appeal concerned investment allowance on the items disallowed; the Court held that "it was necessary to go into the question of validity of the grant" on the items allowed, that the whole claim "was before the Appellate Authority", and that revision of the allowed items was barred. Commissioner of Income Tax v. Nirma Chemicals Works P. Ltd. (Gujarat High Court, 4 February 2008, para 15) applied this to section 80-I: in an appeal on the amount of the deduction the appellate authority was "duty bound to examine" whether the claim met the conditions of the section. The Revenue's case is that the power of the Commissioner (Appeals) to look at other items is not enough. In Commissioner of Income-tax v. Panna Knitting Industries (Gujarat High Court, 5 December 2000, para 8) weighted deduction on export freight was in appeal and three other items were not; the Court accepted that the appellate authority could have withdrawn them and still upheld the revision, since clause (c) exists for matters "which have escaped the attention of the appellate authority". The decisions are reconciled, as counsel for the assessee put it in Nirma Chemicals (para 9), by the difference between one deduction whose grant presupposes eligibility and independent heads of claim. A claim that sits between the two is open. So is a ground raised but not pressed, though on the words of clause (c), which require both consideration and decision, such a ground has not been decided.
Whether revision is open while the first appeal is pending
The assessee's case is that it is not. The Madras High Court held in Smt. Renuka Philip (14 November 2018, para 22) that under clause (c) "when the appeal is pending before the Commissioner, the exercise of jurisdiction under Section 263 of the Act is barred", the "larger issue" being before the Commissioner (Appeals) (para 23). The Allahabad High Court applied the same bar in Vam Resorts & Hotels Pvt. Ltd. (20 August 2019, paras 25 and 28). The appeal there was against a disallowance of Rs.1,20,000 out of development expenses and the revision concerned sections 40A(3) and 40(a)(ia), so the bar was applied to matters outside the appeal (paras 2 to 4). The practical point is that the Commissioner (Appeals) can himself enhance on the issue before him, and a parallel revision invites conflicting orders. The Revenue's case is that clause (c) extends the power to whatever has not been considered and decided, and a pending appeal has decided nothing. In Amritlal Bhogilal the appeal for one of the years was pending when the Commissioner revised; the Court held that "no question of merger arose", that until the appeal is disposed of the order "subsists and is effective in law", and that courts "would not be justified in imposing additional limitations" on the power. The assessee answers that the order revised there, the grant of registration, could not have been questioned in the assessee's appeal, so the Revenue had no other remedy. In the firm's view a pending appeal does not bar revision of a matter that is not before the Commissioner (Appeals): Vam Resorts, so far as it holds otherwise, reads into clause (c) a bar that its words do not contain, though an assessee may cite it. Amritlal Bhogilal does not decide the case of an issue within the pending appeal. Revision of the very issue under appeal is the contestable case: the text does not bar it, but the argument for restraint is strong and Renuka Philip supports the objection. The point is open in Gujarat.
An appeal withdrawn, or dismissed without a decision on merits
The Revenue's case is on the words. Clause (c) asks what was "considered and decided", and an order that records a withdrawal or dismisses an appeal for default or delay considers and decides nothing, so the whole of the Assessing Officer's order stays revisable. The general law points the same way: under Kunhayammed (Supreme Court, 19 July 2000) merger follows where the superior forum "modifies, reverses or affirms the decision put in issue before it". The assessee's case is that a first appeal is an appeal as of right, that its dismissal leaves the appellate order as the operative order, and that Kunhayammed treats the dismissal of an appeal, even without reasons, as attracting merger, and makes the subject matter of challenge "laid or capable of being laid" determinative. Two cautions apply. Kunhayammed concerned the refusal of special leave under Article 136 of the Constitution, and what it says of a dismissal in limine cannot be carried over to an order under section 250 without care. And clause (c) is a special rule for section 263: it does not ask whether the order merged but what the appeal considered and decided. In the firm's view the Revenue's reading is the stronger one for section 263. The assessee's own revision is on a different footing, since section 264(4)(c) and section 378(5)(c) bar it once the order "has been made the subject of an appeal", and whether a withdrawn appeal still attracts that bar is arguable both ways on those words. Neither question is settled.
The two ranks named in Explanation 1(c)
Sub-section (1) has named four ranks since 1 November 2020. Clause (c) still extends only "the powers of the Principal Commissioner or Commissioner" to matters outside a decided appeal. The assessee's case is that a power exercised against the taxpayer is read strictly. Clause (c) gives a Principal Chief Commissioner or Chief Commissioner nothing, and without it the assessee can invoke the view, recorded by the Bombay High Court in Ritz Ltd. and another v. Union of India and others (23 March 1990, para 8), that once an assessment is the subject of an appeal "the whole of it merges in that of the appellate order". Amritlal Bhogilal does not answer this, because it concerned a separate order of registration and itself said that the assessments modified in appeal had ceased to be the Income-tax Officer's orders. Parliament has returned to the clause since: Act No. 6 of 2022 inserted in it, with effect from 1 April 2022, "or the Transfer Pricing Officer, as the case may be", and left the two ranks as they were. The Revenue's case is that the clause is declaratory: it opens "For the removal of doubts" and deems the power always to have extended, so it states a limit on merger that exists apart from it. Section 253(1)(c)(ii) contemplates orders under section 263 by the higher ranks, and nothing suggests that Parliament gave them a power that fails whenever an appeal has been decided. The amendment of 2022 was directed only at the Transfer Pricing Officer, and the Department's annotated editions for 2021 and 2022 note that the higher ranks "should also appear" in clause (c). In the firm's view the omission should not defeat a revision, because the power comes from sub-section (1), which names four ranks, and clause (c) declares the reach of the powers "under this sub-section"; the amendment of 2022 makes that less sure. An assessee facing a revision by one of the higher ranks after a decided appeal should still take the point; it is open.