Partial merger in income-tax assessment allows rectification of untouched issues, and limitation runs from the final operative assessment order.

Merger of an income-tax assessment is partial and extends only to the items actually considered and decided in appeal. Untouched portions of the original assessment remain open to rectification by the Income-tax Officer under section 35(1) of the Indian Income-tax Act, 1922, because the original error survives where no appellate decision exists on that point. For limitation under section 35(5), the four-year period runs from the final assessment order that actually governs the liability, including a later rectification order under section 35(1), rather than from the earlier appellate order alone. The text treats the later 1961 provision as reflecting the same principle.

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Issues: (i) Whether, after an appeal against part of an assessment is disposed of by the Appellate Assistant Commissioner, the Income-tax Officer retains jurisdiction to rectify under section 35(1) of the Indian Income-tax Act, 1922 that part of the assessment which was not considered and decided in appeal. (ii) Whether, for rectification under section 35(5) of the Indian Income-tax Act, 1922, the four-year period runs from the appellate order or from a later rectification order passed under section 35(1).

Issue (i): Whether, after an appeal against part of an assessment is disposed of by the Appellate Assistant Commissioner, the Income-tax Officer retains jurisdiction to rectify under section 35(1) of the Indian Income-tax Act, 1922 that part of the assessment which was not considered and decided in appeal.

Analysis: The doctrine of merger applies only to the extent the appellate authority has considered and decided the matter. Where an assessment is appealed only in respect of some items, and other items are neither raised nor examined suo motu, there is no appellate decision on those untouched items. The original assessment survives in that limited sphere, and a mistake apparent from the record in that part of the assessment remains the Income-tax Officer's own mistake capable of rectification. The statutory principle later reflected in section 154(1A) of the Income-tax Act, 1961 was treated as declaratory of the pre-existing law.

Conclusion: The Income-tax Officer retained jurisdiction to rectify the untouched portion of the assessment. The challenge based on complete merger failed and was against the assessee.

Issue (ii): Whether, for rectification under section 35(5) of the Indian Income-tax Act, 1922, the four-year period runs from the appellate order or from a later rectification order passed under section 35(1).

Analysis: A rectification under section 35(1) forms part of the assessment process and produces the corrected final assessment unless altered by a later order. The phrase "final order passed in the case of the firm" refers to the order that finally effects the assessment, not merely the earlier appellate order. Since the later rectification order altered the final assessment, limitation under section 35(5) had to be counted from that rectification order.

Conclusion: The period of four years ran from the later rectification order, so the impugned rectification under section 35(5) was within time. This issue was against the assessee.

Final Conclusion: The petition was rejected because the Income-tax Officer's rectification powers survived in respect of matters not decided in appeal, and the subsequent rectification under section 35(5) was not time-barred.

Ratio Decidendi: Merger in income-tax proceedings is partial and limited to matters actually considered and decided in appeal; untouched items in the assessment remain open to rectification by the original authority, and limitation for later rectification runs from the final assessment order that actually governs the liability.

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