Short Overview : Enhancement of assessment by CIT(A) on a new source of income that was not considered by AO could not be upheld.

AO completed assessment after making only disallowance under section 14A read with rule 8D. Aggrieved, assessee carried the matter in appeal. CIT(A) deleted addition made under section 14A nevertheless he enhanced assessment by disallowing salary expenses claimed by  assessee. Assessee challenged this on the ground that CIT(A) had no jurisdiction to make enhancement on a new source of income. 

It is held that : Power of CIT(A) as regards enhancement is restricted to the subject-matter of assessment or the sources of income which have been considered expressly or by clear implication by AO from the point of view of  taxability. In asses see’s case, AO made statutory disallowance under section 14A. Under the circumstances, disallowance of salary was enhancement of income from a new source which was not considered by AO. Thus, enhancement of assessment by CIT(A) on a new source of income could not be upheld.

Decision: In asses see’s favor.

 IN THE ITAT, KATAKANA BENCH

J. SUDHAKAR REDDY, A.M.

Sugota Industries Pvt. Ltd. v. ITO

I.T.A. No. 1459/Kol/2019

A.Y. 2013-14

16 March, 2020

Assessee by: A.K. Tibrewal, FCA & Amit Agarwal, Adv.

Revenue by: Dhrubajyoti Ray, JCIT, Sr. DR,

J. Sudhakar Reddy, A.M.

This is an appeal filed by the assessee directed against the order of the Commissioner (Appeals)-3, Kolkata [‘CIT(A)’ for short] dated 16-4-2019 under section 250 of the Income Tax Act, 1961 (‘the Act’ for short) for assessment year 2013-14.

2. The assessee is a domestic company and filed its return of income for the assessment year 2013-14 on 29-10-2013 declaring total income at Rs.10,340. The assessing officer completed assessment under section 143(3) of the Act on 31-12-2015 determining the total income of the assessee at Rs.12,19,571 after making disallowance under section 14A of the Act r.w. Rule 8D of the Income Tax Rule.

3. Aggrieved, the assessee carried the matter in appeal. The first appellate authority deleted the addition made under section 14A of the Act by the assessing officer. Nevertheless he enhanced the assessment by giving a notice of enhancement. In this notice of enhancement, he proposed to disallow salary expenses claimed by the assessee to the tune of Rs.11,21,250 for various reasons. The assessee relied upon the judgement of Hon’ble Delhi High Court in the case of Sardari Lal & Co. (2001) 120 Taxman 595 (Del.) : 2001 TaxPub(DT) 1617 (Del-HC) and argued that, the learned Commissioner (Appeals) has no jurisdiction to make an enhancement on a new source of income.

4. The learned Commissioner (Appeals) relied on the judgement of the Hon’ble Supreme Court in the case of Nirbheram Daluram (1997) 224 ITR 610 (SC) : 1997 TaxPub(DT) 1136 (SC) for the propositions that powers of the learned Commissioner (Appeals) are co-terminus with that of the ITO as held by the Hon’ble Supreme Court in the case of Jute Corpn. Of India Ltd. v. CIT (1991) 187 ITR 688 (SC) : 1991 TaxPub(DT) 0505 (SC).

5. He distinguished the judgement of the Hon’ble Delhi High Court in the case of Sardari Lal & Co. (supra). The learned Commissioner (Appeals) also relied on the decision of the Allahabad High Court in the case of CIT v. Kashi Nath Candiwala (2006) 144 Taxman 840 (All) : 2006 TaxPub(DT) 0129 (All-HC) and rejected the contention of the assessee. He enhanced the assessment by disallowing the claim of salary payment of Rs.11,21,250 for the various reasons given in his order. Aggrieved, the assessee is in appeal before me.

6. The learned Councel for the assessee Mr. A.K. Tibrewal submitted that, the sole issue is whether the learned Commissioner (Appeals) was right in relying on the decision of the Allahabad Bench of the Tribunal in the case of Kashi Nath Candiwala (supra) and ignoring the full bench decision of the Hon’ble Delhi High Court in the case of Sardari Lal & Co. (supra). He took this Bench through both these judgements and submitted that the full bench decision of the Hon’ble Delhi High Court should have been followed by learned Commissioner (Appeals) under the facts and circumstances of the case. He further pointed out that the Kolkata SMC bench of the Tribunal in the case of Manjit Management Services Pvt. Ltd. v. ITO in ITA No. 2667/Kol/2018, Order, dated 10-5-2019has followed this judgement in the case of Sardari Lal & Co. (supra).

7. The learned DR on the other hand opposed the contention and submitted that this is not a new source of income which is brought to tax by the learned Commissioner (Appeals) and hence the full bench decision in the case of Sardari Lal & Co. (supra) would not apply on the facts of this case. He relied on the order of the learned Commissioner (Appeals).

8. Rival contentions heard. On a careful consideration of the facts and circumstances of the case, perusal of the papers on record and case laws cited, I hold as follows.

9. The assessing officer in this case has only disallowed expenses under section 14A of the Act r.w. Rule 8D of the Income Tax Rules. No other aspect or issue has been touched by the assessing officer in the assessment order. The learned Commissioner (Appeals) enhanced the assessment by disallowing the claims made by the assessee on account of payment of salary.

10. The question is whether the learned Commissioner (Appeals) has such powers of enhancement under section 251(1) of the Act. This bench of the Tribunal in the case of Manjit Management Services Pvt. Ltd. (supra) from para 7 onwards held as follows :–

“7. Section 251(1)(a) of the Act, reads as follows :–

“(a) In an appeal against an order of assessment he may confirm, reduce, enhance or annul the assessment, or he may set aside the assessment and refer the case back to the assessing officer for making a fresh assessment in accordance with the directions given by the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the assessing officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment;”

7.1. This Section has been interpreted by the Hon’ble Courts as follows :–

CIT v. Rai Bhadur Hardutroy Motilal Chamaria (1967 SCR (3) 508)

“The principle that emerges as a result of the authorities of this Court is that the Appellate Assistant Commissioner has no jurisdiction, under s. 31(3) of the Act, to assess a source of income which has not been processed by the Income- tax Officer and which is not disclosed either in the returns filed by the assessee or in the assessment order, and therefore, the Appellate Assistant Commissioner cannot travel beyond the subject- matter of the assessment. In other words, the power of enhancement under s. 31 (3) of the Act is restricted to the subjectmatter of assessment or the sources of income which have been considered expressly or by clear implication by the Income-tax Officer from the point of view of the taxability of die assessee.

……. But since the Income-tax Officer has not applied his mind to the question of the taxability or non-taxability of the amount of Rs. 5,85,000, the Appellate Assistant Commissioner had no jurisdiction, in the circumstances of the present case, to enhance the taxable income of the assessee on the basis of this amount of Rs. 5,85,000 or of any portion thereof. As we have already stated. it is not open to the Appellate Assistant Commissioner to travel outside the record, i.e., the return made by the assessee or the assessment order of the Income- tax Officer with a view to find out new sources of income and the power of enhancement under section 31(3) of the Act is restricted to the sources of income which have been the subject-matter of consideration by the Income-tax Officer from the point of view of taxability. In this context “consideration” does not mean “incidental” or “collateral” examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied Ms mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection. In the present case it is manifest that the Income-tax Officer has not considered the entry of Rs. 5,85,000 from the point of view of its taxability and therefore the Appellate Assistant Commissioner had no jurisdiction, in an appeal under section 31 of the Act, to enhance the assessment.”

CIT v. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC) : 1962 TaxPub(DT) 0283 (SC)

“There is no doubt that the Appellate Assistant Commissioner can “enhance the assessment”. It is admitted also by the assessee that within the four corners of the sources processed by the Income-tax Officer, the Appellate Assistant Commissioner can enhance the assessment. This power must, at least, fall within the words “enhance the assessment”, if they are not to be rendered wholly nugatory. The controversy in this case is about his discovering new sources,  not mentioned in the return and not considered by the Income-tax Officer. The High Court held following its earlier view in Manordass v. CIT (1957) 31 ITR 909 (Bom) : 1957 TaxPub(DT) 0101 (Bom-HC)Narrondas , that the Appellate Assistant Commissioner has revisional powers, but that they are  confined to what was before the Income-tax Officer and considered by the latter. The correctness of this view is challenged in this appeal by the Commissioner of Income-tax,  Bombay.The earliest case, which considered the meaning of section 31(3), was Jagarnath Therani v. CIT AIR 1925 PAT. 408 decided by the Patna High Court. In that case, the assessee had three businesses at Purnea, Jalpaiguri and Calcutta. His income from Purnea only was assessed by the Income-tax Officer. On appeal by the assessee, the Appellate Assistant Commissioner assessed him with regard to the income from the other two businesses.

The head of income was the same within section 6 of the Income-tax Act, but the sources of income were different. The Patna High Court observed :–

“Now this section relating to appeals is enacted for the benefit of the subject and also, to the limited extent therein stated, for the benefit of the Crown. But the subject-matter of the appeal is the assessment and the scope of the appeal must in my opinion be limited by the subjectmatter.  The appellate authority has no power to travel beyond the subject-matter of the assessment and, for all the reasons advanced by the appellant, is in my opinion not entitled to assess new sources of income.”

The view of the Patna High Court receives support from a decision of the Madras High Court in Gajalakshmi Ginning Factory v. CIT (1952) 22 ITR 502 (Mad) : 1952 TaxPub(DT) 0102 (Mad-HC)where, at page 510, the Divisional Bench observed as follows :–

“Of course, it would not be open to the Appellate Assistant Commissioner to introduce into theassessment new sources, as his power of enhancement should be restricted only to the income which was the subject-matter of consideration for purposes of assessment by the Income-tax Officer.”

In Bishwanath Prasad Bhagwat Prasad v. CIT (1956) 29 ITR 748 (Pat) : 1956 TaxPub(DT) 0037 (Pat-HC), the Appellate Assistant Commissioner had actually remanded the case, but while considering the powers of the Appellate Assistant Commissioner, the Divisional Bench appears to have approved of the above-quoted passage from the Madras case. The observations in that case may be treated as obiter. In Narrondas Manordass v. CIT (1957) 31 ITR 909 (Bom) : 1957 TaxPub(DT) 0101 (Bom-HC) is to be found the earlier case of the Bombay High Court, which was followed in the judgment under appeal. In that case, the assessee was carrying on business in Bombay and also in Rajkot. The profits from the Rajkot business were assessed by the Income-tax Officer at Rs.  1,17,643. The Income-tax Officer also found remittances to the extent of Rs. 4 lakhs from Rajkot to Bombay, but did not include that amount in the assessment in view of the concession allowed  by the Part B States Taxation Concession Order. The assessee appealed with respect to the sum of Rs. 1,17,643, contending that the Rajkot business had no profits but only loss. The Appellate Assistant Commissioner accepted this contention, but set aside the assessment and remanded the case to the Income-tax Officer for reassessment with a view to assessing the sum of Rs. 4 lakhs. In dealing with the case, the High Court held that the powers of remand were extremely wide, but it quoted with approval the decision of the Patna High Court in Jagarnath Therani v. CIT AIR 1925 Pat. 408and also the above observation of the Madras High Court. The learned Chief Justice on that occasion added that there was a distinction between the subject-matter of the appeal and the subject-matter of the assessment, and that the Appellate Assistant Commissioner’s powers under section 31 were not confined to the subject-matter of the appeal but extended to the subject-matter of the assessment. Those powers included a power of remand to include in the assessment something which ought to have been so included by the Income-tax Officer, and a remand in that case was, therefore, proper.  The matter also came before this court in CIT v. McMillan & Co. (1958) 33 ITR 182 (SC) : 1958 TaxPub(DT) 0107 (SC); but the question, with which we are concerned, was left open. There is,  however, a passage in the judgment, approving of the observations of Chagla, C.J., in Narrondas Manordass v. CIT (1957) 31 ITR 909 (Bom) : 1957 TaxPub(DT) 0101 (Bom-HC) to the following effect :–

“It is clear that the Appellate Assistant Commissioner has been constituted a revising authority against the decisions of the Income-tax Officer; a revising authority not in the narrow sense of revising what is the subject-matter of the appeal, not in the sense of revising those matters about which the assessee makes a grievance, but a revising authority in the sense that once the appeal is before him he can revise not only the ultimate computation arrived at by the Income tax Officer but he can revise every process which led to the ultimate computation or assessment. In other words, what he can revise is not merely the ultimate amount which is liable to tax, but he is entitled to revise the various decisions given by the Income-tax Officer in the course of the assessment and also the various incomes or deductions which came in for consideration of the Income-tax Officer.”

The learned Chief Justice in the judgment under appeal considers that this court has thus given approval to his view and also the view of the Patna High Court in the earlier case. In our opinion, this court must be held not to have expressed its final opinion on the point arising here, in view of what was stated at pages 709 and 710 of the report. This court,  however, gave approval to the opinion of the learned Chief Justice of the Bombay High Court that section 31 of the Income-tax Act confers not only appellate powers upon the Appellate Assistant Commissioner in so far as he is moved by an assessee but also a revision jurisdiction to revise the assessment with a power to enhance the assessment. So much, of course, follows from the language of the section itself. The only question is whether in enhancing the assessment for any year he can travel outside the record that is to say, the return made by the assessee and the assessment order passed by the Income-tax Officer with a view to finding out new sources of income not disclosed in either. It is contended by the Commissioner of Income tax that the word “assessment” here means the ultimate amount which an assessee must pay, regard being had to the charging section and his total income. In this view, it is said that the words “enhance the assessment” are not confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. There is no doubt that this view is also possible. On the other hand, it must not be over looked that there are other provisions like sections 34 and 33B, which enable escaped income from new sources to be brought to tax after following a special procedure. The assessee contends that the powers of the Appellate Assistant Commissioner extend to matters considered by the Income-tax Officer, and if a new source is to be considered, then the power of remand should be exercised. By the exercise of the power to assess fresh sources of income, the assessee is deprived of a finding by two tribunals and one right of appeal.  The question is whether we should accept the interpretation suggested by the Commissioner in preference to the one, which has held the field for nearly 37 years. In view of the provisions of sections 34 and 33B by which escaped income can be brought to tax, there is reason to think that the view expressed uniformly about the limits of the powers of the Appellate Assistant Commissioner to enhance the assessment has been accepted by the legislature as the true exposition of the words of the section. If it were not, one would expect that the legislature would have amended section 31 and specified the other intention in express words. The Incometax Act was amended several times in the last 37 years, but no amendment of section 31(3) was undertaken to nullify the rulings, to which we have referred. In view of this, we do not think that we should interpret section 31 differently from what has been accepted in India as its true import, particularly as that view is also reasonably possible.

CIT v. Associated Garments Makers [(1992) 64 Taxman 215 (Raj) : 1992 TaxPub(DT) 1199 (Raj-HC)]

“7. Appeals are provided under section 246 of the Act before the AAC and the Commissioner (Appeals). These appeals are by the assessee aggrieved by the orders mentioned therein. Any order made under section 143(3) is appeal able and the powers of the appellate court are provided in section 251 of the Act wherein appellate authority has power to confirm,  reduce, enhance or annul the assessment or he may set aside the assessment and refer the case back to the ITO for making fresh assessment in accordance with directions given in appeal and after making such further enquirer as may be necessary. These powers are, inter alia, mentioned in the other powers. According to sub-section (2) of section 251, the AAC has no power to enhance assessment or a penalty, or reduce the amount or refund unless the appellant has a reasonable opportunity for showing cause against such enhancement or reduction. An explanation has been provided according to which the AAC may consider and decide any matter arising out of the proceedings in which the order appealed against was passed,  notwithstanding the fact that such matter was not raised before him. A perusal of sections 246 to 251 of the Act makes it clear that any questions arising out of the assessment orders in an appeal by the assessee can be possible and wide powers are given to the appellate authority, but these powers are circumscribed by the assessment order in the matters arising thereof or a matter arising out of the proceedings. Even the appellate authority has suo motu power to consider the questions arising thereof but there is no provision to go beyond the matter arising out of the proceedings before the assessing authority, more particularly as separate provisions for that are made in the Act. The Tribunal has elaborately discussed the provisions of the Act and the case law on the subject and has rightly come to the conclusion that new sources not mentioned in the return or considered by the ITO are beyond the scope of powers of the AAC.  The case relied on by the learned counsel for the petitioner about the power of setting aside the assessment order remanding the case for re-consideration of the whole matter including the evasion by the assessee, is not applicable to the facts of the present case because the matter arising in that case was one which arose out of the proceedings before the ITO. The question was not about new and fresh material for the purposes of enhancement. On the contrary, the case is clearly covered by the decisions of the Supreme Court in CIT v. Shapoorji Pallonji Mistry’s case (supra) wherein it has been held that, “In an appeal filed by the assessee the Appellate Assistant Commissioner has no power to enhance the assessment by discovering new  sources of income not mentioned in the return of the assessee or considered by the Income-tax Officer in the order appealed against”, and in the case of Rai Bahadur Hardutroy Motilal Chamaria (supra) wherein it has been held that, “It is not therefore open to the Appellate Assistant Commissioner to travel outside the record, i.e., the return made by the assessee or the assessment order of the Income-tax Officer, with a view to finding out new sources of income and the power of enhancement under section 31(3) is restricted to the sources of income which have been the subject-matter of consideration by the Income-tax Officer from the point of view of taxability”. Their Lordships considered the meaning of the word ‘consideration’ and held that, ” ‘consideration’ does not mean ‘incidental’ or ‘collateral’ examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection”. In the instant case, the AAC had himself, after issuing notice, considered the new material and had gone into new sources of income for the consideration of which he had no jurisdiction.

8. In fact, we fail to understand as to why when the order was brought to the notice of the Commissioner he proceeded into wrong direction when he had ample powers under other provisions of this Act. There are various other provisions under the Act which can be invoked in cases of escaped income or such situation where the new sources had been left to be considered,  but that would not give powers to the AAC to transgress his jurisdiction.”

CIT v. Sardari Lal & Co. (2001) 251 ITR 864 (Delhi) (FB) : 2001 TaxPub(DT) 1617 (Del-HC) 

“8. Looking from the aforesaid angles, the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the assessing officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 and section 263, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the first appellate authority. That being the position, decision in Union Tyres’case (supra) of this Court expresses the correct view and does not need re-consideration. This reference is accordingly disposed of.”

11. The case of Kashi Nath Candiwala (supra) what was enhanced was a new source of income. The assessing officer in that case assessed to tax, income from business, after making certain additions on account of excessive claim of deduction. This source of income from business was enhanced by the learned Commissioner (Appeals) in that case. In the case on hand, the assessing officer made a statutory disallowance under section 14A of the Act. Under the circumstances, disallowance of salary is enhancement of income from a new source which was not considered by the assessing officer. Thus, we agree with the argument of the learned Counsel for the assessee and quash the enhancement of the assessment by the learned Commissioner (Appeals).

12. Before parting, it is noted that the order is being pronounced after ninety (90)  days of hearing. However, taking note of the extraordinary situation in the light of the COVID-19 pandemic and lock down, the period of lock down days need to be excluded.  For coming to such a conclusion, I rely upon the decision of the Co-ordinate Bench of the Mumbai Tribunal in the case of DCIT v. JSW Limited in ITA No. 6264/Mum/2018 & 6103/Mum/2018, Assessment year 2013-14, Order, dated 14-5-2020 : 2020 TaxPub(DT) 2142 (Mum-Trib).

13. In the result, the appeal of the assessee is allowed.