Powers of CIT(A) for admitting additional ground of appeal

CA Maneet Pal Singh

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Brief of case laws in regarding the powers of CIT(A) admitting additional grounds of appeal:

Dr. K. Nedunchezhian v. Deputy Commissioner of Income-tax

[2006] 153 Taxman 183 Madras High Court

CIT (A) has been vested with sufficient powers to decide appeal on merits on all aspects in order to render justice by virtue of exercise of appellate power vested with him.

Despite deletion of certain expressions from section 251(1)(c) by Finance (No. 2) Act, 1998, CIT (A) has powers to go into question as to violation of principles of natural justice committed by AO while passing assessment order

The assessee filed a writ petition challenging the block assessment proceedings and order and stating that the AO had violated the principles of natural justice while passing the order and that in these circumstances, he could not validly work out his remedy by way of statutory appeal provided u/s 247 to 251. He also submitted that by virtue of amendment in section 251(1)(c) by Finance (No. 2) Act, 1998, CIT (A) lacks jurisdiction to deal with such preliminary issue relating to the violation of principles of natural justice and the said appellate authority can only deal with the question as to the merits of the assessment and nothing else.

Held that:

Section 250(5) specifically provides that the CIT (A) can even allow the appellant to go into any ground of appeal not specified in the grounds of appeal if the appellate authority is satisfied that the omission of that ground from the form of appeal was neither wilful nor unreasonable. Similarly, u/s 251(1)(c), it is provided that the appellate authority in any other case can pass orders in the appeal as he thinks fit.

Further, in the Explanation it is stated that the CIT (A) can consider and decide any matter arising out of the proceedings in which the order appealed against was passed notwithstanding that such matter was not raised before the CIT (A) by the appellant.

Thus, a conspectus reading of the abovesaid provisions even after the deletion of certain expressions by the Finance Act (No. 2) of 1998 would make it clear that the CIT (A) has been vested with sufficient powers to decide the appeal on the merits on all aspects in order to render justice by virtue of exercise of the appellate power vested with him. In such circumstances, merely because certain expressions came to be deleted from section 251(1)(c), it cannot be said that there is no scope for the CIT (A) to go into the question as to the violation of principles of natural justice complained of by the assessee while prosecuting the appeal before him.

Therefore, there was no scope to entertain the writ petition in the light of the alternative efficacious remedy available to the assessee u/ss 247 to 251. The writ petition was, therefore, liable to be dismissed.

CIT vs Trehan Enterprises 108 Taxman 189 (Jammu & Kashmir High Court)

CIT (A) has virtually all powers which are vested with AO and are in nature of reassessment. CIT(A) has the power to allow the claim of the assessee by holding the requirement of section 80J and 80HH to have been met by accepting the CA certificates in Form No. 10C and 10D in the appellate proceedings, when the same were not filed with the AO.

Assessee’s claims u/s 80J and 80HH were denied by the AO on the ground that CA cer­tificate in Form No. 10C was not furnished. In appeal, the assessee furnished the said certificate but CIT(A) did not consider it. ITAT, however, accepted assessee’s contention that CIT(A) should have treated the requirements to have been met when CA certificates had been filed before him, instead of the same having been filed along with the return as required u/s 80HH(5).

Held:

This case has to be examined keep­ing in view the powers of the appellate authority u/s 251 and to see whether it was within its power to have accepted the same or in the absence of requisite certificate having been furnished along with return of income, the appellate authority was powerless and helpless.

In this behalf, provision of section 251 needs to be noted. A perusal of section 251 clearly indicates that while hearing an appeal against an assessment order, the CIT(A) has virtually all the powers which are vested with the officer framing the assessment. In fact, it is in the nature of a plenary power authorising the CIT(A) to confirm, reduce, enhance or annul the assessment. He is also competent to set aside the assessment and refer back the case to the AO for fresh assessment as per the direction. The powers conferred upon the CIT(A) u/s 251(1)(a) are in the nature of reassessment. While confirming, reducing, or enhancing, it is implicit that in either of these situations he will have to examine the case and it is only thereafter that one of such eventuali­ties may arise.

Moreover, taxation appeals cannot be put at par with civil appeals under the Code of Civil Procedure. In civil appeal, it’s an adjudication of claims of two parties which is known as adversary system. This is not the situation in the tax appeals because in such appeals, the revenue authority concerned is not an adversary or opponent in the sense of the term like in civil cases. The whole purpose of the revenue authority being arrayed as an opponent is one to ensure that the assessment is made as per the requirements of law irrespective of its outcome.

Thus, having come to the conclusion that the CIT(A) has the authority of reassessment on construction of section 251(1)(a), no exception could be taken to the decision of the ITAT in the instant case as what could be done by the ITO was within the competence of the CIT (A).

53 ITR 225 CITv. Kanpur Coal Syndicate (Supreme Court)

The AAC has plenary powers in disposing of an appeal. The scope of his powers is conterminous with that of the ITO. He can do what the ITO can do and can also direct him to do what he has failed to do.

Section 3 of the 1922 Act gives impliedly an option to assess the total income of either an AOP or the members individually, but it does not specify the particular officer who can exercise the option. It is in the first instance for the ITO to exercise that option. This is part of the process of assessment. Where, however, the ITO assesses the AOP instead of the members individually, an appeal lies u/s 30 to the AAC, who u/s 31(3)(b), has power to set aside the assessment and direct the ITO to assess the members individually.

The AAC has plenary powers in disposing of an appeal. The scope of his powers is conterminous with that of the ITO. He can do what the ITO can do and can also direct him to do what he has failed to do.

The ITAT has ample power u/s 33(4) to set aside an assessment made on an AOP and direct the ITO to assess the members individually or to direct amendment of the assessment already made on the members.

Jute Corpn. Of India Ltd vs CIT

187 ITR 688, 53 Taxman 85 (SC)

AAC has discretion to permit the raising of additional grounds. There appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the ITO. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power.

Section 251(1)(a) confers power on the AAC to confirm, reduce, enhance or annul the assessment. The AAC is thus invested with wide powers u/s 251(1)(a) while hearing an appeal against the assessment order made by ITO. The question is whether AAC, while hearing an appeal u/s 251(1)(a), has jurisdiction to allow the assessee to raise an additional ground. The Act does not contain any express provision debarring an assessee from raising an additional ground in appeal and there is no provision in the Act placing restriction on the power of AAC in entertaining an additional ground in appeal. In the absence of any statutory provision, the general principle relating to the amplitude of the appellate authority's power being coterminous with that of the initial authority should normally be applicable.

Distinguished from CIT vs Shapoorji Pallonji Mistry:

In CIT vs Shapoorji Pallonji Mistry (1962) 44 ITR 891 this court held that, in an appeal filed by the assessee, the AAC has no power to enhance the assessment by discovering new sources of income not considered by the ITO in the order appealed against. However, this decision does not directly deal with the question with which we are concerned. Power to enhance tax on discovery of new source of income is quite different from granting deduction on the admitted facts fully supported by the decision of this court. If the tax liability of the assessee is admitted and if the ITO is afforded an opportunity of hearing by the AAC in allowing the assessee's claim for deduction on the settled view of law, there appears to be no good reason to curtail the powers of the AAC u/s 251(1)(a) of the Act.

CIT vs Kanpur Coal Syndicate affirmed:

In CIT vs Kanpur Coal Syndicate (1964) 53 ITR 225, a three-Judge Bench of SC discussed the scope of section 31(3)(a) of 1922 Act, which is almost identical to section 251(1)(a). The court held as under:

The AAC has, therefore, plenary powers in disposing of an appeal. The scope of his power is conterminous with that of the ITO. He can do what the ITO can do and also direct him to do what he has failed to do.

The above observations are squarely applicable in the interpretation of section 251(1)(a) of the Act. The declaration of law is clear that the power of the AAC is conterminous with that of the ITO, and if that is so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the ITO. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise, an appellate authority while hearing the appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appears to be no good reason and none was placed before us to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the assessment order passed by the ITO.

Distinguished from Gujrargravures case:

In Addl CIT vs Gurjargravures P. Ltd. (1978) 111 ITR 1, this court has taken a different view, holding that, in the absence of any claim made by the assessee before the ITO regarding relief, he is not entitled to raise the question of exemption. Apparently, this view taken by the two-Judge Bench of this court appears to be in conflict with the view taken by the three-Judge Bench of this court in Kanpur Coal Syndicate's case. It appears that the Kanpur Coal Syndicate case was not brought to the notice of the Bench in the Gurjargravures P. Ltd. In the circumstances, the view of the larger Bench in Kanpur Coal Syndicate case holds the field. However, the Gurjargravures P. Ltd. case is not overruled as it still does not rule out a case for raising an additional ground before the AAC if the ground so raised could not have been raised at that particular stage when the return was filed or when the assessment order was made, or that the ground became available on account of change of circumstances or law.

Conclusion with reference to the facts of the case:

In the instant case, the assessee did not claim any deduction of its liability to pay purchase tax under the provisions of the Bengal Raw Jute Taxation Act, 1941 as the assessee entertained a belief that it was not liable to pay purchase tax under the aforesaid Act. But later on when it was assessed to tax, it claimed its deduction. The SC held that AAC was within his powers to allow this to the assessee in the appellate proceedings.

Addl. CIT vs  Gurjargravures P. Ltd. 111 ITR 1 (SC)

AAC does not have the power to admit the additional ground in respect of a claim, which was neither made before the ITO nor there was any material on record in to support such a claim. Merely the fact that a claim was allowed in subsequent years, it cannot be assumed that the exemption is available for current year also.

One of the grounds of appeal raised by the assessee in appeal before the AAC was that the ITO had erred in not allowing the benefit of section 84 of the IT Act, 1961. No such claim had been made before the ITO when he completed the assessment, nor was there material on record supporting such a claim. In subsequent years, relief u/s 84 had been allowed to the assessee.

The appeal was dismissed by the AAC on the ground that the question of error on the part of the ITO did not arise as no claim for exemption u/s 84 had been made before the ITO. On further appeal, both the ITAT and High Court held that since the entire assessment was open before the AAC, there was no reason for his not entertaining the claim.

On appeal to the Supreme Court, Held that:

Neither any claim was made before the ITO regarding the relief u/s 84 nor was there any material on record in support thereof, and from the mere fact that such a claim had been allowed in subsequent years it could not be assumed that the prescribed conditions justifying a claim for exemption u/s 84 were also fulfilled, ITAT was not competent to hold that the AAC should have entertained the question of relief u/s 84 or to direct the ITO to allow the relief.

Merely because the ITO brings an item to tax he cannot be deemed to have considered its non-taxability though no such claim was made before him by the assessee.

CIT vs Nirbheram Daluram [1997] 224 ITR 610 (Supreme Court)

Power of AAC is co-terminus with that of the ITO. Appellate power conferred on AAC is not confined to only those matters which were considered by the ITO. Thus, additions made by AAC on account of unexplained hundi loans which had not been considered by the ITO, are justified. Jute Corpn. Of India Ltd vs CIT 187 ITR 688 (SC) applied and followed.

This ruling gives a blanket powers to CIT(A) for enhancement in respect of those issues also which were neither considered by the ITO nor on record (return or assessment).

This decision overrules the MP High Court decision reported in 127 ITR 491, where the High Court had decided the issue in favour of assessee by following CIT vs Shapoorji Pallonji Mistry 44 ITR 891 (SC) and CIT vs Rai Bahadur 66 ITR 443 (SC). However, this SC judgment does not talk about these decisions nor does it refer to the basis of MP High Court decision. In my opinion, the decision of MP High Court was correct as the AAC does not have the power to enhance tax on newly discovered sources of income. This proposition was also recognised by the Supreme Court in the case of Jute coprn 187 ITR 688.

CIT vs Gokuldass & Co. 122 Taxman 849 (Rajasthan High Court – Jaipur bench)

The Supreme Court in Addl CIT vs Gujrargravuers (P). Ltd 111 ITR 1 did not lay down a straight jacket rule that in no circumstance, additional ground for raising new claim not considered by AO, can be permitted to be raised before the appellate authority.

In case, any claim even if not raised before the AO is raised before the first appellate authority, he ought to consider and decide it, if he is satisfied about the bona fides. It was only in the facts and circumstances of that particular case that the court held that permission to raise new grounds had rightly been refused.

Section 250(5) clearly postulates that there is no inhibition against raising new ground before the AAC. Such new ground is required to be considered by the AAC unless he is satisfied that the omission of that ground from the appeal was wilful or unreasonable. Section 251(1)(a) confers on the first appellate authority plenary powers while hearing an appeal against the assessment order. He can confirm, reduce, enhance or annul the assessment, he may set aside the assessment and refer the case back to the AO for making a fresh assessment in accordance with directions given by him (last clause omitted from AY 2001-02).

Thus, scheme of statute itself empowers the first appellate authority to allow the appellant before it to go in the hearing of the appeal into any ground not taken in the grounds of appeal and decide the same unless he is satisfied that failure to raise such ground was wilful or unreasonable. Where there is material or evidence before the AO to support such claim. Such claim even if not raised before the AO, if raised before the first appellate authority, he ought to consider and decide it, if he is satisfied about the bona fides. In each case, it has to decide on facts of its own to entertain or not to entertain new claim or new ground.

In the instant case, the ITAT had applied its mind and then came to a positive conclusion that the claim related to the weighted deduction u/s 35B on fulfillment of certain conditions and, therefore, the question relating to applicability of section 35B to any expenses was not raised for the first time before the CIT (A) but had been before the ITO. Therefore, the ITAT had not erred in allowing the appeal and considering the case of Gurjargravures (P.) Ltd.’s (supra) in its right perspective.

 

CIT vs Shapoorji Pallonji Mistry 44 ITR 891 (SC)

AAC cannot discover new sources of income and enhance the assessment.

It is true that the AAC can enhance the assessment, but he has no power to enhance the assessment by discovering the new sources of income which are neither mentioned in the return of assessee nor are considered by the ITO in the assessment order. Thus, the AAC can enhance the assessment but only within the four corners of the sources processed by the ITO. The AAC has no power to travel outside the records i.e., return made by the assessee and the assessment order passed by the ITO with a view to finding out new sources of income, not disclosed in the either. The provisions of sections 34 (reassessment) and 33B (revision by CIT) of the 1922 Act, by which escaped income can be brought to tax, also support this.

CIT vs Rai Bahadur Hardutroy Motilal Chamaria 66 ITR 443 (SC)

The power of enhancement is restricted to the subject matter of assessment or the sources of income which have been considered by the ITO expressly or by clear implication.

The AAC has no jurisdiction u/s 31(3) of the 1922 Act to assess a source of income which is not disclosed either in the returns filed by the assessee or in the assessment order. It is not therefore open to the AAC to travel outside the record, i.e., the return made by the assessee or the assessment order of the ITO, with a view to finding out new sources of income and the power of enhancement u/s 31(3) is restricted to the sources of income which have been the subject-matter of consideration by the ITO from the point of view of taxability.

In this context "consideration" does not mean "incidental" or "collateral" examination of any matter by the ITO in the process of assessment. There must be something in the assessment order to show that the ITO 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.