Adding new source of income by CIT-A is beyond his powers u/s 251 of Income Tax Act-High Court

Adding new source of income by CIT-A is beyond his powers u/s 251 of Income Tax Act if such new source is not dealt with by the Assessing Officer – High Court

 Adding new source of income by CIT-A

ABCAUS Case Law Citation:
ABCAUS 2110 (2017) (11) HC

Important Case Laws Cited/relied upon by the parties:
CIT v. Best Wood Industries and Saw Mills 331 ITR 63 (Ker) (FB)
CIT v. Kanpur Coal Syndicate 53 ITR 225 (SC)
Jute Corpn. of India Ltd. v. CIT (1991) 187 ITR 688 (SC)
Commissioner of Income Tax, M.P., Bhopal vs. M/s. Nirbheram Deluram 224 ITR 610
CIT v. Shapoorji Pallonji 44 ITR 891
CIT v. Rai Bahadur Hardutroy Motilal Chamaria 66 ITR 443
CIT v. Nirbheram Daluram [1997] 224 ITR 610(SC)
CIT v. Union Tyres, Delhi, [1999] 240 ITR 556
CIT v. Sardari Lal & Co 251 ITR 864 (Del) (FB)

Brief Facts of the Case:
In the instant case, the first Appellate Authority (CIT-Appeals/CIT-A) during the appeal proceedings, noticed that that the assessee had declared an income of Rs. 22,15,116/- from abroad whereas the status claimed by the assessee was “resident”. In the Appellant Authority’s opined that as the assessee had claimed the status of resident, the amount was taxable and the Appellate Authority brought to tax the said income declared by the assessee as income from abroad. He issued a notice of enhancement u/s. 251(1)(i) of the Act.he added the same as undisclosed income of the assessee.

Observations made by the High Court:

The Hon’ble High Court noted that section 251 of the Act (before the amendment in 2008) provides that in an appeal against an order of assessment, the Appellate Authority may confirm, reduce, enhance, or annul the assessment. In an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty. The explanation to the provision further emphasizes that the Appellate Authority may consider and decide any matter arising out of proceedings in which the order appealed against was passed, though such matter was not raised before him by the appellant.

Precedential Positions

The Hon’ble High Court considered the following Precedential Positions:

A Full Bench of Kerala High Court examined the powers of the AO, but not the Appellate Authority. It was held that once the assessment is reopened for any valid reason recorded under Section 148(2), then the entire assessment is open for the AO to bring to tax any item of escaped income which comes to his notice in such reassessment.

Under the old Income Tax Act, the corresponding provision was section 31. Interpreting that provision, the Supreme Court held that under section 31(3)(a), in disposing of an appeal, the Appellate Authority may confirm, reduce, enhance or annul the assessment; under clause (b), he may set aside the assessment and direct the Income-tax Officer [now AO] to make a fresh assessment. The Appellate Authority has, therefore, plenary powers in disposing of an appeal. “The scope of his power is conterminous with that of the Income-tax Officer. He can do what the Income-tax Officer can do and also direct him to do what he has failed to do.”

The Supreme Court in another case has stated that the declaration of law is clear that the power of the Appellate Authority is co-terminus with that of the Income Tax Officer, and if that is so, there appears to be no reason why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income Tax Officer.

Supreme Court again to this view as the Act places no restriction or limitation on exercising 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 limitation, if any, prescribed by the statutory provisions. Absent any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have.

In yet another case, examining section 31 of the old Act, the Supreme Court had held that there is no doubt that the appellate authority 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.

Divergent Views Held:

A three-Judge Bench of the Supreme Court has observed that it is only the assessee who has a right conferred under section 31 to prefer an appeal against the order of assessment made by the Income-tax Officer. If the assessee does not appeal the order of assessment becomes final subject to any power of revision that the Commissioner may have under section 33B of the Act. Therefore, it would be wholly erroneous to compare the powers of the appellate authority with the powers possessed by a court of appeal, under the Civil Procedure Code. The Appellate Assistant Commissioner is not an ordinary court of appeal. It is impossible to talk of a court of appeal when only one party to the original decision is entitled to appeal and not the other party, and because of this peculiar position the statute has conferred very wide powers upon the appellate authority once an appeal is preferred to him by the assessee. It was held that the appellate authority has no jurisdiction under section 31(3) of the Act to assess a source of income not 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 authority cannot travel beyond the subject-matter of the assessment. In other words, the power of enhancement under section 31(3) of the Act is restricted to the subject-matter of assessment or the sources of income considered expressly or by clear implication by the Income-tax Officer from the viewpoint of the taxability of the assessee.

In a recent judgment, following the earlier decisions in Kanpur Coal Syndicate and Jute Corporation of India, the Supreme Court reiterated that the appellate powers conferred on the Appellate Commissioner under Section 251 could not be confined to the matter considered by the ITO, as the Appellate Commissioner is vested with all the plenary powers which the Income Tax Officer may have while making the assessment.

A Division Bench of the Delhi High Court has observed that decision of the Supreme Court in Daluram case did not comment whether these wide powers also include the power to discover a new source of income.

The issue—whether the appellate authority has the power under section 251 to discover a new source of income—was referred to a Full Bench. After examining the authorities holding the fielding on that issue, the learned Full Bench has held that 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, or section 148, or even section 263 of the Act 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. Eventually, the Full Bench upheld the decision of Division Bench of Delhi High Court in Union Tyres.

Therefore, the law settled in Union Tyres concludes that the principle of law laid down in Shapoorji and Chamaria still holds the field.

Decision/ Conclusion/Held:
The Hon’ble High Court observed that the principle emerging from various pronouncements of the Supreme Court, Delhi High Court is that the first Appellate Authority is invested with very wide powers under Section 251(1)(a) of the Act and once an assessment order is brought before the authority, his competence is not restricted to examining only those aspects of the assessment about which the assessee makes a grievance and ranges over the whole assessment to correct the Assessing Officer not only regarding a matter raised by the assessee in appeal but also regarding any other matter considered by the Assessing Officer and determined in assessment. However, It is not open to the Appellate Commissioner to introduce in the Assessment a new source of income and the assessment must be confined to those items of income which were the subject-matter of the original assessment.

Adding new source of income by CIT-A

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