If foundational addition is deleted other addition can not stand. CIT(A) cannot do what AO could not have done in original assessment-ITAT
ABCAUS Case Law Citation:
ABCAUS 1291 (2017) (07) ITAT
Assessment Year : 2006-07
Important Case Laws Cited/relied upon:
CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC)
Jute Corporation of India vs. CIT and Anr. (1991) 187 ITR 688 (SC)
Ranbaxy Laboratories Ltd. VS. CIT (2011) 336 ITR 136 (Del)
CIT vs. Jet Airways (I) Ltd. (2011) 331 ITR 236 (Bom)
CIT vs. Shriram Singh (2008) 306 ITR 343 (Raj)
CIT vs. Adhunik Niryat Ispat Ltd. (2011) 63 DTR 212 (Del)
Brief Facts of the Case:
The scrutiny proceedings of the appellant assessee for the relevant assessment year had been completed and an assessment order u/s 143(3) was passed. However, while finalizing the assessment for the immediately succeeding assessment year, i.e., 2007-08, the Assessing Officer (‘AO’) observed that the figure of opening stock as on 01.04.2006 was not tallying with the inventory as on 31.03.2006. The assessee had shown an opening stock amounting to Rs.22,57,055/- on 01.04.2006 which, in the opinion of the Assessing Officer, should have been shown as closing stock as on 31.03.2006.
The AO Initiated the reassessment proceedings u/s 148 and held that the assessee had understated its closing stock to the tune of Rs.22.57 lac for the relevant AY. AO therefore, made an addition of Rs.22.57 lac in the instant assessment. The CIT(A) deleted the addition of Rs.22.57 lac by noticing that the Tribunal in the assessee’s own case for the assessment years 2006-07 and 2007-08 and held that there was no discrepancy in the quantitative details in respect of the items and there was no excess stock. CIT(A), however, issued notice of enhancement on the ground that there were some discrepancies in the quantitative details filed by the assessee. Such discrepancies were translated into an addition of Rs. 2,36,875/- after adding the necessary mark-up.
The assessee was aggrieved against such enhancement of . 2,36,875/ made by the CIT(A).
Observations made by the Tribunal:
It was observed that the Assessing Officer initiated reassessment proceedings only on the premise that income of the assessee escaped assessment to the tune of Rs. 22.57 lac, being, the difference in the opening stock of succeeding year and closing stock of the current year. This was the sole reason and the only addition made in the assessment. However, the addition of Rs. 22.57 was deleted by the CIT(A) and admittedly no appeal had been preferred before the tribunal against such deletion. In other words, the deletion of the addition in the first appeal had attained finality
ITAT noted that while making the enhancement, the CIT(A) had held that his power was coterminous with that of the Assessing Officer and, thus, he was competent to make a new addition.
It was observed that while there was not and could not be any doubt about the fact that the powers of CIT(A) are coterminous with that of the AO, there is an inherent limitation of this principle, which is, that the CIT(A) cannot do what the Assessing Officer in the original assessment could not have done. In simple words, if the Assessing Officer could have made a particular addition etc., which he failed to do, the CIT(A) would be intra vires making such addition while disposing of the appeal filed against the assessment order. Per contra, if the Assessing Officer has not made a particular addition etc., which he was not entitled to as per law, the CIT(A) cannot equally exercise his power to make such an addition etc.
Foundational and other additions
The ITAT observed that AO, in the course of assessment pursuant to notice u/s 148, can make two types of additions, viz., first, the addition for which he formed reason to believe about the income chargeable to tax escaped assessment (hereinafter also called the `foundational addition’) and second, any other addition which comes to his notice subsequently in the course of the proceedings under this section (hereinafter also called the `other addition’).
The ITAT explained the concept of foundational and other additions and stated that it is trite that the `other addition’ can stand only if the `foundational addition’ is made by the AO. Jurisdiction to proceed with the assessment is acquired by the AO only by virtue of belief that some income chargeable to tax escaped assessment. After validly acquiring the jurisdiction, the AO can make other additions as well. Thus the making of a `foundational addition’ is sine qua non for making `other addition’. Reason behind this is not far to understand, being, prohibiting the Assessing Officer from needlessly exercising the power to reassess, by initiating the assessment proceedings on a fallacious ground and then making other additions as well. To put it simply, the Assessing Officer cannot proceed with the reassessment if the grounds mentioned in the re-assessment notice are non-existent. That is why, it has been held in several cases that no `other addition’ can be made unless the `foundational addition’ is made. The Hon’ble Delhi High Court has held that the AO has jurisdiction to reassess income other than the income in respect of which proceedings under s. 147 were initiated but he is not justified in doing so when the very reasons for initiation of those proceedings ceased to survive. The Hon’ble Bombay High Court has also reiterated the same proposition by holding that the Assessing Officer may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue was not included in the notice. However, if, after issuing a notice u/s 148, the Assessing Officer accepts the contention of the assessee and holds that the income, of which he has initially formed a reason to believe that it had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to assess some other income. Similar view had been taken by the Hon’ble Rajasthan High Court.
Thus the ITAT opined that the position which followed was that the Assessing Officer can make `other addition’ in the reassessment proceedings, provided, the `foundational addition’ is made. When this proposition is taken to a next level, no different consequences will emerge, if the `foundational addition’ is itself finally deleted in an appeal. In such a scenario, the `other addition’ made by the Assessing Officer would automatically cease to stand in isolation.
Explanation 3 has not enhanced the scope of the provision.
The ITAT opined that the legal position about not continuing with the `other additions’, if none of the `foundational additions’ is either made or finally sustained, has not been watered down by the insertion of Explanation 3. Ambit of the Explanation is confined only to making `other addition’ and not sustaining the `other addition’, when the `foundational addition’ is not made or finally deleted. Thus in the instant case, in the absence of foundational addition, neither the Assessing Officer nor for that purpose, the CIT(A), exercising his coterminous power, could have made the `other addition’. As a consequence of deletion of the foundational addition, not only the assessment order but all the proceedings flowing therefrom had the effect of becoming null and void. As such, he could not have gone ahead with any other issue and made enhancement of income. Making an enhancement in such circumstances would mean that though the jurisdiction of the Assessing Officer in initiating the reassessment was lacking, still, the assessment would be valid and ex consequenti, the addition would be sustainable which is a totally illogical and unsound proposition.
Held:
Addition of Rs.2.36 lac and odd made by the CIT(A) was ordered to be deleted.
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