C.V.O. Chartered & Cost Accountants' Association

Powers Of First Appellate Authority - Tax New Source Of Income

Contributed by : Paras Savla
                        Priti Savla 

Page 1

Issue for Consideration:

Clause (a) to sub-section 1 of section 251 of the Income Tax Act, 1956 provides that "in an appeal against an order of assessment, he [CIT (A)] may confirm, reduce, enhance or annul the assessment". Over the years it is highly debated that whether Commissioner of Income Tax (Appeals) has power within the meaning of above section to consider new source of income. There are various conflicting decisions on this issue. Let us examine the matter in light of recent decision of Full Bench of Delhi High Court in case Sardarilal & Co.

CIT v. Sardarilal and Co. 251 ITR 864 (Delhi Full Bench)

The matter was placed before the full bench of the Court to reconsider earlier decision of Division Bench in Union Tyres 240 ITR 556 and also the question of the first appellate authority's power to take into account a new source of income. Court proceeded in the matter with initial remarks that there is no uniformity in judicial opinions on this question.

Brief Facts of Union Tyre's case:

The dispute relates to the assessment year 1967-68 and the assessee is an individual dealing in tyres. In his return for the relevant assessment year, the assessee declared a loss of Rs. 4,552, which was revised to Rs. 3,500. The said loss was computed by applying the rate of gross profit at 0.9 per cent, on the total sales of Rs. 11.75 lakhs. During the course of assessment proceedings, the assessee did not produce any books of account. The Income-tax Officer estimated the sales at Rs. 11.85 lakhs by applying a gross profit rate of 3.5% and has made an addition of Rs. 30,756 to the declared loss. Against the said addition, the assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner felt that the Income-tax Officer had not properly examined the case and made following observation:

'It is not known how the appellant, who was a mere student prior to the start of the business, managed to secure finances for purchase of goods the sale of which resulted in such a huge turnover. The source of investment in the purchase of goods has not been enquired into. It is also not known whether the appellant was registered under the Shops and Establishment Act as also under the Sales Tax Act. It has also not been verified whether purchases and sales are on cash or credit basis. If the purchases were on cash basis, the source of money invested in the purchases should have been looked into by the Income-tax Officer. If the purchase and sales are on credit basis, it is not understood why the books of account were not maintained and, if maintained, why were they not produced? The antecedents of the appellant have also not been enquired into.'

Accordingly, AAC directed the Income-tax Officer to submit a report indicating following eleven aspects-

(1) Full and complete antecedents of the appellant.

(2) Whether the books of account were maintained? For this purpose, the Income-tax Officer will obtain an affidavit of the appellant.

(3) Source of investment made in the purchase of goods.

(4) Whether the sales and purchases are on cash or credit basis, wholly or partly. The Income-tax Officer will obtain a list of sales and purchases made on credit basis exceeding Rs. 1,000 in each case ?

(5) Whether the appellant is a registered dealer under the Sales Tax Act ?

(6) Whether the appellant has obtained registration under the Shops and Establishment Act ?

(7) Whether any sales tax assessment has been made?

(8) The business connections of the appellant with any business/ businesses carried on by the appellant's close relatives.

(9) G. P. rate declared by other similar business assessees in the locality.

(10) A bank reconciliation statement to be obtained.

(11) Name of the employees whole-time/part-time.

Aggrieved by the said directions assessee filed an appeal to the Income-tax Appellate Tribunal, alleging that the Appellate Assistant Commissioner had travelled beyond the legitimate scope of his jurisdiction in disposing of the appeal. The Tribunal held that the Appellate Assistant Commissioner was not justified in calling for the remand report in respect of several items, since calling for the remand report in respect of some of the points viz. 1, 3, 8, 10 would have the effect of directing the Income-tax Officer to make assessment on an entirely new footing. The Revenue's application under section 256(1) of the Act was dismissed. On being moved for reference under section 256(2) of the Act, the following question was called for:

"Whether on the facts and in the circumstances, the Tribunal was right in holding that the Appellate Assistant Commissioner could not in law call for a remand report in respect of items Nos. 1, 3, 8,10 as mentioned in the order of the Appellate Assistant Commissioner dated May 4, 1973?"

Observation of Union Tyre's Cases:

After noticing several judgments of Apex Court viz. Shapoorji Pallonji Mistry [1962] 44 ITR 891, Kanpur Coal Syndicate [1964] 53 ITR 225 Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443, Jute Corporation of India's case [1991] 187 ITR 668 and CIT v. Nirbheram Daluram [1997] 224 ITR 610, Division Bench of the Delhi High Court held as under (page 561) :

"Thus, the principle emerging from the aforenoted pronouncements of the Supreme Court is, that the first appellate authority is invested with very wide powers under section 251(l)(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 with regard to a matter raised by the assessee in appeal but also with regard to any other matter which has been considered by the Assessing Officer and determined in the course of assessment. However, there is a solitary but significant limitation to the power of revision, viz., that it is not open to the Appellate Assistant Commissioner to introduce in the assessment a new source of income and the assessment has to be confined to those items of income, which were the subject matter of original assessment.

Applying the above well-settled principles of law to the facts of the instant case, we are of the view that the Tribunal was justified in holding that in calling for a remand report on the aforenoted four points the Appellate Assistant Commissioner had exceeded his jurisdiction.

In the paragraph below, court has pointed out what amount to finding new source of Income and what not.

While computing the total business income of the assessee, the Assessing Officer had estimated the sales at an enhanced figure and had applied a higher rate of gross profit. Thus, the only matter dealt with by the Assessing Officer in the assessment order was the estimation of profits and gains of the business of the assessee. None of the aforenoted four points had any bearing on the question of estimation of either the sales or the gross profit rate. From the observations, extracted above, it is evident that the Appellate Assistant Commissioner had his doubts about the capacity of the assessee to raise finances for the purchase of goods and show a huge turnover in the very first year of his business. In other words, the enquiry ordered by the Appellate Assistant Commissioner was to satisfy himself about the source of investment by the assessee. It is axiomatic that failure to prove the sources of investment will result in addition in the hands of the assessee under a different provision of law and will not have much relevance in the estimation of sales and gross profit rate adopted by the Assessing Officer. In our opinion, any addition on account of unexplained investment would constitute a new source of income, which was not the subject-matter of assessment before the Assessing Officer and, therefore, it was not open to the first appellate authority to direct the Assessing Officer to conduct enquiry on the said four points."

At this juncture it would be proper to consider various judicial pronouncements as dealt by Full Bench while delivering its decision: Continue

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