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

Powers Of First Appellate Authority - Tax New Source Of Income

Contributed by : Paras Savla
                        Priti Savla

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CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 (SC). The matter related to the corresponding provisions of the Indian Income Tax Act, 1922. It was held, inter alia, that in an appeal filed by the assessee, the Appellate Assistant Commissioner has no power to enhance the assessment by discovering a new source of income not considered by the Income-tax Officer in the order appealed against.

CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC). Under section 31(3)(a), of the old Act in disposing of such an appeal, the Appellant Assistant Commissioner may, in the case of an order of assessment, confirm, reduce, enhance or annul the assessment; under clause (b) thereof he may set aside the assessment and direct the Income-tax Officer to make a fresh assessment. The Appellate Assistant Commissioner has, therefore, plenary powers in the disposing of an appeal. The scope of his power is coterminous 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.

However, in the latter decision in CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC) court delivered its decision on the similar lines as in case of Shapoorji Pallonji Mistry. That also related to a case under section 31(3) of the old Act. It was held that the power of enhancement under section 31(3) of the old Act was restricted to the subject matter of the assessment or the source of income, which had been considered expressly or by clear implication by the Assessing Officer from the point of view of taxability and that the Appellate Assistant Commissioner had no power to assess the source of income, which had not been taken into consideration by the Assessing Officer. Apex Court has went a step further by observing that the subject matter of consideration by the ITO should be from the point of view of taxability and such consideration must be conscious and not merely incidental or collateral examination of any matter by the ITO.

Jute India Corporation v. CIT [1991] 187 ITR 688 The declaration of law is clear that the power of the Appellate Assistant Commissioner is coterminous with that of the Income tax Officer, 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 Income tax Officer. 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 Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income tax Officer

CIT v. Nirbheram Daluram [1997] 224 ITR 610. In the recent decision of Supreme Court wherein their Lordship, following the ratio laid down by it in the case of Kanpur Coal Syndicate, has held that the AAC can enhance the assessment by going into the subject matter which was even not considered by the ITO. Their Lordship also considered the decision of Apex Court in case of Jute Corporation of India Ltd.

Observation in Sardarilal's Case:

Full Bench of the Delhi High Court has delivered its decision after considering the Revenue's submission in the background of what had been stated by the apex court in Jute Corporation's case [1991] 187 ITR 688 and Daluram's case [1997] 224 ITR 610 and made following observations.

In Jute Corporation's case, the apex court while considering the question whether the Appellate Assistant Commissioner has the jurisdiction to allow the assessee to raise an additional ground in assailing the order of assessment before it, referred to Shapoorji's case, and drew a distinction between the power to enhance tax on discovery of a new source of income and granting a deduction on the admitted facts supported by the decision of the apex court. Relying on certain observations made by the apex court in Kanpur Coal Syndicate, the apex court held that powers of the first appellate authority are coterminous with those of the Assessing Officer and the first appellate authority is vested with all the wide powers, which the subordinate authority may have in the matter. In Daluram's, the decisions of Kanpur Coal's case and Jute Corporation's case were also considered and it was observed by the apex court that the appellate powers conferred on the first appellate authority under section 251 of the Act were not confined to the matter, which had been considered by the Income-tax Officer, as the first appellate authority is vested with all the wide powers of the Assessing Officer may have while making the assessment, but the issue whether these wide powers also include the power to discover a new source of income was not commented upon. Consequently, the view expressed in Shapoorji's case and Chamaria's case still holds the field. It may be noted that the issue was considered in CIT v. McMillan and Co. [1958] 33 ITR 182 (SC). Referring to a decision of the Bombay High Court in Narondas Manohar Dass v. CIT [1957] 31 ITR 909, it was held that the language used in section 31 of the old Act is wide enough to enable the first appellate authority to correct the Income-tax Officer not only with regard to a matter which has been raised by the assessee but also with regard to a matter which has been considered by the Assessing Officer and determined in the course of the assessment. It is also relevant to note that in the Jute Corporation's case [1991] 187 ITR 688, the apex court, inter alia, observed as follows (page 692) :

"The Appellate Assistant Commissioner, on an appeal preferred by the assessee, had jurisdiction to invoke, for the first time, the provisions of rule 33 of the Indian Income-tax Rules, 1922 (in short, 'the Rules'), for the purpose of computing the income of a non-resident even if the Income-tax Officer had not done so in the assessment proceedings. But, in Shapoorji Pallonji Mistry's case [1962] 44 ITR 891 (SC), this court, while considering the extent of the power of the Appellate Assistant Commissioner, referred to a number of cases decided by various High Courts including the Bombay High Court judgment in Narrondas' case [1957] 31 ITR 909 and also the decision of this court in McMillan and Co.'s case [1958] 33 ITR 182 and 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 considered by the Income-tax Officer in the order appealed against. It was urged on behalf of the Revenue that the words 'enhance the assessment' occurring in section 31 were 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. The court observed that there was no doubt that this view was also possible, but having regard to the provisions of sections 34 and 33B, which made provision for assessment of escaped income from new sources, the interpretation suggested on behalf of the Revenue would be against the view which had held the field for nearly 37 years."

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 of the Act and 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. That being the position, the decision in Union Tyres' case [1999] 240 ITR 556 of this court expresses the correct view and does not need reconsideration.

Conclusion:

Full Bench of Delhi Court has distinguished the decision of Supreme Court in case of Nirbheram Daluram [1997] 224 ITR 610 stating that the first appellate authority is vested with all the wide powers that the Assessing Officer may have while making the assessment, but the issue whether these wide powers also include the power to discover a new source of income was not commented upon. Consequently, the view expressed by Supreme Court in its earlier decisions of Shapoorji' case and Chamaria's case still holds good. Moreover in presence of specific provisions u/s 147/148 and u/s 263 with revenue, first appellate authority has no power to tax income from new source, which has not been considered by the Assessing Officer.

The authors are members of the Association and are practising Chartered Accountants.

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C.V.O. CA's News & Views

Vol.5 No. 4 mar. - Apr. 2002