CIT(A)’s Power to Enhance the Assessment – Too Wide but “Too Narrow”

CA Sunil Maloo has pointed out that while the CIT(A)’s powers are wide and co-terminus with that of the AO, there are also restrictions on the exercise of those powers. He has explained the law on the subject with reference to important judgements

1. CIT(A) is the first Appellate Authority under the Income Tax Act, 1961 to whom the Assessee can approach if he is aggrieved by the Order of the Assessing Officer. The CIT(A) shall dispose the appeal so filed by exercising his powers u/s 251 of the Act, which reads as under: –

Powers of the[Commissioner (Appeals)].
251. (1) In disposing of an appeal, the[Commissioner (Appeals)] shall have the following powers—

(a)	in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment;
[(aa)	in an appeal against the order of assessment in respect of which the proceeding before the Settlement Commission abates under section 245HA, he may, after taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment;]
(b)	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;
(c)	in any other case, he may pass such orders in the appeal as he thinks fit.

(2) The [Commissioner (Appeals)] shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.

Explanation.—In disposing of an appeal, the [Commissioner (Appeals)] may 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[Commissioner (Appeals)] by the appellant.

2. The above section read with the explanation clearly provides 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 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. The Supreme Court in Jute Corporation of India Ltd. v. CIT (1) has stated that the declaration of law is clear that the power of the appellate authority is co-terminus with that of the Assessing Officer.

3. The powers of the CIT(A) u/s 251(1)(a) of the Act, includes the power to “Enhance the Assessment”. Through this article we will analyse and discuss the scope of the power of the CIT(A) to “Enhance the Assessment” and critically examinehow wide this power actually is. Whether such power is absolutely unlimited or the interest of the Assessee has been protected by the statue or court of laws? Let’s discuss –

4. Hon’ble Delhi High Court had an occasion to analyse the scope of the CIT(A)’s power to “Enhance the Assessment” in the case of GURINDER MOHAN SINGH NINDRAJOG v. COMMISSIONER OF INCOME-TAX (2) and after detailed analysis, Hon’ble Court has laid down the broad guideline as under: –

“19. We have considered the submissions of both the parties. There is no doubt about the fact that while framing the assessment even under section 143(3) of the Act, the Assessing Officer may omit to make certain additions of income or omit to disallow certain claims which are not admissible under the provisions of the Act thereby leading to escapement of income. The Income-tax Act provides for remedial measures which can be taken under these circumstances.

While framing an assessment under section 143(3) of the Act, any of the following situations may occur :

(a) the Assessing Officer may accept the return of income without making any addition or disallowance ; or

(b) the assessment is framed and the Assessing Officer makes certain addition or disallowance and in making such additions or disallowances, he deals with such item or items of income in the body of order of assessment but he under assessed such sums ; or

(c) he makes no addition in respect of some of the items, though in the course of hearing before him holds a discussion of such items of income ;

(d) yet, there can be another situation where the Assessing Officer inadvertently omits to tax an amount which ought to have been taxed and in respect of which he does not make any enquiry ;

(e) further another situation may arise, where an item or items of income or expenditure, incurred and claimed is not at all considered and an assessment is framed, as a result thereof, a prejudice is caused to the Revenue, or

(f) where an item of income which ought to have been taxed remained untaxed, and there is an escapement of income, as a result of the assessee’s failure to disclose fully and truly all material facts necessary for computation of income.

20. To ensure for each of such situations, an income which ought to have been taxed and remained untaxed, the Legislature has provided different remedial measures as are contained in sections 251(1)(a), 263, 154 and 147 of the Act.

21. In the category stated in (a), obviously if an income escapes an assessment, the provisions of section 147 of the Act can be invoked, subject to the condition stated in the proviso to the said section. In the category of cases falling in category (b), section 251(1)(a) provides the Commissioner of Income-tax (Appeals) could enhance such an assessment qua the under assessed sum, i.e., where the Assessing Officer had dealt with the issue in the assessment and was the subject-matter of appeal. In category falling in (c) and (e), the Commissioner of Income-tax has been empowered to take an appropriate action under section 263 of the Act In the category of cases falling under clauses (d) and (f), appropriate action under section 147 of the Act can be taken to tax the income which has escaped assessment or had remained to be taxed.

There can be situations where an item has been dealt with in the body of the order of assessment and the assessee being aggrieved from the addition or disallowances so made, had preferred an appeal before the Commissioner of Income-tax (Appeals) against the said addition and disallowance, the said disallowance and addition being the subjectmatter of appeal before the Commissioner of Income-tax (Appeals) in such cases, the Commissioner of Income-tax (Appeals) has been empowered under section 251(1)(a) of the Act to enhance such an income where the Assessing Officer had proceeded to make addition or disallowance by dealing with the same in the body of order of assessment by under assessing the same as the same was the subject-matter of the appeal as per the grounds of the appeal raised before him.

In other words, the Commissioner of Income-tax (Appeals) has a power of enhancement in respect of such item or items of income which has been dealt with in the body of the order of the assessment, and arose for his consideration as per the grounds of appeal raised before him, being the subject-matter of appeal.”

5. The above guidelines of from the High Court can be tabulated as under: –

Sr No	Situation	Remedial Measures under the Income tax Act
a	Assessing Officer may accept the return of income without making any addition or disallowance ; or	U/s 147 of the act subject to limitations contained therein
b	the assessment is framed and the Assessing Officer makes certain addition or disallowance and in making such additions or disallowances, he deals with such item or items of income in the body of order of assessment but he under assessed such sums ;	u/s 251 (1) (a) where the Assessing Officer had dealt with the issue in the assessment and was the subject-matter of appeal
c	AO makes no addition in respect of some of the items, though in the course of hearing before him holds a discussion of such items of income	U/s 263 of the act
d	where the Assessing Officer inadvertently omits to tax an amount which ought to have been taxed and in respect of which he does not make any enquiry	u/s 147 of the act
e	where an item or items of income or expenditure, incurred and claimed is not at all considered and an assessment is framed, as a result thereof, a prejudice is caused to the Revenue,	U/s 263 of the act
f	where an item of income which ought to have been taxed remained untaxed, and there is an escapement of income, as a result of the assessee’s failure to disclose fully and truly all material facts necessary for computation of income	u/s 147 of the act

6. The high court has technically held that for the matters which are not emanating from the Assessment Order, the CIT(A) can neither be allowed to step into the shoes of the AO to tax the escaped income which can otherwise be taxed u/s 147 nor be allowed to step into the shoes of the PCIT to tax items which can otherwise be covered u/s 263 of the Act.

7. The court has held that CIT(A) should not travel beyond the subject matter of the Assessment while enhancing the Assessment within the meaning of Section 251(1)(a) of the Act.The main logic behind the above interpretation is inspired from the interpretation adopted by the Supreme Court in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria (3) to the corresponding provision under the old Income-tax Act, 1922. The SC has held that –

"The principle that emerges as a result of the authorities of this court is that the Appellate Assistant Commissioner has no jurisdiction, under section 31(3) of the Act, to assess a source of income which has not been 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 Assistant Commissioner 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 which have been considered expressly or by clear implication by the Income-tax Officer from the point of view of the taxability of the assessee. ……………….. But since the Income-tax Officer has not applied his mind to the question of the taxability or non-taxability of the amount of Rs 5,85,000 the Appellate Assistant Commissioner had no jurisdiction, in the circumstances of the present case, to enhance the taxable income of the assesseeon the basis of this amount of Rs 5,85,000 or of any portion thereof.

As we have already stated, it is not open to the Appellate Assistant Commissioner to travel outside the record, i.e., the return made by the assessee or the assessment order of the Income-tax Officer with a view to find out new sources of income and the power of enhancement under section 31(3) of the Act is restricted to the sources of income which have been the subjectmatter of consideration by the Income-tax Officer from the point of view of taxability.

In this context ‘consideration’ does not mean ‘incidental’ or ‘collateral’ examination of any matter by the Incometax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer 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…… In the present case, it is manifest that the Income-tax Officer has not considered the entry of ₹ 5,85,000 from the points of view of its taxability and, therefore, the Appellate Assistant Commissioner had no jurisdiction in an appeal under section 31 of the Act, to enhance the assessment."

8. Delhi High court in CIT v. Union Tyres (4) reiterated the same principal that the first appellate authority cannot consider new scope of income under section 251(1) of the Actwhile enhancing the Assessment and the appellate proceedings has to be confined to those items of income which where the subject-matter of original assessment.

9. In CIT v. Sardari Lal and Co. , the same 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 authoritiesthe full bench has held that:
"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….."

10. Undeniably, the precedential position on the powers of the first appellate authority under section 251 undulates. There are seeming contradictions. But, as held by Union Tyres, and as affirmed on reference by Sardari Lal, there is a consistent judicial assertion that the powers under section 251 are, indeed, very wide; but, wide as they are, they do not go to the extent of displacing powers under, say, sections 147, 148, and 263 of the Act.

11. The principle culled out from the above judicial precedents clearly shows that words "enhance the assessment" are confined to the assessment reached through a particular process. It cannot be extended to the amount which ought to have been computed. There being other provisions which allow escaped income from new sources to be taxed after following a certain prescribed procedure. So long as a certain item of income had been considered and examined by the Assessing Officer from the point of view of its assessability and so long as the CIT(A) does not travel beyond the record of the year, there has never been any doubt as to his powers of redoing the categorization and bringing the assessment within the true description of the law.

12. Hence, enhancement u/s 251 (1) (a) of the act is prohibited on the issues which have not at all been considered by the AO during assessment proceedings. This gives the common understanding that the CIT (A) cannot enhance income of the assessee on altogether ‘new Source‘.

13. Therefore, the CIT(A) is not empowered to enhance the assessment taking an income which income was not considered expressly or by necessary implication by the Assessing Officer at all. Such is the mandate of the decisions of various high courts such as in Calcutta High Court in CIT vs. National Company Ltd. (4) , Andhra Pradesh High Court in Sait Bansilal and Raggi setti Veeranna vs. CIT (7) , Karnataka High Court in Sterling Construction & Trading Co. vs. ITO and Bombay High Court in LokenathTolaram vs. CIT (9) .

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