The Power Of Enhancement: A Devious Weapon At The Hands Of The Revenue!

CA Pratik SandbhorCA Pratik Sandbhor has analyzed the entire law relating to the power of enhancement of an assessment in appellate proceedings under the Income-tax Act, 1961. He has referred to all the issues that arise in the context of enhancement and answered them with clarity and with reference to the judgements on the point. The article will prove invaluable as a ready referencer of the law on the subject

Introduction:-The Power of Enhancement: 

The Income Tax Act 1961 (the Act)in Chapter XX lays down the provisionsof appeals and revisions. Sections 246 to 262 under said chapter encapsulate the appeal provisions under the Act. The CIT(A) is the first appellate authority in the appellate ladder under the Act. The provisions of section 246 to 251 of the Act determine the appealable order before the CIT(A) and also the powers of CIT(A) in disposing of such appeals. Whereas the Section 252 to 254 lay down the provisions for formation of the Income Tax Appellate Tribunal (ITAT), the order appealable before this forum and the procedures thereon. In this article we shall consider the extents of power of enhancement in respect of the CIT(A) and ITAT in disposing of the appeals. Yes, the ITAT as well, ex facie the law seems to be settled on the principle that the ITAT has no such powers, but that might turn out to be specious, so let’s  buckle up for a ride through the devious world of enhancement in appellate proceedings.

1. Power of Enhancement: The CIT(A)
2. Powers co-terminus with that of the Assessing Officer
3. Enhancement of assessment
4. Notice u/s 251(2)
5. Extent of power to enhance
6. What amounts to a new source of income
7. Is the power of enhancement to be exercised within the time barring of assessment.
8. Can the CIT(A) record his opinion/satisfaction for that of the Assessing Officer
i. Rejection of books of accounts
ii. Section 68/69
iii. Section 14A
9. Notional Enhancement :- Substantiating the addition made by the Assessing Officer under some other section of the Act
10. Directing addition in the respect of some other year or assesse
11. Enhancement in Penalty proceedings
12. Power of Enhancement: The ITAT

The assessee on being aggrieved with the order of the Assessing Officer or the other appealable order enlisted u/s 246A, files an appeal before the CIT(A) seeking redressal. An appeal is filed by the assessee with intent to seek relief from the impugned order which has resulted into increase in the total income / tax liability or reduction in the losses/tax refundof the assesse. In such circumstances when the assesse prefers an appeal before the CIT(A) for ventilating its aggravation, the exercise of power of enhancement by the CIT(A) on contrary becomes a highly contentious issue. To put it obliquely, the exercise of power of enhancement, simply amounts to swaying open, the doors to Revenue for a second chance to take a bite at the assessee.

The power of enhancement has always been sought within the wide ambit of powers of CIT(A). Section 251 of the Act, as apparent from its title namely ‘Powers of the CIT(A)’ empowers the CIT(A) to confirm, enhance, reduce or annul the assessment in the course of disposal of the appeal. The power to enhancement is obviously perceived as averse by the taxpayers and same has been a point of contention especially in regard to its gamut. The CBDT in the Central Acion Plan 2018attempted to incentivize the CIT(A) on making ‘quality orders’  whereby the criteria of a quality order includes an order in which enhancement has been made. Admittedly, the said directive has been set aside by the Hon’ble Bombay High Court in WP No. 3343 of 2018 dated 11/04/2019. However this reflects on the mindset of ever motivated willingness on part of Revenue to revise the assessment in order to enhance the assessed income and utilizing the power of enhancement of theCIT(A) in its pursuit.  In such scenario understanding the contours of such power of enhancement becomes pertinent moreover. Lets delve deeper into the power of enhancement of the CIT(A) and understand the amplitude of such power and also briefly discuss the same in regard to ITAT.

A. Power of Enhancement: The CIT(A)

The power to enhance the income of assesse is more of an aphorism thought of in regard to the wide powers of CIT(A) since the specific mention of same u/s 251.  For the sake of quick perusal the text of section 251 of Income Tax Act 1961 is reproduced herewith:-

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)  inany 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 penaltyor reduce the amount of refundunless 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.

On reading through the above section it is palpable that, section 251 of the Act determines the powers of the CIT(A) for the disposal of appeal. The CIT(A) has been endowned with power to ‘enhance assessment’/’enhance penalty’. Whereas subsection (2) to the said section makes it incumbent on the part of the CIT(A) to provide a reasonable opportunity of hearing to the assesse, where he proposes to invoke the his power of enhancement.

The explanation to the section further clearlyputting the power of CIT(A) in large conspectus,  lays down that the CIT(A)  may consider and decide any matter arising in the proceedings in which the order appealed against was passed, though the same has not been specifically raised in the appeal before the CIT(A). In other words the CIT(A) has the power to consider the issue which is not raised in appeal before him but arises out of the proceedings in which the order appealed against was passed.(discussed in detail in succeeding paras)

We shall now try to comprehend the various aspects of the power to enhance in detail in the backdrop of its wide ambit,and also consider and attempt to address various issues that may arise:-

1. Powers co-terminus with that of the Assessing Officer

It is no less an aphorism, that the powers of CIT(A)  are co-terminus with that of the Assessing Officer. It is necessary to understand the wide amplitude of the powers of CIT(A), since the power of enhancement is one off shoot of such wide powers.

In order to understand the scope of the powers conferred upon the CIT(A) it is further necessary to bear in mind that the assesse has the right to file an appeal before the CIT(A) however the Revenue lacks the similar convenience (though there are alternative remedies in form of revision/ reassessment, but more on that later). Therefore where no appeal is preferred by the assesse the assessment attains finality subject to revision u/s 263 of the Act. The statute in order to compensate for the lack of power of the Revenue to prefer an appeal before the CIT(A), has conferred very wide powers to the CIT(A),  in order to assess the income of the assesse correctly, with a liberty to enhance the income. Reference in that respect could be made to the decision of Bombay High Court in the case of NaronadasMarondas – 31 ITR 909where the powers of CIT(A) were widely interpreted initially.

It will be immediately noticed that in giving the power of enhancing the assessment, the Legislature has strikingly deviated from the ordinary principles that govern the court of appeal. Although the Department cannot appeal against the order of the Income-tax Officer and although the appeal is only by the assessee, even so the Legislature confers upon the Appellate Assistant Commissioner the power to make an order which is obviously to the prejudice of the appellant. Therefore, although the appellant may only complain of particular points in the assessment and he may be satisfied with regard to the rest of the assessment, the Appellate Assistant Commissioner’s powers are not confined to consider only these points about which the assessee has a grievance but he may consider those points about which the assessee is satisfied and order the enhancement of the assessment.

The Hon’ble Apex Court further placed reliance on the said decision of Bombay High Court in number of decisions including the decision of Full Bench in case of  Mc Millan – 33 ITR 182. Inthe said case though the Hon’ble Apex Court was not essentially seized with the precise point of the ambit of powers of the CIT(A), the Supreme Court approved the said decision of Bombay High Court and decided in favor of the Revenue. However in the said case, of the Three Member Bench of the Apex Court, Justice Bhagwati dissenting from the Judgement of majority decided in favor of the assesse. In doing so he countered the contention of the Revenue that the they lack the right to prefer an appeal before the CIT(A) and  held as follows:-

The first contention is wholly untenable for the simple reason that when proceedings are entertained by the Income-tax Officer, he represents the Revenue and the contest then is between the Revenue (as represented by him) on the one hand and the assessee on the other. If the Revenue itself decides the question in a particular manner in the process of assessment, it cannot legitimately be heard to say that it has not been given any right of appeal against the decision of the Income-tax Officer who represents it fully all the way. The party aggrieved by the decision of the Income-tax Officer can only be one and that is the assessee, the Revenue having decided the question in its own favour

Though the majority Bench decided in favor of the Revenue, Hon’bleJustice Bhagwati gave cognizance to certain relevant considerations while deciding in favor of the assesse.Nevertheless, drawing force from the fact that the Revenue cannot file an appeal before the CIT(A), and holding that the powers of CIT(A) are wider than that of the Civil Court, it has been decided and echoed in numerous cases that the powers of CIT(A) are co-terminus with that of the Assessing Officer. Reference may be made to Kanpur Coal Syndicate – Supreme Court – 53 ITR 225.

“The Appellate Assistant Commissioner 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.”

Consequently, the said dictum pervades in numerous decisions of various judicial authorities over the years. In as much as the same has also been referred to by the CBDT in its Instruction No.F.No. DGIT(Vig.)/HQ/SI/Appeals/2017-18/9959, directing the CIT(A) to not merely dispose off the appeals on legal grounds but to endeavor to remove any lacuna in the assessment by utilizing the wide ambit of his powers.

2. Enhancement of assessment

As discussed earlier, sub-section (2) to section 251, makes it incumbent on the CIT(A) to grant an opportunity of being heard to the assesse, prior to making enhancement to the total income. Consequently it is pertinent to understand what amounts to enhancement of assessment. Since where any modification proposed by the CIT(A) which shall lead to enhancement of income, the CIT(A) shall be bound to issue a Show Cause Notice to give an opportunity of hearing, and in absence of such notice the enhancement shall be invalid.

The Income Tax Act 1961 does not define the word enhance, though in general parlance the same meansto intensify or increase’. On careful perusal of subsection (2) as referred above, it may be observed that the section speaks of three parameters:

  1. Enhance an assessment
  2. Enhance a penalty
  3. Reduce the amount of refund

As far as the section refers to ‘enhance an assessment’  the question arises, whether it means increase in total income of the assesse or would the increase of income under one head and proportionate decrease of income under the other head without any change in the total income of the assesse, amount to enhancement of income?if notthen would the increase in the tax liability of the assesse amount to enhancement of income in such case?

Letstake up an illustration for better understanding: A Ltd filed its return of income for A.Y. 2015-16 disclosing income from capital gains at Rs. 15,00,000/-. The Assessing Officer assessed the total income at Rs. 15,00,000/- but reclassified the income as10 lakhs from PGBP and 5 lakhs capital gains. Aggrieved by the said order A Ltd filed an appeal before the CIT(A). The CIT(A) in the course of appellate proceedingsupheld the addition under PGBP and further reclassified its income of Rs. 5,00,000/- from capital gain as Income from other sources (IOS). 

Now can we say that the CIT(A) has actually enhanced the income of the assesse? Let’s consider the possible scenarios:

  1. The CIT(A) could be said to have enhanced the income of the assesse only if the total income of the assesssee increases
  2. Taxing an amount under any head of income irrespective of increase in total income shall amount to enhancementi.e. taxing Rs. 5,00,000/- as IOS for the very first time by the CIT(A) in the above case
  3. Irrespective of increase in total income, an increase in tax liability shall amount to enhancement of income. And in the given case since reclassification of income from capital gains to IOS leads to increase in tax liability same shall amount to enhancement.

At the outset, lets address the fundamental question whether the CIT(A) is empowered to change the head of income at all  in the first place? The said issue is already put to rest by number of decision echoing that the CIT(A) has powers, co-terminus with that of the Assessing Officer, and is well equipped to make an addition under a completely different head of income, even  under a head of income which is not taxed  in the Assessment Order.  ( Refer Mc Millan & Co. 33 ITR 182)

At this juncture we may recollect that section 251refers to ‘enhancement of assessment’. Section 2(8) of the Act defines ‘assessment’ which is an inclusive definition and it includes reassessment.Section 143relates to ‘assessment’ and as per the provisions of sub-section (3) of the said section, the AO determines the total income or loss and determine the sum payable or refundable as per the procedure given in the said section and thus makes an assessment/reassessment as the case may be. Thus, the assessment or reassessment constitutes the determination of total income/loss of the assesse for an assessment year  and further determination of tax payable by the assesse or refundable to the assesse. Reference may also be made to charging section i.e. section 4 of the Act which states that income tax shall be levied on the total income of the assesse. It is important to note that what is assessed is the total income of the assesse. Whereas section 14 classifies the income under 5 categorical head in order to compute the income under each head for charging income-tax. Therefore in the backdrop of above discussion, section 251 refers to assessment of total income and not the income under each head. Therefore by ‘enhance the assessment’ the law necessarily refers to the total income of the assesse and consequently the charging income under a different head of income without ant increase in the total income shall not amount to enhancement. However this needs to be read with the other clause ‘reduce the amount of refund’ and the same is discussed in succeeding paras.

At this stage we may make fruitful reference to the decision of Madras High Court in the case of T. Namberumal Chetty& Sons – 1 ITR 32. The decision refers to section 31 of Income Tax Act 1922(para materiawith section 251of the Act). In the said case the AAC [CIT(A)]in course of appellate proceedings increased income under one head and simultaneously reduced the income under the other head of income. As a consequence to the order of the AAC  the total income of the assesse actually reduced as against the assessed income, as a result of the net effect of addition under one head of income and reduction of income under the other. But the assesse challenged that increase of income under a head of income, irrespective of reduction in the total income, amounts to enhancement. The Hon’ble  High Court held as under:-

“The Income-tax Commissioner in his Order of Reference is of the opinion that the enhancement referred to in ss. 31(3) and 32(1) is an enhancement of the assessment and that it means an enhancement of the assessment as a whole and not an enhancement of a particular item of income in the assessment which does not result in the enhancement of the assessment as a whole.

Therefore enhancement of assessment necessarily refers to assessment of total income of the assesse.Though this does not answer the other scenario as to where such change in head of income leads to increase in tax liability, would that amount to enhancement.  As referred above sub section (2) also makes it incumbent on CIT(A) to issues a show cause notice where the adjustment to income amounts to reduction in refund of the assesse.Therefore any increase in tax liability irrespective of change in total income should also amount to enhancement of income

In that respect we may refer to the observation of the Hon’ble ITAT Pune in the case of Naresh Sunderlal Chug – 171 ITD 116. In the said case the CIT(A) reclassified income under capital gains as business income thereby increasing the total income as against the assessed income. The ITAT on the precise point of whether the said reclassification amounted to enhancement, held as under:

“The CIT (A) was not only changing the head of income but was also enhancing the assessment, since income which is assessed in the hands of assessee as per direction of CIT (A) had worked out at Rs.49,41,225/- as against income assessed by the Assessing Officer under the head Long Term Capital Gain at Rs.48,75,610/-. The second aspect is rate of tax. In case income is assessed under the head Long Term Capital Gain, the rate of tax is lower than the rate applied when the income is being assessed as business income. In view thereof in not giving an opportunity or any show cause notice of enhancement as required under section 251(2) of the Act, the order of CIT (A) suffers from infirmity and the same cannot be sustained”

As evident from the above decision that though the total income increased in consequence to the order of CIT(A), the ITAT also gave weightage to the fact that the tax rate for business income is greater than that for capital gains and therefore the same amounted to enhancement. Therefore it could be fairly concluded that the increase in tax liability (as also reduction in refund), in consequence to the modification to assessment made by the CIT(A) , tantamount enhancement of income.

Further drawing substance from the above decision it may be argued that  change in status of assesse by the CIT(A), which results into increase in the tax liability of assesse shall also amount to enhancement. For instance if the CIT(A) in the course of appellate proceedings , proposes to assess the assesse as an AOP instead of an partnership firm, then the same shall amount to enhancement on the count of increase in tax liability (Refer Megatrends Inc – Madras High Court – WP No. 276 of 2016)

In cosequenti we may draw drawn the following analogies:-

  1. The CIT(A) is empowered to change the head of income u/s 14 to determine the taxability of income of the assesse.
  2. Such change of head of income does not ipso facto result into enhancement. The CIT(A) may be said to have enhanced the income if same results in increase in total income/tax liability or reduction in losses/refund.
  3. Also, reclassification of income or change in status of the assesse whereby the tax rate increases irrespective of increase in total income shall amount to enhancement as could be read in the decision of Hon’ble ITAT Pune above.

3. Notice u/s 251(2)

Having discussed what amounts to enhancement now it may be noted that where the criteria of enhancement is fulfilled, the CIT(A) is bound to grant an opportunity of hearing by issuing a show cause notice.Now, the question arises as to whether the failure on part of CIT(A) to grant such an opportunity of hearing before making such enhancement, make such enhancement null and void.

There are divergent views on this aspect of various judicial authorities. Few of such decision include the ITAT Pune – Naresh Sunderlal Chug – 171 ITD 116 and Delhi ITAT in the case of Jagdish Prasad Sharma – 115 taxmann.com 162,Lotte India Corporation Ltd – Madras High Court – 290 ITR 248where the held the enhancement was held to be void ab initio in the absence of show cause notice. Whereas there is an equal inclination of judiciary to refer such matters back to the CIT(A) for providing a proper opportunity of hearing. Reference be made to VinidbhaiNaranbhaiVaghani – Ahemdabad ITAT – ITA No. 1753/Ahd/2014, Y Brahmiah – Andra Pradesh High Court  – 52 taxmann.com 169

Therefore depending on the view followed by jurisdictional judicial authorities the fate of such failure on part of the CIT(A) shall be decided.

4. Extent of power to enhance

At this juncture let’s try to contemplate the ambit of the power of enhancement and does it have any periphery. If it does have some restrictions then certain enhancements would stand void ab initio irrespective of issue of show cause notice. Since the exercise of power beyond such a periphery (of power to enhance) would amount to transgression of jurisdiction which is blatantly void and illegal.

On perusal of the explanation to section 251 it may be observed that it grants a wide amplitude of power to the CIT(A) to not only consider the issues appealed against by the assesse but also the issues arising out of the proceedings from which the order appealed against germinates. This absolutely gives widest powers to the CIT(A) to consider any issue which is not forming part of appeal. The point to be considered is whether it grants an unbridled power to the CIT(A), to pick up any matter and make an enhancement in contrast to the fact that the assesse prefers an appeal before the CIT(A) for ventilating his grievances against the Assessment Order. And not for granting a second chance to inspect the records of the assesse thoroughly and vet for something that was missed by the Assessing Officer.

At this juncture it may be noted that the Hon’ble Bombay High Court in the case of Narrondas Manordas(supra) deciding on the amplitude of powers of the AAC [CIT(A)] held that the power to enhance is not confined to the ‘subject matter of appeal’ but to the ‘subject matter of assessment’. But such power does not extend to bringing a new source of income to taxation, under the garb of enhancement.

Further the Supreme Court in the case of Shapoorji Pallonji -44 ITR 891was seized with the extent of the power of enhancement of the CIT(A). The Revenue argued before the Apex Court that the order of assessment’ as referred to under section31 [parimateri to 251] is the assessment ought to have been reached and not merely the assessment reached through a particular process by the Assessing Officer and therefore the CIT(A) has wide power to consider any issue in assessing the correct income. The Apex Court appreciating the argument of the Revenue held that, the interpretation as proposed by the revenue is also a possible view but such interpretation shall make the other provisions of reassessment/ revision under the Income Tax Act infructuous and therefore decided in favor of the assesse holding that the CIT(A) does not have the power to tax a new source of income.

It needs to be noted that the Income Tax Act 1961 has various provision u/s 147, 263 to take care of issues which were not considered by the Assessing Officer. And therefore if the power of enhancement is interpreted to empower the CIT(A) to tax any income which is not considered by the Assessing Officer, then the other provisions of revision/reassessment  would be rendered otiose and redundant

The said decision was reaffirmed by the Hon’ble Supreme Court in the case of Rai Bahudor Hardutroy Motilal Chamaria – 66 ITR 443. The said decision is moreover important as it lays down the law in a detailed manner. In the said case the Hon’ble Supreme Court was seized with the facts that the Assessing Officer originally made addition in respect of unexplained creditors, alleging that the purchases were inflated. The Assessing Officer in the course of assessment also made reference to certain deposits for holding that the creditors were not genuine but he made no addition in respect of such deposits. The AAC in the course of appellate proceedings made addition of such deposits after granting certain relief. The issue for consideration was, whether the AAC is empowered to enhance an assessment on account of such deposits. The Apex Court held as under:-

“In other words, the power of enhancement under section 31(3) of the Act is restricted to the subject-matter of assessment or the source 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. ………………It is true that the Income-tax Officer has referred to the remittance of Rs. 5,85,000 from the Calcutta branch, but the Income-tax Officer considered the despatch of this amount only with a view to test the genuineness of the entries relating to Rs. 4,30,000 in the books of the Forbesganj branch. It is manifest that the Income-tax Officer did not consider the remittance of Rs. 5,85,000 in the process of assessment from the point of view of its taxability. …………………

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 subject-matter of consideration by the Income-tax Officer from the point of view of taxability.

Therefore in the facts at hand the Apex Court considering that the impugned deposit were considered by the Assessing Officer but not with a view of taxability and therefore the same was not considered and processed by the Assessing Officer to empower the AAC to enhance the same. In other words the CIT(A) can consider an issue for enhancement if the same forms part of the income tax return or Assessment Order and is not merely considered by the Assessing Officer but considered from the point of view of taxation. Consequently, sources of income which were not considered by the Assessing Officer from the point of view of taxability, completely fall out of the scope of enhancement and therefore irrespective of issue of notice u/s 251(2) the same cannot be taxed under the garb of enhancement.

However,  the Apex Court in a subsequent decisiontook a contrary view when the said law was again put to test in the case of NirbheramDaluram – 224 ITR 610.  It was held that the CIT(A)’s power to enhance is not confined to  matters considered by the Assessing Officer and the CIT(A) may consider any source of income whether same is considered by the CIT(A). The following aspects need to be noted in this respect:-

  1. The Madhya Pradesh High Courtoriginally in the case of NibheramDaluram – 127 ITR 491, relying on three decisions of Apex Court namely ShapoorjiPallonji, Rai Bahadur HardutroyMotilalaChamaria ( Rai Bahadur) and Gujragravures P Ltd, decided in favor of assesse, holding that the CIT(A) cannot bring to tax a new source of income.
  2. The Apex Court in deciding the appeal against the said decision, placed reliance on Jute Corp Of India Ltd and distinguished Gurjargravures P Ltd
  3. However the Apex Court did not consider the decision of ShapoorjiPallonji and Rai Bahadurwhich were precisely on the point for consideration before the Apex Court.

It pertinent to note that the decision in Gurjagravures P Ltd was in different conspectus, in as much as the power of CIT(A) to entertain an additional claim not made before the Assessing Officer was considered, and held that CIT(A) has no such power. Similarly decision in Jute Corpn P Ltd as well, is based on different aspect of law. In the said decision the Apex Court held that the CIT(A) is empowered to entertain an additional ground of appeal and in doing so differed from the decision in Gurjagravures P Ltd.

However the Apex Courtinthe case of NirbheramDaluram neither consider the decision in case of ShapoorjiPallonjinor did it address theproposition laid out in the said decision of rendering the other income tax provisions redundant. The said decision has been delivered without considering the decision of ShapoorjiPallonji& Rai Bahadur, which are on the very aspect of extent of power of enhancement of the CIT(A), despite the fact that High Court had considered such decisions and decided in favor of the assesse.

Subsequently a Full Bench of Delhi High Court in the case of Sardari Lal & Co. – 251 ITR 864, considering all  the above decisions held that the decision in ShapoorjiPallonji, Rai Bahadur still holds ground.

Therefore it may be noted that the Explanation to section 251 in no manner enlarges the scope of powers of CIT(A). It is mere statutory embodiment of the judicial principles of wide powers of the CIT(A), laid down in the various decisions discussed above. The said explanation cannot empower the CIT(A) to tax a new source of income since it is a well-established law now, that an explanation cannot expand the scope of the provisions of the Act  .Therefore it may fairly be concluded that the CIT(A) does not have the power to assessea source of income, which was not considered by the Assessing Officer in the course of assessment proceedings, with a view of its taxability.

5. What amounts to a new source of income

In order to argue that particular adjustment made by the CIT(A) amounts discovering a new source of income, it is essential to understand what exactly is a new source of income. As established by various judicial precedents drawing anologies from the decision of Hon’ble Apex Court( Rai Bahadur)(as discussed above) it may fairly be said that a source of income which was not discussed by the Assessing Officer in the course of assessment proceedings with a view of its taxability shall be a new source of income. We may considered a scenario where an issue has been discussed by the Assessing Officer in course of assessment proceedings in as much as question in that respect was raised and reply to the same was filed in the course of assessment proceedings, but no reference to same  is made in Assessment Order. Since the issue was considered and processed in the course of assessment proceedings the same shall not be a new source of income,if the CIT(A) proposes an enhancement on that point

Fruitful reference could be made to the decision ofDelhi High Court in the case of Gurinder Mohan Singh Nindrajog – ITA No. 322 of 2005 30/09/2011. The Hon’ble High Court unequivocally held as under

“We are of the opinion that the aforesaid item or source had been subjected to the process of assessment. Merely because the ultimate order passed by the Assessing Officer is silent about this item and there is no discussion thereupon would not mean that the Assessing officer had not considered the same. It is trite law that the Assessing Officer is not supposed to frame the assessment order like a judgment of the Court and would discuss each and every item and aspects specifically. It is clear from the record that import and impact of every document seized including page no.21 was considered by the Assessing Officer; he went into the matter by issuing a questionnaire; calling upon the assessee to give reply and reply/clarification was received from the assessee.”

The Delhi High Court further drawing substance from the decison of Hon’ble Apex Court in the case of ShapoorjiPallonji, elaborately discussedas to how the source of income which is not brought to tax by the Assessing Officer in the original assessment proceedings may be brought to tax under the various provisions of the Act. The same is summarised herein below for quick perusal:-

“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 situation may occur:-

Sr. No.

Situation

Provision of  ITAC

(a)

The Assessing Officer may accept the return of income without making any addition or disallowance; or

Section 148/147

(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

Section 251(1)(a)

(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

Section 263

(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.

Section 147

(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

Section 263

(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.

Section 147

Delving deeper let us consider certain intricate issues under various provisions for assessment/revision of income as against the power of enhancement under the Act

i. Intimation u/s 143(1)

On reading through section 251 it may be observed that. Clause(a)/(aa) makes a reference to ‘order of assessment’, clause (b) refers to ‘order imposing penalty’ whereas clause (c) refers to ‘any other case’. As far as clause (a)/(aa) & (b) are concerned there is specific mention of ‘power to enhance’ whereas the same does not find place in clause (c). However clause (c) seems to be more liberal in its wording in as much as it empowers the CIT(A) to pass an order as he thinks fit. Therefore in order understand the scope of power of enhancement in respect of intimation u/s 143(1) it becomes necessary to decipher as to whether order u/s 143(1) is an order of assessment for the purpose of section 251.  

Intimation u/s 143(1) is a summary proceedings made by the Assessing Officer without requiring the presence of the assesse. The said section lays down the adjustments that can be made to compute the total income. What is permissible is correction of errors that are apparent on the basis of documents on the record. The Assessing Officer u/s 143(1) cannot go behind the return of income and the accompanying documents in making such amendments. Therefore it is not as elaborate a procedure as carried out in the course of assessment proceedings.

We may refer to clause (a) of sub-section (1) of section 246A of Income Tax Act 1961 which enlists the appealable order before the CIT(A).The relevant extract of the same is produced herein below:-

246A (1) Anyassessee or any deductor or any collector aggrieved by any of the following orders (whether made before or after the appointed day) may appeal to the Commissioner (Appeals) against—

(a) an order passed by a Joint Commissioner under clause (ii) of sub-section (3) of section 115VP or an order against the assessee where the assessee denies his liability to be assessed under this Act or an intimation under sub-section (1) or sub-section (1B) of section 143 or sub-section (1) of section 200A or sub-section (1) of section 206CB, where the assessee or the deductor or the collector objects to the making of adjustments, or any order of assessment under sub-section (3) of section 143 except an order passed in pursuance of directions of the Dispute Resolution Panel or an order referred to in sub-section (12) of section 144BA or section 144, to the income assessed, or to the amount of tax determined, or to the amount of loss computed, or to the status under which he is assessed;

On perusal of the said section it may be observed thatClause (a) of said section refers to order u/s 143(1) as an ‘intimation’ whereas in the very same para the order u/s 143(3)/144 is referred to as an ‘order of assessment’. Therefore even u/s 246A, intimation u/s143(1) has been ranked differently from that of an order of assessment. The proposition that the intimation u/s 143(1) is not an Assessment Order has been enunciated by the Hon’ble Apex Court in the case of Rajesh Jhaveri – 291 ITR 500.

In the backdrop of above discussion it is palpable that the order u/s 143(1) is not an order of assessment and therefore same shall be covered within ambit of cause (c)of said section.

At the cost of reiteration may be noted that clause (a)/(aa)/(b) grants a specific power of enhancement to the CIT(A) whereas clause (c) grants no such specific power. The language used in clause (c) is as follows

(c)  in any other case, he may pass such orders in the appeal as he thinks fit.

Therefore in case of a intimation u/s 143(1) or any order which is neither a ‘order of assessment’ nor a ‘penalty order’, the CIT(A) can pass such an order “as he thinks fit”. It is therefore pertinent to know what is the scope of ‘order as he thinks fit’. Similar language can be read u/s 254 of Income Tax Act 1961 which has been held by the Hon’ble Apex Court to be of wide amplitudein number of decisions. In that respect reference may be made to the decision of Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd  – 229 ITR 383 :-

“Under section 254 of the Income-tax Act, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law.”

Therefore drawing force from the above mentioned decisions of the Apex Court the CIT(A) may be deemed to have unbridled power in respect of an order falling within the contours of clause (c) u/s 251(1). In respect of such order the CIT(A) may not only confirm, reduce, enhance or annul the order in appealbut also set aside an appeal to the file of the Assessing Officer.Therefore even though the Finance Act, 2001 revoked the words ‘and set aside’ from the provisions of section 251(1), but on reading through clause (c) and considering the wide amplitude attached to language ‘as he thinks fit’, the CIT(A) may set aside an order under clause (c) of section 251, to the file of the Assessing Officer. The said proposition has been considered and upheld by ITAT Delhi, in the case of AmityInternationalSchool – 150 ITD 704. In the said case theITAT was concerned with order u/s 201 which alike order u/s 143(1) is an intimation under the TDS provision of the Act.

“we are of the opinion that when the ld CIT(A) adjudicates an appeal preferred against an order passed u/s 201 of the Act, he draws his power from sub-section (1)(c) of section 251 of the Act, which entails him to pass any order as he thinks fit and we do not find any restriction in the said power and we cannot read any restrictions which is not there in sub section (1)(c) of Section 251 and therefore even he has powers to even set-aside the said order impugned before him”

Therefore the CIT(A) may absolutely enhance the income u/s 143(1), subject to fact that said issue arises out of the Income Tax Return (ITR) and the other supporting document to the ITR and may also set aside such an order to the file of Assessing Officer.

ii. Limited scrutiny u/s 143(3)

The scrutiny assessment u/s 143(3) is initiated by issuing a notice u/s 143(2). The CBDT In order to facilitate expeditious completion of scrutiny proceedings classifies the rudimentary scrutiny proceedings as ‘Limited Scrutiny’ & ‘Complete Scrutiny’. The complete scrutiny as the name suggests is a full-fledged assessment proceeding,  on the other hand the limited scrutiny is constricted in its scope. The intention behind a limited scrutiny is to constrict the scope of assessment to pre-determined issues, inorder to expedite the scrutiny proceedings. CBDT vide it’s Circular’s (for instance CBDT Circular No. 5/2016 dated 14/07/2016) has made it crystal clear that under Limited Scrutiny the Assessing Officer is supposed to complete the assessment within the contours of predetermined issues for the assessment and in order to go beyond the scope of limited scrutiny he has to obtain an approval of the Pr. CIT/CIT to convert the ‘limited scrutiny’ into a ‘complete scrutiny’.

Therefore where the Assessing Officer is bound by the restricted scope of limited scrutiny the CIT(A) under the guise of power of enhancement, cannot envisage to transgress the same by taxing an issue which is not the subject matter of limited scrutiny in the first place. Refer Storewell Construction &Engineer  – ITAT Pune – ITA No. 768/PN/2019 whereby a similar attempt of CIT exercising powers u/s 263, to bring to tax an issue not forming part of limited scrutiny was struck down as invalid by the judicial authorities.

iii. Assessment u/s 147

The Assessing Officer in order to make an assessment u/s 147 records the reason for reopening the assessment and issues the notice u/s 148. Explanation 3 to the section 147 lays down that the Assessing Officer may also make addition in respect of other issues, for which no reasons were recorded u/s 148, that come to his notice in the course of assessment. Accordingly since the CIT(A) is seized with the completed assessment proceedings he is free to make enhancement on issues, for which no reasons have been recorded, but were  that were considered by the Assessing Officer in the course of assessment.

However, the Bombay High Court in the case of Jet Airways I Ltd  – 355 ITR 172have taken a view that where no addition is made on basis of the reasons recorded, the complete assessment is bad in law and Explanation 3 does not come to rescue in light of lack of jurisdiction. The said decision has been further followed by various High Court and ITAT.However there also existsdivergent view of the Punjab & Haryana High CourtMehakFinvest P Ltd –  52 taxmann.com 51.  The said finding of the Bombay High Court has been has been further developed to hold that in a case where the CIT(A) grants complete relief in respect of additions for which reasons were recorded u/s 148, the complete assessment shall be bad in law ( Refer – P Rahim Abdullah ITA No. 2757/PN/2016 dated 28/01/2020). Therefore ins such case the question of enhancement wot arise in the light of invalidity of assessment.

We may also consider a scenario where the assessment of the assesse is originally completed u/s 143(3) and is subsequently re-opened u/s 147.Whether in such case the CIT(A) may exercise his power of enhancement in respect of matter which though not considered by the Assessing Officer in the assessment proceedings u/s 147 but was considered in the original assessment proceedings u/s 143(3).

In that respect we may refer to Explanationto section 251. The explanation statesthat the CIT(A) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed.Therefore the CIT(A) can consider the matter arising out of proceedings u/s 147 which are in appeal and the assessment u/s 143(3) is not a proceeding in which order appealed against was passed. Therefore the CIT(A) cannot refer to issue which was not considered in assessment proceedings u/s 147, for the purpose of enhancement.

It may further be noted that the Assessment Order u/s 143(3) does not completely merge with the assessment u/s 147 to contend that the same being a continuation of original assessment the CIT(A) shall be justified in doing so. It is pertinent to bear in mind that the original assessment merges with the reassessment u/s 147 only to the extent the subject matter of reassessment and the original assessment is one and the same  Reference could be made to the decision of the Hon’ble Supreme Court in the case of Alagendran Finance Ltd  – 293 ITR 1. Therefore even otherwise the power of enhancement cannot be stretched to an issues which was considered in original assessment but not in the re assessment

iv. Assessment u/s 153A/153C

It is a well settled law now, that in case of unabated assessment year addition can be made only on the basis of incriminating material. (ReferAll Cargo Global Logistics Ltd. v. Dy. CIT [2015] 374 ITR 645). The CIT(A) has powers co-terminus with that of the Assessing Officer and therefore he may do what the Assessing Officer can do and nothing beyond the reach of Assessing Officer. Consequently any enhancement proposed by the CIT(A) in respect of  unabated assessment year, dehors any incriminating material shall be bad in law. Therefore apart from the primary requirement that the additional issue be considered by Assessing Officer in the course of assessment proceedings, it is also necessary to ensure that in case of an unabated assessment year the addition is on basis of some incriminating material.

v. Section 263: Interplay between powers of CIT & CIT(A)

The PrCIT/CIT is empowered u/s 263 to revise an Assessment Order where he is satisfied that the Assessment Order is erroneous in as far as prejudicial to the interest of revenue. The appeal against the order u/s 263 lies directly to the ITAT. The powers of Pr. CIT/CIT u/s 263 have been tested in various judicial decisions and now it is a well-established law that, where there are two views possible and the Assessing Officer after application of his mind takes one such possible view, the CIT cannot by sheer use of his power try to substitute his opinion that for the Assessing Officer. Therefore where an issue has been verified by the Assessing Officer in the course of assessment proceedings, and after such verification the Assessing Officer has taken a possible view, then the said issue cannot be considered by the Pr CIT/CIT u/s 263.( Reference be made to decision of  Gabriel India Ltd – Bombay High Court – 203 ITR 108).In other words where the Assessing Officer has considered an issue in the course of assessment proceedings then the power of CIT to revise the same is outsted.Whereas on the very anvil the power of the CIT(A) to enhance the income germinates.

To put it succintly, in case of complete lack of enquiry on the part of the Assessing Officer in respect of certain issue, the jurisdiction in respect of same shall be exclusively exercised by CIT u/s 263, since for the CIT(A) the said issue shall tantamount to finding a new source of income. In other words, where the Assessing Officer does not consider examine a matter in the course of assessment proceedings, the jurisdiction in respect of same shall be out of the clutches of CIT(A) u/s 251, and within the domain of the CIT u/s 263.    Though there are certain grey areas where the CIT as well as the CIT(A) may exercise their powers u/s 263 & 251 respectively. For instance a situation where an issue has been considered by the Assessing Officer and without applying his mind to the issue he makes no addition in respect of the same, then the jurisdiction u/s 251 can absolutely be invoked or even the jurisdiction u/s 263 may be invoked, subject to the satisfaction of conditions laid down under the said section

On further reference to Explanation 1 to section 263 it may be observed that where the assesse has filed an appeal against the Assessment Order, the power of Pr. CIT/CIT u/s 263 shall be restricted to such matters not considered and decided in such appeal. Therefore the power of revision u/s 263 of the CIT and the power of enhancement u/s 251, of theCIT(A) is mutually exclusive (subject to exceptional situation as discussed above). If one has it the other is automatically dethroned of it.

Therefore it is evident that each section grants power with a purpose at each stage of proceedings. Therefore the ambit of power under each section has to be interpreted keeping in mind that the other sections are not left otiose and redundant. This is exactly what made Hon’ble Apex Court to weigh in favor of the assesse in the landmark decision of ShapoorjiPallonji (supra)

6. Is the power of enhancement to be exercised within the time barring of assessment.

The legislature requires the assessment to be completed within the time limit prescribed under relevant provisions ( section 153/153B) of the Act.  The CIT(A) as discussed earlier is empowered to exercise the power of enhancement in order to bring the correct income to taxation. Section 250(6) directs that wherever possible the CIT(A) may hear and decide an appeal within a year from the end of the financial year in which appeal has been filed. However, as apparent from the language of said section, it is not a mandatory provision and therefore there is no time limit prescribed for completion of the appellate proceedings.  Consequently there is no time limit for exercising the power of enhancement u/s 251 of the Act. Therefore the same cannot be read into the provisions of the Act. Refer H. A. Shah & Co. – Bombay High Court – 34 ITR 401.

7. Can the CIT(A) record his opinion/satisfaction for that of the Assessing Officer

It may be noted that though section 251 specifically refers to the powers of the CIT(A), the same does not encompass all the powers of the CIT(A). The CIT(A) also draws powers from various provisions of the Income Tax Act 1961 ranging from section 131: granting powers equivalent to that of the court under the Code of  Civil Procedure, 1908  section 250: admission of additional ground, carrying out further inquiry himself or direct the Assessing Officer to do so,  section 270A: to levy penalty and so on. It may be noted here that the various sections as referred above and their ilk, while granting such powers makes a specific reference to CIT(A). However the powers of CIT(A) have also been read out impliedly, even in absence of such specific reference in the provision of a particular section.  Though can such powers be extended to empower the CIT(A) to record his satisfaction/opinion for that of the Assessing Officer. We may consider this juxtaposing certain exemplary provisions under the Act which mandate recording of satisfaction by the Assessing Officer. 

a. Rejection of books of accounts

The text of section 145 of the Act is reproduced herewith for easy perusal:-

145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) …………………

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

On perusal of subsection 3 to section 145 as reproduced above it may be noted that the Assessing Officer may reject the method of accounting employed by the assesse and determine the profits from PGBP & IOS at the best of his judgement. The said section has two limbs. First, a case where the Assessing Officer is not satisfied with the method of accounting followed by the assesse.Second, a situation where no method of accounting is regularly followed by the assesse.

As far as the second limb is concerned it is an objective consideration and there is no requirement to record an opinion/satisfaction in order to attain jurisdiction for the rejection of books of accounts.Therefore the CIT(A) in his wide amplitude of powers may reject the books in such situation even if the Assessing Officer had accepted the books.      

However, in contradiction, the first limbcalls for a subjective determination of the Assessing Officer to be satisfied that the method employed by the assesse does not portray a correct or complete picture. The Assessing Officer in order to attain the jurisdiction the Assessing Officer has to record his satisfaction, then and only then he may proceed to reject the books of the assesse.At this juncture we may refer to section 2(7A) of the Act which defines Assessing Officer as follows:-

"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of this Act, and the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act ;

On perusal of above section it may be observed that the term ‘Assessing Officer’ does not include the CIT(A). So the obvious question arises, whether in the first situation referred above, where the assesse regularly follows a method of accounting and the Assessing Officer  is satisfied with such method of accounting, can the CIT(A) substitute his satisfaction for that of the Assessing Officer to reject the books of accounts?

At this juncture it may be noted that under the Act the authority empowered to exercise a particular power is the only authority who can validly exercise such a power. The said proposition has been upheld to an extent that even the officer assuming superior authority cannot record his/her satisfaction on behalf of the lower authority. Reference may be made SPL’s Siddhartha Ltd – Delhi High Court – 345 ITR 223where the requisite sanction u/s 151 for re-opening of assessment u/s 147, was given by the CIT instead of the JCIT. The High Court noted that as per the provisions of section 151, in the case at hand it was the JCIT who should have approved the re-opening and held as follows:-

“Section 116 also defines the Income-tax authorities as different and distinct Authorities. Such different and distinct authorities have to exercise their powers in accordance with law as per the powers given to them in the specified circumstances. If powers conferred on a particular authority are arrogated by other authority without mandate of law, it will create chaos in the administration of law and hierarchy of administration will mean nothing. Satisfaction of one authority cannot be substituted by the satisfaction of the other authority. It is trite that when a statute requires, a thing to be done in a certain manner, it shall be done in that manner alone and the Court would not expect its being done in some other manner.”

It may also be noted that a certain power cannot merely be presumed to be granted to the CIT(A),since wherever the legislature intended to do so it has made a specific reference to the CIT(A). As discussed earlier such reference may be read into section 131/ 270A etc. Therefore as it appears, in absence of specific mention of the CIT(A) u/s 145, prima facie the same cannot be envisaged to empower the CIT(A) to reject the books by substituting his opinion for that of the Assessing Officer.  

At this juncture it may be noted that theApex Court in the case of Mc Millan – 33 ITR 182 has settled the position, that the CIT(A) has power to reject the books of accounts of the assessee. In deciding so the Apex Court prominently harped on the fact that when the CIT(A) has the power to decide whether the Assessing Officer rightly rejected the books of the assesse, he is also empowered to decide the contrary.To put it pithily the Apex Court held that when the CIT(A) may hold the rejection of books to be incorrect and decide in favour of the assesse he may also hold the acceptance of books to be incorrect.

Further the Apex Court on the foundation of the wide amplitude of powers decided in the favour of the Revenue. The relevant portion of the decision is reproduced herein below.(section 13 of Income Tax Act 1922 is para materia to section 145 of the Act.)

“The Income-tax Officer may proceed in one of three ways:

(1) he may fail to apply his mind to the statutory duty imposed on him by section 13 and its proviso and may accept the assessee’s method of accounting without at all considering if (a) the method was regularly employed and (b) if the income, profits and gains of the assessee can be properly deduced therefrom; (2) he may apply his mind and decide in favour of the assessee that the method is both regular and acceptable (in the sense that income, profits and gains can be properly deduced therefrom); or (3) he may decide against the assessee and hold that the method is either not regularly employed or is unacceptable. In the first case, there is a failure to perform a statutory duty and it has not been seriously disputed that the appellate authority can direct the Income-tax Officer to perform that duty. This is supported by high authority to which we shall presently refer. In the third case, it is conceded that the appellate authority can interfere and set aside the opinion or determination of the Income-tax Officer, and in doing so the appellate authority must form his opinion if the method of accounting is proper and acceptable. The dispute or divergence of opinion relates only to the second case and to a part of it only, because it is not disputed that the finding as to whether the method of accounting is regularly employed or not is an objective determination which the appellate authority can revise. Both the Appellate Assistant Commissioner and the Appellate Tribunal have wide powers to go into questions of fact and law, the Appellate Assistant Commissioner under section 31(3) and the Appellate Tribunal  under section 33(4). Even the Commissioner can revise an order of the Income-tax Officer under section 33B in certain circumstances stated therein. We see no justification for holding that these powers, so widely expressed by the statute, become ineffective in one particular case only, namely, when the determination or opinion is in favour of the assessee as respects the propriety of the method of accounting. It is true that the Revenue has no right of appeal under section 30, but that is not a decisive circumstance. The assessee can make any order of assessment by the Income-tax Officer final by not appealing therefrom—whether the order is based on a subjective or objective determination. The point is not what happens when there is no appeal; but the point is when the appellate authority is lawfully in seizin of the matter, what powers it can exercise”.

The Hon’ble Apex Court considering the wide amplitude of power of CIT(A) brushed away the literal interpretation of the provisions as discussed above.

Nevertheless the said decision is devoid of the basic fact that the, the Assessing Officer represents the Revenue and in the first place has the power to make an assessment. He in the exercise of such powers makes addition or disallowances in the Assessment Order. The assesse aggrieved by such an Order knocks the doors of the CIT(A), seeking relief. Therefore the Assessing Officer sets the complete process in motion. In such scenario how can he be aggrieved by his opinion lest his own acceptance of the accounting method. The legislature has inserted the requirement of ‘satisfaction’ of the Assessing Officer to avoid the arbitrary use of wide powers that he possesses. Therefore it is incumbent on the Assessing Officer to record his satisfaction with great caution before exercising such powers. In absence of such satisfaction the exercise of power shall be arbitrary and therefore null and void.(Refer Teletronics Dealing Syatems P Ltd  – Bombay High Court – 228 Taxman 194)

The Apex Court made an comparison with a situation where the CIT(A) decides the rejection of books to be incorrect and thereby decides in the favour of the assesse and consequently justified that the CIT(A) can hold that the acceptance of the books by the Assessing Officer is incorrect. The said decision of Apex Court is right in its consideration

However the basic and fundamental difference in the two situation has been turned a bats eye to. In a case where the Assessing Officer rejects the books of the assesse the Assessing Officer has actually recorded his satisfaction for doing so. The assesse aggrieved by such rejection of the books prefers an appeal before the CIT(A).  The CIT(A) in the appellate proceedings decides if such act of rejection of books is correct in light of the submission of the assesse and additional evidences if any. The CIT(A) in acting as a judicial authority decides whether the satisfaction already recorded by the Assessing Officer is correct or erroneous. He does not in doing so record any satisfaction but merely decides upon the correctness of satisfaction of the Assessing Officer.

Whereas in the case where the Assessing Officer accepts the books of assesse,at the outset the Assessing Officer cannot be aggrieved by his own action. Secondly,the CIT(A) is not concerned with the correctness of any satisfaction or the books for that sake, since the assesse is not aggrieved by it. Even if the CIT(A) is inclined to decide that the books are not properly maintained and deserve to be rejected, the CIT(A) also needs the satisfaction to that effect. And as discussed above the CIT(A) is not empowered by the Act to do so.  Therefore in order to reject the books the CIT(A) first has to decide that the acceptance of books on part of Assessing Officer was not correct and then go on further to record a satisfaction which is the affair to be carried out in the course of assessment by the Assessing Officer.  Therefore it may strongly be argued that the CIT(A) cannot arrogate the power of the Assessing Officer to reject the books of the assesse.

It may further be noted that the above decision in case of Mc Millanwas  delivered by a Three Member Bench and Hon’ble Justice Bhagwati passed a dissenting order from that of the other two judges. In deciding so he dismissed the arguments of the Revenue on the very ground that the Revenue cannot be aggrieved by its own cause in as much as the Assessing Officer who represented the revenue in course of assessment cannot be aggrieved by his own order before to the CIT(A). He placed strong reliance on the text of the Income Tax Act 1922, holding that the provision of  the Act do not envisage to grant any power of rejection of books to the CIT(A) .   

Though the said arguments can be validly contended but since the decision of the Apex Court(the majority judges) being the law of land shall prevail till a Larger Bench decision is delivered in this respect. Therefore as the position exists as of today the CIT(A) is empowered to reject the books of the assesse.

Albeit, there is one possible angle to this, that being such rejection should not result into ‘finding a new source of income’. We may go back to the decision of Hon’ble Apex Court in case of Mc Millan (relevant extract discussed above). In the said decision the Apex Court considered three scenarios of which the first scenarios referred to a situation where the Assessing Officer accepts the books of accounts without considering the correctness or completeness of the books. Though the Apex Court held that in such scenario the CIT(A) may direct Assessing Officer to do his statutory duty, it may be noted that post 2001 the CIT(A) lacks the power to set aside an assessment to the file of Assessing OfficerThe Hon’ble Apex Court in Mc Millan, did not consider that such rejection of books may amount to finding of a new source of income and whether in that light the rejection of books by the AAC is viable. Subsequently, the Hon’ble Apex Court in the case of  Rai Bahadur (supra) has held that the power of enhancement can be applied only in respect of issues which have been considered in the course of assessment proceedings from point of view of taxability. Reading the principles laid down by the Supreme Court (in subsequent decision), in symphony, the music that is produced , limits the power of such rejection of books when the Assessing Officer has not considered the said aspect in course of assessment proceedings.  Similar view has been taken in the case of Zuberi Engineering Company – Jaipur ITAT – 175 ITD 557.

“In the case in hand, the Assessing Officer made certain disallowances of expenses while completing the assessment U/s 143(3) of the Act whereas the ld. CIT(A) invoked the powers to enhance the assessment by rejecting the books of account and consequently the income of the assessee was enhanced by applying the G.P. rate to estimate the income of the assessee. Therefore, it is clear that the said issue and aspect of not accepting the book results of the assessee was never taken up by the Assessing Officer in the scrutiny assessments of the assessee. Even if the Assessing Officer ought to have considered the said point of correctness of the books of account and rejection of same U/s 145(3) of the Act if the said matter was not taken up for scrutiny and enquiry then it is a subject matter falling in the ambit of revisionary power U/s 263 of the Act due to the reason that there was a complete lack of enquiry on the part of the Assessing Officer to examine the correctness of books of account. Since this was not at all subject matter of the assessment, therefore, it cannot be a subject matter of enhancement of income U/s 251 of the Act. Accordingly following the various decisions as relied upon by the assessee as well as the decision of this Tribunal in the case of Jagdish Narayan Sharma (supra) we set aside the order of the ld. CIT(A) qua this issue being beyond the jurisdiction of the ld. CIT(A).”

Therefore an bold analogy may be drawn that where the Assessing Officer has considered the correctness or completeness of accounts or the method of accounting for a reason other than the rejection of books u/s 145(3) and the Assessing Officer in the course of assessment proceedings never proposed rejection of the books, the CIT(A) cannot reject the books of accounts as the same shall amount to discovering new source of income

b. Section 68/69

We very commonly come across the situation where the Assessing Officer wrongly makes an addition u/s 68 and the CIT(A) in the course of appellate proceedings upholds the addition u/s 69/69A/69B. In our discussion earlier we have already concluded that the CIT(A) has plenary powers (co-terminus to that of the Assessing Officer) and he is absolutely empowered to change the head of income for purpose of determining taxability of such income. Also, a mere adjustment to the income already assessed by the Assessing Officer, by taxing the same under a different head of income does not amount to discovering a new source of income.

Nevertheless, it may be noted that section 68/69 similar to section 145 calls for the satisfaction of the Assessing Officer. At this juncture reference may be made to section 68 of Income Tax Act 1961. Same is reproduced herein below:-

68. Where any sum is found credited in the books of an assessee maintained for any previous year, and theassessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year :

     Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed tobe not satisfactory, unless—

 (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

 (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

On reading through the section it may be gleaned that similar to section 145 (discussed above) there are two limbs to the section. Firstly, the assesse offers no explanation of nature and source of credit in the books of account of the assesse. Secondly, the assesse offers an explanation which in the opinion of the Assessing Officer is not satisfactory. In respect of the second limb the Assessing Officer is required to be satisfied that in his opinion the explanation offered is not satisfactory, whereas there is no such requirement in the first case. In other words the power of the Assessing Officer to make addition in the first limb is absolute, which is not the case is second limb. The above proposition has the imprimatur of Calcutta High Court. The Hon’ble High Court in the case of Hindustan Tea Trading Co. Ltd – 263 ITR 289 holds as under:-

Section 68 of the IT Act, 1961, empowers the AO to treat any sum found credited in the books of account of the assessee for any previous year, if the assessee fails to offer explanation about the nature and sources of such fund or if explanation offered by the assessee is not, in the opinion of the AO, satisfactory, as income from undisclosed sources and charge the same to tax as income of the assessee of that previous year. Therefore, it appears that the power of the AO under Section 68 is not an absolute one. It is subject to its satisfaction where explanation is offered. The power is absolute where the assessee offers no explanation. The satisfaction with regard to explanation is in effect an in-built safeguard in Section 68 protecting the interest of the assessee.

As discussed earlier the term Assessing Officer as defined u/s 2(7A) of Income Tax Act 1961 does not include the CIT(A) within its ambit. On conjoint reading of section 68 and section 2(7A), the inevitable conclusion arises that it is the Assessing Officer, and not the CIT(A), who is required to cast his opinion as to satisfactory explanation of nature and source of income. Further, as laid down u/s 120 of Income Tax Act 1961, the CIT(A) cannot be conferred the powers and functions of the Assessing Officer. In other words the reference to ‘Assessing Officer’  u/s 68 cannot be stretched to include the CIT(A) in its ambit.

Notably, section 68 does not make any reference to the satisfaction of any person lest the CIT(A). The question only arises in respect where a satisfaction is to be recorded since that is the domain of the Assessing Officer. As faras the first limb is concerned the CIT(A) may change the head from section 68 to 69 under the Act but in case the second limb, the Act requires the satisfaction of Assessing Officer which in all fairness is a subjective satisfaction.

There are decisions where the power of the CIT(A) to change the head of income has been upheld by the judicial authorities. Reference may be made to decision in the case of Anup SharmaChandigarh ITATITA No. 161/Chd/2012dated 10/09/2014. In the said case the assesse challenged the validity of the power of  CIT(A) to uphold the addition made by the Assessing Officer u/s 68, under section 69 of the Act.

“Whereas in case before us clear y the Assessing Officer had information that assessee had deposited certain sums in a bank account and assessee was duly confronted with this information but assessee had no explanation and that is why the addition was made. Mere y because the bank pass book cannot be treated as books of account on the basis of certain decisions does not mean that addition is not protected u/s 292B and has been rightly confirmed by the Ld. CIT(A) u/s 69A of the Act.”

It may be noticed that the said decision is in respect of the first limb, where no explanation is offered by the assesse. Therefore in case of second limb the CIT(A) cannot uphold the addition under some other head in the series of section 68 & 69 of the Act. In case of second limb where the Assessing Officer records satisfaction and makes addition u/s 68 and the CIT(A) merely upholds it (say) u/s 69, due cognizance needs to be given to the fact that there is a satisfaction inked by the Assessing Officer as to explanation offered by the assesse in respect of unexplained credits (u/s 68). The CIT(A) in such case cannot consider the same satisfaction for upholding addition u/s 69 in respect of unexplained investments.

Further, where the CIT(A) reclassifies the income disclosed by assesse under business income, as undisclosed income u/s 68/69the same shall amount to increasingthe tax liability since the income u/s 68/69 is taxed @ 60% (section 115BBE). And therefore even if the assesse offers no explanation and consequently no satisfaction is required, the same shall amount to enhancement and it would be incumbent on the CIT(A) to issue a show cause notice u/s 251(2). This has relevance especially in the survey cases u/s 133A, search matter u/s 132 and also in the recent assessment in consequence to the Operation Clean Money post demonetization.

The language u/s 69/69A/69B/69C/69D in respect of the opinion of the Assessing Officer is identical and therefore the same proposition is similarly applicable to all such sections.

At this juncture we may refer the decision of Hon’ble ITAT Delhiin the case of Rima Maheshwari. The Hon’ble ITAT in the said decision held that since the assesse has not maintained any books of accounts, no addition could be  made u/s 68 and also at the stage of appeal the ITAT cannot uphold the addition u/s 69. Though the said decision is in respect of the power of ITAT, the ratios laid down in the said decision further strengthensour proposition.  The relevant extract of the decision is reproduced herein below:-

“Secondly it requires "..opinion" on part of "assessing officer" vis a vis explanation of assessee if any which opinion in clear prescription of statute is exclusively reserved for "assessing officer" which is defined u/s 2 clause 7A as "Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of this Act, and the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act" so satisfaction required on part of AO u/s 68 of the Act (which phrase is also employed in section 69 and section 69A etc) can’t be implanted by any other authority”.

Therefore we may conclude that in case where the assesse offers an explanation of nature of source of income u/s 68/69 etc, it is the Assessing Officer who in his opinion has to be satisfied with that explanation. The CIT(A) cannot uphold the addition made by Assessing Officer under one head (68/69) under other head (68/69)

c. Section 14A

The Act u/s 14A provides for disallowance of expenses incurred in respect of exempt income. This section has two limbs. First, where the assesse sumotu disallows certain expenditure.Second, where the assesse makes no such sumotu disallowance.   Where the assesse does not make any disallowance then the Assessing Officer is empowered to make a disallowance under Rule 8D of the Income Tax Rules 1962. However in case where the assesse sumotu makes a disallowance of certain expenses u/s 14A and the Assessing Officer is of the opinion that an higher amount needs to be disallowed then he may do so only on recording of satisfaction as to how the disallowance made by the assesse is incorrect. In absence of such satisfaction the disallowance made u/s 14A shall be invalid and bad in law.

The said section calls for satisfaction of the Assessing Officer. Therefore even in this case the CIT(A) cannot record satisfaction on behalf of the Assessing Officer to make a disallowance u/s 14A. In that respect reference may be made to the decision of Azimuth Investments Ltd –  Delhi ITAT – ITA No. 6679/Del/2015

A bare reading of the aforementioned provision makes it clear that the satisfaction is to be recorded by assessing officer and by no other authority. Under section 251 Ld. CIT(A) in an appeal against an order of assessment is empowered to confirm, reduce, enhance or annul the assessment but if the assessment order suffers from jurisdictional errors then Ld. CIT(A) has no power to correct such jurisdictional errors. The coterminous powers vested in CIT(A) does not imply that he can clothe himself with powers to correct the jurisdictional defects in the assessment order. It is well settled law that where the very initiation of assessment proceedings by the AO was invalid then Ld. CIT(A) cannot direct for making a fresh assessment. The CIT(A) should annul the assessment where the assessment proceeding is a nullity in the sense that the AO had no jurisdiction ab initio to take the proceeding. In the present case the AO could take up the issue regarding disallowance u/s 14A only after recording satisfaction. Non- recording of satisfaction results into creeping of illegality in the assessment order and not a mere irregularity. The jurisdiction of recording satisfaction for invoking section 14A lies with the assessing officer and once he has not recorded such satisfaction then the said basic function of AO which clothes him jurisdiction to make disallowance u/s 14A cannot be usurped by Ld. CIT(A). We, therefore set aside the order of Ld. CIT(A)

However the above decision was seized with facts where the Assessing Officer has already made a disallowance u/s 14A without recording his reasons, and it was held that the CIT(A) now cannot record the satisfaction on behalf of the Assessing Officer. In other words it is not a case where the CIT(A) proposed a disallowance for the first time. Nevertheless the Hon’ble  ITAT unequivocally holds that the jurisdiction to make a disallowance u/s 14A is with the Assessing Officer and the CIT(A) cannot exercise such power. Therefore an analogy may be drawn that, the CIT(A) cannot assume such jurisdiction to make a disallowance u/s 14A.

8. Notional Enhancement:- Substantiating the addition made by the Assessing Officer under some other section of the Act –

We may also consider a scenario where the CIT(A) upholds the addition/disallowance made by the Assessing Officer under the section invoked by the Assessing Officer and further substantiatesit under some other section. In other words take a scenario where the Assessing Officer has already made  disallowanceu/s 40(a)(ia) for non deduction of TDS and the CIT(A) upholds the same. He further may hold that the said amount also is disallowable u/s 40A(3) for payment in cash, exceeding Rs. 10,000/-Can it be said in such a situation that such invoking of some other section for upholding the addition/disallowance made by the Assessing Officer shall amount to enhancement?

It may be prim facie gleaned that the total income or the tax liability of assesse does not increase in such situation and therefore same shall not amount to enhancement of income. Consequently question of giving an opportunity u/s 251(2) won’t arise. (Refer Khandelwal trading Co. – ITAT Jaipur – 55 TTJ 261)

However here’s some food for thought. Can we categorize this as ‘Notional Enhancement’, since if the assesse further prefers an appeal before the ITAT and the addition/disallowance made by the Assessing Officer is deleted then the alternative section invoked by the CIT(A) comes to rescue of the Revenue. And therefore the addition though not upheld on the basis of the provision of act invoked by the Assessing Officer but by the CIT(A).

In my opinion there cannot be a notional enhancement, because enhancement as discussed earlier is to be considered as against the total income assessed by the Assessing Officer. Therefore since the invoking of alternative provision by the CIT(A) does not lead to increase in total income as assessed by the Assessing Officer the CIT(A) cannot be said to have enhanced the income. However if the invocation of alternative provision increases the assessed income or tax liability the same shall amount to enhancement and call for issue of SCN u/s 251(2).

9. Directing addition in the respect of some other year or assesse

In the appellate proceedings the CIT(A) may take a view that a particular amount is not taxable in the relevant year which is subject to appeal but in a preceding year or a subsequent year.We may consider following scenarios in regard to the status of such preceding/subsequent assessment year.

  1. The assessment of such preceding year/subsequent year is either not taken up or it has been completed and attained finality
  2. The assessment of such year is completed and pending for hearing before the CIT(A)
  3. As far as the first scenario is concerned the Assessing Officer might consider such direction for taking up/ reopening the assessment of the assesse. Again there shall be two scenarios.

Firstly, in case the said assessment year can be reopened within the prescribed time limit u/s 149, then the Assessing Officer may proceed to reopen the assessment u/s 148 subject to the provisions of section 147 i.e. there should be some new tangible material and such reopening should not amount to change of opinion

Secondly, the said year is time barred i.e it lies beyond the time limit mentioned u/s 149 (6years). In that case the Assessing Officer shall take resort to the provisions of section 150 to overcome the time limit prescribed u/s 149. Section 150 overrides  the provision of section 149 and provides that the Assessing Officer may issue notice u/s 148 at any time to give effect to any finding or direction contained in an order passed by any authority in any proceedings under the Act by the way of appeal, reference or revision. Subsection (2) to said section restricts the scope of subsection (1), however we are not concerned with that.It is pertinent tonote here that the scope of the provisions of section 150 is narrow. Refer Greenworld Corporation – Supreme Court –  314 ITR 81

b. In the second scenario since the said year is already pending for hearing before the CIT(A) the question of enhancement in the said year may arise. For sake of convenience let’s assume that theCIT(A) in  A.Y. 2013-14 holds that certain capital gain is actually taxable in A.Y. 2014-15 and the appeal of such A.Y. 2014-15 is also pending before the CIT(A). It needs to be emphasized here that the year in which the CIT(A) proposes the taxability of income is a different year. Also the explanation to section 251 as discussed above refers to matter arising out of the proceedings in which the order appealed against was passed. Therefore the Assessment Order for such year i.e. A.Y. 2014-15 needs to be considered to determine if the Assessing Officer in the course of assessment proceedings has considered and processed such capital gain for purpose of taxability in A.Y. 2014-15. In case where no such consideration is made in assessment, the CIT(A) cannot tax such capital gain in A.Y. 2014-15 since it shall amount to finding a new source of income. The only option to tax such income would be to direct the Assessing Officer to reopen the assessment for such year u/s 148.(Refer the decision ofJapiur ITAT in the case ofJagdish Narayan Sharma – Jaipur ITAT – ITA No. 751/JP/2015 dated 25/05/2018& National Co. Ltd – Calcutta High Court – 199 ITR 445)

10. Enhancement in Penalty proceedings:-

As palpable from section 251 of the Act the CIT(A) is empowered to enhance the penalty in course of appellate proceedings. The enhancement in respect of penalty may be carried out by initiating & levying a new penalty altogether or by merely increasing the quantum of the penalty. Therefore we shall analyse the same in following two prospects:-

a. Initiation &Levy of new penalty

The Act embodies various sections providing for levy of penalty. Penalties are  prescribed in order to plug the evasion of taxation, and sanction a consequential  punitive action for such escapement of income. The penalty sections under the Act (in chapter XXI) determine the authority that can initiate/levy the respective penalty.  Certain sections (like 270A, 271, 271A etc) empower various tax authorities, including the CIT(A), to initiate/levy penalty whereas certain section (like 271AAB, 271AACetc) restrict such power to a single  income tax authority ( Assessing Officer/Jt. Commissioner). It is well settled law that the penalties being punitive in nature need to be interpreted strictly to the word of law. Therefore where a particular authority has been empowered to initiate &levy penalty, it is the said authority alone who may initiate and levy penalty.

The penalty proceedings are carried out in two stages, Firstly the penalty has to be initiated by the relevant income tax authority in the course of proceedings. Subsequently, after giving opportunity of being heard to the assesse the penalty may be levied if sought necessary, by passing a penalty order. It may be noted here that the initiation of penalty is an affair carried out in the course of assessment proceedings whereas levy of penalty is an affair for the penalty proceedings.

In the quantum proceedings the income of the assesse is assessed and penalty (if any) is also initiated by the Assessing Officer and in case where an appeal is preferred before the CIT(A) , the CIT(A) as discussed earlier may subject it to further enhancement. Since penalty can be initiated in the quantum proceedings, even theCIT(A) may initiate a new penalty in the quantum proceedings only. To put it pithily the CIT(A) cannot endeavour to levy a new penalty while deciding on a penalty order but he may do so only while he is seized with the quantum proceedings. Reference may be made to the decision of Hon’ble ITAT Pune in the case of AjitRamchandraJadhav – 178 TTJ 204 where the ITAT deciding on the levy of penalty u/s 271(1)(c) by the CIT(A), relied heavily on the decision of Karanataka High Court    in the case of Manjunath Cotton & Ginning  Factory  – 359 ITR 565 and held as under

“In view of the ratio laid down by the Hon’ble High Court of Karnataka (supra) and applying the said ratio to the facts of the present case, we find that the assessment in the present case was completed by the Assessing Officer, who consciously did not initiate any penalty proceedings in respect of the additional income offered by the assessee. However, penalty proceedings were initiated and levied by the CIT(A) during the course of hearing the appeal against the order levying penalty under section 271(1)(c) of the Act. The assessment proceedings and the penalty proceedings are two separate and distinct proceedings. The initiation of the penalty proceedings has to be during the course of assessment, which admittedly, is a separate and distinct proceeding. Thereafter, the requirement of the Act is to issue show cause notice to the assessee as to why penalty for concealment should not be levied against the assessee.

Where the penalty proceedings are initiated during the course of appeal or revision proceedings, the authority who has to be satisfied is the authority in whose proceedings, the issue is examined and not any other authority. Further, levy of penalty has also to be done by the same authority, but by different proceedings. The Hon’ble High Court very clearly held the authority in whose proceedings, there is satisfaction of concealment or furnishing inaccurate particulars of income alone, can levy the penalty and not any other authority. Applying the above said principles laid down by the Hon’ble High Court of Karnataka (supra), it is clear that there are two stages i.e. first stage of initiation of penalty proceedings during the course of assessment proceedings and / or appeal or revision proceedings, as the case may be and thereafter, levy of penalty for concealment by a separate order passed under section 271(1)(c) of the Act. The person who is making the assessment in the hands of a person, is the person authorized to give the satisfaction as to whether the addition made in the hands of the said assessee justifies initiation of penalty proceedings. The exercise of initiation of penalty proceedings is at the stage of assessment by the Assessing Officer or at the stage of an appeal against the quantum appeal, by the CIT(A) or in the revision proceedings. Thereafter, the person who has initiated the penalty proceedings is only the competent person to levy the penalty proceedings and not any other authority”

Therefore the CIT(A) may initiate a new penalty on enhancements made by him in the course of quantum proceedings and further levy the same by passing an order to that effect.

Now, the question arises, whether while deciding on quantum proceedings the CIT(A) may initiate penalty in respect of the additions on which the Assessing Officer failed to initiate the penalty in the first place. As far as the sections where the CIT(A) has been specifically empowered to initiate and levy penalty, the CIT(A) may absolutely correct the error on the part of the Assessing Officer &levy such penalty in the quantum proceedings . The Hon’ble Supreme Courtin the case of KamlapatMotilal – 45 ITR 266 wile deciding on a question whether the AAC [now the CIT(A)] was empowered to levy penalty u/s 28(1)(c) [parimateria to 271(1)(c)]  in respect of addition where the Assessing Officer failed to initiate a penalty, held as under:-

Section 28 of the Income-tax Act in terms enables the Appellate Assistant Commissioner to take action under that section if in the course of any proceedings under the Act he is satisfied that any person has, Inter alia, concealed the particulars of his income or deliberately furnished inaccurate particulars of such income. The High Court rightly pointed out that the Appellate Assistant Commissioner was within his right in taking action under section 28 of the Income-tax Act against the assessee when in the course of the appeal proceedings before him he was satisfied that the assessee had deliberately furnished inaccurate particulars of its income in the sense that it debited a sum of Rs. 76,836 on account of excise duty, an expenditure which related to another year and could not be debited against the profits of the year under consideration. We are satisfied that the Appellate Assistant Commissioner was legally justified in issuing a notice under section 28 of the Income-tax Act against the assessee.

b. Increasing the quantum of penalty

At the outset it may be noted here that we are seized only with the increase of penalty within the prescribed limits under the Act as no Income Tax Authority lest the CIT(A) can levy penalty in excess of the prescribed limits, as the same shall amount to exceeding the powers laid down under the Act. Therefore the increase in quantum of penalty shall be a case where the CIT(A) enhances the quantum of penalty already levied by the Assessing Officer or there persists an arithmetical errorin levy of penalty. In the first case the CIT(A) may on being satisfied may absolutely increase the quantum of penalty levied by the Assessing Officer, wherever he is empowered to do so (obviously after issuing a SCN u/s 251). Whereas is second case that being a mere correction in error on part of the Assessing Officer the same may be carried out either in the appeal against the quantum proceedings or the penalty proceedings. Reference may be made to the decision of Supreme Court in the case of Asian Consolidated Industrial Limited – 114 taxmann.com 106&Assam Travels Shipping Services – Supreme Court – 199 ITR 1

B. Power of Enhancement: The ITAT

Aggrieved by the order of CIT(A) the assesse may further escalate the appellate  ladder, seeking relief by filing an appeal before the Income Tax Appellate Tribunal (ITAT). The Act in section 252 to 255 embodies the provisions for the constitution of ITAT, determines the appealable orders, the procedures and powers of the ITATetc. We are specifically concerned with the power of enhancement and accordingly we may straight away dive into section 254. The relevant portion of the section is reproduced herein below:-

“254 1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.”

On reading through the relevant section it transpires that the powers of the ITAT are wide enough to pass an order as it thinks fit.We have already discussed earlier above that the Apex Court in the case of NTPC(supra) has held the powers of ITAT to be wide to pass an order as it thinks fit. It may also be observed that the said section does not specifically grant powers of enhancement as in the case of section 251. Therefore does the exclusion of the word ‘enhance’ bar the power of ITAT to enhance the income of assesse or the liberal power to pass an order as it thinks fit empower the ITAT to enhance the income of assesse. Whether ITAT being superior to CIT(A) has the power of enhancement or ITAT not being an income tax authority u/s 116 cannot tinker with the assessment in order to enhance the income of the assesse.

In a landmark decision the Hon’ble Apex Court in the case of Hukumchand Mills Ltd – 63 ITR 232 held as follows:-

“The word ‘thereon’ in section 33(4) of 1922 Act restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words ‘pass such orders as the Tribunal thinks fit’ include all the powers (except possibly the power of enhancement) which are conferred upon the AAC by section 31 of 1922 Act. Consequently, the Tribunal was authority under this section to direct the AAC or the ITO to hold a further enquiry and dispose of the case on the basis of such enquiry.

The said decision has ever since been a landmark judgement to effect that ITAT lacks the power of enhancement. The said decision was re-affirmed by the Apex Court in the case of MCorp Global P Ltd – 309 ITR 434

However recently the Karnataka High Court in the case of Fidelity Business Services India P Ltd – 95 taxmann.com 253after elaborately considering the text of the Act and the judicial precedents gave a contrary decision.It is pertinent to read through the said decision as the High Court has made certain very relevant considerations:-

60.The words "as it thinks fit" employed in Section 254 of the Act is only bound by the requirement of giving an opportunity of being heard to the parties to the appeal.

61. Section 254(1) of the Act clearly stipulates that the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such Orders thereon as it thinks fit. The emphasis on the word ‘thereon’ sought to be placed by the learned counsel for the Assessee, Mr. Pardiwala on the basis of case laws relied upon by him as against the words ‘as it thinks fit‘ is slightly misplaced. The emphasis while analyzing the powers of the Tribunal should be on the words ‘as it thinks fit’ rather than on the word ‘thereon‘. The word ‘thereon’ only relates to the ‘subject matter’ of the appeal in first part of the Sub-section (1) and therefore while the Tribunal is dealing with the subject matter of the appeal, it can pass any such relevant Order as it thinks fit, which would be rational, germane, reasonable, appropriate, necessary and expedient in the opinion of the learned Tribunal subject to the requirement that it gives an opportunity of hearing to both the parties to the appeal, viz., the Assessee and the Revenue. Neither the powers are restricted nor the power to allow the fresh and new ground to be raised before it is restricted nor the powers to enhance an assessment or tax liability or reduce the tax especially enumerated in the Proviso to Sub-section(2) of Section 254 of the Act also is restricted.

62. The powers under Section 254 of the Act with the Tribunal to pass such Orders ‘as it thinks fit’ cannot be lesser than the powers conferred upon the lower and first Appellate Authority, viz., the Commissioner of Income Tax(Appeals) who under Section 251(1)(a) of the Act has power to dispose of an appeal against the Order of assessment and he may confirm or reduce or enhance or annul the assessment. The higher and final Appellate Authority under the Act cannot be intended by the Parliament to have lesser power than the first Appellate Authority as is well settled that the powers of the Appellate Authorities are always co-extensive with that of the Assessing Authority and therefore what the Assessing Authority or the first Appellate Authority could do in the matter of assessment, the Tribunal cannot be said to have any lesser power to do so.

63. Section 254 of the Act, in our opinion, does not have any narrower scope to put fetters on the powers of the Tribunal as is sought to be canvassed before us that the Tribunal could not have exceeded the grounds raised before it by the Appellant Assessee. The Appellant may be either Assessee or Revenue before the Tribunal and the Tribunal has also powers to allow fresh ground of appeal or allow the other party to the appeal to file its cross objections and even suomotu Date of Judgment :23-07-2018 I.T.A.No.512/2017 M/s. Fidelity Business Services India Pvt. Ltd., Vs. Assistant Commissioner of Income-Tax, &Anr. pass appropriate Orders ‘thereon’ and therefore the words ‘as it thinks fit‘ in our opinion, confer wide powers upon the Income Tax Appellate Tribunal to pass such Orders on the subject matter of appeal ‘as itthinks fit‘ whether the issue is raised by either party to the appeal or not. The Tribunal is not bound to decide the appeal in a particular or narrower manner or limited to the grounds raised in the appeal before it. The confines or boundary limit is only "subject matter" of the appeal.

64. The powers of the Tribunal are not limited or circumscribed by the grounds raised before it and any order on the subject matter of appeal can be passed if it is found to be necessary, expedient and relevant by the learned Tribunal.

While distinguishing the decision of Supreme Court in Hukumchand Mills(supra) the High Court held as under:-

In the case of Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232, the Hon’ble Supreme Court held that Rules 12 and 27 of the Appellate Tribunal Rules, 1946 are not exhaustive of the powers of the Tribunal and words "pass such orders as the Tribunal thinks fit" including all the powers (except possibly ! the power of enhancement). The Court itself expressed its doubt over the power of enhancement of the assessment or tax liability of the assessee in the said judgment which was later on explained by the Rajasthan High Court in the case of (supra)

On reading through the above decision of Karnataka High Court it obviously provokes a though, if the ITAT is actually deprived of the power of enhancement?The genesis of the principle that the ITAT is not empowered to enhance assessment, arose from the decision in case of HukumchandMills(supra). However when we read the decision meticulously it is palpable that the Apex Court did not lay down the said principle unequivocally rather the use of word “possibly” and the use of brackets make it more of a doubtful statement than a hard bound law laid down by the Apex Court. Subsequently, while reaffirming the said decision in Mcorp Global P Ltd (supra) the law has not been discussed in detail but a mere reliance has been placed on the earlier decision of Hukumchand Mills.

However as the law stands today the decision of Apex Court prevails and the ITAT is not empowered to enhance the assessment, we may see as to how the law develops further.

Conclusion

The power of enhancement is obviously averse to the assesse since it gives the Revenue a second run at the assessment.The Assessing Officer cannot be aggrieved by his own order to contend for a sympathetic view under the garb that the Revenue lacks the power of appeal before the CIT(A).  If at all the Assessing Officer omitted to make certain addition/disallowance he is empowered to re-open the assessment or the same may be revised by the CIT/Pr CIT u/s 263. Therefore the question arises as to whether such a devious power to enhance the income is required in the first place. The said power is obviously averse to the assesse when he prefers an appeal to ventilate his grievances. However the law has specifically empowered the CIT(A) to enhance the income.

In order to overcome the harsh effects of the power to enhance we have discussed various facets of the power of enhancement and thereby tried to draw a line to its wide out reach. To summarize it and put it in simple words: The CIT(A) may put life into a corpse but he may not give birth to a new issue, while exercising the power of enhancement. Therefore whenever some enhancement is proposed by the CIT(A) lets be aware of the following:-

  1. Whether the same amounts to discovering a new source of income and thereby exceeding of jurisdiction by the CIT(A)
  2. Whether the same is exercised within the co-terminus powers of the Assessing Officer and that the CIT(A) is not doing something that the Assessing Officer cannot do in the first place?
  3. Whether a particular provision requires the satisfaction of the Assessing Officer and therefore the CIT(A) does not have jurisdiction in that regard?
  4. Whether the CIT(A) has granted a proper opportunity of hearing as prescribed u/s 251(2) of the Act?

In respect of the powers of ITAT the law as of now is well settled by the Apex Court however we may further observe if it takes a different turn in the light of the decision of Karnataka High Court. 

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org
2 comments on “The Power Of Enhancement: A Devious Weapon At The Hands Of The Revenue!
  1. pavan ved says:

    Excellent and comprehensive.
    one issue remains: if the AO has not given opportunity of cross examination of material collected by him, Can CIT(A) give and make the deficinecy good?
    This is common issue in many cases. i would be obliged if you can enlighten on this issue.

  2. SNBhargava says:

    Excellent. Wish author has found in how many cases enhancement was done by CIT(A), say in last 5 years, before using such harsh words against rerun by revenue. Authors have to be balanced since their write ups would be used both by assessees and revenue

Leave a Reply

Your email address will not be published. Required fields are marked *

*