ITAT power to increase demand.

Introduction

 1.    A controversy has cropped up due to conflicting decisions of the Hon'ble Karnataka High Court in Karnataka  Instrade  Corporation Ltd.

v. Asstt. CIT [2015]  62  taxmann.com  239/235  Taxman  374, wherein it was  held  that  where  a  claim  of  assessee  is  allowed  by  the  AO,  the Tribunal    does    not    have    power    to    withdraw    such    claim    and, consequently,  enhance  assessed  income.  But  in  the  other  decision  in Fidelity   Business   Services   India   (P.)   Ltd.   v.   Asstt.   CIT   [2018]   95 taxmann.com 253/257 Taxman 266 (Kar.), it was held that "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", meaning thereby that if CIT(A) has power of enhancement then Tribunal will also have the power of enhancement. In this article the issues relating to power of the Tribunal for enhancement, changing the head of income or withdrawing the claim allowed by lower authorities have been briefly described.

The provisions

2.  Section 254(1) reads as under-

"(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."

2.1     The scope of expression "thereon" - It is held that the word 'thereon' restricts the jurisdiction of the Tribunal to the subject-matter   of the appeal constituted by the original grounds of appeal, such additional grounds as may be raised by leave of the Tribunal and cross objections. [refer- CIT v. N.T.A. Kareem [2001] 117 Taxman 229 (Ker.)]. The word "thereon" occurring in section 254(1) means an appeal. [refer- CIT v. Pratap Singh [1987] 164 ITR 431 (Raj.); Motor Union Insurance Co. Ltd. v. CIT [1945] 13 ITR 272 (Bom.)]. In other words, the word "thereon" reflects that the Tribunal has to confine itself to the questions, which are arising or are subject matter in the appeal and it cannot travel beyond the same. That is, if addition made u/s 68 is challenged before the Tribunal which the Tribunal considers as explained, then Tribunal cannot direct the AO to consider the addition u/s 69A, as otherwise Tribunal would be travelling beyond the subject matter of appeal. [refer- Smt. Sarika Jain v. CIT [2017] 84 taxmann.com 64/249 Taxman 625/[2018] 407 ITR 254 (All.)].

From this it also follows that if any issue is not raised in the grounds of appeal, or in the cross objections or in the additional grounds raised by the parties with the leave of the Court, same cannot be considered by the Tribunal as it is not part of appeal and, therefore, cannot  fall  in the scope of expression "thereon". Following examples will clarify as to  which issue will not fall within the scope of "thereon".

(i)      Where there was no prayer from the litigant to set aside the appeal for enabling it to go to Settlement Commission, the order of the Tribunal in setting aside the appeal for this purpose was beyond the scope of appeal. [refer- N.T.A.  Kareem (supra)].

(ii)      The Tribunal can pass interim orders: The expressions "pass such orders thereon as it thinks fit" in section 254(1) and "in any proceeding relating to an appeal" in the proviso includes the power to pass interim orders, being orders for stay of demand, as they relate to proceedings in the appeal pending before the Tribunal for which now a specific provision of sub- section (2A) has been inserted by the Finance Act, 1999.  [refer- Pr. CIT v. ITAT [2015] 63 taxmann.com 269/[2016] 236 Taxman 39/382 ITR 321 (Punj. & Har.)]

(iii)       No power to remand for enhancement: The word 'thereon' appearing in the said expression is a serious constriction on the exercise of power by the Tribunal. It can decide only the points or grounds raised before it and has no power for the enhancement of any penalty, or assessment nor can it remand a case with the object of such enhancement. [refer- Jeypore Timber & Veneer Mills (P.) Ltd. v. CIT [1983] 12 Taxman 191/[1982] 137 ITR 415 (Gau.)]

2.2    The scope of "as it thinks fit" - On the other hand, the power to pass such orders as the Tribunal thinks fit can be exercised only in relation to the matters that arise in the appeal. It is not open to the Tribunal to adjudicate or give a finding on a question which is not in dispute and which does not form the subject-matter of the  appeal.  [refer- N.T.A. Kareem (supra)]. The words 'as it thinks fit' are general in nature and confer powers of the widest amplitude on the Tribunal.  [refer- Pratap Singh (supra)]. This power includes within its scope-

(i)      Power of remand: The expression 'as it thinks fit' in section 254(1) is wide enough to include power of remand to authority competent to make requisite order in accordance with law. [refer- CIT v. Assam Travels Shipping Service [1993] 67 Taxman 269/199 ITR 1 (SC)]. However, power of remand can be exercised only if it is necessary to decide the issues which are subject matter of the appeal. [refer- Coca Cola India (P.) Ltd. v. ITAT [2007] 290 ITR 464 (Bom.)].

(ii)      Power of allowing additional grounds: The Tribunal has jurisdiction to permit additional grounds to be raised before   it, even though these might not have arisen from CIT(A)'s order, so long as these grounds are in respect of subject- matter of entire tax proceedings. [refer- Ahmedabad Electricity Co. Ltd. v. CIT [1993] 66 Taxman 27/199 ITR 351 (Bom.)]. Rule 11 of the ITAT Rules, 1963 also provides power  to the Tribunal to admit additional grounds. However, such power is restricted to allow a question of law arising from the facts which are on record in the assessment proceedings.

[refer-  National  Thermal  Power  Co.  Ltd.  v.  CIT  [1998]  97 Taxman 358/229 ITR 383 (SC)]

(iii)       Power to allow consequential relief: Even in a case where an expenditure is held as capital in nature by the Tribunal, as a consequence the Tribunal can, give direction to include that expenditure in the cost of asset and allow depreciation and development rebate, even where no such plea is raised. [refer- Ciba of India Ltd. v. CIT [1993] 70 Taxman 505/202 ITR 1 (Bom.)]

(iv)      No power to stay prosecution proceedings: Tribunal has no power to interfere in a prosecution under the Act, either at the stage of a show-cause notice or at any other stage because proceedings for prosecution are independent of assessment and penalty, and the Tribunal is neither the appellate nor the revisional authority in a case where prosecution is launched. [refer- PCIT v. ITAT, Delhi (supra)]

(v)      New source of income cannot be examined: The Tribunal has no power to examine new sources of income for which  separate remedies are provided to the revenue under the Act. [refer- VMT Spinning Co. Ltd. v. CIT [2016] 74 taxmann.com 33/389 ITR 326 (Punjab & Haryana)]

(vi)      Relief can be granted under different head: If relief to the assessee is not available on one ground, but relief  is  admissible on other ground, it would be open to the Tribunal, and indeed they would be under a duty, to grant that relief.  The right of the assessee to relief is not restricted to the plea raised by him. For example, the Tribunal would be justified to hold that the expenditure incurred for introducing the new conversion system, though not admissible as development rebate, yet was admissible as an allowance under section 10(2)

(v) of the Indian 1922 Act, [refer- CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC)]

2.3       What is subject matter - A subject matter of appeal is constituted by grounds of appeal and additional grounds raised by the assessee and cross objections filed by the respondent. The Tribunal cannot enhance effective subject matter of appeal not arising from  appeal filed by the assessee or not challenged by the Department.

Whether Tribunal has power of enhancement?

3.   Specific powers of enhancement have been conferred on the AAC/ CIT(A) by the Statute u/s 251(1)(a), wherein it is provided that "in disposing of an appeal the CIT(A) shall have the following powers……(a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment". On the other hand, no such express power has been provided to the Tribunal. But Hon'ble Rajasthan High Court in Pratap Singh (supra) is of the view that the powers of the Tribunal can in no way be considered limited, narrow or circumscribed, but the powers conferred on the Tribunal are of the widest amplitude. The Tribunal can pass any order which it thinks fit which includes the power of enhancement of tax. A similar view was taken by the Hon'ble Karnataka High Court in Fidelity Business Services India (P.) Ltd. (supra), wherein it was observed that "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  also  is  restricted.  "  While  taking  this  view  the  Hon'ble Karnataka  High  Court  in  this  case  also  observed  that  "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." However, the Hon'ble High Court did not consider the argument that the power to pass such orders as   it   thinks   fit   is   circumscribed   by   expression   "thereon",   meaning thereby  that  the  wide  power  by  virtue  of  "as  it  thinks  fit"  cannot  be extended  beyond  the  subject  matter  in  appeal,  either  by  grounds  of appeal   filed   by   the   appellant,   or   by   cross   objections   filed   by   the respondent.

Under general provisions of the law of procedure, the worst detriment which  the  Tribunal  may  visit  on  an  appellant  is  to  dismiss  the  appeal with a direction in an appropriate case to pay costs to the Revenue but in  no  case  it  can  take  away  the  benefit  appellant  has  received  at  the lower  appellant  forum  which  benefit  the  Revenue  has  not  challenged. [refer- Pathikonda Balasubba Setty v. CIT [1967] 65 ITR 252 (Mysore); Fidelity  Shares  &  Securities  Ltd.  v.  Dy.  CIT  [2017]  82  taxmann.com 108/390  ITR  267  (Gujarat);  Sanmar  Speciality  Chemicals  Ltd.  v.  ITO [2018] 93 taxmann.com 330/256 Taxman 46 (Mad.)]

Power of enhancement in Proviso to section 254(2)

4.  The proviso to section 254(2) reads as under:

"Provided that an amendment which has the effect of enhancing  an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this sub-section unless the Appellate Tribunal has given notice to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of being heard."

Analysis of the above Proviso

5.   A bare reading of Proviso gives the impression that while amending  its order u/s 254(2), the Tribunal can enhance an assessment, or reduce the refund, or increase the liability of the assessee, after giving the assessee a reasonable opportunity of being heard. However, the Proviso cannot be read in such a manner so as to infer that the Tribunal can consider new issues, new source of income or direct the addition to be made under different sections even after deleting the addition made under specific section against which the assessee is aggrieved. It is because the expression "enhancing an assessment" in the Proviso is not intended to confer on the Tribunal, under the garb of  rectification,  power to enhance the assessment beyond the limits set out by the AO.   To understand this aspect, we have to analyse the scope of word "assessment" used in the Proviso.

Scope of word "assessment" in the Proviso to section 254(2)

6.  The word "assessment" in the proviso to section 254(2) does not refer to original assessment passed by the AO u/s. 143(3) but refers to the assessment passed after order of the Tribunal u/s 254(1). It is because what is to be amended u/s 254(2) is the order passed by the Tribunal

u/s  254(1).  The  order  passed  by  the  Tribunal  u/s  254(1)  has  to  be confined to the subject matter of the appeal which is defined by grounds of  appeal,  cross  objections  and  additional  grounds  of  appeal  raised  by the  parties.  As  submitted  above,  power  u/s  254(1)  does  not  include power of enhancement (enhancement beyond the assessment framed by the AO, or relief allowed by the CIT(A) and remained uncontested by the Revenue). Once the limit of the order u/s 254(1) is defined by virtue of expression  "thereon",  then  such  limit  cannot  be  extended  by  power  of rectification.  Thus,  the  expression  "enhancing  an  assessment"  in  the proviso  to  section  254(2)  refers  to  the  assessment  emerging  after  the order  passed  u/s  254(1),  i.e.,  after  giving  appeal  effect  to  the  order passed u/s 254(1). Power of amendment/rectification emerges from the power  of  passing  order  u/s  254(1)  and  amendment  u/s  254(2)  cannot provide  additional  power  which  is  not  available  to  the  Tribunal  in passing  the  original  order  u/s  254(1).  At  best,  the  relief  allowed  u/s. 254(1)  can  be  withdrawn  by  the  Tribunal  through  amendment  u/s. 254(2)  but  in  no  case  it  can  burden  the  assessee  with  a  liability  not thrown   upon   him   before   filing   appeal   to   the   Tribunal.   Therefore, amendment  u/s.  254(2)  has  to  confine  to  subject  matter  of  appeal considered by the Tribunal while disposing of appeal u/s. 254(1).

Power of conversion of income assessed under one head into another

7.   If the assessee has contested an addition made by the AO under one section, and Tribunal finally considers no such addition is called for under that section then it cannot direct to make addition of the same amount under different head of income while deleting addition made by the AO under specific head. It is because subject matter of appeal is the sustainability of addition under the specific head. The issue whether that income could be added under different head (or could not be added) was not the part of assessment and, therefore, could not be a subject matter  of appeal. For example, (i) if the Tribunal is deleting penalty u/s 271D it cannot direct to consider the addition u/s 68/69A in respect of cash deposited., (ii) if the addition is u/s 68, and which is deleted, the Tribunal cannot direct to make addition u/s 69A (iii) if the assessment is framed u/s 153A, the Tribunal cannot direct to frame the assessment u/s 153C (iv) where penalty u/s 271C for failure to deduct tax at source is deleted, the Tribunal cannot direct to make addition u/s 40(a)(i).

8.  The consequence of lack of power of enhancement

(i)      Where the Department has not filed any appeal on the issues arising against it from the order of the CIT(A), then the Tribunal, in an appeal filed by the assessee on the issues decided against it by the CIT(A), cannot remand the matter to the AO for considering the issues not challenged by the Revenue, i.e., the remand cannot be intended to benefit the respondent revenue. [refer- V. Ramaswamy Iyengar v. CIT [1960] 40 ITR 377 (Mad.)]. As a consequence, the Tribunal cannot remand entire order to the AO for making de-novo. It has to restrict itself to make a remand only on the  issues  raised by the appellant and for the benefit of appellant or otherwise dismiss the appeal of the assessee.

(ii)      The Tribunal cannot take away the benefit granted by the

CIT(A),   if   such   benefit   has   not   been   challenged   by   the Revenue. The Hon'ble Apex Court in Mcorp Global (P.) Ltd. v. CIT [2009] 309 ITR 434/178 Taxman 347, observed as under-

"6. In the case of Hukumchand Mills Ltd. v. CIT (1967) 63 ITR

232  this  Court  has  held  that  under  Section  33(4)  of  the Income-tax Act, 1922 (equivalent to Section 254(1) of the 1961 Act), the Tribunal was not authorized to take back the benefit granted to the assessee by the AO. The Tribunal has no power to  enhance  the  assessment.  Applying  the  ratio  of  the  said judgment to the present case, we are of the view that, in this case,  the  AO  had  granted  depreciation  in  respect  of  42,000 bottles  out  of  the  total  number  of  bottles  (5,46,000),  by reason of the impugned judgment. That benefit is sought to be taken  away  by  the  Department,  which  is  not  permissible  in law.  This  is  the  infirmity  in  the  impugned  judgment  of  the High Court and the Tribunal."

(iii)       Since the Tribunal has to confine to the subject matter of appeal, it is not open to it to give finding adverse to assessee, which does not arise from any question raised in appeal. It is also not open to the Tribunal to raise any ground which would work adversely to appellant and pass an order which makes   his position worse than what it was under order appealed against. [refer- J.K. Bankers v. CIT [1974] 94 ITR 107 (Allahabad)]

(iv)      Similarly, the Tribunal cannot confirm or decide the sustainability of the order u/s. 263 passed by the Commissioner on another ground/ reason not raised by the Commissioner in his notice or order u/s 263. [refer- CIT v. Jagadhri Electric Supply & Industrial Co. [1981] 7 Taxman 56/[1983] 140 ITR 490 (Punj. & Har.); CIT v. Chandrika Educational Trust [1994] 207 ITR 108 (Ker.)]

(v)      However, assessee can enhance its claim before the Tribunal,  if relevant documents/ evidence is already placed in  the  record of the AO. This will not be a case of a different subject matter of appeal and further it will not be a case of enhancement of income or reduction of refund. [refer- Madhu Jayanti (P.) Ltd. v. CIT [1985] 23 Taxman 511/154 ITR 277 (Cal.)]

Conclusion

9.    The power of the Tribunal for disposal of appeal is restricted to grounds of appeal raised before it by the appellant or cross objections filed by the respondent. The tribunal cannot travel beyond the subject matter of appeal as defined by grounds and cross objections, as it has to restrict itself to pass order "thereon", i.e., "on appeal". It has no power of enhancement of income as assessed by the AO as such power of enhancement of income is provided to Income Tax Authorities and the Tribunal is not an Income Tax Authority. Tribunal has also no power to direct addition under different head if not sustainable under the head "assessed by AO". Further, power of the Tribunal to enhance available in the Proviso to section 254(2) cannot exceed subject matter of appeal on which order u/s 254(1) is passed and, therefore, assessee cannot be burdened u/s 254(2) with additional liability not imposed u/s 254(1).

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