Analysis of the CBDT’s Recent Instruction bearing F.No. DGIT(Vig.) / HQ/SI / Appeals / 2017-18/9959, dated 8.3.2018 On Plenary, Coterminous & Co-extensive Powers of First Appellate Authority!!!
The CBDT has very recently issued an Instruction bearing F.No. DGIT(Vig.)/HQ/SI/Appeals/2017-18/9959, dated 8.3.2018, to the Chief Commissioners and CIT(Appeals), wherein, apart from the disciplinary code of conduct, the CIT(Appeals) have been instructed not to give appellate reliefs to assessees on mere legal and technical grounds especially in relation to addition u/s 68 of the Income Tax Act, on account of unexplained cash credits in the form of unsecured loans and share application money.
In the captioned Instruction, it has been stated that in view of several judgements of the Hon’ble Supreme Court, the First Appellate Authority i.e. CIT(Appeals) is vested with plenary powers in disposing of an appeal, and that the powers of CIT(Appeals) are coterminous and coextensive with that of the Assessing Officer, and as such the CIT(Appeals) are expected to rectify/cure the technical and legal defects being made by the Assessing Officers, in the assessments.
One particular instance has also been specifically quoted that in the absence of opportunity of cross-examination being provided by the Assessing Officer to the assessee, instead of summarily deleting the additions on this account, the opportunity of cross-examination, should be provided by CIT(Appeals) to the assessees.
In the aforesaid backdrop, it will be desirable and worthwhile to consider and analyse the judgements of the Hon’ble Supreme Court, wherein it has been held that the CIT(Appeals) has plenary powers in disposing of an appeal and that the powers of CIT(Appeals) are coterminous and coextensive with that of the assessing officer. Accordingly, the under-mentioned, landmark judgments of the Hon’ble Apex Court are being analyzed, viz.
CIT, U.P vs Kanpur Coal Syndicate, (SC) 53 ITR 229:In the said case, the assessee contended that it should not be assessed to tax as an association of persons, but the proportion of the income in the hands of each of the members of the association might be assessed to tax instead. In the appeal before the Apex Court, the Revenue Authorities, argued that even if the Income-tax Officer has the option to assess to income-tax the association of persons on its total income or the individual members thereof in respect of their proportionate share of the income, if he had exercised the option in one way or other, neither the Appellate Assistant Commissioner in appeal nor the Income-tax Appellate Tribunal in further appeal has power to direct the Income-tax Officer to exercise his discretion in a different way.
However, the Hon’ble Supreme Court, held in the favour of the assessee as under:
“….If an appeal lies, s. 31 of the Act describes the powers of the Appellate Assistant Commissioner in such an appeal. Under s. 31 (3) (a) in disposing of such an appeal, the Appellate Assistant Commissioner may, in the case of an order of assessment, confirm, reduce, enhance or annul the assessment; under cl. (b) thereof he may set aside the assessment and direct the Income-tax Officer to make a fresh assessment. The Appellate Assistant Commissioner has, therefore, plenary powers in disposing of an appeal. The scope of his power is coterminous with that of the Income- tax Officer. He can do what the Income-tax Officer can do and also direct him to do what he has failed to do. If the Income-tax Officer has the option to assess one or other of the entities in the alternative, the Appellate Assistant Commissioner can direct him to do what he should have done in the circumstances of a case.
We, therefore, hold, agreeing with the High Court, that the Appellate Tribunal has jurisdiction to give directions to the appropriate authority to cancel the assessment made or the association of persons and to give appropriate directions to the authority concerned to make a fresh assessment on the members of that association individually. The answer given by the High Court to the question propounded is correct. In the result, the appeal fails and is dismissed with costs. Appeal dismissed.”
Jute Corporation of India Ltd vs CIT and Anr (SC) 187 ITR 688:
In the said judgement, the Hon’ble Supreme Court had observed and held as under:
“The question is whether the Appellate Assistant Commissioner while hearing an appeal under s. 251(1)(a) has jurisdiction to allow the assessee to raise an additional ground in assailing the order of the assessment before it. The Act does not contain any express provision debarring an assessee from raising an additional ground in appeal and there is no provision in the Act placing restriction on the power of the Appellate Authority in entertaining an additional ground in appeal. In the absence of any statutory provision general principle relating to the amplitude of appellate authority's power being coterminous with that of the initial authority should normally be applicable.”
…….The contention of law is clear that the power of the Appellate Assistant Commissioner is coterminous with that of the Income Tax Officer, if that he so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income Tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power.
Even otherwise an Appellate Authority while hearing an appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations if any prescribed by the statutory provisions. In the absence of any statutory provision, the Appellate Authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appears to be no good reason and none was placed before us to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income Tax Officer.
CIT vs ShapoorjiPalloonji Mistry, 44 ITR 891:
In the said judgement, the Hon’ble Apex Court, while adjudicating the question as to whether in enhancing the assessment for any year,the Appellate Assistant Commissioner, can travel outside the record, that is to say, the return made by the assessee and the assessment order passed by the Income-tax Officer with a view to finding out new sources of income, not disclosed in either, had categorically held that in view of the provisions of sec. 34 and 33B by which escaped income can be brought to tax, the power of the Appellate Assistant Commissioner is limited. He has no power to travel beyond the record to enhance the assessment of any year by discovering new source of income not mentioned in the return of the assessee.
Interestingly, all the landmark Supreme Court Judgements, as mentioned supra, which are very often quoted in support of the view of the CIT(Appeals)’s coextensive and coterminous power with that of the Assessing Officer, had been rendered in favor of the assessee.
The principal ratio emerging from all the aforesaid judgements of Hon’ble Supreme Court, that the powers of CIT(Appeals) are plenary and coterminous with that of the Assessing Officer, has been rendered in the context of providing appropriate relief to the assessees, and not to cure the legal or technical defects being committed by the Assessing Officers, in the assessments, so as to provide the Revenue Authorities, with a second opportunity of further strengthening the case of Revenue Authorities, at appellate levels.
In other words, in all the above judgements, the Hon’ble Supreme Court has held that the first appellate authority is vested with the plenary powers which the assessing authority has, injudicious disposal of appeals, and interestingly in all the said judgements, the exercise of such plenary, coterminous and co-extensive powers by the appellate authorities, has resulted in grant of appropriate appellate reliefs to the assessees.
In the judgement of CIT vs Kanpur Coal Syndicate, as mentioned supra, the Hon’ble Supreme Court had observed that the “Appellate Tribunal has jurisdiction to give directions to the appropriate authority to cancel the assessment made or the association of persons and to give appropriate directions to the authority concerned to make a fresh assessment on the members of that association individually.” Therefore, the Hon’ble Apex Court, held in favour of the assessee.
In the judicial pronouncement of Jute Corporation of India Ltd vs CIT, as mentioned supra, the Hon’ble Supreme Court had observed that, “…In the absence of any statutory provision, the Appellate Authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appears to be no good reason and none was placed before us to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income Tax Officer.”
In the judgement of CIT vs ShapoorjiPalloonji Mistry, as mentioned supra, the Hon’ble Supreme Court had observed that, although the Appellate Assistant Commissioner has the powers to enhance the assessment, but he has no power to travel beyond the record to enhance the assessment of any year by discovering new source of income not mentioned in the return of the assessee.
In the present legislative framework, the assessees, on becoming aggrieved with the additions or disallowances, done by the assessing officer, in the assessments, have been vested with an appellate right to appeal before the jurisdictional appellate authorities viz. CIT(Appeals), ITAT, High Court and the Supreme Court.
The exercise of this appellate right by the assessees, at various levels of appellate authorities especially at the higher levels of appellate authorities, i.e. High Courts and Supreme Court, has resulted in the emergence and establishment of several well-settled principle ratios regarding certain legal propositions in the form of legal and technical grounds, which over a period of time have mastered the test of Law.
So, when a particular legal or technical ground, becomes a Rule of Law, by way of a Supreme Court judgement, or becomes binding in nature, by the majority view of the High Courts, then in respect of such legal issues, the assessees, as a matter of their appellate right, are fully entitled to obtain appropriate appellate reliefs at all appellate levels, including the first appellate level of CIT(Appeals).
In such cases, it will not be justifiable and lawful to deprive the assessees of their appellate right to avail the appropriate relief in respect of such well settled and well established legal or technical propositions, even at the first appellate authority level.
However, the captioned CBDT Instruction, surprisingly, is amenable to form the same impression and perception, of putting restrictions and limitations on the independence and discretion of the first appellate authorities i.e. CIT(Appeals), by indirectly dictating them,to rectify or cure the legal or technical defects being committed by the AOs, in the assessments, through exercise of their plenary and coterminous powers, and thus, not to give appellate reliefs to the assessees, on legal and technical grounds.
However, it will be interesting to know that whether all such legal and technical defects, being committed by AOs in assessments, can be cured by the first appellate authorities, through the exercise of their plenary, coterminous and co-extensive powers, as that of the AO, so as to deprive the assessees of their lawful entitlement of appropriate appellate reliefs.
For the sake of better understanding and ready reference, a few instances of such legal and technical defects being committed by AOs in assessments, resulting in entitlement of lawful availment of appellate reliefs by the assessees, are being discussed as under:
- Non recording of satisfaction about the failure on the part of the assessee in disclosing fully and truly, all material facts, necessary for assessment, by the AO in case of Reassessment u/s 147 of the Act, beyond a period of four years, renders such reassessment, a nullity in the eyes of Law, as per numerous binding judgements. So, going by the dictum of the captioned CBDT Instruction, if the AO has not recorded his satisfaction in this regards, then could it be recorded by the CIT (Appeals), in the appellate proceedings, through the exercise of his plenary powers, so as to rectify this fatal defect of AO?
- Non recording of satisfaction by the AO of the searched person as well as by the AO of any third person, in respect of whom, proceedings u/s 153C of the Act, have been initiated, that the seized material doesn’t belong to the searched person and it belongs to the third person, also renders the assumption of jurisdiction by the AO of such third person, u/s 153C of the Act, a complete nullity in the eyes of Law. So, could the required satisfaction, be recorded by the CIT (Appeals), in the appellate proceedings, through the exercise of his co-extensive powers with that of the AO powers, so as to rectify this technical defect of AO?
- Non recording of satisfaction by the AO u/s 14A read with Rule 8D: As pronounced in numerous judgements, it has become a well settled and well-established Rule of Law that for making any lawful disallowance u/s 14A, the AO has to record his satisfaction in the assessment order, regarding his disagreement with the assessee’s claim of non-incurring of any expenditure in earning any exempt income. Therefore, going by the idea of the captioned CBDT Instruction, if the AO has not recorded his satisfaction in this regards, then could it be recorded by the CIT (Appeals), in the appellate proceedings, through the exercise of his coterminous powers with that of the AO,so as to rectify this technical defect of AO?
- Non formation of a reasonable belief that any income of the assessee has escaped assessment, by the AO, renders the entire reassessment u/s 147 of the Act, a nullity, so could the required reasonable belief about escapement of income, be formed by the CIT(Appeals), in pursuance of his plenary powers, in the appellate proceedings?
- Failure to issue Notice u/s 143(2) of Income Tax Act, within the stipulated time period, by the AO, also vitiates the entire assessment and makes it null & void. So again going by the philosophy of the captioned CBDT Instruction, could it be construed that the CIT(Appeals) can use his plenary and co-extensive powers with that of the AO, to rectify this defect.
- Failure by the AO, to specifically mention the particular reason i.e. either the failure to disclose fully and truly all material facts, or the concealment of particulars, by the assessee, in the Notice u/s 274 of the Act, for the purpose of levy of penalty u/s 271(1)(c) of the Act, results in quashing of the entire penalty proceedings. So could the said fatal defect be rectified by the CIT(Appeals), through the use of his coterminous powers, in the appellate proceedings?
The crucial question in this regards, is, as to whether the plenary, coterminous and co-extensive powers of the CIT(Appeals), with that of the Assessing Authority, are to be exercised in judicious disposal of appeals in order to provide appropriate appellate reliefs to the assessees or these are to be exercised with a mindset of curing the technical and legal defects of the Assessing Authorities, in the assessments, so as to provide second opportunity to the Revenue Authorities, in further strengthening their assessments, with a view to deprive the assessees of their appellate reliefs.
In answering this question, one most important parameter concerning the Legislative Intent of providing the assessee with an opportunity of appeal on becoming aggrieved by the assessment done by the assessing authority, needs to be rationally and objectively viewed and it needs to be appreciated that it’s the assessee who has been vested with the appellate right at the First Appellate Authority Level and not the Assessing Authority, notwithstanding that the first appellate authority is fully empowered to enhance the assessment also.
It is interesting to note that in the case of “CIT vs HardeodasAgarwalla Trust”, 198 ITR 511, the Hon’ble Calcutta High Court, has observed and held as under:
“19….Where an assessee, in compliance with the provisions of the Act, cures the defect in the return by filing the audit report before the completion of the assessment, the Assessing Officer cannot ignore such audit report or the return in completing the assessment. 20. In our view, the result of ignoring such return or the audit report will be denial of exemption to the trust although the income has been spent for charitable or religious purposes. This was not intended by the legislators. If an assessee fails to obtain the audit report in the prescribed form before the assessment is completed, he may not, ordinarily, be entitled to get the benefit of exemption. In this case, however, as we have indicated, the assessee was not given an opportunity to file the audit report in the prescribed form which was available with the assessee before the assessment was completed. In such a case, the appeal being a continuation of the original proceedings, the appellate authority has the power to accept the audit report and direct the Assessing Officer to redo the assessment. The appellate authority has plenary powers in disposing of an appeal and the scope of his power is coterminous and co-extensive with that of the Assessing Officer. He may, therefore, consider and decide any matter arising out of the proceedings in which the order appealed against is passed. He can do what the Assessing Officer can do and direct him to do what he has failed to do. Such powers are, however, subject to the limitation that what an Assessing Officer could not do validly, the first appellate authority also cannot do in appeal.”
In all its fairness, it needs to be mentioned here, that in the captioned CBDT Instruction, a one particular instance of providing the opportunity of cross-examination to the assessee, of the third party on whose statement, an adverse inference is being drawn against the assessee, by the CIT(Appeals), in exercise of his plenary and co-extensive powers, instead of summarily quashing the entire assessment, has been mentioned.
However, having said that, it is equally true that the language of the captioned CBDT Instruction, is definitely amenable to be misunderstood and misconstrued, so as to form an impression and a perception, that restrictions and limitations have been imposed, on the independence and discretionary powers of the First Appellate Authority, i.e. CIT(Appeals), and no appellate reliefs on legal and technical grounds, are expected to be granted by the First Appellate Authority, in the appellate proceedings.
Therefore, in view of the principle of natural justice, equity and fair-play, the captioned CBDT Instruction, needs to be reviewed and reconsidered in a more rational, pragmatic and lawful manner.
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