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Commissioner Of Income-Tax v. Fundilal Rikhabchand.
Structured Summary of the Court's Opinion (V.K. Singhal, J.)
Factual and Procedural Background
An assessment under section 143(3) of the Income-tax Act for the assessment year 1975–76 was finalised by the Income-tax Officer (ITO) on October 6, 1976. The assessee had disclosed investment of Rs. 48,337 in construction of a house. An inspector deputed by the ITO estimated the investment at Rs. 56,800; based on that report the ITO made an addition of Rs. 5,000 as income from undisclosed sources.
The assessee appealed to the Appellate Assistant Commissioner (AAC), arguing the inspector's report had not been disclosed to the assessee and that the assessee had not been given an opportunity to meet the basis of the estimate. The AAC set aside the assessment order with directions that the ITO "examine the whole case afresh," follow the correct procedure in law (not making an adverse order without a reasonable opportunity to be heard), and then make a fresh assessment.
On remand the ITO referred the matter to the Departmental Valuation Officer (DVO), who estimated construction cost at Rs. 1 lakh; the ITO adopted that figure and treated the difference from the assessee's disclosure as income from undisclosed sources. On further appeal the AAC fixed the cost at Rs. 73,270 (arriving at an addition under section 69 of Rs. 20,208). The matter proceeded to the Income-tax Appellate Tribunal (ITAT), which held that the ITO had exceeded his jurisdiction in enhancing the assessment on remand and reinstated the original addition of Rs. 5,000 while quashing additions beyond that figure.
The Tribunal under section 256(1) referred the question of law whether, in the fresh assessment proceedings pursuant to the AAC's directions, the ITO had jurisdiction to enhance the assessment.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Income-tax Officer had jurisdiction to enhance the assessment while making a fresh assessment in consequence of the Appellate Assistant Commissioner's order setting aside the earlier assessment (question framed under section 256(1) of the Income-tax Act, 1961).
Arguments of the Parties
Assessee's Arguments
- The inspector's report, which formed the basis of the higher estimation, was not brought to the notice of the assessee; the ITO should have disclosed the basis of the estimate and the enquiries conducted.
- The assessee contended that the ITO had no jurisdiction to go beyond the figures of the earlier assessment order which had been set aside by the AAC; the ITO should have merely confronted the inspector's report and reframed the assessment limited to that context.
Revenue's Arguments
The opinion does not contain a detailed account of the Revenue's legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Rambilas Chandram v. CIT, [1986] 156 ITR 344 (Raj) | Where an appellate authority sets aside an assessment and remands the matter for fresh assessment without restrictions, the assessing officer may exercise the same powers in the fresh assessment that he would have had in the original assessment. | The court treated the present remand as analogous to Rambilas Chandram — the AAC had set aside the assessment "fully" and directed the ITO to examine the whole case afresh. On that basis the court held the ITO could lawfully make additions beyond what was made in the original assessment. |
Court's Reasoning and Analysis
The court began with a statutory reading of section 251(1)(a) of the Income-tax Act. It explained the following legal propositions, drawing only from the reasoning contained in the opinion:
- Section 251(1)(a) empowers the Appellate Assistant Commissioner to confirm, reduce, enhance, annul, or set aside an assessment and to refer the case back to the ITO for a fresh assessment in accordance with directions given.
- If an assessment is annulled, the ITO has no jurisdiction to proceed further. If it is merely set aside, a fresh assessment must be made in accordance with the directions given by the appellate authority, and the ITO is bound by those directions.
- Where a matter is remanded without restrictions, the ITO may exercise the same powers in the fresh assessment as he had in making the original assessment (i.e., the ITO is not restricted to the precise points decided or the figures in the earlier order).
- The ITO must, however, follow any restrictions expressly imposed by the appellate authority when making the fresh assessment. The only statutory exception noted to strict compliance with appellate directions is a subsequent retrospective legislative amendment of the law.
Applying these principles to the facts, the court scrutinised the operative language of the AAC's order. The AAC had "set aside fully" the assessment and directed the ITO (1) to examine the whole case afresh, (2) to follow the correct procedure in law (meaning not to make an adverse order without giving a reasonable opportunity to be heard), and (3) to make a fresh assessment accordingly.
The court concluded that these directions amounted to an unrestricted remand: the earlier assessment order no longer existed and the direction to examine the whole case afresh indicated the ITO was not fettered to the previous figures. The only restriction expressly imposed was procedural — to afford the taxpayer a reasonable opportunity to be heard. The court relied on Rambilas Chandram to support the proposition that a remand without substantive restrictions allows the ITO to exercise full assessment powers as in the original assessment.
On that basis the court held that the ITAT erred in concluding the ITO had no jurisdiction to enhance the assessment on remand; the ITO's reference to the DVO and the consequent enhanced assessment were within the powers conferred by the remand order.
Holding and Implications
HOLDING: The reference is answered in favour of the Revenue and against the assessee. The court held that, on the facts, the Income-tax Officer had jurisdiction to enhance the assessment in the fresh assessment proceedings directed by the Appellate Assistant Commissioner.
Implications:
- The immediate consequence recorded in the opinion is that the ITAT's conclusion (that the ITO had no jurisdiction to enhance the assessment) was not justified, and the remand permitted the ITO to make enhancements subject only to the procedural requirement of giving the assessee a reasonable opportunity to be heard.
- The court applied an existing authority (Rambilas Chandram) to confirm that an unrestricted remand restores to the assessing officer the powers available at the original assessment stage; the opinion does not state that it creates a new legal precedent beyond that application.
The Judgment of the Court was delivered by
V.K Singhal, J.:— The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated July 8, 1983, in respect of the assessment year 1975–76 under section 256(1) of the Income-tax Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that in the fresh assessment proceedings on the directions of the Appellate Assistant Commissioner, the Income-tax Officer had no jurisdiction to enhance the assessment?”
2. An assessment under section 143(3) of the Income-tax Act was finalised by the Income-tax Officer on October 6, 1976. The Income-tax Officer observed that the assessee has built a house, in the construction of which a sum of Rs. 48,337 was spent.
3. The Income-tax Officer, who deputed the inspector to make the enquiry with regard to the construction, has estimated the investment to the extent of Rs. 56,800. On the basis of the report of the inspector, wherein a difference of Rs. 8,263 was found taking into consideration the cost of the old material of the demolished house, which was used by the assessee and for which due credit was given, the Income-tax Officer made an addition of Rs. 5,000, as the assessee's income from undisclosed sources which was invested in the construction of the house. The assessee preferred an appeal before the Appellate Assistant Commissioner. It was argued that the report given by the inspector was not brought to the notice of the assessee, as to on what basis the estimate was made and what enquiries were conducted and therefore the addition of Rs. 5,000 so made is liable to be deleted. It was also submitted that the Income-tax Officer may be directed to disclose full facts of the inspectors' enquiry and reasonable opportunity should be given for explaining his case in the light of the report of the inspector. The Appellate Assistant Commissioner set aside the assessment order and observed that no adverse order could be made unless the assessee is given a reasonable opportunity of being heard. The exact language used was : “Thus, the assessment order is set aside fully with direction to the Income-tax Officer to examine the whole case afresh and then follow the correct procedure in law as stated above and then make a fresh assessment order accordingly.” The Income-tax Officer referred the matter regarding the cost of construction of the above property to the Departmental Valuation Officer, who estimated the cost of construction at Rs. 1 lakh. The Income-tax Officer adopted the cost as per the Departmental Valuation Officer, figured at Rs. 1 lakh as against Rs. 48,337 disclosed by the assessee and the difference of Rs. 51,663 was treated as the assessee's “income from undisclosed sources”.
4. An appeal was preferred to the Appellate Assistant Commissioner, who has estimated the cost of construction at Rs. 73,270. The Appellate Assistant Commissioner observed that, as per the books of account maintained by the assessee, the investment is at a figure of Rs. 53,062 and for that purpose a break-up was taken for the cost of construction for 1973–74, 1974–75 and 1975–76 which figured at Rs. 44,037,4,300 and Rs. 4,725, respectively. It was found that the cost of construction shown by the assessee was Rs. 48,337 and the sum of Rs. 4,725 was the outstanding amount and thus the figure as per the books of account comes to Rs. 53,062 and not Rs. 48,337. The report of the approved valuer which was at a figure of Rs. 57,000 which was submitted by the assessee was also taken into consideration and a sum of Rs. 2,500 (instead of Rs. 16,500, Rs. 14,000 was considered reasonable) in respect of the excess deduction allowed by the approved valuer on account of old material and a sum of Rs. 13,770 which was allowed as deduction by the approved valuer on account of use of own trucks without any basis was added to it and the figure of Rs. 73,270 was taken as the final figure, resulting in an addition, under section 69 of the Act, at a figure of Rs. 20,208. On the contention of the assessee that the Income-tax Officer has no jurisdiction to travel beyond the figures of the earlier order which was set aside by the Appellate Assistant Commissioner, it was observed that, since the order is fully set aside in appeal, there is nothing in law to prevent the Income-tax Officer from making a reference to the valuation side for obtaining the estimate from the official valuer as regards the cost of construction shown by the assessee. The assessee as well as the Revenue challenged the order of the Appellate Assistant Commissioner before the Income-tax Appellate Tribunal and an objection was taken that the Income-tax Officer while giving effect to the order of the Appellate Assistant Commissioner has travelled beyond his jurisdiction in reopening the entire issue inasmuch as the matter before the Appellate Assistant Commissioner was that the inspector's report was not confronted and therefore the Income-tax Officer should have confronted the said report and proceeded for reframing the assessment by giving an opportunity. The Income-tax Appellate Tribunal observed that the directions issued by the Appellate Assistant Commissioner have to be read in the context of the ground of appeal which was before him. The Appellate Assistant Commissioner has the power to enhance the assessment after affording opportunity, but no such powers were exercised nor any directions were given to the Income-tax Officer for enhancement and, therefore, the Income-tax Officer has exceeded his jurisdiction in enhancing the assessment while framing reassessment in consequence of the order of the Appellate Assistant Commissioner. As such, the addition which was initially made of Rs. 5,000 was found justified and the further additions beyond the figure of Rs. 5,000 were quashed.
5. The provisions of section 251(1)(a) confers jurisdiction on the Appellate Assistant Commissioner to confirm reduce, enhance or annul the assessment or he may set aside the assessment and refer the case back to the Income-tax Officer for making a fresh assessment in accordance with the directions given by the Appellate Assistant Commissioner and after making such further enquiry as he may consider necessary and the Income-tax Officer shall thereupon proceed to make such fresh assessment and determine where necessary, the amount of tax payable on the basis of such fresh assessment. From a perusal of the provisions of section 251(1)(a), it is evident that, if the assessment order is annulled, then the Income-tax Officer has no jurisdiction to proceed further for making an assessment, but, where it has only been set aside, then a fresh assessment has to be made in accordance with the directions given by the appellate authority. The Income-tax Officer is bound by the directions given by the appellate authority. The new source of income, while making an assessment as per the remand order of the appellate authority, cannot be made. The assessee also cannot be allowed to agitate new points or grounds which were not dealt with by the appellate authority in his order and the concluded matter cannot be reagitated or redetermined afresh. In respect of a particular source of income, if the matter has been remanded and directions have been given to make a fresh assessment as in the present case, then subject to the directions which have been given by the Appellate Assistant Commissioner, the Income-tax Officer has the same power in the fresh assessment, as he originally had in making an assessment under section 143 of the Income-tax Act, 1961, in respect of that point. If the Appellate Assistant Commissioner sent the matter back to the Income-tax Officer without any restrictions, then no directions can be presumed or inferred on the powers of the Income-tax Officer when he proceeds to make the fresh assessment in substitution of the order which has been set aside. If the directions have been given, then the basic principles of administration of justice demand that the Income-tax Officer is bound by the directions of his higher authorities and he cannot travel beyond that. If any other interpretation is taken, it would be not only denial of justice, but destructive of the administration of justice resulting in indiscipline. The Appellate Assistant Commissioner may indicate in the order, the various points or the matters on which the enquiry is to be made. If such directions are given, then they have to be strictly followed and the Income-tax Officer has to conduct the enquiry in accordance with the directions given and cannot ignore those directions. The only exception is when the law is amended retrospectively and it is only in that case, ignoring the directions of the appellate authority, that effect to the retrospective amendment by the Legislature has to be given.
6. In the present matter, as observed above, the operative part of the order of the Appellate Assistant Commissioner gives direction to the effect that the assessment is set aside fully with directions to the Income-tax Officer (1) to examine the whole case afresh, and (2) then follow the correct procedure in law as stated above, and (3) then make a fresh assessment order accordingly. From these observations, it is evident that the assessment order was completely and fully set aside and directions were given to examine the whole case afresh. Further directions after examining the whole case afresh has been given to follow the correct procedure in law as stated above. The correct procedure which was referred to in these directions was that no adverse order could be made unless the taxpayer was given reasonable opportunity of being heard. Thus, it would be evident that while setting aside the entire order the directions were to examine whole case afresh and the further directions were to follow correct procedure in law and then to make a fresh assessment order. No restrictions have been placed by the Appellate Assistant Commissioner on the right of the Income-tax Officer restricting the assessment to the figure, which was determined in the earlier assessment order, which has been set aside. As a matter of fact, the said order is no longer in existence and the necessity to direct the Income-tax Officer to examine the whole case afresh makes it clear that no restrictions have been imposed on the power of the Income-tax Officer to frame the assessment order afresh. The only restriction was that no adverse order could be made unless the taxpayer was given reasonable opportunity of being heard. This court in the case of Rambilas Chandram v. CIT, [1986] 156 ITR 344 has examined the point in dispute with regard to the power of the Income-tax Officer. In that case, the assessment framed by the Income-tax Officer was set aside in appeal with a direction that the Income-tax Officer should make assessment after giving proper opportunity to the assessee. The Income-tax Officer has made certain additions in the tilli account and the alsi account which were not made in the original assessment and the books of account were rejected. The additions in the groundnut account which were made in the original assessment order were reduced in appeal by the Appellate Assistant Commissioner and when the matter was taken before the Income-tax Appellate Tribunal, it was contended that the additions in the tilli account and the alsi account were not made in the original assessment order and, therefore, the Income-tax Officer has no jurisdiction to make the additions. It was observed by this court that the Appellate Assistant Commissioner has set aside the assessment order and sent the matter back to the Income-tax Officer for reframing the assessment after examining the various factors involved in detail giving an opportunity to the assessee before the additions are made and, therefore, this order of remand is without any restrictions and the Income-tax Officer could exercise all powers which he could otherwise exercise at the time of making the original assessment. On the basis of this decision and the operative part of the order of the Appellate Assistant Commissioner, we find that the assessment order in the present case has also been set aside fully and the Income-tax Officer was directed to examine the whole case afresh. The order of the Appellate Assistant Commissioner has not fettered the discretion of the Income-tax Officer while framing the assessment order and examining the whole case afresh. Had the matter been restricted only to providing the opportunity to the assessee for confronting the report of the income-tax inspector, then there was no necessity to direct the Income-tax Officer to examine the whole case afresh. The directions in the present case cannot be considered as restricted to the grounds of appeal, because, while passing an order, the Appellate Assistant Commissioner could set aside the entire assessment order for making the fresh assessment. The examination of the whole case afresh, therefore, is similar to the case of Rambilas Chandram, [1985] 156 ITR 344 (Raj) referred to above and the further direction to follow the correct procedure in law as mentioned in the appellate order, i.e, no adverse order could be made unless the taxpayer was given a reasonable opportunity of being heard, cannot be interpreted to mean that the addition beyond Rs. 5,000 cannot be made. In these circumstances, we are of the opinion that the Income-tax Appellate Tribunal was not justified in holding that in the fresh assessment proceedings on the directions of the Appellate Assistant Commissioner, the Income-tax Officer had no jurisdiction to enhance the assessment. The reference is accordingly answered in favour of the Revenue and against the assessee.
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