Assessment, Rectification, Revision, Appeal Procedure and Issue on Hawala Transaction

By Accommodation Times News Service

By CA Vimal Punmiya

  1. Assessment :

A) ASSESSMENTS.

(i)        Regular Assessment

(ii)       Best Judgment Assessment

  1. ASSESSMENTS :

2.1) Introduction :

–        means determination of income-tax liability.

–                S. 2(8) assessment includes reassessment.

–                s. 147 – 148 – reassessment of escaped income.

–                s. 142 – 143 – 144 Normal assessment of total income.

–                s. 142 Inquiry before assessment.

–                s. 143 (1) summary assessment – assessment based on return.

–                s. 143 (3) scrutiny assessment – assessment based on evidence.

–                s. 144- best judgment assessment

–                s. 2(40), regular assessment, means the assessment made u/s 143(3) or u/s 144.

We are mainly concerned with assessment u/s 143  & u/s 144.

2.2)    Summary Assessment:

S. 143 (1) w.e.f. 1/4/2008 where return has been made u/s 139 or pursuant to notice u/s 142 (1) determine

(i)                Tax/interest due

(ii)              Refund due

On the basis of the return.

Send intimation to assessee, raising demand or granting of  refund or loss adjusted.

Intimation deemed to be notice of demand.

Proviso 1. Even no interest, no refund due but loss is adjusted than also intimation will be sent.

Proviso 2. No. intimation to be sent after expiry of one year from the end of the financial year in which the return is furnished.

If there is no demand nor refund the acknowledgement of filing the return shall be deemed to be an intimation.

143(1A),(1B),(1C) introduce for centralised processing. And accordingly implemented through CPE, Bangloure.

143(1D) w.e.f. 01/07/2012 -Notice U/s 143(2) issued than processing u/s 143(1) is not necessary.

2.3) Assessment u/s 143 (3) and S. 144 :

S. 143 (3) – Scrutiny assessment – regular assessment –co-operative assessee.

S. 144- Best judgment assessment –Non-co-operative assessee.

S.142 – Inquiry before assessment .

2.3.1) Time limit for completion of assessment :

S.153 (1) – Asst. u/s 143 (3) or u/s 144 shall be made within 2 years from the end of the A.Y.

S. 153 (2) – Asst. u/s 147 shall be made within one year from the end of the F.Y. in which notice u/s 148 was served.

Ex. If the notice was served between 1/4/11 to 31/3/2012 then the time for completing the assessment is upto 31/3/2013.

2.3.2)     Preliminaries for assessment under these two sections commences with inquiry before assessment u/s 142. Assessment u/s 144 would be made whether a return of income is filed or not. Assessment u/s 143 is made only where a return of income is filed u/s 139 or in response to notice u/s 142 (1).

Return of income represents self assessment of tax and corresponding liability.

2.3.3)     Time for filing return of income:-

I) S. 139 (1) :

31st Sept. :                               Company        : irrespective of income

Others : requiring audit and working

partners of firms requiring

Audit, where there is tax liability.

31st July :                                Remaining cases where there is tax liability.

30th Nov.                               Company required to furnish a report u/s 92E        ( Transfer Pricing Rules)

II) S. 139 (1A) : Filing of Bulk Returns. Employee at his option file return through his employer.

III) S. 139(1B): Filing of electronic Return

IV) S.139(1C): Special power of central Govt. to exempt any class of person from requirement of furnishing a return of income.

Govt. Notified that if following condition are satisfied, the assessee shall have option to submit his return or not to submit his return of income.

a) The Assessee is an individual ( may be resident or non resident)

b) His total income should consist only of salary and/ or saving bank interest

c) His total income should not exceed Rs. 5,00,000/- and saving bank interest should not exceed RS.10,000/-.

d) He should receive salary from only one employer.

e) The assessee should have reported his PAN to his employer

f) The assessee must have reported his interest income from saving bank account to his employer for the purpose of TDS u/s 192

g) The Assessee must have received a TDS certificate in form No.16 from his employer and such TDS certificate must include his PAN, Details of income, tax deducted by the employer and deposited to govt. A/c

h) The assessee should not have any claim of refund.

Exemption shall not be allowed if a notice U/s 142(1), 148, 153A or 153C is issued by the department.

V) a)S. 139 (3) Return of Loss

b)S. 139(4) Belated Return

c)S. 139 (4A) Charitable Trust exempt u/s 11 & 12.

d)S. 139 (4B) Political Parties.

e)S. 139(4C) Return in some cases where income is exempted u/s 10

f)S. 139(4D) Return by university, collage etc. covered u/s 35

g)S. 139(5) Revised Return

IV)      S. 139 (4) Extended Period : One year from end of A.Y. or before the completion of assessment.

V)        S.142 (1): Where no return filed u/s 139 (1) and time has expired A.O. can issue notice requiring the assessee to file return within the time prescribed in the notice.

VI) S.139 (5): Revised return: Where return is filed u/s 139 (1) or u/s 142 (1): revised return to be filed within one year from the end of the A.Y. or before completion of assessment whichever is earlier.

Belated Return U/s 139(4) and return U/s 148 cannot be revised.

Kumar Jagdish Chandra Sinha V/s CIT (1996) 220 ITR 67 (SC)

V)        S. 148: Within the time prescribed in the notice – requires the assessee to furnish return of his  income – however the assessing officer before issuing any notice should record his reasons for doing so .

2.3.4) Assessment u/s 143 (3) : Scrutiny Assessment : regular assessment :

2.3.4.1) Commences with notice u/s 143 (2):-

Where return is filed u/s 139 or 142 (1) and where the A.O. considers it necessary or expedient to ascertain the correctness of the return.

The notice is issued for giving an opportunity to substantiate, by leading evidence if necessary to prove the correctness of the return.

The notice u/s 143 (2) should be served on the assessee within 6 months from the end of the financial year in which the return is furnished.

A notice u/s 143 (2) served beyond the prescribed time is without jurisdiction and is held as  invalid and hence the consequent. Assessment Order. u/s 143(3) will also be invalid as held in the cases:-

i)                   C.I.T. v/s D. S. Screens P. Ltd. (2000) 164 CTR (Bom) 62

ii)                 Arasina Hotels Ltd. V/s D.C.I.T. (1997) 60 ITD 667 (Bang)

Illegality of notice cannot be waived.

C.I.T. v/s Ram such Motilal 27 ITR 54 (Bom).

2.3.4.2)           Procedure of assessment u/s 143 (3) (r.w.s.142):

i)                   A.O. shall hear the assessee on the evidence produced by the assessee on the day specified in the notice u/s 143 (2).

ii)                 A.O. can adjourn the hearing and hear the evidence on adjourned day or days.

iii)               A.O. may require the assessee to produce further evidence on specified points on the adjourned day or days.

iv)               A.O. can take into account all relevant material which he has gathered, after affording a reasonable opportunity of being heard to the assessee in that regard.

v)                 A.O. to assess total income/loss and pass assessment order on the last day of hearing or soon afterwards as may be.

Some Points:

1)           The Assessment u/s 143 (3) must be based on the i) the return of income filed by the assessee, ii) the evidence i.e.( the documents/material/information) produced by the assessee and/or gathered by the A.O. on his independent enquiry.

2) Admission by assessee/his legal representative :

What is shown/claimed in the return is admitted by the assessee.

–        What is admitted by a party to be true must be presumed to be true unless the contrary is proved (Nathulal v/s Durga Prasad, AIR 1954 S.C. 355, 358.)

–        An admission is the best evidence that an opposition party can rely upon, and though not conclusive, is decisive of the matter, unless successfully withdrawn or proved erroneous.

–        Thus an admission is not conclusive proof of the matter admitted, though it may, in certain circumstances, operate as estoppel.

(K.S. Srinivasan v/s U.O.I. AIR 1958 S.C. 419, 427. Basant Singh v/s Janaki Singh, AIR 1967 S.C. 341, 343.)

–        An admission would bind the person making it only in so far as facts are concerned but not in so far as it relates to a question of law.

(Banarasi Das v/s Kanshi Ram AIR 1963 S.C. 1165, 1169)

–        It is open to the assessee who made the admission to show that it is incorrect and the assessee should be given a proper opportunity to prove that what is correct

i)                   Pullangode Rubber Roduce Co. Ltd. v/s State of Kerala (1973) 91ITR18 (SC

ii)                 Kishori Lal v/s Mt. Chaltibai AIR 1959 S.C. 504, 511.

iii)               Federal Bank Ltd. v/s State of Kerala AIR 1955 Ker 62, 65 (1995) 127 Taxation 273, 279-80 (Ker).

–                      Admission can be retracted if it could be shown that it was made under an erroneous impression of law.

(G. Murugeshan & Bros v/s C.I.T. (1973) 88 ITR 432, 438 (S.C.)

–           Any admission made in ignorance of legal rights or under duress cannot bind the maker of the admission. (Shri. Krishan v/sKurukshetra University AIR 1976 S.C. 376, 382.)

–                      C.I.T. v/s Dayaram Vasudev (1992) 193 ITR 602, 605 (Bom):

Tribunal held justified in deleting addition, which was made on the basis of an admission made by the assessee’s C.A., after accepting an affidavit of the C.A. showing that the admission was made under an erroneous impression.

–           No appeal lies against agreed assessment.

i)                   Sterling Machine Tools v/s C.I.T. 123 ITR 181 (AII)

ii)                 Ramanlal Kamdar v/s C.I.T. 108 ITR 73 (Mad).

iii)               Rameshchandra & Co. v/s C.I.T. 168 ITR 375 (Bom) : Where an assessee has made a statement of facts, he can have no grievance if the taxing authority taxes him in accordance with that statement. If he has any grievance on law then he can file. Therefore, it is imperative, if the assessees case is that his statement has been wrongly recorded or that he made, it under mistake of belief of fact or law, that he should make an application for rectification to the authority which passed the order based upon that statement. Until rectification is made, an appeal is not competent.

–           Basic principle is that appeal against agreed addition is not maintainable

Exceptions:

i)                   No estoppels against law. I.T.O. v/s G.E. Hawn (1987) 21 ITD 553 (All)…

ii)                 Appeal against addition agreed to under misapprehension is maintainable.

a)  Dina Nath Prem Kumar v/s I.T.O. (1982) 13 TTJ (Del) 442.

b)  R. T. Balasebramaniam v/s I.T.O (1994) 50 ITD 513 (Mad) (SMC).

3)        Revised Return: Section 139 (5):

An assessment u/s 143 (3) is based on a return or a Revised return which replaces the original return.

Belated return cannot be revised u/s 139 (5).

Kumar Jagdish Chandra Sinha v/s C.I.T. 220 67 (S.C).

Revision of claim without revising return:

i)             Gopaldas Purshottamdas v/s C.I.T. 9 ITR 130 (All)

ii)           Dharmpur Sugar Mills Ltd. v/s C.I.T. 90 ITR 236 (All)

iii)         C.I.T. v/s Prabhu Steel Industries P. Ltd. (1988) 171 17R 530 (Bom)

iv)         Gujarat Gas Co. Ltd vs. C.I.T. 245 ITR 84 (Guj) See 9 below.

Claim directly before AO/CIT/ITAT during course of Asst/Appeal if information available on record –Yes possible in respect of legal issues.

i)             National  Thermal Power Corporation v/s C.I.T. 229 ITR 33 (S.C.)

ii)           Jute Corporate of India Ltd. v/s C.I.T. 187 ITR 688 (S.C.).

iii)         C.I.T. v/s Western Rolling Mills (P) Ltd. (1985) 156 ITR 54 (Bom)

Circular No. 14 (XL-35) of 1955 C. No. 13 (207) –IT/50, dated 11/4/1955.

4)        Strict rules of evidence are not applicable

5)        Evidence obtained in the course of illegal search can be relied upon by the A.O.
Dr. Pratap Singh v/s Director of Enforcement (1985) 155 ITR 166, 175 (S.C).

6)        Return filed in pursuance of an invalid notice may still be taken as material for making the assessment such a return is a valid material on record and the A.O. can look into it as a piece of evidence to come to the conclusion as to the assessable income.

Commercial Art Press v/s. C.I.R. (1978) 115 ITR 876 (All)

7)        Statements recorded u/s 131 cannot be used without giving opportunity of rebuttal to the assessee.

8)        Finding, on material partly relevant and partly irrelevant is bad in law.

i)             Dhirajlal  Girdharilal v/s C.I.T. (1954) 26 ITR 736 (S.C.)

ii)           Lalchand Bhagat Ambika Ram v/s C.I.T. (1959) 37 ITR 288 (S.C.)

iii)         C.I.T. v/s Daulatram Rawatmal (1973) 87 ITR 349 (S.C.).

iv)         C.I.T. v/s S.P. Jin (1973) 87 ITR (S.C.)

v)           Dhirajlal Girdharilal v/s C.I.T. (1970) 78 ITR 657 (Bom).

9)        Gujarat Gas Co. Ltd. V/s C.I.T. (2000) 161 CTR (Guj) 246/245 ITR 54 (Guj) :

A.O. was not bound by Circular No. 549 dated 31/10/1989, and was not justified in refusing refund to the assessee when its assessed income was less than returned income. A.O was directed to modify the assessment ignoring the

Circular.

10)      Cross-examination: If A.O. is relying on the testimony of a witness; the assessee is to be afforded an opportunity to cross examine him.

C.I.T. v/s Eastern Commercial Enterprises (1994) 210 ITR 103, 111 (Cal).

11)      Assessment u/s 143 (3) on the basis of an invalid or honest return is ab-initio void.

Maya Debi Bansal v/s C.I.T. (1979) 117 ITR 125 (Cal). Such an assessment cannot also be treated or sustained as one made u/s 144.

C.I.T. v/s Smt. Minabati Agarwalla 79 ITR 278 (Cal).

C.I.T. v/s Bissessar Lal Gupta 105 ITR 684 (Cal.).

Cf. CED v/s Bhola Dut (1981) 130 ITR 468 (All).

2.3.5)     Best Judgment Assessment u/s.144 can be done if there are four fatal defaults namely,

1) Failure to   make return required u/s 139 (1), (4) & (5)

2) Failure to comply with all terms of notice u/s 142 (1)

3) Failure to comply with direction u/s 142 (2A)

4) Failure to comply with all terms of notice u/s 143 (2)

5) Method of accounting as prescribed in sec.145 is not followed.

6) Accounting standards notified by central govt. u/s 145 are not complied.

7) Assessing officer not satisfied about correctness of the accounts.

8) Assessing officer not satisfied about completeness of the accounts.

After giving opportunity to the assessee the assessing officer can make best judgment assessment determining the sum payable by the assessee.

–           On committing one of the defaults the A.O. is bound to assess u/s 144 to the best of his judgment on the basis of the material on record and the material gathered by him.

2.3.5)  Best Judgment Assessment: How to be made?

It must be honest, rational, fair and reasonable – say estimate guided by justice, equity and good conscience (i.e principles of natural justice).

Should not be arbitrary.

Should not be made capriciously in utter disregard to the material on record.

It is not by way of penalty for non-compliance.

The estimates must be based on adequate and relevant material.

The estimate must be based on legal and not on mere hearsay evidence, not on mere conjecture or suspicion or surmises.

2.3.6)     Protective Assessment : v/s Regular/ Substantive Assessment :

–           Where there is doubt or ambiguity about the real entity in whose hands a particular income is to be assessed the A.O. is entitled to have recourse to make protective assessment in the case of one and regular assessment in the case of the other.

–           There is no statutory mandate to make protective assessment. It is the settled law that where there is doubt or ambiguity about the real entity in whose hands a particular income is not be assessed the A.O. is entitled to have recourse to making protective assessment.

(Banyan & Berry v/s C.I.T. (1996) 222 ITR 831 (Guj).

I.T.O. v/s Bachu Lal Kapoor (1966) 60 ITR (S.C.).

–           There can be protective assessment under Chapter XIVB. (Unique Hotel v/s Asst. C.I.T. (2000) 108 Taxman 254 (Chd) (Mag).

–          Where an assessment is intended to be protective, it must be expressly mention in the order.

CIT v/s Khalid Mehdi (1987) 165 ITR 685 (AP)

–           Protective assessment is permissible but protective recovery is not.

i)                   Jagannath Bawri v/s C.I.T. (1998) 234 ITR 464, 471 (Gauh)

ii)                 Sunil Kumar v/s C.I.T. (1983) 139 ITR 880 (Bom).

iii)               C.I.T. v/s Cochin Co. P. Ltd. (1976) 104 ITR 655 (Ker).

iv)               P. K. Trading Co. v/s I.T.O. (1970) 78 ITR 427 (Cal).

–           There cannot be protective order of penalty, as held in the following judicial pronouncement

i)                   C.I.T. v/s Behari Lal Pyare Lal (1983) 141 ITR 32 (Punj)

ii)                 C.I.T. v/s Super Steel Sales Co. (1989) 178 ITR 451, 452 (Cal).

iii)               Metal Stores v/s C.I.T. (1990) 186 ITR 612, 614, 615 (Gauh).

u/s 167B: Association of persons or Body of individuals, tax shall be charged on the total income of the association or the body at the maximum marginal rate, provided where the total income of any member of such association or body is chargeable to a tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate.

B) RECTIFICATION AND REVISION UNDER INCOME TAX ACT

  1. I. Rectification Sec.154

Section 154 Provides for rectification of mistakes.

b)                          Any order passed by an income tax authority can be rectified under this section.

c)                           Intimation or demand intimation u/s143(1) can also be rectified under this section.

d)                          Rectification is possible only if there is a “MISTAKE APPARENT FROM THE RECORD”. In other word, the mistake must be a prima facie/apparent mistake from record.

e)                          Mistake can be classified under two categories- (i) Apparent from record, and (ii) arguable/ disputable/ debatable mistake.

f)                            The scope of section 154 is limited to the rectification of mistake apparent from record, not extended to arguable/ disputable/ debatable mistake.

However, the parliament has not prescribed any guidance in income tac act related to classification of mistake. But based on court decisions, followings are some of the examples of apparent mistake-

  • Arithmetical mistake
  • Mistakes in application of any limit/amount/percentage prescribed in the law
  • A view taken against the decision of jurisdictional high court or supreme court.

Honda Siel Power Products Limited Vs. Dy CIT and Anr

The Assessing Officer could not have resorted to Section 154 proceedings to disallow expenditure under Section 14A of the Act. This was not possible in 154 proceedings as it was not an error or mistake apparent from the record.

T. S. Balaram, Income-tax Officer v. Volkart Brothers, wherein the Supreme Court held that a mistake apparent on the record must be an obvious and patent mistake and not something which could be established by a long drawn process of reasoning on points on which there may be conceivably two opinions.

Arvind N. Mafatlal v. T. A. Balakrishnan, Deputy Controller of Estate Duty and Burmah-Shell Refineries Ltd. v. G. B. Chand

A decision on a debatable point of law is not a mistake apparent from the record

Tata Iron & Steel Co. Ltd. v. N. C. Upadhyaya & Anr. (1974) 96 ITR 1 (Bom.)

Issue involve is disputable, therefore provision of sec.154 not applied.

Dy CIT v. Waman Hari Pethe Sons (2011)138 TTJ (Mumbai) 451

The AO has in detail tried to justify the addition to be made u/s. 68 and accordingly, has passed the detailed order giving the elaborate reasons. Now the law is well-settled in respect of the limitation of the AO to rectify any order u/s. 15

g)                          Rectification can be done only by an income-tax authority covered by section116. Hence ITAT, High court or supreme court etc cannot make a rectification u/s 154 as they are not income tax authorities within the meaning of section 116.

h)                          Rectification is done by the same authority i.e. the authority who passed the order sought to be rectified.

i)                            Where the relevant order(i.e. the order sought to be rectified) is subject matter of any appeal/ revision/, rectification is possible in relation to any such matter as is not considered and decided in appeal/revision (Doctrine of partial merger)

j)                            Rectification can be done-

a)                 On own motive by the concerned authority, or

b)                 On an application by the assessee, or

c)                  On an application by the assessing officer( if the authority taking action u/s 154 is CIT[A]

k)                          If the result of the rectification is likely to be against assessee i.e. the result shall be increase in tax liability or reduction in refund, an opportunity of being heard shall be given the assessee before passing an order under this section.

l)                            Rectification can be done within 4 years from end of the financial year in which the order sought to be rectified is passed.

m)                        Where the assessee files application for rectification, the order of rectification shall be passed within 6 month from end of the month in which such application is received by the department. However, the law does not provide as to what will happen if the department does not pass order within 6 month.

CIRCULAR No.73 dated 07.01.1972:

Where a valid application u/s 154 has been filed by the assessee within the statutory time limit but it was not disposed by the concerned authority within the time limit of 4 years. It can still be disposed by the authority.

CIRCULAR No.669 dated 25/10/1993

Where the amount of tax, duty etc. as specified in section 43B had been paid within the prescribed time but evidence of payment has not been furnished with the return, the assessee can submit an application u/s 154.

Hind Wire Industries Ltd. V/s CIT (1995) 212 ITR 639 (SC)

Order sought to be rectified does not necessarily mean the original order. It could be any order including the amended or rectified order itself. Thus if the order of reassessment is sought to be rectified, the time limit of 4 years shall be computed from end of  the financial year in which the order of reassessment was passed.

II) Revision u/s 263/264

Section 263 Revision Of Order Prejudicial To The Interest Of Revenue

  • The provision deals with the revisionary powers of the Commissioner of Income Tax (CIT) which are supervisory in nature. The CIT can call for and examine the record of any proceedings under the act and if he considers that any order passed by the assessing officer is erroneous in so far as it is prejudicial  to the interest of revenue, he can take action under this section.
  • The CIT can exercise revision only if the following circumstances exist:

i)                   The order of the Assessing Officer is erroneous. and

ii)                 The order of the Assessing Officer is prejudicial to the interest of the Revenue.

  • ‘Record’ shall include all records relating to any proceedings of the Act available at the time of examination by the CIT.
  • The words “Any Proceedings” would mean proceedings of any kind such as assessment, penalty, interest, rectification etc. CIT V/s Christian Mic Industries Ltd. (1979) 120 ITR 627 (Cal)
  • However, the CIT has to given an opportunity of being heard before any order is passed under this section.
  • Power of CIT

The CIT can pass such order as the circumstances may justify including followings types of orders—

a)     Order enhancing assessment,

b)     Order modifying assessment

c)      Order cancelling assessment

d)     Order directing fresh assessment

This implies that the CIT is empowered to modify the assessment order passed by the Assessing Officer, if the order is found to be erroneous and prejudicial to the interest of the Revenue. If the order of the Income Tax Officer is erroneous but not prejudicial to the interest of the Revenue or if the order of the ITO is prejudicial to the interest of the Revenue and not erroneous, recourse to Section 263(1) cannot be taken by the CIT. [CIT Vs. Smt.Minalben S. Parikh [1995] 215 ITR 81 (Guj.)] It can never be implied that every order that is erroneous is also prejudicial to the interest of the Revenue.

  • If the order passed by the Assessing Officer has been subject matter of appeal, the power of the CIT shall extend to such matters as had not been considered and decided in such appeal. However, he will not have revisionary powers on matters which have been decided in the appeal. In such a situation, the appellate order stands merged with the order of the Assessing Officer.
  • provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. [Malabar Industrial Co. Ltd. Vs. CIT [2000] 243 ITR 83 (SC).]

Time Limit

  • The act prescribed two time-limits, viz (i) two years time limit, and (ii) indefinite time-limit

Two year Time limit: Normally, order u/s 263 can be passed within a period of 2 years from end of financial year in which order sought to be revised was passed by the Assessing Officer.

In computing the period of 2 years, following periods shall be excluded—-

a)     Period taken in giving an opportunity of re-hearing u/s 129

b)     Period during which proceeding u/s 263 are stayed by an order/ injunction of any court.

Indefinite time limit:

An order passed in consequence of, or to give effect to, any finding or direction contained in an order of the ITAT, high Court or Suprme Court, can be revised at any time.

Doctrine of Partial Merger

Where an order passed by the assessing officer has been subject matter of any appeal, the CIT can revise that part of the order which has not been considered and decided in appeal.

The orders which can be revised u/s 263 :

Apart from the order passed by the Assessing Officer [including order u/s 143 (1)], the following orders can also be revised by the CIT:

i)                   An order of assessment made by Assistant Commissioner of Income Tax (ACIT) or

ii)                 Deputy Commissioner of Income Tax Officer (DCIT) or Income Tax Officer on the basis of direction from Joint Commissioner of Income Tax (JCIT) u/s 144A.

iii)               An order made by the JCIT conferred on him under the order issued by the Board or CCIT or DG u/s 120.

Meaning of the word ‘erroneous’ and ‘prejudicial to the interest of the revenue’

  1. 1. CIT Vs. Shri Ashish Rajpal, High Court of Delhi (16.11.2007)

“An order is erroneous when it is contrary to the law or proceeds on an incorrect assumption of facts or in breach of principles of natural justice or is passed without application of mind, that is stereo-typed, in as much as, the Assessing Officer, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case, that is proceeds with undue haste. The expression ‘prejudicial to the interest of the Revenue’ while not to be confused with the loss of tax will certainly include an erroneous order which results in a person not paying tax which is lawfully payable to the Revenue.”

Both conditions need to be satisfied in order to exercise powers u/s 263.

  1. 1. Malabar Industrial Co. Ltd. [2000]243 ITR 83

Held that pre-requisite for exercise of suo motu revisional jurisdiction by the Commissioner under Section 263 of the Income Tax Act is that, the order of the Income Tax Officer is erroneous in so far as it is pre-judicial to the interest of the Revenue and if the twin conditions, namely, (1) the order of the Assessing Officer sought to be revised is erroneous, and (2) it is prejudicial to the interests of the Revenue, the exercise of suo motu revisional power under Section 263(1) of the Act would be justified.

Revisional powers cannot be exercised on the ground that the AO should have gone deeper into the matter or should have made a more elaborate discussion.

  1. 1. CIT vs. Leisure W ear Exports Ltd. [2010] 46 DTR (Del) 97

“W here the assessment order has been passed by the AO after taking into account assessee’s submissions and documents furnished by him, and no material is brought on record by the CIT which shows that there was any discrepancy or falsity in the evidence furnished by the assessee, the order of the AO cannot be set aside for making deep enquiry only on the presumption that something new may come out.”

  1. CIT v. Development Credit Bank Ltd., (323 ITR 206) (Bom.);
  2. CIT v. Hindustan Marketing and Advertising Co. Ltd.,(341 ITR 180) (Del.);
  3. CIT v. Ganpati Ram Bishnoi, (296 ITR 292) (Raj.);
  4. CIT v. Unique Autofelts (P) Ltd., (30 DTR 231) (P&H);
  5. Hari Iron Trading Co. v. CIT, (263 ITR 437) (P&H); and
  6. CIT v. Goyal Private Family Specific Trust, (171 ITR 698) (All.).

Powers u/s 263 cannot be invoked when assessment order is subject to appeal effect because appellate order stands merged with the Assessment Order (provided the issues raised in the order u/s 263 deal with the issues subject to appeal effect).

  1. Fortaleza Developers Vs. Assessee  (ITA NO. 2648/MUM/2012

Once the deduction u/s 80 IB (10) was a subject matter of appeals , the entire issue of 80 IB(10 ) was open in appeal and according to the followings decisions, so far as it relates the deductions u/s 80IB (10), the assessment order has merged with the appellate order passed by the CIT(A)

  1. Marico Industries Ltd. Vs Assisstant Commissioner of Income Tax (312 ITR 259)

It was held that since deduction u/s 80IB(10) was the subject matter of appeal before CIT(A), the order of Assessing officer got merged with the order of CIT(A).

  1. Ranka Jewellers Vs Additional Commissioner of Income Tax (328 ITR 148)

Once the issue was considered and decided by the CIT(A) , the remedy of the revenue cannot lie in the invocation of the jurisdiction under Section 263.

  1. Commissioner of Income Tax Vs. Farida Prime Tannery (259 ITR 342)

Held, it was clear from the express language of Section 263 of the Income Tax Act, 1961 that issues on which the Appellate Authority had already deliberated, the matter could not be reopened by way of revision- Answered the question against the Revenue and in favour of the Assessee.

Where two views are possible and the AO adopts one view  with which the CIT does not agree, the order cannot deemed to be erroneous or prejudicial to the interest of the Revenue even if there is a loss of the revenue.

  1. CIT Vs. Honda Siel Power Products Ltd. [ (2010) 6 TAXMANN 15]

In cases where the Assessing Officer adopts one of the courses permissible in law or where two views are possible and the Income-tax Officer has taken one view, the  Commissioner of Income-tax cannot exercise his powers under Section 263 to differ with the view of the Assessing Officer even if there has been a loss of revenue. Of course, if the Assessing Officer takes a view which is patently unsustainable in law, the Commissioner of Income-tax can exercise his powers under Section 263 where a loss of revenue results as a consequence of the view adopted by the Assessing Officer.

  1. CIT Vs Max India Ltd [2007] 295 ITR 282 (SC) : 213 CTR 266 (SC)
  2. Jamnadas T. Mehta Vs. ITO [2002] 257 ITR (AT) 90 (Pune) (TM)
  3. Patel Cotton Co.Ltd. Vs ACIT [1998] 64 ITD 273 (Mum)

Powers u/s 263 cannot be invoked merely because the CIT had a different opinion on the matter.

  1. Ramakant Singh Vs CIT [2011] 8 ITR (Trib) 403 (Pat)

It was held, that the questionnaire issued by the Assessing Officer covered all the points raised by the Commissioner in his show-cause notice and in the order passed under section 263 and on all these points, reply along with necessary details and evidence was furnished by the assessee before the Assessing Officer in the course of assessment proceedings and hence, it had to be accepted that the Assessing Officer had applied his mind on all these issues and even if such enquiry was inadequate in the opinion of the Commissioner, this did not give power to the Commissioner to pass order under section 263 merely because he had a different opinion on the matter.  The order of the Commissioner under section 263 was not sustainable.

There is a difference between ‘lack of enquiry’ and ‘inadequate inquiry’.

  1. ITO Vs. D G Housing Project Ltd. (343 ITR 329), Cit Vs Hero Auto Ltd. (343 ITR 342)

If there was inquiry, even inadequate, that would not by itself give occasion to the Comm0issioner to pass order under section 263 of the Act merely because he has a difference of opinion in the matter. It is only the cases of ‘lack of inquiry’ that such a course of action would be open.

The order of the AO cannot be branded as erroneous merely because, according to the  Commissioner, the order should have been written more elaborately.

  1. CIT v. Gabriel India Ltd.,203 ITR 108 (1993)

The Court observed that the Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in the matters or orders which are already concluded. The power u/s.263 can be exercised only when the order is erroneous and due to this, prejudice has been caused to the interests of the Revenue. The order cannot be branded as erroneous by the Commissioner because according to him the order should have been written more elaborately.

Remedy Against order

If the order passed by CIT u/s 263 is not acceptable, the assessee can avail following remedies—

a)     If the order suffers from prima facie mistake, an application u/s 154 for rectification can be filed to the CIT, or

b)     If the order suffers from a disputable mistake, an appeal u/s 253 can be filed to the ITAT.

Section 264 Revision Of Orders Prejudicial To The Interest Of Assessee.

  • An assessee can file appeal against an order passed by the Assessing Officer to the CIT(A) or He can prefer an appeal to the CIT for revising the order passed by the AO.

Revision of Which Order?

The CIT can revise any order (other than to which section 263 applies) passed by a subordinate authority. The revision under this section can be done—

a)     Either on own motion of CIT, or

b)     On an application by the assessee

Time Limit For Submission of Application:

The Assessee can submit application for revision u/s 264 within 1 year from the date on which the order was communicated to him or the date on which he otherwise came to know of it, whichever is earlier. However CIT can admit belated application.

Time Limit For Submission of Application:

a) Where the CIT takes action on his own motion—

1 year from the date of the order sought to be revised.

b) Where the assessee submits application for revision—

1 year from the end of the financial year in which such application is submitted by the assessee. While computing this period of limitation following periods shall be excluded-

i)                   Period taken in giving an opportunity of re-hearing u/s 129

ii)                 Period during which proceeding u/s 263 are stayed by an order/ injunction of any court.

However, An order passed u/s 264 can be passed at any time in consequence of, or to give effect to, any finding or direction contained in an order of the ITAT, high Court or Suprme Court.

Powers Of CIT:

The CIT can pass such order as he thinks fit, subject to the restriction that the order passed by him cannot be prejudicial to the interest of assessee-

  • An order passed by CIT declining to interfere,
  • An order in which neither favour nor unfavour is done by the CIT,
  • An order in which both favour and unfavour are done by the CIT but the net result is favourable to the assessee or NIL.

Payment Of Fee:

A fee of Rs. 500/- is to be paid.

No Revision In Some Cases:

CIT cant revise following orders u/s 264-

a)     An order which is appellable to CIT(A)/ITAT cannot be revised so long the time within which appeal may be made, expires. However, the CIT can make revision if the assessee waives his right of appeal.

b)     If the order has been made subject matter of appeal before CIT(A)/ ITAT, revisional powers of CIT come to an end. Thus CIT cannot make revision during the pendency or even after the disposal of appeal.

Remedy Against Orders U/s 264:

Since the order u/s 264 cannot be prejudicial to the interest of assessee, normally there is no need of filling further appeal etc. however, if the order is not acceptable, the assessee can avail following remedies—

a)     If the order suffers from a prima facie mistake, an application u/s 154 for rectification can be filed to the CIT or

b)     If the order suffers from a disputable mistake, the assessee can file a writ petition under article 226 of the constitution of india as decided by the supreme court in case of Dwarka Nath V/s ITO 1965 57 ITR 349.

Some Relevant Point

  • Those cases which are not appealable before the CIT (A) can be referred by the assessee to the CIT for revision or modification.
  • Even those orders which are not appealable before the Dy.CIT(A) or CIT(A), may be referred by the assessee to the CIT for seeking revision or modification. [Dwarka Nath Vs ITO 57 ITR 349 (SC)].
  • A remedy u/s 264 is contemplated by the Legislature only to meet a situation faced by an aggrieved assessee who is unable to approach the appellate authorities for relief and has no other alternative remedy under the Act.
  • The revisional powers conferred by Section 264 on the CIT are very wide. It is open to the CIT to entertain even a new ground, not urged before the lower authorities, while exercising revisional powers. — C.Parikh & Co Vs CIT 138 ITR p.689 (All).
  • Hindustan Aeronautics Ltd. Vs. CIT (2000) 243 ITR 808 (SC)-The CIT does not have power to revise an order u/s 264 if the same order has been made subject-matter of appeal to the ITAT, even though the relief claimed in appeal is different from the relife claimed in revision and irrespective of fact whether the appeal is filed by the assessee or by the revenue.
  • CIT can interfere both on question of fact and law as his power is co-extensive with that of the original and the first appellate authority.
  • Second time revision by CIT is not possible.
  • The assessee should be given an opportunity      of being heard by fixing a date of hearing even where a written submission is there.
  • CIT’s power u/s 264 is discretionary. CIT may even refuse to interfere in a case where, for reasons to be stated, the assessee has disentitled himself to get the relief at the revisional stage by his own conduct.

An order u/s 264 cannot be prejudicial to the interest of the assessee.

ACIT Vs M.V.Kenlucky, 60 ITD 492 (Pune – Trib)

In this case, on a petition U/s 264 by the assessee the CIT set aside the assessment, with a direction to make a fresh assessment. The AO completed the fresh assessment without any change in total income and tax originally assessed. The AO also initiated penalty proceedings U/s 271(1)(c), though no such penalty proceedings were initiated in the original order of the AO. The Hon. Tribunal held that order U/s 264 of the CIT, had indirectly resulted in the levy of penalty U/s 271(1)(c) and as such was prejudicial to the interest of the assessee. The cancellation of order U/s 271(1)(c) was accordingly held to be justified.

A new claim for deduction made by the assessee in revision petition is to be examined on merits

Rashtriya Vikas Ltd Vs CIT 99 CTR 68.

The CIT has the power U/s 264, to issue directions to the AO.

Mohammadi Begum Vs CIT 158 ITR 622 (AP)

The assessee can file a revision petition against an addition erroneously accepted by him.

The CIT cannot reject a petition for revision on the ground that the assessee itself had returned income which it claims in the revision petition as not its income. In such a situation the CIT is bound to apply his mind to the question whether the assessee is liable to be taxed in respect of that income. [Pt. Sheonath Prasad Sharma Vs CIT 66 ITR p.647 (All)].

Even an order passed in violation of the principles of natural justice can be corrected U/s 264.

Mohammadi Begum Vs CIT 158 ITR p.622 (AP)

Even an order wherein the principles of natural justice have been ignored, can be corrected in exercise of revisional powers U/s 264.

  1. C. Appeal :

Coverage :-

  1. 1. Drafting of Appeals
  2. 2. Filing of Appeal
  3. 3. Precautions to be taken.
  4. 4. Various Appellate authorities.
  5. 5. Procedure
  6. 6. Preparation & Appearance.

  1. 3. APPEALS :

The term “Appeal” is not defined in the act. It means a complaint to higher authority against the order passed by lower authority in order to get justice and relief.

–        Redressal of grievances by way of appeal is not an inherent or constitutional right  but a statutory right and hence is subject to the provisions of the statute and the restrictions prescribed therein.

C.I.T.  v/s S.C. Shah (1982) 137 ITR 287, 294 (Bom).                                                             CIT V/s Ashoka Engineering Co. (1992) 194 ITR 645 (SC)

3.1 Appeal to C.I.T. (A) :

The First appeal is to the C.I.T. (A).

Exception: S. 253 (1):

a) Orders u/s 154, 271, 271A & 272A passed by C.I.T. (A).

b) A.O. u/s 158BC in case of search action after 30.6.95 but before 1.1.97.

c)      Order of C.I.T. u/s.12 AA , 263,271, 272A, 154 order passed by C.C.I.T. Director General or Director u/s 272A.

d)     An Order passed by an assessing officer u/s. 115(1) VZC.

Second appeal lies to the Tribunal.

3.1.1)  Appealable Orders:

–           Section 246A (1) enlists orders against which appeal lies before C.I.T. (A).

–           This section provides the specific orders, which are appealable.

–           However, in Sec. 246A (1) (a) there is a general clause covering “an order against the assessee where the assessee denies his liability to be assessed under this Act.”

–           The scope of this clause has been considered by the courts.

a)   C.I.T. v/s Kanpur Coal syndicate 53 ITR 225 (S.C.) Denial of liability will embrace denial of liability to tax under particular circumstances.

b)  Central Provinces Manganese One Co. Ltd. V/s C.I.T. 160 ITR 961 (S.C.).

1. C.I.T. v/s Mustakhuse in Gulamhuse Ghia 143 ITR 95 (Bom).

2. C.I.T. v/s Gannon Dunkerley & Co. Ltd. 119 ITR 595 (Bom)

Owner levying interest is appealable when assessee denies total) liability to pay interest.

c)   C.I.T. v/s Prakash Cotton Mills  P. Ltd. 188 ITR 713 (Bom).

Appeal does not lie against quantum of penal interest.

d)  C.I.T. v/s B. V. Subnani 177 ITR 56 (Bom).

Where liability to be assessed to tax including interest u/s 139 (1) was to some extent disputed an appeal against levy of interest would be competent.

e)   C.I.T. v/s Devichand Panmal 160 ITR 545 (Raji).

If an appeal against assessment, it is open to the assessee to attack levy of penal interest u/s 215 also and such appeal is maintainable.

3.1.2. Section 248:

–           Person having deducted and paid tax can file appeal under this section (if he denies his liability to make such deduction) or declaration that he is not liable to make such deduction.

S.M.M v/s C.I.T. 33 ITR 529 (Bom).

–           An employer who has not deducted or paid tax cannot file appeal u/s 248.

–           Therefore a person, denying his liability to deduct and pay tax may file appeal u/s 246A (1) (a).

3.1.3        Who can file appeal : Any assessee aggrieved?

–           Revenue has no right of appeal. before 1st Appellate  authority. Remedy for revenue is S. 154, S. 148, S. 263.

–           S.2 (7) ‘Assessee’ means a person by whom any tax or any other sum of money is payable under the Act and includes a person who is deemed to be an assessee or deemed to be an assessee in default.

–           Assessee

–           Legal heir of assessee – on death of assessee

–           Successor –after dissolution etc.

–           Assessee in default – a person who is made to pay tax etc.

–           A member of HUF in case of HUF.

–           Amalgamated company on amalgamation.

–           Representative assessee- assessee and the beneficiary-

–           S. 166 tax can be recovered from beneficiary.

–           Firm and Partners.

–           Benoy Kurian v/s Agr. I.T.O. (1998) 234 ITR 617, 623-24 (Ker). Kerala Agr. I.T. Act, I.T.Act, 1991. Recovery of tax dues of B.D. by sale of property purchased by petitioner from B.D. Petitioner aggrieved entitled to file appeal.

–           Om Prakash v/s State of Haryana (1996) 100 STC 41, 47-48 (Punj). Haryana General Sales Tax Act, 1973. Recovery proceedings initiated against surety. Surety held entitled to prefer appeal.

–           Agreed Assessment: – Basic principle is that appeal against agreed addition is not maintainable.

i)                   Sterling machine Tools v/s C.I.T. 123 ITR 181 (All).

ii)                 Ramanlal Kamdar v/s C.I.T. 108 ITR 73 (Mad).

iii)               Remeshchandra & Co. v/s C.I.T. 168 ITR 375 (Bom).

–           Exceptions:

i)                   No estoppel  against law I.T.O. v/s G.E.Hawn (1987) 21 ITD 553 (All).

ii)                 Appeal against addition agreed to under misapprehension is maintainable.

a)         Dina Nath Prem Kumar v/s I.T.O. (1982) 13 TTJ (Del) 442.

b)        R.T. Balaschramaniam v/s I.TO. (1994) 50 ITD 513 (Mad) (SMC).

3.1.4)     Time Limit for filing appeal : Section 249 (2) – 30 days time:

a)         S.248, from date of payment.

b)        A.O. & penalty : from date of service of notice of demand.

c)         Other case : from date of intimation of order.

S.249 (3) – Condonation of delay for sufficient cause.

3.1.5)     Payment of agreed tax 249 (4):

a)         Tax due as per return.

b)        Where no return filed : advance tax as per assessed income must be paid before filing appeal.

Otherwise appeal will not be admitted.

Provision : Power to exempt payment for good and sufficient reasons in case

of (b) only.

–           Prior to 1/4/1989 power was in both the cases.

–           Consider case where appeal filed without payment of tax in clause. (a)

–           Subsequent payment of tax.

–           Condonation of delay

3.1.6)  Fees : Section 249(1) :

i)          Total income upto Rs. 1,00,000                   –           Rs. 250/-

ii)         Total income upto Rs. 2,00,000                   –           Rs. 500/-

iii)        Total income above Rs. 2,00,000                –           Rs. 1,000/-

iv)        Where subject matter of appeal is not covered under clauses (i), (ii) & (iii) – Rs. 250/-

Fair interpretation: in case of an appeal against the assessment order (i), (ii) & (iii) will apply. In all other cases (iv) Rs. 250/- will apply. Which include in case loss return filed.

Memorandum explaining proposed amendments:

Appeals are also filed on issues such as TDS defaults, non-filing of returns, etc., which may not have any nexus with the assessed income. It is therefore, proposed to provide a fee of Rs. 250/- for appeals before the Commissioner (Appeals ) and Rs. 500/- for appeals before the Income Tax Appellate Tribunal  for the residuary group of appeals which cannot be linked with assessed income or assessed net wealth.

3.1.7)  Form of Appeal – Grounds of Appeal – S. 249 (1):

–           In Form No. 35-Rule 45(1).

–           Statement of Facts & Grounds of Appeal.

–           Verify facts on record not considered by A.O.

–           Considered facts not on record – for additional evidence.

–           Considered – Claims made and not allowed/ not considered by A.O.

–           Find out claims not made and not considered.

–           Make such claims in appeal.

–           Find out grounds for claims considered/not considered.

–           Raise such grounds not raised and not considered.

–           All relevant grounds must be taken.

–           Grounds must be precise and clear and complete.

–           Challan of fees paid for filing appeal before CIT (A).

–           Grounds must not be in the form of arguments (long) but must communicate the issue and points to be considered by the Authority – This helps at the time of hearing.

–           The grounds on similar issues, additions and points may be clubbed.

e.g.       – a particular addition.

– rejection of books of accounts.

– validity of reopening

– Technical grounds.

3.1.8)     Powers of C.I.T. (A)- Powers enjoined with duty to be fair, just and to do justice :

3.1.8.1) Power to admit additional evidence(Rule 46A):

S. 250 (4) : Commissioner may make such further enquiry as he thinks fit or may direct the A.O. to make further enquiry and report the result of the same to him by way of Remand report .

This includes suo moto admission of additional evidence.

Rule 46A : Production of additional evidence  before CIT(A)

1)        Production of additional evidence (by right). Assessee entitled to produce additional evidence. Only

a)         Where A.O. refused to admit evidence.

b)        A.O. called upon to produce evidence –

Assessee could not produce evidence before assessing officer  for

sufficient cause.

c)         Assessee could not produce evidence for sufficient opportunity.

d)        A.O. passed order without giving sufficient opportunity.

2)        Order of admission must be in writing and for reasons.

3)        Assessing Officer must be given reasonable opportunity.

4)        This is without prejudice to the suo moto power of the Commissioner.

–           Smt. Prabhavati S. Shah v/s C.I.T. 231 ITR 1(Bom).

–           Powers u/s 250 being quasi judicial, it is incumbent in him to exercise the same, if the facts and circumstances justify. These powers are not restricted by Rule 46A.

–           Thus an additional evidence, which

–           Was not in existence.

–           Was not available

–           Not produced for sufficient reasons.

–           Needs to be admitted in first appeal.

–           If it is relevant necessary for just decision in the case.

3.1.8.2) Additional Grounds of Appeal : S. 250 (5) (Fresh/Additional Ground):

Allow additional ground of appeal at the time of hearing if he is satisfied that the omission was not willful or not unreasonable.

i)          When the relevant material is on record the additional ground  can be entertained by the Tribunal.

National Thermal Power Co. Ltd. V/s C.I.T. 229 ITR 383 (SC).

ii)         C.I.T. v/s Western Rolling Mill Pvt. Ltd. 156 ITR 54 (Bom).

Additional claim by way of additional ground before AAC is allowable when material is on record.

iii)        Powers of C.I.T. (A) are to terminus with the powers of the A.O..

Investors Industrial  Corporation Ltd. 194 ITR 548 (Bom).

3.1.18.3) Sec. 251 (1) (a) : In case of appeal against A.O. Power to confirm – can confirm on different ground such as:

a) Reduce

b) Enhance

c) Annual

d) Set Aside

e) Remand

f ) Confirm

Note : Power to set aside and remand has been withdrawn with effect from 1/6/2001.

Sec. : 251 (1) (b) : in case of order of penalty.

Power to confirm

Or cancel

Or vary either to enhance or reduce penalty

No power to set aside or remand

Regular commance has got a right to waive interest so levied u/s 234A, 234B & 234C

Sec. 251 (1) (C ) in any other case as it thinks fit.

3.1.8.3)           Power of Enhancement : Prior notice necessary.

i)          C.I.T. v/s Rai Bahaddur Hardutraj Motilal Chamaria 77 ITR 443 (S.C.)

Power restricted to sources of income which have been subject matter of consideration by I.T.O.

ii)         C.I.T. v/s Shapoorji Pallonji Mistry 44 ITR 891 (S.C.) Restricted to income mentioned in return and considered by I.T.O.  in assessment order.

iii)               Lokenath Tolaram v/s C.I.T. 161 ITR 82 (Bom).

In CIT v/s Assam Travels Shipping Services 199 ITR 1 (S.C)

A.O. levied less than minimum penalty. A.A.C. cancelled penalty. Tribunal held that it had no alternative but to uphold the order. High Court upheld the order of the Tribunal. S.C. held that the A.A.C. should have enhanced.

3.1.8.5) Power to levy penalty:

S.271 (1), 271A- Provides power to levy penalty Rs. 25,000/- .

S. 271 AA – Penalty for failure to keep & maintain information & documents in respect of International Transaction which will be a sum equivalent to 2% value of each such international transaction .

3.1.8. 6) Power to stay recovery: Section 226.

During pendency of appeal the C.I.T. (A) has inherent power to stay recovery of demand.

i)                   Paulsons Litho Works v/s I.T.O. 208 ITR 676 (Mad).

ii)                 Prem Prakash Tripathi v/s C.I.T. 208  ITR 461 (All).

iii)               Tin Manufacturing Co. of India v/s C.I.T. 212 ITR 451 (All).

iv)               Kesav Cashew Co. v/s C.I.T. 210 ITR 1014 (Ker).

v)                 Pradeep Ratanshi v/s A.C.I.T. 221 ITR 502 (Ker).

C.I.T. has no power, only C.I.T. (A) has power to stay recovery proceedings so initiated

3.1.8.7) Time for disposal: Section 250 (6A):

Where it is possible, to decide within one year from the end of the financial year in which appeal is filed under sub section (1) of section 246A.

3.1.8.8) Important Point

  • The CIT(Appeal) shall not enhance an assessment/penalty unless a reasonable opportunity of hearing is given to assessee.
  • In addition to specified powers u/s 251, the CIT(A) is also having general power relating to enquiry and production of evidence etc. u/s 131.
  • The Hon’ble Supreme court has decided CIT Vs. Kanpur Coal Syndicate (1964) 53 ITR 225 and Jute Corporation of India V/s CIT (1991) 187 ITR 688 Wherein it was held that the powers of the CIT(A) are conterminous with the powers of the assessing officer. The CIT(A) can do what the assessing officer can do and also what the assessing officer has failed to do. Thus, the CIT(A) has very wide powers. However, it has been held that the CIT(A) cannot search for and assessee a source of income which neither the assessee has included in the return not the AO has dealt with in the assessment order.
  • Normally, the CIT(A) annulles an assessment or penalty order in following situations and that too, only if the mistake committed by the assessing officer is incurable:

a) The Assessing officer has completed assessment/penalty without issue/service of notice,

b) The assessing officer has acted without authority of law or beyond such authority/jurisdiction, or

c) The assessing officer has not complied with time-limitation requirement.

3.2) Proceedings before Tribunal :

3.2.1) Appealable orders : Sec 253(1):

a)         Order of C.I.T. (A) u/s 250, 154,271, 271A,272A

b)        A.O. u/s 158BC in respect of search between 1/7/1995 and 31/12/1996

c)         Order passed by Commissioner u/s 263,271, 154, 272A 154 , by Chief Commissioner, Director or General Director  u/s 272A. Commissioner’s order u/s 12AA.

3.2.2) Who can file appeal : Assessee against all order u/s 250, 263

S.253 (2): A.O. against orders u/s 250 & 154, 271, 271Aor sec . 272A of C.I.T. (A).

3.2.3) Time limit : 253 (3), (4) & (5) :

Within 60 days of communication of the order appealed against.

30 days in case of 253 (1) (b) – order u/s 158BC.

3.2.4) Cross Objection : S. 253 (4) :

A.O. and assessee is entitled to file cross objection within 30 days of receipt of notice of appeal.

Meaning of cross objection. (What to contain- grounds not decided or decided against the assessee)

3.2.5) Power to condone delay : S. 253 (5) :

Empowers the Tribunal to condone delay for sufficient cause.

3.2.6.) Form of appeal:

_           Appeal From No.36.              Rule 47(1)

–           Cross Objection Form 36A   Rule 47(2).

–           Ground of Appeal

Statements of facts, CIT (A) order, Grounds of Appeal & Statement of Facts  filed before CIT (A), Assessment order and challan.

3.2.7) Fees :

i)          S. 253 (6): On appeal by assesses:

a)         Total income upto Rs. 1,00,000/-   –           Rs. 500/-

b)        Total income upto Rs. 2,00,000/-   –           Rs. 1,500/-

c)         Total income above Rs. 2,00,000/-               1 percent of assessed income

with the maximum limit of  Rs. 10,000/-

d)        Where subject matter of appeal is not covered under

(a) (b) or  (c) -Rs. 500/-

ii)         253 (6) Proviso: No fees:

In appeal by revenue or on cross objections by revenue.

iii)        253 (7) : Application for stay of demand – Rs. 500/- for each assessment year.

3.2.8) Power of Tribunal: 254 (1) to pass an order as it thinks fit. See Para No.3.2.8.3 below.

3.2.8.1) Power to allow additional grounds:

National Thermal Power Co. Ltd. 229 ITR 383 (S.C.) No reason why a question of law should not be allowed to be raised when it is necessary to consider that question in –Question on the basis of facts on record.

3.2.8.2) Additional evidence:

Rule 29-30, & 31 of I.T.A.T. Rules

Production of additional evidence

Examination of witness

Filing of affidavit

Either before the Tribunal

Or before such Income-tax Authority as the Tribunal may direct.

Rule    29-Production of additional evidence before Tribunal

Rule    30-Mode of taking additional evidence

Rule    31-Additonal evidence to be submitted to the Tribunal.

3.2.8.3 ) Pass such order as it thinks fit :

In the interest of justice.

Includes to confirm, reduce, cancel, set aside, remand- for fresh disposal or for remand report.

3.2.8.4)  has no power to enhance :

Meaning of :

In department appeal, restoration is possible, but further enhancement will not be permissible.

3.2.8.5) Power to grant stay : Fees Rs. 500, Rule 35A Inherent power : I.T.O. v/s M.K. Mohammed Kunhi 71 ITR (SC)

a)         Merits of the case must be the first criteria for granting stay. Many a times this criteria is ignored.

b)        The financial hardship to the assessee is the second criteria which is mainly looked at by the member.

c)         Security for the future recovery in case of decision going against the assessee is another criteria – which is important.

In this respect production of balance sheet, bank statement any other, supporting proving financial hardships is a material factors.

It will disclose availability of liquid funds and the assets position.

Rule 35A (2) (V) provides : Whether any application for stay was made to the revenue authorities concerned, and if so the result thereof (copies of correspondence if any, with the revenue authorities to be attached) – as a requirement of application.

3.2.9) Rectification : Section 254 (2) Fees Rs.50, Suo moto rectification can be done within 4 years of the date of the order. Application to be made within four years from date of receipt of the orders.

Mistake apparent from record : Includes

1)        Restoration of exparte  order.

2)        Grounds raised, not considered.

3)        Submissions made not considered.

4)        Inherent contradictions.

5)        Incomplete orders/ Not Speaking order.

3.2.10) Paper book :

I. Papers on record

II. Additional evidence.

Service to Respondent at least a week before.

Filing at least a week  before the date of hearing for Department Representative

3.2.12) to award cost :

Section 254 (2B) : The cost of any appeal to the Appellate Tribunal shall be at the discretion of that Tribunal.

Memo Explains Provisions :

To discourage filing of frivolous appeals it is also proposed to empower the Appellate Tribunal to award cost.

3.3) Appeal to High Court : S. 260A & B

Appeal shall lie to High Court if the case involves substantial question of law.

3.4) Appeal to Supreme Court : S-261

Appeal shall lie to Supreme Court only it the case involves substantial question of law, provided High Court, Certifies the case to be fit before Supreme Court or Assessee can file the case before Supreme Court u/s136 special leave petitions.

  1. D. ISSUES ARISING OUT OF INCOME TAX NOTICES RECEIVED ON ACCOUNT OF HAWALA TRANSACTION IN MVAT

Currently the sales tax department notified various parties as Hawala Operator. List of those parties is also available on MVAT site. Due to this racket Income tax department re-open the cases u/s 148 of those parties who have transaction with this parties. And made addition/disallowance on account of transaction with hawala parties on following grounds that –

–          assessee transaction are bogus.

–          Assessee books of account are not correct,

–          Assessee take accommodation entries to adjust his profit

–          Assessee take Bill to adjust his stock quantity

But no addition will be sustainable if.

I) TRANSACTIONS IS GENIUNENESS

a)        Whether a transaction is genuine or not is basically a question of fact . Where there was concurrent finding of facts by CIT (A) as well as the Tribunal that the transaction of purchases and sale of jute was genuine and the assessee suffered loss therein, the loss cannot be disallowed on the basis of some discrepancies noticed in the books of the seller.

The assessee could not be punished for mistake in the seller’ books. The Tribunal held that the transaction was genuine and allowed loss.The finding of the Tribunal was held justified.

CIT v. Basant Investment Corporation [1999] 238 ITR 680 (Cal),

b)     The genuineness of transaction was doubted by the AO. The assessee furnished the name of the company, number of share purchased, date of sale amount of purchase and sale money etc. The assessee had discharged its initial burden.

The claim of the assessee could not be denied merely because the broker, through whom the shares were purchased and sold, failed to produce his books. That does not mean that the transaction was not genuine.

CIT V. KORLAY TRADING CO. LTD [1998] 232 ITR 820 (CAL)

II)       No addition will be made without any evidence.

Addition were made to the income of the assessee on the ground that the purchases were fictitious. The Tribunal found that there was no evidence that purchases were bogus. Deletion of addition was held to be justified.

CIT V. KASHIRAM TEXTILE MILLS (P) LTD [2006]284 ITR 61 (GUJ)

SARASWATHI OIL TRADERS V. CIT [2000] 254 ITR 259 (SC),174 CTR 108 (SC)-The Tribunal deleted the additions made on account of bogus purchased as well as addition made on account of unaccounted sales. No question of law arose.

III) Without find any discretionary in books of account, books of account cannot be rejected.

i)                   DY.CIT V. BRAHMAPUTRA  STEELS (P) LTD. [2002] 122 TAXMAN 32 (IATA – GAUHATI)]-

assessee had maintained daily stock register in respect of purchase of raw materials and production of finished goods as required by the Central Excise Act and also furnished weekly, fortnightly and quarterly returns before authorities, factum of purchase of raw materials could not be disputed. Therefore, transactions of purchase of raw materials were genuine and accepted.

ii)                 ITO VS. SURANA TRADERS C/O S.G. SALECHA AND CO.

: No mistake was pointed out by the AO in the stock register and quantitive tally furnished by the assessee and genuineness of the transactions was verified from the books of account.

IV) Quantitative tally then no addition will made

  1. Balaji Textile Industries (P) Ltd v. ITO(1994) 49 ITD 177(Bom)
  2. DCIT v. Adinath Industires (2001) : 252 ITR 476 (Guj)
  3. CIT v. M K Brothers (1987)  : 163 ITR 249 (Guj)
  4. DCIT v. Adinath Industries (2001)  : 247 ITR 35

V) Estimation should have some basis of evidence

i) GANGA RAM BALMOKAND v CIT (1937) 5 ITR 65 (LAHORE)

When the A.O rejects the accounts and estimates the income, the A.O must base some estimates on evidence and not on conjectures.

ii) MYSORE FERTILIZER CO v CIT (1966) 59 ITR 268 (MAD)

The law provides that the A.O shall make the assessment to the best of his judgment. This means that he must make the assessment according to the rules of reason and justice. He cannot estimate the profit according to private opinion, humour and the estimate must not be arbitrary vague or fanciful.

VI) Other Relevant Judgement

ACIT vs. Kisan Lal Jewels (P) Ltd 147 TTJ 308(Del)

The assessee was engaged in the business of certain goods .In assessment Ld. A.O. held held that the assessee had made the purchases of goods from the disclosed parties and assume that the assessee would have made the purchases of goods from the disclosed parties and assume that the assessee would have made the purchase from the parties not recorded at in the books of accounts, accordingly made addition U/S 69c in respect of purchases made from undisclosed source.

Assessee had admittedly exported goods involving several channels of custom department and bank accounts thus admittedly goods were purchased by assessee for said export. assessee while furnishing necessary information regarding transaction and aforesaid parties like purchase bills issued against goods purchased, sales –tax registration of parties ,PANs ,their confirmations and bank statement showing debit of amount paid through account payee cheques to them in account of assessee  and credited in bank account of seller , had discharged its primary onus lower authorities were not justified in making and sustaining a huge addition on account of bogus purchase U/S 69c on the basis of some probabilities that assessee might not have purchased goods exported from above parties.

Assessee has duly explained purchases made particular part and Ao has no creditable evidence to support his case that purchases in question were not made from aforesaid parties and the same were not made from aforesaid parties and same were made from some were else .therefore addition in question is deleted  CIT(A), has correctly appreciated full factual as well as legal matrix , as discussed and there is no error in finding of CIT(A) in this regard and same is confirmed”.

CIT vs. Leaders Valves (p) Ltd   [285 ITR 435 (P&H – High Court)

The assessee is engaged in the manufacture of valves, cocks, boiler fittings, etc. the AS.O observed that assessee has made purchase gun metal scrap in collution with certain suppliers and there after invoking sec 145 made addition of bogus purchase.

The Ld. CIT (A) deleted the entire disallowance of purchase. The Hon’ble ITAT upheld the order of Ld. CIT (A) on holding that addition is not sustainable.

The Hon’ble High court dismissed Revenue’s appeal and decided that the addition on account of bogus purchases cannot be sustained for reasons that:-

(a)  In case the purchase of goods is treated as bogus, then it is impossible to manufacture the goods as shown to have been manufactured by it out of purchases.

(b) Further, the supplier of the assessee is in existing business and has vast financial resources of their disposal;

Milk Foods Ltd vs. DCIT 65 TTJ 848(Del)

The assessee is engaged in running the milk plant wherein it used coal and rice husk for use in the boiler for generation of required steam. A search action was carried on at the premises of the assessee. During search action, it was revealed that the assessee has made bogus purchase of rice husk. However, the supplier during assessment proceedings confirmed the supply of goods. The Ld. A.O. observed that against cheques issued by the assessee, the cash was withdrawn and ultimately the bank account was closed and further held that the supplier has no capacity to supply the goods and thus made addition of bogus purchase. The Ld. CIT(A) confirmed the disallowance of purchase.

The Hon’ble ITAT, Deleted the disallowance of purchases on the reasons that:-

(a) The assessee had regularly maintained ad tax audited its books of accounts and no irregularities is pointed in assessment, thus rejection of the books U/S 145 is erroneous;

(b) No material evidence was found nor seized during search action;

© The consumption of rice husk in milk processing is established by the assessee and consumption ratio is proved.

Ultimately the Hon’ble ITAT deleted the major addition made on account and bogus purchase.

M/s. J.R. Solvent industries PVT Ltd Vs.  ACIT 68 ITD 65(Chd) (TM decision is equivalent to special bench)

The assessee was engaged in the manufacture of rice burn oil. The A.O. Held the purchase of raw material viz. Rice bran as bogus for the reason that the supplier is not traceable and that supplier’s  telephone number , sales tax number, transport vehicle number are all bogus and that the supplier had withdrawn the amount immediately against assessee’s cheque payment. The Ld. A.O. rejected assessee’s books of accounts u/s 145(2) and made addition of entire purchases. The LD. CIT(A) observed that assessee had maintained production records and yieldd shown was reasonable, accordingly deleted major disallowance and restricted additions to the extent of inflation of purchase price and wastage. The Hon’ble ITAT bench comprising of 3 members against revenue’s appeal and assessee’s cross objection, decided that-

(a) The raw material purchased from whatsoever source had went into production as established by day to day records kept by the assessee and no discrepancies were pointed in assessment;

(b) The yield shown by the assessee is reasonable and thus if product stood accepted, the quantity of purchases would also stand accepted;

In the end, Hon’ble ITAT Dismissed the revenue’s appeal and deleted the additional on account of bogus purchase.

Kasat paper and pulp ltd Vs ACIT 74 ITD 455(PUNE).

The assessee was engaged in manufacturing activity . a search and seizure action was conducted at the premise of the assessee . In search assessment, Ld. A.O. held that the purchase of steel from a supplier- M is bogus.

In appeal, the Hon’ble ITAT held that the purchase of steel from supplier –M and usage in construction of building could be held as in genuine under following reasons-

(a) The managing director had started that the steel has been purchased from supplier- M

(b) The A.O. has not brought any positive material on record to prove the falsity of the entries in the books of accounts  and that the books of accounts cannot be rejected in the light hearted manner on mere suspicion and surmises however grave;

(c) The assessee had produced chartered engineer’s report to establish the use of steel;

CIT vs. Faqirchhand chamanlal 262 ITR 295 (P&H)

Revenue’s appeal also dismissed by hon,ble supreme court in 268 ITR 215(St)

“It is also a well settled preposition that the presumption that howsoever strong cannot substitute evidence and if there is no direct nexus on the point , no  addition in block assessment can be made. In the instant case also, there was no evidence with the A.O. in support of his contension that the assessee, in fact, earned the income by way of interest”

ACIT vs. Nem Prakash Khandaka Jain 35 TTJ 382(JP)
“However, we have come to the conclusion that all the arguments advanced by the departments against the assessee can at better arouse a suspicion that it might have been the assessee’s own investment but  it is a well know principle of law that suspicion however strong cannot take the place of proof . In the Instant case also as against the suspicion aroused by the circumstances so also the statement of shri M. there is ample evidence to prove that the allegations of the department cannot be accepted”

CIT vs. Balchand Ajit kumar 135 Taxman 180 (High Court- MP)

“Total Sale Cannot be regarded as the profit of the assessee. The net profit rate has to be adopted and once a net profit is adopted, it cannot be said that there is perversity of approach. Whether the rate is low or high, it would depend upon the facts of each case. In the present case net profit rate 5% has been applied. It is not appropriate that the same requires to be enhanced. It is high. In any case, it cannot be said that there has been perversity of approach.”

CIT vs. President Industries 258 ITR 654 (Guj – High Court)

“It cannot be a matter of an argument that the amount of sales by itself cannot  represent the income of the assessee who has not disclosed the sales. The sales only represented the price received by the seller of the goods for the acquisition of which it has already  incurred that only forms part of the profit included in the consideration of sales”

Man Mohan Sadani vs. CIT 304 ITR 52 ( MP – High Court)

“Entries sale proceeds of the assessee cannot be added to his income for assessing income from undisclosed sales; net profit rate has to be applied”

ITO vs. Gurubachansingh J. Juneja 55 ITD 75 (TM)

“Addition of entires  unaccounted sale cannot be made as sales is not income and only by application of G. p. rate can be added; however, unaccounted sales were computed at a particular figure, CIT (A)was not justified in directing addition  by applying G.P. rate to a lower figure agreed by assesseee”

V.R. Textiles vs. JCIT (2011) 11 ITR 476 (Ahd) (trib)

“The CIT (A) wasa, therefore, justified in applying gross profit rate against   unaccounted sales  for the purpose of making the addition on account of undisclosed income of the assessee. Similarly, CIT (A) was justified in considering the issue of deployment of minimum capital investment for the purpose of making and rotating the sales outside the books of account. These facts are sufficient to hold that the books results of the assessee were not reliable and have rightly been rejected by the authorities below. Rejection of book   results is also not disputed by the assessee. The counsel for the asseesee has not pointed our any error in the finding of the CIT(A) to that extant. Considering the facts and circumstances noted above. We are of the view that the CIT (A) was justified in applying gross profit rate as against undisclosed sales made by the assessee for the purpose of making the addition against the assessee. To that extant the findings of the CIT (A) are maintained”

R.R. carrying corporation vs. ACIT (2009) 126 TTJ 240(Cuttack)

“ After Going through the rival submissions and materials on records, we find that the Hon’ble Gujraty High Court in the case of president Industries (supra) has held that the entire addition of undisclosed sales cannot be added . Only the profit embedded in the sale proceeds can be  taxed. Similar view has been taken in the case of Balchand Ajit Kumar (Supra) and following the similar reasoning, Cuttack Bench  of the Tribunal in the case of Balasore Synthetic (P) Ltd. (Supra) has decided the similar issue in favour of assessee wherein AO was directed to adopt GP rate declared by the assessee for the year under consideration. The facts being same, so following  the same reasoning, we are of the considered view that in case of the difference between the assessee’s books and as per TDS certificate, then on the said difference, the only embedded portion of the profit is to be taken into consideration. Therefore, we set aside the order of revenue authorities on the issue and direct the AO to adopt the GP rate declared by the assessee for the assessment year under consideration and compute addition in question accordingly.”

ACI vs. Aggarwal Sanitary & Hardware Co.  82 TTJ (CHD ) 501

“Addition made on account of unrecorded purchases and undisclosed commission –AS regards unaccounted purchases, only the resultant profit  was to be added and not the entire amount”

K.C.K.A. Gupta vs. ACIT 90 TTJ (Hyd) 555

“In All the cases, there were unaccounted sales. The AO has taken a View in the matter and accepted the contention of the assessee that a percentage of the sales should be considered as undisclosed income. The ADI as well as the Addl. CIT approved of this view. The view taken by the AO that only a percentage of undisclosed sale is to be considered as undisclosed income is a view taken by some of the courts and Tribunals of this country and hence it is a permissible view and cannot be termed as unsustainable in law. On this ground, the revisionary orders under s.263 have to fail as the AO ha taken one of the permissible views in law.”

Abhishek Corporation vs. DCIT 63 TTJ (Ahd) 651

“Even though it is established from seized documents that asessee was receiving premium/ ‘on money’ on booking of flats belonging to third parties,   entire receipts of ‘on money/premium cannot be treated as undisclosed income of assessee; only net profit rate can be applied on unaccounted sales/receipts for making addition.

Kachwala Gems vs. JCIT 288 ITR 10 (SC)

“It is well settled that in a best judgment assessment there is always a certain degree of guesswork. No doubt the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment, and should not act totally arbitrarily”

ITO vs. Girish M. Mehta 105 ITD 585 (Rajkot)

“Best judgment assessment is not a provision to penalize the assessee, but is a machinery provision to enable the Revenue to assess a person when situation warrants an assessment. The order under Sec. 144 is to be made to the best of the judgment   of the AO which means, the order has to be rational and is to be best on ab honest guesswork for which some valid basis is available to the AO. While estimating the GP the AO Should be fair and reasonable and should keep into account the turnover and the GP of earlier  years along with all the facts and circumstances of the case. By rejecting book result, the AO does not get absolute and unbridled powers to estimate whatever profit he wants, as per his sweet-will”

DCIT vs. Adinath Industries 252 ITR 476 (GUJ 0 High Court)

“The assessee was engaged in manufacturing activity. On the basis of information received from sales Tax Departments, the Ld AO held that the assessee’s supplier M/s Geeta Industries is a mere billing agent and is not a genuine seller. Accordingly, an Addition on account of bogus purchase was made in assessment.

The Ld. CIT(A) and Hon’ble  deleted the addition .

The Hon’ble High Court upheld the order of ITAT on deleting the addition of bogus purchase on ground that  :-

a)     The requisite details of purchase are furnished.

b)     The relevant materials showing details of purchase of material and its use in production filed.

c)      The other documents being receipt note, entries in Excise register, production registers maintained under Excise laws are furnished.

In end, hon’ble high Court dismissed the revenue appeal.

CIT vs. M.K. Brothers 163 ITR 249 (Guj –High Court)

The assessee was engaged in manufacturing of spindles and machinery parts. The Ld. A.O. observed that assessee had made bogus purchase of  pig iron,  scrab and spindle steel from 4 suppliers . The Ld. A.O. also learnt that the sales 4 suppliers. The Ld. A.O. learnt that the sales Tax Authorities  had carried on investigations which revealed that such suppliers were involved in a racket of issuing bogus bills. The confessional statements admitting the ingenuine transaction were recorded of such suppliers. Accordingly, Ld. A.O. held entire purchase made from such suppliers as bogus. The 1st Appellate authority sustained the additions.

In 2nd Appeal, Hon’ble ITAT deleted the addition of bogus purchase under the reason that :

A)    There is no evidence that any part of the fund given by the assessee to these suppliers came back to the assessee in any form;

B)    The 2 statements of suppliers do not implication the transaction with the assessee;

C)     The evidence  gathered during investigation can create doubtful features, but such evidence is not adequate to conclude that purchase made by the assessee from these parties were bogus;

Jagdamba Trading Company vs. ITO 107 TTJ 398 (Jd)

The assessee was engaged in purchase and sales of agriculture produce. The Ld. A.O. Received an information from sales Tax Departments that the purchase made by assessee from certain suppliers are ingenuine. The Ld. AO Relied on the affidavits  filed by such suppliers before sales Tax authorities admitting that no sales are made by them to the assessee. In assessment, Ld. A. O. made addition on account of bogus purchase. In 1st Appeal Ld. CIT (A) partly deleted the additions.

In 2nd appeal Hon’ble ITAT deleted the entire additions on holding that :-

a)     There is no proof that the amount has been received back by the assessee from suppliers;

b)     The suppliers statements and their affidavits does not have any evidentiary value when an opportunity of cross examination was not given to assessee;

c)      The ld. A.O. had heavily relied on the affidavits of the suppliers ;

d)     There are 101 reasons for the seller to tell untrue facts and unless the seller is confronted with by the assessee, the alleged statements do not have any useful meaning.

CIT vs. Shri Sindhuja Foods Pvt Ktd 16 DTR 278 (Raj – High Court)

In scrutiny assessment, Ld. A.O. had a made bogus purchase of goods, accordingly, rejected the books of accounts and disallowed the purchase.

“At this point, it is significant to note, that the gross sales figure for the relevant year is not in controversy, in the sense, that whatever bogus  sales have been found by the AO, If they were to be considered literally, that would have reduced the figure of sale, and there is no material of  finding , or any indication, to show that the assessee at any deflated figure. In that view of the matter for making best judgment assessment the only relevant thing required to be considered was, application of particular GP rate, which has been applied by the Tribunal and the CIT (A) , on relevant consideration, being the GP rate applied in the last year. Thus it cannot be said that any material evidence has not been considered, or an irrelevant consideration has been taken in account by the Tribunal.”





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