Income‑tax‑‑

‑‑‑‑Appeal to AAC‑‑‑Powers of First Appellate Authority‑‑‑First Appellate Authority cannot consider new source of income‑‑‑Assessing Officer estimating profits ‑‑‑AAC cannot direct enquiry regarding unexplained investments‑‑‑Indian Income Tax Act, 1961, S.251.

The first appellate authority is invested with very wide powers under section 251(1)(a) of the Income Tax. Act, 1961, and once an assessment order is brought before the authority, his competence is not restricted to examining only those aspects of the assessment about which the assessee makes a grievance but ranges over the whole assessment to correct the Assessing Officer not only with regard to a matter raised by the assessee in appeal but also with regard to any other matter which has been considered by the Assessing Officer and determined in the course of assessment. However, there is a solitary but significant limitation to the power of revision, viz., that it is not open to the Appellate Assistant Commissioner to introduce in the assessment a new source of income and the assessment has to be confined to those items of income which were the subject‑matter of original assessment:

Held, that, in the instant case, the Tribunal was justified in holding that in calling for a remand report on four points, namely, antecedents of the assessee, source of investment made in purchase of goods, business connections of the assessee and bank reconciliation statement, the Appellate Assistant Commissioner had exceeded his jurisdiction. While computing the total business income of the assessee, the Assessing Officer had estimated the sales at an enhanced figure and had applied a higher rate of gross profit. Thus, the only matter dealt with by the Assessing Officer in the assessment order was the estimation of profits and gains of the business of the assessee. The Appellate Assistant Commissioner had his doubts about the capacity of the assessee to raise finances for the purchase of goods and show a huge turnover in the very first year of his business. In other words, the enquiry ordered by the Appellate Assistant Commissioner was to satisfy himself about the source of investment by the assessee. It is axiomatic that failure to prove the sources of investment will result in addition in the hands of the assessee under a different provision of law and will not have much relevance in the estimation of sales and gross profit rate adopted by the Assessing Officer. Any addition on account of unexplained investment would constitute a new source of income which was not the subject‑matter of assessment before the Assessing Officer, and therefore, it was not open to the first appellate authority to direct the Assessing Officer to conduct enquiry regarding it.

CIT v. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC) and CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) applied.

CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC); CIT v. Nirbheram Daluram (1997) 224 ITR 610 (SC) and Jute Corporation of India Ltd. v. CIT (1991) 187 ITR 688 (SC) ref.

R.C. Pandey with Ms. Prem Lata Barisal for the Commissioner.

Harihar Lal with Ms. Radlia Rangaswamy and Ms. Molina Madan Lal for the Assessee.

JUDGMENT

D.K. JAIN, J.‑‑‑Pursuant to the directions issued by this Court under section 256(2) of the Income Tax Act, 1961 (for short "the Act"), the Income‑tax Appellate Tribunal (for short "the Tribunal"), has referred the following question for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Appellate Assistant Commissioner could not in law call for a remand report in respect of items Nos. l, 3, 8, 10 and (sic) mentioned in the order of the Appellate Assistant Commissioner, dated May 4, 1973?"

The reference relates to the assessment year 1967‑68 for which the accounting period ended on March 31, 1967. The assessee is an individual anted deals in tyres. In this return for the relevant assessment year, the assessee declared a loss of Rs.4,552 which was revised to Rs.3,500. The said loss was computed by applying the rate 9f gross profit rate 0.9 per cent. on the total sales of Rs.11.75 lakhs. During the course of assessment proceedings the assessee did not produce any books of account. The Income‑tax Officer estimated the sales at Rs.11.85 lakhs and by applying a gross profit rate of 3.5 per cent., he made an addition of Rs.30,756 to the declared loss. Against the said addition the assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner felt that the Incometax Officer had not properly examined the case. He observed thus:

"It is not known how the appellant, who was a mere student prior to the start of the business, managed to secure finances for purchase of goods the sale of which resulted in such a huge turnover. The source of investment in the purchase of goods has not been enquired into. It is also not known whether the appellant was registered under the Shops and Establishment Act as also under the Sales Tax Act. It has also not been verified whether purchases and sales are on cash or credit basis. If the purchases were on cash basis, the source of money "invested in the purchases should have been looked into by the Income‑tax Officer. If the purchase and sales are on credit basis, it is not understood why the books of account were not maintained and, if maintained, why were they not produced. The antecedents of the appellant have also not been enquired into."

Accordingly, he directed the Incometax Officer to submit a report on the following points:

"(1)Full and complete antecedents of the appellant.

(2)Whether the books of account were maintained. For this purpose, the Income‑tax Officer will obtain an affidavit of the appellant.

(3)Source of investment made in the purchase of goods.

(4)Whether the sales and purchases are on cash or credit basis, wholly or partly. The Income‑tax Officer will obtain a list of sales and purchases made on credit basis exceeding Rs.1,000 in each case?

(5)Whether the appellant is a registered dealer under the Sales Tax Act?

(6)Whether the appellant has obtained registration under the Shops andEstablishment Act?

(7)Whether any sales tax assessment has been made?

(8)The business Connections of the appellant with any business/businesses carried on by the appellant's close relatives.

(9) G.P. rate declared by other similar business assessees in the locality. (10) A bank reconciliation statement to be obtained.

(11) Name of the employees whole‑time/part‑time."

Aggrieved by the said directions and alleging that the Appellate Assistant commissioner had travelled beyond the legitimate scope of his jurisdiction in disposing of the appeal preferred before him, the assessee filed an appeal to the Tribunal. Observing that in calling‑ for the remand report in respect of some of the aforenoted points the Appellate Assistant Commissioner had travelled beyond his powers inasmuch as it had the effect of directing the Income‑tax Officer to make the assessment on an entirely new footing, the Tribunal held that the Appellate Assistant Commissioner was not justified in calling for the remand report in respect of items Nos. l, 3, 8 and 10 noted above but sustained his action in calling for the report on the remaining points.

The Revenue's application under section 256(1) of the Act having been dismissed, on its approaching this Court under section 256(2) of the Act, reference on the aforenoted question was called for.

We have heard Mr. R.C. Randey for the Revenue and Mr. Harihar Lal, for the Assessee.

The question for consideration is whether the directions by the Appellate Assistant Commissioner to the Income‑tax Officer to conduct enquiry and furnish information on the aforenoted four points fell within the ambit of his powers under section 251(l)(a) of the Act?

Section 251 of the Act prescribes the power of the Appellate Assistant Commissioner, now the Commissioner of Income‑tax (Appeals). Section 251(1)(a) of the Act empowers the Appellate Assistant Commissioner in disposing of an appeal by the assessee against an order of assessment to confirm, reduce, enhance or annul the assessment or to set aside 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. The Explanation to section 251 provides that the Appellate Assistant Commissioner may hear and decide any matter arising out of the proceedings in which the order appealed against was passed notwithstanding that such a matter was not raised before the Appellate Assistant Commissioner by the appellant.

The issue with regard to the scope of powers of the first appellate authority in disposing of an appeal has come up before the Courts umpteen times but we do not propose to burden the judgment by making reference to all the decisions on the point. We will notice a few decisions which we consider are relevant to answer the question referred. In CIT v. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC), while construing the corresponding provisions of the Indian Income‑tax Act, 1922, relating to the jurisdiction of the Appellate Assistant Commissioner in such an appeal, the Supreme Court held that, in an appeal filed by the assessee, the Appellate Assistant Commissioner has no power to enhance the assessment by discovering a new source of income, not considered by .the Income‑tax Officer in the order appealed against. Similar views were expressed by the apex Court in CIT v. Rai Bahadar Hadutroy Motilal Chamaria (1967) 66 ITR 443. It was held that the power of enhancement under section 31(3) of the 1922 Act was restricted to the subject‑matter of the assessment or the source of income which had been considered expressly or by clear implication by the Income tax Officer from the point of view of taxability and that the Appellate Assistant Commissioner had no polder to assess a source of income which had not been processed by the Assessing Officer.

In Jute Corporation of India Ltd. v. CIT (1991) 187 ITR 688 (SC), heavily relied upon by learned counsel for the Revenue, the Supreme Court, while considering the question whether the Appellate Assistant Commissioner had the jurisdiction to allow the assessee to raise an additional ground in assailing the order of assessment before it, referred to Shapoorji's case (1962) 44 ITR 891 (SC), but drew a distinction between the power to enhance tax on discovery of a new source of income and granting of deduction on the admitted facts, supported by the decision of the Supreme Court. Relying on the observations of the apex Court in CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225, the Court, however, held that powers of the Appellate Assistant Commissioner are co‑terminus with those of the Income‑tax Officer and the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter.

A question regarding powers of the first appellate authority came up for consideration before the Supreme Court recently in CIT v. Nirbheram

Daluram (1997) 224 ITR 610. Following their earlier decisions in Kanpur Coal Syndicate (1964) 53 ITR 225. and Jute Corporation of India's case (1991) 187 ITR 668 though their Lordships reiterated that the appellate powers conferred on the Appellate Assistant Commissioner under section 251 could not be confined to the matter which had been considered by the Income‑tax Officer, as the Appellate Assistant Commissioner is vested with all the plenary powers which the Income‑tax Officer may have while making the assessment, but did not comment on the issue whether these wide powers also include the power to discover a new source of income. Therefore, the principle of law laid down in Shapoorji's case (1962) 44 ITR 891 (SC) and Chamaria's case (1967) 66 ITR 443 (SC) still holds the field.

Thus, the principle emerging from the aforenoted pronouncements of the Supreme Court is, that the first appellate authority is invested with very wide powers under section 251(l)(a) of the Act and‑once an assessment order is brought before the authority, his competence is not restricted to examining only those aspects of the assessment about which the assessee makes a grievance and ranges over the whole assessment to correct the Assessing Officer not only with regard to a matter raised by the assessee in appeal but also with regard to any other matter which has been considered by the Assessing Officer and determined in the course of assessment. However, there is a solitary but significant limitation to the power of revision, viz., that it is not open to the Appellate Assistant Commissioner to introduce in the assessment a new source of income and the assessment has to be confined items of income which were the subject‑matter of original assessment.

Applying the above well‑settled principles of law to the facts of 111, instant case, we are of the view that the Tribunal was justified in holding that in calling for a remand report on the aforenoted four points the Appellate Assistant Commissioner had exceeded his jurisdiction. While computing the total business income of the assessee, the Assessing Officer had estimated the sales at an enhanced figure and had applied a higher rate of gross profit. Thus, the only matter dealt with by the Assessing Officer in the assessment order was the estimation of profits and gains of the business of the assessee. None of the aforenoted four points had any bearing on the question of estimation of either the sales or the gross profit rate. From the observation, extracted above, it is evident that the Appellate Assistant Commissioner had his doubts about the capacity of the assessee to raise finances for the purchases of goods and show a huge turnover in the very first year of his business. In other words, the enquiry ordered by the Appellate Assistant Commissioner was to satisfy himself about the source of investment by the assessee. It is axiomatic that failure to prove the sources of investment will result in addition in the hands of the assessee under a different provision of law and will not have much relevance in the‑estimation of sales and gross profit rate adopted by the Assessing Officer. In our opinion, any addition on account of unexplained investment would constitute a new source of income which was not the subject‑matter of assessment before the Assessing Officer and, therefore, it was not open to the first appellate authority to direct the Assessing Officer to conduct enquiry on the said four points.

For the foregoing reasons, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue. No order as to costs.

M.B.A./348/FCReference answered