2015 (10) TMI 1593 - AT - Income Tax

Enhancing effect of income by changing heads of income and imposing tax on the assessee - principles of natural justice denied - not providing the assessee with a reasonable opportunity of being heard - Held that - if such change of head of income results in enhancement of income and consequently enhancement of tax, then the CIT(A) has to issue a notice u/s 251(1) of the Act before bringing it to tax. The Hon ble Allahabad High Court in the case of Tarkeshwar Nath Agarwal vs. CST (1974 (3) TMI 92 - ALLAHABAD HIGH COURT ), has held that an assessment can be said to have been enhanced only if the tax assessed has been enhanced. In the case before us, the change of head of income has resulted in enhancement of assessed income and tax thereon and therefore the provisions of sec.251(1) are attracted. From the order of the CIT(A) before us, it is clear that before such enhancement of the assessment, by such change of head of income, no notice u/s 251(2) was issued to the assessee. Therefore, in our opinion, the CIT(A) ought to have issued notice u/s 251(2) of the Act. Since such notice has not been issued by the CIT(A), we set aside the order of the CIT(A) and remit the issue to the file of the CIT(A) with a direction to re-adjudicate the appeal before him de novo in accordance with law after issuing a notice u/s 251(2) of the Act - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Violation of principles of natural justice by the CIT(A) in enhancing the income without issuing a notice u/s 251 of the Income-tax Act.
2. Disallowance of interest and depreciation by the Assessing Officer.
3. Change of head of income by the CIT(A) resulting in enhancement of assessed income.

Analysis:
1. The appeal addressed the violation of principles of natural justice by the CIT(A) in enhancing the income without issuing a notice u/s 251 of the Income-tax Act. The Assessing Officer observed that the assessee, a partnership concern, had incurred interest expenditure and claimed it as a deduction from rental income. The CIT(A) treated the entire income as income from house property, disallowing the claim of interest and depreciation. The Tribunal found that the assessed income was enhanced by the CIT(A), triggering the need for a notice u/s 251(2) before such enhancement. Citing the case law, the Tribunal emphasized that any change resulting in an increase in assessed income requires a notice to the assessee. Consequently, the Tribunal set aside the CIT(A)'s order and remitted the issue for re-adjudication with a directive to issue the necessary notice u/s 251(2) of the Act.

2. The second issue involved the disallowance of interest and depreciation by the Assessing Officer. The AO disallowed a portion of the interest and depreciation claimed by the assessee, considering it capital in nature. The assessee appealed to the CIT(A), arguing for the allowance of these deductions. However, the CIT(A) upheld the disallowance, treating the entire income as income from house property. As the entire assessment was remanded for re-adjudication, the Tribunal did not delve into the merits of these disallowances at that stage.

3. The final issue pertained to the change of head of income by the CIT(A), resulting in the enhancement of the assessed income. The Tribunal noted that the CIT(A) had plenary powers to consider all aspects of a matter in an appeal. However, when such a change led to an increase in assessed income and tax, a notice u/s 251(1) was necessary. Since no such notice was issued in this case, the Tribunal set aside the CIT(A)'s order and directed a re-adjudication after issuing the requisite notice u/s 251(2) of the Act. Consequently, the appeal was treated as allowed for statistical purposes, pending the re-adjudication by the CIT(A.