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2020 (8) TMI 266 - AT - Income TaxCIT(A) powers of enhancement u/s 251(1) - Disallowance u/s 14A r.w. Rule 8D - HELD THAT - The case of Kashi Nath Candiwala 2004 (12) TMI 21 - ALLAHABAD HIGH COURT what was enhanced was a new source of income. AO in that case assessed to tax, income from business, after making certain additions on account of excessive claim of deduction. This source of income from business was enhanced by the ld. CIT(A) in that case. In the case on hand, the AO made a statutory disallowance u/s 14A - Under the circumstances, disallowance of salary is enhancement of income from a new source which was not considered by the AO. Thus, we agree with the argument of the assessee and quash the enhancement of the assessment by the ld. CIT(A). Appeal of the assessee is allowed.
Issues Involved:
1. Whether the CIT(A) has the jurisdiction to enhance the assessment by disallowing salary expenses, which was not considered by the AO. 2. Applicability of legal precedents and judicial interpretations related to the powers of the CIT(A) under section 251(1) of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Jurisdiction of CIT(A) to Enhance Assessment by Disallowing Salary Expenses The primary issue in this case revolves around whether the CIT(A) had the authority to enhance the assessment by disallowing salary expenses amounting to ?11,21,250/-, which was not originally considered by the Assessing Officer (AO). The AO had only made a disallowance under section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, without touching upon the salary expenses. The assessee argued that the CIT(A) had no jurisdiction to make such an enhancement, citing the judgment of the Hon'ble Delhi High Court in the case of Sardari Lal & Co. (120 Taxman 595), which states that the CIT(A) cannot assess a new source of income not considered by the AO. The CIT(A), however, relied on the Supreme Court judgment in Nirbheram Daluram (224 ITR 610) and the Allahabad High Court decision in CIT vs. Kashi Nath Candiwala (144 Taxman 840), asserting that his powers are co-terminus with that of the AO and thus, he had the authority to enhance the assessment. Upon careful consideration, the Tribunal noted that the AO had only disallowed expenses under section 14A and did not consider the salary expenses. Therefore, the CIT(A)'s action of disallowing the salary expenses constituted an enhancement based on a new source of income, which was not within the scope of the original assessment by the AO. Issue 2: Applicability of Legal Precedents and Judicial Interpretations The Tribunal referred to several judicial precedents to determine the scope of the CIT(A)'s powers under section 251(1) of the Income Tax Act, 1961. The relevant judicial interpretations include: 1. CIT vs. Rai Bhadur Hardutroy Motilal Chamaria (1967 SCR (3) 508): This case established that the Appellate Assistant Commissioner (AAC) cannot assess a new source of income not considered by the AO, and the power of enhancement is restricted to the sources of income considered by the AO. 2. CIT vs. Shapoorji Pallonji Mistry (44 ITR 891): Reiterated that the AAC's power to enhance the assessment does not extend to new sources of income not mentioned in the return or considered by the AO. 3. CIT vs. Sardari Lal & Co. (251 ITR 864) (Delhi) (FB): Concluded that the jurisdiction to deal with new sources of income, not considered by the AO, lies under sections 147/148 and 263, and not with the first appellate authority. The Tribunal found that the CIT(A)'s reliance on the Allahabad High Court decision in Kashi Nath Candiwala was misplaced, as the enhancement in that case pertained to the same source of income (business income) initially considered by the AO. In contrast, the present case involved disallowance of salary expenses, which was a new source of income not considered by the AO. The Tribunal concluded that the CIT(A) overstepped his jurisdiction by enhancing the assessment based on a new source of income, which was not within the purview of the original assessment by the AO. Consequently, the enhancement made by the CIT(A) was quashed. Final Judgment: The Tribunal allowed the appeal of the assessee, quashing the enhancement of the assessment by the CIT(A). The judgment was pronounced after considering the extraordinary situation due to the COVID-19 pandemic, which necessitated the exclusion of lockdown days from the calculation of the 90-day period for pronouncing the order. In summary, the Tribunal held that the CIT(A) did not have the jurisdiction to enhance the assessment by disallowing salary expenses, as it constituted a new source of income not considered by the AO, aligning with the legal precedents restricting such enhancements.
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