2021 (2) TMI 646 - HC - Income Tax

Maintainability of appeal - ITAT dismissed the appeal on the ground of low tax effect being less than 10 lakhs - Board Circular No.21/2015 - Determination of tax effect where returned loss is reduced or assessed as income, the tax effect would include notional tax on disputed additions - whether tax effect would include notional tax on disputed additions? - THAT - From perusal of para 4 of Circular No.21/2015, it is evident that where the returned loss is reduced or assessed as income, the tax effect would include notional tax on disputed additions and the Assessing Authority had made disallowances with regard to the provisions of wage reversion to the extent as well as provision for audit frees and the notional tax effect on aforesaid contested issue was more than ₹ 10 Lakhs and therefore, the appeal before the tribunal was maintainable and the same ought to have been adjudicated on merits. For the aforementioned reasons, the substantial question of law is answered in favour of the revenue. However, the aforesaid aspect of the matter has not been appreciated by the tribunal. The impugned order of the tribunal is quashed and the matter is remitted to the tribunal for decision afresh in accordance with law.

Issues Involved:
1. Interpretation of Circular No. 21/2015 regarding the tax effect for maintaining appeals before the tribunal.
2. Whether the tribunal was correct in dismissing the appeal based on the tax effect being less than 10 lakhs.
3. Assessment of disallowances made by the Assessing Authority on wage reversion and audit fees.
4. Adjudication on the merits of the appeal before the tribunal.

Analysis:

Issue 1: Interpretation of Circular No. 21/2015
The appeal under Section 260A of the Income Tax Act, 1961 was filed by the revenue, challenging the decision of the tribunal to dismiss the appeal based on the tax effect being less than 10 lakhs. The substantial question of law revolved around the interpretation of Circular No. 21/2015, specifically para 4, which stated that the tax effect should include notional tax on disputed additions when the returned loss is reduced or assessed as income. The Assessing Authority had disallowed provisions for wage reversion and audit fees, with the notional tax effect on these contested issues exceeding 10 lakhs. The court held that the appeal before the tribunal was maintainable based on this interpretation.

Issue 2: Tribunal's Dismissal of the Appeal
The tribunal had dismissed the appeal without considering the merits of the case, citing the tax effect being less than 10 lakhs and relying on Circular No. 21/2015. However, the court found that the notional tax effect on the disallowed provisions exceeded 10 lakhs, making the appeal maintainable. The court concluded that the tribunal's decision to dismiss the appeal solely based on the tax effect was incorrect.

Issue 3: Assessment of Disallowances
The Assessing Authority had made disallowances related to provisions for wage reversion and audit fees, considering them as contingent and not genuine expenditures. The Commissioner of Income Tax (Appeals) partly allowed the appeal, leading to the revenue filing an appeal before the tribunal. The court noted the significant disallowances made by the Assessing Authority and emphasized the need for a proper adjudication on the merits of these disallowed provisions.

Issue 4: Adjudication on the Merits
After considering the submissions and perusing the record, the court found that the appeal before the tribunal should have been adjudicated on its merits, especially considering the substantial disallowances made by the Assessing Authority. The court quashed the tribunal's order and remitted the matter back to the tribunal for a fresh decision in accordance with the law, ensuring a proper consideration of the disputed issues.

In conclusion, the court ruled in favor of the revenue, emphasizing the importance of interpreting Circular No. 21/2015 correctly and ensuring that appeals are adjudicated on their merits, especially when significant tax effects are involved.

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