2000 (5) TMI 190 - AT - Income Tax

Issues Involved:
1. Scope of powers of CIT(A) under section 251.
2. Enhancement of assessment by CIT(A) on account of under-valuation of stock.
3. Enhancement of assessment by CIT(A) on account of disallowance under section 43B.
4. Disallowance of interest under section 40(b).

Issue-wise Detailed Analysis:

1. Scope of Powers of CIT(A) under Section 251:
The main issue in this appeal is the scope of powers of the Commissioner of Income Tax (Appeals) [CIT(A)] under section 251 of the Income Tax Act. The assessee challenged the jurisdiction of the CIT(A) regarding the enhancement of assessment on account of under-valuation of stock. The assessee argued that the CIT(A) cannot discover a new source of income and should be confined to the subject matter of the appeal, which was the disallowance under section 40(b). The assessee relied on Supreme Court decisions in CIT v. Shapoorji Pallonji Mistry and CIT v. Rai Bahadur Hardutroy Motilal Chamaria, arguing that the CIT(A) had traveled beyond the record before the Assessing Officer (AO).

On the other hand, the Department contended that the powers of the CIT(A) are very wide and coterminous with that of the AO, citing the Supreme Court decision in CIT v. Kanpur Coal Syndicate and the recent decision in CIT v. Nirbheram Daluram. The Department argued that the CIT(A) could enhance the assessment even in respect of new sources not considered by the AO.

Upon reviewing the conflicting Supreme Court decisions, the Tribunal concluded that the CIT(A) has plenary powers in disposing of an appeal and can enhance the assessment by considering new sources of income, as established in the Kanpur Coal Syndicate case. Therefore, the recent decision in Nirbheram Daluram must be followed, allowing the CIT(A) to enhance the assessment based on material not considered by the AO.

2. Enhancement of Assessment by CIT(A) on Account of Under-valuation of Stock:
The CIT(A) noticed discrepancies in the stock declared by the assessee to the bank and the stock shown in the books. The assessee failed to reconcile the discrepancy despite multiple opportunities. The CIT(A) enhanced the assessment by Rs. 4,48,679 due to under-valuation of stock. The Tribunal upheld this enhancement, stating that the CIT(A) was justified in making the addition since the AO failed to make necessary inquiries despite having the balance-sheet showing a significant overdraft against minimal closing stock. The Tribunal emphasized that the CIT(A) has the authority to cause an inquiry and make additions if discrepancies are not satisfactorily explained.

3. Enhancement of Assessment by CIT(A) on Account of Disallowance under Section 43B:
The CIT(A) also enhanced the assessment by Rs. 41,918 due to disallowance under section 43B, as the payment of outstanding sales tax dues had not been made by the assessee before the due date. Since the assessee did not press this issue before the Tribunal, the enhancement was confirmed.

4. Disallowance of Interest under Section 40(b):
The AO disallowed interest of Rs. 14,774 paid to a partner under section 40(b), which was confirmed by the CIT(A). The assessee argued that the disallowance should be restricted to the period after the individual became a partner. The Tribunal found merit in the assessee's contention, noting that the interest paid before the individual became a partner (up to 31-12-1988) should not be disallowed. The Tribunal directed the AO to exclude the interest payment up to 31-12-1988 from the disallowance.

Conclusion:
The Tribunal partly allowed the appeal, confirming the enhancements by the CIT(A) on account of under-valuation of stock and disallowance under section 43B, while modifying the disallowance of interest under section 40(b) by excluding the interest paid before the individual became a partner.

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