JURISDICTION OF APPELLATE TRIBUNAL IS CONFINED TO PASSING OF ORDERS ON SUBJECT MATTER OF APPEAL.

[Mr. M. GOVINDARAJAN]

                        Section 254 of the Income Tax Act, 1961 (‘Act’ for brevity) deals with the orders of Appellate Tribunal.   Sec. 254(1) of the Act provides that the Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.  This sub section is analyzed in various judgments of courts and Supreme Court in deciding the jurisdiction of the Appellate Tribunal.

                        In ‘Commissioner of Income Tax V. Manick Sons’ – 1969 -TMI - 5242 – (SUPREME Court), the Supreme Court while delineating the powers of the Tribunal held that the power conferred by Section 33(4) of the Act of 1922 and Section 254 of the Act of 1961 is wide, but it is still a judicial power which must be expressed in respect of the matters that arise in the appeal and according to law.   The Tribunal in the matters in deciding an appeal before it must deal with the question of law and fact deciding an appeal before it must deal with the question of law and the fact which arose out of order of assessment made by the Income Tax Officer and the order of the Appellate Assistant Commissioner.   It cannot assume powers which are inconsistent with the express provisions of the Act or its scheme.

                        In ‘V. Ramasamy Iyengar V. Commissioner of Income Tax’ (1960) 40 ITR 377 (Mad) the High Court held that the jurisdiction of the Appellate Tribunal should, in the absence of express words in the statute, be governed and circumscribed by the subject matter of the appeal-the subject matter of the appeal being that contained in the original grounds of appeal together with such other ground as may be raised by the assessee by leave of the Tribunal.

                        In ‘Natwarlal and Co.,’ – (1963) 50 ITR 783 the Gujarat High Court held that the words ‘pass such orders thereon’ refer to the order that may be passed in respect of a matter which does not constitute the subject matter of the appeal.  What the Tribunal in effect was asked to do was to give directions in respect of a matter pertaining to an earlier assessment year and to direct the Income Tax Officer to take action in respect of completed assessment for the previous assessment year.   This, the Tribunal would have no jurisdiction to do and the Tribunal was justified in not acceding to the request of the assessee in this connection.

                        In ‘Marubeni India P. Limited V. Commissioner of Income Tax’ – 2010 -TMI - 78744 – (Delhi High Court) the main business of the assessee is international trading in various items such as textiles, chemicals, energy, metals etc.,  It is a subsidiary company of Marubeni Corporation of Japan.   The appellant took over the assets and liabilities of the liaison office of Marubeni Corporation and also took over 18 employees on deputation. It was agreed that the salaries and perquisites of the said employees were to be paid by the Japanese company and for their services to the appellant they were paid  a comparatively small amount of salary and perquisites.

                        The appellant in the previous year relevant to the assessment years 1997-98 and 1998-99 paid to the aforesaid employees by way of incentives, the taxes which they had to pay in India in respect of salary and perquisites received by them from the Japanese company outside India.  The said taxes were to the tune of Rs.4,21,87,756 for the assessment year 1997-98 and Rs.2,78,28,161 for the assessment year 1998-99.   These amount were claimed as deduction in computing the income for income tax purposes which were not claimed in original return but in revised returns.  The deductions were claimed in the P&L account relating to the year 1999-2000 on payment basis.  The tax auditors had disallowed the same on the ground that the payments related to the assessment years 1997-98 and 1998-99 and it was on this basis that the revised returns were filed for the aforesaid assessment years.

                        The Assessing Officer disallowed the claim on the ground that the copy of the agreement with the employees had not been filed by the appellant; that liability to pay the amount was not ascertained; that the liability was a contingent liability both at the time of the closing accounts for the years under consideration and at the time of filing of the returns, as the payment was actually made in the financial year 1998-99 relating to the assessment year 1999-2000.  Another ground for disallowance that the accounts of the company had been finalized and adopted by the board of directors and the shareholders, they could not be interfered with by the appellant after a lapse of three years.

                        On appeal, the Commissioner (Appeals) held that the appellant did not make any payment of incentives to its employees in the relevant assessment years and what had actually happed was that the appellant had failed to deduct TDS on he salaries paid to its expatriate employees, despite the fact the Section 9(1)(ii) specifically provided that any payment for the services render in India shall be regarded as income earned in India.  In the absence of any enforceable contractual liability, the amounts were not allowable as deductions and dismissed the appeal.

                        Before the Tribunal the appellant did not dispute that there was no contract in writing with the expatriate employees and put forth the following arguments:

• There was no bar on the liability being undertaken in pursuance of an oral arrangement;
• The said oral arrangement was the one under which the service of the employees were seconded by the Japanese company to the appellant company;
• It was in the appellant’s own interest to pay the incentives and retain the services of the employees;
• The liability was not an unascertained liability and there was nothing contingent about it;
• There was no survey in the appellant’s case nor was any order passed against the appellant under Section 201(1) or (1A) in respect of the salary paid to the expatriate employees outside India by the Japanese company;
• The amount of taxes paid by the appellant were thus paid voluntarily on the ground of commercial expediency;
• When the appellant paid these amounts during the year ending 31.03.1999 the Department accepted the same and also dropped the penalty proceedings initiated under Section 271(1) © of the Act;
• If the perquisites are part of the salary and if the salary relates to the assessment years 1997-98 and 1998-99 the perquisites are also allowable as deduction in those years and to hold otherwise would lead to incongruity.
• In case the amounts were not found in law to be allowable for the years under appeal, directions should be issued by the Tribunal that they should be allowed in the year of payment, namely, the assessment year 1999-2000.

The Tribunal held the following:

• It was difficult to believe that there was no formal written agreement as alleged by the appellant;
• It was also difficult to lay down that the appellant, well advised in its income tax matters, would not claim the liability as deductions under the return for the years filed originally, since the amounts were quite substantial;
• The assessee had been compelled to pay the tax on pressure from the department;
• If such a liability had been undertaken, it was not necessary for the appellant to put forth its claim on the principal of commercial expediency;
• The prayer to allow as a deduction in the assessment year 1999-2000 could not be accepted since the said year is not before it.

The Tribunal dismissed the appeal of the appellant. Therefore the appellant filed this appeal before the High Court.

                        The appellant put forth the following arguments before the High Court:

• The power of the Tribunal in dealing with appeals are wide and it was open to the Tribunal to render a finding that the deduction sought for by the appellant, though not admissible for the years 1997-98 and 1998-99, could be granted for the assessment year 1999-2000;
• When the Tribunal had clearly opined that the said amounts could not be allowed as deduction on the principle of commercial expediency for the years under the consideration, but could be allowed as a deduction in the year when the amount was actually paid i.e., in the assessment year 1999-2000;

The Department contended that the Tribunal would have no jurisdiction nor would the Tribunal be justified in giving directions in respect of a matter pertaining to an earlier or later assessment year.   The words ‘pass such orders thereon’ in Section 254 of the Act referred to the orders that may be passed in the appeal.   The Tribunal could not be required to give directions in respect of the matter which did not constitute the subject matter of the appeal.  Though the powers of the Tribunal in dealing with an appeal are very wide, they are not absolute.

                        The High Court analyzed the provisions of Section 254(1) of the Act.  On a plain reading of Sec. 254(1) the power to pass such orders as the Tribunal thinks fit can be exercised only in relation to the matters that arise in the appeal and it is not open to the Tribunal to adjudicate a question which is not in dispute and which does not form the subject matter of the appeal.  The word ‘thereon’ is particularly significant and has been interpreted by Courts to circumscribe the jurisdiction of the Tribunal to the subject matter of the appeal, which is constituted of the original grounds of appeal and such additional grounds as may be raised by the leave of the Tribunal.

                        The jurisdiction of the Appellate Tribunal is confined to the passing of the orders on the subject matter of the appeal, i.e., those orders which are necessary for the disposal of the appeal.   The Tribunal cannot give a finding in respect of the assessment of a year which is not the subject matter of the appeal before it.  There is only one exception to this.   Where an additional ground has been raised with the leave of the Tribunal it may constitute the subject matter of the appeal.

                        The Tribunal had permitted the appellant to raise the ground of commercial expediency as an alternate ground that it had made the payment to the expatriate employees on account of its contractual liability.   The Tribunal, however, opined that the principle of commercial expediency was available to the assessee only in the year of payment i.e., the assessment year 1999-2000.  The High Court held that the Tribunal rightly did not accede to the prayer of the appellant for a direction to be issued that the amounts should be allowed as a deduction in the assessment year 1999-2000 which is not the subject matter of the appeal.