Procedures in appeal : Enhancement of assessment by CIT(A)

[Mrs. Uma Kothari]

Commissioner (Appeal), has power to enhance assessment, however, he should provide a reasonable opportunity to the assessee before passing such order, he should issue SCN and fix date for hearing, otherwise principal of natural justice shall vitiate.

(a) Directions to re-examine an issue, which is not agitated by the assessee, in grounds of appeal has effect of opening a settled issue and can lead to enhancement of assessment.(b) The assessee might have pointed out some errors, in assessment order, correction of which may result in enhancement. (c) Substantial relief on grounds of appeal, may far exceeds amount of enhancement even then statutory opportunity of hearing has to be provided before passing an order which may pave way to enhancement of assessment.  Therefore, in all such case the Commissioner (Appeals) should allow specific opportunity of hearing otherwise his order might be null and void. The authorities should be more careful about statutory provisions relating to procedures particularly regarding opportunity of hearing to assessee on particular issue, otherwise, the whole exercise may be futile, as has been in the case before the Madras High Court.  

Power of Commissioner (Appeal)

The power of Commissioner (Appeal) while deciding the appeals is co-terminus with the Assessing Officer and therefore, Commissioner (Appeal) definitely can do such things as the Assessing Officer could have done for the purpose of making proper assessment of income. Power which can be exercised against the interest of the assessee inter alia include the power to enhance assessment, enhance penalty or reduce refund.

However, these powers are subject to the restrictions imposed in the procedure prescribed for the functioning of the Commissioner (Appeal) and while deciding the appeals.  His powers are contained in sub-section (1) of section 251.  Sub-section (2) of section 251 deals with procedure required in respect of enhancement of an assessment or penalty or reduction of the amount of refund and according to this provision, the Commissioner (Appeal) should have allowed reasonable opportunity of showing cause against such enhancement of assessment or penalty or reduction of refund.  For the sake of brevity these provisions are not reproduced.

Case where assessee / appellant himself has pointed out some mistakes in the assessment

In some cases the assessee may find that there are some mistakes in the assessment order and rectification of the same may enhance the assessment and therefore, the assessee might have pointed out the same to the Commissioner (Appeal) whether by way of statement of facts and grounds of appeal or by way of written submission.  In such cases it can be said that it is fair on the part of the assessee / appellant.  However, in such circumstances also it is desirable that the Commissioner (Appeal) should issue show cause notice and provide reasonable opportunity of hearing to the appellant / assessee.  This is required because during the time gap of filing of appeal and hearing of appeal, there may be change in circumstances or legal position. Accordingly the mistakes considered earlier may no longer be a mistake.  In this regard author himself had several occasions when he pointed out certain points involving enhancement, while filing or while hearing of the appeal.  Some Commissioner (Appeals) were quite dutiful and they issued show cause notice to the appellant / assessee and provided further opportunity of hearing on those issues also.  However, some Commissioner (Appeals) considered that the assessee himself has admitted that there is a case of enhancement of assessment and therefore, they did not provide opportunity of hearing on those issues and made enhancement.  The author feels that in spite of assessee's admission and / or assessee having pointed out certain points of enhancement the Commissioner (Appeal) must have provided opportunity of hearing.

Overall relief yet opportunity on point of enhancement is required:

It may be that in the appellate order substantial relief is allowed and the amount involved in enhancement is meager one, and in totality there is net relief, still the Commissioner (Appeals) must allow opportunity about the matter of enhancement. It would be wrong on part of the authority that as there is no net enhancement opportunity on point of enhancement is not required.

Representation before CIT (A) does not absolve mandatory requirement of specific opportunity:

Merely because the assessee was represented before the CIT(A), the CIT (A) cannot say that it is not necessary to issue notice before enhancement. The issuance of notice and specific opportunity is pre-condition laid down in the enactment. The opportunity of hearing allowed in general way is opportunity about the grounds agitated by the assessee and not for points on which CIT(A) intend to enhance assessment. Therefore, it would be wrong to say that as assessee or his representative attended hearing and he was told about enhancement, it is not necessary to provide opportunity of hearing. A reasonable hearing means that the authority should point out the issue of enhancement, and then allow some reasonable period so that the assessee can check factual and legal position and make a proper representation as to why enhancement is not required.

Enhancement by the Commissioner (Appeal) and Revision by the Commissioner u/s 263

If we consider the provision relating to the above two proceedings as contained u/s 251 as discussed above and u/s 263 relating to revision by Commissioner we find the following common features:-

The Commissioner (Appeal) or the Commissioner may take steps for enhancement when it is considered that there was under-assessment in any cases.  The authorities are required to issue show cause notice and provided opportunity of hearing to the assessee.

In both cases the authorities may after hearing the assessee either drop the proceeding for enhancement or revision as the case may or may pass  order which has the effect of enhancement of assessment etc.

Thus, the ultimate purpose of both the provisions are the same.  However, both the proceedings have different fields of operation in case of the Commissioner (Appeal), he can take steps for enhancement only when an appeal is pending before him and not otherwise whereas Commissioner can take steps when he finds that any order passed by assessing officer is erroneous and pre-judicial to the interest of revenue.

Principle of natural justice

The requirement of issuing show cause notice and hearing the concerned parties can be considered as a fundamental procedure required to be followed in case any party is to be effect adversely in case any proposed order is passed.  Therefore, whether there be any statutory provision or not specifically requiring issue of SCN and hearing will not make much difference and even in absence of such a specific provision the authorities should issue show cause notice and provide opportunity of hearing before passing any order which adversely affect the concerned party.  Therefore, even in a case where the assessee or appellant had indicated himself the mistake in the order passed by the lower authority the appellate authority or revisionary authority should not pass an order without issuing SCN and without providing reasonable opportunity of hearing to the  assessee to explain or re-explain the issue.

The notice must be specific:

It is also necessary that the notice for enhancement should be specific. The Commissioner cannot go beyond scope of SCN. In case he wants to make enhancement on any additional points, not covered by the SCN, he may issue another notice to cover new point, however, enhancement cannot be made simply on a general notice or by giving notice for some points and making enhancement on other points also.

Recent judgment of Madras High Court

In COMMISSIONER OF INCOME-TAX v. LOTTE INDIA CORPORATION LTD, 2006 -TMI - 13281 - (MADRAS High Court), the assessee had capitalized certain expenses in the accounts.  However, the same were claimed as an allowable expenditure in the computation of income.  While considering the appeal, the learned CIT(A) noticed this aspect, he did not issue any SCN or even otherwise he did not allow  reasonable opportunity to the assessee  or his counsel  to explain why this expenditure was allowed and why it should not be disallowed.  He simply took the views that it was not clear as to how the expenditure which had been capitalized in the books of account and claimed in the adjustment statement had been allowed by the Assessing Officer observing "It was not clear as to how the expenditure which had been capitalized in the books of account and claimed in the adjustment statement had been allowed by the Assessing Officer and observed and held that this part of the case needed to be examined. 

Though while directing the assessing officer to re-examine the issues, the learned CIT (A) had not specifically made an enhancement in the assessment.  However, he did reopen the issue, which was settled by the Assessing Officer, and the department had not taken any other step to disallow the same by way of rectification or revision.  Particularly when the assessee had made claim specifically and it was allowed by the AO after considering the fact that the expenditure was capitalized in the books of account but was allowable.  It cannot bed said that the AO had allowed it without application of mind though there may be difference of opinion between the assessee, Assessing Officer and the Commissioner (Appeal).

 Therefore, by the order of the Commissioner (A), the assessee was put to another risk or uncertainty about what view the Assessing Officer may take while reconsidering the matter.  Therefore, the order of the Commissioner (Appeal) tantamount to enhancement of assessment or steps towards enhancement of assessment.  The question is whether such order is permissible or not.

Appeal before Tribunal

The assessee carried the matter before the Appellate Tribunal.  The assessee claimed that without giving reasonable opportunity to the assessee against any enhancement, the Commissioner (Appeal) cannot make an enhancement and his directions to re-examine the issue about allowability of expenditure amounts to enhancement.  Accordingly, the Tribunal set aside the order of Commissioner (Appeal) on this aspect holding that without allowing mandatory opportunity of hearing the Commissioner (Appeals) could not pass such order.

Appeal before the High Court

The department preferred an appeal raising the following questions of law.

"(i) Whether, on the facts and circumstances of the case, the Tribunal was right in canceling the direction of the Commissioner of Income-tax (Appeals) to adjudicate the issue of interest on debenture and intercorporate dividends that was allowed by the Assessing Officer, on the ground that no notice under section 251(2) was issued, even though the assessee had participated in the appeal proceedings?

and

(ii) Whether, on the facts and circumstances of the case, the order of the Commissioner of Income-tax (Appeals) directing the Assessing Officer to verify and pass orders is in the nature of enhancement is prejudicial to the assessee and notice under section 251(2) of the Act is mandatory?"

The Hon'ble High Court considered the provisions of section 251 and noted that in sub-section (2) of section 251 it is mandatory that Commissioner (Appeal) shall not enhance …………..unless the appellant has had a reasonable opportunity of showing cause against such enhancement and the High Court held that finding of Commissioner (Appeal) that it is not clear in the assessment order as to how the expenditure which have been capitalized in the books of account and claimed in adjustment statement has been allowed by the assessing officer and that the said aspect also needs to be re-examined, certainly leads to the conclusion that there may be an enhancement of the assessment and therefore, according to section 251(2), the Commissioner (Appeal) as rightly held by the Tribunal, should not exercise the power conferred u/s 251(2) without giving a reasonable opportunity to the assessee against such enhancement.

The Hon'ble Tribunal had also held that in view of India Cement Ltd. vs. CIT (1966) 60 ITR 52(SC) that the loan obtained was not an asset or advantage for the enduring benefit of the business of the assessee and therefore, applying the said principle, the court held that interest on debenture and corporate borrowings also cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee and accordingly the High Court confirmed the order of the Tribunal.  Finding no substantial question of law the appeal was dismissed by the High Court.

A recent order of CIT(A):

In a case of client of author the CIT(A) passed an order involving enhancement  without allowing specific opportunity to the assessee to explain the case. The CIT(A) did not allow opportunity of hearing as he consider it not necessary for the reasons that (a) the assessee has pointed out the same in written submission and (b) the relief allowed far exceeds petty enhancement so there is no enhancement on overall basis.

The relevant portion of the order of the CIT(A) reads as follows:

     "In the light of facts and circumstances of the case, the addition u/s 2(24)(x) to the extent of Rs.36,56,260/- is liable to be confirmed. Since the A.O. made additions of Rs..35,78,961/-, which means an enhancement for RS.77,299/- [Rs.36,56,260/- (-) Rs.35,78,961/-] is liable to be made. Since the appellant itself vide letter dated 7.1.2005 has pointed out the figure of employee's contribution Rs.36,56,260/- instead of Rs.35,78,961/- as taken by the A.O., there is no need to provide further opportunity before making this enhancement. Moreover, certain relief have been provided in this appellate order. Thus, the over all cumulative effect of this order will be lesser income than assessed income. Hence there will not be any violation of principle of natural justice by making the enhancement of Rs.77,299/- under this head."  

With respect, it appears that the learned CIT(A) failed in his duty by not following mandatory requirement of allowing  reasonable opportunity of hearing  to the assessee, after specifically mentioning that he intend to pass an order of enhancement.

 Off course substantial relief on other issues has been allowed on ground of appeals taken by the assessee. In respect to employees PF contributions the assessee has challenged the addition, and in course of seeking relief for the same the assessee pointed out correct amount of employees contribution. That does not meant that the assessee would be agreeable to enhancement. 

Practical support:

In case CIT(A) want to note a point of enhancement in the order sheet and want to get it signed by the authorized representative (A/R) and / or assessee who is /are  appearing before him, then better course is to request him to issue a formal notice and provide reasonable time because old records have to be consulted and discussion is to be made with concerned persons. The recording in order sheet should not be considered as reasonable opportunity, unless the CIT(A) allows reasonable time to  the A/R to note down the noting in the order sheet and allow reasonable time to submit explanations.

Conclusion:

Even a direction to re-examine any matter which is not in respect of any ground taken by the assessee can amount to enhancement, as the matter which is settled in favor of assessee by the Assessing Office stands open with a risk of change in view by the Assessing Officer. Even before such directions the CIT(A) should allow reasonable opportunity of hearing, otherwise the order may become null and void for the reason of non-compliance of legal requirement as well as principal of natural justice. Careless attitude or high handed ness of offices many times prove to be advantageous to the assessees. In this case suppose the CIT(A) had issued a notice, heard the assessee on the issue of intended enhancement, and then directed the A.O. to re examine, then no fault could be found in the order of the CIT(A). The revenue, on examination of facts and legal position could have also disallowed the impugned expenses, if facts and law so required.