2016 (10) TMI 253 - HC - Income Tax

CIT(A) jurisdiction to consider the status of the appellant as an AOP - disallow of remuneration as interest to the partners - Held that - As rightly pointed out by Ms.T.C.A.Sangeetha, learned counsel for the appellant, contradictions in the statement of the Commissioner of Income Tax, Appeals-4, Chennai from the above two paragraphs extracted supra, is apparent. Though at one stage, the Commissioner of Income Tax, Appeals-4, Chennai makes a prima facie statement, regarding the status of the appellant as an AOP, in the sur rejoinder dated 15.01.2016, the appellate authority has stated that there is no predetermination of the issue, and that it has not been concluded yet. Whether the impugned show cause notice dated 6.11.2015, has to be set aside, on the grounds of jurisdiction, or to allow the Commissioner of Income Tax, Appeals to decide the status of the assessee. The authority, in his affidavit on oath has stated that, the issue is yet to be decided. True that in the earlier years, the issue was not raised. Merely because, it was not raised, it cannot be said that the Commissioner, has no powers to decide, if the Assessing Officer, has failed to advert to the said aspect. On this aspect, we are of the considered view, that it is only a show cause notice and it is always open to the appellant to respond. While considering the scope and powers of the appellate authority, under the Income Tax Act, 1961, courts have consistently held that the power of the first appellate authority are coteminous with that of the Assessing Officer and that the appellate authority can do what the Assessing Officer ought to have done and also direct the latter to do what he has failed. Appeal is also continuation of original proceedings and unless some fetters are placed upon the powers of the appellate authority by express words, the appellate authority can exercise all the powers as that of the original authority. If the Assessing Officer, has erred in concluding the status of the assessee as a firm, it cannot be said the Commissioner of Appeals, has no jurisdiction to go into the issue. In the light of the averments on oath, in the sur rejoinder, made before this court, and on the facts and circumstances of the case, we are of the considered view that the Commissioner of Income Tax, Appeals-4, Chenai, without being influenced by any of the observations made in the impugned show cause notice dated 6.11.2015, should decide the status of the assessee, with reference to the satutory provisions, and decisions relied on, and simultaneously, consider the explanation, materials and supporting documents, if any to be filed by the appellant, in response to the show cause notice and accordingly answer, as to whether disallowance should be made or not, depending upon the answer on the first issue. Writ Appeal is disposed of in the above terms. However, there shall be no order as to cost. Consequently, the connected civil miscellaneous petition is closed. Inasmuch as the matter pertains to adjudication, where the appellant is required to be heard in person and evidence, if any, to be recorded, an outer limit of six weeks time is fixed. Taking note of the above, appellant is directed to submit the reply/objections, within such time, to be fixed by the Commissioner of Income Tax, Appeals, and the respondent is directed to pass orders, at the earliest, notwithstanding the outer limit fixed by this court. Appellant is directed to extend cooperation and not to protract the proceedings, except, for bonafide cause. It is made clear that if for any bonafide or genuine reasons, the respondent is not in a position to pass orders, within the time frame fixed by this court, contempt proceedings shall not be entertained.

Issues Involved:
1. Jurisdiction of the Commissioner of Income Tax (Appeals) to issue a show cause notice for enhancement.
2. Status of the appellant as a partnership firm or an Association of Persons (AOP).
3. Validity and legality of the show cause notice issued by the Commissioner of Income Tax (Appeals).
4. Application of the rule of consistency in tax assessments.

Detailed Analysis:

1. Jurisdiction of the Commissioner of Income Tax (Appeals) to Issue a Show Cause Notice for Enhancement:
The primary issue is whether the Commissioner of Income Tax (Appeals) has the jurisdiction to issue a show cause notice for enhancement. According to Section 251(1) of the Income Tax Act, 1961, the Commissioner (Appeals) has the power to "confirm, reduce, enhance or annul the assessment." The court held that the Commissioner (Appeals) has the statutory authority to enhance the assessment, provided that the assessee is given a reasonable opportunity to show cause against such enhancement. The court cited several precedents, including the Full Bench decision in State of Tamil Nadu vs. Arulmurugan and Co., which affirmed the appellate authority's power to enhance assessments.

2. Status of the Appellant as a Partnership Firm or an Association of Persons (AOP):
The appellant contended that it has been assessed as a partnership firm for the past 17 years and that its status should not be changed. The Commissioner of Income Tax (Appeals) issued a show cause notice proposing to treat the appellant as an AOP, citing that a partnership firm cannot be a partner in another firm. The court noted that the Commissioner had arrived at a prima facie conclusion based on the assessment records and information available, indicating that the appellant might be an AOP rather than a firm. The court emphasized that it is within the jurisdiction of the Commissioner (Appeals) to investigate and determine the correct status of the appellant.

3. Validity and Legality of the Show Cause Notice Issued by the Commissioner of Income Tax (Appeals):
The appellant argued that the show cause notice was issued without jurisdiction and was predetermined. The court, however, found that the show cause notice was issued to provide the appellant an opportunity to present its case. The court referenced several judgments, including State of U.P. v. Brahm Datt Sharma and Special Director v. Mohd. Ghulam Ghouse, which held that courts should be reluctant to interfere with show cause notices unless they are issued without any authority of law. The court concluded that the show cause notice was valid and within the jurisdiction of the Commissioner (Appeals).

4. Application of the Rule of Consistency in Tax Assessments:
The appellant relied on the rule of consistency, citing the Supreme Court's decision in Berger Paints India vs. CIT, arguing that the status should not be changed as it had been assessed as a partnership firm for many years. The court acknowledged the principle but stated that it does not preclude the Commissioner (Appeals) from investigating and determining the correct status if the Assessing Officer failed to do so initially. The court held that the rule of consistency does not override the statutory powers of the Commissioner (Appeals) to ensure correct assessment.

Conclusion:
The court dismissed the writ petition, affirming the jurisdiction of the Commissioner of Income Tax (Appeals) to issue the show cause notice and to determine the correct status of the appellant. The appellant was directed to submit its reply to the show cause notice, and the Commissioner (Appeals) was instructed to pass orders on merits and in accordance with the law. The court emphasized the need for the appellant to cooperate and not protract the proceedings, setting an outer limit of six weeks for the Commissioner (Appeals) to pass the final order.

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