2023 (6) TMI 117 - AT - Income Tax

Enhancement of income - Exercise of power by the CIT(A) u/s 251 - introducing new source of income - AO had not applied his mind to the question of taxability or non-taxability of the three issues raised - HELD THAT - Power of enhancement u/s 251(2) of the Act is restricted to the subject matter arising out of assessment proceedings or the source of income which has been considered expressly or by clear implication by the Ld. AO from the point of view of taxability of the assessee. In the present case, it is manifest that ld. AO did not consider the issues relating to allocation of common expenses in terms of provisions contained in section 115VJ requiring a reasonable basis, disallowance to be made under section 14A of the Act and deduction claimed under section 80GGB and 80G of the Act. It is also manifest that ld. CIT(A) had raised the three above noted issues from the point of view of their taxability. Since ld. AO had not applied his mind to the question of taxability or non-taxability of the three issues, ld. CIT(A) had no jurisdiction in the circumstances of the instant case to enhance the taxable income of the assessee on these three issues. It is not open for the ld. CIT(A) to travel outside the assessment order with a view to find out new sources of income. There must be something in the assessment order to show that Ld. AO had applied his mind to the particular subject matter with a view to its taxability or its nontaxability and not to any incidental connection. It is not a case where the three issues have been considered but addition on that account is not made in the assessment order by the ld. AO. Had it been such a case, it would clearly follow that ld. AO had determined the same in the course of assessment by deciding not to make any addition empowering the ld. CIT(A) to invoke the provisions in respect of enhancement subject to fulfilment of conditions prescribed for the same u/s 251 of the Act. Exercise of power by the ld. CIT(A) to enhance the income of the assessee by raising the new issues not germane out of the assessment order is not tenable. Accordingly, additions/disallowances made by exercising such power are deleted. Grounds taken by the assessee in this respect are allowed.

Summary

Issues Involved:
1. Jurisdiction of CIT(A) in enhancing income by introducing new sources of income.
2. Enhancement of income without issuing statutory notice under section 251(2).
3. Validity of new addition based on incorrect view regarding common costs.
4. Application of Rule 8D for disallowance under section 14A.

Summary:

1. Jurisdiction of CIT(A) in Enhancing Income by Introducing New Sources of Income:
The assessee contested that the CIT(A) exceeded his jurisdiction by making an enhancement of income by Rs. 1,41,15,230/- by introducing new sources of income not considered by the AO during the assessment. The Tribunal held that the CIT(A) does not have the jurisdiction to enhance the taxable income by introducing new sources of income not considered by the AO. The Tribunal emphasized that the CIT(A) can only enhance the assessment on matters considered by the AO, as per section 251 of the Act. The Tribunal cited the Supreme Court's decision in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria, which limits the CIT(A)'s power of enhancement to matters considered by the AO.

2. Enhancement of Income Without Issuing Statutory Notice Under Section 251(2):
The assessee argued that the enhancement was made without issuing a statutory notice under section 251(2). The Tribunal found that the CIT(A) did not provide a reasonable opportunity to the assessee to show cause against such enhancement, violating section 251(2).

3. Validity of New Addition Based on Incorrect View Regarding Common Costs:
The CIT(A) made a new addition of Rs. 1,41,15,230/- by incorrectly concluding that no common costs are attributable to earning income from non-shipping business. The Tribunal agreed with the assessee that the CIT(A) raised new issues not considered by the AO, which is beyond his jurisdiction.

4. Application of Rule 8D for Disallowance Under Section 14A:
The CIT(A) directed the AO to apply Rule 8D for making disallowance under section 14A, which the assessee contested. The Tribunal held that the CIT(A) cannot introduce new issues for disallowance under section 14A that were not considered by the AO during the assessment.

Conclusion:
The Tribunal concluded that the CIT(A) exceeded his jurisdiction by enhancing the income based on new issues not considered by the AO. The additions and disallowances made by the CIT(A) were deleted, and the appeal of the assessee was allowed. The Tribunal emphasized that the CIT(A) must confine his enhancement powers to matters considered by the AO, and any new sources of income should be addressed through sections 263 or 147, subject to their respective conditions.