APPEAL BEFORE THE COMMISSIONER OF INCOMETAX (APPEALS)

Subject : Income Tax Law Month-Year : Apr 2006 Author/s : K. Sarkar Topic : Appeal before the Commissioner of Income-tax (Appeals) Article Details : Historical background : The Institution of Commissioner of Income-tax (Appeals) [CIT(A)], as the first appellate authority, was brought in the Income-tax Act, 1961 and other direct tax enactments (the Acts) by the Finance Act (No 2), 1977. This was necessary to overcome a piquant situation, whereby consequent to the amendment in law, in certain cases, the assessments made by the officers of the seniority of the (present) Additional CIT had to be appealed before another officer of the same rank, or, sometimes even junior to him i.e., (present) Deputy Commissioner of Income tax (DCIT), who were designated Appellate Assistant Commissioner and subsequently the DCIT (Appeals). It was in these circumstances and to remove such anomaly that it was considered necessary to have a post of the first appellate authority at a higher level. Thus the Institution was created. Over a period of time, the powers and the jurisdiction of the CIT (A) increased and those of the AAC/DCIT (Appeals) were narrowed. Finally, with effect from 1st October 1998, the posts of DCIT (Appeals) were abolished and the jurisdiction of the first appellate authority got vested exclusively with the CIT (A). Consequently, a new S. 246A was introduced in the Act by the Finance Act, 1998 effective from 1st October 1998. A transitory clause was provided by way of Ss.(2) therein to provide that all appeals hitherto pending before the DCIT (Appeals) shall stand transferred to CIT(A). Administratively, the CIT (A)s function under the Chief Commissioner of Income-tax and the Legislature has empowered the Central Board of Direct Taxes to assign jurisdiction to the CIT(A)s [S. 120(1)]. Similarly, the Board can assign the said powers to Chief Commissioner of Income-tax. However, the independence of the CIT (A)s in the matters of their appellate jurisdiction has been ensured. Clause (b) of the proviso to S. 119(1) of the Act provides that the Board shall not issue any order, instruction, or direction so as to interfere with the discretion of the CIT (A) in the exercise of his appellate jurisdiction. The independence of the CIT (A)s, in their appellate jurisdiction, has been further ensured and the sanctity of the orders passed by them is preserved,

as the Commissioner of Income-tax is prohibited from exercising his revisionary powers over an order in respect of the matter considered and decided in appeal, even the order is erroneous and prejudicial to the interest of the Revenue clause (c) of Explanation to S. 263(1). In fact, the Commissioner of Income Tax is also prevented from exercising revisionary powers in respect of, (i) an order that has been made a subject matter of appeal before the CIT(A) clause (c) of S. 264(4) or (ii) where an appeal against the order lies to the CIT(A) and the time within which such appeal is to be made has not expired and the assessee has not revoked his right of appeal clause (a) to S. 264(4). On the flip side and rightly so, once the Commissioner of Income-tax exercises his revisionary powers u/s.264, the assessee cannot file an appeal considering that he has revoked his right of filing the appeal. Procedure : Appealability of orders : The powers of the CIT(A), however wide, have to be exercised in respect of the matters specifically made appealable. S. 246A gives a right of appeal to any aggrieved assessee on any of the orders expressly specified in that Section. In respect of other orders, it is not open to the appellate authority to entertain a plea about the correctness, propriety or validity of such an order, unless it falls within the ambit of the phrase denial of liability to be assessed to tax. Such denial may be whole or partial; however, a plea that denial of liability would include a contention that the Act does not apply to him, would not be valid. Apart from the orders specified in S. 246A, a person liable to deduct tax u/s.195, having paid such tax u/s.200, can file an appeal, if he "denies his liability to make such deduction". Hence, whereas in respect of a payment where tax is deductible u/s.195, the assessee fails to deduct it or having deducted tax, fails to pay it, and is treated as an assessee in default u/s.201, he can file an appeal u/s.246A (1), if he "denies his liability to make such deduction". On the other hand, if tax has been deducted and paid, but such person denies the liability, he can file an appeal u/s.248. Filing of appeal : The appeal has to be filed, in duplicate, in the prescribed Form 35 being Memorandum of Appeal and should be accompanied by grounds of appeal, statement of facts, the copy of order appealed against and the notice of demand in original. However, as the filing of the documents other than the grounds of appeal are neither provided in the Act nor in the rules, any

omission in filing them is only an irregularity, which is not fatal. The Form is to be verified and signed by a person who is otherwise authorised to sign the return of income (refer S. 140). Grounds of appeal : (i) The contents thereof should be specific, indicating the issue on which relief is sought. (ii) Common or basic ground, such as on violation of principle of natural justice etc. that is material to the validity of the order itself, should be taken up first. (iii) In respect of each issue, there can be one or more grounds; however, in case they are more than one, they should be taken up sequentially one after the other. (iv) Separate and independent ground should be taken for different issues to facilitate its disposal by the appellate authority in the manner provided in S. 250(6). (v) It is desirable and convenient if the issues are incorporated in the Grounds of appeal in the same chronological order, as these are dealt with in the order appealed against. Statement of facts : The statement of facts should also be in the same order as the issues taken in the grounds. The statement of facts should be in details, but should not be used to introduce additional evidence. Time limit : A memorandum of appeal is to be filed within a period of 30 days from : (i) the date of service of notice of demand, where the order appealed against relates to an assessment or penalty; (ii) the date of intimation of the order sought to be appealed against; (iii) in case of appeal relating to tax deducted at source u/s.195(1) of the Act, from the date of payment of such tax. Condonation: The CIT(A) has the powers to condone the delay in filing the appeal and admit the appeal if he is satisfied that there exists sufficient cause for the delay. The discretionary powers vested with the appellate authority should be exercised judiciously and not arbitrarily. The Courts have held that the powers should be also exercised liberally, considering that, (i) ordinarily, a litigant does not stand to benefit by lodging an appeal

late; (ii) refusing to condone the delay may result in a matter being thrown out at the very threshold leading to cause of justice being defeated. However, the existence of sufficient cause is sine qua non to such a condonation. Further, since the admission of a belated appeal is a condition precedent, the CIT(A) has to adjudicate on the issue of condonation before dealing with the issues in appeal. Where the request for condonation is refused, a speaking order that is an order giving reasons for not cordoning the delay, is to be passed. Payment of taxes : Before filing the appeal, the appellant must pay the taxes, (a) where a return has been filed, the tax due on income returned (including interest thereon [refer S. 140A(1) with Explanation, which mandates adjustment of interest first]; such payment should ordinarily be made within the period of limitation (b) where no return has been filed, an amount equal to advance tax payable. As S. 249(4) starts with No appeal under this chapter shall be admitted, this condition will need to be fulfilled for appeals against both, the assessment and the penalty. While, in the first circumstance, the CIT(A) has no power to dispense with the condition prescribed, he may do so in the second one on an application made by the appellant. However, the CIT will have to record that there exists good and sufficient reasons for granting waiver. Thus, the requirement u/s.249(4) does not merely regulate the assessees pre-existing right of appeal, but in effect whittles it down. Filing fees : The appellant has to pay an appeal fee and enclose evidence of payment along with the Memorandum of Appeal. Such fee payable ranges from Rs.250 to Rs.1000, depending upon the total income determined by the Assessing Officer. It is Rs.250 in all other cases. Verification : After verifying that the appeal filed is in order in all respects, the duplicate copy of Form no. 35 is forwarded to the Assessing Officer along with the prescribed form ITNS 51 to verify from his record, (i) whether the conditions prescribed in S. 249(4) are complied; (ii) whether the appeal is filed in time, which is to be verified from the date of service of demand notice as recorded in Demand and Collection Register.

The Assessing Officer is also directed to inform whether he would like to be present at the time of hearing of the appeal. Notice of hearing : Unless the appeal is to be dismissed or rejected in limine for any vital defect, the CIT (Appeals) shall fix a date and place of hearing. A notice for hearing, as prescribed u/s.282, is issued to the parties i.e., the appellant at the address of communication mentioned in Form No. 35 and also the Assessing Officer. Any subsequent change in the address should be intimated to the CIT (A) office. In case of non-attendance, the CIT(A) may after satisfying himself that the notice has been served on the appellant, decide the appeal ex parte. Hence, if the address of communication given is that of an authorised representative, who is no longer representing the assessee, he should forward the same to the appellant at his known address and should also intimate the appellate authority accordingly. The appellant can make a request for early hearing, which may be granted by the CIT(A), only if he is satisfied that the appellant is not delaying the hearing of appeal. Hearing : The appellant can represent either in person or by a duly authorised representative, who should carry proper authorisation with him. The Assessing Officer can also be represented by an authorised representative. The provisions of the Act empower the CIT(A) to adjourn the hearing of appeal from time to time, either suo moto or on an application made by either of the parties, for just or sufficient reasons. The CIT(A) can make inquiry himself or if he deems it necessary, direct the Assessing Officer to do the needful and report. In other words, the powers of the CIT(A) are plenary. The scope of the powers is co-terminus with that of the Assessing Officer. Hence, while representing a case, the appellants representative cannot take a plea of restricting the review of decision of the Assessing Officer, solely on the basis of material and reasons that were placed before the Assessing Officer. In the course of the appeal proceedings, the following situations may arise : Filing of additional grounds : If the appellant wishes to file additional ground(s) of appeal, he has to follow the procedure regarding filing the same in duplicate, submitting statement of facts, verification, etc. S. 250(5) empowers the CIT(A) to admit such additional ground(s), at his discretion which has to be exercised judiciously, provided he is satisfied that omission to include the issue in the original appeal was not willful or

unreasonable or that such ground could not have been raised earlier for good reasons [Jute Corporation of India Ltd. v. CIT, 187 CIT 688 (SC)]. Further, the primary facts relating to the issue should be available on record; if the relevant facts are not available on record, the issue cannot be taken in the form of additional ground [refer National Thermal Power Co. Ltd. v. CIT, 229 ITR 353(SC)]. On receipt of the additional ground(s), before admitting them, principles of natural justice would require that the CIT(A) forward a copy thereof to the Assessing officer for his comments and deal with the objections, if any raised by the AO. In the normal circumstances, there is no difficulty in getting the grounds admitted; however, it cannot be taken by the appellant as an inherent right. Filing of paper book : At the time of hearing of the appeal, oral arguments and submissions should be supplemented by written submission covering all grounds, unless the assessee desires to rely solely on the submissions on statement of facts filed. Oral submissions in the form of oral argument without making a written submission should be avoided in view of the fact that the jurisdiction of CIT(A) is not that of a Court of appeal. Along with oral submissions, if the appellant considers necessary, the appellant can file a paper book, comprising of correspondence and documents placed before the Assessing Officer and the gist of judicial decisions (preferably head notes from the journals where these are reported) in support of his contention and also distinguishing those relied on by the AO. Of course, the appellant can make alternative submissions before the CIT(A) in respect of the issues before him. In view of the plenary powers granted to CIT(A), he may call upon the appellant to submit more documents. Similarly, he may ask for clarifica-tions and submission on the material gathered during the enquiry. While the appellant can intimate the CIT(A) that he has nothing further to submit in that direction, if it is so, he cannot refuse to part with the information/document in his possession in this respect merely on the ground that such information/documents were not called for by the Assessing Officer and not considered by him. Filing of additional evidence : As far as possible, the issues before the CIT(A) are to be decided on the basis of material placed before the Assessing Officer. However, to ensure fairness and considering that the purpose of the assessment proceedings is to correctly assess the tax liability of an assessee in accordance with the law, the CIT(A) has been given powers to admit additional evidence in certain circumstances. The receipt of additional evidence by the first appellate authority cannot be equated with the receipt of additional evidence as

contemplated in Order No. XLI, Rule 27 of the Code of Civil Procedure. Thus, the powers of the CIT(A) in respect of admitting additional evidence are much wider than the powers of a Court of appeal. The additional evidence envisaged in Rule 46A(1) can be admitted, subject to fulfilment of the conditions laid down therein and the onus is on the appellant to prove that such circumstances existed. The mere fact that the evidence sought to be produced is vital/important cannot be sufficient cause to allow its admission at the appellate stage. The additional evidence can be admitted by the CIT(A) after recording the reasons in writing and giving an opportunity to the AO to examine the document or examine the witness produced or produce similar evidence in rebuttal of the additional evidence. Where such an opportunity is not granted to the AO, it amounts to violation of the provisions of the rule. Also, the provisions of Rule 46A can be invoked only when the appellant wants to produce fresh material before the CIT(A); it would not apply in a case where further material is called for by the CIT(A). The restriction placed under Rule 46A applies only in respect of preliminary evidence and not in respect of secondary evidence produced to support the preliminary evidence [refer Smt. Prabhawati S. Shah v. CIT, 231 ITR 1 (Bombay)] Powers of remand : With effect from 1-6-2001, the CIT(A) no longer has the powers to set aside an assessment order. However, in view of the powers of getting enquiry made by the Assessing Officer, he has the powers of remanding any issue arising in appeal to the Assessing Officer, directing him to examine the issue again with reference to the material submitted in the course of appeal. The power to call for a remand report in tax cases is not circumscribed. In terms of the Code of Civil Procedure, power of remand is ancillary to the main power given to the appellate authority and has to be exercised in the aid of and not in excess of it. The general principles of remand discussed in CPC are that the powers of remand should be used sparingly and ordinarily only in those cases where the appellate authority, after the examination of the material placed on record by way of evidence, takes the view that it is not possible for him to make a just order without the assistance of further evidence or without the assistance of a clearer finding from the authority who has passed the order under appeal. However, if the CIT(A) is of the view that circumstances to call for a remand do not exist, such decision being an interlocutory order, the appellant has no avenue for seeking remedy against it. On the principles of natural justice, the appellant has a right of getting an opportunity to rebut any findings by the Assessing Officer in the remand report, which are prejudicial to its case. Apart from the need for a remand where additional evidence is brought on

record, other instances where the order can be remanded are :

where the interest of justice so requires where the submission made before the Assessing Officer are defective and the appellant pleads that it be given an opportunity to correct it when the Assessing Officer has omitted to record a specific finding on a material issue; When the findings of the Assessing Officer are not sufficiently specific or lack precision.

Power of stay of demand : Although the Act is silent on CIT(A)s power to grant stay from the recovery of demand, the Courts in a number of decisions have held that such power does exist in view of the inherent powers available and in the absence of any exclusionary provision in that direction. However, such powers can be exercised only if it is considered not only necessary but expedient for effective adjudication of appeal (Bongaigaon Refinery and Petrochemicals Ltd v. CIT, 239 ITR 871 (Gau.) and Prem Prakash Tripathi v. CIT, 208 ITR 461 (All.) It has also been held that mere filing or pendency of an appeal does not constitute an automatic stay of recovery of tax under dispute. The power of stay of demand ought not to be exercised by the appellate authority in a routine manner or as a matter of course, having regard to the object of the taxation laws. The Courts [Paulson Litho Works v. CIT, 208 ITR 676 (Mad.)] have also suggested that a specific provision regarding stay of demand should be incorporated in the Act by the Legislature, rather than leaving it to be decided by way of implication. In this context, one has to take into account the two provisos to Ss.(2A) of S. 254 incorporated by the Finance Act, 2001, effective 1-6-2001 in regard to the proceedings in appeal before the Honble ITAT. The said proviso provides for disposal of such appeals within a certain time frame and automatic removal of the stay in case the appeal has not been so disposed of. No such amendments were made regarding powers of stay of demand by the CIT(A). This aspect cannot be ignored while considering an application of stay by the CIT(A). Moreover, there are administrative instructions for granting instalments in respect of demand in appeals pending before the CIT(A). Passing of appellate order : At the conclusion of the hearing, the CIT(A) has to pass an order in writing giving reasons for his decision on the issues in appeal [S. 250(7)]. This is to ensure that the party in appeal knows the reasons for deciding in his, favour or against him enabling the appellant to decide on the further course of action in case the decision is against him. A copy of the order has to be

communicated to the AO and also to the CIT [refer S. 250(7)]. In respect of passing of the appellate order, the Act prescribes an advisory time limit, for appeals instituted on or after 1-10-1998, [refer S. 250(6A) w.e.f. 1-6-1999] to decide the appeal, as far as possible, within one year from the end of the financial year in which the appeal is filed. Powers of CIT (Appeals) : While disposing of an appeal, the CIT(A) is vested with the powers of : (i) in the case of assessment order : (a) to confirm (b) to reduce (c) to enhance (d) to annul the order that is passed without jurisdiction and the defect is not curable; (ii) in the case of order of penalty : (a) to confirm (b) to cancel (c) to vary so as to either enhance or reduce it (iii) in respect of any other order, as he may consider or deem fit. Powers of enhancement : The powers conferred upon the first appellate authority by the Income-tax Act are much wider than the powers of an ordinary Court of appeal. The first appellate authority is not an ordinary Court of appeal, considering that only one party to the original decision taken is entitled to appeal. It is on account of this peculiar position that the statute has conferred wide powers to the first appellate authority. Once the assessment comes before the CIT(A), his jurisdiction is not restricted to examining only those issues that have been taken up by the appellant in appeal, but ranges over the whole assessment and it is open to him to correct the assessment order not only in regard to the matters taken in appeal, but also with regard to maters which were considered by the Assessing Officer in the assessment proceedings. He can examine every process which results in ultimate computation and assessment of income, even if his decision leads to enhancement of income. However, in the area of powers of enhancement, there are contrary decisions : while one view relying upon the decisions in the cases of : CIT v. Shapoorji Pallonji Mistry, 44 ITR 891 (SC) and CIT v. Rai Bahadur Hardut Roy Motilal Chamaria, 66 ITR 445 (SC) is that the power of enhancement is restricted to only those areas and sources of income which were considered

by the Assessing Officer at the assessment stage, and hence, such enhancement should not lead to a new source of income. The other view relying upon the decisions in the cases of CIT v. Kanpur Syndicate Ltd., 53 ITR 225 (SC) and CIT v. Nirbheram Daluram, 224 ITR 610 (SC) is that such power of enhancement can even lead to an addition in respect of a new source of income. In CIT v. Nirbheram Daluram, 224 ITR 610 (SC), the Apex Court relied upon the three judges Bench decisions in the cases of Jute Corporation of India v. CIT, 187 ITR 688 (SC) and CIT v. Kanpur Coal Syndicate, 53 ITR 229 (SC) to hold that the CIT(A) (or AAC as in that case) has plenary powers in disposing of an appeal. The scope of his power is coterminous with that of the Assessing Officer. He can do what the Income-tax Officer can do and can also direct him to do what he has failed to do. The ratio of the decision in the case of Nirbheram Daluram should prevail considering that it was pronounced in the context of S. 251 of the Act, while the earlier decision was in the context of the corresponding provision of 1922 Act. On the other hand, it is also argued that the decision in the case of Rai Bahadur Hardut Roy Motilal Chamania was a decision of a three-Member Bench, while that in the case of Nirbheram Daluram, the decision was by a Division Bench and therefore, the former should prevail over the latter. It has to be noted that in the case of Nirbheram Daluram, the issue of enhancement in respect of a new source of income was never under consideration. Hence, wherever such a situation arises, the proper course of action is to take remedial action u/s.147 or S. 263 of the Act, as the case may be [CIT v. Sardari Lal & Co., 251 ITR 864 (Del-FB)]. Needless to add, where the CIT(A) proposes to enhance the income or penalty, he has to issue a show-cause notice giving the appellant a reasonable opportunity to explain his case. In view of the wide powers of the CIT(A), proceeding before the CIT(A) should be conducted after adequate preparation and care. Further, as far as possible, all legal issues should be taken before the CIT (Appeals), as at times, the Tribunal takes the view that the issue had not been agitated before the CIT(A) and does not arise out of his order.