VIP Road Chartered Accountants Association

Commissioner of Income-tax (Appeals)

Introduction
1. The provisions relating to first appeals under the direct tax laws have undergone several changes over the years. The purpose of this article is to cover the first appeal provisions under direct tax laws. The discussion here focuses on the provisions under the Income-tax Act, 1961 (the Act).
2. The authority to entertain first appeals earlier vested in the Appellate Assistant Commissioner (AAC) of Income-tax. We then had a new designation of Deputy Commissioner of Income-tax (Appeals) [DCIT(A)]. Then came the period when the appeals were entertained by the Commissioner of Income-tax (Appeals) [CIT(A)]. We now have a period when first appeals lie before the CIT(A). This article does not cover the area of first appeal directly to the Tribunal, as was available for some time, against the orders in block assessment cases or, as currently available, the orders passed by the Commissioner of Income-tax (CIT).
Appealable orders
1. Section 246A(1) of the Act which is part of Chapter XX of the Act deals with appealable orders. It is not intended to enumerate or reproduce the provisions of section 246A(1) here. However, the important area of denial of liability to be assessed is discussed here. Some typical questions which arise are discussed later.
2. One of the common questions which arise is whether an appeal can be filed in respect of an order under a provision not enumerated under section 246A(1). The answer to this question depends on whether the Act otherwise provides for an appeal against such an order. For example, take a scenario where a person responsible for paying any sum chargeable under the Act and responsible for deducting tax under section 195 of the Act desires to file an appeal against an order under section 195(2). The appeal would not lie under section 246A(1) but under section 248. Section 248 makes it a pre-condition that tax must have been deducted and paid in accordance with the order under section 195.
3. On the other hand, a certificate granted under section 197(1) might not be appealable as it is not an order and even if it were to be treated as an order, the provisions of Chapter XX do not list it as an appealable order. Consider a situation where a person who holds the view that he is not liable to tax in respect of certain amounts receivable from India applies for a certificate under section 195(3) or under section 197(1) for a certificate for ‘Nil’ tax deduction at source. The Assessing Officer (AO) refuses to grant a certificate or grants a certificate determining the tax deduction rate at a percentage other than ‘Nil’. It may be possible for such a person to argue that the ‘certificate’ under section 195(3) or section 197(1) or the communication of denial of such ‘certificate’ is an order appealable under section 246A(1) as "the assessee denies his liability to be assessed under the Act". For this proposition, one may rely on the ratio in R.B. Jodhamal Kuthiala vs. CIT (1967) 66 ITR 319 (Del).
4. The general rule, therefore, is that an appeal does not lie unless specifically provided for. This rule has been laid down in CIT vs. R. Arunachalam Chettiar (1953) 23 ITR 180 (SC). The issue that crops up is whether an assessee can file an appeal against an order levying interest. The answer to this would be in the affirmative, if the assessee denies totally his liability to pay interest under a particular section under the Act but in the negative if he disputes only the quantum levied. In the former case, his case is covered under section 246A(1) but in the latter scenario his case does not fall within the ambit of section 246A(1). See Central Provinces Manganese Ore Co. Ltd. vs. CIT (1986) 160 ITR 961 (SC) and Associated Stone Industries (Kotah) Ltd. vs. CIT (1997) 224 ITR 560 (SC). On the other hand, interest under section 220(2) is not appealable as it is not part of an order nor is there a specific provision for appeal against such interest. See Princess Usha Trust vs. CIT (1989) 176 ITR 27(MP) and ANZ Grindlays Bank plc CIT (2000) 241 ITR 269 (Cal).
5. Another question that is often asked is whether an appeal can be filed where an assessee has filed a return of loss and even after the time limit for completion of assessment is over, no order of assessment or intimation under section 143 is received. As no order has been passed, the assessee would not be entitled to file an appeal in such a case.
6. Can an appeal be filed against a protective assessment? In the first place, the Act does not have any concept of protective assessment. Any assessment is determinative of an assessee’s liability under the Act. Protective assessment alleged to be under section 143(3) or under section 158BC read with section 158BD are appealable under section 246A(1)(a) or section 246A(1)(k) respectively.
Who can file an appeal
1. Section 246A(1) states that any assessee aggrieved may file an appeal. The person filing the appeal must, therefore, be an assessee as defined in section 2(7) of the Act. The assessee must be aggrieved; i.e., there must be a legal loss to the assessee and the loss must emanate from the order being appealed against. Neither an AO nor his successor can, therefore, file a first appeal. It can only be an assessee who can file the first appeal.
2. Can an appeal be filed against an agreed assessment? The answer depends upon what is the nature of the agreement. For example, an agreement that the assessee would waive limitation and the assessment order could be passed after the limitation period was over is appealable as there can be no waiver of limitation. Another situation could be where an assessee agrees to a certain position being taken in his assessment e.g. accepting certain cash credits as income under section 68. In such a case, the assessee would not be entitled to dispute the assessment order for that year on the point which is agreed upon with the tax authorities. This does not bar the assessee from disputing the same point in a later year, as the principle of res judicata does not apply. For example, in a later year the assessee could well produce satisfactory evidence of the cash credits and stem disallowance of interest paid in respect of those cash credits appearing in the form of loans in the books of account. There can, however, be no valid agreement in respect of incorrect interpretation of the law.
3. An individual is entitled to file an appeal against an order in his own case. During the lifetime of an individual, his duly authorized agent is also entitled to file an appeal. On the death of an individual, the agent cannot file an appeal as the agency arrangement comes to an end but the legal representative of the deceased is entitled to file an appeal. In one instance, where the agent filed an appeal after the death of the individual concerned but the agent was also a legal representative, the appeal memo was allowed to be rectified to correctly record the status as ‘legal representative’ instead of ‘agent’. To dismiss the appeal in such a case would amount to miscarriage of justice. See Rajah Manyam Meenakshamma vs. CIT (1956) 30 ITR 286 (AP).
4. Generally, an HUF would file its appeal through a Karta but, in certain circumstances, notwithstanding the provisions of section 140(b) of the Act, any other member of the HUF could also file an appeal on behalf of the HUF. For example, if a Karta of a Hindu Undivided Family (HUF) agrees with the tax authorities that income from ancestral property will be treated as his individual income, such an agreed assessment is not binding on the HUF and some other member of the HUF may still file an appeal on behalf of the HUF against such an ‘agreed assessment’.
Grounds of appeal and statement of facts
1. The grounds of appeal and statement of facts must be carefully drafted. They must be comprehensive and complete and address all the grievances that the assessee wishes to seek redress in appeal.
2. Some common practice points to be observed are discussed here, as it is not possible to discuss all types of grounds of appeal which may need to be taken up. First, the grounds of appeal and the statement of facts must be separate. Cluttering up grounds of appeal with detailed facts or mixing up legal grounds with the statement of facts is a common failing. This should be avoided. While the statement of facts may be detailed, the grounds of appeal must be brief. The grounds of appeal must never amount to a written submission by the assessee.
3. It is generally advisable to include a ground reading "the learned AO has erred in determining the total income at Rs. ______ as against the returned income of Rs. _______" or words to that effect. It is also advisable to include a prayer for reliefs and a prayer for leave to withdraw or alter an existing ground or to introduce an additional ground of appeal. Care must be taken to seek appropriate reliefs in respect of each ground and to seek consequential reliefs.
4. As signing of all annexures to the appeal memo is covered under a separate article, the issue is not discussed here.
Claim and evidence before CIT(A) for first time
1. In spite of all the care taken at the stage of drafting of grounds of appeal, situations may arise where there is need to raise a fresh claim before the CIT(A). This may involve either raising a fresh ground of appeal based on existing evidence or on the basis of new evidence. It may sometimes involve taking up a ground which was not taken up before the AO either but is being taken up in the context of either a legislative amendment or interpretation by a court of law.
2. The ability to file fresh evidence before the CIT(A) is circumscribed to some extent by the provisions of rule 46A of the Income-tax Rules, 1962 (the Rules). Rule 46A lays down four sets of circumstances in which the assessee can lead fresh evidence before the CIT(A). These are:
  1. where the AO refused to admit evidence;
  2. where the AO called for the evidence and the assessee was unable to produce the evidence;
  3. where the assessee was unable to produce any evidence relevant to any ground of appeal; and
  4. where the AO passed the order without giving sufficient time to the assessee to adduce any evidence relevant to any ground of appeal.
  In cases referred to in (b) and (c) above, the assessee has to show that there was sufficient cause for failure to adduce the evidence before the AO. The CIT(A) is required to record in writing the reasons for admission of the fresh evidence. The AO is given the opportunity to examine the fresh evidence being introduced. If the assessee introduces the statement of any person as fresh evidence, the AO is entitled to examine the witness. Where fresh evidence has come to light after the assessment was completed, such evidence will be treated as evidence which the assessee was unable to produce before the AO for sufficient cause. For example, the statement of third party given in other proceedings owning up the income as the income of that third party or loan confirmations signed by the lenders after the date of completion of assessment could be treated as falling within this category.
3. Subject to the discussion on rule 46A above, a ground may be taken up for the first time before the CIT(A) if the evidence already before the AO or the CIT(A) could lead to a decision on that ground. As the powers of the CIT(A) are coterminous with those of the AO, there is no reason why the assessee should be barred from taking a ground for the first time before the CIT(A). In this connection, useful reference maybe made to CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC) and to Jute Corporation of India vs. CIT (1991) 187 ITR 188; CIT vs. Nirbheram Duleram (1997) 224 ITR 610 (SC).
4. Where a new ground is taken after a legislative amendment or a decision of a court of law, the discussion above would apply with equal force. It may be pertinent to note that under section 250(5), the CIT(A) may allow an additional ground of appeal to be agitated if he is satisfied that the omission of that ground from the grounds of appeal was not wilful or unreasonable.
Powers of CIT(A)
1. Section 251 lays down that the CIT(A) may confirm, reduce, enhance or annul the assessment. In doing so, the CIT(A) may go into all the matters covered by the assessment. The CIT(A) is not bound by the scope of the appeal. See in this connection CIT vs. Nirbheram Duleram (1997) 224 ITR 610 (SC) and CIT vs. Ahmedabad Crucible Co. (1994) 206 ITR 574 (Guj.). The CIT(A) cannot, however, discover new sources of income not considered by the AO. The appropriate power is with the AO in terms of section 148 or with the CIT in terms of section 263. See in this connection CIT vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC).
2. The issue often debated is whether the CIT(A) is justified in setting aside an assessment or whether it is mandatory for him to call for a remand report from the AO and decide the appeal. The Gujarat High Court in CIT vs. Ahmedabad Crucible Co. (1994) 206 ITR 574 (Guj.) concluded that the first appellate authority was in that case justified in setting aside the assessment order. This, in my view, continues to be good law even after the amendment of section 251(1)(a) by the Finance Act, 2001 with effect from 1st June, 2001. The word ‘annul’ is wide enough to cover not only a total cancellation of the assessment but also a cancellation with a direction to assess afresh.
3. Where an assessment is annulled, the AO cannot pass a fresh order whereas if an order is set aside, a fresh assessment is possible. See CIT vs. Ratanbai Dubhash (1998) 230 ITR 498. An order which is void ab initio, for example on account of limitation, can only be annulled. It cannot be set aside and validated by a later assessment.
4. The CIT(A) has an inherent power to grant stay but this area is not discussed at great length here as powers of stay are covered elsewhere.
5. The CIT(A) is bound by orders of an appellate authority of higher level (including the Tribunal) whether they are jurisdictional authorities or not. The normal rules relating to precedents and their binding nature would apply. See Union of India vs. Kamalakshi Finance Corporation Ltd. (1992) AIR (SC) 711.
6. In appeals relating to penalty, the CIT(A) may confirm, enhance, vary or reduce the penalty. In any other appeal, the CIT(A) is empowered to pass such order as he deems fit.
Enhancement by CIT(A)
1. Section 251(1)(i) also gives the CIT(A) the power to enhance the assessment. As required by section 251(2), the assessee must be given notice before the assessment is enhance d. The powers of the CIT(A) in enhancement are subject to following the principles of natural justice like giving adequate notice and opportunity including opportunity to lead additional evidence, cross-examine witnesses. The CIT(A), in such cases, is exercising the functions of an AO. The notice to the assessee must be in writing giving the reasons for the proposed enhancement and the evidence which he relies upon. In my view, notings on the proceeding sheet cannot take replace proper written notice. If the CIT(A) proposes to rely on fresh evidence available or on statement of witnesses, the assessee is entitled to examine the evidence, lead evidence of his own to counter the evidence relied upon by the CIT(A), cross-examine witnesses. Rule 46A would have no application in such cases of evidence being considered by the CIT(A). As pointed out earlier, the enhancement can never arise out of discovery of a new source of income.
2. The CIT(A) cannot purport to enhance an assessment which is invalid or carry out a reassessment. This is because he cannot validate an originally invalid order. See V. Subramania Iyer vs. CIT (1978) 113 ITR 685 (Ker.).
Withdrawal of appeal
1. There is no inherent right in an assessee to withdraw an appeal. The CIT(A) may proceed on the basis of the material available before him and decide the matter on merits. See CIT vs. Rai Bahadur H.M. Chamaria (1967) 66 ITR 443 (SC) and CIT vs. R.N. Bhattacharjee (1979) 118 ITR 461 (SC). The CIT(A), however, cannot dismiss the appeal for non-prosecution or non-attendance by the assessee. The CIT(A) is required to dispose of the appeal on merits.
Penalty by CIT(A)
1. The CIT(A) is empowered to levy penalties under section 271(1)(c) for concealment of income in situations where he has enhanced the income of the assessee or under sections 271AA or 271G for defaults in the area of transfer pricing or under section 272A for failure to answer questions, etc.
2. The general rules relating to imposition of penalty e.g. notice, reasonable cause, etc. would apply to such penalty proceedings.
Pre-deposit of tax
1. Section 249(4) provides that an appeal under Chapter XX shall not be admitted unless the assessee has paid the tax due on the income declared in the return of income. If no return has been filed, the assessee is required to pay the amount of advance-tax payable by him. In the latter case, the CIT(A) may in response to an application by the assessee waive the requirement of payment of the tax. The CIT(A) is required to record in writing the reasons for waiver.
2. As discussed earlier, an appeal against an order under section 195 is appealable under section 248 only if the tax has been deducted and paid in accordance with the order under section 195.
Conclusion
1. The provisions relating to first appeal are complex and the powers of the CIT(A) are wide ranging and include the power to grant stay. But the CIT(A) is not permitted to act as an AO and discover new sources of income. As laid down by the Supreme Court, judicial discipline requires that lower appellate authorities like the CIT(A) follow the rulings handed down by the higher appellate authorities. The decision of the Supreme Court, of course, forms the law of the land by virtue of the Constitution of India and does not require a special provision in the income-tax law to that effect.

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