1. It Appeal No. 514 (Mad.) of 1984 is filed by the department whereas CO. No. 63 (Mad.) of 1984 is filed by the assessee. Since the questions involved are same, both the appeal and cross-objection are taken up together and disposed of by this common order for the sake of convenience.
2. The assessment year involved in these matters is 1976-77. According to the facts appearing in this case, originally the ITO completed the assess ment for 1976-77 on 26-2-1979 on a total income of Rs. 58,920.
As against this order, the assessee preferred an appeal before the AAC wherein he contested only with regard to the claim made in respect of stud-farm expenses. The AAC by his order in IT Appeal No. 112 (Mad.) of 1979, dated 23-7-1980 on considering the facts and after hearing the arguments, set aside the assessment and directed the ITO to redo the assessment in accordance with law.
3. In pursuance of the abovesaid order of the AAC in IT Appeal No. 112 (Mad.) of 1979-80, dated 23-7-1980, the ITO took up the matter for reconsideration. Subsequent to the completion of the original assess ment and the receipt of the above appellate order, some significant development took place in this case. Searches were conducted in the assessee's residential premises and various other premises connected with him on 20-1-1981 and subsequent dates, As a result of which variousdocuments were taken possession of besides seizure of jewellery by the department. Some of the documents were found to have been connected with the assessment for 1976-77. It was also noted that in the original assessment certain aspects, such as, value of rent-free accommodation provided to the assessee by the employer, South India Corpn. Agencies (P.) Ltd., was not correctly valued and brought to tax.
Considering the various documents seized during the search, questionnaires were issued to the assessee by the ITO in his letters dated 5-1-1983 and 8-2-1983. A notice under Section 143(2) of the Income-tax Act, 1961 ('the Act') was also issued. While furnishing replies to the questionnaires, the assessee has raised a preliminary objection stating that as the assessment is set aside for a limited purpose, namely, to look into the stud-farm expenses claimed by the assessee, the other points cannot be looked into. Reliance was placed on the decision of the Madras Bench of the Tribunal in the case of S.Balasubramaniam v. ITO [IT Appeal Nos. 1111 to 1113 (Mad.) of 1975-76, dated 16-10-1982]. The ITO placed reliance on a decision of the Madras High Court in the case of CIT v. Seth Manicklal Fomra [1975] 99 1TR 470 and ultimately came to the conclusion that once an order of assessment is set aside and the matter comes f6r fresh assessment before the officer, his powers will have to be decided with reference to the provisions of Section 143(3) and not with reference to any observations made by the AAC in his order or with reference to the scope of appeal before the AAC. In view of this decision, the ITO was unable to accept the assessee's preliminary objection and proceeded to complete the assessment after taking into account all the material available before him which have come into his possession as a result of search.
4. After considering the submissions made by the assessee since the income returned by the assessee was more than Rs. 1 lakh, a draft of the proposed assessment order was forwarded to the IAC as contemplated under Section 144B of the Act. The details of the proposed assessment order are contained in the order of the ITO dated 26-3-1983.
Thereafter, the IAC after giving opportunities to the assessee has given his instructions to enable the ITO to complete the assessment for the assessment year 1976-77 (vide IAC's Instruction No. 26 of 1983-84) in proceedings under Section 144B. Accordingly, the assessment was completed and the details are contained in the assessment order dated 22-9-1983. Aggrieved by the assessment made by the ITO, the assessee preferred an appeal before the Commissioner (Appeals). Before the Commissioner (Appeals) at the very outset, the appellant submitted that the assessment has become barred by time as the ITO is not competent to make an assessment under Section 143(3) and the IAC is not competent to assume jurisdiction under Section 144B while making the assessment on the basis of the limited directions given by the AAC while setting aside the assessment to look into and allow a particular item of expenditure. According to the appellant, the ITO has not confined to the directions of the AAC but has completely ignored the directions and has recomputed the income from all sources. According to the appellant, this is illegal and this is against the directions and in violation of the limited directions given by the AAC. The appellant further submitted that not only that the ITO recomputed the income on the basis of material subsequently gathered, he has also on the basis of information already on record changed his mind regarding the computation of perquisite and income from other sources. The appellant further pointed out that the ITO has not considered the very purpose for which the assessment was set aside, namely, to ascertain the expenditure on maintenance of horses. The appellant has also argued that the ITO has dismissed the same without examining the claim in detail. The appellant has also pointed out that the ITO failed to note that all other items except the expenses on stud-farm had become final and conclusive. According to the appellant if the ITO was of the opinion that income has escaped assessment for whatever reason then he could have resorted to proceedings under Section 154 of the Act, Section 147 or 263 or any other section of the Act. Accordingly, it was submitted that once the final assessment was arrived at, it cannot be reopened except in the circumstances detailed in and within the time limit by the other expressed provisions of the Act. Reliance was placed on a decision of the Privy Council in CIT v. Khem Chand Ramdas [1938] 6 ITR 414. Reliance was also placed on a decision in ITO v. S.K.Habibullah [1962] 44 ITR 809 (SC). The appellant drawing attention of the Commissioner (Appeals) to Section 251(1)(a) submitted that the section has made it very clear that the ITO should just apply the directions of the AAC and he cannot state in an unfettered manner as if he is making the first assessment. Even if there is any escapement of income he has to take recourse only to the other relevant provisions of the Act.
The decision of the Madras High Court in the case of Seth Manicklal Fomra (supra) is not applicable to the facts of this case especially when the High Court had not considered the provisions of Section 251(1)(a). Thereafter, the appellant relied upon the decisions of the Calcutta High Court in the case of Katihar Jute Mills (P.) Ltd. v. CIT [1979] 120 ITR 861 and in the case of Surrendra Overseas Ltd. v. CIT [1979] 120 ITR 872. In the above said two judgments, the judgment of the Madras High Court in Seth Manicklal Fomra's case (supra) has been explained. The ITO does not have powers to travel beyond the specific directions given by the AAC. Reliance was placed on the decision in the case of Smt. Sneh Lata v. CIT [1966] 61 ITR 139 (All.) and in the case of CIT v. Jagdish Mills Ltd. [1964] 51 ITR 266 (Guj.). In these cases the High Court held that the AAC cannot direct the ITO to include the escaped income ignoring the provisions of Section 147. The ITO cannot include an income which has not been considered at all in the original assessment while completing the assessment in accordance with Section 251(1)(a) especially when the time limit for issue of notice under Section 148 of the Act in this case had elapsed by 31st March itself.
Thus, it would be very clear that the ITO cannot under the guise of complying with the provisions of Section 251(1) (a) even attempt to compute any income that would come purely within the ambit of the other provisions of the Act.
6. One more objection raised before the Commissioner (Appeals) was that the assessment made in this case had become clearly barred by limitation because the assessment had earlier been set aside for the limited purpose of considering the stud-farm expendituie and the fresh assessment that could be made is one under Section 143(3), read with Section 251, and not purely under Section 143(3) so as to follow the procedure laid down under Section 144B. This view is supported by the decision of the Madras Bench of the Tribunal in the case of ITO v. K.R.Chinnikrishna Chetty. It has been held therein that the extended time under Section 144B is not available for assessments to be made Under Section 147.
7. The Commissioner also heard the ITO who was present before him. The ITO submitted that since the assessment itself has been set aside it is within his power to redo the assessment on the basis of material seized in the search conducted subsequent to the AAC's order. On hearing the parties, the Commissioner (Appeals) held as under : (i) The AAC in exercise of his powers under Section 251 cannot confer jurisdiction to the ITO to make an assessment utilising the materials seized after the assessment and the appealCITv. Estate of Late Sri. Veeraswamy Chettiar [1963] 49 ITR 13 (Mad.) at p. 22, N. Naganbatha Iyer v. CIT[1966] 60 ITR 647 (Mad.) at p. 654.
(ii) The AAC was concerned only with the claim for maintenance of horses and whether it is capital expenditure or revenue expenditure, he was not concerned with the other aspects of the assessment order.
(iii) The question of assessment of income from undisclosed sources was never before the ITO while making the original assessment, and the AAC should not have legally given any direction to look into that source while making the reassessment as that ground was not even there at the time of making the original assessment. The AAC, therefore, could not have possibly given the directions to the ITO to look into the new source of income which was not in existence at the time of making the original assessment.
(iv) The ITO could have considered the sources only after he has reopened the assessment under Section 147 with the previous permission of the Commissioner. It is not within the powers of the AAC to have conferred the powers to the ITO to reopen the assessment and conduct fresh enquiries when such a power cannot be read into the orderPulipati Subbarao & Co. v. AAC [1959] 35 ITR 673 (AP).
(v) It is not open to the AAC to travel outside the records to give a directionSterling Construction & Trading Co. v. ITO [1975] 99 ITR. 236 (Kar.). Therefore, it is incorrect to read into the order of the AAC more than what is apparent from a plain reading of the words. In the present case, the entire assessment was not set aside. The quantum was not disturbed but the ITO was directed to verify whether similar claim as made by the assessee regarding the expenses on maintenance of horses have been allowed in the hands of the other co-owners. The original assessment was not set aside fully but only a small portion thereof was allowed to be verified.
(vi) The AAC has not directed the ITO to assess the income from undisclosed sources or to compute the income afresh. The ITO could not have assumed jurisdiction while making the original assessment for assessing this income from undisclosed sources as it is clearly beyond his powers as it falls under the provisions of Section 147.
The ratio of the decision in the case of J & K Cotton Spg. & Wvg.
Mills Co. Ltd. v. CIT [1963] 47 ITR 906 (All.) followed by the Madras High Court clearly shows that the AAC's order could not have been the basis for the assessment of the income from undisclosed sources as there was no express provision so as to recompute the entire income afresh. The assessment as originally done has not been set aside but only one aspect thereof has been set aside for verifying the admissibility of a particular expenditure claimed as the ITO has not afforded reasonable opportunity and has, thus, followed the principle of natural justice. For these reasons, the Commissioner (Appeals) held that the decision of the Madras High Court in the case of Seth Manicklal Fomra {supra) is distinguishable on facts and that it cannot be taken as an authority justifying the assessment as the AAC has not set aside the entire assessment.
(vii) Even if it is assumed for the sake of argument that the ITO had all the powers which he had at the time of making the original assessment while making the fresh assessment consequent on the AAC's order, still it can be seen that the power to rope in an income which has been discovered in search and after four years after the original asssessment was completed is not within his powers as the assessment had to be reopened under Section 147. The ITO, therefore, exceeded his jurisdiction in making the assessment using the materials during the search while redoing the assessment consequent on the AAC's decision to verify the details of the expenditure.
Where the AAC limits the powers of the ITO by giving suitable directions regarding the scope of enquiry by the ITO, the ITO's powers become fettered by the directions and he has to act in accordance with the directions S.P. Kochhar v. ITO. (viii) The Act does not authorise the ITO to bring to tax income escaping assessment discovered in a search while acting under a limited power conferred by the AAC to look into one particular aspect of the expenditure. The ITO cannot recompute the income of property while proceeding under the directions of the AAC to look into the stud-farm expenditureK.P. Moideenkutty v. CIT [1981] 131 ITR 356 (Ker.). In the case of Seth Maniklal Fomra {supra) the directions of the AAC were wide enough to permit any enquiry whereas in this case the AAC has given only directions for limited enquiry.
The assessment is, therefore, according to the Commissioner (Appeals), void ab initio as it is beyond the jurisdiction and, therefore, cannot be upheld. Aggrieved, the department has filed the present appeal before the Tribunal.
8. The submissions of the learned departmental representative are as under: The Commissioner (Appeals) erred in cancelling the assessment made by the ITO as void ab initio and illegal. The Commissioner (Appeals) erred in holding that the original assessment was set aside by the AAC only for the specific purpose of considering the allowance of expenditure incurred by the assessee under the head 'Stud-farm' and, therefore, the ITO could not have traversed beyond his jursdiction in making several additions in the set aside assessment which were not made in the original assessment. The AAC in the decretal portion of the order has specifically mentioned 'with a view to enable the ITO to make a proper assessment on the appellant, assessment made is set aside with a direction to redo the same according to law'. The assessee did not pursue the matter by filing appeal against the order of the AAC setting aside the assessment in its entirety.
Therefore, the assessment was set aside by the AAC in entirety and the ITO was within his limits and additions made in the set aside assessment were in accordance with law as the assessment was made under Section 143(3). The decision of the Madras High Court in Seth Maniklal Fomra's case {supra) would be squarely applicable to the facts of this case and not the decisions of the Calcutta High Court in the cases of Katihar Jute Mills (P.) Ltd. (supra) and Surrendra Overseas Ltd. (supra). Therefore, once the assessment was set aside the ITO is competent and has unfettered jurisdiction to assess the income that was not considered in the original assessment on the basis of material subsequently received by him. It is also significant to note that the assessment is pending as a result of the order of the AAC setting aside the assessment and, therefore, the question of reopening the assessment again under Section 147 to assess the escaped income on the basis of the materials available to the ITO will not. be in order. It should also be remembered that once the assessment is set aside, the ITO has powers to make such enquiries as he thinks fit and frame an assessment accordingly, thereby the ITO is competent to make any additions under any other heads of income if the same has escaped in the original assessment and the addition should be made in the fresh assessment to be made.
It was, therefore, submitted that the ITO has got ample jurisdiction to complete the assessment under consideration.
9. On the other hand, the learned counsel appearing for the assessee submitted that the assessment has become time barred as the ITO is not competent to make an assessment under Section 143(3) and the IAC is not competent to assume jurisdiction under Section 144B while making assessment on the basis of the limited directions given by the AAC while setting aside the assessment to look into and allow a particular item of expenditure. The ITO has not confined himself to the directions of the AAC and has recomputed the income from all sources. This is illegal and is against the direction given by the AAC. The ITO has not only recomputed the income on the basis of materials subsequently gathered but also on the basis of information already on record changing his mind regarding the computation of perquisite and income from other sources. The ITO failed to note that all other items except expenses on stud-farm had become final and conclusive and if the ITO was of the opinion that the income has escaped assessment he could have resorted to provisions of Sections 154, 263 or any other Section under the Act. If once a final assessment is arrived at, it cannot be reopened except in the circumstances detailed and within the time limit prescribed by the other express provisions of the ActKhem Chanel Ramdas's case (supra). The AAC would not have directed the ITO to look into any other aspect than what was before him under Section 251(1)(a).
The judgment of the Madras High Court in the case of Seth Manicklal Fomra (supra) is not applicable to the facts of this case since the High Court has not dealt with the provisions of Section 251(1)(a). This view gains support from two decisions of the Calcutta High Court in the case of Katihar Jute Mills (P.) Ltd. (supra) and in the case of Surrendra Overseas Ltd. (supra). The ITO has no power to travel beyond the specific direction given by the AAC. The AAC cannot instruct the ITO to include the escaped income ignoring the provisions of Section 147 in the appellate order in the case of ITO v. Nawab Shah Nawas Khan [1938] 6 ITR 370 (Lahore). Therefore, the ITO cannot include an income which has not been considered at all in the original assessment while completing the assessment in accordance with Section 251(1)(a) especially when the time limit for issue of notice under Section 148 in this case has elapsed by 31st March itself. The ITO's action in including a portion of income which is strictly categorised as escaped income in the order amounts to violation of not only the provisions of Section 251(1)(a) but also Section 147. Therefore, the ITO cannot under the guise to comply with the provisions of Section 251(1)(a) attempt to compute any income that would come within the scope of other provisions of the Act. For all these reasons, it was submitted that the assessment is illegal, incorrect and in excess of the powers vested with the ITO by the Act and has been made without proper consideration of either the facts or the legal basis and completely disregarding the written arguments made by the assessee.
10. We have heard the rival submissions made by the parties. The preliminary point raised in the appeal relates to the jurisdiction of the ITO in completing the assessment after the appeal was remanded to him by the AAC. We have already set out the facts in detail. The fact remains that while completing the set aside assessment, the ITO included certain new items of income which have not been considered in the original assessment. It was pointed out that when the time limit for issue of notice under Section 148 has elapsed in this case by 31-3-1981 the ITO cannot include the alleged escaped income in the set aside assessment. The question that arises for consideration in this appeal is whether the order of the first appellate authority has to be construed as setting aside the entire assessment or the AAC has set aside only one item of income that was appealed before him for the purpose of redoing the assessment. In order to Understand this, it is necessary to peruse the order passed by the AAC. In the assessment year 1976-77, the original assessment was made on income from salaries and other sources. The assessee had also income from horse racing. A sum of Rs. 52,940 was claimed as loss by the appellant which included an amount of Rs. 36,384 claimed as stud-farm expenses. The ITO while computing the original assessment disallowed expenses claimed to the extent of Rs. 36,384 and reduced the loss claimed to Rs. 16,564. After, determining the loss at the above figure, he carried over the same to the next assessment year. The assessee filed an appeal before the AAC against the disallowance of expenses claimed to the extent of Rs. 36,384 by the ITO as capital in nature. While disposing of this appeal, the AAC in his order dated 23-7-1980 held as under : With a view to enable the ITO to make a proper assessment on the appellant, the assessment made is set aside with a direction to redo the same according to law.
Thus, we have seen the order passed by the AAC on the said appeal. The last portion of the aforesaid order is the fulcrum on which the entire argument rotates.
11. While dealing with the power of the ITO in completing the set aside assessment, there is the judgment of the Madras High Court in the case of Seth Manicklal Fomra (supra) and also the decision of the Madhya Pradesh High Court in the case of Kundanlal Maru v. CIT [1982] 135 ITR 84. According to the facts appearing in the case of Seth Manicklal Fomra (supra) the assessee was carrying on business in cloth at Madurai, and a business in purchase and sale of sugar in Madras. For the assessment year 1961-62 corresponding to the previous year, 1960, the ITO determined the income from the cloth business on the basis of the books of account at Rs. 8,204. Finding that regular books of account had not been kept for the business of sugar, he estimated the income from this source at Rs. 15,000. Accordingly, the total income was, thus, determined at Rs. 23,204. Aggrieved by the estimate made by the ITO in respect of the sugar business the assessee filed appeal to the AAC. The AAC set aside the order of assessment and directed the ITO to redo the assessment in the light of the observations contained in his order. Thereafter, while considering the matter afresh in the light of the direction given by the AAC the ITO called for a wealth statement from the assessee. In the wealth statement filed by the assessee he disclosed cash to the tune of Rs. 1,19,339 as part of his assets as on 31-3-1961. The ITO considered that out of this amount a sum of Rs. 87,595 represented income from undisclosed sources. Even after the reconsideration in the light of the order of the AAC, the ITO estimated the income from the business in sugar at Rs. 15,000 as it was done originally. But in addition to this estimation from the business in sugar, he included the sum of Rs. 87,595 as income from other sources.
On these facts, the Madras High Court held as under : Once an order of assessment is set aside, it is open to the Income-tax Officer to consider the entire matter afresh notwithstanding the terms of the order of the Appellate Assistant Commissioner directing the officer to consider the issue relating to the estimation of the income alone. There is no warrant for reading any such restriction of his power either under Section 251(1)(a) or under Section 143(3) of the Income-tax Act, 1961, under which the officer makes a fresh assessment. It is doubtful whether the Appellate Assistant Commissioner can restrict the power of officer while setting aside the assessment order itself and directing him to make a fresh assessment order. It might be open to the Appellate Assistant Commissioner without setting aside the order and directing the officer to make a fresh assessment to invoke his powers under Section 250, call for a finding on a specific issue and dispose of the appeal himself. But if the order of assessment is set aside and the officer is directed to make a fresh assessment, there is nothing in the provisions of the Act which would restrict the powers of the officer in passing an order under Section 143(3). Once the order of assessment is set aside and the matter comes up for fresh assessment before the officer, his powers will have to be decided with reference to the provisions of Section 143(3) and not with reference to any observations made by the Appellate Assistant Commissioner in his order with reference to the scope of the appeal before the Appellate Assistant Commissioner. (p. 470) 12. Thus, we have seen that when the assessment is set aside, the entire assessment is open before the ITO. It is as if he is making a fresh assessment at that point of time and he can take into account all the materials in his possession at that point of time. Though the ITO is bound by the directions given by the AAC while setting aside the assessment subject to carrying out those directions, he has the same powers as he had originally while making the assessment. It is also significant to note that when an assessment is set aside and pending the ITO cannot take recourse to Section 147. If he completes the assessment without considering the materials which had come to his possession, then too he cannot take recourse to Section 147Gemini Leather Stores v. ITO [1975] 100 1TR 1 (SC). Even though at the time of appeal before the AAC the materials used by the ITO, subsequently, were not in existence, this does not constitute a bar to the ITO using these materials. In fact in Seth Manicklal Fomra's case (supra) the materials in the form of the wealth statements which disclose cash to the tune of Rs. 1,19,339 was not present at the time when the AAC set aside the assessment. Similarly, in the case of Kundanlal Maru (supra) the AAC set aside the assessment to enable the ITO to go into the question whether any income can be estimated in respect of self-occupied portion of the property, still the Madhya Pradesh High Court has sustained the addition on account of unaccounted investment in the property which was not before the AAC at all when he heard the appeal and on which he could not have given any direction.
13. The Calcutta High Court in the case of Surrendra Overseas Ltd. (supra) after considering the decision of the Madras High Court in Seth Manicklal Fomra's case (supra) was of the view that where the order of the AAC is specific it is not open to the ITO to conduct fresh enquiry beyond the said directions and to make a fresh assessment without reference to the earlier assessment. In fact, the Calcutta High Court held that ...the power and jurisdiction of the ITO to make further enquiry while making a fresh assessment will be governed by and strictly should conform to the order of the AAC.The Income-tax Act provides specific remedies and procedures for bringing to tax items of income which have escaped assessment and it is not necessary to extend the scope of reassessment under Section 31 of the Act of 1922, or Section 251 of the Act of 1961, in order to bring to tax escaped income, if any....(p. 885) This was also the view taken by the Calcutta High Court in another decision in the case of Katihar Jute Mills (P.) Ltd. (supra). Though in the decision of the Calcutta High Court in Surrendra Overseas Ltd.'s case (supra) the judgment of the Madras High Court in Seth Manicklal Fomra's case (supra) was referred to, the Calcutta High Court has not dissented from the view taken by the Madras High Court in Seth Manicklal Fomra's case (supra). The learned counsel appearing for the assessee also relied upon a decision of the Tribunal in the case of Trichy Distilleries & Chemicals Ltd. (1979) 7 TTJ 176. According to the facts appearing in that case, the AAC held as under : Since the detailed facts necessary for considering the appellant's claim have not been ascertained, I direct the ITO to ascertain them and then come to a reasonable judgment on the claim itself. For this limited purpose, I am setting aside the assessment order.
The assessment order is set aside for the aforesaid limited purpose and it should be redone after considering it.
It is while interpreting this order, the Tribunal pointed out that the operative part of the AAC's order directed the ITO to redo the assessment only for a limited purpose and, therefore, it was held that the ITO cannot travel beyond the AAC's direction. It is on a reading of the AAC's order, the judgment of the Madras High Court in Seth Manicklal Fomras case (supra) was distinguished. In another case in L.G. Balakrlshnan [WT Appeal Nos. 37, 104, 105, 316, 317 and 371 (Mad.) of 1982 and 98, 99, 101 and 102 of 1982-83] before the Bench 'A' of the Tribunal, the department by producing the appellate orders passed by the Commissioner dated 29-12-1979 and the AAC dated 14-11-1980 contended by relying on the decision of the Madras High Court in Seth Manicklal Fomra's case (supra) that once an assessment is set aside it is open to the WTO to make a reassessment on any point because the entire assessment is open before him. While considering this contention of the department, the Tribunal held in its order dated 20-7-1983 as under: Thus the powers of the WTO while making a fresh assessment are just the same as if the same assessment has been made under Section 16(3) analogous to Section 143(3) of the Income-tax Act, 1961, in which case it is open to him to consider fresh issue that comes up perhaps including those which are not considered by him.
Thus, we have seen that the decision to be taken on this point depends upon the interpretation that we are going to give on the order of the AAC dated 23-7-1980. As seen from the order passed by the AAC it is quite clear that the AAC has not placed any restriction on the ITO in the matter of redoing the assessment. In fact, in the penultimate sentence of the order, the AAC has stated that with a view to enable the ITO to make a proper assessment on the appellant, the assessment made is set aside with a direction to redo the same according to law.
Thus, it is explicit that when the assessment made on the appellant was set aside that means that entire assessment made on the appellant was set aside. The Madras High Court in the case of Seth Manicklal Fomra (supra) while considering the scope of set aside assessments, held that once the assessment is set aside, the entire assessment is before the ITO and the ITO can complete the assessment even on the materials which were not before the ITO during the time when the original assessment was made. There was also a judgment of the Madhya Pradesh High Court in the case of Kundanlal Maru (supra) where it was held that once the assessment is set aside the original assessment becomes non est. On a reading of the order passed by the AAC and in the light of the judgment of the Madras High Court in the case of Seth Manicklal Fomra (supra) and that of the decision of the Madhya Pradesh High Court in Kundanlal Morn's case (supra) and keeping in mind the earlier order of the Tribunal in the case of L.G. Balakrishnan (supra) we hold that the order passed by the Commissioner (Appeals) is not correct in holding that the reassessment made by the ITO is void ab initio as it is beyond the jurisdiction. In that view of the matter, we uphold the contention of the department that the reassessment order passed by the ITO is in accordance with law because we are bound by the judgment of the Madras High Court in Seth Manicklal Fomra's case (supra).
14. Thereafter, we would like to deal with this appeal on merits. The first ground is against the recomputation of perquisite at Rs. 42,000 as against Rs. 7,500 returned and assessed in the original assessment.
The assessee submitted that the recomputation is only a change of opinion. It was also submitted that the property is subject to rent control and the annual letting value cannot, therefore, be taken at a figure more than what is estimated by the corporation authorities.
Reliance was placed on the decision of the Supreme Court in the case of Mrs. Sheila Kaushish v. CIT [1981] 131 ITR 435. The Commissioner agreed with the submissions made by the assessee. He was of the opinion that the annual letting value cannot exceed that fixed by the muncipality as the building is controlled by the Rent Control Act. However, he held that in any case the ITO has no authority to recompute the income while proceeding to redo the assessment on a specific point.
15. Aggrieved, the department is in appeal before us. Before us, the learned departmental representative submitted that the Commissioner (Appeals) erred in holding that the value of perquisite in respect of the house property used by the assessee should be computed at Rs. 7,500 on the basis of the actual value fixed by the Corporation of Madras and that it should not be computed at Rs. 54,000 having regard to the fair market value of the property with amenities obta ined by the assessee.
The learned departmental representative further submitted that the Commissioner (Appeals) erred in relying on the decision of the Supreme Court in the case of Mrs. Sheila Kaushish {supra) since the facts are distinguishable and the decision concerned with the mandatory method of valuation and the compulsive force of Section 6 of the Delhi Rent Control Act, 1958. It was further submitted that the Commissioner (Appeals) should not have held that the computation of the value of the perquisite for the value of the house used by the assessee at Rs. 7,500 was fair and reasonable having regard to the ratio of the decision of the Allahabad High Court in the case of Smt. Radha Devi Dalmiya v. CIT [1980] 125 ITR 134.
16. The assessee has shown a sum of Rs. 7,500 as value of perquisite in respect of the residence, namely, Adayar House owned by South India Corpn. (Agencies) (P.) Ltd. of which the assessee was the deputy chairman of the board of directors. The house was occupied free of rent under an authority of the resolution passed by the company. The value of Rs. 7,500 has been adopted taking into account the municipal value fixed by the Corporation of Madras and taking that 40 per cent of the accom modation was occupied by the assessee for personal purposes. The ITO was of the view that the value of the perquisite in the hands of the assessee would be taken on the basis of market rent which he would have had to pay if the property is hired from an outsider. This property originally belonged to Shri M.A. Chidambaram, the assessee's father. On 31-3-1972 he sold the superstructure alone to South India Corpn. (Agencies) (P.) Ltd. for a consideration of Rs. 9,50,000.
Considering the value of the property in question, the locality in which it was situated, the ITO estimated the fair rental value of the accommodation at Rs. 9,000 per month which worked out to slightly over Re. 1 per sq. ft. On the other hand, the learned counsel appearing for the assessee while supporting the order passed by the Commissioner relied upon certain decisions of the Tribunal in the case of A.Sivasailam [IT Appeal Nos. 274 and 275 (Mad.) of 1984] for the assessment years 1979-80 and 1980-81 dated 30-4-1984 and another decision of the Tribunal in the case of M.A. Chidambaram [IT Appeal Nos. 2401 and 2402 (Mad.) of 1983] for the assessment years 1978-79 and 1979-80 vide order dated 6-6-1984 where the Adayar House itself was the subject-matter of the issue. While dealing with this point, the Commissioner has not considered the earlier order passed by the Tribunal with regard to the same property in question. The learned departmental representative submitted that the decision of the Supreme Court in the case of Mrs. Sheila Kaushish (supra) is not applicable to the facts of this case since that decision deals with Section 6 of the Delhi Rent Control Act. Under these circumstances, we remit back this issue to the file of first appellate authority with the direction to redecide the issue on this point after taking into consideration all the materials produced by the assessee and dispose of the same in accordance with law after giving an opportunity of being heard to the assessee.
17. Another ground in this department's appeal relates to estimating the value of perquisites computed for the use of car. The learned depart mental representative submitted before us that the Commissioner (Appeals) erred in deleting the addition of Rs. 6,000 being the value of the perqui sites computed for the use of the car of the company by the assessee for his personal purposes. The Commissioner (Appeals) held that the issue is covered by the decision of the Commissioner for the assessment year 1979-80 and following that decision the addition was deleted.
18. The assessee has not included any amount for the value of the per quisites on account of the use of the company's car for personal purposes. It was admitted in the subsequent years that expenses on the assessee's car were met by the company South India Corpn. (Agencies) (P.) Ltd. Besides from the files seized during the search there were indications showing a number of cars belonging to the Centralised Service Section of South India Corpn. (Agencies) (P.) Ltd. were earmarked for use at Adayar Villa and Adayar House. This shows that the cars belonging to the company were freely used for personal purposes by the assessee according to the ITO. He estimated the value of perquisites at Rs. 6,000 and added the same. Before us, the learned departmental representative submitted that there is personal element in the use of the car provided by the company. However, the assessee's representative submitted that the assessee owns a car and spent Rs. 2,190 on the same. The car provided by the company was only for official use according to the learned counsel appearing for the assessee. Any how, we find that there is no discussion in the order passed by the Commissioner (Appeals) on this point. The learned counsel appearing for the assessee relied upon the decision of the Tribunal in M.A. Chidambaram's case {supra) in the matter of estimating the value of perquisite on account of use of the company's car. We have already stated there is no discussion in the order of the Commissioner (Appeals) on this point. Accordingly, we remit back this issue to the file of the joint appellate authority with a direction to reconsider this issue in the light of the various evidences produced by the assessee and dispose of the same in accordance with law after giving an opportunity of being heard to the assessee.
19. Another ground in this appeal relates to addition of Rs. 3,639 Under Section 64 of the Act in the hands of the appellant. Relying on the decision in the case of R. Dalmia v. CIT [1982] 133 ITR 169 (Delhi) the appellant argued before the Commissioner (Appeals) that the income has not arisen under property transferred by the appellant to the spouse or minor children. The source of income is savings of Smt.
Muthiah out of pin-money and her own income. She is also an income-tax assessee. The Commissioner (Appeals) was of the view that there is no nexus between the property transferred and the income arising to minor's deposits. Therefore, he held that there is no scope of clubbing income under Section 64. Therefore, the addition was deleted.
20. It was seen that the assessee has been making deposits with Mercantile Credit Corpn. Ltd. in the name of his minor son Master Aswin Chidambaram. The interest earned on such deposits was being admitted in the assessment made on the minor. When asked by the ITO to state why interest earned on deposits should not have been included in the hands of the assessee under the provisions of Section 61(1)(v) or Section 64(1)(VII) the assessee stated that he never wanted his wife to deposit these amounts which were in fact handed over to her for family expenses and, therefore, any income on account of deposits opened by the wife in the name of the minor child out of such savings from the overall amount meant purely for family expenses would not ipso facto grant permission to the department to include such income. Reliance has been placed on the decision of the Delhi High Court in the case of R. Dalmia {supra).
The ITO observed that the deposits in the name of the minor are made regularly and systematically and the entries are made in the books of the assessee. The ITO observed that the decision quoted by the assessee has no application to the facts of the case. Considering these facts, the ITO came to the conclusion that the income and deposits are includible in the hands of the assessee. However, we find that there is no discussion in the order passed by the Commissioner (Appeals) on this point. The department's case is that the decision in R. Dalmid's case (supra) is not applicable to the facts of this case. The learned departmental representative pointed out before us that the Commissioner (Appeals) failed to appreciate that the ITO found on facts that the deposits were entered in the books of account which would clearly show that the source of the deposit was not the alleged savings by his wife.
Under those circumstances, we set aside the order passed by the Commissioner (Appeals) on this point and remit back this matter to the file of the first appellate authority with a direction to redecide this issue afresh after taking into account all relevant materials into consideration and dispose of the same in accordance with law after giving an opportunity of being heard to the assessee.
21. Another ground in this appeal relates to a sum of Rs. 2,000 being the advance paid by the assessee to Mrs. Fordye which was recorded in the books. According to the learned departmental representative, the Commissioner (Appeals) failed to appreciate that the assessee advanced the amount in question out of sources not disclosed to the department and the addition was made on the basis of material seized from the assessee. In file SSR 46 seized from Shri S. Ramanathan at SPIC Centre a letter dated 27-8-1975 from Shri T. Selvapathy No. 133, II Stage Indira Nagar, Bangalore addressed to Shri Ramanathan enclosing the stamped paper along with instalment details duly signed by Mrs. Fordye was available. In that letter there is a 'Note' written by Shri Ramanathan to the following effect : 18-8-1975 cash advancedRs. 2,500 for buying moped (advanced to Mr.
Fordye) In the seized documents, there is correspondence available from Mrs.
Fordye acknowledging the receipt of the above amount from the assessee for specific purpose of purchasing a moped and also return of the loan by her. When the assessee was specifically requested to explain the source for the above payment the assessee's representative merely denied the transaction. The ITO was of the view that this verbal denial was not acceptable in view of the overwhelming material evidence available in the seized papers. According to the ITO since the assessee having failed to prove that the source for the payment is only from the admitted sources of income, it should have been met only from the 'undisclosed sources'. Accordingly, this sum of Rs. 2,500 was added.
However, the Commissioner (Appeals) deleted the same on looking into the facts. The reasons for deletion are given in the order of the Commissioner (Appeals). This is the addition made under Section 69 of the Act. There is also another item of Rs. 5,43,136 added under this head. The learned departmental representative submitted that the Commissioner (Appeals) erred in deleting the addition of Rs. 5,43,136 on the basis of seized materials from the residence of Shri Ramanathan, a trusted employee of the assessee. He further submitted that the Commissioner (Appeals) erred in holding that no link was established by the ITO that the transaction recorded in the seized materials pertains to the assessee only. He also submitted that the Commissioner (Appeals) erred in not taking into account the detailed and cogent reasons given in the assessment order establishing the link between the material seized from the residence of Shri Ramanathan and the assessee. It was also pointed out that the Commissioner (Appeals) failed to appreciate that the additions under reference were made on the basis of seized materials from the residence of Shri Ramanathan and from the sworn statement, recorded from him. Yet another submission made by the learned departmental representative was that the Commissioner (Appeals) erred in not appreciating the fact that Shri Ramanathan, trusted employee of the assessee, had not at any time specifically denied that the transactions recorded in the receipts and payments account did not relate to the assessee.
22. Under the head 'Undisclosed sources' the ITO added a sum of Rs. 5,43,136. In the course of the searches conducted in January 1981, certain documents were seized from the residence of one Shri Ramanathan, who is the personal secretary of the assessee. On a scrutiny of these documents, it was found that these contained rough statement of accounts regarding chronological transactions of receipts and payments. These rough accounts are found in respect of the period 1-1-1976 to 16-7-1976. At the time of search when Shri Ramanathan was questioned on oath according to the ITO he admitted that the entries in these papers were written as directed by the assessee and that the entries reflected Shri A.C. Muthiah's inflow and outflow of funds.
Shortly after the search when the assessee was questioned about this, he had also admitted according to the ITO that these related to some of his financial transactions. Copies of entries as recorded in these rough sheets seized from the premises of Shri S. Ramanathan, arranged date-wise were given to the assessee, a copy of which formed part of the order of the ITO as annexure. The assessee was also asked to explain the nature and source for the various receipts 'item by item' and also the nature of various items of 'outgoings' as recorded in these rough sheets. He was also requested to state whether these transactions had been recorded in the books of account maintained by him, and, if so, to identify the entries with reference to the books.
The assessee had furnished his reply on 28-2-1983. The assessee's objections are contained in the order of the ITO at page 9. At the outset, it was contended that the assessee had no connection whatsoever with the papers maintained by Shri Ramanathan, though some of the entries involving petty amounts like Rifle Club subscriptions, payments to menials, payments for radio licence, TV sets, etc., might have relation with his transactions. According to the assessee due to his multifarous activities he is unable to recollect these petty items and that these would have been made out of his drawings in the accounts.
The ITO was unable to accept the explanation offered by the assessee.
According to the ITO, there are independent evidences and also the admission of Shri Ramanathan and the assessee himself that the transactions relate to the assessee only even though the assessee now tries to go back from his original statement given at the time of raid.
Mr. Ramanathan was also examined on oath. Copies of Shri Ramanathan's statements were given to the assessee. Thus, on going through various materials seized and the sworn statement of Shri Ramanathan and also the answers given by Shri A.C. Muthiah when he was questioned, the ITO made the abovesaid additions under the head 'Undisclosed sources'.
Apart from the above position in this case, independent enquiries were also conducted by the ITO to establish that the receipts and payments recorded by Shri Ramanathan related to the affairs of the assessee.
23. On appeal before the Commissioner (Appeals) the assessee contended that the addition has been made on the basis of suspicion, surmises and conjectures. According to the assessee, it has not been proved that the papers recovered from the residence of Shri Ramanathan were the accounts maintained by the appellant. In the absence of clear evidence to show that the accounts relate to the assessee, the provisions of Sections 68 and 69 of the Act, etc., cannot be invoked according to the assessee. The assessee also referred to the reply given to the ITO as well as to the IAC and argued that the entire addition is baseless. On going through the reply submitted by the assessee and the facts in issue, the Commissioner (Appeals) came to the conclusion that the ITO has exceeded his jurisdic tion in assessing the amount. He was also of the opinion that the mate rials in the hands of the third parties can be used for assessment only where it can be linked to the assessee's case. He was also of the opinion that since these items are not reflected in the books of account maintained by the assessee, Sections 68 and 69 cannot be invoked. He relied on the decision in 129 ITR 313 (sic). Accordingly, he deleted the addition made under Section 69 under the head 'Income from other sources'. Aggrieved, the department is in appeal before us on this point.
24. We have already stated the department's submission hereinabove. The department has proceeded to add this sum of Rs. 5,43,136 on the materials seized and relying on the statement given by Mr. Ramanathan and the answers given by Shri A.C. Muthiah when he was questioned and also the materials gathered by the ITO independently. In fact, the total receipts from 2-1-1976 to 31-3-1976 come to Rs. 13,52,636 according to the IAC. The assessee has given detailed reply before the ITO as well as before the IAC. The Commissioner (Appeals) has not discussed all these materials. On the other hand, the ITO made this addition on the basis of various materials as stated above. The learned counsel for the assessee has also drew our attention to an advocate's notice issued on behalf of Mr. Ramanathan complaining about the harassment made by the department. Without considering all these materials, it will not be possible to come to a conclusion one way or the other. Under these circumstances, we set aside the order passed by the Commissioner (Appeals) on this point and remit back this issue to the file of the first appellate authority with a direction to redecide the issue afresh on this point and come to a conclusion in accordance with law after giving an opportunity of being heard to the assessee.
25. Another ground in this appeal relates to expenses incurred for stud-farm. Before us, the learned departmental representative submitted that the Commissioner (Appeals) erred in holding that the stud-farm expenditure claimed by the assessee should be allowed as a deduction in computing the assessee's total income. According to the learned departmental representative the Commissioner (Appeals) failed to appreciate that the assessee did not produce any evidence to prove that the stud-farm expenses were really incurred by him and he was really under obligation to do so. The learned departmental representative has also pointed out that the Commissioner (Appeals) has overlooked the fact that in the case of M.A. Chidambaram (supra) the present Commissioner (Appeals) has given a finding that the assessee in that case did not incur any expenditure for the horses sent to the stud-farm and, therefore, no capital gain arose on the sale of horse 'Sugar Prince'. The learned departmental representative pointed out that the Commissioner (Appeals) should have upheld the disallowance of stud-farm expenses as the assessee did not discharge his onus of proving that the expenditure was actually incurred by him having regard to the ratio of the decision in the case of CIT v. Ballarpur Industries Ltd. [ 1979] 119 ITR 817 (Bom.) and Gopinath Vir Bhan v. CIT [1938] 6 ITR 243 (Lahore). This ground of appeal is with regard to a sum of Rs. 36,384 being the stud-farm expenses. The AAC set aside the case directing the ITO to verify the details of expenses to arrive at a correct conclusion about the extent of expenditure claimed by the appellant which could be allowed. Before the Commissioner (Appeals) the appellant has pointed out that the ITO did not verify the facts as directed by the AAC.According to him, he has merely disallowed the amount as capital without giving reasons thereon. According to the assessee, the expenses on maintenance of the horses are actually met by the appellant and evidence is available for having incurred the expenditure. It was also pointed out that if it has become unfit for racing it has to be maintained for various purposes including for breeding. The assessee has pomted out that in any case he has to maintain it till its natural death and expenditure has to be incurred as part of business. The Commissioner (Appeals) on going through the facts held that in any case the ITO has not shown how the expenditure on maintenance of horses after its retirement from race course confers a benefit of enduring nature or creates a new asset. He has also pointed out that the appellant's liability to maintain the horse is also there in existence.
It was also pointed out by the Commissioner (Appeals) that it was not stated how this expenditure is not incurred wholly and exclusively for the purposes of business. Accordingly, on considering the facts in question, the Commissioner (Appeals) came to the conclusion that the said expenditure was incurred wholly and exclusively for the purpose of business. Accordingly, he deleted the same.
26. The assessee has shown a loss of Rs. 52,948 from horse racing. Out of this, in the assessment made on 26-2-1979 a sum of Rs. 36,384 representing stud-farm expenses was disallowed. On appeal, the AAC remarked that the details of these expenses should be called for and the matter should be examined afresh after ascertaining whether the joint owners have claimed similar expenses and, if so, whether such expenditure was allowed in their hands. The assessee has furnished the details of the stud-farm expenses before the ITO. The assessee has also produced certain agreements entered into with Mr. Suresh Mahendra, Broadacres Stud-farm. In fact, the assessee has furnished details of stud-farm expenses. The broad analysis is as under: The agreement entered into with Mr. Suresh Mahendra on 17-1-1976 and the seized materials from Mr. Ramanathan give particulars in respect of the following horses : The assessee has also claimed a sum of Rs. 15,000 under the head 'Maintenance' in respect of the horse 'Star Story'. This amount is said to represent 'lease amount paid for the horse to Mr. Suresh Mahendra'.
However, the assessee has filed a cross-objection stating that the Commissioner (Appeals) while disposing of the assessee's appeal in his order for the above assessment year declined to entertain the additional ground of appeal filed before him seeking allowance of capital loss in respect of the horses 'Anakara' and 'Chic Baby'. This aspect was not considered by the Commissioner (Appeals). At the same time, the Commissioner (Appeals) had held that no capital gains arose as computed by the department. However, inasmuch as the department has preferred an appeal before the Tribunal, the appellant thought it fit to file this cross-objection. In the cross-objection, the assessee submitted that the order of the Commissioner (Appeals) insofar as it omitted to consider the claim of capital loss is against the facts and circumstances as also the legal position obtaining in the case of the appellant. The assessee's counsel also submitted that the Commissioner (Appeals) ought to have appreciated the undisputed fact that the appellant would have a right to press for the allowance of this claim since the action in this regard did not require bringing of any new facts or material which had not been before the ITO earlier especially when the agreement entered into with the breeder in this regard clearly had been in the possession of the department only and the claim would in any way be justified. The learned counsel further submitted that the Commissioner (Appeals) should have deducted the amount received on the sale of colt from the purchase consideration of its mother which had been handed over to the breeder and which would never be returned again. Another submission made by the learned counsel was that the Commissioner (Appeals) ought to have taken the value of purchase consideration of Rs. 45,000 in respect of horse Anakara and Rs. 35,000 in respect of Chic Baby and should have deducted the sums of Rs. 24,060 and Rs. 18,125 and in the process should have arrived at a short-term capital loss of Rs. 37,815 to render justice. Lastly, it was submitted that the Commissioner (Appeals) had not appreciated the existence of a valid agreement dated 17-1-1976 and also failed in the process to render real justice by taking into account clauses (2), (3) and (4) of such agreement.
27. We have heard the learned departmental representative on this point. Since the additional ground raised by the assessee did not involve any fresh materials to be obtained apart from what was already on record, we admit this additional ground. We have seen in the order passed by the Commissioner (Appeals) that he has not gone through the expenses arising under this head m detail. Since the assessee has also raised additional ground before us in the second appeal stage and pointed out that the Commissioner (Appeals) has not dealt with this point when the appeal was before him, we consider that the entire matter needs reconsideration. Accordingly, we set aside the order passed by the Commissioner (Appeals) on this point and remit back this issue to the file of the first appellate authority with the direction to redecide this issue after taking into consideration all the materials available on record including the additional ground raised by the assessee before us and dispose of the same in accordance with law after giving an opportunity of being heard to the assessee.
28. Another ground in this appeal relates to guest house expenses. The ITO made additions as perquisite on salary to gardeners, depreciation to house property, electricity charges and car expenses. The assessee is one of the directors of the company which has taken the guest house on lease in the assessment year 1977-78. The addition has been made for expenses incurred in respect of guest house in Bangalore. It was pointed out that the guest house itself came under the company's control only in the next accounting year and this was not available during this assessment year 1976-77. The entire expenditure on the guest house was stated to be paid prior to its leasing and is verifiable from the written agreement entered into between the lessor and lessee. The expenditure on the maintenance was incurred by the lessor and neither the appellant nor the company is connected with it.
It was, therefore, argued that without an iota of evidence regarding the sum allegedly incurred for furnishing the guest house which was taken on lease by the company in a subsequent year has been assessed in the hands of the appellant. This was the submission made by the learned counsel appearing for the assessee. The Commissioner (Appeals) after going through the agreement and on considering the facts came to the conclusion that in any case the investment, if any, has been made by South India Corporation and it cannot be taken as the investment as there is no nexus or connection between the assessee and the guest house. He was also of the view that Section 69 contemplates only invest ment in a property belonging to the assessee. For these reasons, the Commissioner (Appeals) held that the addition cannot be sustained.
Before us, the learned counsel appearing for the assessee submitted that there is a lease deed and no rent was paid by the assessee.
According to him, there is no proof of purchase of any furniture by the assessee. It was only the lessor who has purchased the furniture according to the assessee. However, we consider that the question of assessability of expenditure incurred on guest house relates to this assessment year or not, was not considered by the ITO. The agreement entered into between the company and the guest house owner would also not seem to have properly looked into by the ITO. Under these circumstances, in order to deal with this matter in greater detail, we remit back this matter to the file of the first appellate authority with a direction to redecide this point after going through all the materials and dispose of the same in accordance with law after giving an opportunity of being heard to the assessee.
29. At the outset, we would like to point out that inasmuch as the Commissioner (Appeals) dealt with this appeal firstly on the ground of jurisdiction of the ITO, in the reassessment proceedings, he has not devot ed much attention on the various aspects raised by the assessee on merits. Those matters require greater consideration since decision on these points relate to materials seized from the residence of Shri Ramanathan. There was the statement given by Mr. Ramanathan, the answers given by the assessee himself for the questions put by the department and there are also materials independently obtained on enquiry made by the ITO. Unless all these matters are looked into, we consider that a proper decision cannot be rendered in the appeal filed by the department. It is only with a view to make a proper assessment on the assessee and to give proper opportunity to both the assessee and the department in arriving at a definite conclusion, we remit back those issues raised by the assessee in cross-objection as well as by the department in the appeal, to the first appellate authority for reconsideration with a direction to dispose of the same on merits in accordance with law after giving an opportunity of being heard to the assessee. In that view of the matter, the appeal filed by the department and the cross-objection filed by the assessee are treated as allowed for statistical purposes only.
1. I have read the order proposed by my learned brother. He has reversed the Commissioner (Appeals)'s order, rejecting the assessee's basic objection before us. It appears to me that the Commissioner (Appeals)'s order is perhaps correct in this regard.
2. Assessment was first closed under Section 143(3) on a total income of Rs. 58,916 on 26-2-1979. In this, there was a disallowance of Rs. 36,384 out of the loss from 'horse racing' claim at Rs. 52,948. Other items forming part of the said assessment were :Salaries 1,31,000 (+)fees, commission, annuity deposit refund) 30,325* (+)The correct total is Rs. 30,395 93,259 (-)Interest paid as claimed 9,150 (-)Deduction under Section 80L of the Act 2,250 9,150 3. The assessee appealed against the assessment. There were five grounds of appeal. All of them related to only one objection. This was : The ITO erred in disallowing the stud-farm expenditure of Rs. 36,384.
The claim was that it should be allowed fully as revenue expenditure in computing the loss from horse racing. The AAC, Trichy-I, disposed of the appeal by his order dated 23-7-1980. This order runs to 4 paragraphs. Briefly, the order was as follows: Paragraph 1 of the order recites the factual background relating to the disallowance of Rs. 36,384 made by the ITO.Paragraph 2 records the claim of the assessee that the said expenditure was an allowable revenue expenditure.
Paragraph 3 records certain relevant further facts relating to the above claim and carries the following observations : It is not clear from the order of the Income-tax Officer whether he had applied his mind at all to the issue on hand. Without assigning any reasons, simply after remarking that expenses were capital in nature, he had disallowed the claim. In my opinion the matter may have to be referred back to him to go through all the details for the expenses and then to arrive at a correct conclusion about the extent of expenditure up to which the claim of the appellant could be entertained. In this connection his attention is also invited to the fact that six of the horses had been owned by the appellant jointly with others.
How the expenses claimed in those cases had been dealt with must also be looked into so that any useful information gathered by him could be utilised while completing the present assessment. To cite an example, in the case of the race horse Chick Baby, livery charges has been claimed to the extent of Rs. 6,337. It must be looked into whether a similar claim was made by the joint owner towards this horse. If any expenditure had been claimed, then as to how it had been dealt with in that file may also be looked into. With a view to enable the Income-tax Officer to make a proper assessment on the appellant, the assessment made is set aside with a direction to redo the same according to law.
Paragraph 4 holds that the appeal is treated as allowed for statistical purposes.
4. The matter, thus, went back to the ITO. Subsequently, there was a search conducted 'at the assessee's premises and various other premises connected with him'. This search took place on 20-1-1981. Various documents came to be seized at the search. They were looked into. From these documents the ITO evidently believed that the assessee's total income must have been much higher than what was originally assessed. He gave notice to the assessee of this. He also heard the assessee in the matter. He then submitted a draft assessment order to the IAC in terms of Section 144B after calling for the assessee's objections in that regard. The 1AC also heard the assessee and then issued directions to the ITO. In accordance with these directions, the ITO completed afresh assessment (that had been set aside by the AAC on 23-7-1980) on the following basis by his order dated 22-9-1983:Salaries 1,71,500Income from other sources including additions for unexplainedtransactions as also an addition under Section 64(i)/64(v) 5,63,141Deduction under Section SOL, etc.
9,150 N.B.Horse racing loss was reduced to Rs. 1,564 and carried forward for set off along with long-term capital loss of Rs. 21,350.
5. The assessee appealed again. The appeal now came before the Commissioner (Appeals). He disposed of the appeal by his order dated 26-11-1983. He held as under : (i) Section 251(1)(a) empowers the AAC/the Commissioner (Appeals) to set aside an order of assessment and direct the ITO to make a fresh assessment in accordance with law. But he cannot, under Section 251(1)(a), confer jurisdiction on the ITO that he does not or could not have, as regards such assessment.
(ii) The AAC (who passed the order dated 23-7-1980), was concerned only with the expenses relating to maintenance of various horses owned by the assessee and whether such expenses were of revenue nature. The AAC noted the fact that certain horses were jointly owned by the assessee with others and that the ITO had not considered this. He, therefore, directed the ITO to look into this aspect, i.e., to find out the fate of similar claims, if any, made by the other co-owners. To enable the ITO to do this the AAC set aside the assessment with the direction to the ITO to redo it in accordance with law.
(iii) No other aspect was before the AAC and he could not have therefore given any directions to the ITO 'to look into the new sources of income which was not even in existence at the time of making the original assessment'.
(iv) But for the alleged authority given to him by the AAC, the ITO could not have roped in the income that came to be assessed as a result of the search of January 1981. He could have done so only by invoking Section 147, with the prior approval of the Commissioner. The AAC had no such power of prior approval. On the contrary, the AAC (it has been held) has no power to consider for assessment any source of income not disclosed in the return or discussed in the assessment order.
(v) Seth Manicklal Fomra's case (supra) was not applicable here. The dispute there related to the estimate of income from the assessee's business in sugar. The assessment was set aside by the AAC for being redone by the ITO. In the de novo proceedings, the ITO called for a statement of total wealth. Based on that statement the ITO made a new addition as income from undisclosed sources. But the power to call for a total wealth statement was already with the ITO even at the time of the original assessment, i.e., the AAC 'did not confer fresh jurisdiction to the ITO or any new powers than what he possessed at the time of making the original assessment'.
(vi) The facts in the instant case are quite different. The assessment year involved is 1976-77. Hence, when the AAC passed his order on 23-7-1980 limitation for action under Section 147 had supervened. The Commissioner (Appeals) is apparently not correct here. Initiation action under Section 147(a)/(b) was open up to 31-3-1981 ; and that under Section 147(a) (but only with Commissioner's approval) up to 31-3-1985, and is so open for consideration (but only with Board's approval) up to 31-3-1993. The second assessment order, dated 22-9-1983 having been passed more than 'seven years after the end of the previous year' could not have been authorised by the AAC in law. That could have been done only with the prior approval of the Commissioner as provided in Section 151(2) of the Act. No such approval was obtained here. The original assessment here was set aside by the AAC on only one aspect, i.e., for verifying the admissibility of a particular expenditure claim. Hence, Seth Manicklal Fomra's case (supra) was distinguishable on facts and cannot be of help to the revenue.
(vii) In view of the above position, the assessment completed on 22-9-1983 (under Section 143(3)/144B) was void ab initio.
6. The Commissioner (Appeals) also went on to examine the assessee's contentions on the merits of the new additions in the assessment order of 22-9-1983. His conclusion was that there was no case for such additions on the material on record/or the position in law.
7. Finally, the Commissioner (Appeals) considered the objection that bad been raised by the assessee before the AAC, i.e., against the disallowance of stud-farm expenses to the extent of Rs. 36, 384. (This objection had been repeated before the Commissioner (Appeals) also in the assessee's grounds of appeal). On this objection, the Commissioner (Appeals) held as under: I have looked into the facts. It cannot be said that the Income-tax Officer has made enquiries as required by the Appellate Assistant Commissioner while setting aside the order. In any case he has not showed how the expenditure on maintenance of horses after its retirement from the race course confers a benefit of enduring nature or creates a new asset. The appellant also does not get rid of a liability by incurring this expenditure. It is not also stated how this expenditure is not incurred wholly and exclusively for business purposes. An expenditure incurred during the course of business becomes capital expenditure only if it brings into existence a new asset or an addition of enduring nature. An expenditure can be disallowed only if it is a capital expenditure, personal expenditure or an expenditure not incurred for business purposes. No allegation has been made that this is an expenditure incurred for business purposes. As none of the tests prescribed for categorising the expenditure as capital are satisfied in this case, it has to be allowed provided there is a proof to show that it has actually been incurred. The payment has not been challenged by the Income-tax Officer. It has, therefore, to be inferred in the absence of any other evidence (to show that it has been incurred on behalf of somebody else or for personal purposes) that this is an expenditure incurred wholly and exclusively for business purposes. The addition is, therefore, deleted.
In the result, the Commissioner (Appeals) allowed the assessee's appeal and, hence, this appeal by the revenue. (There is also a cross-objection from the assessee.) 8. The contention of the parties before us in the department's appeal are set out in detail in paragraphs 8 and 9 of my learned brother's order. It is, therefore, not necessary to repeat them. Basically, the objection for the revenue is that in the light of Seth Manicklal Fomra's case (supra), the ITO did have the power to make the new additions in question also. This was because [as explained in Seth Manicklal Fomra's case (supra)], the entire assessment was thrown open by the AAC's order of 23-7-1980. I am of the view that the Commissioner (Appeals) is correct when he says that Seth Manicklal Fomra's case (supra) is distinguishable. Before discussing that case it would be useful to notice some other relevant decisions as well.
9. In V. Ramaswamy Iyengar v. CIT [1960] 40 ITR 377 (Mad.)Facts : the assessee was a member of a HUF, which had extensive properties in and outside India. A, who was the karta, died in February 1938 leaving behind his two widows L and N and his son's widow, U. Under A's will the executors were to arrange for the adoption of a son to each widow.
After payment of the legacies the three adopted sons were to divide the properties equally. U contested the will by a suit and claimed a half-share in the properties. Receivers were appointed in August 1938 to manage the suit properties. As part of their duties the receivers carried on the various businesses which A had carried on. A's widows contested the suit. The matter went up to the Privy Council. At that stage a compromise was entered into. This was in December 1947. (Each of the widows had, in 1945, already adopted a son.) Under the compromise each widow, for herself and her adopted son, agreed to take one-third share in the entire estate.
10. For the assessment year 1939-40, the department assessed the receivers under the first proviso to Section 41(1) of the Indian Income-tax Act, 1922 (corresponding to Section 164(1) of the 1961 Act).
That is to say, tax was levied at the maximum rate on the income of the estate. The Tribunal, however, held that the widows were the legal heirs of A and that their shares were not indeterminate though the issue was sub judice. It directed the ITO to compute the income accordingly. When the matter came back to the ITO he held that only L and N (the two widows) were the income beneficiaries during the relevant period and allocated the income to the receivers in two shares between L and N. This was not accepted by the receivers, who appealed to the AAC but the AAC confirmed the ITO's action. The receivers appealed to the Tribunal. The ITO repeated the same mode as applied earlier for the years 1941-42 to 1945-46 also. But for the assessment year 1946-47, because of the adoption of the sons in 1945, the ITO assessed the income in two shares up to the date of adoption and thereafter for the remaining period of the previous year, in three shares. The appeals for all these years came up before the Tribunal.
The receivers' contention before the Tribunal was : the adoption related back to the date of death of A and, hence, the income was assessable in 6 shares from the beginning. No objection was raised either by the revenue or by the receivers to the assessments having been made under Section 41. The Tribunal held that since the receivers had carried on the business of A, assessment should be made under Section 10 of the 1922 Act (Section 28 of the 1961 Act) directly as an association of persons. On a reference, the Madras High Court held : (i) That as regards the assessment year 1939-40 the order of the Appellate Tribunal directing the Income-tax Officer to make the assessment in three shares became final under Section 33(6) of the Income-tax Act and the Appellate Tribunal had no jurisdiction to direct reassessment for that year under Section 10 directly on the receivers.
(ii) That as regards the assessment years 1941-42 to 1946-47 the Appellate Tribunal had no power suo motu to remand the case to enhance the tax so as to operate to the detriment of the appellants when the department did not make any objection to the assessments under Section 41. The Tribunal had no jurisdiction to direct the assessments to be made on the receivers under Section 10 as an association of persons. (p. 378) Where the whole or part of an order has not been appealed against it would be final, and where there is an appeal against a part of an order, the appellate authority would have no jurisdiction, in the absence of a statutory provision, to interfere with the other part which does not form the subject of the appeal. Where a statute confers a right to appeal to an appellate authority, its powers and functions are limited by the terms of that statute.
The power of the Appellate Assistant Commissioner is not confined to the subject-matter of the appeal taken by the assessee : it is much wider. He might examine all matters and dispose of the appeal, even to the prejudice of the assessee by himself, enhanciug the tax or remanding the case to the Income-tax Officer with a view to increase the tax liability." (p. 379) 12. Estate of late Sri N. Veeraswami Chettiar (supra) : The assessee was a shareholder in a company to which Section 23A of the 1922 Act was applied. This resulted in a deemed distribution of profits of the company for the year concerned. As a corollary, deemed dividends out of such 'distribution' became taxable in the hands of the shareholders.
Following the aforesaid order under Section 23A on the said company, passed on 25-6-1976, the ITO assessed the assessee-shareholder on such deemed dividend income for the assessment year 1950-51. After certain infructuous reassessment proceedings, the ITO made a further order of assessment on the assessee (for the same year) under Section 34 of the 1922 Act, for the inclusion of the deemed dividends, but without the issue of any notice. The AAC cancelled the order of reassessment and as a part of his order he stated : 'As a valid orde r has never been passed under Section 23A, the ITO will not proceed under Section 34 to include the dividends in the hands of the shareholders. The time limit for such proceedings will be four years from the last day of the financial year in which the income first became assessable in the hands of the shareholder on 25-6-1956. The time limit will, therefore, be up to 31-3-1961.' Following the above direction, the ITO issued a notice under Section 34 on 27-10-1956 and completed the reassessment. The question was whether the order made by the A AC, so operated as to remove the bar of limitation prescribed under Section 34 [second proviso to Section 34(3)] and the reassessment made was thus valid.
(i) The period of limitation for action under Section 34 was to be computed only with reference to the assessment year of the shareholder. The date of the order under Section 23A in the case of the company was not relevant. The finding of the AAC that there was no bar of limitation for reassessment was erroneous. Further the direction to assess the deemed dividend in this case was not one which could naturally flow from the subject-matter of appeal that was before the AAC. (ii) Section 31(3) of the 1922 Act (corresponding to Sections 250 and 251 of the 1961 Act) confers power upon the AAC to set aside the assessment appealed against and direct the ITO to make a fresh assessment after further enquiry. But in so doing, the Section contemplated assessment proceedings which have been validly initiated. The Section assumed that the ITO had been seized of jurisdiction when he made the assessment and only the final order made by him was defective for some reason or other. In the exercise of powers under Section 31, the AAC could not make a direction which conferred jurisdiction upon the ITO if he was not lawfully seized of jurisdiction. The direction made by the AAC was therefore neither lawful nor valid and hence outside the scope of the second proviso to Section 34(3) of the 1922 Act (corresponding to Sections 150 and 153(3) of the 1961 Act).
14. CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 (SC) : [Judgment delivered on 14-2-1962. This date receives further notice (infra)\. The assessee had received in July 1946 a sum of Rs. 40,000. In the course of the assessment for the year 1946-47, the ITO noticed this fact: But since July 1946 fell in the previous year for the next assessment year, i.e., 1947-48, the ITO simply made the following note in the record for 1946-47: The question will however be considered again at the time of 1947-48 assessment.
In the return filed for the assessment year 1947-48 this amount was not shown by the assessee. The ITO also overlooked the note he had left at the end of his order in the back years' assessment. The result was : the item was not assessed. The assessee appealed to the AAC against the assessment order for the year 1947-48. While this appeal was pending, the TO wrote a letter to the AAC intimating that he would like to be present and also requesting that the amount of Rs. 40,000 be brought to assessment. The ACC, after issuing notice, assessed the amount and included it in the original assessment. The Tribunal agreed with the AAC and the assessee sought a reference. One of the questions referred to the High Court was : Whether the AAC was competent to enhance the assessment for the year 1947-48 by Rs. 40,000. The High Court said no Shapoorji Pallonji Mistry v. C/T[1958] 34 1TR 342 (Bom.). The revenue then took up the matter to the Supreme Court. The Supreme Court first of all formulated the question to be answered as Under : Whether in an appeal filed by an assessee, the Appellate Assistant Commissioner can find a new source of income not considered by the Income-tax Officer and assess it under his powers granted by Section 31:of the Income-tax Act? 15. The Supreme Court too held that in an appeal filed by the assessee, the AAC had no power to enhance the assessment by discovering new sources of income not mentioned in the return of the assessee or considered by the ITO in the order appealed against. It considered specifically the language of Section 31(3)(b) of the 1922 Act which was as under : (3) In disposing of an appeal the Appellate Assistant Commissioner may, in the case of an order of assessment, -- (b) set aside the assessment and direct the Income-tax Officer to make a fresh assessment after making such further inquiry as the Income-tax Officer thinks fit or the Appellate Assistant Commissioner may direct, and the Income-tax Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment....
16. The specific points made by the Supreme Court were briefly as follows: (i) The Bombay High Court had held in Shapoorji Pallonji Mistry's case (supra) following its earlier view in Narrondas Manordass v. CIT [1957] 31 ITR 909 (Bom.) that the AAC had revisional powers but that they were confined to what was before the ITO and considered by the ITO. (ii) The Patna High Court also in Jagamath Therani v. CIT AIR 1925 Pat. 408, 410 had held that the scope of the appeal must be limited by the subject-matter ; that the appellate authority had no power to travel beyond the subject-matter of the assessment and was not entitled to assess new sources of income.
(iii) The Madras High Court took the same view. This was in the case of Sri Gajalakshmi Ginning Factory Ltd. v. CIT [1952] 22 ITR 502.
The Madras High Court held here that it would not be open to the AAC to introduce into the assessment new sources, as his power of enhancement should be restricted only to the income which was the subject-matter of consideration for purposes of assessment by the ITO (iv) The question to be answered was whether the AAC can travel outside the record with a view to finding out new sources of income not disclosed either in the return made by the assessee or the assessment order of the ITO. The revenue's claim was : The word 'assessment' would mean the ultimate amount which the assessee must pay under the charging Section and therefore the words 'enhance the assessment' should not to be confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. This was no doubt a possible view. To accept the revenue's case, however, would be to discard the interpretation wnich had held the field for nearly 37 years. On the other hand notice must be taken of other provisions like Sections 34 and 33B of the 1922 Act (corresponding to Sections 147 and 263 of the 1961 Act) which enable escaped income from new sources to be brought to tax after following a special procedure.
17. CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC) : For the assessment year 1952-53 the assessee claimed on the basis of entries in the books of his Forbesganj branch, that he had borrowed three sums of Rs. 2,50,000, Rs. 1,50,000 and Rs. 30,000 from three parties. In considering the genuineness of these borrowings, the ITO noticed that the assessee had withdrawn at Calcutta on 31-3-1952, Rs. 5,30,000 from a Calcutta bank and had sent Rs. 5,85,000 to his Forbesganj branch in Bihar on the same day to enable that branch to make payments including repayment of the sum of Rs. 2,50,000. The ITO discussed the impossibility of the amount having reached Forbesganj in Bihar on the very same day. He, therefore, treated the entries in the books as not genuine and added to the assessable income, the sums of Rs. 2,50,000, Rs. 1,50,000 and Rs. 30,000. When the assessee took the matter in appeal the AAC considered that the amount of Rs. 5,85,000 should also be included in the total income of the assessee, after giving a deduction of Rs. 1,80,000 for prior withdrawals from the accounts of two of the creditors. The Supreme Court held that as the ITO had not considered the entry of Rs. 5,85,000 from the point of view of its taxability, the AAC had no jurisdiction under Section 31 of the 1922 Act to enhance the assessment by reference to the sum of Rs. 5,85,000. The Court was of the view that it was not open to the AAC to travel outside the subject-matter of assessment, i.e., to assess a source of income not disclosed either in the return or the assessment order of the ITO, and that the AAC's power of enhancement under Section 31(3) stood restricted'to the subject-matter of assessment or the sources of income which have been considered expressly or by clear implication by the ITO from the point of view of the taxability of the assessee'.
18. Addl. CIT v. Gurjargravures(P.) Ltd. [1978] 111 ITR 1 (SC) : One of the grounds of appeal raised by the assessee-company in its appeal before the AAC was that the ITO had erred in not accepting the assessee's claim for relief under Section 84 of the Act. No such claim had been made before the ITO in the course of the assessment proceedings. There was also no material on record to support such a claim. In subsequent years such relief had been allowed to the assessee. The appeal was dismissed by the AAC on the ground that the ITO's order showed no error as no such claim for relief had been made before the ITO. The Tribunal, however, held that since the entire assessment was open before the AAC he should have entertained the assessee's claim and directed the ITO to allow the relief. The High Court affirmed this view of the Tribunal. The Supreme Court reversed it. While doing so it observed : (i) Section 31(3) defining the powers of the AAC in disposing of an appeal and Section 251(1)(c) are 'almost in similar terms'.
(ii) From the mere fact that a claim under Section 84 had been allowed in subsequent years it did not follow that the AAC should have entertained the question of relief under Section 84 or directed the ITO to allow the relief. There was no claim for such relief before the ITO for this assessment year. There was also no material on record in support of such a claim.
(iii) It is not correct to hold that if an item of income is taxed, the question of its non-taxability should be taken to have been considered by the ITO though no such claim was made by the assessee before the ITO. Such a view would be directly opposed to the view held by the Supreme Court in Rai Bahadur Hardutroy Motilal Chamaria's case (supra).Ram Kanai Jamini Ranjan Pal (P.) Ltd. v. Member, Board of Revenue [1976] 38 STC 1 (SC) : The assesseee-company; a dealer registered under the Bengal Finance (Sales Tax) Act, 1961, was assessed to sales tax for the relevant period. The CTO rejected the assessee's books of account, enhanced the gross turnover and imposed a penalty. On an appeal, the Assistant Commissioner reduced both the enhancement of the turnover and the quantum of penalty. The assessee thereafter moved the CCT in revision. In the meantime, the CTO after an enquiry under Section 14(1) of the said Act had submitted a report to the Assistant Commissioner, inter alia, stating that there were unexplained discrepancies in the cash memos issued by the assessee and that the assessee had 'manufactured' duplicate sets of over 1 lakh cash memos and taxable sales effected by the dealer to the extent of Rs. 30 lakhs were unrecorded. On receipt of the said report, the Additional Commissioner issued a notice to the assessee stating that he proposes to consider the report at the hearing of the revision. On revision, the Additional Commissioner enhanced the gross turnover by Rs. 20 lakhs. The assessee was unsuccessful on a further revision before the Board and on a reference before the High Court. In a final appeal before the Supreme Court, it was contended that the Commissioner could not travel beyond the return of the assessment and discover suppressed or escaped item of turnover. The Supreme Court held that as the statute concerned had no specific and separate provision for bringing to tax escaped turnover it was competent for the Commissioner in that case to proceed on the basis of the report of the concealed turnover and enhance the assessment. The above digest of the case is an extract from the decision in Surrendra Overseas Ltd.'s case (supra) at pages 883, 884.
20. From the above decisions one clear principle is seen to have been affirmed time and again. And that is : the AAC simply cannot travel outside the record. He has the power of enhancement, certainly. He can consider whatever the ITO has considered. But he just cannot add a new source of income. This is the interpretation which holds the field.When the Supreme Court decided Shapoorji Pallonji Mistr/s case (supra) in February 1982 it was already '37 years' old. It is now 60 years old.One shrinks from assailing anything so venerable. As the Supreme Court went on to note, one should not overlook in this context the presence of other provisions in the Act like Sections 147 and 263. They are for roping in new sources not considered by the ITO. Furthermore, these are special provisions with their own rules of limitation and system of prior approval in stated situations by authorities higher than the ITO.21. How is the above settled interpretation, relevant to the issue before us Nemo dat quod non habet as the maxim goes, in a different branch of law. But the principle is broad enough. (Except for negotiable instruments of course.) You cannot pass on what you do not have. The Commissioner (Appeals) hits the nail on the head when he says that the AAC cannot confer jurisdiction on the ITO that he does not or could not have, (see paragraph 5 supra). The AAC can, no doubt, set aside an assessment in terms of Section 251(1)(a). The Section authorises the appellate authority, inter alia, to set aside the assessment and refer the case back to the ITO for making a fresh assessment in accordance with the directions given by him. This power is not an unbridled power. It is to be exercised legally. Suppose the AAC's exercise of such power is not in accordance with law; or is in excess of the jurisdiction vested in him under the statute. Then the mere fact of his having directed the ITO to do a particular thing will not authorise the ITO to do such a thing. It follows equally that if the ITO on his own, reads the order of the AAC as authorising him to make enquiries once again : and with the help of such enquiries and the material gathered thereunder to enhance the assessment, he has to show that such an order of the AAC is within the statutory powers of the AAC. In other words an order of the AAC that either enhances the assessment on its own or directs the ITO to cause enquiries to be made with the result of enhancement of assessment, has to be based on the record before the ITO, i.e., it cannot travel outside the record or beyond the subject-matter of the assessment.
22. In the instant case, the only dispute before the AAC was the allowability of certain expenditure claimed under the source 'horse racing'. In the assessment completed for this year originally (see paragraph 2 supra), the sources of income considered were salaries (Rs. 1,31,000), income from other sources, such as interest, dividends, sitting fees and commission (Rs. 30,325) ; and loss from horse racing (Rs. 16,564). On the other hand in the assessment completed on 22-9-1983 there was a totally new addition on account of unexplained entries in the records seized at the time of the raid as also the addition 'under Section 64(i)/64(v)' {see paragraph 4 supra; as also the draft assessment order of 26-3-1983 as modified by the IAC'S directions). These new additions could not have been made in the assessment of 22-9-1983 except under the authority of the order of the A AC, dated 20-7-1980. That, however, is not seen to be the position here. In view of the direct authority of more than one decision of the Supreme Court, the AAC, in disposing of the record could not enhance the assessment on his own making any addition under the head 'Income from undisclosed sources'. Equally so, he could not have directed the ITO to affect such an enhancement by causing enquiries to be made in such a matter. That was wholly outside his powers. It follows that it was equally outside the powers of the ITO too. When the ITO stepped outside the 'record' and included income from sources not even thought of in the original assessment proceedings, he was clearly acting without jurisdiction. The additions so made were bad in law and the Commissioner (Appeals) was correct in holding so.
23. The Act has a different set of provisions to bring in sources of income not considered in the original assessment proceedings. The effect of such specific statutory provisions in considering the powers of appellate or reviewing authorities has also been noticed. In Shapoorji Pallonji Mistrfs case {supra) the Supreme Court specifically noted that one should not overlook the provisions of Sections 34 and 33B of the 1922 Act which enable escaped income from new sources to be brought to tax after following a special procedure {see paragraph 16 supra). On the contrary, an opposite kind of situation was also commented upon by the Supreme Court in Ram Kanai Jamini Ranjan Pal (P.) Ltd.'s case {supra). There the reviewing authority was the Additional Commissioner (Sales Tax). He sought to include material that was not before the CTO at the time of completion of the assessment for the purpose of maintaining an enhancement of the assessment. The assessee contended that the Commissioner could not travel beyond the return of the assessment and discover suppressed sales. The Supreme Court rejected it because the statute concerned had no specific and separate provision for bringing to tax escaped turnover. The refusal of the Legislature (over a period of 60 years) to clothe the first appellate authority with the power to travel beyond the assessment record in the exercise of his statutory powers coupled with the separate provisions enacted by the Legislature for roping in new sources of income, leads to only one conclusion : The AAC in the instant case could not have directed the ITO to consider new sources of income. It follows that the ITO also could not assume such jurisdiction. It hardly improves matters if the ITO does so on his reading of the AAC's order.
24. This takes one to the consideration of the manner in which the order passed by the AAC (while referring the matter back to the ITO) is to be read. The order of the AAC in such cases cannot be divorced from the context of the grounds of appeal before the AAC, the sources of income considered by the ITO for assessment and the purpose for which and the language in which the AAC sets aside the assessment or any part thereof for being redone by the ITO. In the instant case, the objection taken in first appeal was only one, i.e., to the disallowance of part of the loss from 'horse racing'. Rest of the assessment was accepted by the assessee and became final. It is worthwhile to note again what the Madras High Court said in V. Ramaswami lyengar (see paragraphs 9 and 10 supra). If there is an appeal against a part of an order, the appellate authority would have no jurisdiction, in the absence of statutory provision, to interfere with the other part which does not form the subject-matter of the appeal. The Madras High Court was pleased to refer to this as a settled principle. Then the question may arise : what happens to that part of the order which has bscome final, if subsequent to the completion of the assessment new material comes up for notice Sections 147, 154 as well as Section 263 are there to set right the situation. These provisions also carry safeguards for taxpayers by way of their own preconditions and limitations. One other related aspect also came to be discussed in the course of the arguments before us. This requires notice. In Gemini Leather Stores' case (supra) the assessee-firm did not disclose certain transactions evidenced by certain drafts, in the original assessment proceedings. The ITO himself discovered the facts relating thereto but by oversight he did not include any income (representing the said drafts) in the original assessment. Subsequently, the ITO issued a notice under Section 147(a) for bringing to tax the income that had escaped in relation to the said drafts. The High Court upheld the ITO's action. The Supreme Court, however, reversed the decision of the High Court and held that after the discovery of the primary facts relating to the drafts the ITO should have, on the basis of inquiries made, included the income represented by the drafts. The ITO did not do so due to oversight and, hence, the assessee could not be charged with non-disclosure in terms of S147(a). In fact this case was referred to by the departmental representative to contend before us that in the de novo assessment of 22-9-1983 it was obligatory on the ITO's part to include the new sources of income because by then the search had taken place and the ITO had come to be in possession of new material which supported such additions ; and that if he had not done so action under Section 147(a) would have been barred. It is difficult to accept Gemini Leather Stores' case (supra) as standing in the way of action under Section 147(a) in the instant case. The fact is : in Gemini Leather Stores' case (supra) in the course of the original assessment proceedings certain material came to the notice of the ITO, notwithstanding the circumstance that the full facts were not disclosed by the assessee.
The ITO failed to act on the material and the Court's said action under Section 147(a) was barred. That is not the position here. The original assessment was completed well before the search took place. Hence, there is no question, therefore, of action under Section 147(a) being barred on the analogy of Gemini Leather Stores' case {supra).
25. An interesting issue arises here. It is not as if the exchequer would lose invariably if the claim for the department as in this case is not accepted. The proposition argued for the department is a double-edged one. It can cut against the revenue also. That is exactly what the taxpayer attempted to do in Katihar Jute Mills (P.) Ltd.'s case (supra). The assessee-company there owned a jute mill. The assessment was made under Section 23(3) of the 1922 Act originally, in January 1960. In the said assessment a sum of Rs. 5,22,450 was brought to tax representing the price of loom hours. The assessee filed an appeal to the AAC but on two different points, viz.: Before the Income-tax Officer the contract papers were not produced.
These are now produced. I have examined the account books also. I find that there are genuine business transactions and losses.
However, since the Income-tax Officer has not examined the vouchers and the contract papers, I set aside the assessment with a direction to the Income-tax Officer to make the assessment again after going through the contract papers and other vouchers The next contention in the appeal regarding certain disallowances was not pressed. There is no merit in this contention and the claim is rejected.
In the result, the assessment is set aside with a direction to the Income-tax Officer to go through the contract papers again and do the assessment afresh.
The assessment went back to the ITO to be made afresh. It could not be so made till 27-9-1965. Meanwhile, on 25-4-1965, the Supreme Court delivered its judgment in CITv. Maheslwari Devi Jute Mills Ltd. [1965] 57 ITR 36 holding that proceeds from the sale of loom hours were of capital nature and not assessable as income. (The assessment year concerned in Katihar Jute Mills (P.) Ltd.''s case (supra) was 1955-56 and capital gains tax, after a break, was levied only from the assessment year 1957-58.) The assessee, therefore, filed a revised return on 7-9-1965, i.e., before the denovo assessment was completed.
In the revised return, the assessee claimed that the sum of Rs. 5,22,450 was not taxable. The ITO rejected the claim on the ground that the inclusion of the said sum had become final as the assessee had not appealed against the same from the original assessment completed in January 1960. The assessee filed an appeal to the AAC on the completion of the de novo assessment on 27-9-1965. The contention before the AAC was that once the assessment was set aside the whole assessment was to be made afresh and the correct income had to be computed in accordance with law. The AAC accepted this plea and deleted the inclusion of Rs. 5,22,450. The Tribunal disagreed. It held that in terms of Section 31(3)(6) the ITO had jurisdiction only to look into the point that had been before the AAC and he cannot travel outside the scope of the remand order of the AAC. It further held that it was not open to the assessee to take advantage of the fact that the assessment had been set aside for a limited purpose and claim a different relief which was nowhere in the picture previously and that there was no method by which the assessee could raise the issue in the reassessment proceedings. The Calcutta High Court affirmed the Tribunal's order. The Court observed that the order of the AAC, if read as a whole in its proper context, would clearly show that it was neither the intent nor the purpose nor the import of the order that the whole assessment was set aside and everything should be kept at large so as to allow the ITO to make a fresh assessment on all the aspects of the matter and give a free hand to the assessee to make all claims and all arguments, in that assessment. This case is indeed a fearsome pointer. To validate such a claim as the revenue has placed before us in the instant case would be to let loose a good deal of confusion in an area which is not exactly conspicuous for the clearity of its first principles.
26. Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) requires special notice. This is a decision of the Madras High Court. As such, it is not only entitled to the highest respect but also binding on us, an inferior Tribunal functioning in the State of Tamilnadu. In Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) the assessee-company purchased (in 1932) a ginning factory with extensive appurtenant lands and also a plot containing some fruit stalls. In 1942 the assessee sold the factory with some of the appurtenant lands. It parcelled out 5 acres of land into several small plots and sold some of them by public auction. In the subsequent accounting year it sold the remaining plots and also the fruit stalls. There was a total profit of Rs. 13,197. This consisted of Rs. 9,397 from the sale of vacant plots in the accounting year and Rs. 3,800 from the sale of the fruit stalls. The ITO treated the sum of Rs. 9,397 as a capital receipt and assessed the sum of Rs. 3,800 Under the head 'Profits and gains of business or profession'. The assessee appealed against the assessment of the sum of Rs. 3,800. The AAC upheld the order of the ITO but reduced the amount to Rs. 2,800. In further appeal, the Tribunal remanded the matter to the AAC who came to the conclusion that both the sums of Rs. 9,397 and Rs. 3,800 were assessable to tax as income from business. The questions referred to the High Court were as Under: 1. Whether, on the facts and in the circumstances of the case, the inclusion and assessment of the sum of Rs. 9,397 representing the sale proceeds of plots of land, by the Appellate Assistant Commissioner after remand and upheld by the Appellate Tribunal, when this amount had not formed the subject-matter of the appeal in respect of the assessment year 1944-45 either before the Appellate Assistant Commissioner or the Appellate Tribunal in the first instance, is legal 2. Whether, on the facts and in the circumstances of the case, the assessment of the sum of Rs. 13,197 realised by the sale of vacant plots and fruit shop buildings Under the head 'Business' is lawful'? The Court held that the powers of the AAC are wider under Section 31 than those that could be exercised by an appellate court, under the Code of Civil Procedure, 1908. There is no distinction between cases where the AAC is dealing with an appeal remanded by the Tribunal and an appeal heard by him in the first instance. The only power which he could exercise in disposing of an appeal whether received by him after remand or directly against the order of the ITO is the one conferred upon him by Section 31 and it is not subject to any restrictions arising out of the subject-matter of the appeal.
27. The above decision was referred to by the departmental representative for the contentions that : (i) the AAC's powers are unlimited and they were not subject to restrictions arising out of the subject-matter of the appeal and, hence (ii) when the A.AC set aside the assessment in this case, the whole assessment was set aside enabling the ITO to consider new sources of income in his order of 22-9-1983. There is some difficulty in accepting these contentions wholly. The departmental representative's first proposition is unquestionable. The AAC's powers are plenary. They include the power of enhancement; they will not be confined to the subject-matter of appeal.
All these are readily granted. There is no need to cite any authority for this. But the second proposition said to follow from the first is not at all evident. Here different considerations arise. This second aspect was never before the Court in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra). That is an authority for the proposition that the AAC can act only Under the powers granted to him under Section 31 whether he deals with the appeal for the first time or on remand from the Tribunal. In fact, in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) there are observations of the Court which are directly against the contentions of the departmental representative. The Court said : It was held that when once an appeal was preferred by an assessee, it would not be open to the assessee to withdraw the appeal so as to prevent the Appellate Assistant Commissioner from enhancing the assessment, under Section 31(3)(a) of the Act [vide CIT v. Nawab Shah Nawaz Khan [1938] 6 ITR 370 (Lahore)]. Of course, it would not be open to the Appellate Assistant Commissioner to introduce into the assessment new sources, as his power of enhancement should be restricted only to the income which was the subject-matter of consideration for purposes of assessment by the Income-tax Officer....(p. 510) Thus, it is the opinion of the Madras High Court [delivered in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) and which decision has been affirmed in Seth Manicklal Fomra's case (supra) as correct] that the AAC cannot introduce into the assessment new sources because his power of enhancement is restricted only to the income which was the subject-matter of consideration for the purposes of assessment by the ITO. I think Sri Gajalakshmi Ginning Factory Ltd.'s case {supra) supports the claim of the assessee in the instant case rather than that of the department.
28. We are now left with Seth Manicklal Fomra's case {supra). This also being a decision of the Madras High Court and the department having literally staked its all on it, it becomes necessary to consider this decision in detail. The assessee here was carrying on business in cloth at Madurai and a business in sugar in Madrns. The assessment year was 1961-62. Income from the cloth business was determined by the ITO on the basis of the books of account at Rs. 8,204. Finding that regular books of account had not been kepi for the sugar business, the ITO estimated the income therefrom at Rs. 15,000, i.e., the total income was determined at Rs. 23,204 by an order dated 14-2-1964. The assessee appealed against the estimate of income from the sugar business. The AAC by his order dated 19-6-1964, after pointing out some of the aspects which were not taken into account by the ITO in estimating the income from the sugar business, ultimately held that 'after gathering all these materials, the assessment should be redone in accordance with law and after giving a suitable opportunity to the appellant's representative. In the result, the assessment is set aside and the ITO is directed to redo the same in the light of the above observations'.
Thereafter, while considering the matter afresh in the light of the directions given by the AAC, the ITO called for a wealth statement from the assessee. In the wealth statement filed, the assessee disclosed cash to the tune of Rs. 1,19,339 as part of his assets as on 31-3-1961.
The ITO considered that out of this amount a sum of Rs. 87,595 represented income from undisclosed sources for this year. Even after reconsideration in the light of the order of the AAC dated June 1964, the ITO estimated the income from the sugar business at Rs. 15,000 as done originally. But in addition he included a sum of Rs. 87,595 as income from other sources. This fresh assessment order was made on 7-3-1967.
29. The assessee appealed against the inclusion of Rs. 87,595 as income from other sources. The second assessment order (of 7-3-1967) was challeng ed on the ground that the ITO had exceeded his jurisdiction in travelling beyond the directions of the AAC. The addition was also challenged on merits. The AAC accepted the first contention. He held that the ITO could not deal with any matter which was not before the AAC on the prior occasion and, hence, inclusion of income from other sources was beyond the ITO's jurisdiction. The Tribunal confirmed this view as correct. The question referred to the Madras High Court was as under : Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the Appellate Assistant Commissioner was justified in directing that the sum of Rs. 87,595 should be excluded from the assessment made by the order dated 7-3-1967? The Court answered the question in the negative and in favour of the revenue. It made the following points: (a)The order of the AAC cannot be read as in any way limiting the scope of the ITO when he makes the fresh assessment order. Once the order of assessment is set aside, it is open to the ITO to consider the entire matter afresh notwithstanding the terms of the order of the AAC directing the ITO to consider the issue relating to the estimation of the income alone. Nor is there any warrant for reading any such restriction on his power either under Section 251(1)(a) or under Section 143(3) Under which the ITO makes a fresh assessment.
(b)It is doubtful whether the AAC could restrict the power of the ITO while setting aside the assessment order itself and directing him to make a fresh assessment order. If the order of assessment is set aside and the ITO is directed to make a fresh assessment there is nothing in the Act that restricts the powers of the ITO in passing an order under Section 143(3). Once the order of assessment is set aside and the matter comes up for fresh assessment before the ITO the ITO's powers will have to be decided with reference to the provisions of Section 143(3) and not with reference to the AAC's observations in his order or the scope of the appeal before him [see Sri Gajalakshmi Ginning Factory Ltd.'s case (supra)].
(c) No doubt, Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) related to a remand order made by the Tribunal to the AAC and the powers of the AAC in such a remanded matter, but the ratio of the decision was appli cable even for the purpose of determining the jurisdiction of the ITO after the order has been set aside by the AAC with a direction to make a fresh assessment.
30. Obviously, in Seth Manicklal Fomra's case on looking into the general context and also the terms in which the AAC sent back the matter to the ITO the Court came to the conclusion that the entire assessment was set aside. In fact the Court makes this point repeatedly in its judgment. This is the Court's reading of the AAC's order. The Commissioner (Appeals) of course refers to the fact that the ITO in Seth Manicklal Fomra's case (supra) already had the power to call for a total wealth statement in terms of Section 22(4) of the 1922 Act/142(1) of the 1961 Act even at the time of the original assessment. When the matter went back to the ITO he merely exercised this power which was already available to him at the time of the original assessment and the impugned addition followed thereafter. Presumably the Commissioner (Appeals) view is : this circumstance could have influenced the thinking of the Court in Seth Manicklal Fomra's case (supra). It appears to me that it would be incorrect to read so much between the lines. The plain fact is : the Court read the order of the AAC there as an order setting aside the entire assessment. It did not even thought upon the particular aspect in dispute before us, i.e., whether the AAC has the power to direct an inquiry that results in new sources of income being brought into assessment. It is interesting to note here that the Madras High Court did notice Sri Gajalakshmi Ginning Factory Ltd.'s case (supra), in Seth Manicklal Fomra's case (supra) and even relied upon it for its decision. But the Court did not find it necessary to consider some relevant observations of the Madras High Court therein. I have already reproduced the relevant passage in para 27 supra. The Court was clearly of the opinion in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) that it is not open to the AAC to introduce into the assessment new sources of income as his power of enhancement is restricted only to the 'subject-matter of consideration for purposes of assessment by the ITO'. In Seth Manicklal Fomra's case (supra), the Court's silence on these pertinent observations robs the department of a binding precedent in its favour. In other words I must agree with the Commissioner (Appeals) when he says that Seth Manicklal Fomra's case (supra) is distinguishable. The opinion of the Madras High Court in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) on the narrow crucial issue under discussion here is categorically against the revenue. I would, therefore, prefer to follow Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) rather than Seth Manicklal Fomra's case (supra).
31. There is also perhaps a risk in trying to examine too closely any order. One is likely to miss the wood for the trees. It is not as if the 'decretal portion' of the AAC's order alone should be considered to judge the validity of the new sources of income brought into the assessment of 22-9-1983. In Homi Jehangir Gheesta v. CIT [1961] 41 ITR 135 the Supreme Court held that the order of the Tribunal should be read as a whole to see if a question of law arises therefrom. It said : ...we must make it clear that we do not think that those decisions require that the order of the Tribunal must be examined sentence by sentence, through a microscope as it were, so as to discover a minor lapse here or an incautious opinion there to be used as a peg on which to hang an issue of law.... (p. 141) 32. When the departmental representative describes 'the decretal portion' of the AAC's order as conclusive of the issue in question, one does think of the peg in Homi Jehangir Gheesta's case (.supra). I have tried to read the order of the AAC as a whole, keeping in view the context in which the appeal arose and the reasons for which he sent back the matter to the ITO. No doubt, he used the words 'the assessment made is set aside' towards the end of his order but what all had transpired before that, cannot be brushed aside ; especially so in the context of the opinion of the Madras High Court in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) nd Estate of Late Sri N. Veeraswami Chettiar's case (supra) (see paras 12 and 13 supra) and of the Supreme Court in Shapoorji Pallonji Mistry' case (supra) and Hardutrai Motilal Chamaria' case (supra). To accept the department's contentions in this case is to go directly against the opinions ecorded by the Madras High Court and the Supreme Court to the effect that the AAC cannot go into new sources of income not considered by the ITO in the assessment. If the AAC cannot do so, it follows the ITO also cannot when the matter goes back to him, as in this case. I would, therefore, agree with the Commissioner (Appeals) that the assessment insofar as it pertained to consideration of new sources of income was not valid in law.
33. Matters are by no means final at the Tribunal stage. There are bound to be further proceedings in this case by way of Third Member hearing, by way of reference to the High Court and so on. I would, therefore, record here (for removal of doubts) that, alternatively, i.e., in case the decision of my learned brother on the issue discussed above comes to be upheld as correct, I am wholly in agreement with his order on the merits of the additions in dispute before us, subject to the following observation : 34. The assessee's cross-objection may be considered now. This claims a short-term capital loss of Rs. 37,815. Such a claim was never made before the ITO in the original assessment proceedings. As such, it was never considered by the ITO nor was the issue raised before the AAC.Hence, it was totally outside the scope of the order of the AAC dated 23-7-1980. Applying the ratio of decision in the case of Rai Bahadur Hardutroy (supra), it has to be held that the AAC could not have entertained such a claim evenif it had been made before him by the assessee, i.e., it was not open to the AAC to travel outside the subject-matter of assessment. The Supreme Court restated this basic principle a little differently in Gurjargravures (P.) Ltd.'s case (supra). It said there that if an item of income is taxed it would not be correct to hold that the question of its non-taxability should be taken to have been considered by the ITO even in the absence of such a claim before the ITO, i.e., such a claim would be outside the subject-matter of assessment (see para 18 supra). Hence, the cross-objection is not maintainable. If, however, my learned brother's view is upheld (as in the case of the revenue's appeal) I would record here that on the merits of the objections raised in the cross-objection, I endorse with respect, the directions given by my learned brother. As regards the revenue's appeal the following three grounds in particular are in my view validly taken in law : The Commissioner (Appeals) erred in cancelling the assessment made by the ITO as void ab initio and illegal.
Ground No. 28: The Commissioner (Appeals) erred in holding that the stud-farm expenses claimed by the assessee should be allowed as a deduction in computing the assessee's total income.
Ground No. 31 : The Commissioner (Appeals) should have upheld the disallowance of stud-farm expenses as the assessee did not discharge his onus of proving that the expenditure was actually incurred by him having regard to the ratio of decisions in the cases of Ballarpur Industries Ltd. (supra) and Gopinath Vir Bhan (supra).
I agree with my learned brother that the assessment of 22-9-1983 was not void ab initio and illegal. It was valid to the extent it was made in accordance with the directions of the AAC. Secondly, on the merits of the assessee's claim for deduction of the stud-farm expenses of Rs. 36,384 also, I agree that the matter be restored to the ITO for a fresh consideration, but not as regards the capital loss claimed by the assessee for the first time in the proceedings before the Commissioner (Appeals). That claim cannot be entertained for the reasons stated supra.
35. I have relied for my conclusion, only on the decisions of the Madras High Court and the Supreme Court. Preponderance of judicial opinion (as regards the other High Courts) is also in favour of the assessee's stand, on his basic objection. I have, however, not discussed the decisions of other High Courts as they have only a persuasive value.
36. In the result I would allow the revenue's appeal in part (to the extent indicated above) and dismiss the assessee's cross-objection.
As there is a difference of opinion between the Members, we refer the following two questions to the President under Section 255(4) of the Act : 1. Whether, on the facts and in the circumstances of the case, the Income-tax officer was justified in considering sources of income that were not before him at the time of completion of the original assessment of 26-2-1979 and in thereby making additions from new sources of income in the second assessment of 22-9-1983, by purporting to act in accordance with the order of the Appellate Assistant Commissioner, Trichy-I, dated 23-7-1980 2. Whether the assessee was entitled to raise a new claim of (capital) loss before the Commissioner (Appeals) in the report filed by him against the assessment order of 22-9-1983 1. The assessee in this appeal is an individual deriving income from salary and other sources. One of the sources of income is liorse racing for which purpose the assessee maintained a stud-farm. The assessment was originally made on 26-2-1979 on a total income of Rs. 58,920. In arriving at this total income expenses to the extent of Rs. 36,384 incurred on stud-farm were disallowed. Against this disallowance an appeal was filed before the AAC, who by his order in IT Appeal No. 112 of 1979-80, dated 23-7-1980 set aside the assessment with a direction to the ITO to redo the assessment, according to law. After the assessment was set aside, a search was conducted on 21-9-1981 on the assessee's residential premises and various documents were seized.
Besides some jewellery also was seized by the department. Besides it was found that the value of the rent-free accommodation provided to the assessee by the employer, namely, South India Corpn. Agency (P.) Ltd., was not properly valuated. The department proposed to bring the value of the jewellery and the correct rent of the accommodation to tax in the reassessment to be framed by the ITO. The assessee raised a preliminary objection stating that as the assessment was set aside by the AAC for a limited purpose, namely, to look into the stud-farm expenses, the Income-tax Department was precluded from looking into any other aspect more particularly the items seized in the course of the search. The ITO did not agree with this contention. Relying upon the decision of the Madras High Court in the case of Seth Manicklal Fomra {supra), where an identical question was claimed to have arisen, the ITO rejected the assessee's contention and held that once the assessment was set aside by the AAC, it was open to the ITO to consider the entire matter afresh notwithstanding the terms of the order of the AAC directing the officer to consider the issue. He then brought several other items that were found in the course of the search to tax as a consequence of which the income came to be assessed at Rs, 15,88,991. I am not, in this matter, concerned with the details of this income. Hence, I am not referring to them in detail. Thereafter there was an appeal before the Commissioner (Appeals). Before him the same contentions as were urged before the ITO were repeated. It was urged that in a case of this nature, the ITO should comply with the directions of the AAC and complete the fresh assessment and he had no power to look into any other source of income much less the income based upon the seized material. His power to make a fresh assessment was, thus, confined to the directions given by the AAC and was not an unfettered power. If there was any escaped income, the only course open to him was to take recourse to the provisions of Section 147 and not to utilize the set aside assessment for that purpose. Reliance was placed upon the decisions in Katihar Jute Mills (P.) Ltd.'s case (supra) and Surrendra Overseas Ltd.'s case (supra) and a few other decisions. It was also submitted that the assessment for the assessment year 1976-77, for which the year ended on 31-3-1976, was completed on 26-2-1979. The order of the AAC was on 23-7-1980 and by the time AAC passed his order, the jurisdiction of the ITO to reopen an assessment under Section 147(6) had expired. Therefore, the application of Section 147(6) was ruled out. Section 147(a) could not have been applied because that required the prior sanction ot the Commissioner. Thus, in a case where the power of the ITO to act under Section 147 was barred by time or rendered impossible of invocation, that power could not have been conferred by the IAC on the ITO. The ITO could not, therefore, derive jurisdiction from the order of the AAC to proceed to assess the items found on search. The Commissioner (Appeals) considered these arguments and held that the ITO exceeded his jurisdiction in bringing to tax the items found on search. He also held that the Madras High Court decision in the case of Seth Manicklal Fomra (supra) could not be read as conferring jurisdiction on the ITO which he did not have at the time of making the original assessment. He held that even if the ITO had all the powers which he had at the time of making the original assessment while making the fresh assessment, still it could not be held that the power to rope in an income which was discovered in a search after four years after the original assessment was completed, vested in the ITO.According to him, the ITO travelled beyond the scope of his jurisdiction which was only to look into the expenditure of stud-farm expenses and to decide its allowability. He observed that the ITO would have unlimited power to make a fresh assessment when a case was remanded or set aside only when the AAC directs a fresh assessment but where the AAC limits the powers of the ITO, the ITO's powers were circumscribed by the directions given by the AAC and he has to act only within these limited powers. In his opinion the facts of the case of Seth Manicklal Fomra {supra) and the observations made by the Madras High Court were distinguishable, in that while in the case of Seth Manicklal Fomra (supra) the directions given by the AAC were wide enough to permit any enquiry, the directions given by the AAC in this case were limited in extent and scope. He also dealt with the merits and gave certain directions which resulted in the deletion of certain additions on merits.
2. Aggrieved by the order of the Commissioner (Appeals), the Commis sioner preferred appeal to the Tribunal. The learned Judicial Member, who was on the Bench, after considering the arguments, the facts of the case and the Madias High Court decision in the case of Seth Manicklal Fomra (supra) held in a well discussed order that it was open to the ITO to consider those items found in the course of the search because the assessment when set aside by the AAC, the assessment made originally ceased to be operative, became non est in law and the assessment that the ITO was going to make would be a fresh assessment for making which he has got all the powers available to him Under Section 143(3). According to him much depends upon the interpretation to be placed upon the directions given by the AAC. If the AAC's direction was placing any restriction on the ITO in the matter of redoing the assessment, that direction must perhaps be followed. But in a case where the assessment is set aside as a whole with a direction to redo the same according to law, the entire assessment was open before the ITO and he was then confined only to the directions given by the AAC, which weighed with him to set aside the assessment. He relied very heavily for this view on the decision of the Madras High Court in the case of Seth Manicklal Fomra (supra) particularly these observations where the High Court held while explaining the scope of set aside assessments that once an assessment was set aside, the entire assessment was before the ITO and the ITO could complete the assessment even on the materials which were not before the ITO during the time when the original assessment was made. He also sought support for his view from another judgment of the Madhya Pradesh High Court in the case of Kundanlal Maru (supra). He also placed reliance upon an order of the Tribunal in the case of L.G. Balakrishnan (supra). He, therefore, upheld the contention of the department that the reassessment order passed by the ITO was in accordance with law making it specific that he was bound by the judgment of the Madras High Court in the case of Seth Manicklal Fomra (supra). He then dealt with the merits also with which I am not concerned in this matter.
3. The learned Accountant Member, however, is of a different opinion.
By quoting extensively the order of the AAC which gave rise to this controversy, the learned Accountant Member held that the setting aside of appeals particularly those relating to enhancement. It is as I see, his clear opinion that eventually to Understand the controversy as to how the AAC disposed of an appeal much would depend upon how the order of the AAC must be interpreted. He held that even though the decretal portion of the order of the AAC, namely, 'the assessment made is set aside' had to be kept in view but what transpired before the facts that led to this conclusion and the context in which those observations were made could not be brushed aside specially in the context of the view of the Madras High Court in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) and the Supreme Court decision in the case of Shapoorji Pallonji Mistri (supra).
4. On this vital difference that arose between the learned Members, the difference of opinion formulated by them in the following words was referred to the President, who nominated me as a Third Member to express my opinion thereon : 1. Whether, on the facts and in the circumstances of the case, the Income-tax Officer was justified in considering sources of income that were not before him at the time of completion of the original assessment of 26-2-1979 and in thereby making additions from new sources of income in the second assessment of 22-9-1983, by purporting to act in accordance with the order of the Appellate Assistant Commissioner, Trichy-I, dated 23-7-1980 There is also another point of difference of opinion. I shall refer to it a little later.
5. The learned standing counsel, who appeared for the department, submitted that the order of the AAC in very unambiguous terms set aside the assessment and directed the ITO to make a fresh assessment. The only interpretation possible from that direction given by the AAC was that the entire assessment was set aside. Once the assessment was set aside, the powers of the ITO to make a fresh assessment are traceable to Section 143(3) and not to the order of the AAC and in exercise of those powers it is open to the ITO to consider not only those all sources of income which were considered originally but also those which came to light subsequently. His powers in that direction are absolutely uninhibited and unfettered. It is wrong to think that the AAC had directed the ITO to enhance the assessment by going into new sources of income which were not available before the ITO while making the original assessment. The income that was added now came to surface only on a search conducted subsequent to the original assessment and long after the order of the AAC was made. Neither the AAC nor the ITO could, therefore, have contemplated about this source and this development. It is, therefore, incorrect to read the order of the AAC as if he had permitted the ITO to explore the new sources of income. He further submitted that there was no conflict between the decisions of the Madras High Court in Sri Gajalakshmi inning Factory Ltd.'s case (supra) and Seth Manicklal Fomra's case (supra), In both these cases the Madras High Court was unanimous in pointing out that it was open to the ITO to bring to tax even the income that escaped assessment once the assessment was set aside on appeal by the AAC. In fact the Madras High Court relied upon on Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) in the latter decision of Seth Manicklal Fomra (supra) to held that once an assessment was set aside by the AAC on appeal, the entire assessment was open before the ITO and he was free to make a fresh assessment and then his powers are traceable not to the order of the AAC but to the provisions of Section 143(3) even though the ITO has to keep in view the directions given by the AAC while making a fresh assessment. He further submitted that the decision of the Madras High Court was followed by the two other High Courts, namely, by the Madhya Pradesh High Court in Kundanlal Maru's case (supra) and by the Rajasthan High Court in Rambilas Chandram v. CIT [1985] 156 ITR 344 and these High Courts could not have wrongly understood the purport of the decision of the Madras High Court. He also pointed out that the order of the Tribunal in the case of L.G. BaJakrishnan (supra) correctly understood the import of the Madras High Court decision in Seth Manicklal Fomra's case (supra) and, therefore, that order should have been followed. He submitted further that the learned Accountant Member dealt with in his order only with the powers of the AAC and not with those of the ITO. He then submitted that since no fetter was placed upon the power of the ITO while making a fresh assessment, it was open to him while making a fresh assessment to consider the income which came to surface in the search conducted by the department. He also submitted that the availability of the alternate remedy to the revenue, namely, reopening of an assessment is not an answer to hold that the ITO's power is circumscribed by the direction given in the order of the AAC and would not disentitle the ITO from considering items of the nature in question. He further asked how can the assessment be reopened for the purpose of considering these items under Section 147 when the assessment was already open. The question of reopening of an assessment would arise only when the assessment was closed. When the assessment was rendered open by the order passed by the AAC, the question of reopening of an already opened assessment would not simply exist or arise. Therefore, consideration of these powers would not be of any relevance to the decision of this issue. He supported the order of the learned Judicial Member and urged that that was the view that should be taken more particularly when the matter was governed by the Madras High Court decision to which jurisdiction the Tribunal at Madras is subject and urged that that binding decision of the jurisdictional High Court should have been followed.
5A. The learned counsel for the assessee, Shri Ramamani, assisted by Shri S. Natarajan, while supporting the view taken by the learned Accountant Member strongly opposed the view taken by the learned Judicial Member. His point was that the decision of the Madras High Court in Seth Manicklal Fomrd's case (supra) was not properly appreciated by the learned Judicial Member. The Madras High Court never intended to vest the ITO with a power so wide as to in the eventual analysis result in disobeying the order of the AAC. If AAC sets aside an assessment with certain directions, if the ITO is held to have the power to make a fresh assessment even going beyond the directions given by the AAC, he asked would it not amount to ignoring the directions given by a superior appellate authority by which, the law enjoins, the ITO is not only bound but has to carry out. He submitted that that was not the view of the Madras High Court at all. He submitted that in all such cases it is the interpretation to be placed upon the order of the AAC that ultimately decides the issue. If the order of the AAC could be interpreted as permitting the ITO to make a fresh assessment de novo, then only the ITO could make a fresh assessment by considering the material which was not before him while making the original assessment but if the order of the AAC is to be interpreted as confining the jurisdiction of the ITO to consider only those portions of the assessment which he was directed to investigate into, he should confine himself only to that portion and nothing else. If the ITO had come across any item of escapement of income or underassessment of income, he should resort to some other provisions of the Act to bring such escaped or underassessed income to tax but he could not make use of the set aside assessment to rope in those items of income as that would amount to not carrying out the directions given by the AAC but travelling far beyond for which he has no legal authority. It is this aspect of the matter that was emphasised by the learned Accountant Member which the learned Judicial Member has perhaps ignored. He submitted that the decision of the Madras High Court in Seth Manicklal Fomra's case (supra) was properly understood by the Kerala High Court in K.P. Moideenkuttf's case (supra) and by the Calcutta High Court in Katihar Jute Mills (P.) Ltd.'s case (supra). He further submitted that he would concede that there was no inconsistency between the decisions of the Madras High Court in Sri Gajaiakshmi Ginning Factory Ltd.'s case (supra) and Manicklal Fomrd's case (supra) but he submitted that Sri Gajalakhshmi Ginning Factory Ltd.'s case (supra) would throw light on a proper understanding of Manicklal Fomrd's case (supra). He also conceded that the order passed by the ITO would eventually be an order under Section 143(3) but that was subject to and should be subjected to the provisions of Section 251, namely, the directions given by the AAC.A proper reading of the order of the AAC would show that he was interested only in deciding what portion of the expenditure would be described as capital expenditure and what portion of the expenditure could be considered as revenue expenditure and since details from that aspect were not available, he desired that the ITO should examine this matter and then come to a proper conclusion and a proper conclusion could be arrived at only when the assessment was set aside and not otherwise. It was for that purpose that the assessment was set aside and that should not be understood as permitting the ITO to make the assessment as if he is making the assessment for the first time either under Section 143(3) or under Section 147. Such an interpretation would be travesty of justice. He comm ended for acceptance the view taken by the learned Accountant Member.
6. I have considered these elaborate arguments addressed to me. To my mind there appeared to be no escape from the following judgment of the Madras High Court in Manicklal Fomra's case (supra) for more than one reason. First and foremost it is the decision given by the jurisdictional High Court which is binding on me. Secondly, it is not distinguishable on facts. The ratio of the decision is so unequivocal and clear that when an assessment order is set aside by an AAC, on appeal, the assessment made by the ITO ceased to be an order holding the field. The parties, i.e., the department and the assessee are restored to the position to which they were occupying before the assessment was made, namely, that the entire demand made by the ITO gets wiped out. The assessee becomes free from all obligations created by that assessment order and fresh obligations will emerge only when a fresh assessment is made and the fresh assessment that is to be made derives its authority not from the directions given by the AAC but from Section 143(3). The Madras High Court went to the extent of pointing out that even a direction given by the AAC may not even bind the ITO when he makes a fresh assessment. The fresh assessment as a whole becomes the subject-matter of appeal before the AAC again when all the points by which the assessee feels aggrieved could be agitated.
Thirdly, the Madras High Court decision was understood, explained and followed in a very recent decision given by the Rajasthan High Court in Rambilas Chandram's case (supra). Following the decision of the Madras High Court in Seth Manicklal Fomras case (supra), the Rajasthan High Court noticed that the decision was followed by the Madhya Pradesh High Court in Kundanlal Maru's case (supra) and after making references to those two High Courts decisions, the Rajasthan High Court held that if in an appeal from assessment the AAC sets aside the assessment and directs the ITO to make a fresh assessment, the ITO is bound by the directions of the AAC in making the fresh assessment but subject to those directions the ITO has the same powers in a fresh assessment as he had originally in making an assessment order under Section 143.
Where a case is sent back to the ITO without any restrictions, there are no restrictions at all on the powers of the ITO when he proceeds to make the fresh assessment in substitution of the one set aside. The most important observation made by the Rajasthan High Court in this case is that even if the ITO had not made additions to the income of the assessee in the first assessment, he can make such additions in the fresh order of assessment. It is also important to note that same is the view taken by the Allahabad High Court in J.K. Cotton Spg. & Wvg.
Mills Co. Ltd.'s case (supra). The Allahabad High Court in this case clearly pointed out that the reassessment that is to be made after assessment was set aside by the AAC on appeal was nothing but a second assessment in substitution of the assessment made previously. There are no restrictions at all on the powers of the ITO when he proceeds to reassess the income subject to the directions given in the order of the AAC, and the ITO has to proceed as if he was making an assessment under Section 23(3) at the time when he proceeds to reassess (sic). I find it, therefore, very difficult to agree with the view that when the order of assessment is set aside by the AAC, the ITO has to confine while making the fresh assessment only to the directions given by the AAC and not deal with the other matters at all. If this is the correct legal position then there is no meaning to be given to the expression used in Section 251 of the Act and to the expression mentioned therein that in an appeal against an order of assessment, the AAC may confirm, reduce, enhance or annul the assessment or he may set aside the assessment and refer the case back to the ITO for making a fresh assessment in accordance with the directions given by the AAC or, as the case may be, the Commissioner and after making such further enquiry as may be necessary, the ITO shall thereupon proceed to make such fresh assessment and determine tax payable on the basis of such fresh assessment. If the interpretation placed upon this power of the AAC on this Section is to be taken as canvassed on behalf of the assessee then as I have just now pointed out no meaning can be ascribed to the setting aside of an assessment by the AAC for making a fresh assessment in accordance with the directions given by him and the ITO proceeding to make a fresh assessment to determine the amount of tax payable on the basis of such fresh assessment. But one thing is true that when an assessment is set aside by the AAC and the case was referred back to the ITO for making a fresh assessment, the ITO has to make the fresh assessment in accordance with the directions given by the AAC or, as the case may be, the Commissioner. Therefore, one has to see what are those directions given by the AAC. If the directions given by the AAC are such as to place a restriction on the power of the ITO, then according to the Rajasthan High Court and the other Courts, the ITO is bound by those directions while making the fresh assessment. Even so the ITO has the same powers while making a fresh assessment as he had originally in making an assessment under Section 143. But where the assessment was set aside without restrictions, there are no restrictions on the power of the ITO. He is absolutely free to make the fresh assessment in the manner he likes subject of course to the provisions of Section 143. It, thus, becomes necessary to refer to the order of the AAC only to find out whether there are any restrictions placed upon the power of the ITO to make a fresh assessment or it is only a setting aside of the assessment without placing any restrictions on the power of the ITO. For this purpose a reference has to be made to the order passed by the AAC, the relevant portion of which was extracted in the order of the learned Accountant Member : It is not clear from the order of the Income-tax Officer whether he had applied his mind at all to the issue on hand. Without assigning any reasons, simply after remarking that expenses were capital in nature, he had disallowed the claim. In my opinion the matter may have to be referred back to him to go through all the details for the expenses and then to arrive at a correct conclusion about the extent of expenditure up to which the claim of the appellant could be entertained. In this connection his attention is also invited to the fact that six of the horses had been owned by the appellant jointly with others. How the expenses claimed in those cases had been dealt with must also be looked into so that any useful information gathered by him could be utilised while completing the present assessment. To cite an example, in the case of the race horse Chick Baby, livery charges has been claimed to the extent of Rs. 6,337. It must be looked into whether a similar claim was made by the joint owner towards this horse. If any expenditure had been claimed, then as to how it had been dealt with in that file may also be looked into with a view to enable the Income-tax Officer to make a proper assessment on the appellant, the assessment made is set aside with a direction to redo the same according to law.
It will be seen from this order passed by the AAC that it was to enable the ITO to make a proper assessment on the appellant, the assessment made was set aside with a direction to redo the same according to law.
This direction does not mean in my opinion that the ITO has to confine himself only to the verification of the nature of expenditure and then frame the assessment again. If such had been the case, the AAC would have given positive directions to the ITO to verify, the expenditure and then to consider what portion of it was capital or what portion of it was revenue and then make a proper allowance or disallowance. He would not have set aside the entire assessment with a direction to redo a proper assessment that too according to law. The direction to make the assessment again according to law would not confine the fresh assessment to be made only to the expenditure and none else, although it was the expenditure that was the subject-matter of appeal before the AAC. The entire assessment is to be made according to law which means according to Section 143(3), which means a fresh assessment having regard to the material that has come into the possession of the ITO by that time. It is no doubt true that an inference can be drawn from the order of the AAC that what was weighing in his mind was ascertainment of the expenditure that could be allowed. He did not stop at that. He travelled beyond and set aside the assessment which meant that the entire assessment was set aside without any restrictions. If the AAC wanted that only the expenditure portion should be examined, he could have said that the assessment was set aside only to the extent of ascertainment of expenditure. The absence of such restrictive directions seen in his order, gives me the impression that the whole of the assessment was set aside, may be without any purpose to be served but that was a direction given by the AAC. As a consequence of this direction the assessment made by the ITO stood set aside and no portion of it remains and that assessment order and the findings given therein do not act as res judicata. The ITO, therefore, was justified in making a fresh assessment by utilising the material that has come into his possession subsequent to the setting aside.
7. In this context I am of the view that the decision relied upon by the learned Accountant Member of the Madras High Court in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) is not in conflict with the view expressed by the Madras High Court in the latter decision in Seth Manicklal Fomra's case (supra) which the learned Accountant Member sought to distinguish. In the earlier case, the Madras High Court in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) ruled that there is no distinction between cases where the AAC is dealing with an appeal which is remanded by the Tribunal, and an appeal which is heard by him in the first instance. The only power which he can exercise in disposing of an appeal, whether received by him after remand or directly against the order of the ITO is the one conferred upon him by Section 31 and it is not subject to any restrictions arising out of the subject-matter of appeal. This ruling of the Madras High Court on a deeper consideration suggests in my view that the power of the AAC on remand and the power of the ITO again on set aside, are at par and on the same footing in the sense that the AAC on remand derives his power to hear the appeal afresh under Section 251 and is not subject to any restrictions arising out of the subject-matter of the appeal. So also the ITO on set aside of an assessment derives his power under Section 143(3) and that power is not subject to any restrictions arising out of the subject-matter of the appeal. This way there is neither conflict nor antinomy between the decisions of the Madras High Court in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) and Seth Manicklal Fomra's case (supra). It is also of interest to note that in this case the assessee-company purchased a ginning factory with extensive lands appurtenant thereto and also a plot containing some fruit stalls for certain sum. Sometime later the asssessee sold the factory with some of the lands appurtenant thereto by parcelling them into small plots in public auction. The assessee realised a profit of Rs. 13,197 made up of Rs. 9,397 from the sale of vacant plots and Rs. 3,800 from the sale of the fruit stalls. The ITO treated the sum of Rs. 9,397 as capital receipt and he assessed the sum of Rs. 3,800 under the head 'Business'.
The assessee appealed against the assessment of the sum of Rs. 3,800.
The AAC upheld the order of the ITO but reduced the amount to Rs. 2,800. The Tribunal on further appeal remanded the matter to the AAC, who came to the conclusion that both the sums of Rs. 9,397 and Rs. 3,800 were assessable to tax as income from business. On a reference on the question whether the AAC has the power to assess the sum of Rs. 9,397 after remand, the High Court held in affirmative. This shows that the order of the AAC, when remanded by the Tribunal gets completely vacated and when he deals with the appeal afresh, he is dealing with a fresh appeal as if it is an appeal from the order of the ITO to him and his powers were, therefore, traceable to Section 31 of the 1922 Act or Section 251 of the 1961 Act. Similarly, the ITO also gets the power to deal with the assessment afresh when the original assessment was set aside by the AAC on appeal and the fresh assessment to be made by him would not be subject to any restrictions unless placed deliberately in so many words by the AAC. In this view of the matter, I am unable to see any conflict between the Madras High Court decision in Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) and the later decision of the same High Court in Seth Manicklal Fomra's case (supra). I may also add here that since the learned Accountant Member preferred to follow Sri Gajalakshmi Ginning Factory Ltd.'s case (supra) in preference to Seth Manicklal Fomra's case (supra) it can be said, since in my view, there is no conflict between those two decisions, that there is only misunderstanding of legal position and no difference of opinion between the two Members on this issue. The difference that arose in the present case can, thus, be attributed to a misunderstanding of these two decisions of the Madras High Court. I may also add here that there is no direction given by the AAC in his order to the ITO to examime new sources of income or to enhance the income in any manner. After the assessment was set aside and before the fresh assessment was made, certain materials came into the possession of the ITO, which he wanted to use as a consequence of which there was enhancement in the income. That enhancement cannot be attributed to any direction given by the AAC. I may also refer to a decision relied upon by the learned counsel for the assessee as supporting his contention, namely, K.P. Moideenkutty's case (supra)a judgment given by the Kerala High Courtwhereby the Kerala High Conrt held that where on appeal from an assessment the AAC sets aside the assessment and directs the ITO to make fresh assessment without imposing any restrictions or limitations as to how the fresh proceedings are to be conducted by the ITO, the ITO has the same powers in making such fresh assessment as he had originally when making an assessment under Section 143 and the ITO is competent to redo the assessment in accordance with law after taking into account all matters and aspects that would be relevant in making the original assessment. The Kerala High Court pointed out in this case that it is open to the AAC to limit the scope of enquiry by the ITO to any specified aspect or issue. But so long as that has not been done but the order of assessment has been set aside and the ITO is directed to redo the assessment afresh, the powers of the ITO, the Kerala High Court pointed out, are untrammelled by anything . that he might have said or omitted to say in the original order of assessment, which was set aside by the AAC. The learned counsel for the assessee submitted relying upon this decision that the order of the AAC should be interpreted as limiting the scope of the enquiry by the ITO to the specific issue of expenditure and that the ITO should not be held to possess the power to take into account the further material that came into his possession as a consequence of the raid. As I mentioned a shortwhile ago this argument would have been available to the assessee if the assessment was not set aside as a whole by the AAC. The expression used by the AAC in the present case is similar to the expression used by the AAC in the case before the Kerala High Court, which the Kerala High Court interpreted as setting aside the whole of assessment in which event the powers of the ITO are untrammelled by anything else. I am, therefore, of the opinion that this decision would not be of any assistance to the assessee and this decision falls in line with the decision of the Madras High Court in Seth Manicklal Fomra's case (supra) and the decisions given by the Allahabad, Rajasthan and Madhya Pradesh High Courts. It is also to be noted that the argument of the assessee that the ITO should reopen the assessment to add back those items which were found as a consequence of a search is also not available to the assessee because the reopening of an assessment would arise only when the assessment is completed. When an assessment is already open, there is no question of reopening an open assessment. Under the Act an ITO can disturb the finality of an assessment made by him in three ways. One is by resorting to Section 154 ; the other is by resorting to Section 147 and the third is when the assessment is set aside either by the AAC or the Tribunal on appeal or by the Commissioner under Section 263 or 264. This is a case where the finality of the assessment is set aside by the order of the AAC.8. I am, therefore, of the opinion that the ITO was justified in considering the sources of income that were not before him at the time of completion of the original assessment and in making additions from new sources of income in the fresh assessment. Here I would like to add that when he was making the additions from new sources of income, he was not acting in accordance with the order of the AAC but he was performing his functions referable to Section 143 with the help of the order of the AAC by which the original assessment was set aside.
9. As regards the second point of difference of opinion whether the assessee was entitled to raise a new claim of capital loss before the Commissioner (Appeals) in the appeal filed by him against the assessment rder of 22-9-1983, i.e., the fresh assessment, the short facts are as follows: This relates to a claim of short-term capital loss of Rs. 37,815.
Such a claim was admittedly never made before the ITO in the original assessment proceedings. As such, it was never considered by the ITO nor was the issue raised before the AAC. Hence, it was totally outside the scope of the order of the AAC dated 23-7-1980.
The assessee did not make this claim even at the time of making the fresh assessment. This point was raised for the first time before the Commissioner (Appeals) by way of cross-objection. The learned Judicial Member says that this point could be entertained but the learned Accountant Member says to the contrary. It is fairly conceded by the learned counsel for the department that this issue now stands concluded against the revenue by the decision of the Madras High Caurt in the case of CIT v. Indian Express (Madurai) (P.) Ltd. [1983] 140 ITR 705. In this case the Tribunal admitted a ground raised on behalf of the assessee for the first time before it and when the department questioned the power of the Tribunal to entertain this additional ground, the Madras High Court held that the assessee was not precluded from raising a new contention and the Tribunal was not precluded in examining and determining that contention merely on the score that it had not been put forward at the earlier stages of the proceedings in assessment and in the first appeal. Following, therefore, respectfully the Madras High Court judgment, which is binding on us, I am inclined to agree with the view expressed by the learned Judicial Member and hold that the assessee was entitled to raise the new claim of capital loss before the Commissioner (Appeals) in the appeal filed against the fresh assessment order.
10. The matter will now go back before the regular Bench for disposal of the appeal in accordance with the opinion of the majority. The other points involved in the appeal, which were discussed in my learned brothers' order will be disposed of by the regular Bench.