Judgment:
1. This second appeal is directed against the order dated 13-11-1987 passed by the Commissioner of Income-lax (Appeals), Jalandhar, hereinafter referred as the CIT(A), under section 154 of the Income-tax Act, 1961, hereinafter referred as the Act, in respect of assessment year 1981-82.
2. Primarily the grievance is in ground Nos. 1 and 2 and the contention is that the learned CIT(A) erred in reducing the deduction granted by the Assessing Officer under section 35B of the Act amounting to Rs. 44,004 to Rs. 28,169 as he was not legally competent to pass an order under section 154 of the Act to revise the order of the ITO and thereby withdrawing deduction given by the Assessing Officer, which was and could not be subject-matter of first appeal. The assessment under section 143(3) of the Act was framed on 16-12-1983 in which the assessee was allowed deduction under section 35B of the Act amounting to Rs. 44,004. There being other contested additions, in the assessment, and the CIT(A) passed the affiliate order on 15-5-1987. The IAC (A) submitted an application dated 8-9-1987 before the CIT(A) requesting that since clauses (ii), (iii), (v), (vi) and (viii) of section 35B(l)(b) were no longer on the Statute book as the same were omitted by Finance Act No. (2) of 1980, w.e.f. 1-4-1981 and, as such, weighted deduction on foreign commission, salaries, bonus, export promotion, etc. and other expanses was not allowable in the year, and to reduce deduction under section 35B of the Act, which had been granted by him in the assessment framed on 16-12-1983. The CIT(A) proceeded to pass an order under section 154 of the Act, which he did on 13-11-1987 (supra) and reduced the deduction under section 35B of the Act detailed above in this order.
3. On the above said issue, Shri N.K. Sud, Advocate, appearing submitted that the basic question was whether the learned CIT(A) could reduce the deduction under section 35B of the Act, which had been allowed by the ITO. He accepted that the first appellate authority possibly could have reduced the deduction while passing order in appeal against the assessment because of his powers of enhancement, after giving due opportunity.
4. For the Revenue, Shri C.L. Wali, D.R., supported the CIT(A)'s action by submitting that if any wrong and excessive relief had been given by the Assessing Officer, the CIT(A) could pass an order under section 154 at the request of the Assessing Officer.
5. The question is very interesting and pure legal one involving interpretation of section 251(1) of the Act.
6. Before proceeding with the same, it is clarified that we do not propose to deal with the question of justification or otherwise of the allowance under section 35 of the Act allowed by the Assessing Officer because of the accepted position that powers to make enhancement rest with the first Appellate Authority and if he does not choose to exercise the same while passing the appellate order, he cannot take recourse to the provisions of section 154 of the Act and that too at the instance of the Assessing Officer (emphasis supplied by us) to withdraw deduction or relief given at the assessment stage.
7. Coming back to the provisions of section 251 of the Act, the relevant section with its Explanation is reproduced as follows :-- "251(1) In disposing of an appeal, the Appellate Assistant Commissioner, or as the case may be, the Commissioner (Appeals) shall have the following powers:-- (a) in an appeal against an order of assessment, he 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 Appellate Assistant Commissioner or, as the ease may be, the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the ITO shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment; (b) in any appeal against an order imposing a penalty, he may confirm or cancel such order or vary it, so as either to enhance or to reduce the penalty; (c) in any other case, he may pass such orders in the appeal, as he thinks fit.
(2) The Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.
Explanation : In disposing of an appeal, the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) by the appellant." 8. The above provision has various limbs. From clauses (a), (b) and (c) of sub-section (1) pure power is drawn. In the instant case, we are concerned with primarily clause (a) because it was the assessment order which was involved. Sub-section (2) places constraints and obligations inasmuch as if assessment or a penalty order is to be modified adversely against taxpayer, he must be given reasonable opportunity of showing cause that action contemplated is not proper. Explanation to the section must be closely seen because, though, on a casual look, one may initially form an impression that while disposing of an appeal, the first appellate authority can consider and decide any matter arising out of the proceedings - the assessment order being only a part of such process - but, the catch is in the last lines and the last word 'appellant', reading as :-- "notwithstanding that such matter was not raised before the AAC, or, as, the ease may be, the Commissioner (Appeals) by the appellant," The indication is clear and loud that the above provision is meant for the benefit of taxpayer only. There is and should be no conflict on this score.
9. Accordingly, we accept the primary contention of the assessee. In view of the above, we do not propose to deal with other aspect and ground that the CIT(A) could not enhance the assessment without issue of a statutory notice prescribed under section 251(2) of the Act.
Per Shri R.K. Bali, Accountant Memher - I have perused the order of my learned senior colleague, the JM, but I have not been able to persuade myself to agree with his conclusion that the learned AAC was wrong in reducing the deduction granted by the Assessing Officer under section 35B of the Act, to the assessee initially at Rs. 44,004 to Rs. 28,169, by passing an order under section 154 at the instance of the Assessing Officer.
12. The factual details as well as the controversy, which resulted into the passing of the impugned order, by the learned AAC, has been given by my learned senior colleague, the JM, in para 2 of his order and need not be repealed again.
13. The point in dispute is as to whether the learned first Appellate Authority can reduce the deduction under section 35B of the Act. which had been wrongly allowed by the Assessing Officer.
14. Sh. N.K. Sud, Advocate, learned representative of the assessee, conceded, as mentioned by my learned Sr. Colleague, the J.M., in para 3 of his order, that the first Appellate Authority could have reduce the deduction while passing order in appeal against assessment because of his powers of enhancement, after giving due opportunity to the assessee. However, the argument of Sh. N.K. Sud, Advocate, learned representative of the assessee, which found favour with my learned colleague, the J.M., was that the learned first Appellate Authority could not take recourse to provisions of section 154 of the Act in an appeal filed by the assessee, at the instance of the Assessing Officer, to withdraw the deduction or relief given at the assessment stage. My learned brother, the J.M., has analysed the provisions of section 251(1) in paras 7 and 8 of his order and has come to the conclusion that the provisions of section 251 (1) are meant for the benefit of the taxpayer only. However, I am not in agreement with the above view.
15. The scope of powers of the AAC has been explained by the Hon'ble Supreme Court in a number of casts. In particular, the Hon'ble Supreme Court in the case of CIT v. McMillan & Co. [1958] 33 ITR 182, 193 has quoted, with approval, the observations of Justice Chagla in Nar rondos Manordass v. CIT [1957] 31 ITR 909 (Bom.) as under ;-- "It is clear that the Appellate Assistant Commissioner has been constituted a revising authority against the decisions of the Income-tax Officer; a revising authority not in the narrow sense of revising what is the subject-matter of the appeal, not. in the sense of revising those matters about which the assessee makes a grievance, but a revising authority in the sense that once [he appeal is before him he can revise not only the ultimate computation arrived at by the Income-tax Officer but he can revise every process which led to the ultimate computation or assessment. In other words, what he can revise is not merely the ultimate amount which is liable to tax, but he is entitled to revise the various decisions given by the Income-lax Officer in the course of assessment and also the various incomes or deductions which came in for consideration of the Income-tax Officer.' 16. The Hon'ble Punjab & Haryana High Court in the case of Dalmia Dadri Cement Ltd v. QT [1973] 90 ITR 297, after referring to the decision of Hon'ble Supreme Court in the case of McMillan & Co. (supra) held that if a mistake has been committed by the Assessing Officer in the Assessment order, which has been discovered by him during the pendency of appeal before the AAC, then the ITO alone was not entitled to rectify the error but the A AC has also the jurisdiction to rectify the mistake in the assessment order.
17. The facts of the present case are similar to those of the case decided by the Hon'ble Punjab and Haryana High Court in Dalmia Dadri Cement Works Lid (supra), with the exception that here the learned first Appellate Authority has taken recourse to the provisions of section 154 at the instance of the Assessing Officer.
18. Almost a similar issue came up before the Hon'ble Calcutta High Court in the case of Indian Steel & Wire Products Ltd. v. CIT [1968] 69 ITR 379, wherein the Assessing Officer has allowed a deduction to the assessee at Rs. 1,50,000 on account of payment made to the Indian National Congress, as a business expenditure. But pending an appeal to the AAC, as regards other matters, the Assessing Officer issued notice under section 341 (of the old Act corresponding to section 147 of the new Act) to include the sum of Rs. 1,50,000, which he had allowed as a deduction, but the AAC at the appellate stage disallowed this claim deduction inspite of the ITO having taken action under section 34 and the Tribunal agreed with the AAC and the action of the Tribunal was upheld by the Hon'ble Calcutta High Court, after referring to the decision of Hon'ble Supreme Court in the case of McMillan & Co. Ltd. (supra) as well as the decision of Hon'ble Supreme Court in the case of CIT v. Rai Bahadur Hardutroy Motilal Chaniaria [1967] 66 ITR 443.
19. Accordingly, I will hold that since on merits, clue to amendment brought in section 35B by the Finance Act (No. 2) of 1980 w.e.f.
1-4-1981, the deduction under section 35B was wrongly allowed by the Assessing Officer at Rs. 44,004 and that wrong action of the Assessing Officer was corrected by the learned first Appellate Authority by taking recourse to proceedings under section 154 in accordance with the amended provisions of Act applicable to the assessment year 1981-82, which is the assessment year under appeal, there is no infirmity in the order passed by the learned first Appellate Authority. His action is accordingly upheld and the appeal filed by the assesses is dismissed.
There being difference of opinion between the two Members, who heard the appeal in ITA No. 81(Asr.)/1988, the following point of difference is trained for reference to the resident of the Income-tax Appellate Tribunal under section 255(4) of the Income-tax Act, 1961:-- "Whether the proposed order of the Judicial Member that the CIT(A) could not pass the order under section 154 in respect of the assessment and the issue, which had not been brought in appeal before him in relation to allowance of Rs. 44,004 under section 35B of the Income-tax Act, 1961 is justified or the view expressed by the Accountant Member that the first Appellate Authority was justified in taking recourse to the proceedings under section 154 can be held to be legally correct 1. The following point of difference of opinion was referred to me under section 255(4) of the Act : "Whether, the proposed order of the Judicial Member that the CIT(A) could not pass the order under section 154 in respect of the assessment and the issue, which had not been brought in appeal before him in relation to allowance of Rs. 44,004 under section 35B of the Income-tax Act, 1961 is justified or the view expressed by the Accountant Member that the first Appellate Authority was justified in taking recourse to the proceedings under section 154 can be held to be legally correct 2. The facts are that the assessment under section 143(3) of the Act was framed on 16-12-1983 in which the assessee was allowed deduction under section 35B of the Act amounting to Rs. 44,004. On appeal the learned CIT(A) passed the appellate order dated 15-5-1987 wherein the deduction under section 35B was allowed by him in the light of the order of his predecessor in Appeal No. 330-J/1982-83/CIT(A) in the case of the assessee for assessment year 1979-80 and directed that the assessee should be allowed weighted deduction on the items at 509& in the light of the decision of the Special Bench in the case of J.Hemchand & Co.
3. In the meanwhile the Assessing Officer vide application dated 8-9-1987 pointed out to the learned CIT(Appeals) that the clauses namely (ii), (iii), (v), (vi) and (viii) of section 35B(l)(b) were omitted by the Finance Act (No. 2) of 1980 w.e.f. 1-4-1981 and as such weighted deduction on foreign commission, salaries, bonus, export promotion etc. and other expenses was not allowable in the year. The Learned CIT(Appeals) accordingly reconsidered his order and rectified the same resulting in reduction of the deduction under section 35B from Rs. 44,004 originally allowed by the Assessing Officer to Rs. 28,169.
4. Thereupon the assessee took up the matter in appeal before the Tribunal. The learned Judicial Member was of the view that the learned CIT(Appeals) has got no jurisdiction to reduce the deduction already allowed by the Assessing Officer under section 35B of the Act as the same was not an issue before him.
5. On the other hand, the learned Accountant Member held that it was within the jurisdiction of the learned CIT(Appeals) to rectify the order of the Assessing Officer and even enhance the income. For this proposition, the learned Accountant Member relied on the decision of the Hon'ble Supreme Court in the case of Mcmillan & Co. (supra) wherein they have quoted with approval the observation of Justice Chagla in Narrondas Manordass'case (supra). Reliance also was placed on the decision of the Hon'ble Punjab and Haryana High Court in the case of Dahnia Dadri Cement Ltd. (supra). Reference also was made to the decision of the Hon'ble Calcutta High Court in the case of Indian Steel & Wire Products Lid. (supra). Having regard to the above decisions and keeping in view of the amendment brought in section 35B by the Finance (No. 2) Act, 1980 w.e.f. 1-4-1981, it was his view that the deduction was wrongly allowed by the Assessing Officer at Rs. 44,004 and the learned Appellate Authority was fully justified in taking recourse to the proceedings under section 154.
6. On the above facts, the point of difference was referred to me for decision as extracted above. At the hearing none appeared on behalf of the assessee. After hearing Shri Tarsem Lal, the learned Sr. D.R., I am of the view that the learned Accountant Member has correctly appreciated and upheld the order of the learned CIT(Appeals). The learned Accountant Member gave full reasons which do not bear repetition. It is also seen that the learned Judicial Member extracted the provisions of section 251(1). Section 251(2) reads as follows : "251(2) The Appellate Asstt. Commissioner or, as the case may be, the Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.
Explanation : In disposing of an appeal, the Appellate Asstt.
Commissioner or, as the case may be, the Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in which the order appealed against, was passed, notwithstanding that such matter was not raised before the Appellate Asstt. Commissioner or, as the case may be, the Commissioner (Appeals) by the appellant." 7. The above specific provisions also fully cover the issue. The learned CIT(Appeals) in this case before reducing the deduction under section 35B of the Act gave proper hearing and opportunity to the assessee. Over and above the Explanation itself gave jurisdiction to the Appellate Authority to consider and decide any matter arising out of the proceedings in which the order appealed against was passed notwithstanding that such mailer was not raised before the Appellate Authority as the case may be. Since the matter regarding deduction under section 35B has been the subject-matter before the learned CIT(Appeals), he was fully justified in resorting to the provisions of section 154 for amending the mistake which is also a statutory mistake beyond doubt. There is, therefore, no infirmity in the order of the learned Accountant Member with which I concur.
8. The matter will now go back to the Division Bench for passing consequential order.