Summary: Section 251 of the Income-tax Act grants the Commissioner (Appeals) [CIT(A)] plenary powers over an assessment order brought on appeal, allowing them to confirm, reduce, enhance, or annul the assessment. This jurisdiction is considered co-terminus with that of the Assessing Officer (AO), meaning the CIT(A) can examine all matters arising from the proceedings and correct the assessment, provided the appellant is given a reasonable opportunity to show cause against any enhancement. However, judicial precedent, established by the Supreme Court in cases like CIT v. Shapoorji Pallonji Mistry and CIT v. Rai Bahadur Hardutroy Motilal Chamaria, imposes a crucial limitation: the CIT(A) cannot enhance the assessment by discovering a completely new source of income that was not considered, expressly or by clear implication, by the AO during the original assessment proceedings. The consensus across multiple High Courts reaffirms that the power of enhancement is confined to those items of income already dealt with by the AO, leaving the assessment of new sources to specific provisions like Section 147 (reassessment) or Section 263 (revision).
Before proceeding, a glance of provisions of Section 251 of the Act is necessary, which is extracted here as under: —
“251. (1) In disposing of an appeal, the Commissioner (Appeals) shall have the following powers—
in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment;
[Provided that where such appeal is against an order of assessment made under section 144, he may set aside the assessment and refer the case back to the Assessing Officer for making a fresh assessment;]
(aa) in an appeal against the order of assessment in respect of which the proceeding before the Settlement Commission abates under section 245HA, he may, after taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment;
(b) in an 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.
[(1A) In disposing of an appeal, the Joint Commissioner (Appeals) shall have the following powers—
| (a) | in an appeal against an order of assessment, he may confirm, reduce, enhance or 11annul the assessment; | |
| (b) | in an 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 Joint Commissioner (Appeals) or the Commissioner (Appeals), as the case may be, 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 Joint Commissioner (Appeals) or the Commissioner (Appeals), as the case may be, 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 Joint Commissioner (Appeals) or the Commissioner (Appeals) by the appellant.”
A reading of Section 251shows that the powers of the CIT (A) extend not only to the subject-matter of the appeal against the assessment, that in a given case, it is open to the first appellate authority to even enhance the assessment. Thus, apart from confirming an assessment or granting relief to the assessee or cancelling the assessment, the first appellate authority has the power of an AO to enhance the assessment which is under appeal before him. The CIT(A) has the jurisdiction to examine all matters covered by the assessment order and correct the assessment in respect of all such matters even to the prejudice of the assessee and remand the case to the AO to inquire into matters which were not the subject- matter of appeal. The only restriction on the power while enhancement is that the assessee must be given a reasonable opportunity of showing cause as against such assessment or reducing the amount of refund. Explanation appended to section 251 is a further addition to the power given to the CIT(A) as specified under section 251(1). A reading of the said Explanation shows that the authority of the CIT (A) travels to any matter which may arise out of the proceedings, which is appealed against, notwithstanding the fact that such matter was not raised by an assessee before the CIT(A). The sum and substance are that when the entire assessment is before the CIT(A), the jurisdiction of the CIT (A) is not restricted either by the grounds raised or limited by the assessment made and the authority of the CIT(A) is co-terminus with that of the AO to enhance the assessment too.
Section 251(1)(a) of the Act only envisages for the appellate authority that is CIT (Appeal) to confine its assessment to the original assessment order and not to include the power to discover a new source of income. Reliance has been placed upon the decision in case of CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 (SC). Relevant portion relied upon is extracted here as under: —
“In our opinion, this Court must be held not to have expressed its final opinion on the point arising here, in view of what was stated at pages 709 and 710 of the report. This Court, however, gave approval to the opinion of the learned Chief Justice of the Bombay High Court that section 31 of the Income-tax Act confers not only appellate powers upon the Appellate Assistant Commissioner in so far as he is moved by an assessee but also a revisional jurisdiction to revise the assessment with a power to enhance the assessment. So much, of course, follows from the language of the section itself. The only question is whether in enhancing the assessment for any year he can travel outside the record that is to say, the return made by the assessee and the assessment order passed by the Income-tax Officer with a view to finding out new sources of income not disclosed in either. It is contended by the Commissioner of Income-tax that the word “assessment” here means the ultimate amount which an assessee must pay, regard being had to the charging section and his total income. In this view, it is said that the words “enhance the assessments” are not 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. There is no doubt that this view is also possible. On the other hand, it must not be overlooked that there are other provisions like sections 34 and 33B, which enable escaped income from new sources to be brought to tax after following a special procedure. The assessee contends that the powers of the Appellate Assistant Commissioner extend to matters considered by the Income-tax Officer, and if a new source is to be considered, then the power of remand should be exercised. By the exercise of the power to assess fresh sources of income, the assessee is deprived of a finding by two tribunals and one right of appeal.’
The Supreme Court held that, in an appeal filed by the assessee, the Appellate Assistant Commissioner has no power to enhance the assessment by discovering a new source of income, not considered by the Income-tax Officer in the order appealed against. Similar views were expressed in CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC). It was held that the power of enhancement under section 31(3) of the 1922 Act [ corresponding to S. 251 of the 1961 Act] was restricted to the subject-matter of the assessment or the source of income which had been considered expressly or by clear implication by the ITO from point of view of taxability and that the AAC had no power to assess a source of income which had not been processed by the AO.
In CIT v. Chaganlal Kailas & Co. [1984] 148 ITR 7 (Mad) it was held that-
Though the power of the AAC is plenary and co-extensive with that of the Income-tax Officer, the power of the AAC to enhance an assessment can relate only to those items of income which were before the ITO and considered by him for the purpose of bringing to tax or for grant of relief to the assessee.
In Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688 (SC), the Supreme Court, while considering the question whether the AAC had the jurisdiction to allow the assessee to raise an additional ground in assailing the order of assessment before it, referred to Shapoorji’s case [1962] 44 ITR 891 (SC), but drew a distinction between the power to enhance tax on discovery of a new source of income and granting of deduction on the admitted facts, supported by the decision of the Supreme Court in CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 SC). The Supreme Court held that decision in the case of Gurjargravures P. Ltd. [1978] 111 ITR 1, that held that the CIT(A) had no jurisdiction to entertain the additional claim is not a good law.
In CIT v. Associated Garments Makers [1992] 197 ITR 350 (Raj), the Rajasthan High Court held the Tribunal was justified in holding that the Appellate Assistant Commissioner’s order considering new sources of income and enhancing the assessment was erroneous.
The Calcutta High Court in the case of CIT v. National Company Ltd. [1993] 199 ITR 445 (Cal) held that-
In enhancing the assessment for any year, the Appellate Assistant Commissioner cannot travel outside the record, that is to say, the return made by the assessee and the assessment order passed by the Income-tax Officer. There are other provisions which enable escaped income from a new source to be brought to tax after following the special procedure. The power of the Appellate Assistant Commissioner extends to matters considered by the Income-tax Officer, and if a new source is to be considered, then the power of remand should be exercised.
A question regarding powers of the first appellate authority came up for consideration before the Supreme Court in CIT v. Nirbheram Daluram [1997] 224 ITR 610 (SC). Following their earlier decisions in Kanpur Coal Syndicate [1964] 53 ITR 225 and Jute Corporation of India’s case [1991] 187 ITR 668 though their Lordships reiterated that the appellate powers conferred on the CIT(A) under section 251 could not be confined to the matter which had been considered by the AO, as the CIT(A) vested with all the plenary powers which the AO while making the assessment, but did not comment on the issue whether these wide powers also include the power to discover a new source of income. Therefore, the principle of law laid down in Shapoorji’s case [1962] 44 ITR 891 (SC) and Rai Bahadur Hardutroy Motilal Chamaria’s case [1967] 66 ITR 443 (SC) still holds the field.
Does the CIT(A) have the power to enhance the income from a source which was not before him in appeal— came up in CIT v. Union Tyres [1999] 240 ITR 556 (Delhi). The High Court considered the decisions on the subject including the decision in the case of CIT v. Nirbheram Daluram [1997] 224 ITR 610, 613 (SC), where the Supreme Court reiterated the wide powers “coterminous with that of the AO”, so that, “he can do what the AO can do and can also direct him to do what he failed to do”, a proposition laid down in CIT v. Kanpur Coal Syndicate [Supra], which was followed in Jute Corporation of India Ltd. v. CIT [Supra]. The High Court noticed these decisions but felt that the earlier restriction as to source of income continued in view of CIT v. Shapoorji Pallonji Mistry [Supra] and CIT v. Rai Bahadur Hardutroy Motilal Chamaria [Supra], so that it was not open to him to discover a new source of income.
Relying on the decisions in the case of ITO v. Rai Bahadur Hardutroy Motilal Chamaria [Sura] [followed its earlier decision in CIT v. Shapoorji Pallonji Mistry [Supra]], Addl. CIT v. Gurjargravures (P.) Ltd. [Supra], Jute Corporation of India Ltd. v. CIT [Supra] and CIT v. Union Tyres [Supra], the Delhi High Court in CIT v. Sardari Lal & Co. [2001] 251 ITR 864 (Delhi) Confirmed that the power of the CIT(A) does not go beyond what has been considered by the AO holding as under:—
‘7. We have considered this submission in the background of what had been stated by the Apex Court in Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688 and CIT v. Nirbheram Daluram [1997] 224 ITR 610. In Jute Corporation of India Ltd.’s case (supra), the Apex Court while considering the question whether AAC has jurisdiction to allow the assessee to raise an additional ground in assailing the order of assessment before it, referred to Shapoorji Pallonji Mistry’s case (supra), and draw a distinction between the power to enhance tax on discovery of a new source of income and granting a deduction on the admitted facts supported by the decision of the Apex Court. Relying on certain observations made by the Apex Court in CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225, the Apex Court held that powers of the first appellate authority are coterminous with those of the Assessing Officer and the first appellate authority is vested with all the wide powers, which the subordinate authority may have in the matter. In Nirbheram Daluram’s case (supra), the decisions of Kanpur Coal Syndicate’s case (supra) and Jute Corporation of India Ltd.’s case (supra) were also considered and it was observed by the Apex Court that the appellate powers conferred on the first appellate authority under section 251 were not confined to the matter, which had been considered by the ITO, as the first appellate authority is vested with all the wide powers of the Assessing Officer may have while making the assessment, but the issue whether these wide powers also include the power to discover a new source of income was not commented upon. Consequently, the view expressed in Shapoorji Pallonji Mistry’s case (supra) and Rai Bahadur Hardutroy Motilal Chamaria’s case (supra) still holds feet. It may be noted that the issue was considered in CIT v. Mc. Millan and Co. [1958] 33 ITR 183 (SC). Referring to a decision of the Bombay High Court in Narrondas Manordass v. CIT [1957] 31 ITR 909 (Bom), it was held that the language used in section 31 is wide enough to enable the first appellate authority to correct the ITO not only with regard to a matter which has been raised by the assessee but also with regard to a matter which has been considered by the Assessing Officer and determined in the course of assessment. It is also relevant to note that in the Jute Corporation of India Ltd.’s case (supra), the Apex Court inter alia observed as follows: —
“The AAC, on an appeal preferred by the assessee, had jurisdiction to invoke, for the first time, the provisions of rule 33 of the Indian Income-tax Rules, 1922, for the purpose of computing the income of a non-resident even if the ITO had not done so in the assessment proceedings. But, in Shapoorji Pallonji Mistri [1962] 44 ITR 891, this Court, while considering the extent of the power of the AAC, referred to a number of cases decided by various High Courts including the Bombay High Court judgment in Narrondas Manordass [1957] 31 ITR 909 and also the decision of this Court in McMillan and Co. [1958] 33 ITR 182 and held that, in an appeal filed by the assessee, the AAC has no power to enhance the assessment by discovering new sources of income not considered by the ITO in the order appealed against. It was urged on behalf of the revenue that the words ‘enhance the assessment’ occurring, in section 31 were not 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. The Court observed that there was no doubt that this view was also possible, but having regard to the provisions of sections 34 and 33B, which made provision for assessment of escaped income from new sources, the interpretation suggested on behalf of the revenue would be against the view which had held the field for nearly 37 years………” (p. 692) [Emphasis supplied]
In CIT v. Kashi Nath Chandiwala [2006] 280 ITR 318 (All) it was held that there is no limitation for exercise of powers by the CIT(A) and he can suo motu deal with the issues which were not the subject matter of appeal. This was the law as laid down by the Supreme Court in CIT v. Kanpur Coal Syndicate [Supra] 53 ITR 225, where in it held that his power is coterminous with that of the AO. He can do what the AO can do and can also direct him to do what he has failed to do but did not say that he has the power to travel to a new source of income which was not part of the assessment. Similarly, the Madras High Court in the case of Megatrends Inc [2016] 388 ITR 16 (Mad) held that-
under section 251(1) of the Act, the powers of the first appellate authority are coterminous with those of the Assessing Officer and the appellate authority can do what the Assessing Officer ought to have done and also direct him to do what he had failed to do. If the Assessing Officer had erred in concluding the status of the assessee as a firm, it could not be said that the Commissioner (Appeals) had no jurisdiction to go into the issue. The appeal was in continuation of the original proceedings and unless fetters were placed upon the powers of the appellate authority by express words, the appellate authority could exercise all the powers of the original authority. The assessee was directed to extend its co-operation to the authorities and not to protract the proceedings except for bona fide cause.
The question before the Madras High Court in the case of Megatrends Inc [Supra] was can the CIT(A) enquire into the status of the assessee on a matter that was never part of the assessment proceedings? Answering the question in favour of the Department, the High Court dismissed the writ appeal observing that the power of the CIT(A) being coterminous with that of the AO, it was within the powers of the CIT(A) to issue a notice as to why the status adopted as “firm” with two firms as partners should not be changed to “association of persons” of two firms as members. In so holding, the court relied on section 251(1) conferring such power to the CIT (A) on the finding that the prima facie view of the CIT(A) was tenable based on the law laid down in Dhulichand Laxminarayan v. CIT [1956] 29 ITR 535 (SC), that a partnership shall be formed only by natural persons and cannot consist of partnership firms following State of U.P. v. Brahm Datt Sharma [1987] 2 SCC 179, Special Director v. Mohd. Ghulam Ghouse [2004] 120 Comp Cas 467 (SC) and Union of India v. Kunisetty Satyanarayana [2006] 12 SCC 28.
Looking from the aforesaid angles and the Allahabad High Court decision in S.D. Traders v. CIT [Supra] the conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the AO, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 of the Act and section 263, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the CIT(A). That being the position, decision in CIT v. Union Tyres [1999] 240 ITR 556 (Del) also supports this view and does not need reconsideration.
Conclusion
Does the first appellate authority have the power to enhance the income from a source which was not before him in appeal— This issue is settled CIT v. Union Tyres [1999] 240 ITR 556 (Delhi). The High Court considered the relevant decisions including the latest one on the subject in CIT v. Nirbheram Daluram [1997] 224 ITR 610, 613 (SC), where the Supreme Court reiterated the wide powers “co-terminus with that of the Income-tax Officer“, so that, “he can do what the Income-tax Officer can do and can also direct him to do what he failed to do”, a proposition laid down in CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC), which was followed in Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688 (SC). The High Court did notice these decisions but felt that the restriction as to source of income continued in view of CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 (SC) and CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC), so that it was not open to him to discover a new source of income. But the fact remains that in the case before the High Court, the first appellate authority, while dealing with a case for rejection of accounts for computing business income remanded the matter for further enquiry apart from relevant issues relating to the additions, but also on the facts relating to the source of investment. It had felt that (page 561 of 240 ITR)
“it is axiomatic that failure to prove the sources of investment will result in addition in the hands of the assessee under a different provision of law and will not have much relevance in the estimation of sales and gross profit rate adopted by the Assessing Officer. In our opinion, any addition on account of unexplained investment would constitute a new source of income which was not the subject matter of assessment before the Assessing Officer and, therefore, it was not open to the first appellate authority to direct the Assessing Officer to conduct enquiry on the said four points.”
The Delhi Tribunal in Frick India Ltd. v. DCIT [2022] 28 ITR (Trib)-OL 7 (ITAT[Del]) relying on the decisions in the case of Gurinder Mohan Singh Nindrajog v. CIT [2012] 348 ITR 170 (Delhi), CIT v. Union Tyres [1999] 240 ITR 556 (Delhi) and Hari Mohan Sharma v. ACIT [2019] 71 ITR (Trib) 18 (Delhi) held that-
That the power of the Commissioner (Appeals) to enhance the assessee’s income can be validly exercised only qua such items of income, which had been dealt with in the body of the order of assessment and which arose for his consideration according to the grounds of appeal before him. Since the enhancement carried out by the Commissioner (Appeals) qua the issue of dividends stripping under section 94(7) was never considered by the Assessing Officer in the course of assessment, the Commissioner (Appeals) was not vested with any jurisdiction to enhance the assessee’s income in exercise of the powers vested with him under section 251(1)(a). The enhancement made by him was to be vacated.
The principle emerging from the aforenoted pronouncements of the Supreme Court is, that the first appellate authority is invested with very wide powers under section 251(1)(a) of the Act and once an assessment order is brought before the authority, his competence is not restricted to examining only those aspects of the assessment about which the assessee makes a grievance and ranges over the whole assessment to correct the AO not only with regard to a matter raised by the assessee in appeal but also with regard to any other matter which has been considered by the AO and determined in the course of assessment. However, there is a solitary but significant limitation to the power of revision, viz., that it is not open to the CIT(A) to introduce in the assessment a new source of income and the assessment has to be confined to those items of income which were the subject-matter of original assessment.
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