The Kerala High Court recently ruled that the first appellate authority, under section 251 of the Income Tax Act, 1961 has no power to make additions regarding new source of income which was not considered in the original assessment.
The bench, while upholding the ITAT order, clarified that the power given to the appellate authority under section 251 of the Income Tax Act is not absolute and is subject to the provisions 147/148 and 263 of the Act.
The division bench comprising of Justice Antony Dominic and Justice Dama Seshadri Naidu held so while deleting the penalty proceedings carried by appellate authority and dismissed the appeal.
Assessee during the assessment proceedings did not disclose his income fully, and it led to a reassessment. On a particular plea about the source of income, the assessee pleaded in defense that he sold a few bars of gold. He gave the particulars of the putative purchasers, too. A few, though not all, have been examined and found to be untrustworthy. On appeal, the appellate authority enhanced the addition by adding a new source of income by finding that the assessee had unexplained income in the statement of receipts and payments submitted by the assessee which missed the AO’s attention.
Further aggrieved the assessee filed the second appeal before the Appellate Tribunal wherein the Tribunal partly, allowed the appeal. Then, it was the Department’s turn to come to this Court under section 260 A of the Act.
The counsel of the respondent contented that adding income by the appellate authority is beyond his powers under section 251 of the Act. The provision, at best, permits the appellate authority to re-examine what has already been considered by the AO but what has never been in the AO’s contemplation.
The Court brought into discussion regarding the power of appellate authority under section 251 of the act to add new source of income from a source never considered by the AO. The court had explained the powers of commissioner under 251 of the Act that 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.
The court observed the identical issue held in case of CIT v. Best Wood Industries and Saw Mills had examined the powers of AO but not the appellate authority. Then the court had held that once the assessment is reopened for any valid reason under section 148(2) then it’s the duty of AO to bring the escaped income for taxation.
Citing a plethora of decisions, the bench ruled that “the powers under section 251 are, indeed, very wide; but, wide as they are, they do not go to the extent of displacing powers under, say, sections 147, 148, and 263 of the Act.”
The High Court of Kerala dismissed the appeal and deleted the penalty invoked section 271 (1) (c) of the Income Tax Act levied by the revenue.
Read the full text of the Judgment below.
