The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, has held that a Commissioner of Income Tax (Appeals) [CIT(A)] cannot direct the Assessing Officer (AO) to reopen an assessment for a different assessment year in respect of an issue that was not the subject matter of the appeal before the appellate authority.
Relying on the binding judgment of the Supreme Court in CIT v. Murlidhar Bhaggu Babu, the bench of Shri Sonjoy Sarma (Judicial Member) and Dr. Arjun Lal Saini (Accountant Member) declared the reassessment proceedings void ab initio and directed deletion of an addition of ₹55,90,193 made under Section 69 of the Income-tax Act, 1961.
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The appellant/assessee was engaged in the retail sale of sanitary ware. The tax dispute originated from scrutiny proceedings concerning the sale proceeds of an immovable property. The assessee had sold an incomplete hotel building situated at Village Khicha, Taluka Dhari, constructed on 6,100 square metres of land that had been converted into non-agricultural land, for a consideration of ₹60 lakh.
According to the assessee, construction of the hotel building had been undertaken through one Shri Chaturbhai Bhimjibhai Vegad pursuant to an agreement dated September 25, 2007. The assessee claimed that construction expenditure of ₹58.34 lakh had been incurred. The Assessing Officer, however, questioned the genuineness of the construction arrangement and the cash payments allegedly made towards the work.
The AO’s enquiries revealed that the person named as the contractor had died on November 3, 2000. The assessment order further recorded that he had been a small-scale mason and did not have the capacity or status of a civil contractor to undertake construction of such magnitude. The AO also noted that payments were not made during the period when the construction was allegedly carried out, but were subsequently made in small cash amounts after the assessee received the sale consideration.
On these facts, the AO treated the entire claimed construction expenditure of ₹58.34 lakh as unexplained expenditure under Section 69C of the Income-tax Act. The addition was made while completing the assessment under Section 143(3).
The dispute subsequently took a significant jurisdictional turn before the CIT(A). The appellate authority concluded that the alleged agreement with Shri Chaturbhai was a colourable device and that the assessee himself had made the investment in the construction during Financial Year 2007-08.
However, since the alleged source of the payment was the sale consideration received during FY 2008-09, the CIT(A) deleted the Section 69C addition for AY 2009-10. At the same time, the CIT(A) directed the AO to assess ₹55,90,193, representing the value of the construction according to the valuation report, as unexplained investment under Section 69 for AY 2008-09.
Pursuant to the CIT(A)’s direction, the assessment for AY 2008-09 was reopened. The AO subsequently concluded that the assessee himself had undertaken construction of the unfinished hotel building during FY 2007-08 and had made an unexplained investment of ₹55,90,193. The amount was consequently treated as unexplained investment under Section 69 of the Act.
The assessee challenged the reassessment before the CIT(A), but the appeal was dismissed. The matter then reached the ITAT Rajkot.
Before the Tribunal, the assessee primarily challenged the very validity of the reopening. It was argued that the reassessment for AY 2008-09 had been initiated solely because of the direction issued by the CIT(A) while deciding the appeal relating to AY 2009-10.
The assessee contended that the CIT(A)’s appellate powers were confined to the assessment year and subject matter before him and that he could not direct the AO to reopen an assessment concerning another year and another issue. It was further argued that such a direction deprived the assessee of a proper opportunity to contest the proposed taxation of the alleged unexplained investment for AY 2008-09.
The assessee relied upon the Supreme Court’s judgment in CIT v. Murlidhar Bhaggu Babu, 52 ITR 335 (SC). According to the assessee’s submissions, the Supreme Court had held that an appellate authority has no power to direct the AO to reopen an assessment for another assessment year.
The Departmental Representative supported the orders of the lower authorities. However, the Revenue could not dispute the factual position that the reopening of AY 2008-09 had been undertaken pursuant to the direction contained in the CIT(A)’s order for AY 2009-10.
The Rajkot Bench accepted the assessee’s jurisdictional challenge. The Tribunal observed that it was undisputed that, while disposing of the appeal for AY 2009-10, the CIT(A) had deleted the Section 69C addition but directed the AO to reopen AY 2008-09 and assess the alleged unexplained investment of ₹55,90,193 under Section 69.
The Tribunal categorically held that such a direction could not have been issued by the CIT(A). According to the Bench, appellate jurisdiction under Section 250 is confined to the subject matter of the assessment and the assessment year that is before the appellate authority. The CIT(A) cannot assume jurisdiction over an entirely different assessment year and direct reopening under Section 147 in relation to an issue that was not the subject matter of the appeal.
The Tribunal found the issue to be squarely covered by the Supreme Court’s decision in CIT v. Murlidhar Bhaggu Babu. It reiterated that an appellate authority’s powers are circumscribed by the statute and cannot be enlarged to confer jurisdiction that is otherwise not vested in it.
The ITAT held that the CIT(A)’s direction in the AY 2009-10 proceedings to reopen the assessment for AY 2008-09 was beyond jurisdiction. Consequently, the reassessment proceedings initiated solely pursuant to that direction could not be sustained in law.
The Tribunal emphasised that once the very assumption of jurisdiction for reopening the assessment was found to be invalid, the consequential assessment order and the addition of ₹55,90,193 under Section 69 could not survive. The reassessment order was therefore held to be void ab initio.
The Tribunal directed the Assessing Officer to delete the addition of ₹55,90,193 made in the assessee’s case. The grounds raised by the assessee on this issue were allowed and the appeal was ultimately allowed.
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