2020 (8) TMI 960 - AT - Income Tax

Rectification u/s 254 - Mistake Apparent from Record - ITAT power to enhance or reduce the addition - estimating the expenses on account of magazines journals @ 10% of total operating revenue - disallowance for the year under consideration was enhanced even when the department was not in appeal. HELD THAT - As admitted fact that for the year under consideration the assessee only filed appeal against the disallowance made by the A.O. being 10% of the expenses claimed by the assessee. Similar appeal was filed by the assessee 2019 (1) TMI 2069 - ITAT JALANDHAR ITAT has given the direction to the A.O. to compute the disallowance by estimating the expenses on account of magazines and journals @ 10% of total operating revenue which resulted in the enhancement of disallowance for the year under consideration to Rs. 3, 28, 67, 765/- from Rs. 92, 92, 170/- made by the A.O. Power of the Tribunal to enhance the disallowance / income the Hon ble Apex Court in the case of Hukumchand Mills Ltd. 1966 (9) TMI 38 - SUPREME COURT held that word thereon in section 33(4) restricts the jurisdiction of the Tribunal to the subject matter of the appeal. The words pass such order as the Tribunal thinks fit include all the powers (except possibly the power of enhancement) which are conferred on the Appellate Assistant Commissioner by section 31. Consequently the Tribunal has authority under section 33 to direct the Appellate Assistant Commissioner or the Income-tax Officer to hold a further enquiry and dispose of the case on the basis of such enquiry. Judgment relied by the Ld. Sr. DR in the case of Fidelity Business Services India Pvt. Ltd. 2018 (7) TMI 1738 - KARNATAKA HIGH COURT is distinguishable on facts of the present case. Misc. Application of the Assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this matter are:

- Whether the Appellate Tribunal (ITAT) possesses the power to enhance the addition/disallowance beyond what was originally made by the Assessing Officer (AO) when the enhancement is not challenged by the department in appeal.

- Whether the direction given by the ITAT to the AO to disallow expenses on magazines and journals exceeding 10% of total operating revenue, resulting in an enhanced disallowance amount, is within the jurisdiction and powers of the Tribunal.

- Whether the enhancement of disallowance by the ITAT constitutes a mistake apparent on the record that can be rectified under the provisions of the Income-tax Act.

- The applicability and interpretation of precedents laid down by the Hon'ble Supreme Court regarding the powers of the Tribunal under the relevant statutory provisions, specifically with reference to the cases of Hukumchand Mills Ltd. and MCorp Global (P.) Ltd.

- The relevance and applicability of a contrary view taken by the Hon'ble Karnataka High Court in Fidelity Business Services India Pvt. Ltd. regarding the Tribunal's power to enhance or reduce additions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Power of the ITAT to Enhance Disallowance Beyond AO's Addition

Relevant legal framework and precedents: The Tribunal's powers to adjudicate appeals are governed by section 254 of the Income-tax Act, 1961 (equivalent to section 33(4) of the Income-tax Act, 1922). The Supreme Court in Hukumchand Mills Ltd. held that the Tribunal's jurisdiction is restricted to the subject matter of the appeal and it does not have the power to enhance the assessment beyond what the AO has made. The Court stated that the phrase "pass such orders as the Tribunal thinks fit" includes all powers conferred on the lower authorities except the power of enhancement. Similarly, in MCorp Global (P.) Ltd., the Supreme Court reiterated that the Tribunal cannot take back a benefit granted by the AO and thus cannot enhance the assessment in appeal.

Court's interpretation and reasoning: The Tribunal noted that the AO had made a disallowance of Rs. 92,92,170/- (equivalent to 10% of expenses claimed). The ITAT, however, directed the AO to disallow expenses exceeding 10% of total operating revenue, which resulted in an enhanced disallowance of Rs. 3,28,49,504/-, significantly higher than the AO's original disallowance. The Tribunal held that such enhancement was beyond its jurisdiction since the department had not appealed against the original disallowance amount. The Tribunal relied on the binding Supreme Court precedents to conclude that the ITAT cannot enhance the disallowance beyond the AO's order in the absence of a departmental appeal.

Key evidence and findings: The Tribunal examined the order of the ITAT dated 17/01/2019 and found that the ITAT's direction to enhance the disallowance was not supported by any appeal filed by the department. The Tribunal also considered the past history of the case and the average expenses in succeeding years, which the ITAT had used to justify its approach of fixing the disallowance at 10% of total operating revenue.

Application of law to facts: Applying the Supreme Court's rulings, the Tribunal held that the ITAT's direction to enhance the disallowance was a jurisdictional overreach. The Tribunal modified the ITAT's order to restrict the disallowance to the amount originally made by the AO, i.e., Rs. 92,92,170/-.

Treatment of competing arguments: The department argued, relying on the Karnataka High Court decision in Fidelity Business Services India Pvt. Ltd., that the ITAT has the power to enhance or reduce additions. However, the Tribunal distinguished this case on facts, noting that the Fidelity case involved remanding the matter for fresh enquiry, whereas here the ITAT directly enhanced the disallowance without remanding or fresh enquiry. Therefore, the Fidelity case was held not applicable.

Conclusions: The Tribunal concluded that the ITAT's enhancement of disallowance was not permissible and constituted a mistake apparent on record, which was rectified by limiting the disallowance to the AO's original figure.

Issue 2: Direction to Disallow Expenses on Magazines and Journals at 10% of Total Operating Revenue

Relevant legal framework and precedents: The ITAT had earlier opined that disallowance of expenses on magazines and journals should be limited to the extent they exceed 10% of total operating revenue, considering the past and succeeding years' expense history as a reasonable benchmark.

Court's interpretation and reasoning: The Tribunal accepted the principle that disallowance can be estimated based on a fair and reasonable percentage of total operating revenue, here fixed at 10%. However, it emphasized that the application of this principle must not result in enhancement of the disallowance beyond what was originally challenged or made by the AO in the appeal.

Key evidence and findings: The expenditure claimed was Rs. 9,29,21,703/-, which was 15.47% of total operating revenue. The ITAT's direction implied disallowance of the excess 5.47%, amounting to Rs. 3,28,49,504/-, which was higher than the AO's disallowance of Rs. 92,92,170/-. The Tribunal found this enhancement impermissible.

Application of law to facts: While the 10% benchmark was accepted as a reasonable measure, the Tribunal held that the disallowance must be confined to the amount originally disallowed by the AO unless the department appeals for enhancement.

Treatment of competing arguments: The assessee argued that the ITAT's direction effectively enhanced the disallowance without jurisdiction, while the department contended that the ITAT's power included enhancement. The Tribunal sided with the assessee based on binding Supreme Court precedents.

Conclusions: The Tribunal upheld the principle of limiting expenses disallowance to 10% of total operating revenue but restricted the disallowance to the AO's original figure for the year under consideration.

3. SIGNIFICANT HOLDINGS

"The powers of the Appellate Tribunal in dealing with appeals are expressed in section 33(4) of the Income-tax Act in the widest possible terms. The word 'thereon' in section 33(4) restricts the jurisdiction of the Tribunal to the subject matter of the appeal. The words 'pass such order as the Tribunal thinks fit' include all the powers (except possibly the power of enhancement) which are conferred on the Appellate Assistant Commissioner by section 31."

"Under section 33(4) of the Income-tax Act, the Tribunal was not authorized to take back the benefit granted to the assessee by the Assessing Officer. The Tribunal has no power to enhance the assessment."

"In such type of cases expenses can be allowed by considering the past history as well as the average of expenses incurred in the succeeding year. In our opinion, it will be fair and reasonable to estimate the expenses on account of magazines & journals @ 10% of total operating revenue."

"The direction of enhanced assessment is beyond the powers of the Tribunal, as per the ratio laid down by the Hon'ble Apex Court."

Final determinations:

- The ITAT's direction to enhance the disallowance beyond the AO's original disallowance without departmental appeal is ultra vires and not permissible.

- The disallowance on account of magazines and journals is reasonably fixed at 10% of total operating revenue, but the disallowance for the year under consideration cannot exceed the amount originally disallowed by the AO.

- The Miscellaneous Application filed by the assessee to rectify the mistake apparent on record is allowed, and the order dated 17/01/2019 is modified accordingly.