COMMISSIONER OF INCOME TAX (APPEALS) IS HAVING POWER TO EXAMINE ALL RELEVANT MATTERS EVEN IF FOR THE FIRST TIME

[Mr. M. GOVINDARAJAN]

           Section 246A of the Income Tax Act, 1961 ('Act' for short) provides that any assessee aggrieved by any order as mentioned in the section may file appeal to the Commissioner of Income Tax (Appeals) against such order. Such appeal shall be filed within 30 days. Section 251 of the Act gives the following powers to the Commissioner of Income Tax (Appeals):

In an appeal against the order of assessment to confirm, reduce, enhance or annul the assessment;

In an appeal against the order of assessment in respect of which the proceedings 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 proceedings before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment;

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;

In any other case, he may pass such order in the appeal as he thinks fit.

It is settled law that the powers of the first appellate authority are co-terminus with those of the assessing authority and therefore in order to dispose of a case on its merits and in accordance with the law the Commissioner of Income Tax (Appeals) can examine any relevant matter, even though for the first time, and if necessary after giving fair opportunity to either side.

            The above has been confirmed by the Cochin bench in the case 'Deputy Commissioner of Income Tax Act V. S.L. Theatres (P) Limited' - (2009) 312 ITR 95 Cochin. In this case the assessee is a private limited company engaged in the business of cinema exhibition almost for thirty years. The assessee has returned a total income of Rs.12,26,213 which was set off against the brought forward loss of earlier assessment years. Initially the return was processed under Section 143(1) and the loss return filed by the assessee was accepted.

            Thereafter notice under Section 148 was issued and the case was taken up for reassessment on the ground of escapement of income. The Assessing Officer held that unabsorbed loss available for set off actually amounted to Rs.3,17,191 alone and therefore the income for the impugned assessment year after the set off of the above amount should be recomputed.   This was taken in the first appeal. Before Commissioner of Income Tax (Appeals) the assessee presented the details of the financial position and argued that the assessee is a sick industrial company and therefore the restriction of carry forward with reference to the time limit of eight years is not applicable to the assessee and therefore the amount of Rs.23,01,554 should be permitted to be carried forward for the purpose of setting off against the positive income.

            The Commissioner of Income Tax (Appeals) examined whether the assessee company was a sick industrial company or not.  He observed that the assessee company was incurring losses for so many years in the past and the loss accumulated to Rs.2.36 crores as on March 31, 2001. The paid up capital of the company is Rs.7 lakhs. The net assets available in the hands of the assessee company would not be sufficient to pay off its creditors.  The Commissioner of Income Tax (Appeals) therefore held that the assessee company is a sick industrial company. The Commissioner of Income Tax (Appeals) also analyzed the provisions of Section 32 of the Income Tax Act which states as under-

"Provided that the time limit of eight assessment years specified in sub clause (b) shall not apply in the case of a company for the assessment year relevant to the previous year in which the said company has become a sick industrial company under Sec. 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985."

The Commissioner of Income Tax (Appeals) came to the conclusion that the assessee is entitled to the exception to the rule of restriction of eight years and he directed the Assessing Officer to allow the claim of the assessee for carry forward and set off of unabsorbed depreciation of Rs.23,01,554.

            Aggrieved against the order of Commissioner of Income Tax (Appeals) the Revenue file the present appeal before the tribunal. The contents of the Revenue submitted before the tribunal is as follows:

The question whether the assessee company was a sick industrial company or not was not before the assessing authority and the assessing authority had no occasion to decide the issue;

The findings of Commissioner of Income Tax (Appeals) is premature and it ought to have been remanded to the Assessing Authority for his decision;

The provision relating to exemption from a restriction must be considered very strictly. The general rule is the period available for carrying forward and set off unabsorbed depreciation is a period of eight years. A sick industrial company alone is exempted from the above restriction;

The assessee has not filed any proof to the effect that the assessee company is a sick industrial company and the auditors in their report have mentioned that 'the company has not made a reference for recognition as a sick unit';

The specific conditions must be proved strictly in order to claim the status of a sick industrial company. Therefore it is very necessary for the Assessing officer to examine whether the assessee company is a sick industrial company or not.

The assessee put forth the following submissions before the tribunal:

The findings of the Commissioner of Income Tax (Appeals) that the assessee company is a sick industrial company is supported by the facts available in the assessment files itself;

Once that position is accepted the exemption from the restriction of eight year period is automatic for which no further enquiries are necessary.

The tribunal found that the assessee had filed its financial statements along with return of income before the assessing authority with the details regarding the accumulated loss, loan liabilities, paid up capital and realizable assets. All these relevant details are very much reflected in the balance sheet filed by the assessee before the assessing authority along with the return of income. Therefore the contention of the Revenue the same were not available before the assessing authority. 

            The tribunal held that when the Assessing Officer is enforcing the provisions of law relating to the restriction of eight year period in the matter of carry forward and set off of unabsorbed depreciation, it is his concurrent duty to find out whether the assessee is entitled to exemption from the restriction, in the light of the proviso to Section 32, which states that a sick industrial company is not bound by the restriction of eight year period. The failure on the part of the assessing authority, if any, to examine this vital statutory aspect, cannot be used against the assesee.

            It further held that in order to dispose of a case on its merits and in accordance with law the Commissioner of Income Tax (Appeals) can examine any relevant matter, even though for the time, and if necessary, after giving fair opportunity to either side.

            The tribunal further satisfied that the assessee company has fulfilled the requirements for declaring as sick company as follows:

The assessee company is registered for more than five years;

At the end of any financial year accumulated losses is equal to or exceeding its entire net worth; in this case the net worth of the assess is a negative figure and obviously accumulated losses exceed the net worth of the assessee company;

Feature film production and exhibition is industry.

In these circumstances, the tribunal held that the finding of the Commissioner of Income Tax (Appeals) on merits of the contention of the assessee is justified that the assessee is a sick industrial company entitled to exemption from the restrictive rule of eight year period. The tribunal dismissed the appeal of the revenue.