Q.1 An assessee does not include a particular item in the taxable income under the bona fide belief that he is not liable to include the same. Is the Assessing Officer justified to treat the return as a false return? After doing so, is he justified in imposing penalty for concealment of income and/or furnishing of inaccurate particulars?

Ans. If the querist is able to prove that he had a bonafide belief in not including such item being not liable to tax, there is no conscious concealment, no malafides, conduct is not contumacious and in such circumstances the Assessing Officer is unjustified in treating the return as a false return and in imposing penalty u/s. 271(1)(c) of the Act. Please refer to Cement Marketing Co. of India vs. Asstt. Commr. of S.T. (1980) 124 ITR 15 (SC); Dilip N. Shroff vs. C.I.T. (2007) 291-ITR-519 (SC) and Commissioner of Income-tax vs. T. Ashok Pai (SC) (2007) 292 ITR 11. The querist may further refer to case of K.C. Builders vs. Asstt. CIT (2004) 265 ITR 562 at 569 (S.C.); CIT vs. Sumerpur Truck Operators Union (2006) 203 CTR 205 (Raj.); CIT vs. International Audio Visual Co. (2007) 288 ITR 570 (Delhi); CIT vs. Nath Bros. Exim International Ltd. (2007) 288 ITR 670 (Delhi); CIT vs. P.H.I. Seeds India Ltd. (2008) 301 ITR 13 (Delhi) and CIT vs. Videon (2008) 301 ITR 260 (Delhi).

Q.2 Does the Income Tax Appellate Tribunal has jurisdiction to ignore the decision of a jurisdictional High Court on the ground that it does not lay down the correct principle of law on the issue involved therein? Further, can the appellate tribunal has the power to distinguish the decision of apex court or High Court cited before it on the premise that the decision does not lay down the correct principle of law?

Ans. The Income Tax Appellate Tribunal is subordinate to the Jurisdictional High Court and the jurisdictional High Court has superintendence over it under Article 227 of the Constitution of India. All Tribunals, authorities, Courts and subjects functioning within the territorial jurisdiction of the concerned High Court are bound to follow the law laid down by the jurisdictional High Court. The Income Tax Appellate Tribunal is not justified, rather wrong in observing that the decision does not lay down the correct principles of law on the issue involved therein. Even an obiter is of binding nature. The Appellate Tribunal can distinguish on facts by a reasoned and well discussed Order on facts.

Q.3 In an assessment order, certain issues have been decided in assessee’s favour. In the appeal preferred against the other issues, the CIT (Appeals) has sought remand report for deciding a particular issue, even on an issue decided in assessee’s favour by the Assessing Officer and which was never in dispute before CIT (Appeals). Does the power of CIT (Appeals) calling for remand report extend to the concluded issue by the Assessing Officer, in assessee’s favour, on the premise that CIT(A)’s power is co-extensive with that of an Assessing Officer?

Ans. The powers of CIT (A) when an appeal is preferred before him is wider and he need not restrict himself to the issues raised by the assessee or decided in assessee’s favour by the Assessing Officer. He is a superior income tax officer. His powers are co-terminous with that of the Assessing Officer. He can do what has not been done by an Assessing Officer and can undo whatever has been done by the Assessing Officer. Reliance can be placed on CIT vs. McMillan & Co. (1958) 33 ITR 182 (SC); CIT vs. Kanpur Coal Syndicate (1994) 53-ITR-225 (S.C.). He has power to enhance the assessment on the issues decided in favour of the assessee by the Assessing Officer. He should provide an opportunity of being heard in the assessee. However, he cannot discover new source of income not mentioned in the return of the assessee or considered by the Income-tax Officer. (Please refer CIT vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC) and CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (SC) (1967) 66 ITR 443). However, in case of an enhancing.

Q.4 An assessee who is a resident and ordinarily resident in India is assessable on his global income. In such a situation whether the loss in a foreign branch can be set off against other income of the assessee? How the provisions of domestic law vis-a-vis the application of Double Taxation Avoidance Agreement are to be viewed for consideration in the matter of claim by the assessee?

Ans. Sec. 70 mandates that where the net result in respect of any source falling under any head of income, other than ‘capital gains’, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. Sec. 71 entitles the assessee to set off of loss from one head against income from another. The assessee, who is a resident and ordinarily resident in India is assessable on his global income. It follows that loss in a foreign branch has to be set off against other income of the assessee. It is not open to the Assessing Officer to apply the provisions of the Double Taxation Avoidance Agreement. The assessee is entitled to the benefit of either the domestic law or the Double Taxation Avoidance Agreement, whichever is more favourable to it. On this reasoning, it is also open to the assessee to claim protection of the Double Taxation Avoidance Agreement in a later year, when there is profit. Such claim cannot be barred, merely because of different treatment of loss in an earlier year. It was so held in Deputy CIT vs. Patni Computer Systems Limited (2008) 301-ITR (AT) 60 (Pune).

Q.5 The assessee had made full disclosure of all material facts in the return of income accompanied by statement of total income and the financial statements. In the assessment proceedings, queries were raised by specific show cause notice and the assessee had answered all the queries in writing which formed part of the records. The assessment was completed u/s. 143(3) of the Act. After the lapse of 4 years from the completion of assessment, the incumbent Assessing Officer on the premise that no opinion was expressed in the assessment order and/or in the order sheet and thereby the inference had to be drawn, there was no application of mind, proceedings u/s. 147 of I.T. Act were initiated. Is the Assessing Officer justified in his action of reopening the assessment? Can the remedy of Writ be exercised to seek the quashing of notice issued u/s. 148 of I.T. Act.

Ans. The duty casted upon an assessee is to disclose fully and truly all material facts in the return of income. Once queries having been raised by specific show cause notice, the assessee having answered all the queries in writing, assessment having been completed u/s.143(3) of the Act, after the lapse of 4 years it cannot be reopened u/s.147 read with sec. 148 of the Act. It is not necessary for an Assessing Officer to express any opinion in writing in respecst of such issues which enquired, replied and no adverse inference drawn in the assessment order. There lay innumerable decisions on change of opinion. Reliance may be placed on CIT vs. Foramer France (2003) 264 ITR 566 (S.C.). Said view has been taken in Idea Cellular Ltd. vs. DCIT (2008) 301 ITR 407 (Bom).

Q.6 An assessee was subjected to both penalty and prosecution. The penalty was cancelled by the Income Tax Appellate Tribunal. The revenue carried the matter to High Court, objecting to the order of ITAT. In such circumstances, as there were no findings as regards penalty, can it be said that the prosecution should abate? Whether the prosecution is still sustainable?

Ans. Since there is no finality as regards penalty, it could not be said that the prosecution should abate. The Sessions Court should keep the proceedings in abeyance till finality of penalty. The Delhi High Court in ITO vs. Gigles P. Ltd. (2008) 301 ITR 32, held that there was no reason why it should interfere with the order of the lower court, which was in consonance with law. Even if the final outcome in the penalty proceedings was adverse to the accused, prosecution need not automatically follow, where levy of penalty itself had been a matter of dispute. The accused shall have to face the prosecution proceedings and prove his bonafides. Burden is on the accused. Hence, penalty proceedings be seriously taken and contested to avoid prosecution. The accused can get offence compounded by the Commissioner of Income-tax.