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Facts
The assessee, engaged in wholesale trading of readymade garments, filed its return for AY 2011-12. The assessment was completed at a much higher income on an estimated basis. The CIT(A) disallowed commission, interest, and other expenses.
Held
The Tribunal held that the CIT(A) enhanced the disallowances by making additions on account of new sources of income without issuing an enhancement notice, which is a statutory requirement. The CIT(A) does not have the power to make additions on account of new sources of income.
Key Issues
Whether the CIT(A) can make additions on account of new sources of income without issuing an enhancement notice, and if such additions are legally sustainable.
Sections Cited
143(3), 144, 36(1)(iii), 251(2), 147, 148, 263
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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
(Assessment Year: 2011-12) Shri Hargovind Jain, Vs. ITO, IX/ 3435, Street No. 3, Ward-57, Dharampura, Gandhi D Block, New Delhi Nagar, Delhi-110031 (Now Asst Order by ITO, Ward-35(2), New Delhi (Appellant) (Respondent) PAN: ADJPJ5609E Assessee by : Shri Pranav Yadav, Adv Revenue by: Shri Om Prakash, Sr. DR Date of Hearing 30/06/2025 Date of pronouncement 16/07/2025
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in AY 2011-12, arises out of the ld. Commissioner of Income Tax (Appeals)-19, New Delhi [hereinafter referred to as „ld. CIT(A)‟, in short] in Appeal No. 4/14-15 dated 15.03.2017 against the order of assessment passed u/s 143(3)/144 of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 03.03.2014 by the Assessing Officer, ITO, Ward- 35(2), New Delhi (hereinafter referred to as „ld. AO‟).
2. The assessee has raised the following grounds of appeal:-
“1. That the Id. CIT (Appeal) erred in law in denying the relief claimed against the arbitrary illegal Assessment Order.
That the Appellate Order is based on merely surmises and conjectures and against the pleadings made during the course of the hearing of appeal.
3. That the Id. CIT erred in law in deciding the appeal against his own observations in Para 7 of the Order "........ although the relevant details filed show that the manufacturing expenses are to a large extent verifiable and incurred in the purpose of business"
4. That the Id. CIT (A) erred in disallowing the commission paid at Rs.3,37,500/- merely on surmises and conjectures and without justification for the same.
That the Id. CIT (A) erred in disallowing the interest amounting to Rs.15,00,000/-merely on surmises and conjectures with considering the financial constraint as reflected in the balance sheet.
That the Id. CIT (A) erred in law in arbitrarily disallowing a sum of Rs. 15,00,000/-alleged to be unverifiable expenses.
That the Assessment Order and the Appellate Order is arbitrary and illegal and deserves to be modified and return income be accepted.
8. That the appellant craves, leave to submit such further facts and ground that have bearing on the issues involved in appeal.”
The assessee has raised the following additional grounds of appeal:-
“1. On the facts and circumstances of the case and in law, the order of CIT(A) is contrary to the provisions of section 251 (2) of the Act and, therefore, the addition of Rs. 3,37,500/-, Rs. 15,00,000/- and Rs. 15,00,000/- made by him are erroneous and liable to be deleted.
2. On the facts and circumstances of the case and in law, the addition of Rs. 3,37,500/- on account of commission made by the assessing officer is erroneous and without jurisdiction.
3. On the facts and circumstances of the case and in law, the addition of Rs. 15,00,000/- on account of interest expenses made by the assessing officer is erroneous and without jurisdiction.
4. On the facts and circumstances of the case and in law, the addition of Rs. 15,00,000/-on account of expenses made by the assessing officer is erroneous and without jurisdiction.”
We have heard the rival submissions and perused the materials available on record. At the outset, the additional grounds raised by the assessee are purely legal in nature and facts relevant for its adjudication are already on record. Hence, the same are hereby admitted and taken up for adjudication first.
5. The assessee is engaged in the business of wholesale trading in readymade garments (export basis) under the name and style of M/s. Vardhman Fashion. The assessee filed its return of income on 31.03.2012 declaring total income of Rs. 4,08,550/-. The assessment was completed u/s 143(3) of the Act on 03.03.2014 determining the total income of the assessee at Rs. 2,50,00,000/- on an estimated basis on the basis of reduction in turn over during the year when compared to earlier year. The assessee preferred an appeal before the ld CIT(A). The ld CIT(A) observed that from the details filed, the manufacturing expenses to large extent becomes verifiable and incurred for the purpose of business. But since the books of account have not been produced, the ld CIT(A) noted that in the preceding year, the books of account were rejected and gross profit was estimated @25%. The ld CIT(A) in para 7 also observed that assessee had disclosed gross profit of 24% during the year. But considering the significant drop in the turn over and since gross profit cannot remain the same in every year, the trading results of the assessee were accepted by the ld CIT(A). Thereafter, the ld CIT(A) proceeded to make the following disallowances:- a. disallowance of commission paid in India - Rs.3,37,500/- b. estimated disallowance of interest u/s 36(1)(iii) of the Act- Rs. 15,00,000/- c. estimated disallowance of expenses on account of its verifiable nature Rs. 15,00,000/-
6. On perusal of the order of the ld CIT(A), we find that for making the aforesaid three disallowances, there is no mention of even issuance of enhancement Page | 3 notice by the ld CIT(A), which is a statutory requirement as per law. Further, all the three items that were proposed to be disallowed become a new source of income for the ld CIT(A) to effect such disallowance. The ld CIT(A) does not have power to make any disallowance or addition on account of new source of income. This issue is no longer res integra in view of the decision of the of Hon‟ble Jurisdictional High Court in the case of CIT Vs. Sardari lal and co. reported in 251 ITR 864 (Del) wherein it was held as under:-
“4. Looking from the aforesaid angles, the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the assessing officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 of the Act and section 263 of the Act, if requisite conditions are fulfillled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the first appellate authority. That being the position, the decision in Union Tyres' case (supra) of this court expresses the correct view and does not need reconsideration. This reference is accordingly disposed of.”
7. Respectfully following the same, the enhancement of disallowances made on account of aforesaid 3 items are hereby deleted as it suffers from various infirmities. Accordingly, the additional grounds and original grouds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 16/07/2025.