SANJAY SAWHNEY vs. PRINCIPAL COMMISSIONER OF INCOME TAX

The present appeal under Section 260A of the Income Tax Act, 1961 (‘the Act’) is directed against the order dated 25.03.2019 passed by the Income Tax Appellate Tribunal (‘ITAT’), Delhi Bench ‘F’ allowing Revenue’s appeal [ITA No. 4856/2015 for the Assessment Year 2008-09] and further remanding the matter to the file of the Assessing Officer (‘AO’) for fresh adjudication. Vide the aforesaid impugned order, the ITAT has inter alia rejected additional juri ictional grounds urged by the Appellant- Assessee under Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 (‘ITAT Rules’) to assail the findings of Commissioner of Income Tax (Appeals) [‘CIT (A)’]. By way of this appeal, the Appellant challenges correctness of the reasoning of the ITAT for declining to consider pertinent issues that go into the root of the matter and relate to assumption of juri iction and SANJEEV NARULA, J 2020:DHC:1935-DB

The revenue-initiated search action under Section 132 of the Act on Kouton Group on 19.02.2009 and during the search proceedings, it inter-alia seized a document described as ‘Memorandum of Understanding’ (‘MOU’) relating to transaction of sale and purchase of share capital of M/s S.R. Resorts Private Limited. Consequent upon the seizure of the aforesaid document, a notice was issued to the appellant under Section 153C of the Act, calling for filing of return of income. Since there was no compliance to the said notice, another notice was issued under Section 142(1)(ii) of the Act. In response thereto, the appellant filed the original return of income declaring total income of Rs.8,90,760/- and submitted that the same be treated as a return in compliance to notice under Section 153C of the Act. The assessment proceedings culminated in framing of an assessment order dated 28.12.2010 whereby the return of income of the appellant stood assessed at Rs.1,46,15,445/-. In the appeal before CIT(A), besides challenging the additions made by the AO on merits, assessee also raised legal grounds qua the validity of the reassessment proceedings undertaken by the revenue under Section 153C of the Act. The juri ictional challenge to reassessment proceedings was principally premised on two fundamental legal grounds, viz. (i) the AO failed to record a satisfaction note for initiating proceedings under Section 153C of the Act and, (ii) there was no nexus between the issues in the assessment proceedings and the incriminating material seized during the search. The CIT(A) rejected the aforesaid pleas and inter-alia held that there was no need for recording the satisfaction and The Controversy- In brief 2020:DHC:1935-DB

Revenue contested the order passed by the CIT(A) by filing an appeal under Section 253(2) of the Act before the ITAT, contending that the CIT (A) had erred in deleting the additions. In the said proceedings, appellant- assessee made an oral application under Rule 27 of ITAT Rules and urged additional grounds against the findings of the CIT(A) pertaining to the issue of recording of satisfaction note, and the necessary condition of existence of nexus between assessment and incriminating material by contending that these findings were in the teeth of the law as settled by various courts in respect of the said issues. The ITAT disagreed with Assessee and on a technical ground refused to consider the legal issues that were premised on Rule 27 of the ITAT Rules. However, at the same time, on merit, the ITAT overturned the decision of the CIT(A) and allowed the appeal in favour of the Revenue and restored the issues to the file of the AO for deciding afresh with further direction to the Assessee to produce all the necessary documentary evidence in support of its claim. The relevant extract of the impugned order reads as follows:

Since the assessee has not filed any such application, the appellant, i.e., the revenue cannot be put to surprise by the respondent. Accordingly, the parties were requested to address on the grounds raised in the appeal before us. Since, we have not admitted additional grounds raised by the assessee, we are not adjudicating the issue raised in those additional grounds.”

The operative portion of the order directing remand reads as under:-

3 We have heard the rival submissions and perused the relevant material on record. The issue in dispute in the ground raised is whether the land which was sold by the assessee, was agricultural land in terms of the provisions of the Act. The assessee was required to prove that land was situated beyond 8 kms, from the municipal limit and agricultural activity was carried out by the assessee on the said land. Before us, the assessee has referred pages 43 to 45 of the paperbook, which are handwritten certificate issued by the Patwari (Land Revenue Authority). We agree with the observation of the learned DR that the handwritten certificate is not bearing any seal or name of the Patwari or the person who has issued the certificate. The learned counsel has also not produced the original return of income filed for the earlier years to establish that agricultural income was offered for rate purpose un those returns. The Assessing Officer objected admitting of the additional evidences, however, the Ld. CIT (A) admitted the evidence after giving his reasoning. But the Ld. CIT (A) was required to make compliance of the Rule 46A(3) of the Income Tax Rules,1962 and provide opportunity to the Assessing Officer to rebut those evidences as held by the Hon'ble Delhi High Court in the case of Manish Buildwell Private Limited (supra). In view of the above facts and circumstances, 2020:DHC:1935-DB

With consent, we extensively heard arguments of learned counsels for both the parties for final disposal of the appeal. Mr. S. Krishnan, learned counsel for the appellant contended that the understanding of the ITAT is flawed and contrary to the settled legal position. He submitted that the assessee had relied upon Rule 27 of the ITAT Rules, however, for some strange reasoning, ignoring the basic tenet of law on the applicability of the said provision, the ITAT did not accept Appellant’s contentions. He argued that the ITAT Rules provide for three distinct and coordinate methods whereby a respondent before the ITAT can raise an issue decided against him/her by the Commissioner (Appeals). The said procedure in his words is interpreted as (i) On receipt of the Commissioner’s order, an appeal can be filed in terms of Rule 6, on issues decided against such party. Form 36 is notified for this purpose; (ii). On receipt of a copy of Ground of Appeal from the other contesting party, a cross-objection can be moved on such issues in Question of Law

Although on merits, the controversy is still in the balance, the appellant- Assessee has approached this court aggrieved with the findings of the ITAT pertaining to Rule 27. The Appeal was admitted vide order dated 16.09.2019 and the following question of law was framed:

He submitted that all the three above-stated remedies and mechanisms exist concurrently and demonstrated that all of them are bound by their own due process. Rule 27 of the ITAT Rules does not require an application to be structured in any particular manner, unlike in the case of cross-appeal or cross objection. He also submitted that the ITAT has applied the new ITAT Rules, 2017 which are yet to be notified and, therefore, have no mandate in law. Therefore, the ITAT has erred in mis-reading a requirement into the rules which does not exist in reality. Mr. Krishnan further argued that by shutting the doors on legal defenses that were available to the appellant and stood concluded in his favour by several precedents, the ITAT has failed to exercise its power and has caused extreme prejudice to the appellant. On both the legal issues viz. non recording of satisfaction note, as well as absence of nexus between reassessment and the material stated to be the basis of framing such assessment, the law stands settled in favour of the assessee. The ITAT has grossly erred by remitting the issues on merit to the file of the AO, without giving similar directions in respect of the legal grounds raised by the appellant by way of application under Rule 27 of the ITAT Rules. In support of his submissions, Mr.Krishnan relied upon Tranvancore Chemical & Manufacturing Company Ltd. v. CIT (1997) 226 ITR 429, PCIT, Vadodara-2 v. Sun Pharmaceuticals Industries Ltd. (2017) 86 taxmann.com 148 Guj. Dahod Sahakari Kharid Vechan Sangh Ltd. v. CIT (2005) 149 TAXMAN 456 (Guj.), CIT, Meerut v. Jindal Polyester Ltd. 2020:DHC:1935-DB

Mr. Zoheb Hossain, learned senior standing counsel for revenue, on the other hand, defended the order of the ITAT by relying upon several case laws. He urged that since that the appellant did not file any cross-appeal or cross-objection under Section 253(4) of the Act, he cannot invoke Rule 27 of the ITAT Rules to question the validity of the proceedings under Section 153C of the Act. He further submitted that the issue qua the validity of the proceedings under Section 153C had attained finality and because the appellant chose not to challenge the same in appeal by way of cross- SCC OnLine Del 10952; CIT vs. Edward Keventor Successive Pvt. Ltd. 1980 123 ITR 200 (Delhi) and CIT vs. Anil Kumar Bhatia 2013 352 ITR 493 (Delhi).

In rejoinder, Mr. Krishnan while reiterating his submissions, distinguished 2020:DHC:1935-DB

The facts of the case reveal that the Revenue challenged the order of the CIT (A) dated 20.03.2015 before the ITAT on the grounds pertaining to deletion of additions on account of unexplained cash credits, unexplained investments, interest paid on cash borrowings, personal expenses, long term capital gains etc. The assessee [Respondent before ITAT], admittedly did not file a cross appeal or cross objections under section 253(4) of the Act and sought to invoke Rule 27 to question the validity of the proceedings under Section 153C. Thus, in the above noted factual background, we have to consider whether the approach adopted by ITAT in declining the Appellant- assessee [Respondent before ITAT] the right to question the findings of the CIT(A) is correct or not?

The Tribunal has taken a pedantic view on the interpretation of Rule 27 by holding that for availing the remedy under the said provision, an application in writing is necessary. In our opinion, this surmise is fallacious and we cannot countenance the same. We agree with Mr. Krishnan that Rule 27, as it stands today, does not mandate for the application to be made in writing. Revenue has not brought to our notice any particular Form notified for filing such an application. Revenue also does not controvert the contention of the Appellant that the draft Appellate Tribunal Rules 2017 proposing to insert a proviso to Rule 27, providing for an application to be made in writing, have not been notified, as yet. Therefore, the reasoning of the Tribunal for rejecting Appellant’s contentions is palpably wrong. If the provision does not specify any defined structure for making an application in a particular manner, the Tribunal ought not to have deprived the Appellant of an opportunity to raise a fundamental question of juri iction, taking a 2020:DHC:1935-DB

Before we proceed with our analysis, let us first examine the said provision and then consider the relevant case laws that deals with the interpretation of the said provision. Rule 27 of the ITAT Rules reads as under: “Respondent may support order on grounds decided against him.

The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him.”