Commissioner of Income Tax vs K. Ravindranathan Nair

The GIT, Thiruvananthapuram, has filed this appeal against the order of the Tribunal, Cochin Bench, in ITA No. 457/Coch/95, dt. 20th March, 1999. While admitting the appeal notice was ordered on the following questions of law :

"(1) Whether, on the facts and in the circumstances of the case and the Tribunal having found that "the CIT(A) further held that the assessee''s representative could not point out that the assessee''s case came under any of the exceptional cases specified in Rule 46A," the Tribunal is right in law in holding that "the CIT(A) was not justified in straightaway refusing to entertain the confirmation letters" ?

(2) Whether, on the facts and in the circumstances of the case and on an interpretation of Rule 46A of the IT Rules, the Tribunal is right in law in interfering with the order of the CIT(A) and in remitting the case to the assessing authority for examination of the alleged creditors ?

(3) Whether, on the facts an in the circumstances, of the case, the Tribunal is right in holding that "the CIT(A) found that the assessee has not given any reason for the delay in filing the confirmation letters belatedly" and is not the above finding factually wrong and against law ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal is right in envisaging any reason of delay under Rule 46A of the IT Rules.

(5) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that processing charges will not constitute part of the turnover ?"

Heard the counsel on both sides.

The first four questions relate to the power of the CIT(A) to receive additional evidence. The respondent/assesses in his accounts has shown that he had received loans during the year. The AO did not accept the same since the assessee had only produced the copies of the receipts regarding the loans received and for want of confirmation letters from the creditors. The AO was of the view that there is no evidence of identity and capacity of the creditor and the genuineness of the loan transactions. The AO, therefore, made addition u/s 68 of the Act of the learned amount entered in the accounts. In the appeal before the CIT(A) the assessee had produced two confirmation letters obtained from Sri N. Damodaran Pillai and Sri G.K. Namboothiri. The CIT(A) rejected the said additional evidence relying on the provisions of Rule 46A of the IT Rules stating that the assessee''s case does not fall under any of the exceptional cases mentioned therein. However, in second appeal filed by the assessee the Tribunal took the view that the CIT(A) was not justified in straightaway refusing to entertain the confirmation letters obtained from the aforesaid two persons instead of sending the matter to the AO. The Tribunal had accordingly directed the AO to examine the aforesaid two persons to ascertain their creditworthiness to advance the amounts to the assessee. The first four questions are raised in relation to this finding of the Tribunal.

Sri George K. George, learned Central Government standing counsel (Taxes) on behalf of the appellant submitted that the Tribunal was not justified in directing the AO to examine the two persons mentioned above to ascertain their creditworthiness to advance the amounts to the assessee in view of the provisions contained in Rule 46A. The standing counsel submits that Rule 46A clearly prohibit the production of any documents before the first appellate authority other than the evidence produced by the assessee during the course of the assessment proceedings except in the three circumstances specified in the said rule. The counsel also submits that the assessee''s case does not fall under any of the said three circumstances. The standing counsel pointed out that the first appellate authority in its order had clearly stated that the assessee had not shown any cause for not producing this evidence before the assessing authority. Standing counsel also submitted that the Tribunal without considering the effect of the provisions of Rule 46A had issued the direction to the AO. The standing counsel also took us to the decision of this Court in C. Unnikrishnan Vs. Commissioner of Income Tax, and the decision of the Allahabad High Court in Ram Prasad Sharma Vs. Commissioner of Income Tax, and submitted that the order of the Tribunal on this issue cannot be sustained.

We do not find any merit in the submission made by the standing counsel. The provisions of Rule 46A(1) provides that the appellant shall not be entitled to produce before the CIT(A) any evidence whether oral or documentary other than the evidence produced by him during the course of proceedings before the AO except in the following three circumstances :

"(a) Where the AO has refused to admit evidence which ought to have been admitted; or

(b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the AO; or

(c) where the appellant was prevented by sufficient cause from producing before the AO any evidence which is relevant to any ground to appeal."

It may be true that the assessee''s case may not fall under any of the above three clauses. Sub-rule (4) of Rule- 46A, which according to us, is relevant for the purpose of this case, It reads :

"Nothing contained in this rule shall affect the power of the Dy. CIT(A) or, as the case may be, the CIT(A) to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty whether on his own motion or on the request of the AO under Clause (a) of Sub-section (1) of Section 251 or the imposition of penalty u/s 271,"

The said sub-rule clearly provides that nothing contained in Rule 46A shall affect the power of the CIT(A) to direct the production of any document or the examination of any witness to enable him to dispose of the appeal or for any other substantial cause including the enhancement of the assessment or penalty, whether on his own motion or on the request of the AO under Clause (a) of Sub-section (1) of Section 251. The Allahabad High Court in Ram Prasad Sharma''s case mentioned above had considered the scope of the provisions of Section 250(1) of the Act vis-a-vis Rule 46A of the IT Rules and observed as follows :

"It would be seen that according to this rule the appellant shall not be entitled to produce before the AAC any evidence, whether oral or documentary, which was not produced in the course of the proceedings before the ITO except in specified circumstances. Thus, the appellant has a right to produce additional evidence only in the circumstances specified in the rule and the appellant may be permitted to produce additional evidence in a fit case which falls outside the specified circumstances. The present case does not fall within the first category and the appellant has no right to produce additional evidence before the AAG. He may have been permitted to produce additional evidence but that was a matter of discretion with the AAC. In the present case repeated opportunities were given by the ITO to produce evidence to prove the genuineness of the disputed deposits but no evidence whatsoever was given. It cannot be said that in these circumstances the AAC exercised his discretion arbitrarily or capriciously while refusing to admit fresh evidence at the appellate stage."

The Bombay High Court had also occasion to consider this question in Smt. Prabhavati S. Shah Vs. Commissioner of Income Tax, . In that case the Tribunal has made the following observations :

"Admittedly, the evidence sought to be produced by the assessee before the AAC was not produced by her before the ITO. There is nothing on the record to prove that the evidence sought to be produced before the AAC comes under any of the exceptions (a) to (d) in Sub-rule (1) or Rule 46A of the 1962 Rules. That being the position, the AAC, in our view, was justified in not taking on record the said evidence sought to be produced before him."

The High Court considered the question with reference to the provisions of Rule 46A and observed thus :

"On a plain reading of Rule 46A, it is clear that this rule is intended to put fetters on the right of the appellant to produce before the AAC any evidence, whether oral or documentary, other than the evidence produced by him during the course of the proceedings before the ITO, except in the circumstances set out therein. It does not deal with the powers of the AAC to make further enquiry or to direct the ITO to make further enquiry and to report the result of the same to him. This position has been made clear by Sub-rule (4) which specifically provides that the restrictions placed on the production of additional evidence by the appellant would not affect the powers of the AAC to call for the production of any document or the examination of any witness to enable him to dispose of the appeal. Under Sub-section (4) of Section 250 of the Act, the AAC is empowered to make such further inquiry and to report the result of the same to him. Sub-section (5) of Section 250 of the Act empowers the AAC to allow the appellant, at the hearing of the appeal, to go into any ground of appeal not specified in the grounds of appeal, on his being satisfied that the omission of the ground from the form of appeal was not wilful. It is clear from the above provisions that the powers of the AC are much wider than the powers of an ordinary Court of appeal. The scope of his powers is conterminous with that of the ITO. He can do what the ITO can do. He can also direct the ITO to do what he failed to do. The power conferred on the AAC under Sub-section (4) of Section 250 being a quasi-judicial power, it is incumbent on him to exercise the same if the facts and circumstances justify. If the AAC fails to exercise his discretion judicially, and arbitrarily refuses to make enquiry in a case where the facts and circumstances so demand, his action would be open for correction by a higher authority."

It was further observed as follows :

"On a conjoint reading of Section 250 of the Act and Rule 46A of the Rules, it is clear that the restrictions placed on the appellant to produce evidence do not affect the powers of the AAC under Sub-section (4) of Section 250 of the Act. The purpose of Rule 46A appears to be to ensure that evidence is primarily led before the ITO."

On a consideration of the provisions of Rule 46A particularly Sub-rule (4) thereof and the provisions of Section 250(1) of the IT Act conferring power on CIT(A), we are also of the view that in spite of the provisions of Rule 46A(1), the provisions of Section 250 enables the CIT(A) to accept additional evidence in appropriate cases which power has been preserved by Sub-rule (4) of Rule 46A also. If the provisions of Rule 46A, Sub-rule (4) thereof is held to be mandatory that will go against the provisions of Section 250 of the Act conferring power on the first appellate authority to enquire into the matter and pass appropriate orders. In other words, Rule 46A without Sub-rule (4) will be open to challenge as ultra vires Section 250 of the Act.

In the instant case the first appellate authority, as already noted, has rejected the additional evidence solely on the ground that the assessee did not satisfy the provisions of Rule 46A of the Rules. We find that the Tribunal has considered the matter keeping in mind the provisions of Sub-rule (4) of Rule 46A and the provisions of Section 250 of the IT Act, though the provisions are not specifically mentioned and observed that the CIT(A) was not justified in rejecting the confirmation letters straightaway and that he should have directed the AO to consider the said confirmatory letters and to find out the identity, creditworthiness, etc. of the persons who had made the fixed deposit. It is on the above circumstances the Tribunal directed the AO to consider the two confirmatory letters produced by the assessee before the first appellate authority and to decide the question afresh. Here it must be noted that, neither the AO, nor the first appellate authority had any case that the appellant was given several opportunities to produce the confirmatory letters and that the assessee did not avail the said opportunity by obtaining and producing the confirmatory letters from the two persons mentioned above. Only reason stated is, as already noted, no evidence was produced. It must be noted that the Allahabad High Court denied relief to the assessee only because the assessee did not avail the several opportunities given. We do not find any reason to interfere with the order of the Tribunal on this issue. We accordingly answer questions 1 to 4 in favour of the assessee and against the Revenue.

Question No. 5 relates to the inclusion of processing charges received by the appellant from third parties for processing raw cashewnuts belonging to them in the assessee''s factory in the ''export turnover'' for the purpose of computation of relief u/s 80HHC of the Act. The AO included the processing charges in the total turnover. This was confirmed in appeal before the CIT(A). The Tribunal relaying on its earlier decisions held that processing charges received by the assessee is not liable to be included in the ''total turnover'' and allowed the assessee''s appeal on that ground. This question is covered by the judgment dt. 13th Feb., 2003 in ITA No. 30/2000 and other connected cases, where it was held that the processing charges received will not form part of the export turnover since only sale proceeds of goods or merchandise alone will form part of the turnover. In the light of tile said judgment we answer question No. 5 in favour of the assessee and against the Revenue. This IT appeal is dismissed as above.