1. Since the issue involved in these three Departmental appeals for the successive years and also the cross objections filed by the assessee is common, they have been consolidated and a common order is being passed for the sake of convenience.
2. The following common ground for all the three years has been taken up by the Department in all the appeals : "1. That, on the facts and in the circumstances of the case, the learned CIT(A)-I, Calcutta, erred in deleting the following disallowances made by the AO for asst. yr. 1985-86 : (i) Rs. 35,000 out of salaries, etc. paid to the wives of the directors; That, on the facts and in the circumstances of the case, the learned CIT(A)-I, Calcutta, erred in directing the Dy. CIT to delete the following disallowances of the payment of gratuity for the asst.
yrs. 1986-87 and 1987-88 respectively; That, on the facts and in the circumstances of the case, the learned CIT(A)-I, Calcutta, erred in deleting the disallowance of Rs. 3,07,000 for the asst. yr. 1986-87 under s. 40A(3) of the IT Act." So far as the asst. yr. 1985-86 is concerned, the assessment was originally completed by the AO on 11th March, 1988, in which he rejected the method of accounting as followed by the assessee in its construction business, viz., Completed Contract Method. After introducing his own method, the AO computed the total income of the assessee in accordance with the said method imposed by him wherein he made certain disallowances also.
This order of the AO was set aside by the CIT(A) by his order dated 23rd October, 1989. The relevant portion of the said order of the CIT(A) is being extracted below : "3 ....... It appears that the ITO did not examine the correctness of the method of accounting on the completed contract basis to say that the method of accounting was to be rejected. In making proper assessment, he was required to examine the correctness of the method of accounting on completed contract basis. He is, therefore, directed to examine whether the method of accounting on completed contract basis had been followed by the appellant company in accordance with accounting procedures and to reject the method of accounting only when the method of accounting is found to be different from the accounting procedure or give rise to a situation in which the correctness of the method of accounting is disputed.
Since a proper assessment can be made only after such an examination is made by the ITO the assessment is set aside to be made afresh.
4. Other grounds of appeal are not considered as the assessment is set aside.
3. Consequent upon the setting aside of the original assessment by the aforesaid order of the CIT(A), a fresh assessment was made by the AO on 30th January, 1992 which stands impugned before us. In the said new assessment, the following disallowances were made which had not been made in the earlier assessment order passed on 11th March, 1988 : (1) Disallowance of Rs. 35,000 @ 50 per cent out of the total payment of salary and ex gratia to the wives of four directors of the assessee-company amounting to Rs. 70,000; (3) Fresh disallowance of Rs. 80,000 under s. 40A(3) in respect of payments made to a sister concern, viz. M/s. New Central Group Engineering (P) Ltd. 4. It may be mentioned in this connection that in the original assessment, disallowance under s. 40A(3) had been made in respect of cash payment to another concern, viz. M/s R. B. Timber Corporation which was not repeated in the fresh assessment.
5. The assessee challenged the above disallowances made in the fresh assessment before the CIT(A) on the ground that the AO had travelled beyond his jurisdiction in making the abovementioned disallowances in the fresh assessment which had not been made in the original assessment. Detail arguments were made on behalf of the assessee and certain judgments were also cited. We will make reference to all those arguments and also the judgments cited at appropriate place. On the basis of the above arguments and taking in to consideration the reliance placed on different judgments, the CIT(A) came to the conclusion that the AO had acted in excess of his jurisdiction, while passing the fresh assessment order, in seeking to tax by way of disallowance the expenditure either in part or in full incurred under the abovementioned three heads. On this ground alone, the CIT(A) deleted the three disallowances, as mentioned above.
6. The action of the CIT(A) in this regard is being challenged before us by the Department. It is being contended by the learned Departmental Representative (DR) that inasmuch as the original assessment made on 11th March, 1988 had fully been set aside by the CIT(A), it was within the powers of the AO, while framing the assessment afresh, to take into consideration all the aspects of the assessment and to make such disallowances which had not been made in the original assessment.
7. On the other hand, Shri S. R. Das, the learned counsel for the assessee, contends that, firstly, the original assessment was not set aside fully by the CIT(A) inasmuch as he had set aside that assessment only for the purpose of allowing the AO to examine whether the method of accounting on 'completed contract basis' had been followed by the assessee-company in accordance with the accounting procedures and to reject the method of accounting only when such method would be found to be different from the accounting procedure or would give rise to a situation in which the correctness of the method could be disputed.
8. Alternatively, Shri S. R. Das also argues that even if the original assessment is set aside fully, still it would not be within the power of the AO to take into consideration new source of income and to make disallowance in that regard. The CIT(A) has held that the disallowances made in the fresh assessment had not even been considered by the AO at the time of making the original assessment and hence it was not within the power of the AO to consider such disallowances in the fresh assessment.
9. It will be necessary for us first of all to examine and find out whether the original assessment was set aside by the CIT(A) by his order dated 23rd October, 1989 fully or with a limited purpose. It this connection, a reference may be made to a judgment of the Madhya Pradesh High Court in the case of CIT vs. Jawaharlal Nagpal (1988) 171 ITR 136 (MP). In that particular case, the assessment had been set aside by the AAC with direction to the AO to afford opportunity to the assessee of being heard with regard to certain specific items of income. It was held by the Madhya Pradesh High Court that the setting aside having been made for a limited purpose, the ITO did not have any jurisdiction to add new source of income in the fresh assessment.
10. So far as the present case before us in concerned, there is no dispute about the fact that the CIT(A) directed the AO to make examination about the method of accounting on 'completed contract basis' and whether the same was being followed by the assessee-company and, if so, whether the said method could be considered to give rise to a situation in which the correctness of the method could be disputed.
The CIT(A), however, added thereafter that since proper assessment could be made only after such an examination is made by the AO, assessment was being set aside to be made afresh. The other grounds of appeal raised before him were not considered by the CIT(A) inasmuch as the assessment itself was set aside. The CIT(A) added another sentence to emphasise that the assessment was set aside to be made afresh.
11. It is thus clear that the CIT(A) actually set aside the entire assessment impugned before him. He was of the opinion that unless the dispute relating to applicability of the method of accounting on 'completed contract basis' was resolved, it would not be possible to look into any of the aspects involved in the assessment. Indeed, if the contention of the assessee about application of 'completed contract method' of accounting was to be accepted, the entire face as well as the basis of the assessment would get changed which is found to be the fact in the instant case. After the assessment was set aside by the CIT(A), the AO, on examination, accepted the method of accounting followed by the assessee and proceeded to tackle the matter of making assessment of the taxable income of the assessee from the figure of the net profit arrived at on the basis of the method resorted to by the assessee and made certain disallowances of expenses debited by the assessee to its accounts in accordance with the said method.
12. In fact, the other grounds of appeal raised before the CIT(A) were not adjudicated upon by him simply on the consideration that if the method of accounting itself would get changed, as a result of the claim of the assessee, all those grounds would become infructuous inasmuch as the assessment would be required to be made from a different angle altogether. Thus, although it follows from the judgment of the Madhya Pradesh High Court in the case of Jawaharlal Nagpal (supra) that even if the appellate authority states that he sets aside the assessment, the setting aside may be from a limited angle and in that way may be partial only; whether, however, the setting aside would be partial or complete, would clearly depend upon the facts and circumstances of each case. On analysis of the facts in the instant case, we have already arrived at the conclusion that so far as this particular case is concerned the original assessment made on 11th March, 1988, was set aside by the CIT(A) by his order dated 23rd October, 1989, fully and not within limited directions.
13. The issue thereafter would be whether even in case of a full set aside of the assessment, the AO would be empowered to go into the new points and make fresh disallowances in the assessment to be redone by him. The learned counsel for the assessee has relied on two judgments of the Calcutta High Court in the cases of (i) Surrendra Overseas Ltd. vs. CIT (1979) 120 ITR 872 (Cal) and (ii) Kathihar Jute Mills (P) Ltd. vs. CIT (1979) 120 ITR 861 (Cal) in support of his contention that it would not be within the power of the AO to discover any new disallowance and make such disallowance in the reassessment. In the case of Surrendra Overseas Ltd. (supra) the assessment was set aside partially by the AAC, as is evident for the headnotes of the relevant reported case. Since we have already held, on the facts and circumstances of the case, that the setting aside was full and complete, this particular judgment of the Calcutta High Court would not, therefore, be applicable to the present case.
14. In the case of Katihar Jute Mills (P) Ltd. (supra) the assessment was set aside by the first appellate authority and remanded to the ITO.The appellate order of the first appellate authority was only on a particular point. The Calcutta High Court held that the entire assessment did not become open and that the assessee cannot raise other points not dealt with by the first appellate authority in the remand order. A perusal of the facts of this particular case would show that although the expression "set aside" was used by the first appellate authority, there was, however, a specific direction to the AO to go through the contract papers again and to the assessment afresh.
Therefore, it has got to be held in that particular case, that the setting aside was partial and for a limited purpose only. Hence that judgment would also not be applicable to the present case before us.
15. Shri S. R. Das, the learned counsel for the assessee, tried to rely on a judgment of the Bombay High Court in the case of D. M. Neterwalla vs. CIT (1980) 122 ITR 880 (Bom). In that particular case, the powers of the Tribunal in an appeal filed by the Department before it were considered and it was held that the Tribunal can allow the Department to raise a new contention before it for the first time.
16. The learned counsel for the assessee further argued that when the assessment is set aside and the AO makes a fresh assessment thereafter, his powers would be limited to the powers of the appellate authority which had set aside the assessment. Shri S. R. Das goes on arguing in this connection that if it was not within the power of the CIT(A) to make enhancement on a particular issue, the AO, on assessment being set aside, would be debarred from making any disallowance with regard to that particular issue in the reassessment. In this connection, reliance has been placed on a classical judgment of the Supreme Court in the case of CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC). In the said case, the Supreme Court discussed the power of enhancement of the first appellate authority in details. At p. 451 of the reported judgment the Supreme Court observed as under : "...... It is not open to the AAC to travel outside the record, i.e., the return made by the assessee or the assessment order of the ITO with a view to find out new sources of income and the power of enhancement under s. 31(3) of the (1922) Act is restricted to the sources of income which have been the subject-matter of consideration by the ITO from the point of view of the taxability.
In this context 'consideration' does not mean 'incidental' or 'collateral' examination of any matter by the ITO in the process of assessment. There must be something in the assessment order to show that the ITO applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or its non-taxability and not to any incidental connection." 17. It requires mention in this connection that the Supreme Court in its later judgment in the case of CIT vs. Nirbheram Daluram (1997) 224 ITR 610 (SC) deviated totally from the above view expressed in the case of Rai Bahadur Hardutroy Motilal Chamaria (supra). In that later judgment it was held by the Supreme Court that the AAC is entitled to direct additions in respect of items of income not considered by the ITO. Shri S. R. Das, strongly argued, in this connection, that the earlier decisions of the Supreme Court in the case of Rai Bahadur Hardutroy Motilal Chamaria (supra) having been delivered by a Bench consisting of three Judges would prevail over the later judgment in the case of Nirbheram Daluram (supra) delivered by a bench consisting of two Judges only. It was furthermore pointed out that at the time of hearing of the appeal in the case of Nirbheram Daluram (supra), the earlier judgment of the Supreme Court, in the case of Rai Bahadur Hardutroy Motilal Chamaria (supra) was not cited before the Supreme Court.
18. We find much substance in this argument of Shri S. R. Das. We also find that the judgment in the case of Nirbheram Daluram (supra) was delivered by the Supreme Court simply by following another judgment of the Supreme Court in the case of Jute Corpn. of India Ltd. vs. CIT (1991) 187 ITR 688 (SC), in which case the issue before the Supreme Court had been completely different, viz., whether the appellate authority could consider a completely new point not raised before the authorities below till then. Again, considering that the earlier judgment of the Supreme Court has been delivered by a higher Bench we are of the opinion that the said judgment in the case of Rai Bahadur Hardutroy Motilal Chamaria (supra) would still hold good.
19. However, it can be seen that the abovementioned judgment of the Supreme Court in the case of Rai Bahadur Hardutroy Motilal Chamaria (supra) speaks of a new source of income which was not considered in the assessment.
20. In the appellate order impugned before us, the CIT(A) has extracted the detailed discussion made by Kanga and Palkhivala in their famous treatise on this subject. There also, only the power of the CIT(A) to tax the income, which the AO had not, expressly or by clear implication, considered, was mentioned. The Supreme Court clearly held in the case of Rai Bahadur Hardutroy Motilal Chamaria (supra) that the AAC cannot travel beyond the records of the case, viz., the return and the assessment order. So far as the particular case before us is concerned, no new source of income was discovered either by the CIT(A), while disposing of the original assessment or by the AO at the stage of the reassessment. The return of income along with the P&L a/c of the assessee-company was already on the record of the AO. The said P&L a/c stood debited with various items of expenses including those considered by the AO in the reassessment. Although, while making the original assessment, the AO neither made any disallowance nor even discussed the question of allowability with regard to the three items, as considered in the reassessment, it must be held that the AO had, in an implied manner, considered the allowabilty of all the items of expenses claimed in the P&L a/c. The disallowances made in the reassessment do not at all relate to new source of income. These items of expenses were reflected not only in the books of account of the assessee, but also in the P&L a/c filed along with the return. They therefore, were included in the records before the AO even at the original stage of assessment.
Simply because the AO did not make any mention about the allowability of those items of expenses in the original assessment, it cannot be said that he did not apply his mind to the question of allowability of the expenses at that stage. We are, therefore, of the view that the expenses being on record of the AO, the CIT(A), even at the time of appeal against the original assessment, was empowered to tackle those items of expenses and cause enhancement thereon, if the circumstances so necessitated. We therefore, feel that while setting aside the original assessment, the CIT(A) empowered the AO full power to look into all the items of expenses allowed or disallowed in the original assessment, although at the stage of reassessment, the AO may be considered to be not having the power of covering completely new source of income and tackling the question of allowability of expenses relating thereto, inasmuch as the CIT(A), at the stage of deciding the original appeal, also did not have any power of causing enhancement on such new source of income. Ultimately, therefore, we disagree with the view expressed by the CIT(A) that the AO travel beyond his jurisdiction in making fresh disallowances in the reassessment order. We, thus, reverse his decision in this regard. Since again, the CIT(A) did not decide the appellate grounds on those issues before him on merits, we restore the matter back to his file and direct him to examine all the three issues under consideration on merits and pass appropriate order thereon.
21. So far as the asst. yrs. 1986-87 and 1987-88 are also concerned, the issue is exactly similar. In the asst. yr. 1986-87, the AO made fresh disallowances in respect of payment of gratuity to the extent of Rs. 3,591 and of an amount of Rs. 3,07,000 under s. 40A(3). It is evident that these disallowances had not been made in the original assessment order which was ultimately set aside by the CIT(A) and restored back to the file of the AO for fresh assessment. Exactly similar is the case with regard to the disallowance of Rs. 29,134 towards gratuity payment made in the reassessment for the asst. yr.
1987-88, consequent upon set aside of the original assessment by the CIT(A), It is also a fact that in the original assessments for both the years, the disallowances made under consideration had not been made.
The CIT(A) more or less, had followed the reasoning for the asst. yr.
1985-86 and held that the AO had travelled beyond his jurisdiction in making these fresh disallowances in the reassessment orders.
22. Our decision with regard to these issues for these two years is also exactly the same, as in the asst. yr. 1985-86. For the reasons discussed by us in detail with regard to the asst. yr. 1985-86, we hold that the CIT(A) was not right in concluding that the AO had travelled beyond his jurisdiction in making those disallowances. On the other hand, we are of the opinion that the AO was well within his jurisdiction in making the disallowances inasmuch as expenses under consideration had been debited to the P&L a/cs for the respective years filed along with the returns of income for these years. For these two years also, therefore, we reverse the orders of the CIT(A) and restore the matters back to his file with a direction to him to adjudicate upon the appellate grounds before him on merits and to pass appropriate orders in the light of our discussions above.
23. So far as the cross objections are concerned, they are merely in defence of the actions of the CIT(A). For the same reasoning, as discussed above the cross objections taken up by the assessee also must fail.
24. In the result, the Departmental appeals are partially allowed to the abovementioned extent; whereas the cross-objections filed by the assessee are dismissed.