Rachhpal Singh vs Income Tax Officer on 3 February, 2005

Rachhpal Singh vs Income Tax Officer on 3 February, 2005

Equivalent citations: 2005 94 ITD 79 Asr, 2005 276 ITR 163 Asr, (2005) 93 TTJ Asr 283

Bench: J Pall

ORDER Joginder Pall, A.M.

1. This is bunch of four appeals filed by the assessee against the orders dt. 29th Aug., 2002 of CIT(A), Jalandhar, for the asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01. Since the issues involved in these appeals are identical, these were heard together and are being disposed of by this consolidated order for the sake of convenience.

2. The first effective issue raised in all these appeals is that CIT(A) was not justified in sustaining the orders passed by the AO under Section 154 which were without jurisdiction. Connected with this is the issue that CIT(A) was not justified in not admitting the evidence and the bank certificate, which indicated that interest on FDRs in Non Resident External (NRE) Account was exempt under Section 10(4). The facts of the case are that assessee filed the returns of income claiming therein interest on FDRs in NRE account amounting to Rs. 7,050, Rs. 1,29,927, Rs. 2,48,888 and Rs. 2,94,198 for the asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01, respectively,. as exempt under Section 10(4) of the IT Act, 1961. The AO processed the returns under Section 143(1) under the amended provisions of Section 143(1) effective from 1st June, 1999, and allowed the exemption in respect of interest on FDRs in NRE account under Section 10(4) of the Act. Thereafter, the AO issued show-cause notices under Section 154 for all the assessment years proposing to add the interest on FDRs in NRE account on the ground that status shown in the returns was resident and, therefore, interest was not exempt under Section 10(4) of the IT Act. In response to such notices, the assessee along with his counsel attended before the AO and agreed that assessee was not entitled to exemption under Section 10(4). Accordingly, the AO added the interest to the total income vide his orders dt. 14th Feb., 2002, passed under Section 154 of the IT Act.

3. Being aggrieved, the assessee filed appeals against the orders of CIT(A). It was submitted before the CIT(A) that assessee had agreed before the AO under wrong appreciation of law. It was contended before the CIT(A) that interest had accrued in the amount represented by foreign currency and in the case of a non-resident after his return from abroad, his status for the next 8 years would be resident but not ordinarily resident under Section 6(6) of the IT Act, and, therefore, the assessee would be entitled to exemption on the interest income under Section 10 of the IT Act, 1961. Reliance was also placed on the judgment of Hon'ble Gujarat High Court in the case of Rambhai L. Patel v. CIT (2001) 252 ITR 846 (Guj). During the course of appeal proceedings, the assessee also filed copies of the passport along with copies of bank account where NRI account was opened on the basis of which the interest income was claimed under Section 10(4) of the IT Act. However, the learned CIT(A) declined to take cognizance of the evidence furnished before him on the ground that AO had passed the orders after allowing proper opportunity and the assessee had agreed for such addition before the AO. Accordingly, the learned CIT(A) upheld the orders of AO by recording following finding in para 5.4 of the impugned order:

"5.4 I have heard both the sides and have gone through the details available on record. It is seen that sufficient opportunities were afforded by the AO to the appellant to produce the details against the action proposed to be taken vide notice under Section 154 of the IT Act. But instead of filing any details, the appellant agreed that the deduction was wrongly claimed and having agreed for the same, no cause for grievance, thus, arose as per the decision of the Hon'ble jurisdictional High Court in the case Bharat Carbon & Ribbon Manufacturing Co. Ltd. v. CIT (1980) 127 ITR 239 (Del), wherein the Hon'ble Court laid down the principle that the order passed on agreed basis cannot give rise to grievance and the same cannot be agitated in the appeal. The said decision of the jurisdictional High Court has been followed by the Hon'ble Tribunal, Amritsar Bench, in the case of Modem Sales (India) v. ITO vide ITA No. 189/Asr/1999, dt. 30th Jan., 2001. The appellant having agreed, the AO was precluded from gathering further facts in this regard. It was not the case where the AO has refused the additional evidence, which ought to have admitted, or the AO has made order appealed against without giving sufficient opportunity to the appellant to adduce the evidence. On the other hand, the appellant has not been able to point out any sufficient cause because of which he was prevented from producing the evidence before the AO. In fact, during the course of appellate proceedings, no request was made for admission of additional documentary evidence. Therefore, it is not possible to admit the same because it has not been established that there were unavoidable circumstances due to which the same could not be furnished before the AO. In view of these facts, the action of the AO in taxing the interest income is confirmed."

Assessee is aggrieved by the orders of CIT(A). Hence, these appeals before us.

4. The learned counsel for the assessee reiterated the submissions before the authorities below. It was submitted that assessee left India in 1980 and joined employment in Germany, married German national and came to India in 1995. He again went abroad in July, 2001. After a stay of about fortnight, returned to India. He submitted that assessee opened NRE account and deposited amounts in fixed deposits. Interest earned thereon was claimed exempt under Section 10(4) of the IT Act. He submitted that authorities below have wrongly interpreted the provisions of Section 10(4) inasmuch as they considered the residential status as per provisions of the IT Act instead of considering the same under the Foreign Exchange Regulation Act (In short FERA), 1973. He drew my attention to Sub-section (4) of Section 10 as per which interest on amounts standing to the credit in a NRE account in any bank in accordance with the FERA, and the rules made thereunder, is exempt. He further, drew my attention to proviso to Section 10(4) of the Act as per which such person should be resident outside India as defined in Clause (q) of Section 2 of the said Act or is a person who has been permitted by the RBI to maintain the aforesaid account. He submitted that for the purpose of considering exemption under Section 10(4), the residential status is to be determined under the FERA and not under the IT Act. He further submitted that during the appeal proceedings before CIT(A), the assessee submitted a certificate from the Punjab National Bank to the effect that FDRs in NRE account of Shri Rachhpal Singh were as per the RBI's guidelines. Thus, he submitted that interest on FDRs was rightly claimed exempt under Section 10(4) of the IT Act. He submitted that assessee and his counsel agreed to such addition under wrong appreciation of law. However, the authorities below should have applied the correct law and allowed exemption. He also submitted that CIT(A) ought to have admitted fresh evidence in the form of bank certificate which went to the very root of the issue involved rather than dismissing the appeals purely on the ground that assessee had agreed before the AO.

4.1 Proceeding further, the learned counsel submitted that as per provisions of Section 154 of the IT Act, the AO has powers only to rectify such mistakes of law which are glaring, patent, obvious and in respect of which two views are not possible. He relied on the judgment of Hon'ble Supreme Court in the case of CIT v. Hero Cycles (P) Ltd., Etc., Etc. (1997) 228 ITR 463 (SC), where it was held that rectification is not possible, if the question is debatable and the point, which was not examined on fact or in law, cannot be dealt with as a mistake apparent from the record. He further relied on the decisions of various High Courts in the cases of CST v. Motwane (P) Ltd. (1992) (84) STC 377 (Bom), Master Construction Co. (P) Ltd. v. State of Orissa (1996) 17 STC 36 (SC), CIT v. Harnandrai Shrikishan Akodia v. Asstt. CIT (1966) 61 ITR 50 (MP) and Nirmal Udyog v. CIT and Anr. (1998) 232 ITR 493 (MP). He submitted that in this case, mistake was not apparent from record and it could have not been determined without calling for further details and investigation. Therefore, the same fell outside the scope of provisions of Section 154 of the IT Act.

5. The learned Departmental Representative, on the other hand, relied on the orders of authorities below. He submitted that as per provisions of Section 139, the assessee is required to file return in the prescribed form and is also required to be verified. In the return the assessee is also required to indicate the residential status, which in the present case was shown as resident. He further submitted that as per provisions of Section 154(1)(b), the AO was vested with the powers to rectify any intimation or deemed intimation. In exercise of such powers, the AO rightly rectified the orders. Thus, he submitted that orders of CIT(A) do not merit any interference.

6. I have heard both the parties at some length and given my thoughtful consideration to the rival submissions. I have also examined the facts, evidence and material on record. In fact, the assessment records were called for from the IT Department and examined. In the returns of income filed assessee had claimed exemption in respect of interest on FDRs in NRE account under Section 10(4) of the IT Act. In the returns the assessee had also shown the residential status as 'resident'. Now, the provisions of Clause (ii) of Sub-section (4) of Section 10 read as under :

"Clause (ii) : In the case of an individual, any income by way of interest on moneys standing to his credit in a Non-resident (External) account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the Rules made thereunder".

Thus, from a plain reading of the aforesaid sub-section it is clear that income by way of interest on money standing to the credit in a NRE account in any bank in accordance with FERA, 1973 would qualify for exemption subject to the condition, such person is a resident outside India as defined in Clause (q) of Section 2 of FERA. Therefore, for the purpose of examining whether the person is entitled to exemption under Section 10(4), one has to see the residential status under the FERA and not under the IT Act. Even if the person is a resident outside India as per FERA, such interest income would still qualify for exemption if he is permitted by the RBI to maintain the NRE account. Now, the fact that assessee had shown residential status in the returns, as 'resident' would not mean that assessee was also 'resident' under the FERA. There is no paper, document and information accompanying the returns to show that he was "resident" as per definition under the FERA. Further, there is also no document accompanying the returns, which should show that amounts kept in the NRE account were not permitted by the RBI. Thus, on the basis of returns and documents accompanying the returns, it could not be said that assessee was not entitled to exemption under Section 10(4) of the Act.

7. The learned CIT(A) has upheld the orders of AO on the ground that assessee agreed before the AO and further declined to admit fresh evidence in the form of bank certificate which indicated that amounts kept in the NRE account was as per the RBI's guidelines. I think the approach on the part of CIT(A) was more technical than showing any concern for imparting justice to the assessee. It is settled position under the law that powers of CIT(A) are co-terminus with the AO. He can do what an AO can do. He is also vested with powers of enhancement of income. The appellate proceedings are extension of assessment proceedings as these aim at determining the correct income and correct tax liability of the assessee for a particular assessment year. If the assessee had agreed before the AO because of wrong appreciation of provisions of law, doors should not be closed for him for the simple reason that he had agreed before the AO. This is not a case of GP addition or addition on account of cash credit where there could be two possible views. It is a case which involved allowing of exemption under Section 10(4) where only one view is possible. Assessee is either entitled to exemption or not entitled. Therefore, the judgment of Hon'ble Punjab & Haryana High Court in the case of Banta Singh Kartar Singh v. CIT (1980) 125 ITR 239 (P&H) has been cited by the CIT(A) out of context. If the assessee is entitled to such exemption, the same should not be denied to him simply because he had agreed before the AO on account of wrong appreciation of law. The certificate of the bank which indicated that money kept in the NRE account was as per guidelines of the RBI, went to the very root of the issue. The CIT(A) has inherent powers to admit such evidence under Sub-rule (4) of Rule 46A of the IT Rules. This would have helped the cause for justice. He should have appreciated that orders were passed under Section 154 and not under Section 143(3). Therefore, in my view, CIT(A) was not justified in declining to admit such evidence.

8. Now, coming to the merits of orders passed under Section 154, it is no doubt true that powers have been conferred on the AO to rectify intimation or deemed intimation under Section 143(1). But, such power has to be seen in the light of powers conferred under Section 143(1). The returns were processed under Section 143(1) on 28th March, 2000. Provisions of Section 143 have been drastically amended by the Finance Act, 1999, w.e.f. 1st June, 1999. Highlights of these amendments are that powers of the AO to make adjustments under Section 143(1)(a) and consequent levy of additional tax under Section 143(1 A) have been taken away. The amended provisions of Section 143(1) of the Act read as under:

"143(1) Where a return has been made under Section 139, or in response to a notice under Sub-section (1) of Section 142,-

(i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of Sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under Section 156 and all the provisions of this Act shall apply accordingly; and

(ii) if any refund is due on the basis of such return, it shall be granted to the assessee and an intimation to this effect shall be sent to the assessee :

Provided that, except as otherwise provided in this sub-section, the acknowledgement of the return shall be deemed to be an intimation under this sub-section where either no sum is payable by the assessee or no refunds is due to him:

Provided further that no intimation under sub-section shall be sent after the expiry of one year from the end of the financial year in which the return is made:"

A bare reading of the aforesaid provisions shows that, now, the AO, on the basis of return filed, can determine the tax and interest, if any, payable by the assessee after allowing credit for TDS and pre paid taxes and send the intimation specifying therein the sum so payable. In case any refund is due on the basis of such return, AO shall grant the refund and send the intimation to the assessee. It is only if any tax is payable or refund is due to the assessee, intimation under Section 143(1) would need be sent to the assessee. The AO has not been conferred any other powers to make any adjustments for disallowing or allowing any claim to the assessee. Thus, powers conferred under Section 154(1)(b) for rectification of intimation or deemed intimation have to be considered in the light of powers conferred under Section 143(1).. If the AO is not vested (with) any authority to make adjustments or disallowing the claim of the assessee under Section 143(1), he cannot do so under Section 154(1)(b) of the IT Act. Therefore, the issue whether there is a mistake in the intimation or deemed intimation is to be seen in the light of powers conferred under Section 143(1). If such powers do not exist under Section 143(1), i.e., the main section, such powers cannot be conferred under Section 154(1)(b). Section 154(1)(b) cannot be pressed into service for making adjustment of the nature mentioned under Section 143(1)(a) of the pre-amended section, as such power has been intentionally taken away by the legislature. Since the action of the AO for withdrawing exemption of interest under Section 10(4) of the Act falls outside the scope of powers conferred under Section 143(1), the AO had no jurisdiction to pass orders under Section 154(1)(b). Even if the assessee had agree before the AO due to wrong appreciation of law, such agreement would not have made the illegal orders as legal because the AO had no authority or jurisdiction to do so. Therefore, such orders are bad in law and void ab initio and deserve to be quashed on this ground itself.

9. Last, but not the least, the powers conferred under Section 154 are limited only to those mistakes of law and facts which are obvious, patent and glaring from records. All those issues, where two views are possible and which involve long- drawn process of reasoning and require investigation into the facts are not covered under Section 154 of this Act. Reliance in this regard is placed on the two judgments of Hon'ble Supreme Court in the case of T.S. Balaram, ITO v. Volkart Brothers (1971) 82 ITR 50 (SC) and CIT v. Hero Cycles (P) Ltd. (supra). Now, the issues involved in this case as to whether the assessee was entitled to exemption under Section 10(4), whether the assessee was 'resident' under the FERA and also whether he was permitted by the RBI to keep the deposits in NRE account, were highly debatable, contentious and where two views were possible. In any case, the same could not have been determined without calling for further details and making further enquiries, which are not permitted under Section 154(1)(b). Therefore, I am of the opinion that AO exceeded his powers and jurisdiction in passing the orders under Section 154 for withdrawing the exemption in respect of interest on deposits kept in NRE account. Such powers are vested with the AO under Section 143(2). However, the time-limit for issue of notice as prescribed in the Act is 12 months after the end of month in which return is filed. In the present case, returns were filed on 31st Dec., 1998, and 15th Dec, 2000. Therefore, the time-limit for issue of notice under Section 143(2) expired before 31st Dec, 2001. The present orders under Section 154 have been passed on 14th Feb., 2002, i.e., after the expiry of time-limit for issue of notices under Section 143(2). In any case, Section 154 cannot be substituted for issue of notices under Section 143(2).

10. Thus, in the light of detailed discussions in the preceding paragraphs and legal position discussed above, I am of the considered opinion that CIT(A) was not justified in sustaining the orders of AO passed under Section 154 of the IT Act. Accordingly, I quash the orders of AO passed under Section 154 and resultant orders of CIT(A) and allow the grounds of appeals of the assessee for all the assessment years.

11. The next ground common for all assessment years relates to charging of interest underSections 234A, 234B and 234C. Since the orders passed under Section 154 have been quashed, this ground is of no consequence. In any case charging of interest under Sections 234A, 234B and234C is consequential only. Therefore, this ground does not merit any further discussions and is accordingly disposed of in these terms.

12. In the result, all the appeals filed by the assessee for the assessment years from 1997-98 to 2000-01 are allowed.