Facts of the Case

The petitioner, Mitsubishi Corporation, a company incorporated in Japan and a tax resident of Japan, challenged draft and final assessment orders for AY 2005-06 passed by the Assessing Officer (AO). The AO relied upon CBDT Circular No. 549 dated 31 October 1989 and the Supreme Court decision in CIT v. Sun Engineering Works to hold that assessed income cannot fall below the income declared in the return.

The petitioner had originally filed its return declaring income of approximately ₹4.18 crore and later filed a revised return enhancing the income to about ₹61.05 crore, partly attributable to activities of its Liaison Office in India and certain sales transactions. Disputes arose regarding attribution of income to the Liaison Office and other issues relating to Permanent Establishment and turnover computation.

Additional grounds were raised before the Commissioner of Income Tax (Appeals), which were rejected. The Income Tax Appellate Tribunal (ITAT) later remanded the matter to the AO for fresh consideration. However, the AO again refused to grant relief on the ground that it would reduce assessed income below the returned income, relying on the CBDT circular.

Issues Involved

  1. Whether the Assessing Officer can refuse to consider additional claims merely because they were not made in the original or revised return.
  2. Whether assessed income can be reduced below returned income when appellate authorities direct reconsideration.
  3. Whether CBDT Circular No. 549/1989 restricts the powers of the AO in proceedings pursuant to Tribunal directions.
  4. Scope of powers of the Tribunal under Section 254 of the Income Tax Act, 1961.

Petitioner’s Arguments

The petitioner argued that once the Tribunal had admitted additional grounds and remanded the matter, the AO was obligated to examine those issues on merits. It was submitted that appellate authorities possess wide powers to grant relief, even if such relief was not claimed in the return.

Reliance was placed on judicial precedents, including Goetze (India) Ltd. v. CIT, which clarifies that while an Assessing Officer cannot entertain fresh claims without a revised return, such restriction does not apply to appellate authorities like the Tribunal.

The petitioner further contended that statutory amendments to Section 143(3) rendered the CBDT Circular inapplicable, as the provision now contemplates determination of refund as well.

Respondent’s Arguments

The Revenue contended that allowing relief would result in assessed income falling below returned income, which was impermissible under CBDT Circular No. 549/1989. It relied on the principle that an assessee is bound by the return filed and cannot subsequently adopt inconsistent positions without filing a revised return.

Court Order / Findings

The Delhi High Court held that the Assessing Officer erred in refusing to consider the additional grounds. The Court emphasized that once the Tribunal admits a claim and remands the matter, the AO must adjudicate it on merits.

The Court relied on established jurisprudence, including:

  • Goetze (India) Ltd. v. CIT — restriction applies only to the AO, not to appellate authorities
  • National Thermal Power Co. Ltd. v. CIT — Tribunal has wide powers to consider questions of law
  • Jai Parabolic Springs Ltd. and Rites Ltd. — appellate authorities can grant relief on new grounds
  • Wipro Finance Ltd. v. CIT — fresh claims can be entertained at the appellate stage

It was held that insistence on filing a revised return ignores the plenary powers of the Tribunal under Section 254. Further, directions issued by the Tribunal cannot be nullified by reference to a CBDT circular.

Accordingly, the Court:

  • Quashed the final assessment orders dated 30 November 2021
  • Set aside consequential demand and penalty notices
  • Directed the AO to reconsider the additional grounds and pass fresh orders in accordance with law

Important Clarification

The Court clarified that although an assessee is ordinarily bound by the return filed, this principle does not restrict the powers of appellate authorities. When the Tribunal admits additional grounds or remands the matter, relief cannot be denied merely because the claim was not part of the original or revised return.

The judgment underscores that CBDT circulars cannot override statutory provisions or judicial directions, and that appellate mechanisms exist to ensure correct determination of tax liability.

Link to download the order –  https://www.mytaxexpert.co.in/uploads/1772176231_MITSUBISHICORPORATIONVsASSISTANTCOMMISSIONEROFINCOMETAXCIRCLEINTERNATIONALTAX221DELHIANR..pdf 

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