Exemption of Long term Capital Gain Tax on Transfer of Residential Property (House or Plot of land) if Net Consideration is Invested in the Equity Shares of a new Start-up SME Company [Section 54GB]

Section 54GB of the Act, provides for exemption of capital gain which arises from the transfer of a long-term capital asset, being a residential property (a house or a plot of land), owned by the eligible assessee if Net Consideration is Invested in the Equity Shares of a new Start-up SME Company.

Text of Section 54GB

^[1][54GB. Capital gain on transfer of residential property not to be charged in certain cases

 (1) Where,-

(i)  the capital gain arises from the transfer of a long-term capital asset, being a residential property (a house or a plot of land), owned by the eligible assessee (herein referred to as the assessee); and

(ii)  the assessee, before the due date of furnishing of return of income under sub-section (1) of section 139, utilises the net consideration for subscription in the equity shares of an eligible company (herein referred to as the company); and

(iii) the company has, within one year from the date of subscription in equity shares by the assessee, utilised this amount for purchase of new asset,

then, instead of the capital gain being charged to income-tax as the income of the previous year in which the transfer takes place, it shall be dealt with in accordance with the following provisions of this section, that is to say,-

(a) if the amount of the net consideration is greater than the cost of the new asset, then, so much of the capital gain as it bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45 as the income of the previous year; or

(b) if the amount of the net consideration is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45 as the income of the previous year.

(2) The amount of the net consideration, which has been received by the company for issue of shares to the assessee, to the extent it is not utilised by the company for the purchase of the new asset before the due date of furnishing of the return of income by the assessee under section 139, shall be deposited by the company, before the said due date in an account in any such bank or institution as may be specified and shall be utilised in accordance with any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and the return furnished by the assessee shall be accompanied by proof of such deposit having been made.

(3) For the purposes of sub-section (1), the amount, if any, already utilised by the company for the purchase of the new asset together with the amount deposited under sub-section (2) shall be deemed to be the cost of the new asset:

PROVIDED that if the amount so deposited is not utilised, wholly or partly, for the purchase of the new asset within the period specified in sub-section (1), then,-

(i) the amount by which -

(a) the amount of capital gain arising from the transfer of the residential property not charged under section 45 on the basis of the cost of the new asset as provided in sub-section (I) , exceeds—

(b) the amount that would not have been so charged had the amount actually utilised for the purchase of the new asset within the period specified in sub-section (1) been the cost of the new asset,

shall be charged under section 45 as income of the assessee for the previous year in which the period of one year from the date of the subscription in equity shares by the assessee expires; and

(ii) the company shall be entitled to withdraw such amount in accordance with the scheme.

(4) If the equity shares of the company or the new asset acquired by the company are sold or otherwise transferred within a period of five years from the date of their acquisition, the amount of capital gain arising from the transfer of the residential property not charged under section 45 as provided in sub-section (1) shall be deemed to be the income of the assessee chargeable under the head”Capita1 gains” of the previous year in which such equity shares or such new asset are sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of shares or of the new asset, in the hands of the assessee or the company, as the case may be:

^[2][PROVIDED that in case of a new asset, being computer or computer software, acquired by an eligible start-up referred to in the proviso to clause (d) of sub-section (6), the provisions of this sub-section shall have effect as if for the words “five years”, the words “three years” had been substituted].

(5) The provisions of this section shall not apply to any transfer of residential property made after the 31st day of March, 2017:

^[3][PROVIDED that in case of an investment in eligible start-up, the provisions of this sub-section shall have the effect as if for the figures, letters and words “31st day of March, 2017”, the figures, letters and words “31st day of March, ^[4][2022]had been substituted];

(6) For the purposes of this section,—

(a) “eligible assessee” means an individual or a Hindu undivided family;

(b) “eligible company” means a company which fulfils the following conditions, namely:-

 (i) it is a company incorporated in India during the period from the 1st day of April of the previous year relevant to the assessment year in which the capital gain arises to the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee;

(ii) it is engaged in the business of manufacture of an article or a thing ^[3][or in an eligible business];

(iii) it is a company in which the assessee has more than ^[5][twenty-five] per cent share capital or more than ^[5][twenty-five] per cent voting rights after the subscription in shares by the assessee; and

(iv) it is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 (27 of 2006) ^[3][or in an eligible business;]

^[3][(ba) “eligible start-up” and “eligible business” shall have the meanings respectively assigned to them in Explanation below sub-section (4) of section 80-IAC];

(c) “net consideration” shall have the meaning assigned to it in the Explanation to section 54F;

(d) “new asset” means new plant and machinery but does not Include -  

(i)   any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;

(ii) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house;

(iii) any office appliances including computers or computer software;

(iv) any vehicle; or

(v)  any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year:

^[3][PROVIDED that in the case of an eligible start-up, being a technology driven start-up so certified by the Inter-Ministerial Board of Certification notified by the Central Government in the Official Gazette, the new asset shall include computers or computer software.]

KEY NOTE

1. Inserted by the Finance Act, 2012, with effect from 01.04.2013.

2. Inserted by the Finance (No. 2) Act, 2019, with effect from 01.04.2020.

3. Inserted by the Finance Act, 2016, with effect from 01.04.2017.

4. Substituted for “2021” by the Finance Act, 2021, with effect from 01.04.2021.

5. Substituted for “fifty" the Finance (No. 2) Act, 2019, with effect from 01.04.2020.

Who can claim exemption?

Only Individual and Hindu Undivided Family (HUF) can claim exemption Which original asset is qualified for exemption? (i.e., Capital gains arising from transfer of)

The capital gain arises from the transfer of a long-term capital asset, being a residential property (house or a plot of land) owned by the eligible assessee, i.e., individual and HUF.

Assets to be acquired for exemption (i.e. Investment to be made)

The sale consideration shall be invested in the equity shares of a new start-up Small and Medium Enterprises (SME) company in the manufacturing company. In turn the company must utilize the amount for the purchase of new plant and machinery.

NOTE

1. With effect from 01.04.2017, eligible start-up is also included in definition of ‘eligible company’.

2. The eligible company should utilize the amount of subscription for purchase of new assets (i.e., plant and machinery except vehicle, office appliances, computer or computer software etc.). However, In the case of eligible start-up, the new asset shall include computers or computer software.

Conditions to be satisfied for availing tax relief in respect of capital gains by investment in shares of a company which is “Eligible start-up”

The exemption under section 54GB shall be allowed if the following conditions are satisfied :—

(i)     There should be a long-term gain from the transfer of a residential property (i.e., a house or  plot of land) owned by the eligible assessee (i.e., individual or Hindu undivided family).

(ii)    Such long-term capital gain should arise to an individual or HUF.

(iii)   Transfer of such long-term capital asset should be made on or before 31.03.2022

(iv)   The company should be engaged in the business of manufacture of an article or a thing.

(v)    The assessee will not be able to transfer the above shares for a period of 5 years.

(vi)   The above new plant and machinery acquired by the company cannot be sold for a period of 5 years.

(vii)  The amount of net consideration is used by the individual or HUF before the due date of furnishing of return of income under section 139(1), for subscription in equity shares in the Small and Medium Enterprises (SME) company in which he holds more than 25% share capital or more than 25% voting rights.

(viii) The amount of subscription as share capital is to be utilized by the Small or Medium Enterprises (SME) company for the purchase of new plant and machinery within a period of one year from the date of subscription in the equity shares by the assessee.     

(ix)   If the amount of net consideration subscribed as equity shares in the Small and Medium Enterprises (SME) company is not utilized by the Small and Medium Enterprises (SME) for the purchase of plant and machinery before the due date of filing of return by the individual or HUF, the utilized amount shall be deposited under the deposit scheme to be prescribed in this behalf.

(x)   Investment in eligible start-up which is LLP will not qualify for section 54GB relief.

 

Period during which exemption available

Residential properties transferred between 01.04.2012 and 31.03.2022 are eligible for exemption under section 54GB.

Time limit for acquiring the new assets

(a) Investment by the assessee - Before due date for furnishing of return under Section 139(1).

(b) Investment by the company - purchase new asset within 1 year from date of subscription in

equity shares by the assessee.

E.g.: In the aforesaid case, Mr. X is required to subscribe in the equity shares of an eligible

company within the due date of furnishing income tax return for the relevant assessment

year (i.e. 31.07.2024 assuming his accounts are not liable for audit). If Mr. X has subscribed

in equity capital of eligible company on 15/12/2023, then company should acquire new

asset within 1 year from 15.12.2023

Amount of exemption available under section 54GB

The amount of exemption available under section 54GB is as under :

 

Particulars	Amount of exemption
If entire net consideration is invested	Entire capital gain would be exempt
If the cost of new asset is less than net sale consideration of the transferred asset	Proportionate capital gain would be exempt in following manner - (investment in new asset * capital gain)/ net consideration.

 

“Net Consideration”

Full value of consideration (-) any expenditure exclusively incurred on account of transfer.

“New Asset” means

The term ‘new asset’ means new plant and machinery. However, the term ‘new asset’ does not include the following —

(i) The plant or machinery being installed in any office premises or any residential accommodation (including accommodation in guest house).

(ii) The plant or machinery which has been used prior by any other person within or outside India.

(iii) Any type of vehicle.

(iv) Any type of office appliances (including computer or computer software).

(v) The plant or machinery where whole of the actual cost is allowed as deduction in computing the income chargeable under the head ‘Profit and gains of business or profession’ of any previous year.

 

Eligible company

The company that satisfies the following conditions is termed as ‘eligible company’-

(i)  The company should have been incorporated in India.

(ii) The company should have been incorporated during the previous year in which the capital gain has arisen to the subsequent financial year up to the due date of furnishing of the income-tax return.

E.g.: If Mr. X has transferred his residential property as on 10.08.2023, then company should be incorporated between 01.04.2023 and due date of furnishing return under section 139(1) by Mr. X (i.e. 31.07.2024 assuming his accounts are not liable for audit).

(iii) The company is engaged in the business of manufacturing of an article or a thing or in an eligible business; and

(iv) The company in which the assessee has more than 25% (50% upto 31.03.2019) share capital or more than 25% voting rights after the subscription in equity shares by the assessee.

(v) The company should qualify to be a medium or small enterprise under the Micro, Small and Medium Enterprises Act, 2006 or the same is an eligible start-up.

 

Enterprises	Investment in Plant & Machinery
Micro Enterprises	Does not exceed Rs. 25,00,000
Small Enterprises	More than Rs. 25,00,000 but does not exceed Rs. 5,00,00,000
Medium Enterprises	More than Rs. 5,00,00,000 but does not exceed Rs. 10,00,00,000

 

Points to Remember while Investing in SMEs under Section 54GB

Here are some points that an individual must keep in mind while investing in SMEs under Section 54GB:

(a)          The investment must be made only in equity shares of eligible SMEs.

(b)         The SME must utilize the funds raised from the sale of equity shares for the purpose of expanding its business.

(c)          The investment in eligible SMEs must be made within six months from the date of sale of the residential property.

(d)         The equity shares of the SMEs must be held for a minimum period of five years to be eligible for tax exemption under Section 54GB.

(e)          Investment limit : The maximum amount that can be invested in eligible SMEs is Rs. 50 lakh. Any investment made above this limit will not be eligible for tax exemption under Section 54GB.

 

Eligible Business means [Explanation below section 80-IAC(4)]

“Eligible business” means a business carried out by an eligible start-up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation;

 

What is an eligible start up? [Explanation below section 80-IAC(4)]

A company or a LLP which satisfied the following conditions and is engaged in above mentioned eligible business

(a)         It is incorporated on or after 01.04.2016 but before 01.04.2024

(b)         Total turnover does not exceed 100 crore in the previous year

(c)         It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified by the Central Government.

 Capital Gain Deposit Account Scheme, 1988

In order to claim exemption under section 54GB, the claimant is required to re-invest the amount within a period of one year from the date of transfer. However, if the amount is not invested within the due date of filing of the income-tax return, then, the claimant is required to deposit the amount into the ‘Capital Gain Deposit Account Scheme’, 1988.

The amount so deposited into the account needs to be utilized for subscription in equity shares within the prescribed time. However, if the amount is not utilized within the given period, the unutilized amount would be taxable in the previous year in which the time period expires.

Withdrawal of exemption if equity shares in company or new asset acquired by company is sold or transferred within a period of 5 years (or 3 years for computer and software) from date of acquisition

If the equity shares of the company or the new asset acquired by the company are sold or otherwise transferred within a period of five years (or 3 years for computer and software) from the date of their acquisition, the amount of capital gain arising from the transfer of the residential property not charged as provided under section 45(1) shall be deemed to be the income of the assessee chargeable under the head “capital gains” of the previous year in which such equity shares or such new asset are sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of shares or the new asset, in the hands of the assessee or the company, as the case may be.

 

 

 

Income falling under the head salaries – If payable by the Government to a citizen of India for service outside India [Section 9(1)(iii)]

Salary paid to an Indian citizen by the Government of India for rendering services outside India shall deemed to accrue/arise in India, irrespective of residency of the person.

Text of Section 9(1)(iii)

Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or arise in India :—

       (i)  ………..

      (ii) ………..

      (iii) income chargeable under the head “Salaries” payable by the Government to a citizen of India for service outside India;

Indian citizens, who are employed by the Government abroad, are chargeable to tax in India in respect of their remuneration earned abroad. Though the income is accrued and received outside India, it is, by virtue of the provisions of section 9(1)(iii), deemed to accrue in India, the place of actual accrual of the remuneration being immaterial for this purpose. The residential status of the employee shall not affect the taxability of the remuneration in India. In other words, remuneration for services rendered outside India by an Indian citizen, who is in the employment of Government of India, shall be chargeable to tax in India irrespective of the fact that the employee has attained the status of a non-resident. This is an exception to the general provision that the remuneration received abroad by a non-resident for services rendered out of India is not taxable in India.

Only salary income covered under section 9(1)(iii)

It is pertinent to note that by virtue of section 9(1)(iii) any income received by a Government servant chargeable under the head “Salaries” is deemed to accrue in India. No income other than such income is deemed to accrue in India.

Remuneration received by an Indian citizen, who is ordinarily resident in India or who is a non-resident but is in the employment of Government of India, for services rendered outside India is taxable in India in his hands under the head “Salaries” and the provisions of sections 15, 16 and 17 and other relevant sections of the Act will apply.

Allowances and perquisites of Government servants - Exempt under section 10(7)

Allowances or perquisites paid or allowed as such outside India by the Government to Indian citizens for rendering service outside India are, by virtue of section 10(7), exempt from income of the recipient. The word “allowances” would cover all allowances including dearness allowance. It is pertinent to note that section 10(7) grants exemption to Government servants only. It, therefore, follows that only basic salary will be liable to tax in India and any allowances or perquisites paid or allowed outside India for rendering service outside India will be exempt from tax in India. In other words, any allowance or perquisite paid allowed in India during the period of his service outside India would not fall within the purview of section 10(7) and would not, therefore, be exempt from Indian tax.

For instance, a Government employee serving abroad may retain government residential accommodation in India for the use of his family. The value of perquisite in respect of the residential accommodation occupied by his family in India will be taxable in his hands in India.

Definition of the word “Government” under the General Clauses Act, 1897

It is pertinent to point out that the word “Government” occurring in section 9(1)(iii) is not defined in the Income-tax Act or Rules made thereunder. It is, however, defined in section 3(23) of the General Clauses Act, according to which it includes “both the Central Government and any State Government”. It, therefore, refers to Indian Government and not to the Government of a foreign country.

Thus, if a Government employee, who is an Indian citizen, is sent abroad on deputation to the Government of a foreign country and is paid remuneration by that Government, his remuneration will not be deemed to accrue in India under section 9(1)(iii) since the income chargeable under the head "Salaries" is not paid by the Indian Government. His salary income would, however, be taxable in India, if he remains an ordinarily resident in India by virtue of any clause of section 6.

Similarly, the word “Government” occurring in section 10(7) refers to Indian Government. Any allowances or perquisites paid or allowed as such outside India by the Government of foreign country to a citizen of India for rendering service outside India will not, therefore, qualify for the exemption allowed in that section.

Remuneration due to non-residents directly remitted to India is taxable

If an employee, who is sent abroad by non-Government employer and who renders services outside India, becomes a non-resident, he can be held liable to tax in respect of the remuneration earned by him for services rendered outside India, if the remuneration is paid to him or his family members in India or it is credited to his bank account in India. It is, therefore, advised that any amount, which is earned by such an employee for his services outside India, should be actually received by him outside India so that the amount of such remuneration is not subjected to Indian income-tax. In case such an employee desires to remit the money to his bank account in India, he should first receive the remuneration outside India and then remit the same to India.

Remuneration - Meaning of -

The word “remuneration” is not defined anywhere in the Income-tax Act or in the Rules made thereunder. It has, therefore, to be understood in the general sense. “Remuneration” may cover salary, allowances, bonus and the perquisites as well. It may be allowed in cash or in kind.

Frequently Asked Questions (FAQ)

Q. - I am an Indian citizen working in an Indian consulate in USA and receive salary from the Indian government, is the amount taxable in India?

Ans. : Yes, as per section 9(1)(iii) of the Income Tax Act, salary payable by Indian government to Indian citizen for services rendered outside India are deemed to accrue or arise in India and hence taxable in India.

However, allowances and perquisites provided to such persons by the government of India for rendering services outside India are exempt under section 10(7)

Letter E/275/118A/77-II(B), Dated 07.11.1978

Subject :   Section 9 of the income - tax act, 1961 - income - deemed to accrue or arise in India - Application of section 9(1)(iii) to Sikkim

Though the Indian Income-tax Act, 1961 has not yet been extended to Sikkim by any notification under Article 371F(n) of the Constitution and for the purpose of Indian Income-tax Act, 1961, Sikkim will have to be treated as outside India under section9(1)(iii) of the Indian Income-tax Act, 1961.

CBDT Circular No. 4 [F. No. 73A/2/69-IT(A-II)], dated 20.02.1969

Subject : Pensions received from abroad by pensioners residing in India - Taxability under clause (iii) of sub-section (1)

1. Under section 9(1)(iii), pension accruing abroad is taxable in India only if it is earned in India.  Pensions received in India from abroad by pensioners residing in this country, for past services rendered in the foreign countries, will be income accruing to the pensioners abroad, and will not, therefore, be liable to tax in India on the basis of accrual. These pensions will also not be liable to tax in India on receipt basis, if they are drawn and received abroad in the first instance, and thereafter remitted or brought to India.

2. It is only in cases where in pursuance of a definite agreement with the employer or former employer, the pension is received directly by the pensioner in India that the pension would become taxable in India on receipt basis.

3. While the pension earned and received abroad will not be chargeable to tax in India if the residential status of the pensioner is either “non-resident” or “resident but not ordinarily resident”, it will be so chargeable if the residential status is “resident and ordinarily resident”. The aforesaid status of "ordinarily resident" cannot, however, be acquired by a person unless he has been resident in India in at least nine out of the preceding ten years.

A resident of Sikkim is non-resident for purpose of Act. Where petitioner was Advocate General of Sikkim and was ‘non resident’ in India for income tax purposes during relevant assessment year, retainer and fees received by him from Government of Sikkim could not be assessed under section 9(1)(iii)

The petitioner was a senior advocate of Calcutta High Court. He was appointed as Advocate-General of Sikkim and joined the post in March 1980. Soon thereafter, he shifted his residence to Gangtok, Sikkim. In the Income-tax returns filed for the assessment years 1981-82 and 1982-83, the petitioner claimed exemption from tax in respect of his income earned in Sikkim and the Income-tax authorities allowed the claim. The petitioner resigned from the post of Advocate-General of Sikkim with effect from 01.04.1983 and came back to Calcutta. For the assessment year 1983-84 also he described his status as ‘resident of Sikkim’ and claimed exemption of tax in respect of income earned by him in Sikkim during the period from 01.04.1982 to 31.03.1983. The ITO disallowed the petitioner’s claim. On writ:

The petitioner's retainer could not be taxed under section 9(1)(iii) for the following reasons.:

(a) The Income-tax Act, 1961, having not been extended to Sikkim, the Government of Sikkim is not governed by the provisions of the said Act and the word ‘Government’ in section 9(1)(iii) cannot include the Government of Sikkim.

(b) Tax was deducted by the Sikkim Government at source from the retainer of the petitioner under the provisions of the Sikkim Income-tax Manual which is a law in force in Sikkim under article 371F(k) of the Constitution and as such is an Indian law on taxation on income. To tax his retainer again under section 9(1)(iii), by another Indian law will result in double taxation of the same income by two Indian laws on taxation on income.

(c) All residents of Sikkim including Government servants pay income-tax under the Sikkim Income-tax Manual and not under the Income-tax Act, 1961. The Sikkim Government servants suffer deduction from their salaries at source at Sikkim Government income-tax rates and they do not pay further tax in addition at Central rates on the same income. That being the position, to tax the petitioner again under section 9(1)(iii) would be discriminatory and violative of article 14 of the Constitution. All Government servants of Sikkim are citizens of India and the position of the petitioner was in no way different.

The result of the above discussion was :

(a)  the finding of respondent No. 1, that the petitioner was a resident during the financial year 01.04.1982, to 31.03.1983, was perverse,

(b)  the petitioner was a non-resident during the said financial year,

(c)   Retainer and fees arose and was earned in Sikkim and the finding that part of the same arose outside Sikkim was perverse,

(d)   the petitioner was entitled to exemption of Rs. 1,00,000 as claimed by him and

(e)   charging of interest under section 217 was illegal.

Therefore, the respondent had no jurisdiction to assess or demand tax on Rs. 1,00,000 earned by the petitioner in Sikkim as he was a resident of Sikkim, i.e., a non-resident, during the relevant period 01.04.1982, to 31.03.1983.

In the result, the instant application succeeded. The impugned order of assessment and notice of demand passed by the ITO, were quashed/set aside. The case was decided in favour of the assessee. [In favour of assessee] (Related Assessment year : 1983-84) – [D.P. Choudhury v. Union of India (1990) 186 ITR 329 (Cal.)]

Assessee a citizen of india was a judge of Sikkim High Court - within four years preceding relevant year, he did not stay outside Sikkim for any period or periods amounting in all to 90 days or more-during relevant year, assessee received salary as a judge of Sikkim High Court - assessee, though a citizen of India, should be taken as non-resident for purposes of act - On facts under head ‘residence’ salary drawn by assessee was chargeable to tax as income deemed to accrue in India within meaning of section 9(1)(iii)

The assessee was the Judge of the Sikkim High Court during the previous year relevant to the assessment year 1980-81. He did not stay outside Sikkim for any period or periods amounting in all to 90 days or more in any year since April 1977. In his return he claimed his status as ‘non resident’ and contended that his income from salary as a Judge of the Sikkim High Court was not taxable. His objection concurrently failed before the ITO and in appeal before the AAC. On second appeal:

Held : Sikkim, no doubt, was admitted into the Indian Union as the 22nd State in the First Schedule of the Constitution but thereby all the laws applicable to the Indian territory were not automatically extended to Sikkim. The word ‘India’ used in the Act cannot be construed to comprise the State of Sikkim therein as there was no such extension of the Act to the State of Sikkim. The inclusion of the whole of the State of Sikkim as backward area in the Eighth Schedule of the Act does not make the Act applicable thereto, since any part of land to which the Act is not applicable can be included as a backward area for the obvious purpose of development of that area. Therefore, the assessee, though a citizen of India, had to be taken to be a non-resident for the purpose of the Act, since he did not stay outside Sikkim for any period or periods amounting in all to 90 days or more in any year since April, 1977.

It cannot be said that the word ‘salary’ appearing in article 221 and in the Second Schedule of the Constitution is used in the popular sense and that the remuneration paid to the Judge of the High Court is not salary. The general tests to be applied for finding out if there is an employer and employee relationship hold good in the case of employment of a Judge of the High Court also. The Constitution mentions qualifications of a person to be appointed as Judge of the High Court and the power to appoint has been invested with the President. The terms and conditions of service, namely, his tenure of appointment, salary, pension and other benefits have also been defined. The Constitution has laid down rules for discharge of his duties and so also a procedure has been laid down for removal from his office. Thus, he is obviously an employee of the State and in no sense of the term he can claim to be self-employed without exercise of any control over his work. Because of the nature of his work he has been made independent and supreme within the sphere of his duties inasmuch as that he is paid out of the consolidated fund without any voting but at the same time he has to take an oath that he shall uphold the Constitution and the laws. A Judge of the High Court is a high dignitary and a constitutional functionary and, therefore, the word ‘servant’ is seldom used for him but thereby the reality cannot be denied.

Thus, the impugned salary drawn by the assessee, in the instant case, was income chargeable under the head ‘Salaries’ payable by the Government to the citizen of India for service outside India and, as such, the said income was deemed to accrue to him in India within the meaning of section9. Therefore, the AAC was justified in taxing the impugned salary. – [Justice Anandamoy Bhattacharjee v. ITO (1986) 18 ITD 181 (Cal.)]

 

Payment of Admitted Tax Due before Filing an Appeal before the Joint Commissioner (Appeals) or the Commissioner (Appeals) [Section 249(4)]

Section 249(4) provides that appeal shall not be admitted unless—

(a) where a return of income has been filed by the assessee:

Ø the assessee has paid the tax due on the income returned by him on or before the filing of appeal [Mandatory]

(b) where no return of income has been filed by the assessee:

Ø the assessee has paid an amount equal to the amount of advance tax which was payable by him.

In case assessee has not filed its return, the Joint Commissioner (Appeals) or the Commissioner (Appeals) on an application made by the assessee, may, for any good or sufficient reason to be recorded in writing, exempt him from payment of tax.

 

Text of Section 249(4)

^[1][(4) No appeal under this Chapter shall be admitted unless at the time of filing of the appeal, —

(a) where a return has been filed by the assessee, the assessee has paid the tax due on the income returned by him; or

(b) where no return has been filed by the assessee, the assessee has paid an amount equal to the amount of advance tax which was payable by him:

PROVIDED that, ^[2][in a case falling under clause (b) and] on an application made by the appellant in this behalf, the ^[3][***]  ^[4][Joint Commissioner (Appeals) or the] Commissioner (Appeals) may, for any good and sufficient reason to be recorded in writing, exempt him from the operation of the provisions of ^[5][that clause.”]]

 

KEY NOTE

1.   Inserted by the Taxation Laws (Amendment) Act, 1975, with effect from 01.10.1975.

2.   Inserted by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.04.1989.

3.   Words “Deputy Commissioner (Appeals) or, as the case may be, the” omitted by the Finance (No. 2) Act, 1998, with effect from 01.10.1998. Earlier “Deputy Commissioner (Appeals)” was substituted for “Appellate Assistant Commissioner” by the Direct Tax Laws (Amendment) Act, 1987, with effect from 01.04.1988 and “or, as the case may be, the” was inserted by the Finance (No. 2) Act, 1977, with effect from 10.07.1978.

4.   Inserted by the Finance Act, 2023, with effect from 01.04.2023.

5.   Substituted for “this sub-section” by the Direct Tax Laws (Amendment) Act, 1989, with effect from 01.04.1989.

 

What is contemplated by clause (a) of sub-section (4) of section 249 [Section 249(4)(a)]

What is contemplated by clause (a) of sub-section (4) of section 249 is that when there is an undisputed liability, the appeal filed by the assessee in respect of the disputed liability cannot be admitted unless the assessee pays the admitted liability. The object of clause (a) of sub-section (4) of section 249 is not to entertain the appeal where the assessee fails to pay the undisputed tax liability.

Joint Commissioner (Appeals) or the Commissioner (Appeals) empowered to grant exemption from the payment of tax equal to the amount of advance tax [Proviso to Section 249(4)]

On going through the prescription of proviso to sub-section (4) of section 249 it transpires that the Joint Commissioner (Appeals) or the Commissioner (Appeals) has been empowered to grant exemption from the payment of tax equal to the amount of advance tax which was payable by the assessee in a situation where no return is filed by the assessee. It implies that where the assessee did not file any return for the relevant year and still the assessment was made, the assessee can file first appeal even without the payment of tax provided he satisfies the Joint Commissioner (Appeals) or the Commissioner (Appeals) for the reasons of non-payment of tax. The power of the first appellate authority as per the directive of proviso is not to accept the delayed payment of such tax, but to exempt the payment of tax altogether. The operation of proviso is restricted only to clause (b ) and is not applicable to clause (a) which deals with a situation in which return was filed by the assessee. Thus in such a situation where the return was originally filed by the assessee, the Joint Commissioner (Appeals) or the Commissioner (Appeals) has no power to grant exemption from the making of payment of tax due on the income returned. The requirement of payment of tax in a case covered under clause (a) is to be examined at the time of admission of first appeal.

 

Undisputed tax to be paid before filing appeal [Section 249(4)]

Before filing an appeal, undisputed tax, if any, remaining unpaid should first be paid. An appeal is not as a matter of fact admissible if any tax remains unpaid.

Disqualification to file an appeal

(a) where a return has been filed by the assessee, the assessee has not paid the tax due on the income returned by him;

(b) where no return has been filed by the assessee, the assessee has not paid an amount equal to the amount of advance tax which was payable by him.

 

As per section 249(4) unless and until, assessee has paid income tax due on income returned by him, no appeal under Chapter XX will be admitted and statute does not give any discretion to appellate authority to entertain an appeal or to extend time for paying self assessment tax, except in respect of cases falling under section 249(4)(b) in terms of proviso under said section

The appeal filed by the assessee against certain addition was not considered on merits and was dismissed by the Commissioner (Appeals) on ground that assessee had not paid self assessment tax which assessee had admitted before appellate authority.

On appeal, the assessee submitted that Commissioner (Appeals) ought to have granted time to it to pay self assessment tax. However, when appeal was heard, additional grounds were raised by assessee regarding wrong computation of income. The Tribunal upon considering grounds of appeal raised by assessee at first instance as well as additional grounds, rejected same by holding that self assessment tax was admittedly not paid and there was no satisfactory evidence to substantiate assessee's plea that assessee had wrongly computed income. On appeal.

Held : Section 249(4) provides that, unless and until, assessee has paid income tax due on income returned by him, no appeal under Chapter XX will be admitted and the Statute does not give any discretion to appellate authority to entertain an appeal nor extend time for paying self assessment tax, except in respect of cases falling under clause (b) of section 249(4) in terms of proviso under the said section.

Though such a ground was raised in the appeal memorandum filed before the Tribunal, the assessee appears to have been more interested in canvassing the additional ground with regard to offering a sum of Rs. 82.37 crores relating to inbuilt revenue which according to the assessee was an inadvertent income. The Tribunal had rightly held that there was no satisfactory evidence placed before it to substantiate assessee's plea that they wrongly computed admitted income. Thus, no substantial question of law owner for consideration. [In favour of revenue] (Related Assessment year : 2012-13) – [Pesco Beam Environmental Solutions (P) Ltd. v. DCIT (2020) 275 Taxman 211 : 119 taxmann.com 123 (Mad.)]

 

In terms of section 249(4)(a), stipulation as to payment of tax ante filing of first appeal is only directory and not mandatory and, therefore, where appeal is filed without payment of tax but subsequently required amount of tax is paid, appeal shall be admitted on making payment of tax and taken up for hearing on merits

The Karnataka High Court in the case of CIT v. K. Satish Kumar Singh (2012) 209 Taxman 502 : 19 taxmann.com 154 (Karn.) and in the case of PCIT v. Abdul Zahid M (2017) 394 ITR 727 : 88 taxmann.com 592 (Karn.) took the view that if admitted tax on returned income is paid then the appeal has to be admitted for adjudication by the Commissioner (Appeals) on merits. The Hon’ble Mumbai ITAT in the case of Bhumiraj Constructions v. Addl. CIT (2011) 131 ITD 406 : 11 taxmann.com 333 (ITAT Mumbai) had an occasion to deal with a case where an appeal by the Assessee was dismissed for non-payment of tax due on the income declared in the return of income. The Tribunal firstly observed that there is a distinction between a mandatory and directory provision. If the non-compliance with the requirement of law exposes the assessee to the penal provision, then it is mandatory, but if no penal consequences follow on non-fulfilment of the requirement, then usually it is a directory provision. Omission to comply with a mandatory requirement renders the action void, whereas omission to do the directory requirement makes it only defective or irregular. On the removal of such defect, the irregularity stands removed and the status of validity is attached.

The Tribunal examined the objective behind section 249(4) and observed that the same is to ensure the payment of tax on income returned before the admission of appeal. If such payment after the filing of appeal but before it is taken up for disposal validates the defective appeal, then there is no reason as to why the doors of justice be closed on a poor assessee who could manage to make the payment of tax at a later date. The stipulation as to the payment of tax ante the filing of first appeal is only directory and not mandatory. Whereas the payment of such tax is mandatory but the requirement of paying such tax before filing appeal is only directory.

When the defect in the appeal, being the non-payment of such tax, is removed, the earlier defective appeal becomes valid. It implies that all the consequences which follow on the removal of defect are that the validity is attached to the appeal from the date when it was originally filed and not when the defect is removed. The Tribunal ultimately held that if tax due on income returned is paid even after disposal of the appeal by the Commissioner (Appeals), if such payment is made the defect in the appeal due to non-compliance of a directory requirement of paying such tax before the filing of the appeal, stood removed. Ex-consequential the appeal should have been revived by the first appellate authority.

In the present case, the taxes due on returned income is claimed to has been paid. Therefore the appeal by the Assessee against the order of assessment should be admitted and adjudicated by the Commissioner (Appeals) on merits. In the decision referred to above, it has been held that if the admitted taxes are paid at a later point of time, then the appeal of the assessee should be considered as properly instituted and should be heard and decided by the Commissioner (Appeals) on merits. In view of aforesaid, the order of the Commissioner (Appeals) is set aside and the Commissioner (Appeals) is directed to decide the appeal on merits, subject to verification of payment of taxes (excluding interest) due on the returned income. In the result, the appeal by the assessee is allowed for statistical purposes. [In favour of assessee/Matter remanded] (Related Assessment year : 2006-07) - [Annapoorneshwari Investment v. DCIT(C) [2019] 177 ITD 717 : 107 taxmann.com 417 (ITAT Bangalore)]

Admitted tax as per return of income – Requirement of paying admitted tax before filing appeal is directory – When defect is removed, earlier defective appeal becomes valid. Accordingly, the matter was remanded to Commissioner (Appeals)

For relevant year, Assessing Officer completed assessment under section 143(3) making certain additions to assessee’s income. Assessee filed appeal before Commissioner (Appeals). Commissioner (Appeals) noticed that assessee had not paid taxes on returned income and therefore in view of provisions of section 249(4)(a), appeal filed by assessee was dismissed in limine as unadmitted. In terms of sub-section (4) of section 249, payment of tax is mandatory but requirement of paying such tax before filing appeal is only directory. Tribunal held that payment of admitted tax as per return of income before filing of an appeal is directory, therefore, when defect in appeal, being non-payment of such tax, is removed, earlier defective appeal becomes valid. Accordingly, the matter was remanded to Commissioner (Appeals) for disposal of appeal on merits, subject to verification of payment of taxes due by assessee on returned income. [In favour of assessee/Matter remanded] (Related Assessment Year : 2013-14) – [Sushila Devi Malu (Smt.) v. ITO (2019) 174 ITD 627 (ITAT Bangalore)]

 

Revised return filed not in compliance with requirements of section 139(5) was non-est and same could not constitute a return contemplated in section 249(4)(a)

The assessee was an individual in whose case a search action under section 132(1) was carried out. For the assessment year under consideration, assessee had not filed its regular return under section 139(1) and it was only after a notice under section 153A was issued, assessee filed return of income declaring the total income at Rs. 1.55 crores. Subsequently, the assessee filed a revised return declaring an income of Rs. 6.32 crores. In the assessment finalized under section 143(3) read with section 153A the Assessing Officer determind the total income at Rs. 7.23 crores after making certain additions/disallowances on account of low withdrawals, unexplained credits and rent from property, etc.

The assessee challenged the additions in appeal before the Commissioner (Appeals). The Commissioner (Appeals) referred to the provisions of section249(4), which prescribed that no appeal would be admitted unless at the time of filing of appeal, assessee had paid the tax due on the income returned by him. The Commissioner (Appeals) referred to clause (a) of section 249(4) of the Act and noted that the assessee had not paid the tax on the income declared in the revised return and, therefore, the appeal was dismissed as unadmitted. On Second appeal:

Where assessee filed revised return not in compliance with requirements of section 139(5), same was non-est and could not constitute a return contemplated in section 249(4)(a). [In favour of assessee] (Related Assessment years : 2008-09 and 2009-10) – [Mohammed Farooque Sarang v. DCIT(C) [2017] 164 ITD 573 : 81 taxmann.com 374 (ITAT Mumbai)]

The revenue pointed out that at the time of filing of appeal before the Commissioner (Appeals), admittedly the tax on the income returned was not paid. Under these circumstances, the rigors of section249(4)(a) clearly come into operation and the appeal before the Commissioner (Appeals) deserved to be treated as unadmitted. It is also axiomatic that so far as the situation contemplated in clause (a) of section249(4) of the Act is concerned, the Commissioner (Appeals) is not vested with any power to waive payment of the admitted tax and entertain the appeal in contrast to the situation contemplated in clause (b) to section 249(4) of the Act. However, the defense put up by the assessee is that the non-payment of admitted tax on returned income is a curable defect and once such a defect has been cured, there is enough justification for the appeal being admitted by the Commissioner (Appeals).

The co-ordinate Bench in the case of Smt. Banu Begum, v. DCIT (2012) 22 taxmann.com 235 (ITAT Hyderabad) has observed that non-payment of admitted tax is a defect which can be cured by payment of tax. In fact, the Karnataka High Court in the case of CIT v. K. Satish Kumar Singh (2012) 209 Taxman 502 : 19 taxmann.com 154 (Karn.) opined that even after the dismissal of appeal by the Commissioner (Appeals) for non-payment of admitted tax, if assessee pays the admitted tax, even then the Commissioner (Appeals) may recall the order dismissing the appeal and consider the appeal on its merits. In view of the aforesaid proposition, in the present case too, since the assessee has claimed that it has paid tax on the returned income before passing of order by the Commissioner (Appeals), it will be in the fitness of things that the matter is remitted back to the file of Commissioner (Appeals) to be considered afresh on merits. In the result, assessee's appeal is allowed for statistical purposes. – [Mohammed Farooque Sarang v. DCIT(C) [2017] 164 ITD 573 : 81 taxmann.com 374 (ITAT Mumbai)]

Upholds seized cash with Revenue as tax payment for Commissioner (Appeals) admission under section 249(4) - Commissioner (Appeals) denied hearing of appeal on plea that assessee had failed to pay due tax on returned income and had defaulted in terms of provisions of section 249(4)(a), since amount that had been seized by revenue from assessee was far in excess of amount of tax payable on returned income, assessee could not have been denied hearing

Authorised officer conducted a search under section 132 upon assessee and seized an amount of Rs. 4.60 lakhs from his possession. Thereafter assessee filed return of income showing due tax payable on returned income as Rs. 1.61 lakhs. He stated that amount seized during search at Rs. 4.60 lakhs should be treated as paid. Assessing Officer processed under section 143(1) return of income filed by assessee and issued intimation creating a demand of Rs. 2.15 lakhs. He did not adjust amount of tax payable on returned income against amount that had been seized from assessee. Commissioner (Appeals) denied hearing of appeal on plea that assessee had failed to pay due tax on returned income and had defaulted in terms of provisions of section 249(4)(a). In instant case, amount of Rs. 4.60 lakh which was available with revenue was far in excess of amount of tax payable in terms of returned income. Assessee had duly complied with requirements of section 249(4)(a) and he could not have been denied hearing. [In favour of assessee] (Related Assessment year : 1996-97) – [CIT v. Pramod Kumar Dang (2014) 361 ITR 137 : 265 CTR 1 : 42 taxmann.com 301 : [TS-58-HC-2014(DEL)] (Del.)]

 

Defect arising due to non-compliance of section 249(4) is a curable one

Commissioner (Appeals) having noticed that assessee had not paid admitted tax, invoked provisions of sub-section (4) of section 249 and dismissed appeal in limine as non-maintainable. Later on, assessee filed a petition before Commissioner (Appeals) informing that admitted tax for block period had been paid and prayed for restoration of appeal and for disposing of same on merits. Commissioner (Appeals) rejected petition holding that there is no provision under Act to restore appeal which was dismissed for violation of provisions of section 249(4). Defect arising due to non-compliance of section 249(4) is a curable one. Since assessee was not having sufficient funds at relevant time for compliance of section 249(4), there existed sufficient reasons for not filing a valid appeal before Commissioner (Appeals) and, therefore, matter required to be restored for adjudication on merits. [In favour of assessee] (Block period 1996-97 to 2002-03) – [T. Kishan v. ACIT(C) (2013) 56 SOT 114 : (2012) 23 taxmann.com 383 (ITAT Hyderabad)]

 

If the appeal is filed without the payment of tax on returned income but subsequently the required amount of tax is paid, the appeal shall be admitted on payment of tax and appeal has to be decided on merit

Objective behind section 249(4) is to ensure payment of tax on income returned before admission of appeal and if such payment after filing of appeal but before it is taken up for disposal validates defective appeal, then there is no reason as to why doors of justice be closed on a poor assessee who, could manage to make payment of tax at a later date. Whereas payment of such tax is mandatory but requirement of paying such tax before filing appeal is only directory. When defect in appeal, being non-payment of such tax, is removed, earlier defective appeal becomes valid. Once one calls an appeal as valid, it implicit that it is not time barred and it implies that all consequences which follow on removal of defect are that validity is attached to appeal from date when it was originally filed and not when defect is removed. (Related Assessment year : 2006-07) - [Bhumiraj Constructions v. Addl. CIT (2011) 135 TTJ 357 : 131 ITD 406 : 49 DTR 195 : 11 taxmann.com 333 (ITAT Mumbai)]

Each heading in Chapter XX deals with a different subject-matter and one cannot read words in Chapter XX-A into words used in Chapter XX-B - Therefore, provision of section 249(4)(a), which insists on assessee satisfying a condition of paying admitted tax as condition precedent to his filing of appeal, cannot be read into section 253(1)(b) as it stood prior to 01.10.1998

Chapter XX deals with ‘Appeals and revisions’. Chapter XX is divided into headings ‘A’ to ‘F’. Section 246 enumerates a list of orders of the Assessing Officer against which appeals(s) would lie. In that list of orders, an appeal to the Tribunal under section 253(1) is not mentioned. This is a very important indicia to show that each heading in Chapter XX deals with a different subject-matter and one cannot read the words in Chapter XX-A into the words used in Chapter XX-B. Chapter XX-A deals with appeals to the Deputy Commissioner and the Commissioner (Appeals), whereas Chapter XX-B deals with appeals to the Tribunal. Similarly, reference to the High Court lies under Chapter XX-C. Thus, each heading is a standalone item and, therefore, one cannot read the provision of section 249(4)(a ) into section 253(1)(b). If the argument of the department was to be accepted, then, in that event, no appeal or reference could lie even to the High Court without complying with the provisions of section 249(4)(a). This cannot be the scheme of Chapter XX. Section 253(1)(b) refers to an assessee filing an appeal to the Tribunal against an order passed by an Assessing Officer under section 158BC(c). Clause (b) came to be inserted into section 253(1) by the Finance Act, 1995 and that too with effect from 01.07.1995. The very concept of the block assessment came to be inserted in the Act vide the Finance Act, 1995, with effect from 01.07.1995, whereas the words ‘this Chapter’ in section 249(4) came to be inserted vide Taxation Laws (Amendment) Act, 1975, with effect from 01.10.1975. This is one more reason to confine the expression ‘this Chapter’ in section 249(4) to Chapter XX-A without it being extended to section 253(1)(b) which is there in Chapter XX-B. Further, under the scheme of Chapter XX, no appeal under section 249(4)(a) in Chapter XX-A was admissible without the assessee having paid the admitted tax due on the income returned by him. Once section 249(4)(a) is treated as a mandatory condition for filing an appeal before the Commissioner (Appeals) and once that condition stands satisfied at the time of filing an appeal to the Commissioner (Appeals), then there is no necessity for the assessee to once again pay the admitted tax due as a condition precedent to his filing the appeal before the Appellate Tribunal under section 253(1)(b). Lastly, one must keep in mind the principle that the doctrine of incorporation cannot be invoked by implication. A provision which insists on the assessee satisfying a condition of paying the admitted tax as a condition precedent to his filing of the appeal under section 253(1)(b) is a disenabling provision. Such disenabling provisions must be clearly spelt out by the Legislature while enacting the Statute. The Courts have to be careful in reading into the Act such disenabling provisions, as that would tantamount to judicial legislation which the Courts must eschew. It is for the Parliament to specifically say that no appeal shall be filed or admitted or would be maintainable without the assessee(s) paying the admitted tax due. That has been done only in the case of an appeal under section 249(4)(a). One cannot read such a disenabling provision into section 253(1)(b). Therefore, there was no merit in the revenue’s appeal and the same was to be dismissed. [In favour of assessee] (Block period 1986-87 to 14.09.1995) –[CIT, Indore v. Pawan Kumar Laddha (2010) 324 ITR 324 : 231 CTR 219 : 190 Taxman 169 (SC)]

“Scope of Tax” -  Expression ‘Tax’ does not include interest for purpose of section 249(4)

On the literal reading of section 249(4), the language used by the legislature is has paid tax dues. As per the definition in section 2(43), tax does not include interest which is independently referred to in section 2(28A). - When the legislature itself has used two different expressions and defined them separately, then whilst considering the language of a section, the court is bound to look at the definitions in the legislation for the purpose of interpreting and construing the expressions and words under the Act. - The object being to avoid conflict and have a harmonious interpretation, unless the context otherwise requires. (4). Therefore, the expression “tax” does not include interest for the purpose of section 249(4). - [CIT v. Manoj Kumar Beriwal (2009) 316 ITR 218 : 217 CTR 407 (Bom.)]

Tax includes only “Admitted/Undisputed” Tax, Section 249(4) not applicable when liability to pay tax was disputed

Where petitioner assessee disputed liability on ground that he could not have been assessed as HUF as on date of filing return and on date of assessment there was no HUF in existence, right guaranteed to petitioner to prefer an appeal could not be taken away under section 249(4) by taking view that petitioner had failed to pay tax due on income shown in return filed.

What is contemplated by clause (a) of sub-section (4) of section 249 is that when there is an undisputed liability, the appeal filed by the assessee in respect of the disputed liability cannot be admitted unless the assessee pays the admitted liability. The object of clause (a) of sub-section (4) of section 249 is not to entertain the appeal where the assessee fails to pay the undisputed tax liability. In the instant case, it was the case of the petitioner that the intimations issued were wholly illegal and on that basis the petitioner sought for rectification of the intimations issued by filing applications under section 154 and since the first respondent failed to allow the applications filed by the petitioner or rectify the intimations issued, the petitioner had preferred appeals against the intimations issued and the orders passed under section 154. Therefore, it was clear that though the petitioner had filed the returns, the petitioner had disputed his liability to be assessed as HUF and pay the tax liability imposed on him. Under these circumstances, the view taken by the second respondent that the appeals filed by the petitioner could not be admitted since the petitioner had failed to pay the tax due on income shown by him in the return filed by him was erroneous in law. Sub-section (4) of section 249 has to be construed in the backdrop of the right to appeal provided to an assessee under section 246 . Under these circumstances, while interpreting sub-section (4) of section 249 the court will have to keep in mind the object of sub-section (4) of section 249 and also the right to prefer an appeal guaranteed to an assessee. In that view of the matter, sub-section (4) has to be liberally construed to serve the object of the right provided to an assessee, and not with a view to deprive the right provided to an assessee to prefer an appeal. When the very liability was disputed by the petitioner on the ground that the petitioner could not have been assessed as an HUF as on the date of filing of the return and on the date of the assessment there was no HUF in existence, the right guaranteed to the petitioner to prefer an appeal could not be deprived by taking the view that the petitioner had failed to pay the tax due on the income shown in the return filed. Therefore, the order passed by the second respondent was liable to be quashed. (Related Assessment years : 1991-92 and 1992-93) - [T. Govindappa Shetty & Others v. ITO (1998) 231 ITR 892 (Karn.)]

Assessee’s appeal was held not to be maintainable where assessee failed to pay tax due on returned income by the date of filing appeal for the CIT(A) had not the power to condone that lapse in view of applicability of section 249(4) (a) on facts of assessee’s case

A search of the assessee’s premises was conducted on 24.09.1987. The assessee filed his return of income for the assessment year 1988-89 on 21.03.1991. The Assessing Officer completed the assessment under section 143 on 31.12.1991 by making certain additions. The assessee filed appeal before Commissioner on 30.11.1992, objecting to the various additions. The Commissioner (Appeals) noted that the assessee had not paid the tax due on returned income at the time of filing the appeal and that under section 249(4)(a) as amended with effect from 01.04.1989, the appeal could not be admitted because of that lapse. The assessee contended that assessee’s lapse in not paying the tax on the returned income was bona fide and it should be condoned. The Commissioner (Appeals), rejecting the assessee’s contention, declined to entertain the appeal, holding that with effect from 01.04.1989, the Commissioner (Appeals) had no power to condone that lapse.

On second appeal, the assessee contended that the Commissioner (Appeals) ought to have condoned the lapse on the ground that assessment proceedings could be presumed to have started with the search conducted on 24.09.1987, i.e., much before the amended provisions of section 249(4)(a) came into effect on 01.04.1989.

Held : There was no dispute that the assessee had not paid tax on the returned income before filing of the appeal on 03.02.1992, nor any advance tax or tax on account of self-assessment had been paid by the assessee. As such the provisions of section 249(4)(a) were clearly attracted in the case of the assessee. Being a creature of the Act, the Commissioner (Appeals) has to function within the parameters of the statute and as such has no inherent powers in the matter of entertaining an appeal. He does not have power to transgress the limits placed by the statute. Under the circumstance the Commissioner (Appeals) was justified in not entertaining the appeal filed by the assessee. In the instant case, the return of income was filed on 21.03.1991 and the assessment proceedings started with the issue of notice under section 143(2) thereafter, that is much after 01.04.1989, when the amended provisions of section 249(4)(a) came into effect. The assessee contention that the assessment proceedings started with the search of the assessee’s premises on 24.09.1987 could not be accepted because such an interpretation would produce a manifestly absurd and unjust result which could never have been intended by the Legislature. The Commissioner (Appeals) was, therefore, justified in not entertaining this appeal. [In favour of revenue] - [Khushmanlal Hiralal v. CIT (1996) 57 ITD 531 : 56 TTJ 62 (ITAT Ahmedabad)]