Taxpayers are often faced with a dilemma regarding filing an appeal when though on merits the matter is decided in their favour, on validity of the proceedings (issue of jurisdiction), Revenue’s position is accepted by the appellate forum. For instance, in a reassessment matters, if the taxpayer has obtained relief on merits with regard to the additions made, while the appellant authority upholds the validity of reopening in favour of the Revenue, question arises – what should be the strategy with regard to future litigation?
A common-sense approach would suggest that there is no purpose of filing an appeal give the overall outcome being in favour of the taxpayer. But what if the Revenue is in appeal against the favourable order of the lower appellate authority which has provided relief on merit? In such a situation can the taxpayer at the stage of appellate hearing challenge the lower appellate authorities order with respect to the ground decided against it (upholding jurisdiction i.e. validity of proceedings) or is such opportunity lost in case the taxpayer has not filed a cross appeal/objections against the appeal preferred by the Revenue.
This interesting issue has recently been examined by the Hon’ble Delhi High Court (HC) in the case of Sanjay Sawhney v. Principal Commissioner of Income Tax. In a detailed reasoned order in favour of the taxpayer, the HC has held that the taxpayer was entitled to agitate the jurisdictional issue relating to the validity of the reassessment proceedings even in absence of cross appeal/objections by the taxpayer. The HC examined scope of Rule 27 of the Appellate Tribunal Rules, 1964 (ITAT Rules) which enables the respondent, even if he may not have appealed to support the order appealed against on any of the grounds decided against him.
In the facts of the case, pursuant to a search action, the return filed by the taxpayer was reassessed and income enhanced by the Assessing Officer (AO). Before the first appellate authority [CIT(A], the taxpayer besides challenging the additions made by the AO on merits also raised legal grounds challenging the validity of the reassessment proceedings. The CIT(A) while upholding the reassessment proceedings as being valid, on merits, allowed the appeal in favour of the taxpayer and deleted all the additions made by the AO. The CIT(A) order was contested by the Revenue before the Income Tax Appellate Tribunal (ITAT). In the proceedings before the ITAT, the appellant- assessee made an oral application under Rule 27 of ITAT Rules and urged additional grounds against the findings of the CIT(A) upholding validity of the proceedings. The ITAT disagreed with taxpayer and on a technical ground refused to consider the legal ground challenging validity of proceedings {as upheld by the CIT(A)} premised on Rule 27 of the ITAT Rules considering no application had been filed by the taxpayer.
The Court took note that Rule 27 of the ITAT Rules, as it stands today, does not mandate the application to be made in writing, distinguishing such requirement which is prescribed under the draft Appellate Tribunal Rules 2017 (not notified yet) proposing to insert a proviso to Rule 27, providing for an application to be made in writing. The Court observed that Rule 27 embodies a fundamental principal that a Respondent who may not have been aggrieved by the final order of the Lower Authority or the Court, and therefore, has not filed an appeal against the same, is entitled to defend such an order before the Appellate forum on all grounds, including the ground which has been held against him by the Lower Authority, though the final order is in its favour. Not having filed a cross objection does not lead to an inference that the Respondent– assessee had accepted the findings in part of the final order, that was decided against him.
In the case before hand, the HC accordingly held that the jurisdictional issue sought to be urged by the appellant under Rule 27 is interlinked with the other grounds of appeal, and its adjudication would have a direct impact on the outcome of the appeal. The validity of the proceedings goes into the root of the matter and for this reason, the assessee should not be precluded from raising a challenge to that part of the order which was decided against him by the CIT(A). The Court however clarified that if there is an issue which is decided against a respondent [in appeal], and the decision on the said issue has no bearing on the final decision of the CIT (A), then invocation of Rule 27 to challenge the correctness of the same cannot be sustained. Such issues can be challenged only way of filings a cross appeal/objection.
The decision sheds light on an important right of the respondent which is often marred in controversy. It is however relevant to note that this right does not enable reigniting a settled matter (in absence of an appeal/cross objection) but will be available only for an issue which has a bearing or a nexus on the matter appealed. An issue of jurisdiction clearly falls in this category.
A vital principle of natural justice has been explained by the court which will come as a relief to taxpayer effected by such litigations. Nevertheless, as a course, it may be prudent to exercise the option of cross objection wherever possible to obliterate needless dispute.
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