AO duty bound to follow direction of appellate authorities

Citation of the Case: DCIT vs. M/s. ACC Ltd. (ITAT Mumbai), ITA No.3787/Mum/2009, ITA No.4241 /Mum/2007 & ITA No./4987Mum/2009, AY 2002-03 & 2003-04, Date of Judgment: 29/07/2015

Brief of the Case

ITAT Mumbai held in the case DCIT vs. M/s. ACC Ltd. held that AO  is duty bound to follow instruction of The CIT (A) being very senior officer of the Department who also  also performs quasi judicial functions. The AO has all the rights to challenge the order of the CIT (A) before the appropriate judicial forum, but he is not authorized to disobey the directions given by the CIT (A). Judicial proprietary and departmental hierarchy demands that the AOs and their supervisory officers give due respect to the orders of the CIT (A). Considering the above facts, ITAT held that the appeal filed by the AO is devoid of any merit and he has taken undue advantage of the judicial process.

Facts of the Case

ITA NO./3787/Mum/2009

The Assessee engaged in the business of manufacturing and sale of cement. He filed its return of income on 31.10.2002,declaring its income at Rs.(-)99.48Crores.The AO finalized the assessment on u/s.143(3) on determining its income at Rs.(-)8,11,61,032/- under the normal provisions and at Rs.2,95,81,62,995/-under the provisions of section 115JB.

While passing order u/s.143(3) ,the AO added back the MODVAT credit attributable to the closing stock of Rs.8, 88,04,704/-by applying the provisions of section 145A.He also increased the opening stock by Rs.9,34,67,023/-.In the appellate proceedings, the CIT (A) directed the AO to delete the addition of closing MODVAT of Rs.8.88 Crores. In appeal against the said order, the department did not challenge the direction given by the FAA to the AO, while filing appeal before the Tribunal. The AO did not grant relief to the assessee, while giving effect to the order of CIT (A),in respect of issue of MODVAT. The assessee challenged the order of the AO again .Considering the facts of the case the CIT (A) again directed the AO to delete the addition of MODVAT attributable to closing stock. In the present appeal before us, the AO has challenged the direction of the FAA given in the second round.

Held by CIT (A)

CIT (A) deleted the addition in both round of appeals.

Held by ITAT

ITAT held that we are unable to understand the logic behind filing the appeal by the AO and its authorization by the CIT concerned. The AO has not only refused to follow the directions of the CIT (A) but also choose not to file appeal before the Tribunal against the direction. Thus, the issue had attained finality. When the assessee found that the AO had not followed the directions of the CIT (A), he was compelled to file appeal before the FAA for the same issue for the second time. The CIT (A) rightly held that MODVAT credit attributable to closing stock should be deleted. At that stage also if the AO and the CIT had stopped, the unwanted and frivolous litigation would have not taken place.

Further ITAT held that it is a serious lapse on part of the AO and his supervisory authorities. The CIT (A) being very senior officer of the Department is also performing quasi judicial functions. The AO being his subordinate is duty bound to follow his instruction. The AO has all the rights to challenge the order of the FAA before the appropriate judicial forum, but he is not authorized to disobey the directions given by the CIT (A).Judicial proprietary and departmental hierarchy demands that the AOs and their supervisory officers give due respect to the orders of the CIT (A).

In the case of Bhopal Sugar Industries Ltd.(40 ITR 618) in which AO ignored the direction of ITAT and refused to grant any relief to the assessee, the apex court held that Such refusal was in effect a denial of justice. The order of the Appellate Tribunal having become final, it was not open to the Judicial Commissioner to hold that the order was wrong. As the Income-tax Officer had failed to carry out a legal duty imposed on him and such failure was destructive of a basic principle of justice. Further in the case of Union of India v. Kamlakshi Finance Corporation Ltd., AIR 1992 SC 711, the apex court held that ,” The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not ‘acceptable’ to the Department in itself an objectionable phrase and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessee and chaos in administration of tax laws.” The same principle was delivered in Nicco Corporation Ltd. (251 ITR 791).

From the above, it is clear that the AO has not been given unfettered powers the under the Act to ignore the direction given by the appellate authorities while passing a consequential order .If he is not satisfied with the order of an appellate authority, he must raise the issue in the higher forum under the provisions of the law, but he cannot refuse to/follow the directions. Considering the above facts, ITAT held that the appeal filed by the AO is devoid of any merit and he has taken undue advantage of the judicial process. We are also of the opinion that there was utter failure on the part of the supervisory authorities in whole episode. Registry is directed to forward a copy of the order to the Principle Chief Commissioner of Income tax, Mumbai, so that the directions of the FAA are given due respect by the officers of the field formation and that such frivolous appeals are not filed in future.

Accordingly appeal disposed of

CA Deepak Aggarwal