MISC. APPEAL No.170 OF 2002 (Against the order dated 31/10/2001 passed by Income Tax Appellate Tribunal, Patna Bench, Patna, in ITA No. 438(Pat) 1997 and C.O. No. 92/Pat/1998 for the Assessment Year 1996-97). ---------- SRI LALU PRASAD, 1, ANNE MARG, PATNA ------- ASSESSEE/APPELLANT Versus 1. THE COMMISSIONER OF INCOME TAX, CENTRAL, PATNA. 2. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, PATNA 3. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2, PATNA ------- ASSESSING OFFICER/RESPONDENTS W I T H MISC. APPEAL NO. 513 OF 2002 LALU PRASAD, S/O LATE KUNDAN RAI, EX-CHIEF MINISTER OF BIHAR, 1, ANNE MARG, PATNA -------- ASSESSEE/APPELLANT Versus 1. COMMISSIONER OF INCOME-TAX, CENTRAL, PATNA. 2. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, PATNA. 3. THE ASSTT. COMMISSIONEROF INCOME-TAX, CENTRAL CIRCLE-2, PATNA ---------ASSESSING OFFICER/RESPONDENTS ------- For the appellant : Mr. Ajay Rastogi, Advocate. For the respondents : Mr. Harshwardhan prasad, Senior Standing Counsel Mrs. Archana Sinha, Junior Standing Counsel Mr. Rishi Raj Sinha, Junior Standing Counsel -------- P R E S E N T THE HON'BLE MR. JUSTICE CHANDRAMAULI KUMAR PRASAD THE HON'BLE DR. JUSTICE RAVI RANJAN Prasad & Ranjan JJ: Both the appeals arise out of the common order and as such they were heard together. - 2 - In the assessment year 1996-97, Shri Lalu Prasad (hereinafter referred to the Assessee) was the Chief Minister of the State of Bihar. He filed his return of income on 14.10.1996. Gross total income shown by him in the return is as follows: INCOME FROM OTHER SOURCES : Acc. Intt on N.S.C. 0.00 : Intt on F.D. Matured 216,060.00 : Intt on S/b A/C. 2,439.00 : Pay & Allowance as 72,802.40 Chief Minister -------------- 291,301.40 SHORT TERM CAPITAL GAINS 0.00 0.00 LONG TERM CAPITAL GAINS 0.00 0.00 ---------------------------------- Gross Total Income .. 291,301.40 ------------------------------- He also furnished details of pay and allowance received as Chief Minister and incidental expenses in the following manner: DETAILS OF PAY/ALLOWANCES AS CHIEF MINISTER Pay 23,539.85 Allowance 35,209.70 Sumptuary Allowance 23,539.85 --------------- 82,289.40 TDS Reimbursed 8,497.00 For FY 95-96 ---------------- 90,786.40 Less : Incidental Expenses ------------------------------------ Depreciation on Car (On opening Wdv - 64922/- @ 20%) 12,984.00 Insurance/Expenses on Car (estimated) 5,000.00 17,984.00 --------------------------------------- Net income 72,802.40 --------------------------------------- The Assessing Officer gave intimation to the Assessee - 3 - under Section 143 (1) (a) of the Income-Tax Act, (hereinafter referred to as the Act). In the adjustment explanatory sheet, the Assessing Officer observed as follows: “1. Ministers being Govt. servants are not covered by Board‟s circular, therefore returns are to be filed under the head salary and not income from other sources. The correction has been made. 2. The only deduction allowable from salary income is standard deduction of Rs. 15,000. This has been allowed despite no claim. 3. Incidental expenses claimed are disallowed as they are not permissible deductions from salary income nor are they incidental to the reimbursement of TDS by State Govt. 4. Accrued interest in NSC has not been shown in the income. This has been added back to income from other sources. 5. Interest and additional tax has been levied as per these adjustments” Aggrieved by the same, the Assessee carried the matter in appeal and contended before the Commissioner of Income-Tax Appeal that the head of the income from other sources to salary ought not to have been made by the Assessing Officer. The Assessee also assailed adding of interest on the National Saving Certificate. As regards the grievance of the Assessee in regard to the change of head of income, i.e. income from other sources to salary, the Commissioner of Income-Tax Appeal upheld the view taken by the Assessing Officer. While doing so, it observed as follows: xx xx xx - 4 - “I have considered the submission of the Ld.Counsel and perused the assessment record for the assessment year 1996-97. Under the first proviso to Section 14(1)(a) the A.O. is competent to make disallowance by way of adjustment when there is any arithmetical error in the return of income or when any allowance claimed by the assessee is prima facie inadmissible. Alongwith the return of income filed on 14.10.1996, the assessee enclosed form no. 16 which is certificate under section 203 of the I.T. Act for deduction of tax at source. As per the said form, the assessee as Chief Minister of Bihar received 09,909,40 as gross salary from Government of Bihar. It is this amount which the assessee declared as income from other sources. In my opinion the A.O.has correctly treated pay and allowance received by the assessee as salary and allowed standard deduction, the disallowance incidental expenses of Rs. 17,984 as made by the A.O. is thus upheld.” xx xx xx xx As regards adding back of the interest on National Saving Certificate, the Commissioner of Income Tax observed as follows: xx xx xx xx “If the method of accounting employed is mercantils, he has to show interest/income on accrued basis and if the method of accounting employed is cash he has to declare interest/income on cash basis. In any case, the impugned addition is not a matter of adjustment and can not be linked to the rebate u/s 88 claimed by the assessee on accrued interest of NSC which may be in the mind of the A.O. In view of the aforesaid, adjustment of Rs. 6,000 as made by the A.O. is deleted” xx xx xx xx - 5 - The Revenue aggrieved by the order of Commissioner of Income-Tax Appeal deleting adding back of the interest on National Saving Certificate, preferred appeal before the Patna Bench of Income-Tax Tribunal (hereinafter referred to as the “Tribunal‟). It was registered as ITR No. 438/PATY/1997. Assessee aggrieved by the change of head, filed cross objection and that was registered as C.O. No. 92/PAT/1998. The appeal and the cross objection naturally were heard together and have been disposed of by the Tribunal by the common judgment dated 31st of October, 2001. The Tribunal allowed the appeal preferred by the revenue but dismissed the cross objection filed by the assessee. On the issue of change of head, the Tribunal observed as follows: xx xx xx xx “The Chief Minister is not a political post. It is a constitutional post. The AO had rightly stated that the fact that the assessee enclosed a Service Certificate to the return wherein Form No. 16 shows his income as pay and allowances from the Government. He could not have classified this as professional income to claim the expenses not related to this income. It is not upto the assessee to reclassify the source of his income especially when documentary proof exists. In the case of PV Narsimha Rao vs. State it has been held that the Members of Parliament and Legislative Assembly are public servants and the assessee being a Chief Minister had been drawing salary from the Government which has been his claim for constitutional post of chief ministership. We, therefore, do not find merit in the Cross Objection filed by the assessee which is dismissed”. - 6 - xx xx xx xx While reversing the conclusion of the Commissioner of Income-Tax Appeal on the issue of adding the interest amount on National Saving Certificates, the Tribunal held that the Assessing Officer rightly added the interest amount on National Saving Certificates to the income from other sources of the assessee. The assessee aggrieved by the order of the Tribunal allowing the appeal of the revenue and dismissing his cross objection had preferred separate appeals. The appeal preferred against the order of the tribunal on the appeal preferred by the revenue has been registered as Misc. Appeal No. 170 of 2001 whereas the appeal preferred against the order dismissing the cross objection has been registered as Misc. Appeal No. 513 of 2007. By order dated 17.11.2006, both the appeals have been admitted on the following questions of law:- 1. “Whether on the facts and in the circumstances of the case, the addition made on account of accrued interest on NSC was a matter of adjustment within the provision of section 143(1) (a) ? 2. “Whether on the facts and in the circumstances of the case the Tribunal was justified in upholding taxation of interest on NSC on accrual basis whereas the appellant follows cash system of accounting for taxation of interest income ? 3. “Whether on the facts and in the circumstances of the case, the Tribunal is justified in affirming the change of head of income from other source declared by the appellant to Income from Salaries by the Assessing Officer in processing u/s 143 (1) - 7 - (a) ? 4. “Whether on the facts and in the circumstances of the case the finding of Tribunal regarding change of head of income from other sources to salary is legal, valid and permissible u/s 143 (1) (a) ? 5. “Whether the Tribunal was justified in allowing the appeal of the department in ITA No. 438/Pat/97, the filing of which violate the instruction no. 1979 dated 27.03.2000 issued by Central Board of Direct Taxes?” Mr. Ajay Rastogi, appearing on behalf of the appellant submits that the tax effect in the present case being Rs. 4,305/- i.e. less than the monetary limit of Rs. 25,000/- prescribed by the Central Board of Direct Taxes in its Notification dated 28th October, 1992, the revenue ought not to have preferred the appeal before the Tribunal and the Tribunal instead of deciding the same, ought to have dismissed the same on that ground alone. He points out that such a plea was raised before the Tribunal but has not been answered and without deciding the said issue, the Tribunal had allowed the appeal preferred by the revenue. Mr. Harshwardhan Prasad, appearing on behalf of the revenue, does not dispute that the tax effect is only Rs. 4,305/- but in view of the nature of issue involved the revenue had filed the appeal and the Tribunal rightly did not dismiss the appeal on the ground of monetary limits. It is not in dispute that tax effect in the case in hand is Rs. 4,305/-. The instruction of the Central Board of Direct Taxes - 8 - relevant at the time when the appeal was preferred, is instruction No. 1903 dated 28th of October, 1992 wherein monetary limits of Rs. 25,000/- was fixed for filing departmental appeals before the Income-Tax Appellate Tribunal. Section 268A has been inserted in the Income-Tax Act by Finance Act, 2008 with effect from 1.4.1989. Same reads as follows:- “268-A. Filing of appeal or application for reference by income tax authority. – (1) The Board may, from time to time, issue orders, instructions or directions to other income tax authorities, fixing such monetary limits as it may deem fit, for the purpose of regulating filing of appeal or application for reference by any income tax authority under the provisions of this chapter. (2) Where, in pursuance of the orders, instructions or directions issued under sub- section (1), an income tax authority has not filed any appeal or application for reference on any issue in the case of an assessee for any assessment year, it shall not preclude such authority from filing an appeal or application for reference on the same issue in the case of – (a) the same assessee for any other assessment year; or (b) any other assessee for the same or any other assessment year”. (3) Notwithstanding that no appeal or application for reference has been filed by an income tax authority pursuant to the orders or instructions or directions issued under sub-section (1) it shall not be lawful for an assessee, being a party in any appeal or reference, to contend that the income tax authority has acquiesced in the decision on the disputed issue by not filing an appeal or application for reference in any case. (4) The appellate Tribunal or Court ,hearing such appeal or reference, - 9 - shall have regard to the orders, instructions or directions issued under sub-section (1) and the circumstance under which such appeal or application for reference was filed or not filed in respect of any case. (5) Every order, instruction and direction which has been issued by the Board fixing monetary limits for filing an appeal or application for reference shall be deemed to have been issued under sub-section (1) and the provisions of sub-sections (2), (3) and (4) shall apply accordingly.” From a plain reading of Section 268A(1) of the Act, it is evident that the Central Board of Direct Taxes has been conferred power to issue order/instructions for the purpose of regulating, filing of appeal or application for reference. Section 268A(5) further provides that order/instruction or direction issued by the Central Board of Direct Taxes fixing monetary limits for filing appeal shall be deemed to have been issued under sub Section (1) of Section 268A of the Act. Thus, the instruction fixing monetary limit for filing of appeal before the Tribunal has statutory flavour and in the background thereof, we are of the opinion that the appeal preferred by the revenue against the order of the Commissioner of Income-Tax (Appeal) was wholly unjustified. Accordingly, our answer to the 5th question is in the negative, against the revenue and in favour of the assessee and it is held that the Tribunal was not justified in entertaining - 10 - the appeal of the revenue. The view which we have taken finds support from a Division Bench Judgment of this Court dated 15th of Septembner,2008 passed in Misc. Appeal No. 90 of 2000 (Commissioner of Income-Tax and Anr. Vs. Uma Kant Mishra and analogous case). In the said case, it has been observed as follows: “It is worth mentioning that the instruction of the Central Board of Direct Taxes dated 28.10.1992 shall be deemed to have been issued under section 268A(1) of the Income- Tax Act in view of section 268A(5) of the Act. Thus the instruction dated 28.10.1992 fixing monetary limit for filing appeal has staturoty flavour and in the background thereof, we are of the opinion that these appeals are incompetent “. In view of our answer to the aforesaid question, it is common ground that questions No. 1 and 2 have been rendered academic. For what we have observed above, the order of the Tribunal in the appeal preferred by the revenue is set aside. Now, we proceed to consider questions No. 3 and 4. Mr. Ajay Rastogi, submits that whether the income shown by the assessee is fit to be counted under the head “Salary” or “income from other sources” being debatable, the Assessing Officer in exercise of its power under Section 143(1)(a) of the Act ought not to have changed the head to salary. In support of his submission, he has placed reliance on a Division Bench Judgment of this Court in the case of Parikh - 11 - Engineering and Body Building Co. Ltd. And Another Vs. Union of India and others, 238 ITR 554 and our attention has been drawn to the following passage from the said Judgment : xx xx xx xx “The legal position, thus, appears to be well settled that under section 143(1)(a), of the Act the Assessing Officer has to proceed on the basis of the return (and the accounts or documents accompanying the same) as it is; he can only make correction of arithmetical errors or adjustments which are “prima facie” admissible. “Prima facie”, literally means “on the face of it”. Hence, while allowing adjustments which are prima facie admissible and disallowing adjustments which are prima facie inadmissible, he has to confine himself to the materials before him in the return etc.” xx xx xx xx Mr. Rastogi, emphasises that the income can count under the head “Salary” when the relationship of employer and employee exists between an assessee and the employer. He points out that the Chief Minister is not employed by anybody. Mr. Harshwardhan Prasad, however, contends that on the basis of information available in the return filed by the assessee, the Assessing Officer prima facie came to the conclusion that the head shown by the assessee is incorrect and hence nothing prevented him from changing the head of income from other sources to that of salary. Rival submission necessitates examination of the scheme of the Section 14 of the Act. For the purpose of charge of income-tax, the total income has to be classified under - 12 - various heads which include salaries and income from other sources. Section 14 of the Act which is relevant for the purpose, reads as follows: “ Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:- A. – Salaries B. – [***] C. – Income from house property. D. - Profits and gains of business or profession. E. - Capital gains. F. - Income from other sources.” Section 15 of the Act inter alia provides for charging of income under the head “salary” when it is due or paid by him. Section 15 of the Act reads as follows: “The following income shall be chargeable to income-tax under the head “Salaries” – (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year. Explanation 1.- For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total - 13 - income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. Explanation 2.- Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section. Article 164 of the Constitution of India provides for appointment of the Chief Minister and payment of salaries and allowances, same reads as follows: “164. Other provisions as to Ministers. – (1) The Chief Minister shall be appointed by the Governor and the other Ministers shall be appointed by the Governor on the advice of the Chief Minister, and the Ministers shall hold office during the pleasure of the Governor: Provided that in the States of Bihar, Madhya Pradesh and Orissa, there shall be a Minister in charge of tribal welfare who may in addition be in charge of the welfare of the Scheduled Castes and backward classes or any other work. [1-A) The total number of Ministers, including the Chief Minister, in the Council of Ministers in a State shall not exceed fifteen per cent. of the total number of members of the Legislative Assembly of that State: Provided that the number of Ministers, including the Chief Minister, in a State shall not be less than twelve: Provided further that where the total number of Ministers, including the Chief Minister, in the Council of Ministers in any State at the commencement of the Constitution (Ninety-first Amendment) Act, 2003 exceeds the said fifteen per cent. or the number specified in the first proviso, as the case may be, then, the total number of Ministers in that State shall be brought in conformity with the provisions of this clause - 14 - within six months from such date as the President may by public notification appoint. (1-B) A member of the Legislative Assembly of a State or either House of the Legislature of a State having Legislative Council belonging to any political party who is disqualified for being a member of that House under paragraph 2 of the Tenth Schedule shall also be disqualified to be appointed as a Minister under clause (1) for duration of the period commencing from the date of his disqualification till the date on which the term of his office as such member would expire or where he contests any election to the Legislative Assembly of a State or either House of the Legislature of a State having Legislative Council, as the case may be, before the expiry of such period, till the date on which he is declared elected, whichever is earlier.] (2) The Council of Ministers shall be collectively responsible to the Legislative Assembly of the State. (3) Before a Minister enters upon his office, the Governor shall administer to him the oaths of office and of secrecy according to the forms set out for the purpose in the Third Schedule. (4) A Minister who for any period of six consecutive months is not a member of the Legislature of the State shall at the expiration of that period cease to be a Minister. (5) The salaries and allowances of Ministers shall be such as the Legislature of the State may from time to time by law determine and, until the Legislature of the State so determines, shall be as specified in the Second Schedule.” From a plain reading of Article 164(1) of the Constitution, it is evident that the Chief Minister is to be appointed by the Governor and he holds office during his pleasure. Article 164 (5) of the Constitution provides for salaries and allowances of the Ministers to be determined by the - 15 - legislature of the State and until it is so determined as specified in the second schedule of the Constitution. The State Legislature enacted the Bihar Minister‟s salaries and allowance Act, 1953. It provides for payment of salaries and other perquisites to the ministries. In face of the language of Article 164 (5) that Ministers shall be paid salary and such salary shall be determined by the State Legislature, we are of the opinion that the Assessing Officer did not err in changing the head from other income to that of salary. It is relevant here to state that the assessee in the return itself has stated that he was the Chief Minister of the State and received salary from Government of Bihar. On the basis of aforesaid information, it cannot be said that the conclusion of the Assessing Officer is erroneous. The Supreme Court had the occasion to consider this question in the case of Justice Deoki Nandan Agarwala Vs. Union of India and Another, 237 ITR 872. In the said case besides the question as to whether salary of a Judge is taxable and another question was as to whether it is to be taxable under the head “salary or Income from other sources”. One of the question in the aforesaid case was as follows:- xx xx xx xx “Whether the salary of a judge of the Supreme Court payable under clause (1) of article 125 or the salary of a judge of the High Court of a State payable under clause (1) of article 221 is not taxable under the head „Salaries‟ ; and, if it is so, is it taxable under any other head of income referred to - 16 - in section 14 of the Income-tax Act, 1961 ?” xx xx xx xx Answering the aforesaid question, the Supreme Court had observed that Supreme Court Judges and High Court Judges, although, have no employer but this itself will not mean that they do not receive salary. In the said case, it has been held as follows: xx xx xx xx “It is true that High Court and the Supreme Court Judges have no employer, but that, ipso facto, does not mean that they do not receive salaries. They are constitutional functionaries. Articles 125 and 221 of the Constitution deal with the “salaries” of Supreme Court and High Court judges respectively and expressly state that what