Additional evidence v. Clarificatory evidence

1. Introduction:

Assessment of income is based on the information submitted by the taxpayer, analysis and review of the information submitted and calling for further information before assessing the income of the assessee. The AO before proceeding with making any addition is required to issue a show cause particularly if the information collected by the AO is going to be used against the Assessee. There may be various reasons why the assessee is not able to submit any, or complete evidence before the AO, during the course of assessment proceedings.

When additions are made to the total income by the AO and taxes are levied on account of no evidence furnished, or half-baked evidence furnished, or incorrect evidence furnished, it becomes important for the assessee to submit such evidence before CIT(A) in support of his case.

Rule 46A of the IT Rules provides mechanism for submission of such additional evidence before First Appellate Authority. In addition, section 250(4) and (5) also provide opportunity to the assessee to submit new evidence as required by the CIT(A) or required for adjudication of additional ground allowed to be raised by the CIT(A) to the assessee

One safeguard is that conditions laid down under Rule 46A must be fulfilled for admitting additional evidence. Before admitting these evidences it is obligatory on CIT(A) that he gives an opportunity to the AO before admitting these evidence for adjudication of the issue. Section 250(4) deals with the issue of dealing with additional evidences submitted by the assessee during the course of appellate proceedings.

2. Three kind of evidence:

Considering the above provisions, the evidence submitted by the assessee before CIT(A) may be categorized into three as under-

(i) Additional evidence: The Evidence in respect of an issue arising before the AO and required to be submitted before him is not submitted by the assessee but is sought to be submitted before the CIT(A).
This is a technical term used under Rule 46A which explains that additional evidence would be evidence other than already submitted before AO and is sought to be submitted first time before CIT(A).
Additional evidence can be allowed only after (i) recording the reasons by the CIT(A), (ii) the case of the assessee falls under any of the four exceptions provided under Rule 46A(1) and (iii) to provide reasonable opportunity of being heard to the AO to examine the document, to cross examine the witness and to adduce evidence/witness to rebut the additional evidence submitted by the assessee. Undoubtedly, this is in line with the sound principles of Justice.
(ii) New Evidence: Such evidence is submitted by the assessee in response to queries u/s 250(4) or in support of new ground permitted by CIT(A) u/s 250(5). The evidence may include documents etc. already submitted before CIT(A) or may include fresh evidence not earlier submitted before AO, or may include evidence brought on record by CIT(A) himself under suo moto inquiries, or got collected through AO. This may also include evidence in support of new grounds permitted to be raised by CIT(A). (This term is coined to distinguish it from evidence covered u/r 46A).
(iii) Clarificatory evidence: This term is not defined in the Statute and there is a possibility of subjectivity in such cases. The assessee would have a tendency to put forth evidences before CIT(A) by way of Clarificatory evidences as he does not have to go through the rigors of inquiry by the AO . But what amounts to clarificatory is contextual.

A clarificatory evidence is one which is placed on the record:

To clarify the evidence already placed on the record.
To remove doubts/misunderstanding created by the evidence on record.
To make the effect of evidence (on record) more explicit.
To remove mistakes appearing in record already submitted.

3. The basic difference between three kind of evidence with regards to:

In respect of evidence collected by the CIT(A) on carrying out inquiries u/s 250(4) or collected by AO on his direction, the conditions laid down under Rule 46A will not be applicable.

Similarly, where CIT(A) allows a new ground as provided u/s 250(5) not raised in the grounds of appeal and evidence submitted in respect of such new grounds will not be hit by Rule 46A.

Further, Rule 46A (4) empowers the CIT(A) to direct the production of any document or examination of any witness to enable him to dispose off the grounds raised before him. Therefore, additional evidences produced before the CIT (A) pursuant to his direction u/s 250(4) read with Rule 46A(4) stand on a different footing than the new evidence produced before him suo motu by the assessee.

4. Treatment of clarificatory evidence:

Where assessee has already submitted evidence before the AO and CIT(A) can take decisions on the basis of those documents, but under any of circumstances like (i) to remove the doubts arising in the mind of CIT(A) from the documents on record or (ii) to support the case already made by the assessee or (iii) to make the argument more explicit or (iv) to remove mistakes bonafidely committed, further evidence submitted would be clarificatory in nature and will not require confronting the same to the AO.

5. Whether scrutiny by the AO is required in respect of any kind of evidence submitted before CIT(A):

In this regard, a distinction has to be made between the evidence and material voluntarily furnished by an assessee in support of his appeal and the evidence/material requisitioned from an assessee by the first appellate authority with a view to proper disposal of appeal.

Providing opportunity to AO in respect of new evidence submitted before CIT(A) by the assessee is governed by Rule 46A which states that an assessee shall not be entitled to produce before the first appellate authority evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the Assessing Officer except under the circumstances mentioned in that Rule.

However, u/s 250(4) the CIT(A) can make such further inquiries as he thinks fit and direct the AO to make further inquiries and report the result of the same to him. It has been held in several cases that CIT(A) is duty bound to make inquiries even if such inquiries are not made by the AO, if facts and circumstances of the case warrant such an inquiry to be made. Thus, u/s 250(4) CIT(A) has wide powers under which he can direct the assessee to produce any evidence or material that was not produced before or considered by the AO. Section 250(4) is an extension of power of assessment conferred on the CIT(A) under which he can do or direct the AO to do what AO failed to do.

Thus, u/s 250(4) CIT(A) gives the power of assessment to CIT(A) but within the limitation of grounds of appeal. Once, he exercises such powers, then he acts like an AO to correct the assessment and therefore, he is not required to refer the material collected by him u/s 250(4) to the AO for his comments or for his scrutiny. In this regards his powers are co-terminus power with that of AO to decide the issue before him. This being so he need not confront the same before the AO.

6. Contrary view by the Gujarat HC that even where evidence is collected by CIT(A) u/s 250(4) read with Rule 46A(4) opportunity is required to be given to the AO:

Gujarat High Court in Pradyuman M. Patel held that CIT(A) has to allow opportunity to the AO in respect of evidence/statements collected by him even u/s 250(4). This can be said to be in line with the principles of natural justice.

In this case, the CIT(A) had recorded statements of 24 investors and on the basis of those statements deleted the addition u/s 68. He, however, did not allow any opportunity to the AO to cross examine the witnesses. The Tribunal confirmed the order of CIT(A) holding that it is not necessary to provide opportunity to the AO when evidence is collected u/s 250(4).

7. In an era of faceless assessment – concluding remarks

In an era of faceless assessment – submission of evidences would assume greater importance as the assessee, in absence of face to face interaction will not be able to comprehend if the AO is satisfied with the evidences submitted. The taxpayer should submit all the information at assessment stage. The tax payer should make best use of show cause issued and while defending his position he should place all possible evidences as going the rigors of Rule 46A is time-consuming and often a futile exercise.

About the Author: Mr. Dhrunal Bhatt is a Chartered Accountant having experience of over 25 years in corporate tax. The views expressed by the author are expressly his personal. Neither the author nor the organisation is liable in any way, to the reader who acts on the basis of this article.