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Observations by Cecil Aluthwela (Part 3)

In a series of articles former Deputy Commissioner of (Appeals) Department of inland Revenue Cecil Aluthwela gives his observations on the article titled " On tax appeals - Some reflections" by Stanley Fernando (BA Ceylon) Attorney-at-Law Lecturer and Examiner in Tax Law, Council of Legal Education, Visiting lecturer in Tax Law, Faculty of Law, University of Colombo which appeared in the July 1993 issue (vol.1 No.1) of the Journal of the Institute of Taxation.

These observations present different points of view which may be of benefit and interest to the tax paying public. The Inland Revenue Act (Sri Lanka) referred to is Act No 28 of 1979. The sections referred referred to are those in the Act.

Mr. Stanely Fernando submits "It is my view that the assessor at this stage of the appellate procedure can only confirm or reduce the assessment....if he wants to increase the assessment he will have to exercise his jurisdiction to issue another additional assessment... it must be noted that the assessor has no power under section 117 (5) to increase an assessment even by agreement with the assessee appellant, for he cannot contravene the law by agreement.

This is clearly an incorrect view of the law. That an assessor can increase an assessment when acting terms of section 117 (5) is best illustrated by an example. Let it be supposed that an assessee had not sent in return of income for a particular year of assessment. Hence, the assessor estimates the income for the year at Rs. 300,000/-.

The taxpayer appeals declaring an income of Rs. 270,000 from trade. This is the only source of income declared in the return.

In the meantime, information is received in the department to the effect that the assessee in the relevant year had received bank interest in a sum of Rs. 700,000/-. The assessor then summons the assessee for an interview with a view to settling the appeal. He confronts the assessee regarding the interest received.

The assessee agrees that he has failed to declare it. The assessor does not contest the income declared from trade. Now, at what figure is the assessor to settle the appeal? It is obvious that the appeal has to be settled at Rs. 270,000/- declared in the return and accepted by the assessor plus Rs. 70,000/- (interest) not disclosed in the return. That means the appeal should be settled at Rs. 340,000/-.

Now, is this not increasing the assessment appealed against? At the time of settling the appeal, the assessor will take down a note of interview, which will be to the effect, that the appeal has been settled at Rs. 340,000/-. He will also get the assessee to sign the note of interview. When he makes that note is not the assessor increasing the assessment and the taxpayer when he agrees, is he not agreeing to an increase in the assessment appealed against?.

The assessor cannot in the note of interview say, as Mr. Fernando will want him to say, that the appeal is settled at Rs. 300,000/-. (According to Mr. Fernando an assessor can only confirm or reduce the assessment appealed against when he acts under section 117 (5).

If the assessor settles the appeal at Rs. 300,000/- for that year, he is agreeing to an Assessable Income of Rs. 300,000/- for that year. Having agreed to an Assessable Income of Rs. 300,000/- there is no basis for the issue of another assessment on Rs. 40,000/-.

What an assessor settles when he acts in terms of section 117 (5) is the Assessable Income - vide section 123 of the Inland Revenue Act. There is only one Assessable Income for a year of assessment. There cannot be two or three Assessable Incomes for a year of assessment.

Thus, with an Assessable Income of Rs. 340,000/- staring in the face of the assessor can he, as Mr. Fernando would wish him to, confirm the assessment already made and settle the appeal at the figure of Rs. 300,000. If he does, he will not merely be contravening the statute, what is more, he will find no statutory support for the additional assessment on Rs. 40,000/- which Mr. Fernando wants the assessor to issue subsequent to the settlement of the appeal. For the assessable income having being settled at Rs. 300,000/- there is no statutory basis for an assessment on Rs. 40,000/- to be issued at a later and subsequent occasion.

I think the confusion will be resolved if it is understood that the additional assessment emanates from the appeal settlement and is issued in pursuance of it. It is not a totally independent exercise unconnected with the appeal settlement.

Thus, Mr. Fernando's view that an assessor cannot increase an assessment when he acts under section 117 (5) is contrary to the statute.

Under the same caption Mr. Fernando submits "if the time bar operates against the issue of another additional assessment the appeal should be submitted to the commissioner - General for a hearing at which the assessor may make application for an increase in the assessment under the powers vested in the commissioner-general of inland revenue by section 117 (11)".

This view of the Fernando too is open to objection. Firstly, the time bar does not operate in respond of a year assessment under appeal. The law keeps the year open till the appeal is finally agreed to or determined. An assessment agreed to or determined on appeal can be issued weeks, months or years after the settlement. So to issue an assessment agreed to on appeal, the assessor, does not have to go before the Commissioner-General.

What is more this view of Mr. Fernando contradicts the earlier position taken by him under the caption "An assessor's right to be heard at an appeal hearing". There he says "the law does not give the assessor any locus standi or right of representation at the appeal hearing before the commissioner-general that is, the assessor has no right to be heard in support of the assessment. If this is the correct position, the assessor will have no authority to appear before the commissioner-general in an appeal and make an application for an increase in the assessment.

Mr. Fernando also states that "The assessor cannot however walk outside the matters specified in the petition of appeal".

What if the petition of appeal does not specify any matters that should be looked into on appeal? In the example given by me to indicate that an assessor can increase an assessment on appeal, the assessment has been made in the absence of the return.

So how could the assessee specify any matters in the petition of appeal. His appeal will be "the assessment is excessive and is not in accordance with the return herewith submitted". On Mr. Fernando's submission the assessor cannot do anything about the petition of appeal. Therefore, according to the Fernando there is no appeal for an assessor to deal with.

Neither the statute nor the case law supports the position that an assessor or assessee has to adhere strictly to the matters specified in the petition of appeal.

I will take the case of an assessor first. As said earlier an assessor on appeal has to agree to the assessable income. Suppose an assessee declares an income of Rs. 180,000 from trade, his only declared source of income. The assessor not being satisfied with the figure of drawings issues an assessment on Rs. 200,000. The taxpayer appeals.

His appeal will be that the figure of drawings in the accounts is all that he and his family needs for subsistence. Hence, the assessment is excessive and unwarranted. In the course of inquiring into the appeal, it transpires, that the assessee had also derived income from rent which had not been disclosed.

Now if the assessor cannot walk outside the matters specified in the petition of appeal he will be precluded from looking into the question of rent. As I said earlier, on appeal an assessor has to agree the assessable income. In order to do so he has to consider all sources, whether matters in respect of them are specified in the petition appeal or not. Hence, Mr. Fernando's contention that an assessor cannot walk outside the matters specified in the petition of appeal is based on misconstruction of the statute.

Now that about the assessee. If the assessor cannot, as Mr. Fernando would want us to believe, consider any matter other than that specified in the petition of appeal no useful purpose would be served in the assessee raising any issue not specified in the petition of appeal.

But the case law is to a different effect. According to the case law the assessee can raise any issue of law, at any stage in appeal, on the same facts. Thus if the petition of appeal is to the effect that the assessment is excessive, (the assessee does not contest its legality, he is only contesting the quantum of the assessment), on appeal he can take up the position that the assessment is ab initio invalid - that is, it is without jurisdiction.

Judicial authority is to the effect that an assessee could raise any issue of law for the first time at any stage on appeal, provided it is on the same facts - vide.

1. Attorney - General v Aramayo

2. Wolfson v CIR

3. W. S. Fernando v C.I.T.

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