ITAT Mumbai: CIT(A) Cannot Introduce New Source of Income While Exercising Enhancement Powers Under Section 251

April 17, 2026 : The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the Commissioner of Income Tax (Appeals) cannot expand the scope of assessment by introducing a new source of income while exercising enhancement powers under Section 251 of the Income-tax Act, 1961. The Bench comprising Saktijit Dey and Arun Khodpia delivered the decision in cross appeals filed in M/s Skyline Greathills v. DCIT for Assessment Year 2012–13.

The assessee, a partnership firm engaged in real estate development, had filed its return declaring income of ₹22.85 crore. The assessment was completed under Section 143(3), wherein the Assessing Officer made additions on account of deemed dividend under Section 2(22)(e) and valuation issues arising from a Joint Development Agreement (JDA).

During appellate proceedings, the Commissioner (Appeals), while granting partial relief, issued a show cause notice proposing enhancement of income by reducing approximately ₹11.97 crore from the closing Work-in-Progress (WIP). The basis for this adjustment was that the assessee had offered undisclosed income during a survey but had neutralised its impact by capitalising corresponding expenditure in WIP.

The Tribunal found that the issue relating to WIP had never been examined by the Assessing Officer during the original assessment proceedings. It held that the appellate authority exceeded its jurisdiction by introducing a completely new source of income. Reaffirming settled legal principles, the Tribunal observed that the power of enhancement under Section 251 is confined to matters that were considered by the Assessing Officer, either expressly or by necessary implication, and cannot be used to widen the scope of assessment. It further clarified that where a new issue arises, the Revenue must take recourse to other statutory provisions such as Sections 147, 263 or 154, subject to fulfilment of prescribed conditions.

On this reasoning, the Tribunal set aside the enhancement made by the Commissioner (Appeals) in respect of WIP, holding it to be unsustainable in law.

The Tribunal also dismissed the Revenue’s appeal on the issue of deemed dividend under Section 2(22)(e), noting that the assessee was neither a registered nor a beneficial shareholder of the lending company. It followed earlier decisions in the assessee’s own case, which had been affirmed by the Bombay High Court, to hold that such receipts cannot be taxed as deemed dividend in the hands of a non-shareholder.

With respect to the addition based on valuation under the Joint Development Agreement, the Tribunal upheld the findings of the Commissioner (Appeals) that the land constituted stock-in-trade and not a capital asset. It held that the Assessing Officer erred in adopting the stamp duty value of the entire land as consideration, ignoring the actual terms of the agreement under which the assessee was entitled to constructed area equivalent to 16,500 sq. metres. The Tribunal reiterated that income in such development arrangements arises only when the constructed units are sold and not at the stage of execution of the agreement.

In conclusion, the Tribunal allowed the assessee’s appeal by quashing the invalid enhancement and dismissed the Revenue’s appeal on both substantive additions, reinforcing the principle that appellate powers cannot be used to introduce new sources of income beyond the scope of the original assessment.