2025 (3) TMI 1482 - AT - Income Tax

Tax Reassessment Dispute Overturned: CIT(A) Order Set Aside, Fresh Hearing Mandated with Comprehensive Review of Section 69A Additions

The SC/Tribunal addressed multiple tax-related issues involving income tax reassessment. The key outcome was setting aside the CIT(A)'s order dismissing ... Validity of order passed by CIT(A) - main contention was that the AO passed the order u/s 147 r.w.s. 144B of the Act without granting adequate opportunity of being heard HELD THAT:- The undisputed fact is that the Ld. CIT(A) has dismissed the appeal without deciding the grounds on merits. Although it is stated in para 4 of the order that “the grounds of appeal are adjudicated”, there is no discussion, analysis, or decision on any of the specific grounds raised. The appellate order must reflect proper application of mind and deal with the contentions raised by the appellant. It is well settled that dismissal of appeal in limine without disposal on merits, especially when serious additions are involved, causes grave prejudice and violates the principles of natural justice. In view of the above facts and in the interest of justice, we deem it fit to restore the matter back to the file of the CIT(A) for fresh adjudication on all grounds of appeal after granting adequate opportunity of being heard to the assessee. The assessee is also directed to cooperate in the proceedings and furnish necessary submissions and evidence as required. Appeal of the assessee is allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:(a) Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in law and on facts by dismissing the appeal filed by the assessee for non-compliance with appeal notices without adjudicating the grounds of appeal on merits;(b) Whether the Assessing Officer (AO) was justified in making a substantial addition of Rs.1,66,32,866/- under section 69A of the Income Tax Act, 1961 (the Act) treating the alleged short-term capital gains from trading in shares of a penny stock company as unexplained money;(c) Whether the AO was justified in disallowing the short-term capital loss of Rs.5,64,910/- claimed by the assessee from Futures & Options (F&O) transactions for lack of proper details, treating the loss as fictitious;(d) Whether the reassessment order under section 147 read with section 144B of the Act was passed without providing adequate opportunity of being heard to the assessee, thereby violating principles of natural justice;(e) Whether the levy of interest under sections 234A, 234B, and 234C of the Act is justified;(f) Whether initiation of penalty proceedings under sections 271AAC(1) and 270A of the Act is justified in light of the additions made;(g) Whether the appellate authority's failure to decide the appeal on merits and dismissal in limine is legally sustainable.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Dismissal of Appeal by CIT(A) Without Deciding Grounds on MeritsLegal Framework and Precedents: The principles of natural justice require that an appellate authority must consider and adjudicate the grounds raised by the appellant before dismissing an appeal. Dismissal in limine without hearing or deciding substantive grounds, especially in cases involving substantial additions, is contrary to settled legal principles. The maxim 'Vigilantibus et non dormientibus jura subveniunt' invoked by CIT(A) underscores that the law aids those who are vigilant, but this principle cannot justify denial of hearing or adjudication on merits.Court's Interpretation and Reasoning: The Tribunal observed that although the CIT(A) stated in the order that the grounds were adjudicated, there was no discussion, analysis, or decision on any specific ground. The appeal was dismissed solely on the ground of non-compliance with notices, without considering the submissions filed by the assessee before the AO. This amounted to a failure to apply mind and violated principles of natural justice.Application of Law to Facts: The Tribunal found that the CIT(A)'s order was non-speaking and did not reflect any application of mind to the merits of the appeal. The dismissal in limine caused grave prejudice to the assessee, who faced substantial additions. The Tribunal held that such dismissal without disposal on merits is impermissible.Conclusion: The Tribunal set aside the CIT(A) order dismissing the appeal and restored the matter for fresh adjudication on all grounds after granting adequate opportunity to the assessee.Issue (b): Addition under Section 69A Treating Short-Term Capital Gains as Unexplained MoneyLegal Framework and Precedents: Section 69A of the Act permits the AO to treat any money, bullion, jewellery or other valuable article or thing found in possession of the assessee as unexplained money if the assessee fails to satisfactorily account for it. The AO's power under section 147 to reassess income includes making additions where undisclosed income is detected. Judicial precedents emphasize that additions under section 69A require credible evidence and cannot be based on suspicion alone.Court's Interpretation and Reasoning: The AO relied on the facts that the shares purchased were of a penny stock company with no genuine business activity, previously suspended by the stock exchange and flagged by SEBI as a shell company. The AO also referred to SEBI's action and judicial precedents to disbelieve the genuineness of transactions and held that the assessee routed unaccounted income through accommodation entries. The AO noted that the purchases were made through SEBI-registered brokers but disregarded this on grounds of the scrip's dubious nature and marginal gains on sale.Key Evidence and Findings: The AO relied on SEBI's public notices, stock exchange suspension records, and the pattern of transactions. The assessee produced contract notes, bank statements, and payment through account payee cheques to establish genuineness.Treatment of Competing Arguments: The assessee argued that the transactions were genuine, supported by documentary evidence and routed through legitimate brokers. The AO rejected these arguments based on the nature of the scrip and the pattern of transactions indicating accommodation entries.Conclusion: The Tribunal did not decide on the merits of this addition due to the procedural defect in the appellate order. The matter was remanded to CIT(A) for fresh adjudication on merits with proper opportunity to the assessee.Issue (c): Disallowance of Short-Term Capital Loss from F&O TransactionsLegal Framework and Precedents: Losses from trading in F&O are allowable if substantiated with proper records, including scrip-wise and date-wise details. The AO can disallow losses if they appear fictitious or are claimed without adequate evidence.Court's Interpretation and Reasoning: The AO disallowed the claimed loss of Rs.5,64,910/- for want of proper details, holding the loss as fictitious and intended to offset fictitious gains.Application of Law to Facts: The assessee failed to provide detailed evidence to substantiate the loss. The AO's disallowance was based on lack of proper documentation.Conclusion: The Tribunal did not adjudicate this issue on merits and remanded it for fresh consideration.Issue (d): Adequacy of Opportunity of Hearing Before Passing Reassessment OrderLegal Framework and Precedents: Principles of natural justice require that before passing an order under section 147 read with section 144B, the AO must provide adequate opportunity of hearing to the assessee. The time allowed to reply to show cause notices must be reasonable.Court's Interpretation and Reasoning: The assessee contended that the AO issued a show cause notice under section 148A(b) on 11.03.2023 with a reply deadline of 16.03.2023, allowing only four working days, and further, the AO passed the reassessment order on 22.03.2023 without considering the submissions or granting adjournment requests.Application of Law to Facts: The Tribunal noted the short time frame and the AO's failure to consider the assessee's submissions, which amounted to violation of the audi alteram partem principle.Conclusion: The matter was remanded for fresh adjudication after providing adequate opportunity of hearing.Issue (e): Levy of Interest under Sections 234A, 234B, and 234CLegal Framework: Interest under these sections is leviable for defaults in payment of advance tax or delay in filing returns. However, if the additions are set aside or reassessed, the question of interest may also require reconsideration.Court's Reasoning: The Tribunal did not decide the issue of interest as the substantive additions were not adjudicated and remanded the matter.Issue (f): Initiation of Penalty Proceedings under Sections 271AAC(1) and 270ALegal Framework: Penalty under section 271AAC(1) is attracted for concealment of income or furnishing inaccurate particulars in relation to undisclosed income added under section 115BBE or 69A. Section 270A penalizes under-reporting or misreporting of income. However, penalty proceedings depend on the validity of the additions.Court's Reasoning: Since the additions were not adjudicated on merits, the Tribunal refrained from commenting on penalty proceedings and remanded the matter.3. SIGNIFICANT HOLDINGS'The appellate order must reflect proper application of mind and deal with the contentions raised by the appellant. It is well settled that dismissal of appeal in limine without disposal on merits, especially when serious additions are involved, causes grave prejudice and violates the principles of natural justice.''In view of the above facts and in the interest of justice, we deem it fit to restore the matter back to the file of the CIT(A) for fresh adjudication on all grounds of appeal after granting adequate opportunity of being heard to the assessee.'The Tribunal established the core principle that appellate authorities must pass speaking orders addressing the grounds raised and cannot dismiss appeals without adjudication on merits, particularly when substantial additions and penalties are involved.The final determination was to allow the appeal for statistical purposes, set aside the CIT(A) order dismissing the appeal in limine, and remit the matter for fresh adjudication with directions to provide proper opportunity of hearing and consider all submissions and evidence.