2024 (6) TMI 1501 - HC - Income Tax

Assessment order set aside and remanded for fresh inquiry into partners' finances with filing window and video-conference hearing

HC set aside the assessment order and remanded the matter for fresh consideration, finding the AO had relied selectively on one bank statement and failed ... Unexplained capital of partners - capacity of the partners and the flow of funds to the partnership firm - HELD THAT:- AO has focused on the bank statement relating to Punjab National Bank. There is no discussion at all with regard to the financial statement of V S Trading and Consultancy Private Limited, including the cash flow statement appended thereto. As regards Serenity Trust, it is noticeable that the assessing officer disregarded the credit entry of Rs. 46,50,000/- merely because there was a debit entry on the same date. As regards Bhavani Kumar, the bank statement has not been examined. With regard to Madhura Kumar Properties Private Limited, it appears that the variation was confirmed on account of non-production of the bank statement. In the ultimate analysis, it appears prima facie that the petitioner has placed on record sufficient evidence of the financial capability of the partners. In certain cases, the flow of funds has been established whereas it has not been established in others. By taking into account the fact that an addition of about Rs. 24.50 crores has been made, the interest of justice warrants that the petitioner be provided another opportunity by remanding the matter. The impugned order is set aside and the matter is remanded for reconsideration. The petitioner is permitted to submit additional documents, if any, within fifteen days from the date of receipt of a copy of this order. For such purpose, the respondent shall take necessary steps to provide access to the portal. Upon receipt thereof, the first respondent is directed to provide a reasonable opportunity to the petitioner, including a personal hearing through video conference, and thereafter issue a fresh order within three months from the date of receipt of such additional documents. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessing officer, in an assessment under the Income-tax Act, 1961, properly evaluated the partners' capacity and the flow of funds to the partnership when variations were confirmed despite documentary submissions by the taxpayer. 2. Whether the material placed on record by the taxpayer (financial statements, cash flow statement, and bank statements of alleged contributing partners) was sufficiently considered by the assessing officer before making additions totaling approximately Rs. 24.50 crores. 3. Whether interference under Article 226 is warranted to remit the assessment order for fresh consideration when the assessing officer appears to have omitted examination of relevant documents and made findings without affording a further opportunity to the taxpayer. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Adequacy of assessing officer's appraisal of partners' capacity and flow of funds Legal framework: Assessing officers are required to appraise evidence placed before them under the Income-tax Act, 1961, including bank statements and financial statements, and to give reasons for accepting or rejecting documentary explanations regarding source of capital and unexplained credits. Precedent treatment: The Court referred to established principles that an assessment officer must consider relevant material placed on record and that appellate/interference jurisdiction is available where material irregularity or failure to consider relevant material is shown (ratio followed). Interpretation and reasoning: Examination of the impugned order shows selective focus by the assessing officer. For one alleged contributor, only the Punjab National Bank statement was considered while the company's financial statements and cash flow statement were not discussed, despite those documents showing reserves, surplus and an indicated investment of about Rs. 23.80 crores. For another contributor, a clear credit entry in the bank statement was disregarded by the assessing officer on account of a contemporaneous debit entry without further analysis. For others, bank statements were not examined or non-production of specific bank statements was treated as conclusive. The Court found these lacunae significant because they affected the core finding on capacity and flow of funds. Ratio vs. Obiter: Ratio - an assessing officer must consider all material evidence fairly and record reasons when disregarding documentary proof of capacity/flow of funds. Obiter - commentary that some flows were established while others were not; this is case-specific guidance. Conclusions: The assessing officer did not adequately appraise all relevant documents presented by the taxpayer; therefore, the findings confirming variations lack sufficient recorded reasoning and consideration of material evidence. Issue 2 - Sufficiency of documents placed on record by taxpayer and effect of missing documents Legal framework: Taxpayers may discharge the onus of explaining unexplained credits or capital contributions by producing bank records, financial statements and other documentary proof. However, the absence of particular bank statements or proofs can be a legitimate basis for adverse inference if the taxpayer had the means to produce them and did not do so. Precedent treatment: The Court applied the general rule that production of relevant primary documents ordinarily requires examination by the assessing officer and that non-production may justify further inquiry rather than immediate confirmation of additions (followed). Interpretation and reasoning: The petitioner produced a range of documents: balance sheet showing substantial reserves and surplus, cash flow statement indicating large investments, and bank statements evidencing credits. For at least one contributor, specific bank accounts held with other banks (Bank of Maharashtra, UCO Bank) were not produced, and the assessing officer relied on such non-production. The Court treated non-production as a factor that may warrant further investigation but not immediate confirmation of large additions totaling Rs. 24.50 crores without affording an opportunity to rectify or supplement the record. Ratio vs. Obiter: Ratio - where substantial documentary evidence of capacity and flow is placed before the assessing officer but some relevant documents are not produced, fairness requires permitting the taxpayer an opportunity to furnish additional documents before confirming large additions. Obiter - observations distinguishing between documents that establish flow and those that merely evidentially suggest capacity. Conclusions: The documents placed on record prima facie demonstrate financial capacity and, in part, flow of funds; missing documents justified further inquiry rather than immediate adverse conclusion. The balance favors remand for reconsideration with an opportunity to produce additional evidence. Issue 3 - Appropriateness of writ relief (remand) under Article 226 and directions on further proceedings Legal framework: High Courts exercising writ jurisdiction under Article 226 may interfere with administrative/assessment orders when there is a failure to consider material evidence, absence of reasons, or denial of reasonable opportunity; relief may include remand for fresh consideration with directions to afford opportunity to the affected party. Precedent treatment: The Court invoked the principle that where large additions are made without adequate appraisal of documentary evidence, remand for reconsideration with opportunity to produce further documents and to be heard is appropriate (followed). Interpretation and reasoning: Considering that an addition of about Rs. 24.50 crores was confirmed and that prima facie material was on record supporting the taxpayer's case (with lacunae in the assessing officer's discussion), the interest of justice required remand. The Court directed that the taxpayer may submit additional documents within a fixed timeframe, that the revenue provide portal access, and that the assessing authority afford a reasonable opportunity including personal hearing via video conference and pass a fresh order within three months thereafter. Ratio vs. Obiter: Ratio - remand with specific directions to allow submission of additional documents and personal hearing is an appropriate remedy where the assessing officer failed to consider relevant material before confirming substantial additions. Obiter - procedural specifics (portal access, video conference) are practical directions tailored to this matter. Conclusions: Interference under Article 226 was warranted; the matter is remanded for fresh consideration with directions to permit additional evidence and hearing and to pass a reasoned order within a specified period.