Assessment order set aside for giving only two days response time violating natural justice principles

The ITAT set aside a show cause/draft assessment order where the AO provided only two days (19.04.2021 to 21.04.2021) for the assessee to respond. The tribunal held this timeframe violated principles of natural justice, citing precedent from Chhattisgarh HC in MM Wonder Park Private Limited case, which found seven days unreasonably short for section 148A(b) notices. The matter was remitted back to the AO with directions to afford reasonable opportunity of hearing to the assessee before deciding afresh.

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ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the disallowance of Rs. 123,97,06,013/- as unexplained expenditure under Section 69C of the Income Tax Act, 1961, was justified.
• Whether the assessment order was passed in violation of the principles of natural justice due to insufficient time given for response to the draft assessment order during the COVID-19 lockdown.
• The appropriateness of the procedure followed by the Assessing Officer (AO) in making additions under Section 69C without rejecting the books of accounts or doubting the sales.

ISSUE-WISE DETAILED ANALYSIS

1. Disallowance of Purchases as Unexplained Expenditure

- Relevant Legal Framework and Precedents: Section 69C of the Income Tax Act pertains to unexplained expenditure, where the source of expenditure is not satisfactorily explained by the assessee.

- Court's Interpretation and Reasoning: The Tribunal upheld the AO's decision to treat the entire purchase amount as unexplained expenditure. The AO had issued notices to parties from whom purchases were claimed, but only a few responded, and discrepancies were found in the confirmations received.

- Key Evidence and Findings: The assessee failed to provide transportation details, confirmations from all suppliers, or evidence of genuine business transactions. The Directorate General of Goods and Services Tax had also detected fraudulent activities involving the assessee.

- Application of Law to Facts: The Tribunal agreed with the AO's application of Section 69C, as the assessee could not substantiate the legitimacy of the purchases.

- Treatment of Competing Arguments: The assessee argued that the purchases were genuine, supported by GST filings, but failed to provide adequate evidence or respond to notices effectively.

- Conclusions: The Tribunal confirmed the addition of Rs. 123,97,06,013/- as unexplained expenditure under Section 69C.

2. Violation of Principles of Natural Justice

- Relevant Legal Framework and Precedents: Principles of natural justice require that parties be given a reasonable opportunity to present their case. References were made to judgments emphasizing adequate response time.

- Court's Interpretation and Reasoning: The Tribunal found that the assessee was not afforded reasonable time to respond to the draft assessment order, especially during the COVID-19 lockdown.

- Key Evidence and Findings: The draft assessment order was issued on 19.04.2021, with a response deadline of 21.04.2021, amidst a city-wide lockdown.

- Application of Law to Facts: The Tribunal noted that the short response period violated natural justice principles, as highlighted in similar cases where courts set aside orders due to inadequate response time.

- Treatment of Competing Arguments: The Revenue argued against setting aside the order due to the assessee's non-compliance, but the Tribunal prioritized procedural fairness.

- Conclusions: The Tribunal set aside the draft assessment order and remitted the matter to the AO for fresh adjudication with adequate response time.

SIGNIFICANT HOLDINGS

- Core Principles Established: The Tribunal emphasized the importance of adhering to natural justice principles by providing reasonable response time, especially during extraordinary circumstances like a pandemic.

- Final Determinations on Each Issue: The addition under Section 69C was upheld due to lack of evidence from the assessee, but the procedural aspect of the assessment was remitted for fresh consideration due to insufficient response time.

Overall, the Tribunal's decision reflects a balance between upholding tax compliance and ensuring procedural fairness in tax assessments.

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