2025 (3) TMI 934 - HC - Income Tax

Assessment order quashed for violating natural justice principles under Sections 143(3), 270A and 271AAD insufficient response time

M/s. R.R. Infraa Construction Represented by its Partner Mr. R. Murugaperumal Versus Deputy Commissioner of Income Tax, Central Circle, 1, Madurai, Additional Commissioner of Income Tax, Central Range, Madurai, Assistant Commissioner of Income Tax, Central Circle, 1, Madurai

The Madras HC quashed an assessment order under Section 143(3) and penalty orders under Sections 270A and 271AAD(1)(i) for violating principles of natural ... Validity of Assessment Order passed u/s 143(3) and Penalty order issued u/s 270A and 271AAD(1)(i) - violation of the principles of natural justice - HELD THAT:- The petitioner received the Annexure I to the Show Cause Notice dated 22.04.2023 later vide Notice dated 24.04.2023 which was issued by the 1st respondent under the subject ‘Furnishing of Annexure I of Show Cause Notice dated 22.04.2023 - Reg’ leaving only two days for the Petitioner to respond to the same. 26.04.2023 was the date fixed for personal hearing as in the above mentioned Show Cause Notice dated 22.04.2023. Thus, the petitioner requested further time to reply and furnish details. On 27.04.2023, the petitioner had also sent a similar Letter to the Directorate General of Income Tax, Chennai requesting to conclude the assessment after due consideration of Fast Track Record of the petitioner etc. However, the impugned Assessment Order dated 29.04.2023 was passed in a hurried manner to avoid lapsing of the assessment due to the limitation prescribed under Section 153B of the IT Act. As such, there is a clear violation of the principles of natural justice, although the respondent cannot be wholly blamed as assessment orders have to be passed within the time stipulated in the statute. It is noticed that the directions issued by the 2nd respondent on 22.03.2023 also has not been fully complied with in the impugned order. Therefore, to balance the interest of the petitioner and the respondent Department, the impugned Assessment Order deserves to be quashed and the case deserves to be remitted back to the 1st respondent to pass a final order on merits. The request of the petitioner for cross examination of various suppliers and sub-contractors to whom payment were made by the petitioner also cannot be extended, if no statements have been relied upon by the respondent Department in the proposal to disallow the expenses based on the documents that were seized during the search conducted under Section 132 of the IT Act on 20.07.2022. Only if statements of third parties were recorded and relied upon, the request for cross-examination of such third parties can be entertained. As far as the statements of own employees of the petitioner is concerned, unless such statements were retracted immediately after they were recorded, the statements recorded cannot be ignored. They are admissions of the petitioner. Thus, impugned Assessment Order passed u/s 143(3) and the consequential Penalty Orders are quashed and the cases are remitted back to the 1st respondent to pass a fresh Assessment Order. WP allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:Whether the impugned Assessment Order dated 29.04.2023 and the Penalty Orders dated 31.03.2024 were passed in violation of the principles of natural justice.Whether the petitioner was unjustly denied the opportunity for cross-examination of witnesses whose statements were relied upon in the assessment proceedings.The validity and legality of disallowances made in the assessment order concerning alleged bogus purchases and subcontractor expenses.The applicability and interpretation of procedural fairness and statutory compliance in the context of the Income Tax Act proceedings.2. ISSUE-WISE DETAILED ANALYSISViolation of Principles of Natural JusticeRelevant Legal Framework and Precedents: The principles of natural justice, particularly the right to a fair hearing and the opportunity to cross-examine witnesses, are central to the legal analysis. The Court referenced precedents such as Income Tax Officer Vs. M.Pirai Choodi and Conybio Healthcare (India) Pvt. Ltd. Vs. Commissioner of Customs, Chennai, which emphasize the necessity of procedural fairness.Court's Interpretation and Reasoning: The Court found that the assessment order was passed in haste due to statutory time constraints, leading to a violation of natural justice. The petitioner was not given adequate time to respond to the final show cause notice, and the opportunity for cross-examination was unjustly denied.Key Evidence and Findings: The Court noted that the petitioner received the annexure to the show cause notice only two days before the scheduled personal hearing, which was insufficient time to prepare a response.Application of Law to Facts: The Court applied the principles of natural justice to conclude that the assessment order was flawed due to procedural deficiencies.Treatment of Competing Arguments: The respondent's argument that the assessment was based on corroborative evidence was insufficient to justify the denial of cross-examination.Conclusions: The Court quashed the assessment order and remitted the case for a fresh assessment, ensuring compliance with natural justice principles.Denial of Cross-ExaminationRelevant Legal Framework and Precedents: The right to cross-examine is a fundamental aspect of fair trial rights. The Court referenced the precedent set in Jet Unipex Vs. Commissioner of Customs, Chennai, which outlines when cross-examination is necessary.Court's Interpretation and Reasoning: The Court held that cross-examination is warranted when statements from third parties are relied upon. However, the statements of the petitioner's own employees do not necessitate cross-examination unless retracted immediately.Key Evidence and Findings: The Court observed that the statements of the petitioner's employees were admissions and not retracted, thus not requiring cross-examination.Application of Law to Facts: The Court determined that the denial of cross-examination was justified concerning the petitioner's employees but not for third-party contractors or suppliers.Treatment of Competing Arguments: The petitioner argued for cross-examination based on procedural fairness, while the respondent maintained it was unnecessary for employee statements.Conclusions: The Court allowed cross-examination for third-party statements but upheld the denial for employee statements.Disallowances in Assessment OrderRelevant Legal Framework and Precedents: The disallowances were scrutinized under Sections 143(3), 270A, and 271AAD(1)(i) of the Income Tax Act, focusing on the legitimacy of expenses claimed.Court's Interpretation and Reasoning: The Court found that the disallowances were based on inadequate evidence and procedural lapses, necessitating a re-evaluation.Key Evidence and Findings: The petitioner failed to substantiate certain expenses, and discrepancies in vehicle registrations raised doubts about the legitimacy of transactions.Application of Law to Facts: The Court applied the legal standards for substantiating expenses and found the assessment order lacked sufficient evidence.Treatment of Competing Arguments: The petitioner argued for the validity of expenses, while the respondent highlighted discrepancies and lack of documentation.Conclusions: The Court quashed the disallowances and remitted the case for reassessment with proper evidentiary support.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The impugned Assessment Order dated 29.04.2023 was passed in a hurried manner to avoid lapsing of the assessment due to the limitation prescribed under Section 153B of the IT Act.'Core principles established: The judgment reinforced the principles of natural justice, emphasizing the right to a fair hearing and the necessity of cross-examination when third-party statements are relied upon.Final determinations on each issue: The Court quashed the impugned assessment and penalty orders, remitting the case for a fresh assessment with instructions to ensure procedural fairness and proper evidentiary support.