2025 (5) TMI 1163 - AT - Income Tax

Legal Victory: Taxpayer Wins Against Arbitrary Assessment, Challenging Unjustified Income Tax Additions Under Section 144

The SC/Tribunal ruled in favor of the taxpayer, setting aside additions made by the Assessing Officer under section 144 of the Income Tax Act. The court ... Validity of assessment order passed by the ITO, Ward-34(4), Delhi u/s 144 - addition of 8% of the turnover - HELD THAT:- As no notice u/s 143(2) of the Act being served upon the assessee and the addition of 8% of the turnover by the assessee annually on the basis of the documents so furnished before the said authorities though alleging non filing of any supporting document in support of the cash deposits made in the ICICI Bank, is found to be erroneous, total non-application of mind, bad in law and, thus, liable to be deleted. The addition made by the Ld. AO confirmed by the First Appellate Authority is, thus, deleted. Appeal filed by the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:Whether the Assessing Officer (AO) was justified in making an addition of Rs. 32,35,000/- under section 144 of the Income Tax Act, 1961 (the Act) on account of alleged undisclosed cash deposits during the demonetization period without proper verification and application of mind.Whether the AO erred in recording incorrect facts regarding non-filing of the return of income by the assessee for Assessment Year 2017-18, when in fact the return was filed declaring a business loss.Whether the AO was legally competent to make additions without issuing a mandatory notice under section 143(2) of the Act.Whether the assessee had complied with notices issued under section 142(1) of the Act by furnishing all relevant documents and explanations regarding the source of cash deposits and credit entries in bank statements.Whether the addition of 8% of the turnover as undisclosed income, in the absence of any adverse material or non-filing of supporting documents, was justified.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legitimacy of addition of Rs. 32,35,000/- under section 144 of the ActRelevant legal framework and precedents: Section 144 of the Income Tax Act empowers the AO to make best judgment assessment when the assessee fails to comply with the provisions of the Act or does not cooperate in the assessment proceedings. However, the AO's power is circumscribed by the requirement of proper application of mind and consideration of the evidence and explanations furnished by the assessee.Court's interpretation and reasoning: The Tribunal noted that the addition was made on the basis of an incorrect premise that the assessee had not filed its return of income, whereas the assessee had indeed filed the return declaring a loss of Rs. 2,17,935/-. The AO's order was found to be based on an erroneous understanding of facts.Key evidence and findings: The assessee had produced purchase bills from a Thailand-based company for import of flowers, bills of entry, and proof of payment of customs duty verified from the ICEGATE site. These documents were submitted before the AO but were not duly considered. The payments related to imports were made through the assessee's ICICI Bank account, and the sales were on a cash basis with deposits made into the current account for payments against imported goods and customs duty.Application of law to facts: The Tribunal found that the AO failed to apply his mind to the documentary evidence provided by the assessee, resulting in an unwarranted addition. The addition under section 144 was thus held to be unjustified.Treatment of competing arguments: The Department did not controvert the fact of return filing or the submission of documents supporting the cash deposits. The AO's failure to consider these documents was a significant lapse.Conclusions: The addition of Rs. 32,35,000/- under section 144 was set aside as it was based on incorrect facts and non-application of mind.Issue 2: Incorrect recording of non-filing of return of incomeRelevant legal framework and precedents: Filing of return of income is a fundamental procedural requirement. The AO must correctly record the status of return filing before proceeding with assessment or additions.Court's interpretation and reasoning: The Tribunal observed that the AO's order incorrectly stated that the assessee had not filed its return for AY 2017-18, which was factually incorrect. The assessee had filed the return on 05.09.2019 declaring a loss.Key evidence and findings: The return filed by the assessee was on record and was not disputed by the Department.Application of law to facts: The erroneous recording of non-filing led to improper initiation of proceedings and additions, rendering the AO's order flawed.Treatment of competing arguments: The Department failed to rebut the evidence of return filing.Conclusions: The AO's order was held to be based on incorrect facts, undermining the validity of the assessment.Issue 3: Non-issuance of mandatory notice under section 143(2) before making additionsRelevant legal framework and precedents: Section 143(2) mandates that before making any addition or adjustment to the income declared in the return, the AO must issue a notice to the assessee, providing an opportunity to be heard.Court's interpretation and reasoning: The Tribunal found no evidence on record that a notice under section 143(2) was issued to the assessee prior to making the addition. The AO himself did not mention issuance of such notice in the assessment order.Key evidence and findings: The absence of section 143(2) notice was not controverted by the Department.Application of law to facts: The failure to issue mandatory notice vitiates the assessment and the additions made.Treatment of competing arguments: The Department relied on orders of lower authorities but could not justify the procedural lapse.Conclusions: The additions were held to be invalid due to non-compliance with mandatory procedural requirements.Issue 4: Compliance with notices under section 142(1) and furnishing of documentsRelevant legal framework and precedents: Section 142(1) notice requires the assessee to produce evidence and documents relevant to the assessment. Compliance with such notices is essential for a fair assessment.Court's interpretation and reasoning: The assessee complied with the notices under section 142(1) and furnished all relevant documents, including financial statements, bank statements, purchase bills, and customs duty payment proofs.Key evidence and findings: Documents from pages 3 to 15 of the paper book were submitted before the AO and appellate authorities, demonstrating compliance.Application of law to facts: The AO's repeated assertion that the assessee did not comply with section 142(1) notices was contradicted by the documentary evidence.Treatment of competing arguments: The Department did not dispute the submission of documents but proceeded to make additions disregarding them.Conclusions: The AO's findings of non-compliance were rejected, affirming that the assessee had cooperated fully in the assessment proceedings.Issue 5: Justification for addition of 8% of turnover as undisclosed incomeRelevant legal framework and precedents: Additions on the basis of unexplained cash deposits or unexplained turnover must be supported by credible evidence and proper application of mind.Court's interpretation and reasoning: The AO added 8% of the turnover (Rs. 56,10,150/-) as undisclosed income on the premise that the assessee had not filed return or supporting documents. The Tribunal rejected this, noting that the return was filed and supporting documents were furnished.Key evidence and findings: The financial statements and other documents were available on record and not disputed.Application of law to facts: The addition was arbitrary and made without proper basis or consideration of evidence.Treatment of competing arguments: The Department relied on lower authorities but failed to establish any substantive evidence to justify the addition.Conclusions: The arbitrary addition of 8% of turnover was deleted.3. SIGNIFICANT HOLDINGSThe Tribunal held that the addition of Rs. 32,35,000/- under section 144 was based on incorrect facts and total non-application of mind, and thus liable to be deleted.The Tribunal emphasized that 'no notice u/s 143(2) of the Act being served upon the assessee and the addition of 8% of the turnover by the assessee annually on the basis of the documents so furnished before the said authorities though alleging