Assessee's partial compliance with section 142(1) notice justified assessment under section 143(3) over section 144

ITAT Bangalore held that assessment order u/s 143(3) was correctly passed as assessee made partial compliance with s.142(1) notice, not complete non-compliance required for s.144 assessment. Regarding survey disclosure, AO exceeded jurisdiction in limited scrutiny by applying higher tax rates u/s 115BBE without converting to complete scrutiny. Addition of Rs 24,00,000 u/s 68 for cash tax payment was deleted as assessee satisfactorily explained cash availability through bank withdrawal evidenced by statements. Appeal partially allowed.

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The core legal questions considered in this appeal are:

1. Whether the assessment order passed under section 143(3) of the Income-tax Act, 1961 (the Act) is valid when the Assessing Officer (AO) had proposed to complete the assessment ex parte and issued notices under section 144 of the Act.

2. Whether the additional income of Rs. 1,14,20,100/- voluntarily declared by the assessee during a survey under section 133A can be taxed without independent evidence collected during the survey proceedings.

3. Whether the levy of tax and surcharge under section 115BBE of the Act on the additional income declared during the survey is valid in the context of the case being selected for limited scrutiny and the absence of invocation of sections 68, 69, 69A, 69B, 69C, or 69D.

4. Whether the addition of Rs. 24,00,000/- as unexplained cash credit under section 68 is justified when the assessee has explained the source of cash payment for tax and provided bank statements evidencing cash withdrawals.

5. Whether interest under section 234A is rightly levied when the impugned additions are disputed.

Issue-wise Detailed Analysis:

1. Validity of Assessment Order Passed Under Section 143(3) vs. Section 144

Legal Framework and Precedents: Section 143(3) mandates completion of assessment after considering the evidence and submissions of the assessee, while section 144 applies to best judgment assessments where the assessee fails to comply with notices under section 142(1). The AO's power to pass an order under section 144 arises only if the assessee fails to comply with all terms of the notice under section 142(1).

Court's Interpretation and Reasoning: The Court examined the sequence of notices issued by the AO, including notices dated 21.6.2019, 10.4.2019, and 10.5.2019, which warned the assessee that failure to furnish information would result in assessment under section 144. The assessee partially complied by submitting information on 20.5.2019.

The Court held that since the assessee had complied partially with the notices under section 142(1), the AO was justified in passing the assessment order under section 143(3). The invocation of section 144 requires complete non-compliance, which was not the case here.

Treatment of Competing Arguments: The assessee relied on a High Court decision holding that if the AO chooses to assume jurisdiction under section 144, the assessment must be passed under that section. The Court distinguished the facts, noting partial compliance by the assessee.

Conclusion: The assessment order under section 143(3) is valid and not vitiated by the AO's prior notices under section 144.

2. Taxability of Additional Income Declared During Survey Without Independent Evidence

Legal Framework and Precedents: Instructions from the Central Board of Direct Taxes (CBDT), including Instruction No. 286/2003 and Survey Manual 2019, emphasize that disclosures without supporting evidence should not be used to make additions. The assessee relied on these to argue that the declaration of Rs. 1,14,20,100/- during survey, made voluntarily to cover omissions or commissions, cannot be taxed without corroborative evidence.

Court's Interpretation and Reasoning: The Court noted that the assessee voluntarily disclosed the amount during the survey and included it in the return of income under the head "income from other sources," paying tax thereon. The case was selected for limited scrutiny focused solely on verification of cash tax payments during demonetization, not on the survey disclosure.

The Court observed that the AO was not authorized to examine issues beyond the limited scrutiny scope. Furthermore, the assessee did not raise the issue of non-taxability before the AO or Commissioner (Appeals) and accepted the assessment order. The Court also highlighted the absence of any retraction or explanation by the assessee regarding the nature of the disclosure over a period of eight years.

Treatment of Competing Arguments: The assessee argued that the disclosure was a mere statement without evidence and should not be taxed. The Court rejected this, emphasizing the voluntary nature of the disclosure, its inclusion in the return, and the failure to challenge taxability earlier.

Conclusion: The Court dismissed the ground that the additional income declared during the survey could not be taxed, holding that the assessee's voluntary disclosure and acceptance in the return preclude such contention.

3. Applicability of Section 115BBE Tax and Surcharge on Survey Disclosure in Limited Scrutiny

Legal Framework: Section 115BBE prescribes a higher rate of tax on undisclosed income identified under certain sections (68, 69, 69A, 69B, 69C, 69D). The case was selected for limited scrutiny under section 143(2) with the specific purpose of examining cash tax payments during demonetization.

Court's Interpretation and Reasoning: The Court held that since the scrutiny was limited to a specific issue, the AO could not exceed jurisdiction by levying tax and surcharge under section 115BBE on the survey disclosure without converting the case to complete scrutiny. The AO did not invoke the relevant sections that trigger section 115BBE.

Treatment of Competing Arguments: The assessee argued the levy was void as it was not proposed in any notice and was contrary to circular instructions. The revenue contended that the rate under section 115BBE is automatic on undisclosed income. The Court sided with the assessee on jurisdictional grounds.

Conclusion: The levy of tax and surcharge under section 115BBE on the survey disclosure in a limited scrutiny case is not valid, and this ground was allowed.

4. Addition of Rs. 24,00,000/- as Unexplained Cash Credit Under Section 68

Legal Framework and Precedents: Section 68 applies to unexplained cash credits where the assessee fails to explain the nature and source of such credits. The assessee claimed that the cash payment of Rs. 24 lakhs was made from cash withdrawals from his bank account and other receipts, and that section 68 does not apply to tax payments.

Court's Interpretation and Reasoning: The Court examined the bank statements showing cash withdrawals totaling Rs. 28,30,000/- prior to the cash payment of tax. There was no evidence that the withdrawn cash was used for any purpose other than tax payment. The lower authorities rejected the explanation without any contrary material.

The Court held that in absence of any contrary evidence, the explanation of the assessee was acceptable, and the addition under section 68 was not justified. The Court also noted that the addition duplicated the income already offered during the survey, resulting in double taxation.

Treatment of Competing Arguments: The revenue argued that the source was unexplained and no documentary evidence was furnished beyond bank statements. The Court found the bank statements sufficient and the revenue's rejection unsustainable.

Conclusion: The addition of Rs. 24,00,000/- under section 68 is deleted, and the ground is allowed.

5. Levy of Interest Under Section 234A

Legal Framework: Section 234A provides for interest on delay in filing return of income or payment of advance tax.

Court's Interpretation and Reasoning: The Court noted that since the impugned additions were partly disallowed, the levy of interest under section 234A on those additions was also disputed. However, detailed adjudication on this ground was not elaborated in the judgment, and it appears subsumed within the findings on the validity of additions.

Conclusion: No separate relief was granted on this ground as the interest is consequential to the additions upheld or disallowed.

Significant Holdings:

"As the assessee has complied with part of the notice under section 142 (1) of the Act, the assessment order passed under section 143 (3) of the Act is in accordance with provisions of the law."

"The AO was precluded from examining any issue other than payment of tax in cash during demonetization period as the case was selected for limited scrutiny."

"The levy of higher rate of tax and surcharge under section 115BBE on the survey disclosure without converting the limited scrutiny into complete scrutiny is not valid."

"In absence of any contrary evidence, the explanation of the assessee regarding cash withdrawals as source of cash payment of tax is acceptable and addition under section 68 is not justified."

"Voluntary disclosure by the assessee during survey, inclusion in return of income, and payment of tax thereon preclude the contention that such income cannot be taxed."

Final determinations on the issues are:

- The assessment order under section 143(3) is valid despite notices under section 144, as there was partial compliance by the assessee.

- The additional income declared during survey is taxable, and the assessee cannot avoid tax liability by claiming lack of independent evidence.

- Levy of tax and surcharge under section 115BBE on the survey disclosure in limited scrutiny is invalid and set aside.

- Addition of Rs. 24,00,000/- as unexplained cash credit under section 68 is deleted due to adequate explanation and absence of contrary evidence.

- Interest under section 234A is consequential and dependent on the validity of additions.

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