2025 (7) TMI 1737 - AT - Income Tax

CIT(A) cannot enhance assessment under Section 251 without issuing mandatory enhancement notice under Section 251(2)

Daurau Farm LLP Versus ACIT, Central Circle-II, Noida

The ITAT Delhi held that the CIT(A) lacked jurisdiction to enhance the assessment under section 251 due to failure to issue the mandatory enhancement ... Power of CIT(A) to enhance the assessment u/s 251 - Failure to issue notice - Addition made on account of trade creditors under section 68 - Fresh addition on account of net profit at the rate of 8% of turnover - HELD THAT:- On perusal of the entire order of the Learned CITA, we find that there is absolutely no whisper about issuance of notice of enhancement in terms of section 251(2) of the Act by the Learned CITA for proposing the addition on account of net profit. Hence the assessee was never given an opportunity for responding to the enhancement notice, which is a statutory notice to be issued to the assessee. Failure of the issuance of the statutory enhancement notice to the assessee would become fatal to the entire addition proposed thereon on account of net profit at the rate of 8% of turnover. Hence, we have no hesitation to hold that the addition made on account of net profit at the rate of 8% in the sum is to be deleted on this count itself and is accordingly deleted. Accordingly, the grounds raised by the assessee are allowed. ISSUES: Whether the addition made on account of incremental trade creditors under section 68 of the Income-tax Act, 1961 was justified.Whether the learned Commissioner of Income Tax (Appeals) was justified in rejecting the books of accounts and estimating net profit at the rate of 8% of turnover under section 145(3) of the Act.Whether the addition on account of net profit estimated at 8% of turnover could be sustained without issuance of a statutory notice of enhancement under section 251(2) of the Act. RULINGS / HOLDINGS: The addition on account of incremental trade creditors under section 68 made by the Assessing Officer was deleted by the Commissioner of Income Tax (Appeals), and this deletion was not challenged before the Tribunal.The Commissioner of Income Tax (Appeals) rejected the books of accounts and made an addition by estimating net profit at the rate of 8% of turnover under section 145(3) of the Act, but this addition was held to be invalid as there was no issuance of a statutory enhancement notice under section 251(2) of the Act.The failure to issue the statutory notice of enhancement to the assessee rendered the addition on account of net profit at 8% of turnover unsustainable, leading to its deletion. RATIONALE: The legal framework applied includes section 68 (unexplained cash credits), section 115BBE (special provisions for income declared to be income of other persons), section 145(3) (rejection of books of accounts and estimation of income), and section 251(2) (notice of enhancement) of the Income-tax Act, 1961.The Tribunal emphasized the mandatory requirement of issuing a statutory notice under section 251(2) before enhancing income on estimation basis, underscoring procedural fairness and the assessee's right to be heard.The Tribunal noted reliance on precedents holding that section 68 could not be applied to trade creditors without proper evidence and that the onus of proving genuineness of purchases lies on the assessee.No dissent or doctrinal shift was indicated; the decision reaffirms the necessity of compliance with statutory procedural safeguards in assessment enhancements.