2025 (8) TMI 1434 - AT - Income Tax

Assessment and appellate order set aside under s.147 r.w.s.144/144B; matter remitted for de novo reassessment, penalty s.271AAC reconsidered

Mahant Pandey Versus Commissioner of NFAC, Delhi

Mahant Pandey Versus Commissioner of NFAC, Delhi - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the reassessment under sections 147/148 (read with sections 144/144B) is valid in the absence of communication of reasons recorded for reopening and in circumstances where no return was filed before completion of reassessment. 2. Whether an assessment can be completed under section 143(3) when no notice under section 143(2) has been issued to the assessee and when the assessee files a return (timely or belated) only after issuance of the section 148 notice. 3. Whether additions made as unexplained cash credits/explanations (sections 69/69A) and other unexplained receipts (including amounts reflected in Form 26AS and cash payments/purchases) are sustainable on the record before the Assessing Officer without giving the assessee adequate opportunity to explain and produce supporting documents. 4. Whether penalty proceedings under section 271AAC (and other penalty provisions referred) are maintainable where the underlying assessment additions are made without disposing of the assessee's explanations or without affording a reasonable opportunity of hearing. 5. Whether the principles of natural justice (including communication of draft assessment, opportunity to respond to draft/reasons, and application of mind by the AO) were observed and, if not, whether the assessment and consequential penalty orders ought to be set aside/remitted. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reassessment under sections 147/148 in absence of communication of reasons for reopening Legal framework: Power to reopen a completed assessment is extraordinary and conditioned on recorded reasons forming the basis for belief that income has escaped assessment; communication of those reasons to the assessee upon request is required before completing reassessment (principles developed in GKN Driveshafts and subsequent High Court decisions). Precedent Treatment: The judgment discusses GKN Driveshafts (Apex Court) and subsequent High Court authorities (Berger Paints; Trend Electronics; Videsh Sanchar Nigam) holding that reassessment is bad in law if reasons for reopening, when sought, are not furnished and if there is no application of mind. Interpretation and reasoning: The Tribunal noted the assessee's contention that reasons recorded under section 148 were not communicated despite request. While the Revenue did not place evidence to controvert non-communication, the panel analysed that communication of reasons is a prerequisite when challenged and is integral to valid exercise of reopening power. The submissions of various High Court authorities were recorded to show that absence of communicated reasons vitiates reassessment in appropriate cases. Ratio vs. Obiter: Ratio - where reasons recorded for reopening are not communicated on request and record does not show application of mind, reassessment is vulnerable; Obiter - discussion of various High Court dicta and their background in relation to different factual matrices. Conclusion: The Tribunal accepted that deficiency in communication/application of mind could render reopening defective; consequently, it set aside the assessment and remitted the matter for de novo reassessment, directing that the assessee be given reasonable opportunity to be heard. Issue 2: Completion of assessment under section 143(3) without issuing notice under section 143(2) Legal framework: Section 143(2) procedure ordinarily issues when a return is filed to enable a hearing and filing of evidence before passing a regular assessment under section 143(3). The interplay with reassessment provisions under section 147/148 arises where returns are absent or belated. Precedent Treatment: The assessee relied on authorities holding that assessments made without issuing mandatory notices under section 143(2) are bad (citing High Court decisions and tribunal discussions, e.g., PCIT v. Jai Shankar Traders; Alpine Asia), while Revenue relies on the position that where no return was filed before reassessment, the Assessing Officer may proceed under reassessment provisions subject to compliance with prerequisites for reopening. Interpretation and reasoning: The Tribunal recorded the contention and legal arguments but did not decide the abstract legal issue as a point of final law. Instead it focused on factual insufficiency before the AO and the need to afford an opportunity to the assessee to produce documentation. The Tribunal observed that where reassessment is predicated on absence of return and unexplained credits, technical objections about section 143(2) notices do not absolve the AO of the obligation to apply mind and to afford hearing when material is offered. Ratio vs. Obiter: Obiter - the discussion of the technical interplay between sections 143(2)/143(3) and reassessment provisions, as the Tribunal did not base its final order on invalidity of assessment solely for lack of a section 143(2) notice. Conclusion: The Tribunal did not annul the assessment on the sole ground of absence of section 143(2) notice but remitted the matter for fresh adjudication so that the AO, having applied mind and after giving the assessee a reasonable opportunity, may proceed lawfully; thereby preserving the Revenue's right to reassess if justified by record and reasons. Issue 3: Sustenance of additions under sections 69/69A and other unexplained receipts without affording opportunity to explain Legal framework: Sections 69/69A permit addition of unexplained cash credits/receipts where the assessee fails to satisfactorily explain the nature and source of such entries. However, such additions require proper inquiry, consideration of explanations and supporting evidence, and cannot be based on conjecture or surmise. Precedent Treatment: The AO relied on established jurisprudence that unexplained cash credits can be taxed under sections 69/69A when not satisfactorily explained; the assessee invoked the need for consideration of departmental advances and documentary support to demonstrate genuineness. Interpretation and reasoning: The Tribunal found that the AO made additions after noting non-filing of return and absence of adequate explanation on record. However, because the assessee asserted availability of supporting documents and sought further opportunity to explain departmental receipts, the Tribunal considered it appropriate in the interest of justice to remit the matter for de novo reassessment rather than uphold additions made without full adjudication of the claimed evidence. Ratio vs. Obiter: Ratio - additions under sections 69/69A must follow proper consideration of explanations and evidence; additions made without affording opportunity to produce material are liable to be reconsidered. Obiter - detailed discussion of documentary particulars which the assessee claimed to possess. Conclusion: The Tribunal set aside the additions and remitted the matter for fresh adjudication, directing the AO to consider the assessee's explanations and documents and to not resort to conjecture; the remand allows the AO to either sustain or delete additions after proper application of mind. Issue 4: Validity of penalty proceedings under section 271AAC (and related penalties) where underlying assessment was passed without disposal of explanations Legal framework: Penalty under section 271AAC(1) attaches where income is determined to be income referred to in section 69 (i.e., unexplained credits); however, penalty is consequential upon the assessment and the finding of unexplained income after due process. Precedent Treatment: Penalty can stand only if the assessment/ determination on which it is based is sustainable and made after proper procedure; courts have set aside penalties where the underlying assessment is vitiated by procedural infirmities or where explanations were not considered. Interpretation and reasoning: Because the Tribunal set aside the assessment for de novo consideration in view of the assessee's asserted evidence and the lack of proper opportunity/application of mind, it necessarily quashed the consequential penalty orders and remitted them to be reconsidered after reassessment. Ratio vs. Obiter: Ratio - consequential penalties dependent on the upheld assessment cannot be sustained where the assessment itself is set aside for procedural defects. Obiter - commentary on timing/adequacy of opportunity in penalty context. Conclusion: The Tribunal set aside the penalty orders and directed that any penalty, if sought thereafter, be considered afresh in the light of the reassessment outcome and after affording a reasonable opportunity to the assessee. Issue 5: Observance of principles of natural justice, application of mind by the AO, and adequacy of opportunity to the assessee (including draft assessment and hearing requests) Legal framework: Administrative and adjudicatory actions must observe principles of natural justice; assessment orders must reflect application of mind and cannot be mere replicas of draft assessments. Case law recognises that absence of application of mind or non-consideration of objections renders assessment non est. Precedent Treatment: The judgment references decisions where orders reproducing draft assessment without considering objections were set aside (including High Court pronouncements cautioning imposition of costs where AOs fail to apply mind). Interpretation and reasoning: The Tribunal accepted the assessee's plea that material in support of departmental receipts existed and that further opportunity ought to be granted. Noting that the AO's order was passed without adequate adjudication of the assessee's explanations on record, the Tribunal concluded that fairness and justice required remand for de novo assessment with a clear direction to afford reasonable opportunity and to apply mind. Ratio vs. Obiter: Ratio - where there is a credible claim of available evidence and where the record shows that the AO did not consider such material or apply mind, the appropriate remedy is remand for fresh adjudication with reasonable opportunity. Obiter - reference to harsh measures (costs) mentioned in High Court dicta for repeated lack of application of mind. Conclusion: The Tribunal set aside both assessment and consequential penalty orders and remitted the matters for fresh adjudication. It directed the Assessing Officer to conduct reassessment de novo, to give the assessee a reasonable opportunity of hearing to produce supporting documents, and to refrain from unjustified adjournments by the assessee; in consequence, both appeals were partly allowed for statistical purposes.