2025 (9) TMI 295 - AT - Income Tax

Assessed income enhancement set aside where no notice under section 251 issued; appeal grounds allowed

Dewan Chand Versus CIT (Appeals), Coimbatore

Dewan Chand Versus CIT (Appeals), Coimbatore - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the Appellate Authority could enhance the assessed income without issuance of a notice under the statutory provision for enhancement (Section 251), when an earlier assessment order under Section 143(3)/250 had already determined a lower income. 2. Whether the rejection of books of account and adoption of a net profit rate (8% of turnover) by the appellate authority was sustainable in the absence of a speaking order explaining (a) reasons for rejecting the books, (b) why the specific net profit rate was selected, and (c) what replies of the assessee were considered and why they were rejected. 3. Whether additions made by the Assessing Officer on account of unverifiable expenses are affected by the assessee having disclosed surrendered income at the time of a survey and having included that sum in the return. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Power to enhance income at appellate stage without issuance of statutory notice for enhancement (Section 251) Legal framework: The statutory scheme provides that where an appellate authority proposes to enhance an assessment determined under Section 143(3)/250, the assessee must be given notice under the provision dealing with enhancement (Section 251) before such enhancement can be confirmed. Precedent treatment: The Court relied on the statutory requirement (as reflected in the Act) and the principles of natural justice embedded in the notice requirement; the record shows no valid notice for enhancement was issued by the appellate authority when it fixed a higher income than an earlier finalized figure. Interpretation and reasoning: The Tribunal examined the sequence of orders: (a) initial assessment under Section 143(3) with an addition; (b) appellate order adopting 8% resulting in a specified income; (c) consequential revision by the AO in compliance with that appellate figure; and (d) a later appellate de novo order determining a higher income without any notice for enhancement. The Court found that increasing the assessed income beyond the figure fixed earlier required adherence to the statutory procedure-issuing an enhancement notice and providing opportunity to be heard-which was not done. Ratio vs. Obiter: Ratio. The determination that enhancement by an appellate authority without issuing the statutory notice is unlawful is central to the decision. Conclusions: The enhancement of income by the appellate authority without issuing the required notice for enhancement was illegal and is set aside; grounds challenging such enhancement are allowed. Issue 2 - Validity of rejection of books and adoption of an 8% net profit rate absent a speaking order Legal framework: When books of account are rejected, the appellate authority must record reasons for rejection, explain the basis for selecting an estimated profit rate, and deal with the assessee's responses; orders must be speaking and show absorption of issues and materials on record. Precedent treatment: The prior Tribunal order (restoring the matter for de novo consideration) criticized the earlier appellate order as non-speaking-specifically for not explaining the reason for choosing the 8% net profit rate and for failing to record why the assessee's reply did not persuade the authority. The present proceedings took that directive into account in review of the later order. Interpretation and reasoning: The Court reiterated that mere conclusionary statements that books are rejected and a rate applied are insufficient. The appellate authority must disclose the factual basis and reasoning for selecting a particular percentage, address discrepancies in the books, and note why the assessee's explanations were inadequate. The record showed that the earlier order lacked such articulation; the Tribunal had therefore directed a fresh de novo order. Even on de novo consideration, the appellate authority cannot lawfully finalize an income figure by applying a profit rate without meeting the requirements of reasoned decision-making and, where applicable, statutory notice for enhancement. Ratio vs. Obiter: Ratio (as to requirement of speaking order when rejecting books and adopting an estimated profit rate); the significance of those defects in the earlier order formed a basis for remand and influenced the outcome here. Conclusions: The appellate order that earlier adopted an 8% net profit rate was procedurally defective for being non-speaking regarding the choice of rate and treatment of the assessee's replies; this defect required fresh consideration and contributed to setting aside the subsequent enhancement when combined with failure to issue enhancement notice. Issue 3 - Effect of surrendered income at survey and inclusion in return on additions for unverifiable expenses Legal framework: Income voluntarily disclosed during a survey and included in the return is evidence of declared income; additions for unverifiable expenses require a valid basis and must respect the statutory procedures for changing an earlier assessed figure. Precedent treatment: The decision notes the factual position that Rs. 70,00,000 was offered during survey and included in the return; the Assessing Officer had made additions on account of unverifiable expenses, and the appellate authority later reached differing income figures on appeal. Interpretation and reasoning: The Court observed that the assessee had declared the surrendered amount in the return and that any further upward adjustment by the appellate authority could not be sustained without following enhancement procedure. While the AO's addition for unverifiable expenses stood as a matter of assessment, the appellate authority could not lawfully determine a still higher income without issuing the requisite notice and without explaining its basis for rejecting books and selecting a profit rate. Ratio vs. Obiter: Primarily ratio by application: the inclusion of the surrendered amount in the return underscores that any later enhancement requires compliance with statutory notice procedure; the assessment additions themselves were not re-adjudicated on merits beyond procedural infirmity in enhancement. Conclusions: The presence of the surrendered amount in the return does not justify the appellate enhancement made without statutory notice; additions for unverifiable expenses remain subject to proper procedure and reasoned findings, and the uplift to the final income figure by the appellate authority is unlawful for lack of statutory notice and adequate reasoning. Interconnection of issues and final determination Cross-references: Issues 1 and 2 are interlinked - the procedural infirmity (no Section 251 notice) combined with the substantive defect (non-speaking rejection of books and unexplained selection of 8% profit rate) rendered the appellate enhancement invalid. The Tribunal's earlier direction for a speaking de novo order (discussing why books were rejected and why 8% was chosen) is treated as binding guidance which the later appellate order failed to cure in respect of enhancement procedure. Overall conclusion: The appellate determination enhancing the assessed income to the higher figure without issuing the statutory notice for enhancement and without adequate, speaking reasons is illegal and is set aside; the appeal is allowed to the extent of vacating the enhanced assessment figure.