2025 (9) TMI 355 - AT - Income Tax

Section 68 addition set aside after ex parte proceedings under Section 144; taxpayer must be given fair chance to contest

ITAT (Mum) set aside the FA's order upholding an addition u/s 68 made after ex-parte proceedings u/s 144, holding the assessee was entitled to a fair ... Assessment completed ex-parte u/s. 144 - Addition u/s 68 - HELD THAT:- We are of the opinion that the assessee deserves an opportunity to contest the validity of addition by bringing on record the relevant facts and supporting evidences. Since the assessee did not get the opportunity to do so due to ex-parte orders passed by the Departmental Authorities, in the interest of fair play and justice, we are inclined to set aside the impugned order of learned First Appellate Authority and restore the issue to the file of the Assessing Officer for de novo adjudication after providing due and reasonable opportunity of being heard to the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the delay of 243 days in filing the appeal constituted sufficient cause for condonation and admission of the appeal. 2. Whether the assessment completed ex parte and the appellate order passed ex parte amounted to a violation of the Rules of natural justice such that the additions require interference. 3. Whether the addition of Rs. 41,81,79,265/- to income as unexplained cash credit under Section 68 of the Income Tax Act, 1961 is sustainable where the Assessing Officer's own finding records the relevant bank credits for the period 01.04.2016 to 31.03.2017 and the impugned assessment relates to an earlier assessment year (i.e., whether the credited amounts pertain to the impugned assessment year). 4. Whether, in the factual matrix of total non-cooperation by the assessee (non-filing of return, non-response to notices), the appropriate remedy is to confirm the ex parte additions or to restore the matter to the Assessing Officer for de novo adjudication after providing a reasonable opportunity of being heard. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay Legal framework: The procedural scheme permits admission of delayed appeals on showing sufficient cause; condonation is discretionary and requires bona fide reasons. Precedent Treatment: The Court applied standard discretionary principles without citing a specific precedent; the Registrar's factual note regarding non-receipt and subsequent knowledge formed the basis for sufficiency of cause. Interpretation and reasoning: The assessee asserted non-receipt of the appellate order until counsel noticed it incidentally; upon obtaining a departmental copy, the appeal was filed. The Court evaluated the explanation as bona fide and sufficient. Ratio vs. Obiter: Ratio - the Court's finding that the delay was for sufficient cause is a binding outcome for this appeal; no broader dictum on condonation standards was laid down. Conclusion: The delay of 243 days in filing the appeal was condoned and the appeal admitted for adjudication. Issue 2 - Validity of Ex Parte Proceedings and Natural Justice Legal framework: Principles of natural justice require that an assessee be afforded adequate opportunity to be heard before adverse findings are recorded; proceedings may proceed ex parte only after opportunities have been given and the assessee remains non-responsive. Precedent Treatment: The Court relied on the record of the assessment and first appellate proceedings showing repeated opportunities afforded to the assessee and persistent non-cooperation; no authority was overruled or distinguished. Interpretation and reasoning: The Assessing Officer issued notices under Sections 148 and 142(1) which went unresponded; the Assessing Officer completed assessment ex parte under Section 144. First Appellate Authority likewise provided several opportunities (as recorded in paragraph 3.1 of the appellate order) but proceeded ex parte due to lack of response. The Court observed that departmental authorities cannot be faulted for proceeding ex parte in face of total non-cooperation. Ratio vs. Obiter: Ratio - where repeated opportunities are shown on record and the assessee does not participate, ex parte action is permissible; the Court affirmed this proposition in context. Conclusion: The ex parte conduct of Departmental Authorities was permissible given the assessee's complete noncompliance; however, permissibility of ex parte action does not preclude remand if other procedural or factual infirmities exist. Issue 3 - Substance of Addition under Section 68 vis-à-vis Accounting Period Legal framework: Section 68 permits treating unexplained credits as income where the taxpayer fails to satisfactorily explain source and nature; additions must, however, relate to the assessment year under consideration and be supported by proper factual foundation. Precedent Treatment: The Court referred to a Coordinate Bench decision in a closely related matter (ITA No. 5010/Mum/2024, A.Y. 2011-12) where, on identical facts, the matter was restored; that authority was followed in principle to afford an opportunity for factual verification. Interpretation and reasoning: The Assessing Officer's own bank statement finding records credits of Rs. 41,81,79,265/- for 01.04.2016 to 31.03.2017 (which includes an accommodation entry of Rs. 19,70,000/-). The assessee's contention that such credits do not pertain to the impugned assessment year therefore raises a prima facie factual issue. The Court held that this contention possesses merit and requires factual verification with reference to the concerned bank account and supporting material. Given that the addition under Section 68 operates on unexplained credits, it is essential to ascertain whether the alleged credits fall within the impugned year before upholding the addition. Ratio vs. Obiter: Ratio - where the Assessing Officer's own record suggests that credited amounts may fall outside the assessment year, the addition cannot be sustained without factual inquiry; the matter should be remitted for such inquiry. Obiter - the Court's observation that the assessee may, if given opportunity, explain the facts is advisory but flows from the ratio. Conclusion: The addition under Section 68 cannot be finally sustained on the record before the appellate forum because the temporal nexus of the credited amounts to the assessment year is factually disputed; the matter requires de novo consideration by the Assessing Officer with opportunity to the assessee. Issue 4 - Appropriate Remedy: Confirmation versus Remand for De Novo Adjudication Legal framework: Appellate tribunals may set aside and remit matters for fresh adjudication where material factual issues remain unexamined, especially when natural justice considerations or temporal/identification errors exist; restoration is appropriate where the assessee was not afforded a real opportunity to place evidence. Precedent Treatment: The Court noted a coordinate bench restoration in identical facts and followed a consistent remedial approach of remanding for de novo adjudication to permit factual verification and opportunity to be heard. Interpretation and reasoning: Although Departmental Authorities were justified in proceeding ex parte due to non-cooperation, the record discloses a material issue (timing/period of bank credits) that merits adjudication on evidence. The Court found that fairness required permitting the assessee to actively cooperate and produce relevant evidence; consequently, confirmed ex parte orders were set aside and the matter remitted to the Assessing Officer for fresh adjudication with due and reasonable opportunity of being heard. Ratio vs. Obiter: Ratio - where material factual issues affecting the validity of additions exist and the assessee was not given an effective opportunity to contest those facts, the proper course is to remit for de novo adjudication with directions to afford opportunity to the assessee. Obiter - the Court's direction that the assessee must 'actively cooperate' is purposive guidance for future conduct. Conclusion: The impugned ex parte appellate order confirming the Section 68 addition is set aside; the issue is restored to the file of the Assessing Officer for de novo adjudication after providing due and reasonable opportunity of being heard to the assessee. The appeal is allowed for statistical purposes.