2025 (10) TMI 576 - AT - Income Tax

Assessment order set aside; matter remanded to assessing officer for fresh adjudication after verification of creditors' trading documents

Ginni Filaments Ltd. Versus DCIT, Circle 1 (1) (1), Agra

ITAT Agra (AT) set aside the impugned assessment order and restored the matter to the AO for fresh adjudication, holding that interim relief depended on ... Invocation of section 41(1) - said outstanding balances of sundry creditors were of regular nature from trading transactions - Order passed w/o affording proper opportunity of hearing to the assessee - HELD THAT:- The interim order/stay order are always based on three factors, i.e., prima facie case, balance of convenience and irreparable loss. The above referred interim order is no exception. However, the tribunal while passing the aforesaid interim order in the instant appeal, has observed that in the aforesaid circumstances also, the impugned addition made by the AO and confirmed by CIT(Appeals), still stands and has to be tested by this Tribunal on the basis of confirmations of balances, ledger copies of the sundry creditors, details of payments released in subsequent period and by the copies of purchase bills with respect to the impugned amount. Assessee has filed paper book in four volumes with a common index along with volume-I. Assessee has mentioned the particulars of documents at Sl. No. 7 as “chart containing list of sundry creditors along with supporting documents enclosed as annexures in paper book volume-II to IV”. Volume-II to IV of the paper book are voluminous and the details include confirmations, sample invoices and bank statements showing subsequent payments to creditors require verification as the same were neither filed before the Assessing Officer nor before ld. CIT(Appeals). In such a factual scenario, both the revenue authorities below had no occasion to examine and verify the said documentary evidences. We, therefore deem it just and appropriate to restore the matter back to the file of AO who shall pass order afresh in accordance with law after examining and verifying the details in respect of confirmations, sample invoices and bank statement showing subsequent payments to the creditors with respect to impugned amount, after affording opportunity of hearing to the appellant assessee. The aforesaid point is accordingly determined and the appeal is liable to be allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether the appellate order was passed in violation of principles of natural justice for failure to afford reasonable opportunity of hearing (including video conferencing) and to allow submission of written explanations and documents. 2. Whether the addition of Rs. 34,45,60,149/- under section 41(1) of the Income-tax Act (remission or cessation of liability) in respect of outstanding sundry creditors is sustainable where confirmations of balances, full ledgers, sample invoices/purchase bills, and bank statements showing subsequent payments were not placed before the revenue authorities. 3. Whether, in view of the nature of the documents filed subsequently before the Tribunal (confirmations, sample invoices and bank statements), the matter should be restored to the Assessing Officer for fresh examination and verification after affording opportunity of hearing. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Principle of natural justice: adequacy of opportunity and procedural fairness Legal framework: Principles of natural justice require that an assessee be given reasonable opportunity of hearing and chance to furnish relevant documents before adverse inference is drawn or additions are made. Interim orders are governed by considerations of prima facie case, balance of convenience and irreparable loss. Precedent Treatment: The Tribunal referred to its own interim order (stay order) earlier passed in the same appeal which recognized that even if certain proceedings under section 263 were dropped, the addition made under section 41(1) remained to be tested; the interim order was founded on the usual three-factor test for stay and observed that documentary evidence (confirmations, ledgers, subsequent payment evidence) required testing. Interpretation and reasoning: The Tribunal examined the record and noted that the Assessing Officer and the CIT(Appeals) proceeded on the basis that confirmations, identity of creditors and evidence of repayment in subsequent years were not furnished despite notices. The Tribunal observed that voluminous documentary material (filed before the Tribunal as a paper book in four volumes) included confirmations, sample invoices and bank statements which were not before the revenue authorities and therefore could not have been examined by them. Given that the Tribunal's earlier interim order contemplated testing of such documents, fairness requires an opportunity for the AO to examine and verify these documents with an opportunity of hearing to the assessee. Ratio vs. Obiter: Ratio - where material documentary evidence which was not before the AO/CIT(A) is filed subsequently, due opportunity must be given and the matter remitted for fresh consideration; the appellate order confirming additions without such examination suffers from procedural unfairness. Obiter - observations on the earlier interim order's content and its effect as indicating that the addition remained to be tested. Conclusion: The Tribunal found procedural infirmity in the sense that key documents crucial to the disputed addition were not before the revenue authorities and that the assessee must be afforded an opportunity for the AO to examine and verify them; therefore, remand was warranted. The appellate order is set aside for that reason and the appeal is allowed for statistical purposes. Issue 2 - Legality of addition under section 41(1) for outstanding sundry creditors lacking corroborative evidence Legal framework: Section 41(1) treats remission or cessation of liability as income chargeable to tax. The correctness of invoking section 41(1) depends on whether there is a remission or cessation of liability, and whether the existence, identity and genuineness of liabilities are established by the assessee. Revenue may invoke other provisions (e.g., section 68) where appropriate; however, the nature and quantum of the addition remain to be tested on available material. Precedent Treatment: The Tribunal noted that the PCIT in show-cause proceedings considered whether the addition should have been made under section 68 instead of section 41(1) but observed that in either case the quantum of disallowance remains unchanged and must be tested by documentary verification. The Tribunal relied on its stay-order reasoning that mere submission of invoices/bills does not necessarily prove existence of liability absent confirmation of identity/creditor and evidence of repayment. Interpretation and reasoning: On facts, the AO disallowed liabilities amounting to Rs. 34,45,60,149/- because confirmations, sample bills and bank extracts were not submitted; ledgers for only a portion of creditors were produced. The Tribunal emphasised that the documents subsequently placed before the Tribunal (confirmations, sample invoices, bank statements showing subsequent payments) require verification since they were not before the lower authorities. The Tribunal did not decide on the substantive correctness of invoking section 41(1) versus section 68 but held that the addition's validity turns on verification of documentary evidence proving the identity, genuineness and extinguishment/repayment of liabilities. Ratio vs. Obiter: Ratio - an addition under section 41(1) premised on non-production of confirmations/ledgers must be subject to verification where the assessee subsequently produces such material; remand for verification is the appropriate remedy. Obiter - the Tribunal's note that the quantum of disallowance would remain the same even if characterized under section 68, as remarked in the prior interim order. Conclusion: The Tribunal concluded that the impugned addition cannot be finally sustained without examination and verification of the confirmations, sample invoices and bank statements which were not earlier available to the revenue; consequently the matter is remitted to the Assessing Officer for fresh adjudication in accordance with law after affording hearing. Issue 3 - Appropriateness and scope of remand to Assessing Officer Legal framework: Where critical documents are filed for the first time before the Tribunal, a remand to the fact-finding authority is appropriate so that those documents can be tested, veracity checked and the assessee given opportunity of hearing; appellate and revisional forums should not decide disputed factual records that were not placed before the original fact-finder. Precedent Treatment: The Tribunal's earlier interim order explicitly contemplated that the addition must be tested on the basis of confirmations, ledger copies, subsequent payment details and purchase bills; consistent with that approach, the Tribunal here ordered restoration to the AO for examination. Interpretation and reasoning: The Tribunal observed the paper book filing and the particulars indicating that annexed volumes contained lists of sundry creditors with supporting documents. Given that many of these materials were not before AO/CIT(A), it would be unjust to permit the appellate process to end without the AO having the opportunity to verify bank statements, invoices and confirmations and to afford the assessee hearing. The Tribunal therefore directed the AO to pass a fresh order after examination and verification, following the requisite opportunity of hearing. Ratio vs. Obiter: Ratio - remand to AO for verification and fresh order is the correct remedial course where documentary evidence material to the addition is filed first before the Tribunal. Obiter - none significant beyond reiteration of the three-factor test governing interim relief. Conclusion: The Tribunal restored the matter to the file of the Assessing Officer with directions to examine and verify confirmations, sample invoices and bank statements relating to the disputed sundry creditors and to afford the assessee an opportunity of hearing; consequently, the assessment order and the appellate order were set aside and the appeal was allowed for statistical purposes, with stay (if any) vacated.