2025 (10) TMI 1230 - AT - Income Tax

Assessing officer's disallowance of alleged bogus purchases set aside; Section 69A inapplicable, expense addition under Section 37 unsupported.

ITAT held the assessing officer's disallowance of alleged bogus purchases unsustainable. The assessee produced books, bank statements, P&L, balance sheet ... Reopening of assessment - failure of the assessee to file an ITR in response to notice u/s 148 - in the absence of valid return in response to notice u/s 148, notice u/s 143(2) cannot be issued - bogus purchases - Applicability of section 37 or 69A - HELD THAT:- AO was not sure under which section he propose to make the disallowance of purchases and in the final Table of Variation the disallowance has been done as per discussion above without quoting the section. Now, since there is a disallowance of purchases i.e. an expense and not considering it as business income of the assessee and added to the total income, it is assumed, it is a disallowance of business expense u/s 37 of the Act. The assessee in submission before the AO submitted no such sale transactions were executed with noticed party. The appellant had not made any purchase from these parties and did not execute any transactions. When no expense has been claimed by the assessee in her books on account of purchases made from these parties, no question of disallowance arises. Assessee had submitted her detailed response and also filed the requisite documents, bank statements, balance sheet, P&L account, Tax Audit Report and provided all the details sought for but the AO did not rebut the appellant submission in this regard. It is seen that the books of accounts have been maintained by the assessee and all the withdrawals have been duly recorded. Details of enquiries made with third parties have not been logically concluded by the AO. So, Section 69A cannot be triggered in this case. In view of above material facts, in absence of contrary evidence, the grounds of appeal being untenable, are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether reassessment notice under section 148 is invalid where no notice under section 143(2) was issued despite existence of an original return of income filed earlier. 2. Whether reassessment under section 147 read with section 144 (best judgment) and section 144B can be sustained where the assessee did not file a return in response to the section 148 notice and failed to respond to statutory notices. 3. Whether additions for alleged bogus purchases (disallowance under section 37 or deeming under section 69C) can be sustained where books did not record corresponding expenses or where no expense was claimed in the books. 4. Whether unexplained cash withdrawals can be taxed under section 69A where books of account exist, withdrawals are recorded in books, and the Assessing Officer did not controvert the explanations or conclude third-party enquiries. 5. Whether the appellate authority should have called for a remand report under section 250(4) or admitted additional evidence in violation of Rule 46A (administrative/compliance issues raised by Revenue). ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reassessment where no section 143(2) notice was issued despite an original return being on record Legal framework: Section 148 empowers reopening of assessments; section 143(2) prescribes mandatory issue of notice before assessment completion where a return exists; procedural requirements for reassessment (including service of notices) are jurisdictional prerequisites. Precedent Treatment: The Tribunal treated the point as a preliminary legal issue and accepted additional grounds to raise it, relying on authority permitting consideration of preliminary jurisdictional defects. Interpretation and reasoning: The Tribunal examined AO's record and the taxpayer's earlier filed return (e-filed on 25-10-2018). Finding that AO did not issue notice under section 143(2) despite presence of an original return, the Tribunal held issuance of a section 143(2) notice to be mandatory. The absence of such statutory notice vitiated the reassessment proceedings. Ratio vs. Obiter: Ratio - the reassessment under section 147 read with section 144/144B is invalid where an original return exists and no notice under section 143(2) was issued before completing reassessment. Conclusion: The reassessment was declared invalid on this jurisdictional ground and that ground of appeal was allowed. Issue 2: Power to make assessment under section 144 where assessee failed to file a return in response to section 148 notice Legal framework: Section 148 requires notice for filing return; where no return is furnished in response, AO may proceed under provision for best judgment assessment (section 144). However, when an original return already exists, the mandatory procedure under section 143(2) applies. Precedent Treatment: The Tribunal recognized competing contentions but placed primacy on the existence of an original return and the statutory requirement of section 143(2). Interpretation and reasoning: The Tribunal found the AO inconsistent in asserting that no return existed for the assessment year when an earlier return was on record. Because of that, the AO's reliance on ex parte/best judgment or on failure to file a return in response to the section 148 notice could not cure the procedural defect of omitting section 143(2). The Tribunal therefore did not sustain the AO's exercise of power under section 144 to validate the reassessment. Ratio vs. Obiter: Ratio - AO cannot rely on failure to file a return against the assessee to avoid mandatory issuance of section 143(2) when an original return is on record; procedural compliance is essential before making an assessment. Conclusion: The AO's attempt to proceed under section 144 (best judgment) does not validate reassessment in absence of the mandatory section 143(2) notice where an original return exists; issue resolved in favour of assessee on procedural ground (see Issue 1). Issue 3: Disallowance/addition for alleged bogus purchases (sections 37 and 69C) Legal framework: Section 37 disallows business expenditure not allowed elsewhere when not wholly and exclusively for business; section 69C deals with unexplained investments, purchases, etc., where the assessee cannot explain entries; additions must be supported by material and proper invocation of statutory head. Precedent Treatment: The Tribunal examined AO's draftings and found uncertainty as to statutory basis for the disallowance - AO did not consistently cite the correct section and treated purchases both as disallowance and as income in different parts of order. Interpretation and reasoning: The Tribunal observed that the assessee had not claimed the alleged purchases as expenses in books; when no expense is recorded in books of account there is no disallowance under section 37 to be made. AO's failure to specify the legal basis and his uncertainty undermined the addition. The Tribunal further noted that the assessee produced bank statements, balance sheet, P&L, tax audit report and other records; the AO did not satisfactorily rebut or complete third-party verifications. Ratio vs. Obiter: Ratio - where no expense is claimed in the books and AO fails to identify the correct statutory head or to establish factual veracity, additions for alleged bogus purchases cannot be sustained; legal basis for additions must be clearly stated. Conclusion: Addition of Rs. 2,64,84,517/- on account of alleged bogus purchases was deleted and directed to be removed from the assessment. Issue 4: Addition under section 69A for unexplained cash withdrawals where books exist and AO did not controvert explanations Legal framework: Section 69A deems unexplained money, bullion, jewellery or other valuables owned but not recorded in books as income if the assessee cannot satisfactorily explain nature/source; burden rests on AO to displace explanations when books exist and withdrawals are recorded. Precedent Treatment: The Tribunal analyzed statutory conditions for section 69A, listing its essential parts (ownership, nature of asset, absence in books, unsatisfactory explanation) and emphasised AO's duty to controvert the taxpayer's explanations with evidence. Interpretation and reasoning: The Tribunal found books of account maintained and withdrawals recorded. The assessee furnished bank statements, accounts and tax audit report. The AO failed to effectively rebut or to logically conclude enquiries with third parties; therefore the statutory conditions for invoking section 69A were not satisfied. Consequently, section 69A could not be triggered. Ratio vs. Obiter: Ratio - additions under section 69A cannot be made where the assessee maintains books recording the transactions and the AO does not satisfactorily displace the explanation or conclude third-party enquiries. Conclusion: Addition of Rs. 4,23,21,000/- as unexplained cash under section 69A was deleted. Issue 5: Remand report under section 250(4) and admission of additional evidence (rule 46A) / procedural relief sought by Revenue Legal framework: Section 250(4) permits remand for further evidence where necessary; Rule 46A and similar procedural rules govern admissibility of additional documents at appellate stage; appellate authority has discretion to admit or reject additional grounds/evidence. Precedent Treatment: The Tribunal accepted additional grounds raising jurisdictional defects (preliminary issue) and adjudicated them; it refused to remand for further inquiry where the AO had not properly made out statutory basis for additions and procedural defects were determinative. Interpretation and reasoning: The Tribunal declined Revenue's contention that a remand report was necessary, because the primary defect (absence of section 143(2) notice where an original return existed) vitiated the reassessment. On admission of additional evidence, the Tribunal considered the preliminary jurisdictional ground and allowed additional grounds under principles permitting adjudication of jurisdictional defects; other contentions on Rule 46A were not pressed by Revenue or were dismissed. Ratio vs. Obiter: Ratio - appellate authority may adjudicate preliminary jurisdictional defects without remand; where procedural invalidity is established, remand for further factual inquiry is unnecessary to set aside the assessment. Conclusion: No remand was directed; additional grounds raising jurisdictional defect were admitted and decided; other complaints about admission of evidence were either not pressed or dismissed. Overall Conclusion of The Tribunal The Tribunal held the reassessment invalid for failure to issue mandatory notice under section 143(2) where an original return existed, deleted additions for alleged bogus purchases and unexplained cash because AO failed to identify correct statutory basis and to rebut the taxpayer's records, and dismissed Revenue's appeal in result. Certain consequential directions (interest under section 234A and credit adjustment) were remitted to the AO for fresh action in accordance with law.