KESM INDIA LLP,ANANTHAPUR vs. ITO, WARD-1, HINDUPUR

Succinctly stated, the case of the assessee firm was selected for scrutiny assessment under CASS for the reasons, viz., (i) business purchases made by the assessee without deduction of tax at source under Section 194Q of the Act; and (ii) lower amount disallowed under Section 40(a)(ia) of the Act in comparison to the amount reported in the audit report.

During the course of assessment proceedings, the AO issued notices under Section 142(1) of the Act dated 12-07-2024 and 06-08-2024. However, the same were not complied with by the assessee firm. The letters issued by the AO dated 20-08-2024 and 04-10-2024 also were not responded to by the assessee firm. 2

As is discernible from the record, the AO, based on the material available on record, was constrained to proceed with and frame the assessment to the best of his judgment. The AO observed that the assessee firm had, during the subject year, made purchases exceeding the threshold limit of Rs. 50 lacs from various parties aggregating to Rs. 59,29,57,192/-, on which it had failed to deduct tax at source as required under Section 194Q of the Act. Accordingly, the AO, based on his aforesaid observation, worked out a disallowance of Rs. 17,78,87,158/- (30% of Rs. 59,29,57,192/-) under Section 40(a)(ia) of the Act. It was further observed by him that the assessee firm had claimed substantial expenditure of Rs. 10,35,80,203/- for which supporting documentary evidence had not been furnished. The AO, taking cognizance of the fact that the assessee firm, for the failure on its part to deduct tax at source on expenditure of Rs. 4,21,70,392/-, had voluntarily disallowed an amount of Rs. 1,26,51,118/- under Section 40(a)(ia) of the Act. Considering the aforesaid facts, the AO, on an ad hoc basis, disallowed an amount of Rs.1,53,52,452/-, i.e., 25% of the balance expenditure of Rs. 6,14,09,811/-. Accordingly, the AO, after making the aforesaid additions /disallowances, completed the assessment under Section 144 r.w Section 144B of the Act vide order dated 19-03-2025 and determined the total income of the assessee firm at Rs. 5,35,72,460/-.

Aggrieved, the assessee firm carried the matter in appeal before the CIT(A). However, as there was a 70-day delay in filing the appeal, the assessee firm filed an application seeking condonation thereof. However, the CIT(A), not being 3 satisfied with the explanation furnished by the assessee firm, declined to condone the delay and dismissed the appeal as non-maintainable.

Aggrieved, the assessee firm has carried the matter in appeal before us.

We have heard the Ld. Authorized Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements pressed into service by them.

Shri Sundar Rao Chinthala, Ld. Authorized Representative (for short, “AR”) for the assessee firm, at the threshold of hearing of the appeal submitted that the failure of the assessee firm to participate in the assessment proceedings was not deliberate. It was submitted that the accountant entrusted with overseeing the income-tax proceedings had failed to monitor the income-tax portal and, consequently, the notices issued by the Department remained unanswered. The Ld. AR further submitted that, during July and August 2024, the managing partners of the assessee firm remained engrossed in criminal proceedings initiated against them by an erstwhile partner and were preoccupied with Court proceedings. Elaborating on his contention, the Ld. AR submitted that the managing partners of the assessee firm, due to the criminal proceedings initiated against them, had remained under considerable stress and apprehension of arrest and therefore could not devote adequate attention to the income-tax proceedings. It was further submitted that the partners remained under a bona fide belief that the accountant entrusted with the income-tax proceedings was duly attending to the same. It was also submitted that one of the managing partners, viz., Mr. S. Nagaraju, had suffered ill health and was admitted to M/s. Aster CMI Hospital from 20-02-2025 to 22-02-2025.

The Ld. AR submitted that the aforesaid circumstances continued even after completion of the assessment and that the partners remained occupied in attempting to revive the business, which was incurring substantial losses. Carrying his contention further, the Ld. AR submitted that the partners became aware of the assessment only upon receipt of the demand notice, after which they approached their counsel and filed the appeal before the CIT(A), resulting in a delay of 70 days.

The Ld. AR in support of his explanation placed before us a copy of the order of the Hon’ble High Court of Madras dated 31-01-2025 in Criminal R.C. No. 1226 of 2024, copies of the proceedings before the lower Courts, an email dated 25-07-2024 referring to the filing of an FIR against the partners and the discharge summary of Mr. S. Nagaraju. The Ld. AR submitted that the aforesaid circumstances constituted sufficient and reasonable cause for the delay and that the CIT(A), instead of summarily dismissing the appeal, ought to have condoned the delay and adjudicated the appeal on merits.

Per contra, Shri K Prasad, the Ld. Senior Departmental Representative (for short, “Sr. DR”) objected to the assessee firm's request for condonation of delay. It was submitted that the conduct of the assessee firm reflected a lackadaisical approach towards its income-tax proceedings. The Ld. Sr. DR submitted that the assessee firm had failed to comply even with the notices issued under Section 142(1) of the Act, resulting in the framing of an ex parte assessment under Section 144 of the Act. The Ld. Sr. DR, therefore, submitted that the CIT(A) had rightly declined to condone the delay and dismissed the appeal as non-maintainable.

We have given thoughtful consideration to the contentions advanced by the Ld. Authorized Representatives of both parties in the backdrop of the orders of the authorities below.

Admittedly, there was a delay of 70 days in filing the appeal before the CIT(A). The issue before us is whether, having regard to the explanation furnished by the assessee firm and the material placed on record, the said delay deserved to be condoned by the CIT(A).

At the outset, we find that the explanation of the assessee firm regarding the circumstances prevailing during the relevant period is supported by material on record. We are of the view that the order of the Hon’ble High Court of Madras dated 31-01-2025, copies of the orders of the lower courts and the other documents placed on our record establish that the managing partners were at the relevant point of time involved in criminal litigation instituted against them by an erstwhile partner. We also find that the assessee firm has placed on record an email dated 25-07-2024 referring to a Court order directing registration of an FIR against the partners.

We find substance in the contention of the Ld. AR that, in the midst of the aforesaid circumstances, the partners remained under a bona fide belief that the accountant entrusted with the income-tax proceedings was duly attending to the notices and proceedings pending before the Department.

We are conscious of the fact that the assessee firm had also failed to comply with the notices issued during the assessment proceedings. Although the conduct of the assessee firm, as can be gathered in the backdrop of an ex-parte assessment order passed in its case and delayed filing of appeal before the CIT(A), at first blush reveals its lackadaisical conduct and lack of diligence regarding the income tax proceedings, but, while considering an application for condonation of delay, the explanation furnished by the appellant has to be considered in the backdrop of the entire factual circumstances and not in isolation. In this regard, guidance can be drawn from the judgment of the Hon’ble Supreme Court in Vidya Shankar Jaiswal v. Income Tax Officer, Ward-2, Ambikapur, Civil Appeal No. 1207 of 2025 [arising out of SLP(C) Nos. 26310-26311 of 2024], dated 31-01-2025. In the said case, the Hon’ble Supreme Court was considering a delay of 166 days in filing an appeal before the Tribunal. The Tribunal had declined to condone the delay and the Hon’ble High Court of Chhattisgarh had upheld the said order. The Hon’ble Supreme Court, however, set aside the orders of the Tribunal as well as the Hon’ble High Court and held that a justice-oriented and liberal approach ought to have been adopted while considering the application seeking condonation of delay. The Hon’ble Supreme Court accordingly condoned the delay and directed 7 the Tribunal to decide the appeal on merits. We are of the view that the aforesaid principle assumes significance in the present case. We are of the firm conviction that, as there is a delay of only 70 days and the assessee firm has furnished an explanation supported by documentary evidence, viz. the criminal litigation involving the managing partners, their preoccupation with the Court proceedings, the hospitalization of one of the partners and the failure of the accountant to properly follow up the income-tax proceedings, the same, cannot be said to be wholly devoid of substance.

We further find that the assessee firm had candidly disclosed the delay in Column 15 of “Form No. 35” and had filed a petition seeking condonation thereof. Thus, the assessee firm had placed its explanation before the CIT(A) and had sought an opportunity to have its appeal adjudicated on the merits.

In our considered view, in the aforesaid set of circumstances, the CIT(A), before rejecting the explanation furnished by the assessee firm, ought to have afforded it an effective opportunity to substantiate its explanation regarding the reason leading to the delay in filing the appeal. However, we find that the CIT(A) had summarily declined to condone the delay and dismissed the appeal in limine as non-maintainable. We are of the view that the purpose of limitation provisions is not to defeat a genuine claim on technical grounds, particularly where the assessee has furnished a plausible explanation for the delay. Rather, the expression “sufficient cause” occurring in the provisions relating to condonation of delay has to receive a pragmatic and justice-oriented interpretation, while at the same time ensuring that the appellant does not derive an advantage from deliberate or mala fide inaction.

In the present case, considering the totality of the facts and circumstances, we are of the firm conviction that as the delay of 70 days was supported by sufficient and reasonable cause, the CIT(A), therefore, ought to have adopted a liberal approach and condoned the delay.

We thus, in the backdrop of our aforesaid deliberations, direct the CIT(A) to condone the delay of 70 days in filing the appeal and adjudicate the appeal on merits in accordance with law. Needless to say, the CIT(A) shall, in the course of the set aside proceedings, afford a reasonable opportunity of being heard to the assessee firm, which shall remain at liberty to substantiate its claim based on fresh documentary evidence, if any, as per extant law.

As we are restoring the matter to the file of the CIT(A) for adjudication on merits, we refrain from expressing any view on the merits of the additions/disallowances made by the AO, which, thus, are left open for adjudication by the CIT(A).

In the result, the appeal filed by the assessee firm is allowed for statistical purposes in terms of our aforesaid observations.