Loading judgment…
Facts
The Revenue appealed against the order of the CIT(A) which deleted additions made by the AO under sections 68 and 37. The AO had initially proposed an ad-hoc addition of 8% of total turnover, but later made specific additions for unsecured loans and disallowance of expenses without issuing a fresh show cause notice.
Held
The Tribunal held that the Assessing Officer (AO) violated the provisions of Section 144B(1)(xii) of the Income Tax Act, 1961, by failing to issue a fresh show cause notice after deviating from the initial proposal in the draft assessment order. This violation of mandatory procedure and principles of natural justice rendered the additions/disallowances invalid.
Key Issues
Whether the AO's failure to issue a fresh show cause notice before making additions/disallowances different from the draft assessment order violates Section 144B(1)(xii) and principles of natural justice.
Sections Cited
68, 37, 143(3), 144B, 142(1), 270A, 139(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, DELHI
Before: SHRI ANUBHAV SHARMA & SHRI MANISH AGARWAL
O R D E R PER ANUBHAV SHARMA, JM:
This appeal is preferred by the revenue against the order dated 15.10.2024 of the Ld. National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’)
P a g e | M/ s Discovery Sales (AY; 2022-23) in DIN & Order No.: ITBA/NFAC/S/250/2024-25/1069683950(1) arising out of the order dated 25.03.2024 u/s 143(3) r.w.s 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by the NaFAC for AY: 2022-23.
The department is in appeal raising following grounds:
“1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) was justified in deleting the additions made u/s 68 of the Act even though the onus of evidence regarding unsecured loans has not been discharged including loan confirmations, PAN and re-payment details despite opportunity given by the AO repeatedly beginning from notice dated 12.09.2023 u/s 142(1) and also proposed to be added as per Para 3.4 of the Show-cause notice dated 12.03.2024.
2. Whether Ld. CIT(A) was justified in deleting the interest expenses even though the AO treated it as not being utilized wholly and exclusively for business purposes.
3. Whether Ld. CIT(A) was justified in deleting the addition of miscellaneous expenses, interest on LIC and interest on TDS/TCS being not allowable u/s 37 of Income Tax Act, 1961.
4. Appellant craves right to add, delete, amend any ground at any time during the appellate proceedings. It is prayed that the order of Ld. CIT(A) is contrary to the facts on record and the settled position of law, and the order of the AO deserves to be restored.”
3. Heard and perused the record and we find that there is a material observation of ld. CIT(A) giving relief to the assessee whereby it has been held that there is violation of provision of Section 144B(1)(xii) of the Act while proposing the alleged additions/disallowances made and for P a g e | M/ s Discovery Sales (AY; 2022-23) completeness we reproduce the relevant part of the impugned order of ld. CIT(A):
8.2 The facts and grounds of the case, arguments of the appellant, evidences placed on record and relevant case laws have been carefully perused. The Appellant AOP filed its return of income u/s 139(1) of the Act which was processed by the CPC u/s 143(1) of the Act on the returned income of Rs. 8,72,33,330/-. In the due course, the case was picked up for complete scrutiny to verify the following issues:- (a) ICDS Compliance and Adjustment (b) High Creditors/ liabilities (c) Income from Liquor Business (d) Stock Valuation (e) Refund Claim The AO accordingly issued statutory notices u/s 143(2)/142(1) of the Act and in compliance, various details such as written explanations, Balance Sheet, Audit Report, Profit & Loss Account, details of unsecured loans, sundry debtors, details on loans/advances, direct expenses, current liabilities, other expenses, rent, compensation paid to employees etc. were furnished as is evident from para 3.2 of the assessment order. Upon verifying/analyzing all the details furnished by the appellant, the AO issued a show cause notice cum Draft Assessment Order (in short DAO') on 12/03/2024 vide DIN: ITBA/AST/F/143(3)(SCN)/2023-24/1062430635(1) based on his inferences and proposed an addition of differential sum of Rs. 49,39,21,763/- @8% of the total turnover of Rs. 726,44,38,671/-. The relevant portion of the said SCN is reproduced as under:-
In the wake of non-submission of details as requested, the total income of the assessee is charged at an 8% of the total turnover of the assessee i.e., Rs. 58,11,55,093/- (8% of the total sales of Rs. 7,26,44,38,671/-). Already, the assessee had declared Rs. 8,72,33,330/- as total income in the return of income filed by the for the AY under consideration. The difference amount i.e., Rs 49,39,21,763/- Rs. 58,11,55,093/-- Rs. 8,72,33,330/-) is added to the total income of the assessee. Also, Penalty u/s 270A will be initiated for under-reporting of income to the tune of Rs. 49,39,21, 763/-. Considering the facts of the case, the entire amount Rs.49,39,21,763/- i.e., the difference as explained above is liable to be treated as under reported income of the assessee and added back to the income of the assessee. You are requested to show cause why the assessment proceedings should not be completed as below:
P a g e | M/ s Discovery Sales (AY; 2022-23) Total Income (As declared in 139(1)): Rs. 8,72,33, 330/- Add: Difference amount of income charged @ 8% and income declared as per ITR: Rs. 49,39,21, 763/- Proposed Assessed Income: Rs. 58,11,55,093/- (Proposed Addition of Rs. 49,39,21, 763/-)", 8.2.1 On perusal of DAO cited supra, it is evident that the AO originally proposed the adhoc addition of 8% of the total turnover to the returned income, however, upon submission of the written arguments/objections to the proposed addition on 14.03.2024, 15.03.2024, 16.03.2024 and 18.03.2024 (para 3.4 of the assessment order), the AO proceeded to complete the assessment proceedings on 25/03/2024 by making following additions/disallowances: - (a) Unsecured Loan u/s 68 - Rs. 22,86,64,515/- (b) Disallowance of interest expenses u/s 37 - Rs. 1,53,98,940/- (c) Disallowances of other expenses u/s 37 - -Rs.6,36,860/- Thus, from this fact, it is observed that the AO has deviated from the DAO and has made completely separate additions/disallowances which had not been intimated to the appellant to put forth its further arguments, which breached the principles of natural justice. Considering the written arguments filed by the appellant in response to the DAO, the AO dropped the proposed adhoc addition of the net turnover and later on made the alleged additions/disallowances without issuing any further SCs which contradicts the provisions of section 144B(1)(xii) of the Act. In this regard, the said provision is reproduced as under:- "144B. Faceless Assessment (1) Notwithstanding anything to the contrary contained in any other provision of this Act, the assessment, reassessment or recomputation under sub-section (3) of section 143 or under section 144 or under section 147, as the case may be, with respect to the cases referred to in sub-section (2), shall be made in a faceless manner as per the following procedure, namely: - **** (xii) the assessment unit shall, after taking into account all the relevant material available on the record, prepare, in writing, - (a) an income or loss determination proposal, where no variation prejudicial to assessee is proposed and send a copy of such income or loss determination proposal to the National Faceless Assessment Centre; or (b) in any other case, a show cause notice stating the variations prejudicial to the interest of assessee proposed to be made to the income of the assessee and calling upon him to submit as to why the proposed variation should not be made and serve such show cause notice, on the assessee, through the National Faceless Assessment Centre,"
P a g e | M/ s Discovery Sales (AY; 2022-23) Thus, it becomes necessary to the AO in the regime of the faceless assessment to issue show cause notices (SCs) to the assessee intimating the variations prejudicial to the interest of the assessee, which he is going to make in the returned income and therefore it is safe to presume that the AO has violated the provisions of section 144B(1)(xii) of the Act. Further Section 144B(9) of the Act provides that any breach of the mandatory provisions as envisaged u/s 144B would make the order nonest. Hon'ble Bombay High Court in the case of Mantra Industries Ltd. v. National Faceless Assessment Centre (FAC or NeAC), reported in (2022) 441 ITR467 (Bom.- HC) has set aside the order of the AO in violation of the provisions of section 144B of the Act without going into the merit of the case. In this regard, the appellant has also relied on judgment of the Hon'ble Calcutta High Court in the case of Vishal Jhajharia Vs. Assessment Unit, Income-tax Department Faceless Assessment Centre reported in [2024] 164 taxmann.com 781 (HC - Cal.), wherein, Hon'ble court has held the judgment in favor of the assessee stating that where revenue issued a show cause notice to assessee for adding back amount in question as 'unexplained cash credits' under section 68, it could not pass final order by adding said amount as 'unexplained money' under section 69A without giving assessee an opportunity to explain. 8.2.2 Thus, considering the facts of the issue, discussions made above and also respectfully relying on the judgments cited supra, it is held that the AO has not followed the provisions of section 144B(1)(xii) of the Act and principles of natural justice as well in not issuing further show cause notice proposing the alleged additions/disallowances made. In view of this, the alleged additions/disallowance made are dismissed on this legal issue also.”
4. At the time of arguments ld. DR had relied the assessment order with regard to the merits of the additions which was deleted by the ld. CIT(A) by concluding that additions u/s 68 were not justified. However, we did not find any ground raised by the department challenging the conclusion drawn by the ld. CIT(A) in determination of ground No. 6 & & at ld. First Appellate Authority. Ld. DR has filed written submissions to contend that in the show cause notice issued to the assessee on 12.03.2024, the issue were already put P a g e | M/ s Discovery Sales (AY; 2022-23) across and subsequent or second notice was not necessary. As for convenience we reproduce the submissions of the department herein below:
“2. In this case, the CIT(A) vide order dated 15.10.2024 at para 8.2.2 has held that "the AO has not followed the provisions of section 144B(1)(xii) of the Act and principal of natural justice as well not issuing further show causes notice proposing the alleged additions/ disallowances made. In view of this, the alleged addition/ disallowance made are dismissed on this legal issue also."
In this regard, kindly find attached herewith Show Cause Notice (SCN) dated 12.03.2024 issued by the AO to the Assessee. Your kind attention is drawn to para 3.4 of the SCN, which is reproduced below: "3.4 Variation proposed on the basis of inference drawn: In the instant case, notice uls. 142(1) dated 12.09.2023 was issued and served on the assessee. The assessee has submitted only_partial details and did not submit details as requested in the notice u/s 142(1). Subsequently, another notice u/s 142(1) dated 12.09.2023 and 16.02.2024 was issued and served on the assessee. The assessee has submitted reply again on 23.09.2023, 06.10.2023, 09.10.2023 and 02.03.2024. In the reply, the assessee submitted that the assessee was engaged in the whole sale & retail trading of Indian made foreign liquor & beer in terms of the license granted by the State Excise Department. Haryana State Excise department had been granted license for L-1 (wholesale) for the period. In case of whole sale license (L-1) the assessee used to purchase Indian Made Foreign liquor & Beer from the distilleries and sell it only to those parties who were having license L-2 & L-14A granted by the State Govt. The assessee was also engaged in the Retail trading of Indian made foreign liquor & beer in terms of the license granted by the State Excise Department. Haryana State Excise department had - given license for L-2 (Retail) for the period. All Sales made by the assessee in cash or through Credit/ Debit Card. Also, the assessee submitted break-up of the unsecured loans taken during the year of. consideration. However, the assessee was specifically asked to furnish the documentary. evidences that could establish the transactions i.e account copies of loan creditors in books of account, documents establishing the credit worhtines of the lenders i.e confirmation letter from the parties, ITR of the third parties for the relevant assessment year along with any relevant details that could establish the unsecured loans which the assessee clearly failed to do so. Also, with regard to details submitted w.r.t sundry debtors the assessee has simply. furnished a list of mere names of third parties which could not be ascertained and verified. Also, the details submitted w.r.t all the details requested i.e loans/ advances given, current liabilities, sundry debtors, advance receivables the assessee has submitted P a g e | M/ s Discovery Sales (AY; 2022-23) list of the third parties merely with names listed and the details submitted by the assessee could not be ascertained / verified. In the reply submitted by the assessee, even after provided with ample opportunities and sufficient time, the assessee did not furnish the details requested in the notices in the requisite format and also few details have not been submitted till date. The assessee had sufficient time of around 6 months to submit the details requested in the specific format which the assessee clearly failed to do so. For instance, in the current liabilities for the year under consideration the assessee has submitted M/s MODI DISTILLERY as creditor to the tune of Rs 9,44,23,788/- which is submitted merely name of the third party with amount mentioned even for this high quantum and the details / reply submitted in this manner cannot be accepted at all. In the wake of non-submission of details as requested, the total income of the assessee is charged at an 8% of the total turnover of the assessee i.e Rs 58,11,55,093/ - 8% of the total sales of Rs 7,26,44,38,671l-). Already, the assessee had declared Rs 8,72,33,330/ - as total income in the return of income filed by the for the AY under consideration. The difference amount i.e Rs 49,39,21,763/- (Rs 58,11,55,093/ - -- Rs 8,72,33,330/-) is added to the total income of the assessee. Also, Penalty u/s 270A will be initiated for underreporting of income to the tune of Rs 49,39,21,763/-. Considering the facts of the case, the entire amount Rs 49,39,21,763/- i.e., the difference as explained above is liable to be treated as under reported income of the assessee and added back to the income of the assessee. You are requested to show cause why the assessment proceedings should not be completed as below: Total Income (As declared in 139(1)): Rs 8,72,33,330/- Add: Difference amount of income charged @ 8% and income declared as per ITR: RS 49,39,21,763/- Proposed Assessed Income: Rs 58, 11,55,093/-"
As is apparent above, the AO had discussed and pointed out discrepancies in respect of Unsecured loans in the SCN. Moreover, the AO had made additions only after verifying the submissions made by the Assessee in response to the SCN. Need for second SCN was therefore not felt in this regard. Thus, the assessment order was completely absolutely in conformity with the provisions of the Act and with the Principle of Natural Justice.”
After taking into consideration the facts and circumstances we are of the considered view that as with regard to mandate of Section 144B(1)(xii) of P a g e | M/ s Discovery Sales (AY; 2022-23) the Act requiring a show cause notice to the assessee intimating the variations prejudicial to the interest of assessee is concerned department does not dispute that it is mandatory and not merely discretionary.
Then going through the facts and circumstances, it comes up that when the show cause notice dated 12.03.2024 was issued the proposal was to make an adhoc addition of 8% of the total turnover of the returned income. However, assessing officer ended making up additions/disallowances of unsecured loans u/s 68 and disallowance of interest expense and other expenses u/s 37. Certainly, the additions and disallowances were not as per the proposed variation. If the assessing officer was dissatisfied with the reply of the assessee with regard to the merits of explanation on the issue of genuineness of unsecured loan or interest expenses and other expenses claimed, then certainly the notice dated 12.03.2024 became in consequential as the same was only with regard to the issue of proposal to make an adhoc addition of 8% of the total turnover of the returned income. Therefore the draft assessment order passed on inferences and proposed addition of addition on differential amount became redundant. The assessment thus, completed by impugned order dated 25.03.2024 by making aforesaid addition P a g e | M/ s Discovery Sales (AY; 2022-23) and disallowance finally cannot be said to be preceded by compliance of provision of Section 144B(1)(xii) of the Act. Ld. CIT(A) has committed no error to hold that the AO has not followed the provisions of section 144B(1)(xii) of the Act. That being the case we find no substance in the ground of department challenging the merits of the relief granted to the assessee. The ground thus, raised have not substance. The appeal of department is dismissed.
Order pronounced in the open court on 08.04.2026