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Facts
The assessee filed a return for AY 2021-22, and the assessment was completed on 30.12.2022. The PCIT initiated revision proceedings under Section 263, alleging the assessment order was erroneous and prejudicial to the revenue. The assessee challenged the PCIT's order, primarily on the grounds that a proper opportunity for hearing was not provided.
Held
The Tribunal held that the PCIT erred in not providing the assessee with a proper opportunity of hearing before passing the revisionary order, thereby breaching the principles of natural justice. The Tribunal noted that the PCIT relied on facts not presented by the assessee in response to the show cause notice and issued the impugned order without adequate opportunity for the assessee to respond.
Key Issues
Whether the Principal CIT erred in passing a revisionary order under Section 263 without providing a proper opportunity of hearing to the assessee, thus violating principles of natural justice.
Sections Cited
263, 143(3), 131A, 131, 2(14), 133A, 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCHES “B”, PUNE
Before: DR.MANISH BORAD & SHRI VINAY BHAMORE
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The captioned appeal at the instance of assessee pertaining to A.Y. 2021-22 is directed against the order dated 25.03.2025 of Ld.PCIT (Central), Nagpur passed u/s.263 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) arising out of Assessment order dated 30.12.2022 passed u/s.143(3) of the Act.
Assessee has raised following grounds of appeal :
“1. The learned PCIT has erred on facts and in law in not providing a proper opportunity of hearing and thus breaching the principle of natural justice.
2. The learned PCIT has erred on facts and in law in assuming jurisdiction under Section 263 of the Income Tax Act, 1961.
3. The learned PCIT has erred on facts and in law in invoking Section 263 as there was no material on record to establish that the assessment was erroneous or prejudicial to the interests of the Revenue.
4. The appellant craves leave to amend any of the grounds of appeal or add to the same, if deemed necessary.”
We will first take up the Grounds of appeal No.1 through which ld. Counsel for the assessee has contended that proper opportunity of hearing was not provided by ld. PCIT thereby breaching the principles of natural justice. Ld. Counsel for the assessee referred to the show cause notice u/s.263 of the Act which is dated 10.03.2025 and in response the assessee furnished written submission through its Authorised Representative on 17.03.2025 and immediately thereafter on 26.03.2023 the impugned order has been passed. It is submitted that due to lack of sufficient opportunity assessee could not furnish complete details before ld. PCIT and therefore one more opportunity may be granted for doing the needful.
On the other hand, ld. Departmental Representative supported the order of ld. PCIT.
We have heard the rival submissions and perused the record placed before us. The grievance of the assessee is against the revisionary proceedings carried out u/s.263 of the Act and apart from challenging the assumption of jurisdiction u/s.263 of the Act as well as on merits of the case, Ground No.1 has been raised that ld. PCIT erred on facts and in law in not providing proper opportunity of hearing and thus breaching the principles of natural justice.
Before proceeding further, we would like to refer to the brief facts of the case. Assessee is an individual and filed the return of income for A.Y. 2021-22 on 24.02.2022 declaring income of Rs.22,31,180/-. In the case of assessee, survey u/s.133A of the Act was carried out on 05.03.2021 and books of accounts and other documents were impounded during the survey action. Assessee is engaged in the business of manufacturing and sale of crushed sand in the name of M/s. Kalpataru Buildcon. Ld. Assessing Officer (AO) issued statutory notices for carrying out the assessment proceedings and after considering the submissions filed by the assessee in response to the queries raised in the notice issued u/s.142(1) of the Act, assessment completed on 30.12.2022 assessing the income at Rs.2,11,97,716/- after making addition of long term capital gain amounting to Rs.1,89,65,541/-.
Thereafter, ld. PCIT called for the assessment records and under the revisionary powers vested u/s.263 of the Act issued show cause notice on 10.03.2025 and the same is reproduced below (relevant extract) :
“2. You had filed Return of Income for A.Y. 2021-22 on 24.02.2022 declaring total income at Rs. 22,31,180/-. Scrutiny assessment u/s. 143(3) was completed vide order dated 30.12.2022 and the total income was determined at Rs.2,11,96,716/-. 3.1. It is seen from the details available in the assessment record as well as from the order of the assessment that the following issue in the assessment order for A.Y. 2021-22 has not been dealt with by the Assessing Officer properly and this requires further examination and verification. 3.2. In this case, action u/s.131 was conducted by Investigation Wing by ADIT, Jabalpur and subsequently survey u/s.133A of the I.T. Act was conducted on 05/03/2021 by DDIT (Inv.), Aurangabad at your office premises at Plot No.52, N-1, CIDCO, Aurangabad. During the proceedings at Jabalpur, a black diary was impounded from the possession of the assessee and back up of mobile whatsapp messages was taken by the Investigation Wing, Jabalpur.
3.3. During the course of statement u/s.131(1A) of the Act, the assessee was confronted with the notings make in black diary vide Question No. 12 and in reply the assessee stated that notings made in black diary pertain to real estate project at Chhindwara. In the mobile backup whatsapp messages, conversations with Shri Bhaijan Bhopali, Commission Agent and on-money cash receipts and payments were noted. The assessee had declared additional income of Rs.1,28,00,000/-considering the transactions noted in the diary and other documents.
3.4. During the course of assessment proceedings, the Assessing Officer found that the total on-money received against sale of plots is at Rs.3,21,58,760/- after considering the impounded material. The Assessing Officer had accepted the capital gains as declared on sale of plots of (-) Rs.3,93,219/- and made addition of Rs.1,93,58,760/-, Scrutiny assessment was completed assessing total income at Rs.2,11,96,716/-
4.1. During the year under consideration, the assessee was found to be engaged in the business of real estate project at Chhindwara and sold plots to different parties and received on-money of Rs.3,21,58,760/-. During the course of statement recorded u/s.131(1A) of the Act, the assessee stated that the notings in the diary relate to his real estate business and out of cash receipts he had made a declaration of additional income of Rs.1.28 crores for F.Y.2020-21. However, the assessee had declared the income from real estate under Long-term capital gains at (-)Rs.3,93,219/- in Income Tax Return and the Assessing Officer has accepted the same under LTCG. Thus, the income from real estate has been incorrectly computed under the head LTCG as against income from business.
4.2. As per provisions of Section 2(14) of the I.T. Act, the 'capital assets' means:
(a)**** (b)**** (c)**** but does not include-
(i) any stock-in-trade [other than the securities referred to in sub- clause (b)], consumable stores or raw materials held for the purposes of his business or profession;
(ii)***** As the plots sold are stock-in-trade of the assessee, the same do not constitute capital asset within the meaning of Section 2(14) of the Income Tax Act and the Income arising out of sale of plots falls under the head "Income from Business". 4.3. Further it is observed that the assessee has credited Rs.59,99,424/- as profit on sale of plot, Chindwada. However, the assessee has not offered the same for taxation either in P&L Account or in computation of income.
5. In view of the above facts, I am of the considered opinion that the order of the assessment u/s. 143(3) passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of revenue. It is proposed to set-aside the order of assessment dated 30.12.2022 and issue directions to the Assessing Officer as deemed fit in the facts and circumstances of the case.
6. You are hereby, required to show-cause as to why action as above should not be taken under section 263 of the I.T. Act. The case is fixed for hearing on 17.03.2025 at 3.00 PM in Room No.116, Aayakar Bhawan, Civil Lines, Nagpur 400 001. In this regard, you may appear either in person or through an Authorized Representative. If you do not wish to avail the opportunity of being heard in person, you may send your written submission along with documentary evidence, if any, on or before 17.03.2025, which will be considered in the proceedings u/s 263 of the I.T. Act. It is also stated that in case of non-compliance to this Notice, it will be presumed that you have no explanation to offer and the case will be decided on merit taking into consideration the material available on record.”
In the above show cause notice u/s.263 of the Act, ld. PCIT has referred to two issues relating to the declaration of additional income of Rs.1.28 crore during the course of survey but has declared loss from sale of plots under the head long term capital gain at Rs.3,93,219/- only and further ld. AO has accepted the same and has not considered the statement of the assessee given u/s.131(1A) of the Act. Ld. PCIT has also observed that the plots sold by the assessee are part of Stock in trade and therefore cannot constitute capital asset u/s.2(14) of the Act. Reference also given to the profit on sale of plot at Chindwada at Rs.59,99,424/- alleging that the assessee has not offered the same for taxation in the profit and loss account. Assessee responded to the show cause notice and filed reply on 16.03.2025 which is placed at pages 196 to 213 of the paper book. This is the only reply filed by the assessee and ld. PCIT referring to the said submission firstly dropped the revisionary proceedings initiated on account of the declaration of additional income at Rs.1.28 crore for A.Y. 2020-21 and only carried out the discussion on the sale of plot of land at Chindwada including the taxability of income of plotting transactions under the head profits and gains from the business and secondly regarding the computation of correct income on sale of plots at Chindwada and proportionate cost of land and improvement of the land sold during the previous year.
Now in the show cause notice ld.PCIT has only referred to the profit on sale of plot of land at Chindwada at Rs.59,99,424/- but then in the impugned order has referred to the statement of the assessee recorded by ADIT (Investigation), Jabalpur on 05.03.2021 and also about the order of National Lok Adalat on 09.12.2017 , Bench No.2, Chindwada in para 4.1 and 4.2 of the impugned order which reads as under :
Ld. PCIT has also referred to the over statement of the proportionate cost of acquisition and improvement (without indexation) of the plot of land at Chindwada at Rs.1,13,93,623/- with reference to the assessee’s own ledger account. For the rebuttal of all these observations fair opportunity was required to be given to the assessee by ld. PCIT. However, no further notice issued to the assessee to respond to all these queries and in a very short span, i.e. one week from the date of first submission by the assessee, ld. PCIT has passed the impugned order on 25.03.2025, which clearly indicates that proper opportunity of hearing has not been granted to the assessee thereby not adhering to principles of natural justice.
Audi Alteram Partem is a latin maxim (Hear the other side) and this principle is the bedrock of procedural fairness and is premised on the idea that no one should be condemned unheard. In the context of tax proceedings, it mandates that the assessee must be given (i) prior notice of the proceedings or proposed action against him. (ii) informed of the material or evidence being relied upon by the AO to make an addition or adverse inference (iii) provide copies of relied-upon documents so that assessee can formulate his defence (iv) allow to make a written representation, either personally or through a legal representative (v) grant adequate time to submit his reply or evidence (vi) give an opportunity for a personal hearing, if requested, where the assessee may explain his position orally and (vii) allow the right of cross-examination, especially if the AO relies on third-party statements or testimonies to frame additions.
Hon’ble Supreme Court in its recent judgment in the case of Krishnadatt Awasthy Vs. State of M.P. & Ors - Civil Appeal No. 4806 of 2011 judgment dated 29.01.2025 (2025 INSC 126) has observed as under :
“68. The principle of audi alteram partem is the cornerstone of justice, ensuring that no person is condemned unheard. This principle transforms justice from a mere technical formality into a humane pursuit. It safeguards against arbitrary decision-making, and is needed more so in cases of unequal power dynamics.
An allegation of bias, can only be proved if facts are established after giving an opportunity of hearing. This process requires a fair and transparent procedure in which the concerned parties are given an adequate opportunity to present their case. Such an opportunity allows the accused party or the affected individuals to respond to the allegations, provide evidence, and clarify any misgivings regarding the decision-making process. Therefore, for an allegation of bias to be proved, it is imperative that the procedural safeguards of a fair hearing are observed allowing for establishment of the relevant facts.
In light of the foregoing, we uphold the opinion of Justice KV Vishwanathan allowing the appeal(s) and setting aside the judgment of the Division Bench. Resultantly, this Court is not able to endorse the opinion rendered by Justice JK Maheshwari.
Since the selection pertains to the year 1998, and the appellants have continuously held office and performed their duties for over twenty-five years under interim orders, remanding the matter for a fresh inquiry would hardly be a practical exercise and will be an injustice to the appointees. The time lag can be better appreciated by bearing in mind that one of the appellants has already superannuated.
The matters stand answered and allowed on the above terms. Parties to bear their own cost.”
In light of above principle and also taking note of the various observations of ld. PCIT in the impugned order dated 25.03.2025, holding the assessment order dated 30.12.2022 as erroneous and prejudicial to the interest of Revenue, we find that ld. PCIT has referred to the facts and various other observations which were not appearing in the submissions filed by the assessee in reply to the show cause notice and therefore the assessee deserves fair opportunity to respond to such observations of ld. PCIT. We also notice that in the paper book page Nos.171 to 193 assessee has filed a copy of declaration under the Direct Tax Vivad Se Vishwas Scheme and Form No.2 refers to the Tax Arrear of Rs.3,73,53,478/- and Form No. 3 has been issued on 07.05.2025. Even during the course of hearing, ld. Counsel for the assessee referring to para 4.1 of the show cause notice u/s.263 of the Act has stated that the issue has already been declared in the VSVS however the impugned order has been passed much before on 25.03.2025. All these aspects clearly indicates that revisionary proceedings needs to be carried out afresh after taking into consideration the facts narrated before us during the course of hearing by ld. Counsel for the assessee and observations of ld. PCIT needs to be confronted to the assessee for which reasonable opportunity shall be granted. Impugned order is set aside and the Grounds of appeal No.1 raised by the assessee is allowed.
14. Since we have allowed the legal issue raised by the assessee in Ground No.1, dealing with remaining grounds raised on merits would be merely academic in nature and thus held to be infructuous.
In the result, the appeal filed by the assessee is allowed for statistical purposes as per terms indicated hereinabove.
Order pronounced on this 06th day of October, 2025.