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Facts
The assessee's case was reopened under Section 147 of the Income Tax Act, leading to an addition of Rs. 2,25,87,173/- on account of alleged unexplained expenditure. The assessee contended they had no transactions with the entity from which the expenses were allegedly incurred.
Held
The Tribunal held that the Assessing Officer's show cause notice was defective as it did not clearly specify the grounds for the proposed addition, violating the principles of natural justice. The addition made under Section 69C was therefore unjustified.
Key Issues
Whether the assessment order is vitiated due to a defective show cause notice and violation of principles of natural justice. Whether the addition under Section 69C was justified based on the provided show cause notice.
Sections Cited
147, 148, 143(3), 69C, 37(1), 143(2), 142(1), 56(2)(x)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCHES : A : NEW DELHI
Before: SHRI S. RIFAUR RAHMAN & SHRI ANUBHAV SHARMA
This is an appeal preferred by the Assessee against the order dated 30.08.2024 of the Commissioner of Income-tax (Appeals)-26, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No.11108/2015-16 arising out of the appeal before it against the order dated 21.03.2022 passed u/s 147 r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Central Circle-14, New Delhi (hereinafter referred to as the Ld. AO).
Heard and perused the records. Brief facts of the case are that the case of the assessee was reopened u/s 147 of the Act by issuing notice u/s 148 of the Act dated 31.03.2021, based on certain material allegedly impounded during the course of survey proceedings conducted at the premises of M/s Mayfair Resorts India Pvt. Ltd. The assessee filed its return of income on 25.11.2021 at same income as shown in the original return of income. The assessment u/s 147 of the Act has been completed on 21.03.2022 after making an addition of Rs.2,25,87,173/- on account of alleged unaccounted expenditure by invoking the provisions of section 69C of the Act to the returned income.
The Ld. CIT(A) has granted the relief of Rs.1,43,05,000/- (53.05 Lacs + 90 Lacs) on the basis that Rs.53.05 Lacs has already been recorded by the appellant in its books of account and Rs.90 Lacs was spent by Mr. Sachdeva, Partner of appellant LLP and should not be taxed in the hands of appellant LLP. Against the addition sustained by Ld. CIT(A) aggregating to Rs.82,82,173/-, the appellant is in appeal raising various grounds and it is the ground No. 8, arising out of allegation that there is disparity in Show Cause Notice vis-a-vis Assessment Order, which was argued foremost.
Though ld. DR has defended the impugned ground submitting that same cannot be raised at this stage what we find is that same goes to assumption of jurisdiction. It comes up that the Ld. AO had made an addition of Rs.2,25,87,173/- u/s 69C of the Act as unexplained money on account of unaccounted expenditure during the year under consideration. In the show cause notice dated 17.03.2022 (copy of which is at Page8 of PB), assessee was questioned to explain that 'why the transactions with M/s Mayfair Resorts India Pvt. Ltd. should not be treated as bogus expenses.”. The assertion of assessee was that during the year under consideration, the assessee has not entered into any transaction with M/s Mayfair Resorts and ld. AO records same in para 5.1 at page 7 of the assessment order, which is reproduced below: 5.1 The assessee vide its letter dated 16.03.2022 has submitted its reply wherein the assessee stated that the assesse LLP does not have any transaction with M/s Mayfair Resorts Private Limited during the year under consideration and the assessee does not have any transaction with M/s Mayfair Resorts Private Limited, therefore, it does not have any ledger account ijn the books of the assessee.
Ld. Counsel has submitted that if the allegation or ground is not made at the stage of show cause itself, it is not permitted for the authorities to create a new ground. Travelling beyond show cause would defeat the very purpose of principles of natural justice. Therefore, adherence to show cause is not merely a procedural formality but a mandatory requirement. The assessee is entitled to fair and reasonable opportunity of being heard for which law has provided specific mechanism in the form of show cause notice. Hence, the assessment order is invalid and deserves to be quashed. Reliance is placed by him on the decision of Hon’ble Bombay High Court in the case of Vivek Jaishing Asher vs Income Tax 3 Officer, Ward 19(3)(1) dated 16.04.2024, wherein, in para 9 and 10 at page 3 of the judgement, held as under: "9. The courts have time and again held that issuance of show cause notice is not an empty formality. Its purpose is to give reasonable opportunity to the affected persons to effectively deal with the allegations in the show cause notice. In our view, even the show cause notice dated 23 rd August 2022 is defective in as much as even though it had reference to Section 56(2)(x) of the Act, it did not mention whether the Assessing Officer proposed to treat the stamp duty value as deemed income of assessee under clause (a] or clause (b) of Section 56(2)(x) of the Act. This is because both are separate provisions and under either of these two clauses the stamp duty value could be treated as deemed income. By not specifying whether Section 56(2)(x](a) or Section 56(2)(x)(b) of the Act was applicable, the A.O. first of all has not given reasonable opportunity of showing cause to the assessee. Assessee would be totally unaware of the grounds which had prompted the A.O. to arrive at a prima facie conclusion and issue show cause notice. The power that the A.O. had was required to be executed properly. Moreover in the assessment order dated 29th September 2022 that is impugned in the petition, the A.O. has chosen to give Section 56(2](x], a go by and treat the stamp duty value of the flat at Rs.11,68,99,000/- as from unexplained source under Section 69 of the Act. There is no reference to Section 56(2)(x) of the Act in the operative part of the order dated 29th September 2022.
In the circumstances, the impugned order dated 29th September 2022 cannot be sustained. The allegations in the affidavit in reply that assessee has claimed tenancy rights as colourable device in order to get an exemption under the provisions of the Act and evade the tax liability also cannot be accepted because if the A.O. had evidence to that effect the same should have been stated in the show cause notice dated 23rd August 2022."
Now the primary requirement for application of section 69C of the Act is that assessee should incur expenses out of unexplained source of income. The section 37 of the Act is a specific provision that disallows business expenses when it is found not to be wholly and exclusively for business. Where purchases 4 and source of expense are not doubted and only doubt was regarding genuineness of expense, disallowance may be made under section 37(1) of the Act, by Assessing Officer and section 69C of the Act may not become applicable. Thus where the ld. AO has show caused the assessee for justifying expenses alleged to be bogus making addition u/s 69C of the Act by invoking deeming income provision, is not justified and violates principles of natural justice made applicable under the Act, by way of mandatory notices, u/s 143(2) or 142(1) of the Act. The principles of procedural fairness and burden of proof require assessee being given due notice of prospective action and specially if there is any legal burden on assessee to be discharged specifically. Thus we are inclined to sustain this ground No. 8 and allow the appeal.