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Additions Made Without Giving Notice Are Bad in Law

Introduction

In the case of Net Agri Co. (P) Ltd. v. Income-tax Officer[i], the Income Tax Appellate Tribunal (‘ITAT’) addressed a case where Net Agri Co. (P.) Ltd. (‘Assessee’) acquired the property through auction. The AO made income additions citing unexplained sources of investment. Appeals ensued, leading to the Commissioner of Income Tax (Appeals) [‘CIT(A)’] deleting additions on account of unexplained sources of investments but confirming the additions on account of unexplained cash deposits. Both parties appealed to the ITAT. The ITAT emphasized proper notice to the Assessee on new issues, overturning the CIT(A)’s decision on unexplained cash deposits while upholding the deletion of the remaining addition.

Brief Facts

  • The Assessee acquired an immovable property through an auction conducted by Kotak Mahindra Bank. The AO made an addition to the Assessee’s income on the grounds of unexplained sources of investment in the property.

  • Aggrieved by these additions, the Assessee appealed to the CIT(A), providing additional evidence. CIT(A) failed to consider the said evidence and passed an order.

  • Aggrieved by this, the Assessee approached the ITAT. The ITAT set aside the CIT(A)’s order, directing reconsideration with the additional evidence.

  • The CIT(A), upon reconsideration, deleted an addition made by the AO on account of unexplained sources of investment in the property.

  • However, an addition on account of unexplained cash deposits was confirmed because the Assessee could not prove the source of a cash deposit in the bank account used for repaying a loan taken from M/s LMJ Logistics Ltd. for purchasing the property.

  • Consequently, both the revenue and the Assessee filed cross-appeals before the ITAT.

Observations/ Held by the ITAT

  • To fund the purchase of the said auctioned property, the Assessee took a loan from Development Credit Bank. Due to delays in the disbursement of the loan, an unsecured loan was temporarily taken from M/s LMJ Logistics Ltd.

  • Once the loan from Development Credit Bank was disbursed, it was used to repay the unsecured loan from M/s LMJ Logistics Ltd.

  • The Assessee provided additional evidence, including the registered sale deed, loan sanction letters, account statements, and unsecured loan confirmations from M/s LMJ Logistics Ltd. These documents were intended to establish the genuine source of funds used for purchasing the property.

  • The ITAT observed that the CIT(A), after accepting the additional evidence, should have confined the review to the issues raised in the AO’s original assessment order. Instead, the CIT(A) identified new issues regarding unexplained cash deposits used for loan repayments without providing prior show-cause notice to the Assessee.

  • The ITAT relied on the principle established by the Hon’ble Supreme Court in CIT v. Sardari Lal & Co.[ii], which restricts the CIT(A) from examining new sources of income not considered by the AO without due notice.

  • The ITAT emphasized that the CIT(A) cannot make additions to new issues not arising from the original assessment order without providing proper notice to the Assessee.

  • The ITAT allowed the Assessee’s appeal by overturning the CIT(A)’s decision regarding additions on the basis of unexplained cash deposits. Additionally, it upheld the CIT(A)’s deletion of the remaining addition, dismissing the Revenue’s appeal.

Conclusion

The ITAT reiterates the important legal principle that no addition can be made without giving the opportunity to the Assessee to respond. In line with the precedent set by the Hon’ble Supreme Court, the ITAT emphasized that the CIT(A) cannot introduce new issues without prior notice to the Assessee, limiting their review to the matters raised in the original assessment order. This decision underscores the significance of procedural fairness in tax assessments, ensuring that taxpayers are afforded the opportunity to address any allegations or discrepancies effectively.






End Notes

[i] [2023] 157 taxmann.com 6 (Delhi - Trib.) dated 24-11-2023.

[ii] IT Reference No. 227 of 1979





Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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