2022 (12) TMI 1569 - AT - Income Tax

Unexplained deposits - unexplained money - nature and source of the deposits reflecting in the bank account unexplained - CIT(A) deleted addition - HELD THAT - We note that the order of the Ld. CIT(A) is not at all sustainable in as much as it exhibits lack of proper application of mind. Furthermore there is contradictory finding by the AO and the CIT(A). While in assessment proceedings the AO has stated that no details has been given by the assessee but on the other hand the Ld. CIT(A) has observed that all the details were available. Both counsel agreed that in the interest of justice the issue in this appeal may be remitted back to the file of the AO to examine the same. Thus remit the issue to the file of the AO. Appeal of the Revenue stands allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the Commissioner of Income Tax (Appeals) erred in law and on facts by deleting the addition of Rs. 8,39,78,849/- made by the Assessing Officer (AO) on account of unexplained deposits in the assessee's bank accounts;

(b) Whether the CIT(A) was justified in relying on the submissions filed by the assessee, which were previously rejected by the AO as inadequate, incomplete, and not genuine;

(c) Whether the CIT(A) failed to conduct an independent and effective inquiry as mandated under subsection 4 of section 250 of the Income Tax Act and ignored relevant judicial precedent;

(d) Whether the order of the CIT(A) is erroneous and untenable in law and on facts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of deletion of addition of unexplained deposits by CIT(A)

Relevant legal framework and precedents: Under the Income Tax Act, unexplained cash credits or deposits in the bank account of an assessee can be added to income if the assessee fails to satisfactorily explain the nature and source of such deposits. The AO is empowered to make such additions after recording satisfaction of concealment of income. The CIT(A) has appellate jurisdiction to verify whether the AO's addition is justified on facts and law.

Court's interpretation and reasoning: The AO, after investigation, found the assessee company to be a paper company used for accommodation entries and noted substantial unexplained deposits totalling Rs. 8,39,78,849/- in two bank accounts. The AO recorded satisfaction that the assessee failed to provide any evidence regarding the identity, capacity, and genuineness of parties from whom the money was received, and thus treated the deposits as unexplained income. Consequently, the AO added the entire amount to the income of the assessee and initiated penalty proceedings under section 271(1)(c).

In contrast, the CIT(A) observed that the assessee had filed complete details of credit and debit entries in the bank accounts, along with details of loans paid and interest earned. The CIT(A) concluded that the AO had not appreciated these facts and deleted the addition.

Key evidence and findings: The AO's order noted absence of documentary evidence and failure to explain the nature of deposits. The CIT(A) relied on the submissions and documents filed by the assessee which purportedly explained the transactions.

Application of law to facts: The AO's addition was based on the principle that unexplained deposits are taxable as income. The CIT(A) took a contrary view that the assessee had adequately explained the deposits. However, the appellate record shows contradictory findings between AO and CIT(A) regarding the availability and adequacy of evidence.

Treatment of competing arguments: The Revenue argued that the CIT(A) erred in deleting the addition without conducting an independent inquiry and ignoring the AO's findings. The assessee contended that it had furnished full details and thus the addition was unwarranted.

Conclusions: The Tribunal found the CIT(A)'s order to lack proper application of mind and noted the contradictory findings. It held that the issue required fresh examination by the AO after giving the assessee an opportunity to be heard.

Issue (b): Reliance on assessee's submissions previously rejected by AO

Relevant legal framework: The appellate authority is required to independently examine the evidence and submissions. Reliance on submissions rejected by the AO without independent scrutiny may amount to non-application of mind.

Court's interpretation and reasoning: The Tribunal noted that the CIT(A) accepted the assessee's submissions which the AO had rejected as inadequate and unreliable. This indicated a lack of independent inquiry by the CIT(A).

Key evidence and findings: The AO's assessment order explicitly stated that the assessee failed to provide any documentary evidence or explanation. The CIT(A) simply recorded that all details were available without critically analyzing their genuineness.

Application of law to facts: The appellate authority must consider the adequacy and reliability of evidence afresh rather than merely accepting the assessee's submissions. The CIT(A)'s failure to do so was a procedural lapse.

Treatment of competing arguments: The Revenue emphasized that the CIT(A) ignored the AO's findings and did not conduct an independent inquiry. The assessee argued that it had submitted full details which were wrongly disregarded by the AO.

Conclusions: The Tribunal agreed with the Revenue that the CIT(A) did not apply independent mind and thus the deletion order was unsustainable.

Issue (c): Failure of CIT(A) to conduct independent inquiry and disregard of judicial precedent

Relevant legal framework and precedents: Section 250(4) of the Income Tax Act mandates the appellate authority to conduct an independent inquiry and may direct the AO to make further inquiries if necessary. Judicial precedents emphasize that appellate authorities must not be mere rubber stamps of the AO's findings or accept submissions without scrutiny.

Court's interpretation and reasoning: The Tribunal observed that the CIT(A) neither conducted an independent inquiry nor issued directions to the AO under section 250(4). The CIT(A) also ignored the Delhi High Court's judgment in the cited case, which underscores the necessity of independent verification before deleting additions.

Key evidence and findings: The CIT(A)'s order did not reflect any independent analysis or directions for further inquiry. The AO had recorded satisfaction of concealment and initiated penalty proceedings, which the CIT(A) overlooked.

Application of law to facts: The appellate authority's failure to exercise jurisdiction under section 250(4) amounted to procedural impropriety and incomplete adjudication.

Treatment of competing arguments: The Revenue contended that the CIT(A) had abdicated its duty to independently verify the facts and comply with statutory provisions. The assessee maintained that the submissions were sufficient and no further inquiry was warranted.

Conclusions: The Tribunal held that the CIT(A)'s approach was erroneous and directed remand to the AO for fresh consideration.

Issue (d): Overall tenability of the CIT(A) order

The Tribunal found the CIT(A)'s order to be erroneous in law and on facts due to lack of proper application of mind, contradictory findings vis-`a-vis the AO, failure to conduct independent inquiry, and non-compliance with statutory provisions and judicial precedent.

3. SIGNIFICANT HOLDINGS

"The order of the Ld. CIT(A) is not at all sustainable in as much as, it exhibits lack of proper application of mind. Furthermore there is contradictory finding by the AO and the ld. CIT(A). While in assessment proceedings, the AO has stated that no details has been given by the assessee but on the other hand, the Ld. CIT(A) has observed that all the details were available."

"Both counsel agreed that in the interest of justice, the issue in this appeal may be remitted back to the file of the AO to examine the same. Accordingly, in the interest of justice, we remit the issue to the file of the AO and the AO is directed to consider the issue afresh after giving proper opportunity of being heard to the assessee."

Core principles established include:

• The appellate authority must conduct an independent and effective inquiry and not merely accept the assessee's submissions rejected by the AO.
• Contradictory findings between AO and appellate authority require fresh adjudication to ensure proper appreciation of evidence.
• Section 250(4) empowers the appellate authority to direct further inquiry and must be exercised where necessary.
• Deletion of additions on unexplained deposits must be based on credible and satisfactory explanation supported by evidence.

The final determination was to allow the Revenue's appeal for statistical purposes and remit the matter to the AO for fresh consideration after affording the assessee a proper opportunity of hearing.