2025 (5) TMI 596 - AT - Income Tax

Validity of reassessment proceedings u/s 147/148 - Assessee failure to deduct tax at source (TDS) on labour payments - HELD THAT - Assessee is said to have incurred expenditure by way of sub contract (labour charges) amounting to Rs. 61, 32, 354/- for which the assessee is alleged to have failed to deduct TDS on the same for around 18 parties. AR brought our attention to the details of the contractor s which are enclosed at paper book page no. 9 in which he had stated that the details of party mentioned at serial no. 8 and 10 were not furnished before the ld. AO but was provided before the ld. CIT(A) and that the details pertaining to the other contractors were provided to the ld. AO. On perusal of the assessment order and CIT(A) s order it is observed that the assessee has not furnished complete details along with form no. 16A of all these parties neither before the ld. AO nor before the ld. CIT(A). At the request of the ld. AR we deem it fit to remand this issue back to the file of ld. AO to extend the assessee one more opportunity to furnish the complete details of the transactions along with form no. 16A to substantiate its claim in the interest of justice dispensation. AO is directed to verify the same and to decide on the merits and in accordance with law. Appeal filed by the assessee is allowed for statistical purpose.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal (AT) in this appeal are:

(a) Whether the reassessment proceedings initiated under Sections 147/148 of the Income Tax Act, 1961 (the Act) are valid and in accordance with the mandate of Section 147;

(b) Whether the assessment order passed under Section 147 read with Section 144B of the Act suffers from violation of principles of natural justice;

(c) Whether the mandatory procedural requirements of Section 144B of the Act were complied with by the Assessing Officer (AO);

(d) Whether the disallowance of Rs. 13,87,297/- under Section 40(a)(ia) of the Act for failure to deduct tax at source (TDS) on labour payments is justified, particularly when the assessee claims to have deducted TDS and furnished relevant evidence;

(e) Whether the lower authorities erred in not considering the evidence and documents submitted by the assessee, including Form 16A and details of deductees, and in not providing adequate opportunity to the assessee to substantiate its claims.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Validity of Reassessment Proceedings under Sections 147/148

The legal framework governing reassessment proceedings under Section 147 requires the AO to have a "reasonable belief" that income chargeable to tax has escaped assessment. The reassessment notice under Section 148 must satisfy the procedural and substantive requirements laid down by the Act and judicial precedents.

The Court noted that the AO issued the notice under Section 148 on 30.03.2021, alleging escapement of income amounting to Rs. 15,39,706/-. The assessee responded by filing a return declaring the same income as originally declared. The reassessment order was passed under Section 147 read with Section 144B, disallowing certain expenses on account of alleged failure to deduct TDS.

The Tribunal did not find any explicit challenge to the validity of the initiation of reassessment proceedings in the final order but observed that the grounds raised included the contention that the mandate of Section 147 was not satisfied. However, the Tribunal's focus was primarily on the procedural compliance and merits of disallowance rather than on the validity of reopening per se. Given the absence of detailed discussion on this point, the Tribunal implicitly upheld the reopening as valid for the purpose of adjudicating the substantive issues.

(b) Compliance with Principles of Natural Justice and Procedural Requirements under Section 144B

Section 144B of the Act imposes mandatory procedural safeguards in reassessment proceedings, including issuance of notice, opportunity of hearing, and compliance with time limits. The assessee contended that these provisions were not complied with, rendering the reassessment order bad in law.

The Tribunal examined the record and noted that the AO had issued notices under Sections 143(2) and 142(1), and had provided several opportunities to the assessee to furnish details, particularly Form 16A and Form 26AS of deductees. However, the assessee had failed to furnish complete details despite repeated opportunities.

The Tribunal observed that the principles of natural justice require that the assessee be given a fair opportunity to present its case. In view of the incomplete compliance by the assessee, the Tribunal deemed it appropriate to remand the matter to the AO to provide the assessee one more opportunity to submit complete details and evidence. This remedial measure was taken in the interest of justice and to ensure compliance with procedural fairness.

(c) Disallowance under Section 40(a)(ia) for Failure to Deduct TDS on Labour Payments

Section 40(a)(ia) mandates disallowance of expenditure where tax is deductible at source but has not been deducted or, if deducted, has not been paid to the government.

The AO disallowed Rs. 13,87,297/- representing 30% of labour payments amounting to Rs. 46,24,322/-, alleging failure to deduct TDS on payments to approximately 18 parties. The assessee claimed that TDS was duly deducted and submitted Form 16A and other evidence for some parties, while for two parties the evidence was submitted before the CIT(A).

The CIT(A) upheld the disallowance on the ground that the assessee failed to substantiate the genuineness of payments and did not furnish all Form 16A documents during appellate proceedings.

The Tribunal carefully examined the submissions and noted that the assessee had submitted partial evidence before the AO and additional evidence before the CIT(A), but the lower authorities did not consider the latter. The Tribunal emphasized the importance of verifying the genuineness of payments and the correctness of TDS compliance.

In light of incomplete documentation and to ensure fair adjudication, the Tribunal remanded the issue to the AO to verify the complete details and Form 16A documents, and to decide the matter on merits and in accordance with law. The assessee was directed to cooperate fully and avoid undue delay.

(d) Treatment of Competing Arguments and Evidence

The assessee argued for consideration of all submitted evidence and for an opportunity to present the case fully. The Departmental Representative relied on the record of non-compliance and incomplete submissions before the lower authorities.

The Tribunal balanced these competing contentions by recognizing the procedural lapses on the part of the assessee in furnishing complete evidence and the need for procedural fairness. The decision to remand the matter was a measured approach to enable the assessee to substantiate its claims while allowing the AO to verify and decide the issue afresh.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning is encapsulated in the following observations:

"On perusal of the assessment order and the ld. CIT(A)'s order, it is observed that the assessee has not furnished complete details along with form no. 16A of all these parties neither before the ld. AO nor before the ld. CIT(A). At the request of the ld. AR, we deem it fit to remand this issue back to the file of ld. AO to extend the assessee one more opportunity to furnish the complete details of the transactions along with form no. 16A to substantiate its claim, in the interest of justice dispensation. The ld. AO is directed to verify the same and to decide on the merits and in accordance with law. The assessee is also directed to strictly comply with the proceedings without any undue delay on its side before the ld. AO."

The core principles established include:

(i) Reassessment proceedings under Sections 147/148 must comply with procedural safeguards and principles of natural justice, including providing the assessee a fair opportunity to present evidence;

(ii) Disallowance under Section 40(a)(ia) requires careful scrutiny of TDS compliance and genuineness of payments, and the assessee must substantiate its claims with complete documentation such as Form 16A;

(iii) Where procedural lapses or incomplete submissions occur, the appropriate remedy is to remand the matter to the AO for fresh verification and decision rather than outright dismissal or upholding of disallowance;

(iv) The appellate authorities must consider all relevant evidence placed before them, and failure to do so may warrant intervention by the Tribunal.

On final determinations, the Tribunal allowed the appeal for statistical purposes and remanded the matter to the AO for fresh adjudication on the merits after providing the assessee one more opportunity to furnish complete details and evidence.

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