2025 (5) TMI 1470 - AT - Income Tax

Reassessment proceedings u/s 147 /148 - Addition on account of trading income and short-term capital gains - applicability of best judgment assessment under section 144 - HELD THAT - We observe on perusal of Ld AO s order sufficient opportunities was provided to the assessee to furnish the required details as well as books of accounts along with bills and vouchers for verification of details of audit report the assessee was asked to furnish the complete details of turnover sales ledger account of purchase and expenditures and also asked to produce books of accounts along with bills and vouchers but the assessee has failed to furnish therefore AO have no option but to complete the assessment proceedings on the basis of material available on record. We observed that even during appellate proceedings before the Ld. CIT(A) also the Ld. AR of the assessee did not submit any submissions nor sought any adjournment for two notices issued to the assessee therefore Ld. CIT(A) has decided the appeal on the basis of material available on record and merely upheld the orders of the Ld. AO where the Ld. CIT(A) has passed four line order and dismissed the appeal. Assessee submitted paper book containing 198 pages and requested with grounds so raised by the assessee that since at both stage the assessee could not produce the documents the assessee be permitted to place on record concerning the issues of various addition so made. Thus matter is required to be set aside to the file of the Ld. CIT(A) in the interest of justice who will decide the issue afresh by providing sufficient opportunity of hearing to the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

• Validity of the reassessment proceedings initiated under sections 147 and 148 of the Income Tax Act, 1961, particularly whether the reopening was justified despite the assessee having filed the original return of income for the relevant assessment year.
• Whether the reasons recorded for reopening the assessment were adequate and confined to the issues on which reassessment was initiated, or whether additions beyond the reasons recorded were improper.
• Legality of the best judgment assessment passed under section 144, including whether the assessee was afforded adequate opportunity of hearing before such assessment.
• Validity of the trading addition of Rs. 33,94,084/- made by applying an 8% net profit rate on turnover, in light of the assessee's failure to produce books of accounts and substantiating documents.
• Legality of the addition of Rs. 11,04,606/- on account of short-term capital gain arising from sale of immovable property, including whether the entire sale consideration or only the differential value between stamp duty valuation and declared consideration should be taxed.
• Whether the cost of acquisition of the immovable property should have been deducted before computing capital gains.
• Whether the trading additions and capital gain additions could be sustained simultaneously without allowing set-off benefits.
• Consequential issues relating to interest under sections 234B, 234D, and withdrawal of interest under section 244A, as well as penalty proceedings initiated under sections 271(1)(c), 271(1)(b), and 271B read with section 274.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reassessment Proceedings under Sections 147/148

Legal Framework and Precedents: Sections 147 and 148 of the Income Tax Act empower the Assessing Officer (AO) to reopen an assessment if there is reason to believe that income chargeable to tax has escaped assessment. The reopening must be based on tangible material and a recorded reason. Judicial precedents emphasize the requirement of a clear link between information available and formation of belief for reopening, and that the reopening cannot be based on mere change of opinion.

Court's Interpretation and Reasoning: The AO initiated reassessment on the basis of information that the assessee had sold immovable property for Rs. 10,00,000/- but the stamp duty valuation was Rs. 11,04,606/-. The assessee did not disclose capital gains in the original return and failed to respond to notices under section 133(6) and 142(1). The AO formed a belief that income had escaped assessment and issued notice under section 148. The CIT(A) upheld the reassessment, relying on the availability of prima facie material and the assessee's non-compliance.

Key Evidence and Findings: The assessee had not filed the return initially, nor responded to statutory notices. The Department had information from the sub-registrar's valuation and non-disclosure of capital gains. The reassessment notice was duly served.

Application of Law to Facts: Given the material and non-compliance, the AO's formation of belief was justified. The reassessment was not a mere change of opinion but based on tangible information. The reopening was therefore valid.

Treatment of Competing Arguments: The assessee argued that the original return was filed and that reassessment was initiated on false assumptions. The Tribunal found these arguments unsubstantiated due to the assessee's failure to comply with notices and non-disclosure of material facts.

Conclusion: The reassessment proceedings under sections 147/148 were valid and sustainable.

Issue 2: Adequacy and Scope of Reasons Recorded for Reopening

Legal Framework and Precedents: The reasons recorded for reopening must be specific and confined to the issues on which reassessment is initiated. Additions beyond the scope of reasons recorded are impermissible.

Court's Interpretation and Reasoning: The CIT(A) noted that the AO had reasons to believe income escaped due to non-disclosure of capital gains from property sale. The reassessment was confined to this issue. Additions beyond reasons recorded were not sustained.

Key Evidence and Findings: The reassessment notice and reasons recorded pertained to the capital gain transaction. No evidence suggested expansion beyond these reasons.

Application of Law to Facts: The AO acted within the scope of recorded reasons. No illegality in sustaining additions within the scope.

Treatment of Competing Arguments: The assessee's claim of additions beyond reasons recorded was rejected as the AO did not exceed the scope.

Conclusion: Reassessment was confined to the recorded reasons and additions beyond were not upheld.

Issue 3: Legality of Best Judgment Assessment under Section 144

Legal Framework and Precedents: Section 144 allows best judgment assessment where the assessee fails to comply with notices or produce accounts. However, the AO must provide opportunity of hearing before making such assessment.

Court's Interpretation and Reasoning: The AO issued notices under section 142(1) and 143(2) but the assessee failed to appear or produce documents. The AO completed assessment on best judgment basis. CIT(A) upheld the assessment, noting the assessee's non-compliance and failure to avail opportunity.

Key Evidence and Findings: Notices served, non-appearance by assessee, failure to produce books, and documents.

Application of Law to Facts: The AO complied with procedural requirements. The assessee's failure to respond justified best judgment assessment.

Treatment of Competing Arguments: The assessee contended no opportunity was given under section 144. The Tribunal found that notices under section 142(1) and 143(2) were issued, and non-compliance by the assessee warranted best judgment assessment.

Conclusion: Best judgment assessment under section 144 was valid.

Issue 4: Validity of Trading Addition of Rs. 33,94,084/-

Legal Framework and Precedents: Under section 145(3), where books of accounts are not produced or are found unreliable, the AO may estimate income based on prescribed methods such as applying a percentage of turnover as net profit. The addition must be reasonable and supported by material.

Court's Interpretation and Reasoning: The AO rejected the books of accounts due to non-production of complete records and applied an 8% net profit rate on turnover across three business concerns. The CIT(A) found the addition conservative and reasonable given the assessee's failure to substantiate claims.

Key Evidence and Findings: Absence of audited accounts for real estate business, failure to produce bills and vouchers, and incomplete submissions.

Application of Law to Facts: AO's estimation was justified and based on material available. The addition was upheld as the assessee failed to rebut it.

Treatment of Competing Arguments: The assessee argued against the addition but failed to produce evidence. The Tribunal and CIT(A) rejected the unsubstantiated claims.

Conclusion: Trading addition was valid and sustained.

Issue 5: Addition of Rs. 11,04,606/- as Short Term Capital Gain

Legal Framework and Precedents: Capital gains are computed by deducting cost of acquisition from sale consideration. If cost of acquisition is not furnished, the entire sale consideration may be treated as capital gain. Transactions in real estate business may be treated as business income if so declared and substantiated.

Court's Interpretation and Reasoning: The assessee sold immovable property at Rs. 11,04,606/-, but did not disclose capital gains or furnish cost of acquisition despite notices. The AO treated entire sale consideration as short term capital gain. CIT(A) upheld addition, noting non-compliance and failure to produce documents.

Key Evidence and Findings: Sale deed values, non-filing of capital gain details, absence of cost of acquisition, and failure to respond to notices.

Application of Law to Facts: Without cost of acquisition, no deduction was allowable. The addition was justified. The claim that the transaction was part of real estate business was unsubstantiated due to lack of audit and documents.

Treatment of Competing Arguments: The assessee argued that only differential value should be taxed and that the transaction was part of business income. The Tribunal found these claims unsupported by evidence.

Conclusion: Addition of entire sale consideration as short term capital gain was upheld.

Issue 6: Deduction of Cost of Acquisition and Set-off of Trading Additions

Legal Framework and Precedents: Cost of acquisition must be deducted in capital gains computation. Set-off of losses or additions across business and capital gains must be considered as per Income Tax provisions.

Court's Interpretation and Reasoning: The assessee failed to produce cost of acquisition details, hence no deduction was allowed. The simultaneous sustaining of trading additions and capital gains without set-off was upheld due to lack of substantiation and compliance.

Key Evidence and Findings: Absence of cost of acquisition documents and failure to produce books of accounts for real estate business.

Application of Law to Facts: No deduction was permissible without evidence. Set-off was not allowed where claims were unsubstantiated.

Treatment of Competing Arguments: The assessee's submissions were not supported by documents and thus rejected.

Conclusion: No deduction of cost of acquisition allowed; set-off claims rejected.

Issue 7: Interest and Penalty Proceedings

Legal Framework and Precedents: Interest under sections 234B, 234D is consequential to tax demand; penalty under sections 271(1)(c), 271(1)(b), and 271B read with 274 is consequential to assessment and non-compliance.

Court's Interpretation and Reasoning: These grounds were consequential and did not require separate adjudication at this stage.

Conclusion: Interest and penalty issues disposed of accordingly.

Procedural Fairness and Remand

The Tribunal noted that the CIT(A) passed a brief ex-parte order dismissing the appeal without affording adequate opportunity to the assessee to place on record documents and submissions. The assessee had filed a detailed paper book before the Tribunal. Considering the facts and in the interest of justice, the Tribunal remanded the matter to the CIT(A) for fresh adjudication after providing sufficient opportunity of hearing and examination of evidence. The Tribunal emphasized that the remand does not reflect any opinion on the merits and directed the assessee to cooperate and avoid frivolous adjournments.

3. SIGNIFICANT HOLDINGS

"In this scenario, the appeal is being decided on the basis of material on record and merit."

"There was enough material to validate that the reassessment proceedings are valid. Since in this case there is a clear link between information available with AO and his formation of belief that income chargeable to tax had escaped assessment, reopening of assessment is justified."

"During the assessment proceedings the appellant was provided ample opportunity to submit the details to substantiate its claim. However, in spite of extending sufficient opportunities the appellant failed to furnish evidences to substantiate the claims made during the appellate proceedings. As such these can best be considered as unsubstantiated averments."

"The addition made by AO is conservative & reasonable and is upheld the plea of the appellant on this issue is dismissed."

"During the course of assessment proceeding the assessee was asked to furnish the complete details of this property i.e. computation of capital gain, cost of acquisition etc. But assessee has failed to furnish the same. Therefore, in absence of cost of acquisition no deduction is allowable on account cost of acquisition. Considering the above, the total sale consideration amounting to Rs. 11,04,606/- adopted by the Sub Registrar is treated as short term capital gain of the assessee and added to the total income."

"The appellant has nothing to say in regard to addition made by the AO and merely filing of appeal is not enough, the appellant is expected to reply to opportunity granted during appeal but the appellant did not do so."

"Taking into consideration of facts and circumstances of the case in our considered view the matter is required to be set aside to the file of the Ld. CIT(A) in the interest of justice, who will decide the issue afresh by providing sufficient opportunity of hearing to the assessee."

Core principles established include the necessity of a clear link between information and formation of belief for reopening under section 147, the validity of best judgment assessment in case of non-compliance, the requirement for the assessee to substantiate claims with proper documents to avoid estimation additions, and the procedural fairness in appellate proceedings requiring adequate opportunity to the assessee.

Final determinations on each issue confirm the validity of reassessment, best judgment assessment, trading additions, and capital gains additions, subject to the remand for fresh adjudication by the CIT(A) with opportunity to the assessee to present evidence and submissions.