2025 (6) TMI 1856 - AT - Income Tax

Addition u/s 69 r.w.s. 115BBE and disallowance u/s 14A r.w. Rule 8D - CIT(A) failure to issue any statutory show-cause notice u/s 251(2) - HELD THAT - We find that in the present case while passing the impugned order the ld. CIT(A) confirmed the addition u/s 69 r.w.s. 115BBE of the Act without fully examining the supporting documents and explanations offered by the assessee before him and similarly while making the disallowance u/s 14A r.w. Rule 8D CIT(A) simply upheld the addition despite admitting the fact that the assessee has not earned any exempt income during the relevant assessment year which is contrary to the settled proposition of law. We additionally note that the enhancement of income as unexplained expenditure u/s 69C by the ld. CIT(A) is not justified as the CIT(A) failed to issue any statutory show-cause notice u/s 251(2) while making the adjustment which is clearly a violation of principles of nature justice. We also note that the assessee was deprived of proper opportunity to explain or rebut the proposed enhancement of income rendering the action unsustainable in the eyes of law. In view of the above and in the interests of justice and fair play we feel it necessary to remand the whole issue to the file of the AO. Therefore we set aside the impugned order of the CIT(A) and restore the entire matter to the file of the AO with a direction to re-examine the case of the assessee on merits after affording reasonable opportunity of being heard to the assessee. Appeal of the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the addition of Rs. 7,47,00,000/- under section 69 read with section 115BBE of the Income Tax Act is justified, considering the assessee's submission of documents to substantiate the source of investment in unquoted shares.

- Whether the disallowance of Rs. 1,88,254/- under section 14A read with Rule 8D of the Income Tax Rules is valid, given that the assessee did not earn any exempt income during the assessment year.

- Whether the enhancement of income by Rs. 3,52,22,603/- as unexplained expenditure under section 69C of the Act by the Commissioner of Income Tax (Appeals) without issuing a statutory show-cause notice under section 251(2) of the Act violates principles of natural justice and is legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under section 69 read with section 115BBE regarding unexplained investment

The relevant legal framework includes section 69 of the Income Tax Act, which empowers the Assessing Officer to treat unexplained investments as income of the assessee if the source is not satisfactorily explained. Section 115BBE prescribes a special rate of tax on unexplained income or investment. The law requires that the assessee must be given an opportunity to explain the source of such investment and that the Assessing Officer must consider the explanations and documents furnished.

The Court observed that the Assessing Officer made an addition of Rs. 7,47,00,000/- on the ground that the source of investment in unquoted shares was not proved. However, the assessee had submitted documents to substantiate the claim. The Commissioner of Income Tax (Appeals) confirmed the addition without fully examining these supporting documents and explanations. This approach was found to be contrary to the principles of natural justice and settled law requiring a fair and thorough examination of the evidence before making such an addition.

The Tribunal noted that the failure to consider the documents submitted by the assessee rendered the addition unjustified. The Court emphasized the necessity of a speaking order that addresses the evidence and explanations on record before confirming such additions.

Issue 2: Disallowance under section 14A read with Rule 8D regarding expenditure related to exempt income

Section 14A read with Rule 8D permits disallowance of expenditure incurred in relation to income that is exempt from tax. The legal principle is well-settled that if no exempt income is earned during the relevant assessment year, no disallowance under section 14A can be made.

In this case, the assessee had not earned any exempt income during the year under consideration. Despite this, the Assessing Officer disallowed Rs. 1,88,254/- under section 14A, which was sustained by the CIT(A). The Tribunal found this to be contrary to settled law and held that the disallowance was not justified. The CIT(A) failed to consider the absence of exempt income, which is a mandatory precondition for invoking section 14A disallowance.

Issue 3: Enhancement of income under section 69C without issuance of statutory show-cause notice under section 251(2)

Section 69C deals with unexplained expenditure, and section 251(2) mandates that before making any enhancement of income at the appellate stage, the Commissioner of Income Tax (Appeals) must issue a show-cause notice to the assessee, providing an opportunity to respond. This procedural safeguard is critical to uphold the principles of natural justice.

The CIT(A) enhanced the assessee's income by Rs. 3,52,22,603/- under section 69C without issuing any show-cause notice under section 251(2). The Tribunal found this to be a clear violation of the principles of natural justice as the assessee was deprived of the opportunity to represent its case or rebut the proposed enhancement. The lack of a statutory notice rendered the enhancement unsustainable in law.

The Tribunal emphasized that such procedural lapses cannot be condoned, and the matter requires re-examination by the Assessing Officer after affording the assessee a reasonable opportunity of hearing.

3. SIGNIFICANT HOLDINGS

- "The ld. CIT(A) confirmed the addition of Rs. 7,47,00,000/- u/s 69 r.w.s. 115BBE of the Act without fully examining the supporting documents and explanations offered by the assessee before him."

- "The disallowance u/s 14A r.w. Rule 8D amounting to Rs. 1,88,254/- was upheld despite admitting the fact that the assessee has not earned any exempt income during the relevant assessment year, which is contrary to the settled proposition of law."

- "The enhancement of income at Rs. 3,52,22,603/- as unexplained expenditure u/s 69C by the ld. CIT(A), is not justified as the ld. CIT(A) failed to issue any statutory show-cause notice u/s 251(2) of the Act while making the adjustment, which is clearly a violation of principles of natural justice."

- "The assessee was deprived of proper opportunity to explain or rebut the proposed enhancement of income rendering the action unsustainable in the eyes of law."

- The Tribunal set aside the impugned order of the CIT(A) and remanded the entire matter to the file of the Assessing Officer with directions to re-examine the case on merits after affording reasonable opportunity of being heard and to pass a speaking order in accordance with law.