2025 (4) TMI 901 - AT - Income Tax

CIT(A) admitting additional evidence under Rule 46A of the Income-tax Rules 1962 without giving the AO a reasonable opportunity to examine and rebut the same during remand proceedings - HELD THAT - Not only that the evidence with the ld. CIT(A) has entertained are all those bills as AO noted that he made the disallowance merely on account of not submitting the bills. CIT(A) the bills were not submitted. CIT(A) having co-terminus power has entertained that evidence AO choose to remain silent and has not provided the remand report even after so many reminders the CIT(A) passed the order as on 12.04.2024 based on facts and records available. As is evident that the assessee had filed the appeal before the CIT(A) on 28.08.2018 and the appeal order was passed on 12.04.2024 which means the appeal was pending before the CIT(A) for approximately six years and sufficient opportunity was granted to the ld. AO. Without prejudice to that rule 46A(4) provide that Nothing contained in this rule shall affect the power of CIT(A) to direct the production of any document or the examination of any witness to enable him to dispose of the appeal or for any other substantial cause including the enhancement of the assessment or penalty . As regards the filling of the audit report belatedly AO has already considered the audited accounts and made the addition there from and there being no further grievance on that delayed filling of audit report and therefore they contention has no effect either on merit or that of the admitting the evidence on those accounts. Thus when the ld. CIT(A) has considered those evidence giving equal chance to ld. AO for providing his comments he has considered those evidence in furtherance to the records already on record. Therefore we do not find any merits on the grounds of appeal of the revenue and thereby the ground of appeal 1 2 raised by the revenue are dismissed. Addition on account of purchases and development expenses claimed by the assessee in profit and loss account contending that the assessee failed to submit the books of accounts bills or vouchers etc. to substantial its claim during the assessment proceedings - HELD THAT - We note that AO had observed that the assessee had debited purchase and internal development expenses in respect of the lands transferred to M/s M.M. Reality. As per the details furnished before the AO the said expenses had been paid to seven parties / contractors. The assessee had furnished the details of TDS deducted u/s 194C copy of ITR acknowledgments and computation of income of the parties / contractors. However the relevant books of accounts bills and vouchers verifying the expenses were not produced before the Ld. AO as contended by him while making the addition. While in proceeding before him the AO in order to verify the genuineness of the expenses issued summons u/s 131 to the parties. None of the parties appeared however they sent reply by post the relevant details to the Ld. AO forwarding the details as called for. In case of M/s Flexible Machine Tools Faridabad and Shri Arun Sharma Faridabad the summons the summons so issued were not served and came back as unserved. AO deputed his inspector for site verification and upon report of that inspector so deputed he stated that the land in questions is uneven rugged and having no constructions except a room. There was no agriculture activity on the land. That also made reasons to disbelieve the expenditure claimed by the assessee. While arguing the case ld. DR in its submission dated 23.12.2024 has mentioned point no. 3.1 Failure to produce books and supporting evidence that in spite of AO s specific request on 26.02.2016 for books of accounts bill and vouchers the assessee only provided partial reply through dak and also the assessee has failed to submit primary records substantiating the payment to seven contractors. In this matter we note that in the assessment proceeding in the very first reply of the assessee submitted on 13.07.20215 he had provided the following major documents as required by the ld. AO i.e.PAN Card ITR Ack. and Computation of A.Y.2013-14 Audited Balance sheet and Profit Loss of the A.Y.2013-14 Sales ledger in the book of Ascent Buildhome Developers Limited Transfer deeds Bank account statement of Punjab National Bank Jaipur Kotak Mahinda Bank Raja Park Jaipur and Kotak Mahindra Bank Raja Park Bhiwadi. The assessee also submitted the details of the payments made to the seven contractors the assessee had provided the details in its reply dated 02.03.2016 showing details of internal development expenses Copy of ITR Computation of those contractors and Form 26AS of those contractors. The assessee also submitted the copy of ledgers and bills were also duly submitted at the time of appeal proceeding but the ld. AO remained silent in the remand proceedings. DR in its submission dated 23.12.2024 has mentioned vide point no. 3.1.2 Evasions of Summons by Key Contractors and point no. 3.2.3 Non-compliance by Outstation Contractors stating that the AO had issued summons U/s 131 to the contractor but the contactors failed to attend hearings provided responses by post and also that some contractors did not submit their responses. On this issue as we note that the creditors of the assessee have duly filed their submission in response to the summons issued by the AO U/s 131. The creditors could not attend the hearing personally but they have duly provided letter confirming the nature and details of transaction undertaken between them and the assessee their ITR Computation and Copy of their PAN. This basic documents related to the creditors were submitted at the assessment proceeding but the contention of the AO was that the assessee had failed to produce the party so as to establish genuineness of the transaction. Neither these creditors were related party of the assessee nor they have completely neglected the summon. Also subsequent payments have also been made those creditors. AO concluded that the internal development expenses are bogus solely based on the non-appearance of the creditors/contractors which is not the correct. The bench noted that the ld. CIT(A) while dealing with the appeal of the assessee has dealt with all the aspect of the matter and categorically held that the assessee submitted all the necessary details in respect of the expenses incurred by them. All the ledger accounts bills and vouchers have been produced. The TDS has been paid u/s 194C the copy of ITR acknowledgments have been provided all the transaction have been carried out through the banking channels. Hence the said expenses cannot be held to be bogus in nature. The appellant cannot be forced/compelled to produce its parties to prove genuineness of the transactions. By submitting the necessary documents the appellant had discharged the onus cast upon him to prove the genuineness of the transactions quite sufficiently. Further since all the details were available with the Ld. AO necessary inquiries could have been conducted by the Ld. AO to determine the genuineness of the expenses. Also in respect of the report of the Patwari that no agricultural activity has taken place on the land it is pertinent to mention that the appellant has never claimed that he has done agriculture on the said land. Since the land was rugged that is why land filling and landscaping were required to be made for the land to be sold. Therefore we also do not find any infirmity in the finding so recorded by the ld. CIT(A) while allowing the appeal of the assessee on its merits. Thus we do not find any merit of the ground number three raised by the revenue and the same is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in admitting additional evidence under Rule 46A of the Income-tax Rules, 1962 without giving the Assessing Officer (AO) a reasonable opportunity to examine and rebut the same during remand proceedings;

(b) Whether the CIT(A) erred in admitting additional evidence without verification by the AO, especially considering the assessee's belated filing of the Income Tax Return (ITR) and Audit Report, and absence of evidence that the audit was conducted within the prescribed time;

(c) Whether the CIT(A) erred in deleting the addition made by the AO disallowing purchase and development expenses amounting to Rs. 2,90,20,819/- claimed by the assessee, despite the assessee's failure to substantiate the claim with books of accounts, bills, vouchers, or other supporting evidence during assessment proceedings;

(d) Ancillary issues relating to procedural compliance, natural justice, and the onus of proof regarding genuineness of claimed expenses.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Admission of Additional Evidence under Rule 46A without reasonable opportunity to AO

Relevant Legal Framework and Precedents: Rule 46A of the Income Tax Rules, 1962 governs admission of additional evidence before the CIT(A). It mandates that additional evidence not produced before the AO may be admitted only if specific conditions are met, such as refusal by AO, prevention by sufficient cause, relevance to grounds of appeal, or lack of opportunity to adduce evidence during assessment. The Rule requires the CIT(A) to record reasons in writing for admitting such evidence and to provide the AO reasonable opportunity to examine, cross-examine witnesses, and produce rebuttal evidence.

Judicial precedents including ITO v. Kripa Shanker Gupta, CIT v. Manish Buildwell Pvt. Ltd., Smt. Prabhavati S. Shah v. CIT, and DCIT v. Keshav Cement & Infra Ltd. emphasize strict adherence to Rule 46A and principles of natural justice, holding that failure to comply vitiates appellate orders.

Court's Interpretation and Reasoning: The CIT(A) admitted additional evidence submitted by the assessee during appellate proceedings after forwarding it to the AO for comments and reminders for remand report. However, the remand report was not received, and no adjournments were sought by the AO. The CIT(A) proceeded to decide the appeal based on available material, admitting the additional evidence to meet ends of justice.

The Revenue contended that the CIT(A) admitted evidence without providing the AO the actual documents, thus denying a fair opportunity to examine and rebut, violating Rule 46A and natural justice. The AO's requests for copies of additional evidence were unheeded, making preparation of remand report impossible.

Application of Law to Facts: The Tribunal noted that the CIT(A) failed to record specific reasons for admission of additional evidence as required under Rule 46A(2). The AO was not furnished with the additional evidence for examination and rebuttal, breaching procedural safeguards and principles of natural justice.

Treatment of Competing Arguments: The assessee argued that the AO was given sufficient opportunity through repeated requests for remand report and the CIT(A) acted within powers under Rule 46A(4) to admit evidence for substantial cause. The Revenue emphasized that mere reminders without actual provision of evidence to AO is insufficient and that the CIT(A) cannot proceed without AO's report.

Conclusion: The Tribunal found merit in the Revenue's contention that the CIT(A) erred in admitting additional evidence without furnishing it to the AO and without recording reasons, thereby violating Rule 46A and principles of natural justice.

Issue (b): Admission of Additional Evidence without Verification by AO despite Delay in Filing ITR and Audit Report

Relevant Legal Framework and Precedents: Timely filing of ITR and audit report is critical for verification of claims. Courts have held that belated filing raises questions on the credibility of evidence and that the AO's prerogative to verify such evidence is essential (Prakash Chand Nahta v. CIT).

Court's Interpretation and Reasoning: The assessee filed ITR and audit report with an eight-month delay and did not provide evidence that audit was conducted before the statutory deadline. The CIT(A) admitted additional evidence without AO's verification. The Revenue argued this prejudiced the AO's ability to verify genuineness.

Application of Law to Facts: The Tribunal noted that the CIT(A) admitted evidence without AO's verification, despite the delay and absence of audit evidence. This procedural lapse undermines the assessment process and violates Rule 46A.

Treatment of Competing Arguments: The assessee contended that the delay was considered by the AO and CIT(A), and that the AO had access to all details. The Revenue stressed that verification is mandatory before admission.

Conclusion: The Tribunal agreed with the Revenue that admission of additional evidence without AO's verification in the context of delayed filings was improper and prejudicial.

Issue (c): Deletion of Addition of Purchase and Development Expenses of Rs. 2,90,20,819/- despite Failure to Substantiate Claim

Relevant Legal Framework and Precedents: The onus lies on the assessee to prove the genuineness of claimed expenses. Mere banking transactions, TDS certificates, or ITR acknowledgments are insufficient without primary evidence such as books of accounts, bills, vouchers, and corroborative documents (Principal Commissioner of Income Tax vs. NRA Iron & Steel Pvt. Ltd., CIT vs. Durga Prasad More, Sumati Dayal vs. CIT, CIT vs. Precision Finance Pvt. Ltd.). Section 131 summons enable AO to verify genuineness through personal inquiry.

Court's Interpretation and Reasoning: The AO disallowed the expenses due to non-production of books of accounts, bills, vouchers, and the failure of summoned contractors to attend personal hearings, submitting only limited responses by post. The AO's inspector and local Patwari reported no development activity on the land, contradicting the assessee's claim of internal development expenses.

The CIT(A) deleted the addition, accepting the assessee's submission of ledger accounts, bills, vouchers, TDS payments, and banking transactions, and held that the assessee had discharged the onus of proving genuineness. The CIT(A) also noted that the assessee cannot be compelled to produce parties for verification and that the land was rugged, justifying development expenses.

Application of Law to Facts: The Tribunal analyzed that the AO conducted thorough inquiries, including issuing summons under Section 131, deputing an inspector for site verification, and obtaining reports from the Patwari. The non-cooperation of contractors and absence of primary evidence justified the AO's adverse inference. Mere submission of TDS certificates, ITR copies, and banking transactions does not establish genuineness of expenses without corroborative evidence. The CIT(A) failed to appreciate the distinction between submission and verification of documents and overlooked the significance of contractors' non-appearance.

Treatment of Competing Arguments: The assessee argued that all necessary documents were submitted and that the AO did not object to these during assessment. The assessee also contended that the CIT(A) acted within powers to admit additional evidence and that the land was rugged, necessitating development expenses.

The Revenue emphasized the incomplete submission, evasive responses from contractors, and the factual findings of no development activity. The Revenue also highlighted the procedural and substantive lapses in the CIT(A)'s order.

Conclusion: The Tribunal found that the AO's disallowance was justified due to the assessee's failure to substantiate expenses with primary evidence and non-cooperation of contractors. The CIT(A)'s deletion of the addition was unsustainable on facts and law.

Ancillary Issues:

The Tribunal also considered issues related to the delay in appeal disposal, procedural compliance with summons, the role of Section 131 in ensuring transparency, and the applicability of VAT/Sales Tax on land transactions. It was held that the assessee was not liable for VAT/Sales Tax on land transactions as land is not classified as goods under relevant statutes.

3. SIGNIFICANT HOLDINGS

"The CIT(A) erred in admitting additional evidence under Rule 46A of the Income Tax Rules, 1962 without recording specific reasons in writing and without providing the Assessing Officer a reasonable opportunity to examine and rebut the evidence, thereby violating the principles of natural justice and procedural safeguards."

"Admission of additional evidence without verification by the AO, especially in the context of belated filing of ITR and audit report, undermines the fairness and integrity of the assessment proceedings."

"The onus to prove the genuineness of claimed expenses lies squarely on the assessee. Mere submission of TDS certificates, ITR acknowledgments, and banking transactions is insufficient without primary evidence such as books of accounts, bills, vouchers, and corroborative documents."

"Non-compliance by contractors summoned under Section 131, including failure to appear personally and submit full records, justifies adverse inference and disallowance of unverifiable expenses."

"Physical verification reports by departmental inspectors and local revenue officials are valid and substantial evidence to assess the genuineness of claimed development expenses."

"The CIT(A) cannot substitute the AO's role by deleting additions without appreciating the factual matrix, procedural compliance, and the evidentiary requirements."

"The assessee cannot compel the AO to accept incomplete or evasive submissions, and the AO's duty includes conducting thorough inquiries and applying judicial mind to ensure fair assessment."

Final determination: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order admitting additional evidence and deleting the addition, but noted procedural lapses by the CIT(A) in admitting evidence without AO's verification. The Tribunal emphasized the need for AO's opportunity to examine additional evidence and the assessee's responsibility to substantiate claims with credible evidence. However, considering the facts and submissions, the Tribunal found no merit in Revenue's grounds and dismissed the appeal.