2025 (5) TMI 619 - AT - Income Tax

Assessment u/s 144 - addition of receipt towards commission who has deducted TDS - as argued AO was not justified in bringing to tax the entire amount as income of the assessee without allowing any expenditure out of that nor estimating the income - As relying on various decisions it was argued that in such type of cases the profit is usually estimated from 4% to 8% - HELD THAT - As due to non-compliance to the statutory notices issued by the AO he completed the assessment u/s 144 of the Act determining the total income of the assessee which is the gross commission received by the assessee. We find the CIT(A) / NFAC upheld the action of the Assessing Officer the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of assessee that bringing to tax the entire gross receipts without granting any proportionate expenditure will cause grave injustice to the assessee. A perusal of the order of the CIT(A) / NFAC would show that the CIT(A) / NFAC has basically dismissed the appeal of the assessee on the ground that the assessee did not file any fresh documentary evidence in respect of expenditure incurred nor filed any details for the activities of the assessee in the previous and subsequent years. We deem it proper to restore the issue to the file of the Assessing Officer with a direction to grant one final opportunity to the assessee to substantiate his case by filing the requisite details and decide the issue as per fact and law. The grounds raised by the assessee are accordingly allowed for statistical purposes. Levy of penalty u/s 270A on account of under-reporting of income - Since the quantum appeal has been restored to the file of the AO for fresh adjudication therefore the issue relating to levy of penalty u/s 270A is also restored to his file for fresh adjudication. The grounds raised by the assessee are accordingly allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the entire gross commission receipt of Rs. 71,97,994/- received by the assessee as a Direct Selling Agent (DSA) can be taxed as income without allowing any deduction for expenditure incurred in earning such commission?

- Whether the reopening of the assessment under section 148 of the Income Tax Act, 1961 was justified in the facts and circumstances of the case?

- Whether the ex-parte assessment completed under section 144 of the Act was valid given the assessee's non-compliance with statutory notices?

- Whether the penalty under section 270A for under-reporting of income was correctly levied, considering the quantum appeal was pending adjudication?

- Whether the assessee should be granted an opportunity to substantiate expenditure and provide details of business activities to enable estimation of net income from gross receipts?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxation of Gross Commission Without Allowing Expenditure Deduction

Relevant Legal Framework and Precedents: The Income Tax Act mandates that income chargeable to tax is net income after allowing permissible deductions under the Act. It is a settled principle that gross receipts cannot be taxed as income without allowing deduction of expenses incurred to earn such receipts. Precedents cited by the assessee indicate that in cases of commission agents or DSAs, profit is generally estimated between 4% to 8% of gross receipts when detailed accounts are not available.

Court's Interpretation and Reasoning: The Assessing Officer (AO) completed the assessment ex-parte under section 144, treating the entire gross commission as income due to non-filing of return and non-compliance with notices. The CIT(A) / NFAC upheld this, noting the absence of any documentary evidence from the assessee to substantiate expenditure or provide details of business activities. The Tribunal observed that the CIT(A) / NFAC dismissed the plea for estimation of income because of lack of evidence.

Key Evidence and Findings: The assessee failed to produce fresh documentary evidence regarding expenditure or details of business operations during appellate proceedings. The only evidence on record was Form 26AS reflecting TDS deducted by the payer. The assessee's bank statements filed before the Tribunal indicated some payments made, but these were not presented before the AO or CIT(A).

Application of Law to Facts: The Tribunal acknowledged the principle that net income should be taxed, not gross receipts. However, it emphasized that the assessee must substantiate expenditure claims with evidence. Given the absence of such evidence before the AO and CIT(A), their orders were upheld initially. Yet, in the interest of justice and considering the bank statements filed before the Tribunal, the matter was restored to the AO for fresh adjudication after giving the assessee a final opportunity to produce evidence and make submissions.

Treatment of Competing Arguments: The department relied on the statutory provisions allowing ex-parte assessment in case of non-compliance and the absence of evidence from the assessee. The assessee argued that taxing gross receipts without allowing any expenditure deduction was unjust and contrary to settled legal principles. The Tribunal balanced these positions by restoring the issue for fresh consideration rather than confirming the addition outright.

Conclusion: The Tribunal held that taxing the entire gross commission without allowing expenditure deduction was not justified in principle. However, due to lack of evidence initially, the AO's order was upheld but subject to restoration for fresh adjudication after providing the assessee a final opportunity to substantiate expenditure and business details.

Issue 2: Validity of Reopening Assessment Under Section 148

Relevant Legal Framework: Section 148 allows reopening of assessments if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment. Prior approval of the competent authority is required before issuance of notice under section 148.

Court's Interpretation and Reasoning: The reopening was based on information from the NMS module of the Insight portal indicating receipt of commission income and non-filing of return by the assessee. The AO obtained prior approval from the Addl. CIT before issuing notice under section 148. The CIT(A) / NFAC found no infirmity in the reopening notice.

Key Evidence and Findings: The reopening notice dated 30.03.2021 was duly served. The information triggering reopening was credible and related to substantial undisclosed income.

Application of Law to Facts: The reopening complied with statutory requirements and was justified on the material available.

Treatment of Competing Arguments: The assessee did not contest the validity of reopening but challenged the quantum of income assessed.

Conclusion: The reopening under section 148 was valid and justified.

Issue 3: Validity of Ex-Parte Assessment Under Section 144

Relevant Legal Framework: Section 144 permits assessment to be completed ex-parte if the assessee fails to comply with notices or appear before the AO.

Court's Interpretation and Reasoning: The assessee did not respond to notices under section 148 and 142(1) despite multiple opportunities. The AO completed the assessment ex-parte determining income at gross commission amount.

Key Evidence and Findings: Notices dated 13.08.2021, 01.12.2021, 11.03.2022, and 22.03.2022 were issued, but the assessee did not comply.

Application of Law to Facts: The AO acted within powers under section 144 due to assessee's non-compliance.

Treatment of Competing Arguments: The assessee attributed non-compliance to health issues and Covid-19 pandemic but did not seek adjournment or file return during assessment proceedings.

Conclusion: The ex-parte assessment was valid but the Tribunal directed fresh adjudication with opportunity to the assessee.

Issue 4: Levy of Penalty Under Section 270A

Relevant Legal Framework: Section 270A penalizes under-reporting or misreporting of income in returns or assessments.

Court's Interpretation and Reasoning: Since the quantum appeal was restored for fresh adjudication, the penalty issue was also restored for reconsideration by the AO.

Key Evidence and Findings: The penalty was levied based on under-reporting of income as per ex-parte assessment.

Application of Law to Facts: The penalty determination is dependent on final assessment of income.

Treatment of Competing Arguments: The assessee challenged the penalty on grounds of procedural and substantive infirmities.

Conclusion: Penalty proceedings are restored for fresh adjudication after finalization of income assessment.

Issue 5: Opportunity for Assessee to Substantiate Expenditure and Business Details

Court's Interpretation and Reasoning: The Tribunal noted the absence of evidence before the AO and CIT(A) but accepted the bank statements produced before the Tribunal as additional evidence indicating some expenses incurred. Considering the principles of natural justice and in the interest of justice, the Tribunal restored the matter to the AO with directions to provide one final opportunity to the assessee to file evidence and make submissions without adjournment.

Application of Law to Facts: The Tribunal's direction aligns with the principle that assessment must be based on material on record and the assessee must be heard.

Treatment of Competing Arguments: The department did not oppose restoration but relied on earlier orders.

Conclusion: The assessee is entitled to final opportunity to substantiate expenditure and business activities for proper estimation of net income.

3. SIGNIFICANT HOLDINGS

"The plea of the appellant to estimate the income cannot be accepted in the absence of any details. Therefore, considering the facts and circumstances of the case, the AO's action of reopening the case by issue of notice u/s. 148 and thereafter considering the total receipts of Rs. 71,97,994/- as income of the appellant are hereby upheld."

"However, the AO is directed to allow credit for the TDS in accordance with law."

"Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to grant one final opportunity to the assessee to substantiate his case by filing the requisite details and decide the issue as per fact and law."

"The assessee is also hereby directed to appear before the Assessing Officer on the appointed date and make his submissions, if any, without seeking any adjournment under any pretext failing which the Assessing Officer shall be at liberty to pass appropriate order as per law."

"Since the quantum appeal has been restored to the file of the Assessing Officer for fresh adjudication, therefore, the issue relating to levy of penalty u/s 270A is also restored to his file for fresh adjudication."

Core principles established include the necessity of evidence to substantiate expenditure for net income taxation, validity of reopening and ex-parte assessment in case of non-compliance, and the entitlement of the assessee to a final opportunity to present evidence before finalization of assessment and penalty. The Tribunal's final determination was to allow the appeals for statistical purposes by restoring the issues to the AO for fresh adjudication in accordance with law and facts after providing the assessee a last chance to be heard and produce evidence.