2025 (6) TMI 810 - AT - Income Tax

CIT(Appeals)/NFAC vide an ex-parte order dismissed the appeal of the assessee due to non-compliance by the assessee - HELD THAT - We are providing one final opportunity to the assessee to represent his case before the first appellate authority. Accordingly we set-aside the order of the CIT(A) /NFAC and remand the matter back to its file for denovo adjudication as per law while complying with the principles of natural justice. We are of the considered view that this is not simply ex-parte matter since fact suggests as has been examined afore-stated that there may be colourable device used by the assessee or adopted by the assessee to defraud the revenue it is now the onus on the part of the CIT(Appeals)/NFAC to verify and examine in detailed manner whether any fraud has been committed by the assessee towards department. That though on the ground of natural justice one final opportunity has been given to the assessee but the genesis of the entire facts and circumstances needs proper verification by the department so to find out whether any lawful taxes remain unpaid to the department due to sham transactions adopted which will be within purview of tax evasion amounting to fraud to the revenue and in such case fraud vitiates everything including natural justice.

Summary

Issues Presented and Considered

The core legal questions considered in this appeal are:

• Whether the ex-parte dismissal of the assessee's appeal by the first appellate authority (Ld. CIT(Appeals)/NFAC) due to non-compliance with hearing notices was justified.
• Whether the principles of natural justice, specifically the right to be heard (audi alteram partem), were violated by the ex-parte dismissal.
• Whether the appellate tribunal (ITAT) can adjudicate the appeal on merits despite the ex-parte order by the first appellate authority.
• The legal effect of non-compliance by the assessee in the appellate proceedings and the appropriate remedy.
• Whether the transactions involving shares of UBV Infrastructure Ltd. constitute a colourable device or tax evasion, and the implications thereof.
• The scope and application of the principle of fraud in tax proceedings, especially in relation to natural justice and the duty of revenue authorities.

Issue-wise Detailed Analysis

1. Validity of Ex-Parte Dismissal by First Appellate Authority

Legal Framework and Precedents: The Income Tax Act mandates that appeals be adjudicated on merits, with the first appellate authority providing a reasonable opportunity of hearing. The principle of natural justice, enshrined in Article 14 of the Constitution, guarantees the right to be heard before adverse orders are passed. The Hon'ble Supreme Court in various decisions has emphasized that appellate tribunals must dispose of appeals on merits and not merely dismiss them for non-compliance unless the non-compliance is deliberate and inexcusable.

Court's Reasoning: The first appellate authority dismissed the appeal ex-parte due to the assessee's failure to appear or seek adjournment despite multiple notices. The order emphasized that the assessee was not keen to pursue the appeal, and it cannot be kept pending indefinitely. However, the Tribunal noted that there was no evidence of deliberate non-compliance or mala fide conduct by the assessee.

Key Findings: The Tribunal observed that although the assessee had not complied with hearing notices, the right to be heard is a fundamental principle that cannot be lightly set aside. The ex-parte dismissal deprived the assessee of an opportunity to substantiate grounds of appeal.

Application of Law to Facts: The Tribunal relied on a recent Division Bench decision of the ITAT, Raipur, and the Hon'ble High Court of Bombay's ruling, which held that ex-parte orders by the first appellate authority without proper opportunity violate natural justice and must be remanded for fresh adjudication.

Competing Arguments: The Revenue contended that the assessee's non-compliance justified the ex-parte order. The assessee argued for a hearing on merits. The Revenue's representative conceded that a fresh opportunity could be provided.

Conclusion: The Tribunal set aside the ex-parte order and remanded the matter for de novo adjudication, directing the first appellate authority to provide one final opportunity to the assessee to present the case on merits.

2. Jurisdiction of Tribunal to Decide Merits Despite Ex-Parte Order

Legal Framework and Precedents: The Supreme Court in National Thermal Power Company Ltd. v. CIT held that legal issues going to the root of the matter can be raised at any appellate forum. However, the appellate structure under the Income Tax Act envisages that the first appellate authority adjudicates appeals substantially on merits before the Tribunal intervenes.

Court's Reasoning: The Tribunal emphasized that deciding legal issues on merits when the first appellate authority's order is ex-parte would usurp the statutory role of the first appellate authority and undermine the appellate hierarchy. It would also encourage non-compliance by assessees seeking to bypass the first appellate authority.

Key Findings: The Tribunal held that the proper course is to remit the matter for fresh adjudication by the first appellate authority to ensure compliance with natural justice and preserve the statutory scheme.

Conclusion: The Tribunal will not decide merits on legal grounds where the first appellate order is ex-parte due to non-compliance but will remand for fresh hearing.

3. Examination of Transactions in Shares of UBV Infrastructure Ltd. and Possible Tax Evasion

Legal Framework and Precedents: The Income Tax Act prohibits colourable devices and tax evasion. The Supreme Court in McDowell & Co. Ltd. v. CTO clarified that tax planning is legitimate only if within the law; colourable devices are not permissible. The principle of fraud vitiates all judicial acts and proceedings, including those involving natural justice.

Court's Reasoning: The facts indicate that shares were sold at inflated prices and reacquired at face value, resulting in capital gains benefits to related parties. This arrangement suggests a possible colourable device to evade tax. The Tribunal observed that the onus is on the revenue authorities to investigate thoroughly whether these transactions constitute tax evasion or legitimate tax planning.

Key Findings: While the assessee is granted one final opportunity to represent the case, the revenue must verify the genuineness of the transactions and determine if any fraud has been committed, as fraud vitiates natural justice.

Application of Law to Facts: The Tribunal referred to the Supreme Court's decisions in Badami v. Bhali and Smt. Shrist Dhawan v. M/s. Shaw Brothers, which hold that fraud and collusion invalidate proceedings and that courts must ensure parties come with clean hands.

Conclusion: The matter requires detailed investigation by the revenue; if tax evasion is found, additions are to be sustained. The Tribunal allowed the grounds of appeal for statistical purposes pending such adjudication.

4. Principles of Natural Justice and Right to be Heard

Legal Framework and Precedents: The principle of audi alteram partem is a fundamental right under Article 14 of the Constitution. The Supreme Court in Delhi Transport Corporation v. DTC Mazdoor Union held that a person adversely affected by an administrative order must be given a hearing opportunity.

Court's Reasoning: The Tribunal underscored that the ex-parte order by the first appellate authority violated this principle. The Hon'ble High Court of Bombay's recent judgment reinforced that ex-parte dismissals without proper opportunity of hearing are contrary to natural justice and must be remanded.

Conclusion: The Tribunal directed that the first appellate authority must provide a reasonable opportunity of hearing and pass a speaking order within three months.

Significant Holdings

"The laws aid those who are vigilant, not those who sleep upon their rights."

"Income tax Act is within the ambit of welfare legislation which are completely different from that of the penal legislation, therefore, benefit of doubt whenever arises, it has to be interpreted in favour of the assessee tax payer within the parameters of law and facts."

"Passing of an order on merits by the ITAT even when the impugned order was passed ex-parte amounts to violation of principles of natural justice."

"Article 14 guarantees a right of hearing to a person who is adversely affected by an administrative order. The principle of audi-alteram partem is a part of Article 14 of the Constitution of India."

"Tax planning may be legitimate provided it is within the framework of law, Colourable devices cannot be part of tax planning."

"Fraud-avoids all judicial acts, ecclesiastical or temporal."

"The Tribunal as the highest fact finding authority must be certain enough that the impugned order before it has been passed on merits and is a speaking order where the assessee has also complied during the process of litigation."

"In case where the order of the Ld. CIT(Appeals) itself is ex-parte and some legal ground is raised and if the Tribunal decides such legal ground where in fact principles of natural justice is left unanswered due to the fact that the impugned order before the Tribunal is ex-parte and there was no compliance by the assessee in such scenario the Tribunal would also be usurping the power of the Ld. CIT(Appeals)."

"If tax evasion is determined by the revenue in such circumstances additions are to be sustained in the hands of the assessee."

"The appeal of the assessee is allowed for statistical purposes."

Final Determinations on Each Issue

• The ex-parte dismissal by the first appellate authority was set aside for violating principles of natural justice; the assessee is entitled to one final opportunity to be heard.
• The Tribunal will not decide merits on legal grounds where the first appellate order is ex-parte but will remand the matter for fresh adjudication by the first appellate authority.
• The revenue authorities must investigate the share transactions for possible tax evasion or colourable device; findings of fraud will sustain additions.
• The principles of natural justice and the right to be heard under Article 14 are fundamental and must be respected in appellate proceedings.
• The appeal is allowed for statistical purposes, pending fresh adjudication on merits by the first appellate authority within three months.