2025 (7) TMI 303 - AT - Income Tax

Treating the appeal filed by the appellant as withdrawn for the second time - penalty order was passed and the assessee had opted for Direct Tax Vivad se Vishwas Scheme 2024 (VSVS) against the penalty order only - HELD THAT - CIT(A) has decided and dismissed the appeal as withdrawn erroneously considering that the assessee had opted for VSV Scheme for the assessment order as well. The Tribunal had earlier remanded the matter to the Ld. CIT(A) who has again dismissed the appeal on the same ground. It was submitted that the addition was made on the basis of Form 26AS filed and the income was not received. CIT(A) has mentioned that Form No. 5 has been issued on 03.01.2022 and the assessee is allowed to withdraw the appeal. The assessee is an Alternate Investment Fund of Category-II and registered under SEBI and follows the cash system of accounting and as the income shown in Form No. 26AS was not received hence the same was not accounted for. DR did not raise any serious objection to the request made by the Ld. AR to remand the appeal to the Ld. CIT(A) for adjudication on merits. Whether the TDS claimed had been considered in the impugned assessment year? - Assessee had considered a part of the income equivalent to the TDS made in the impugned assessment year and the rest of the income has been considered in the subsequent assessment year in the year of receipt. This approach is not correct as the entire income had to be given the same treatment. However as the Ld. CIT(A) has not adjudicated the appeal on merits therefore as requested by the Ld. AR we set aside both the orders of the Ld. CIT(A) as well as of the Ld. AO and remit the matter back to the Ld. AO to consider the submission of the assessee as per law and if permissible grant the requisite relief and make the addition only after affording adequate opportunity of being heard to the assessee and as per law. Appeal filed by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal include:

- Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in treating the assessee's appeal as withdrawn for the second time based on an incorrect assumption of facts.

- Whether the CIT(A) erred in disposing of the appeal without adjudicating the matter on merits, despite specific directions from the Tribunal to decide the appeal on merits.

- Whether the addition of undisclosed interest income amounting to Rs. 28,13,52,763/- based on Form 26AS was justified, especially when the assessee had declared actual income of Rs. 3,00,80,483/-.

- Whether the CIT(A) erred in ignoring the fact that the amount shown in Form 26AS was neither received nor accounted for by the assessee and thus did not represent real income.

- Whether the CIT(A) was justified in not allowing corresponding bad debts or business loss of Rs. 25,12,72,280/- while computing income under the head "Profits and gains of business or profession."

- Whether interest u/s 234C levied by the Assessing Officer (AO) was correctly computed, particularly regarding the principle that such interest should be computed on returned income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Treatment of Appeal as Withdrawn and Disposal Without Merits

Legal Framework and Precedents: Under the Income Tax Act, 1961, appeals filed before the CIT(A) must be adjudicated on merits unless withdrawn by the appellant. The Tribunal has the authority to restore issues to the CIT(A) for adjudication on merits if prior orders were erroneous or incomplete.

Court's Interpretation and Reasoning: The CIT(A) treated the appeal as withdrawn based on the issuance of Form No. 5 under the Direct Tax Vivad se Vishwas Scheme (VSVS), assuming the assessee had opted for VSVS against both the penalty and assessment orders. However, the assessee clarified that VSVS was opted only against the penalty order, not the assessment order. The Tribunal noted that this was a factual error leading to dismissal without adjudication on merits.

Key Evidence and Findings: The assessee's submissions and prior Tribunal directions indicated that the appeal was to be decided on merits. The CIT(A)'s dismissal was thus contrary to the Tribunal's earlier specific directions and the facts of the case.

Application of Law to Facts: The erroneous assumption by CIT(A) led to premature disposal of the appeal, violating the principles of natural justice and the statutory mandate to adjudicate appeals on merits.

Treatment of Competing Arguments: The Department did not seriously oppose remand for adjudication on merits, implicitly acknowledging the procedural impropriety.

Conclusion: The CIT(A) erred in treating the appeal as withdrawn and disposing it without merits, warranting setting aside of the order and remand.

Issue 3 & 4: Addition of Undisclosed Interest Income Based on Form 26AS

Legal Framework and Precedents: Income Tax law requires that income be assessed based on actual receipt or accrual, depending on the accounting method followed. Form 26AS is a statement of tax deducted at source and does not conclusively establish receipt of income. For entities following cash system of accounting, income is recognized on actual receipt.

Court's Interpretation and Reasoning: The assessee, a Category-II Alternative Investment Fund registered with SEBI, follows cash system accounting. The addition of Rs. 28,13,52,763/- was made solely on the basis of Form 26AS, without actual receipt or accounting of such income by the assessee. The Tribunal noted that the income shown in Form 26AS was not received and hence should not be treated as income for the assessment year in question.

Key Evidence and Findings: The assessee's books and accounting records did not reflect the disputed income. The assessee had offered income of Rs. 3,00,80,483/-, which was substantially lower than the addition. The assessee also claimed credit for TDS on the portion of income actually received, indicating that the remainder was accounted for in subsequent years.

Application of Law to Facts: Since the assessee follows cash accounting, income must be recognized on actual receipt. Addition based on Form 26AS alone, without receipt or accounting, is not justified.

Treatment of Competing Arguments: The Department relied on Form 26AS as conclusive proof of income. The Tribunal rejected this, emphasizing the accounting method and actual receipt as determinative.

Conclusion: The addition based solely on Form 26AS was not justified; the matter requires reconsideration on merits with due regard to accounting method and actual receipt.

Issue 5: Allowance of Corresponding Bad Debts or Business Loss

Legal Framework and Precedents: Under the head "Profits and gains of business or profession," losses or bad debts incurred in relation to income must be allowed if substantiated.

Court's Interpretation and Reasoning: The CIT(A) did not allow the corresponding amount of Rs. 25,12,72,280/- as bad debts or business loss while computing income. The assessee contended that this amount related to the income shown in Form 26AS but not received and hence should be allowed as loss.

Key Evidence and Findings: The assessee's submissions indicated that the amount was neither received nor accounted for and corresponded to bad debts or losses.

Application of Law to Facts: If income is not recognized due to non-receipt, corresponding losses or bad debts should be allowed to maintain consistency and fairness in income computation.

Treatment of Competing Arguments: The Department did not provide substantive rebuttal on this point.

Conclusion: The CIT(A) erred in not allowing the corresponding bad debts or business losses; this issue requires reconsideration on merits.

Issue 6: Levy of Interest u/s 234C on Returned Income

Legal Framework and Precedents: Interest under section 234C is levied for deferment of advance tax payments and should be computed on the basis of returned income.

Court's Interpretation and Reasoning: The CIT(A) ignored the fact that interest u/s 234C should be computed on the returned income, not on the enhanced income after additions.

Key Evidence and Findings: The assessee submitted that interest was levied incorrectly without considering the returned income.

Application of Law to Facts: Interest computation must align with the returned income as per statutory provisions.

Treatment of Competing Arguments: The Department did not contest this submission vigorously.

Conclusion: The levy of interest u/s 234C requires reconsideration in light of correct computation principles.

3. SIGNIFICANT HOLDINGS

The Tribunal set aside the orders of both the CIT(A) and the AO and remanded the matter for fresh adjudication on merits. The Tribunal emphasized:

"As the Ld. CIT(A) has not adjudicated the appeal on merits, therefore, as requested by the Ld. AR, we set aside both the orders of the Ld. CIT(A) as well as of the Ld. AO and remit the matter back to the Ld. AO to consider the submission of the assessee as per law and if permissible, grant the requisite relief and make the addition only after affording adequate opportunity of being heard to the assessee and as per law."

The Tribunal further mandated that the assessee be given reasonable opportunity to make submissions and cautioned against unnecessary adjournments.

Core principles established include:

- An appeal cannot be treated as withdrawn based on incorrect factual assumptions, especially when prior Tribunal directions require adjudication on merits.

- Income additions based solely on Form 26AS are not conclusive evidence of income, particularly where the assessee follows cash accounting and has not received or accounted for such income.

- Corresponding bad debts or business losses must be allowed if income is not recognized due to non-receipt.

- Interest under section 234C should be computed on returned income, not on enhanced income after additions.

Final determinations on each issue were deferred to the adjudicating authority upon remand, ensuring that the assessee's submissions and applicable law are fully considered in a fair hearing.