2016 (2) TMI 1020 - AT - Income Tax

Conversion of protective addition into a substantive addition - violation of principles of natural justice - Held that - In the case on hand, there was violation of principles of natural justice. No proper opportunity was given to the assessee. The AO extensively relied on a report called appraisal report. This finds mention on pages 24, 26, 49 and 56 of the assessment order. In case the AO relies on a report of any authority, natural justice demands that, a copy of that report be made available to the assessee, so as to enable him to place his contentions on the same. If the Revenue cannot furnish this report to the assessee on the ground of confidentiality, then, no addition whatsoever can be made in the hands of the assessee based on this report. A statement was recorded from one Shri Rajesh Aggarwal. A copy of the statement was also not furnished to the assessee, though the AO relied on this statement for making certain additions. Evidence was gathered during the search of Jagat Group and these evidences were also not confronted to the assessee. We also find that the assessment order was framed in a hurry, possibly due to constraint of time. Though the notice u/s 153A was given on 1.5.2012, show cause notices were issued only on 5.2.2013, 8.2.2013 and 14.2.2013. The assessee gave a reply on 8.3.2013 and the assessments were framed on 28.3.2013. Though the AO had written a very detailed order, we find that the contention of the assessee that, material relied upon by the AO in his orders were not confronted to the assessee is correct. The contents of the show cause notices does not conform to the reasoning in the assessment order. Similarly, the first appellate authority has converted the protective addition made by the AO into a substantive addition without specifically confronting the assessee with such a proposal. The commission income was also bifurcated on ad hoc basis by the ld.CIT(A) without giving any opportunity to the assessee. Though the assessee has pleaded violation of principles of natural justice, the ld.CIT(A) did not address the objection by providing adequate opportunity by furnishing the evidences and by calling for the remand report on these issues from the AO. In view of the above as there is violation of principles of natural justice all these appeals should be set aside to the file of the AO for fresh adjudication in accordance with law.

Issues Involved:
1. Violation of principles of natural justice.
2. Improper framing of assessments.
3. Multiple taxation of the same amount.
4. Application of Section 68 of the Income Tax Act.
5. Adequate opportunity to the assessee.
6. Conversion of protective addition to substantive addition.

Issue-wise Analysis:

1. Violation of Principles of Natural Justice:
The assessee argued that the assessments were made in violation of the principles of natural justice. The Assessing Officer (AO) relied on an appraisal report and other materials without confronting the assessee with these documents. The Tribunal noted that the AO extensively relied on the appraisal report, which was not provided to the assessee. The Tribunal held that natural justice demands that any report relied upon by the AO should be made available to the assessee to enable them to place their contentions.

2. Improper Framing of Assessments:
The assessments were framed hurriedly due to time constraints. Notices under Section 153A were issued on 1.5.2012, but show cause notices were issued only in February 2013, with the assessments being framed on 28.3.2013. The Tribunal found that the content of the show cause notices did not conform to the reasoning in the assessment order. Additionally, the first appellate authority converted the protective addition made by the AO into a substantive addition without specifically confronting the assessee with such a proposal, which was deemed improper.

3. Multiple Taxation of the Same Amount:
The assessee contended that the same amount had been taxed multiple times due to circuitous and chain transactions. The Tribunal acknowledged this issue and directed that the AO should eliminate taxation of the same amount multiple times due to chain transactions resulting from layering indulged by the assessee.

4. Application of Section 68 of the Income Tax Act:
The assessee argued that Section 68 does not apply to them as they were mere entry providers and not beneficiaries. The Tribunal referred to the decision of the jurisdictional High Court in the case of Principal Commissioner of Income-tax vs. Vijaya Conductors Pvt. Ltd., which held that addition under Section 68 cannot be made in the case of conduit companies. The Tribunal directed the AO to follow the propositions laid down in this case law.

5. Adequate Opportunity to the Assessee:
The Tribunal found that the assessee was not given adequate opportunity to present their case. The AO did not provide copies of the appraisal report or the statement of Shri Rajesh Aggarwal, which were relied upon for making additions. The Tribunal directed that the AO should give adequate opportunity to the assessee and confront them with all the material/evidences/statements relied upon while making the assessment.

6. Conversion of Protective Addition to Substantive Addition:
The first appellate authority converted the protective addition made by the AO into a substantive addition without giving any opportunity to the assessee. The Tribunal found this to be a violation of natural justice and directed that the AO should provide adequate opportunity to the assessee and follow the principles laid down by the jurisdictional High Court and the Tribunal in various cases.

Conclusion:
The Tribunal set aside all the appeals to the file of the AO for fresh adjudication in accordance with the law. The AO was directed to give adequate opportunity to the assessee, confront them with all the material/evidences/statements relied upon, and follow the principles laid down by the jurisdictional High Court and the Tribunal in similar cases. The appeals were allowed for statistical purposes.

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