2019 (8) TMI 277 - AT - Income Tax

Addition in respect of share capital - denial of natural justice - AO has not made any endeavour to give a copy of the statements purportedly recorded during search u/s. 132(4) or recorded u/s 131 which the AO claims to contain adverse statements against the assessee - HELD THAT - Though the AO is at liberty to make private enquiries against the assessee, however the material, he collected behind the back of the assessee cannot be used against the assessee without furnishing the same to the assessee and if the material statement is adverse in nature against the assessee then an opportunity to cross-examine the maker of the document or the third person who made the statement has to be given to the assessee as held by the Hon ble Supreme Court in Andaman Timber Industries 2015 (10) TMI 442 - SUPREME COURT . AO has not made any endeavour to give a copy of the statements purportedly recorded during search u/s. 132(4) of the Act or recorded u/s 131 of the Act which the AO claims to contain adverse statements against the assessee, which action is in gross violation of natural justice for the simple reason that the AO cannot use a material which is adverse against the assessee without confronting him with that to say in other words the AO cannot keep the assessee in dark and draw adverse inference without confronting the assessee with the materials/third parties statement which the AO intends to use against the assessee and an opportunity to cross-examine those third party s must be given to the assessee without which the third partie s statement cannot be relied upon by the AO. No proper opportunity the assessee got before the AO - we are inclined to set aside the order of the Ld. CIT(A) and remand it back to AO with a direction to frame assessment de-novo after hearing the assessee - Appeal of the assessee is allowed for statistical purpose.

Summary

Issues:

1. Appeal against ex-parte order of Ld. CIT(A) for Assessment Year 2012-13.

Analysis:

1. The appellant, a public limited company engaged in manufacturing and trading, issued equity shares for expansion. The issue was made in compliance with SEBI regulations, approved by the Bombay Stock Exchange, and allotted to 17 corporate entities. The AO took adverse inference as some shareholders could not be located. The AO relied on old statements without providing copies to the assessee or allowing cross-examination, violating natural justice principles. Citing the Andaman Timber Industries case, the Tribunal held that material adverse to the assessee cannot be used without confrontation and cross-examination. The AO's failure to provide an opportunity to the assessee was deemed a violation of natural justice, leading to the order being set aside for a fresh assessment.

2. Referring to the Tin Box Company Ltd. case, the Tribunal emphasized the importance of providing a reasonable opportunity to the assessee before making an assessment order. The decision highlighted that the assessment order must follow a proper hearing for the assessee. In line with this principle, the Tribunal set aside the Ld. CIT(A)'s order and remanded the case to the AO for a de-novo assessment after hearing the assessee and following due process. The appeal of the assessee was allowed for statistical purposes.

3. The judgment was pronounced on July 1, 2019, setting a precedent for ensuring natural justice and due process in tax assessments, particularly in cases involving adverse inferences based on statements without proper opportunity for the assessee to respond.