2025 (1) TMI 1184 - AT - Income Tax

Exemption u/s 10(26AAA) - income accruing to a Sikkimese individual from sources within the state of Sikkim or by way of dividend or interest on securities - addition treated as undisclosed and unexplained income u/s 69A and 69 - CIT(A) admitting fresh evidence deleted addition without calling for a remand report - HELD THAT - CIT(A) accepted the additional evidence being the certificate of identification and allowed the relief only on the basis of the certificate without allowing an opportunity of being heard to the AO of verifying whether the conditions of section 10(26AAA) were fulfilled. Therefore the order of the CIT(A) being in contravention of Rule 46A(3) of the I.T. Rules 1962 is liable to be set aside. Both the Ld. DR as well as the Ld. AR were agreeable to the proposal. Hence in the interest of justice and fair play since the assessee could not file the required evidence for claiming exemption before the Ld. AO both the orders of the Ld. CIT(A) as well as of the Ld. AO are hereby set-aside and the assessment proceedings are restored before the Ld. AO to be done afresh. Appeal filed by the Revenue is allowed for statistical purposes.

Summary

ISSUES PRESENTED and CONSIDERED

The Tribunal considered the following core legal issues:

1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in allowing the exemption under section 10(26AAA) of the Income Tax Act, 1961, to the assessee on the addition treated as undisclosed and unexplained income under sections 69A and 69 of the Act.

2. Whether the CIT(A) erred by admitting fresh evidence without calling for a remand report from the Assessing Officer (AO), thus contravening Rule 46A(3) of the Income Tax Rules, 1962.

3. Whether the CIT(A) failed to discuss the reasons for accepting additional evidence and the circumstances that prevented the assessee from producing such evidence during the assessment proceedings.

4. Whether the CIT(A) was justified in striking down the addition made by the AO without verification of facts from Indian Oil Corporation Limited and without evidence of audited books of accounts.

ISSUE-WISE DETAILED ANALYSIS

1. Exemption under Section 10(26AAA) of the Income Tax Act, 1961

Legal Framework and Precedents: Section 10(26AAA) provides that any income accruing to a Sikkimese individual from sources within the state of Sikkim or by way of dividend or interest on securities is exempt from income tax. The provision defines "Sikkimese" through various criteria, including registration in the Sikkim Subjects Register or proof of domicile before a specified date.

Court's Interpretation and Reasoning: The Tribunal noted that the CIT(A) allowed the exemption based on the assessee's certificate of identification as a Sikkimese individual, indicating that the income was earned within Sikkim.

Key Evidence and Findings: The CIT(A) relied on the certificate of identification submitted by the assessee, which was not initially presented to the AO.

Application of Law to Facts: The Tribunal observed that while the exemption under section 10(26AAA) was applicable, the process followed by the CIT(A) in admitting additional evidence without AO's verification was procedurally flawed.

Treatment of Competing Arguments: The Revenue argued that the exemption was wrongly granted without proper verification, while the assessee maintained that the exemption was valid based on the identification certificate.

Conclusions: The Tribunal concluded that the CIT(A) erred procedurally by not allowing the AO an opportunity to verify the additional evidence, necessitating a fresh assessment.

2. Admission of Fresh Evidence and Procedural Compliance

Legal Framework and Precedents: Rule 46A(3) of the Income Tax Rules mandates that if fresh evidence is admitted by the appellate authority, a remand report from the AO must be called to ensure procedural fairness.

Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) admitted additional evidence (the certificate of identification) without seeking a remand report from the AO, which contravened Rule 46A(3).

Key Evidence and Findings: The Tribunal noted that the CIT(A) did not provide reasons for accepting the additional evidence or discuss the circumstances that prevented its earlier submission.

Application of Law to Facts: The Tribunal emphasized the necessity of procedural compliance, highlighting that the AO should have been given an opportunity to verify the new evidence.

Treatment of Competing Arguments: The Revenue contended that procedural lapses invalidated the CIT(A)'s decision, while the assessee argued for the validity of the exemption based on the new evidence.

Conclusions: The Tribunal determined that the CIT(A)'s procedural oversight warranted setting aside the order for a fresh assessment.

3. Verification of Income and Evidence from Indian Oil Corporation Limited

Legal Framework and Precedents: Verification of income sources is critical for assessing tax liability, particularly when exemptions are claimed.

Court's Interpretation and Reasoning: The Tribunal noted that the CIT(A) did not verify the income from Indian Oil Corporation Limited, which was essential for a comprehensive assessment.

Key Evidence and Findings: The Tribunal highlighted the absence of evidence from audited books of accounts or confirmation from Indian Oil Corporation Limited.

Application of Law to Facts: The Tribunal underscored the importance of verifying income sources to substantiate the exemption claim.

Treatment of Competing Arguments: The Revenue argued for the necessity of verification, while the assessee relied on the identification certificate for exemption.

Conclusions: The Tribunal concluded that the lack of verification necessitated a de novo assessment.

SIGNIFICANT HOLDINGS

The Tribunal held that the procedural lapses by the CIT(A) in admitting additional evidence without AO verification and the lack of income source verification warranted setting aside the orders of both the CIT(A) and the AO. The Tribunal directed a fresh assessment, allowing the AO to verify the certificate of identification and other evidence supporting the exemption claim under section 10(26AAA).

Core Principles Established: The Tribunal reinforced the importance of procedural compliance and thorough verification in tax assessments, especially when exemptions are claimed.

Final Determinations on Each Issue: All grounds of appeal raised by the Revenue were allowed for statistical purposes, with the assessment proceedings restored before the AO for a de novo assessment.