2025 (2) TMI 40 - AT - Income Tax

Validity of reassessment proceedings - reason to believe to have escaped assessment - addition u/s 41(1) v/s credits in bank account are unexplained - as argued AO exceeded his jurisdiction by making additions unrelated to the reasons for reopening the assessment - HELD THAT - There is material substance advanced on behalf of the assessee that notice u/s 148 of the Act was related with credits in bank account are unexplained as its source is unascertainable whereas addition made u/s 41(1) of the Act on account of remission / cessation of liability in form of creditors was never been an issue forming part of reasons recorded u/s 148 (2) of the Act and addition in question made on an issue which is quite different from the issue on which case was re-opened u/s 148 of the Act. Thus for every new issue coming before the Ld. AO during the proceedings of assessment or re-assessment of escaped income and which he intends to take into account it is required to issue fresh notice u/s 148 but in this case fresh notice u/s 148 of the Act as aforesaid containing fact regarding remission/ cessation of liability does not appears to be issued and if it is crystal clear that the Ld. AO without issuance of fresh notice required by law on issue made alleged addition u/s 41(1) of the Act which was not included in the reasons to believe as recorded for initiation of proceedings and the notice is quite unwarranted by law and against the mandatory provisions and consequently addition in question is not sustainable in the eye of law. In conclusion ground no. 4 and 5 deserve to be allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment include:

• Whether the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] was void ab initio due to procedural violations, specifically the principles of natural justice.
• Whether the assessment order and notices were issued in the name of a non-existent entity and the implications thereof.
• The validity of the jurisdiction assumed by the Assessing Officer (AO) under section 147 for reassessment purposes.
• Whether the addition of Rs. 56,84,733/- under section 41(1) of the Income Tax Act was justified.
• The adequacy of evidence provided regarding sundry creditors and the application of section 40A(3).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Procedural Violations and Principles of Natural Justice

The Assessee argued that the CIT(A) and AO violated principles of natural justice by not allowing sufficient time to respond to notices and not granting an opportunity for a personal hearing. The Tribunal did not focus extensively on this issue, as the resolution of jurisdictional matters rendered other procedural complaints academic.

Issue 2: Issuance of Notices to a Non-Existent Entity

The Assessee contended that the assessment and notices were issued to a dissolved partnership firm. The Tribunal did not specifically address this issue in detail, as the decision on jurisdictional grounds was dispositive.

Issue 3: Jurisdiction under Section 147

The legal framework for this issue involves section 147 of the Income Tax Act, which allows the AO to reassess income if there is a reason to believe that income has escaped assessment. The Assessee argued that the AO exceeded his jurisdiction by making additions unrelated to the reasons for reopening the assessment. The Tribunal relied on precedents, particularly the Delhi High Court's decision in Ranbaxy Laboratories Ltd. v. CIT, which restricts the AO from making additions on issues not forming part of the original reasons for reopening without issuing a new notice.

The Tribunal found that the AO's addition under section 41(1) was not part of the original reasons for reopening the assessment. Therefore, the AO acted beyond his jurisdiction, as no fresh notice was issued for the new issue.

Issue 4: Addition under Section 41(1)

The Tribunal examined whether the cessation of liability amounting to Rs. 56,84,733/- was rightly added to the Assessee's income under section 41(1). The AO had concluded that the liability ceased to exist without sufficient evidence from the Assessee. However, the Tribunal determined that this issue was not part of the original scope of the reassessment notice, rendering the addition unsustainable.

Issue 5: Evidence on Sundry Creditors and Section 40A(3)

The AO had questioned the lack of evidence regarding payments to sundry creditors and potential violations of section 40A(3), which restricts cash payments. The Tribunal did not address this issue substantively, as the jurisdictional defect in the reassessment process was decisive.

3. SIGNIFICANT HOLDINGS

The Tribunal's significant holdings centered on the jurisdictional overreach by the AO. The Tribunal held that:

• The AO cannot make additions on issues not forming part of the original reasons for reopening the assessment without issuing a fresh notice under section 148.
• The addition of Rs. 56,84,733/- under section 41(1) was invalid due to the lack of a fresh notice for the new issue.
• The procedural and jurisdictional defects rendered other grounds moot, leading to the appeal being allowed.

Key legal reasoning included the interpretation of section 147 and the requirement for a fresh notice when new issues arise during reassessment, as established in Ranbaxy Laboratories Ltd. v. CIT.