Bengaluru ITAT restores search assessments with costs for chronic non-compliance

Background of the dispute

The Bengaluru Bench of the Income Tax Appellate Tribunal (ITAT) in the case of Channakeshava Vs DCIT (ITAT Bangalore) dealt with a cluster of six appeals arising out of search assessments framed under section 153A of the Income Tax Act 1961. The controversy covered Assessment Years (AYs) 2013-14, 2014-15, 2015-16, 2016-17, 2017-18 and 2019-20.

The assessee, Mr. CHANNAKESHAVA, challenged substantial additions made by the Assessing Officer (AO), but had repeatedly failed to appear or cooperate both at the assessment stage and before the Principal Commissioner of Income Tax (Appeals)-11, Bengaluru [PCIT(A)].

The ITAT was confronted with a dual issue:

  1. Whether an assessee, who has consistently defaulted in attending proceedings, is still entitled to a further opportunity to contest additions on merits; and
  2. On what terms such an opportunity should be granted, if at all, so that both procedural discipline and principles of natural justice are preserved.

Search proceedings and initiation of assessments

Origin of the proceedings

  • A search under section 132 was carried out in the case of Mr. Channakeshava in connection with the group case of M/s. Telecom Employees Co-operative Housing Society Limited.
  • The search was conducted at the assessee’s premises at No. 530, 4th ‘C’ Cross, HRBR Layout, Kalyan Nagar, Bangalore, on 01.10.2013.
  • The case had been centralized to the concerned Central Circle by the CIT, Bangalore-III, Bangalore, by notification dated 25.11.2008, in continuation of an earlier search dated 16.09.2008.

Issue of notices under Section 153A

For AY 2013-14 (representative of the other years):

  • Notice under section 153A was issued on 05.11.2014 directing the assessee to file a return within 30 days.
  • There was no compliance, following which a reminder dated 08.12.2014 was issued.
  • On 18.05.2015, the assessee sought copies of seized material in order to file the return.
  • The AO supplied the copies on 25.05.2015.

Subsequently:

  • The assessee e-filed a belated return under section 139(4) on 31.03.2017 declaring income of Rs. 57,69,080/-.
  • Another notice under section 153A was later issued on 22.01.2020 granting 30 days’ time.
  • On 19.02.2020, the assessee prayed for an extension, which was allowed up to 25.03.2020.
  • Thereafter, the assessee requested that the return already filed under section 139 be treated as filed in response to the section 153A notice.

Subsequent scrutiny notices and lack of participation

  • Notice under section 143(2) dated 08.09.2021 was issued and duly served.
  • On change of incumbent, a notice under section 129 was also issued.
  • Notices under section 142(1) dated 02.06.2021, accompanied by a questionnaire, were served on the assessee.

Despite repeated opportunities:

  • There was no substantive response to the queries raised.
  • Additional notices dated 02.07.2021 and 15.07.2021 required details by 22.07.2021.
  • On 22.07.2021, the assessee only sought adjournment, which was granted up to 04.08.2021 via notice dated 24.07.2021.

The AO, confronted with persistent non-compliance, proceeded to complete the assessments under section 153A read with section 143(3) (and in the PCIT(A)’s narrative, section 144 is also referred to in context of best judgement), making significant additions across years.

Key additions made by the Assessing Officer

1. Unexplained investment of Rs. 80,00,000/- (AY 2015-16)

During search at the residence of Shri Muddanna Chennakeshava on 03/04/2019, a registered sale deed relevant to AY 2015-16 was unearthed:

  • Sale consideration recorded: Rs. 2.81 crore.
  • Statement of Shri Champakadhama (purchaser, and brother of the assessee) recorded on 21/05/2019 under oath.
  • He deposed that:
    • Rs. 2 crore was received in cash from his mother, and
    • Rs. 80 lakhs in cash was received from his brother, Shri M. Channakeshava (the assessee).

The AO:

  • Issued notice under section 142(1) on 02/06/2021 asking the assessee to explain the source of Rs. 80,00,000/- advanced to Shri Champakadhama.
  • Furnished a copy of Champakadhama’s statement to the assessee.

The assessee’s explanation:

  • In submission dated 21/09/2021, he claimed that the funds were advanced out of his business activities over a period of time.
  • However, he did not provide:
    • Proper fund-flow or source-wise details, or
    • Audited books of account evidencing the advance.

Outcome:

  • The AO treated Rs. 80,00,000/- as unexplained investment and taxed it in the assessee’s hands for AY 2015-16.