ITAT Bangalore Remands Bank Credit Addition Case: Natural Justice and Proper Adjudication Required

Introduction

The Bangalore "B" Bench of the Income Tax Appellate Tribunal delivered an important ruling emphasizing the principles of natural justice in tax assessment proceedings. In the case of Samiulla Vs ITO (ITA No. 2405/Bang/2024) for Assessment Year 2018-19, decided on 31st January 2025, the Tribunal set aside the appellate order and remanded the matter for fresh consideration, highlighting that mechanical addition of entire bank credits without proper examination violates the essence of fair adjudication.

Background of the Case

The assessee in this matter had not filed a return of income for the relevant assessment year. The tax authorities noticed substantial credits flowing through the assessee's bank accounts, which triggered reopening of the case under Section 147 of the Income Tax Act. This provision allows the Assessing Officer to reopen concluded assessments or assess cases where no return was filed, provided there is reason to believe that income has escaped assessment.

Assessment Proceedings Under Section 144

During the course of assessment proceedings, the Assessing Officer made several attempts to secure compliance from the assessee. Multiple notices were issued to the assessee, as documented in the assessment order. However, the assessee failed to respond to these notices or provide necessary documentation and explanations regarding the bank credits.

Faced with non-cooperation, the Assessing Officer proceeded to complete the assessment under Section 144 of the Income Tax Act, which deals with best judgment assessment. Under this provision, when an assessee fails to comply with notices or refuses to cooperate, the Assessing Officer can complete the assessment based on available material and best judgment.

In this case, the Assessing Officer adopted a blanket approach and treated the entire quantum of bank credits as unexplained income of the assessee, thereby adding the complete amount to the taxable income.

Appellate Proceedings Before CIT(A)

Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi. The CIT(A) passed the order dated 18th October 2024 bearing DIN ITBA/NFAC/S/250/2024-25/1069770648(1).

During the appellate proceedings, the CIT(A) issued only three hearing notices to the assessee. Despite the substantial nature of the additions involved, the appellate authority proceeded to confirm the assessment order without granting adequate opportunity for the assessee to present his case.

The CIT(A) upheld the additions made by the Assessing Officer, thereby affirming that the entire bank credits should be treated as unexplained income chargeable to tax.

Appeal Before ITAT Bangalore

Dissatisfied with the appellate order, the assessee approached the Income Tax Appellate Tribunal, Bangalore Bench.

Arguments Advanced by the Assessee

The learned counsel representing the assessee specifically drew the Tribunal's attention to Ground No. 2 of the appeal, which raised a fundamental issue concerning violation of principles of natural justice. The assessee contended that the CIT(A) had failed to grant proper and adequate opportunity of hearing before deciding the appeal.

The counsel emphasized that a mere issuance of three hearing notices cannot be considered sufficient compliance with the requirement of providing reasonable opportunity, particularly in cases involving substantial additions to income. The counsel pointed out that paragraph 3 of the impugned order itself evidenced that only three notices were issued.

The assessee's representative made a solemn undertaking before the Tribunal that the assessee would fully cooperate with the appellate proceedings if granted another opportunity. He requested that the matter be restored to the file of CIT(A) for fresh adjudication.

Arguments by the Revenue Department

The learned Departmental Representative appearing for the revenue authorities opposed the assessee's contentions. The DR highlighted the conduct of the assessee during the original assessment proceedings, pointing out that the assessee had failed to appear before the Assessing Officer and did not comply with any of the notices issued during assessment.