ITAT Mumbai Restores Matter for Fresh Hearing in Faceless Assessment Case Involving Salaried Employee

Background and Overview

The Mumbai Bench of the Income Tax Appellate Tribunal, in the matter of Sankathaprasad Shyamraj Rajbhar Vs ITO (ITAT Mumbai), examined a significant question that arises with increasing frequency in the faceless assessment regime — whether additions made against a salaried assessee can be mechanically confirmed merely on account of non-submission of documents, without examining the substantive merits of the claims. The Tribunal answered this question emphatically in favour of the assessee, setting aside the appellate order and directing fresh adjudication.

This ruling carries significant implications for salaried assessees who may struggle with the technicalities of faceless proceedings and deserve a genuine opportunity to present their case before adverse orders are passed.

Case Background

The Assessee and His Return

The assessee in this case is employed as a mechanic with Mahanagar Telephone Nigam Limited (MTNL) — a government-owned public sector undertaking. He is a salaried individual whose employer had deducted tax at source amounting to ₹44,500/-. The assessee duly filed his return of income for Assessment Year 2017-18, declaring a total income of ₹85,01,375/-.

The return was subsequently selected for scrutiny, and statutory notices under the Income-tax Act, 1961 were issued. However, compliance with these notices was only partial, which set the stage for the assessment proceedings that followed.

Issues Identified by the Assessing Officer

During the course of proceedings, the Assessing Officer identified the following discrepancies:

  • HRA Exemption of ₹2,89,635/-: The assessee had claimed House Rent Allowance exemption but failed to furnish supporting documentation such as rent receipts, PAN of the landlord, or proof of cash payment. The assessee had stated that rent was paid to one Shri Munna Prasad Dinanath Verma in cash, but the landlord's PAN was not provided.
  • Undisclosed Interest Income of ₹25,294/-: Interest income was not reported in the return of income.
  • Unexplained Bank Credit of ₹1,00,000/-: A credit appearing in the assessee's bank account was not satisfactorily explained during the assessment proceedings.
  • Salary Components: Certain elements of salary income including gratuity, leave encashment, and allowances also came under scrutiny.

In the absence of proper compliance and supporting documentation, the Assessing Officer completed the assessment under Section 147 read with Section 144 of the Income-tax Act, 1961 on 18/04/2023, assessing the total income at ₹7,61,356/-.

First Appeal Before CIT(A)

Submissions Made by the Assessee

The assessee approached the Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre, Delhi with the following explanations:

  • He had been residing in rented accommodation during the relevant year and was therefore rightfully entitled to the HRA exemption claimed in the return.
  • The employer had been provided details necessary for computing the eligible HRA deduction, based on which tax was deducted at source under Section 192 of the Income-tax Act, 1961.
  • The credit of ₹1,00,000/- in the bank account originated from a Provident Fund withdrawal and was not taxable as income from other sources.
  • The assessee candidly acknowledged that he was not adequately conversant with the mechanics of online faceless proceedings, which resulted in delayed or incomplete submissions — an error he described as unintentional.

CIT(A)'s Finding and Dismissal

Despite these submissions, the CIT(A) dismissed the appeal on the sole ground that documentary evidence had not been produced before the Assessing Officer to substantiate the claims made. The CIT(A) noted that the assessee had explained various items during the appellate stage — such as bank interest being within exemption limits, the ₹1,00,000/- deposit being a PF withdrawal, and ₹35,400/- being referable to gratuity or leave encashment — but had not backed these explanations with documents.

The CIT(A) also noted that the assessee had, through a reply dated 21.09.2023, acknowledged that a refund of ₹18,470/- for Assessment Year 2017-18 had been erroneously issued and had since been deposited back into the Government Account, interpreting this as an absence of any satisfactory explanation regarding the additions.

The relevant finding of the CIT(A) reads as under: