ITAT Pune Emphasizes Natural Justice Over Technical Defects in Form 35

The Pune Bench of the Income Tax Appellate Tribunal in Raisoni Bagrecha Diamonds Pvt. Ltd. Vs PNE-C-(25)(1) has reaffirmed that appellate remedies cannot be defeated merely on procedural lapses such as defects in Form 35. The Tribunal set aside the orders of the CIT(A)/NFAC for AY 2015-16 and AY 2016-17 and remanded the matters for a fresh decision on merits, thereby reinforcing the primacy of natural justice in income tax proceedings.

The case revolved around additions under Section 69 on account of alleged bogus liabilities, undisclosed purchases and suppressed sales, all sustained ex-parte in reassessment proceedings due to admitted non-compliance by the assessee at earlier stages. The ITAT, however, took note of the peculiar and difficult circumstances prevailing at the time of assessment and appellate proceedings and concluded that the assessee ought not to be non-suited merely on a technical objection relating to defects in Form 35 and non-compliance with Rule 46A procedures.

Background of the Case

Nature of Business and Returns Filed

  • The assessee, Raisoni Bagrecha Diamonds Pvt. Ltd., is a private limited company engaged in the jewellery trade.
  • For AY 2015-16, the assessee filed its original return of income on 26.09.2015, declaring a total loss of Rs. 3,12,39,120/-.
  • For AY 2016-17, the return was filed on 16.10.2016, reporting a total loss of Rs. 4,18,48,341/-.

Trigger for Reassessment under Section 147

Information was received from the Investigation Wing alleging a mismatch between balances shown by the assessee and by M/s. RB Diamonds in their respective books for both AY 2015-16 and AY 2016-17:

  • For AY 2015-16:

    • The assessee allegedly reflected a trade payable (creditor) of Rs. 72,01,411/- towards M/s. RB Diamonds.
    • M/s. RB Diamonds, however, reportedly disclosed a sundry debtor balance of only Rs. 3,39,679/- in its return.
    • The alleged excess liability was computed at Rs. 68,61,732/-.
  • For AY 2016-17:

    • The assessee allegedly showed a creditor balance of Rs. 94,04,285/- towards M/s. RB Diamonds.
    • M/s. RB Diamonds purportedly disclosed only Rs. 3,39,679/- as sundry debtors.
    • The alleged differential bogus liability was quantified at Rs. 90,64,606/-.

On the basis of this material, the Assessing Officer initiated reassessment proceedings under Section 147 of the Income Tax Act, 1961 by issuing notices under Section 148 and Section 142(1).

Course of Assessment Proceedings

Multiple statutory notices were issued under Section 142(1) (including show cause notices), all of which were duly served. The assessee responded only once, merely stating that the returns for both years had been filed on 12.02.2022. No substantive details, explanations, or corroborative documents were supplied in response to the other notices.

In view of this near-complete non-compliance, the Assessing Officer resorted to ex-parte assessment:

  • For AY 2015-16, an order under Section 147 r.w.s. 144B was passed on 28.03.2022, assessing total income at Rs. 68,61,732/- on account of alleged unexplained liability under Section 69.
  • For AY 2016-17, total income was assessed at Rs. 1,04,00,363/-, comprising:
    • Alleged bogus liability of Rs. 90,64,606/- under Section 69.
    • Alleged undisclosed purchases of Rs. 10,80,259/-.
    • Alleged suppressed sales of Rs. 2,55,498/-.

All these components were treated as unexplained income under Section 69 in the absence of explanations from the assessee.

Proceedings Before CIT(A)/NFAC

Assessee’s Appeal Grounds

The assessee filed appeals for both years before the CIT(A)/NFAC, challenging:

  • The validity of additions under Section 69 treating trade payables as bogus liabilities;
  • The treatment of alleged undisclosed purchases and suppressed sales, particularly in the context of Section 145A and VAT treatment;
  • The failure of the Assessing Officer to properly consider reconciliations between books of account and VAT returns;
  • Procedural infirmities and violation of the principles of natural justice.

AY 2015-16 – Key Grounds

For AY 2015-16 (ITA No.