Court sets aside orders for denying tax officer chance to examine new evidence

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Case Name

Commissioner of Income Tax Vs Joy Partnership Mining Centre (High Court of Calcutta)

ITAT/71/2018 IA No.GA/1/2018 (Old No.GA/692/2018)

Date: 15th November 2021

Key Takeaways

• Procedural fairness is paramount: Tax officers must get adequate opportunity to examine any new evidence submitted during appeals
• Rule 46A compliance is mandatory: There are strict rules about when and how additional evidence can be admitted in tax appeals
• Technical violations can overturn substantive decisions: Even if the final decision might be correct, procedural lapses can invalidate the entire process
• Remand for fresh consideration: Courts will send cases back rather than decide on merits when proper procedure wasn’t followed

Issue

The central legal question was: Can a CIT(Appeals) admit additional evidence without giving the assessing officer adequate opportunity to examine and respond to such evidence, and is such an order sustainable in law?

Facts

1. Assessment completed: The tax assessment was completed under Section 143(3) on December 27, 2007
2. New evidence emerges: The taxpayer (Joy Partnership Mining Centre) later produced two letters dated December 24, 2008, and December 29, 2008, explaining details about their creditors
3. Timeline issue: Since the assessment was completed in December 2007, these letters from December 2008 obviously couldn’t have been considered by the original assessing officer
4. Appeal process: The taxpayer submitted these letters for the first time before the CIT(Appeals), not during the original assessment
5. Tribunal decision: The case went through various levels, with the tribunal ultimately dismissing the revenue’s appeal

Arguments

Revenue’s (Tax Department’s) Arguments:

• The CIT(Appeals) wrongly admitted additional evidence without following proper procedure under Rule 46A(1)
• The assessing officer didn’t get adequate opportunity to examine the new documents
• The creditors should be considered fictitious as there was insufficient evidence during the original assessment

Assessee’s (Taxpayer’s) Arguments:

• The term “fictitious” used by the assessing officer was a misnomer, giving a wrong impression that the creditors were non-existent persons
• The additional evidence was relevant and should be considered
• The letters were part of the paper books submitted before the tribunal

Key Legal Precedents

The court primarily relied on Rule 46A of the Income Tax Rules, 1962, which governs the admission of additional evidence. Specifically:

• Rule 46A(1): States that appellants cannot produce new evidence before the Commissioner of Appeals except in circumstances set out in clauses (a) to (d)
• Section 143(3) of the Income Tax Act: Under which the original assessment was completed
• Section 260A of the Income Tax Act: Under which this appeal was filed

The court emphasized that there must be a positive finding that the assessee’s case falls within one of the specified clauses (a) to (d) under Rule 46A(1) before additional evidence can be admitted.

Judgement

The Revenue (Tax Department) won on procedural grounds.

Here’s the court’s reasoning and decision:

Court’s Logic:

1. Procedural violation identified: The CIT(Appeals) failed to record a positive finding that the case fell within the exceptions under Rule 46A(1) before admitting additional evidence
2. Inadequate opportunity: The assessing officer didn’t get adequate opportunity to examine the additional documents
3. Technical ground sufficient: The court didn’t need to decide on the merits (whether creditors were genuine or fictitious) because the procedural violation was sufficient to set aside the orders

Court’s Orders:

• Appeal allowed: The revenue’s appeal was successful
• Orders set aside: Both the tribunal’s and CIT(Appeals)'s orders were set aside on technical grounds
• Matter remanded: Case sent back to CIT(Appeals) for fresh consideration
• Specific directions: CIT(Appeals) must issue notice to both parties, allow the assessing officer to file a report on additional documents, and pass fresh orders after giving adequate opportunity
• Substantial questions left open: The court didn’t decide the substantive tax questions

FAQs

Q1: Does this mean the taxpayer loses and has to pay more tax?

A: Not necessarily. The court only decided on procedure, not on whether the creditors were genuine. The case goes back for a fresh hearing where the tax officer will get proper opportunity to examine the evidence.

Q2: What is Rule 46A and why is it important?

A: Rule 46A sets out when new evidence can be submitted during tax appeals. It prevents taxpayers from withholding evidence during assessment and then producing it later, ensuring fairness in the process.

Q3: What happens next in this case?

A: The CIT(Appeals) will conduct a fresh hearing, give the tax officer proper opportunity to examine the December 2008 letters, and then decide whether the creditors are genuine based on all available evidence.

Q4: Could the taxpayer have avoided this outcome?

A: Yes, if the CIT(Appeals) had properly recorded findings under Rule 46A(1) before admitting the additional evidence, or if the taxpayer had produced the evidence during the original assessment.

Q5: What’s the broader impact of this decision?

A: It reinforces that procedural compliance in tax matters is crucial. Tax authorities must follow prescribed procedures even when the substantive outcome might seem obvious.

Q6: Why didn’t the court decide whether the creditors were genuine or fictitious?

A: The court found the procedural violation sufficient to set aside the orders. It preferred to let the matter be decided afresh with proper procedure rather than making a substantive decision on potentially tainted proceedings.

This appeal of revenue filed under Section 260A of the Income Tax Act (the ‘Act’ in brevity) is directed against the order dated 17th October, 2017 passed by the Income Tax Appellate Tribunal, C-Bench, Kolkata (the ‘Tribunal’) in ITA No.149/Kol/2009 for the assessment year 2005-06.

The revenue has raised the following substantial questions of law for consideration :

“(i) Whether on the facts and circumstances of the case the learned Income Tax Appellate Tribunal has erred in law in not sustaining the order passed by the Assessing Officer who found the creditors to be fictitious as there was no evidence produced by the assessee in spite of demand made by the Assessing Officer ?

(ii) Whether on the facts and circumstances of the case the learned Income Tax Appellate Tribunal has erred in law in upholding the decision of the Commissioner of Income Tax (Appeals) who had admitted additional evidence without giving opportunity to the assessing officer to consider the additional evidence and the same is in violation of the Rule 46A(1) of the Income Tax Rules, 1962 ?”

We have elaborately heard the learned Counsel for the parties and carefully perused the materials placed on record. The first of the two substantial questions of law urged before us by the leaned senior standing Counsel for the revenue is with regard to lack of opportunity to the assessing officer to record the additional evidence admitted by the CIT(A), placed before it by the assessee. The other substantial question of law is a mixed question of fact and law and what is required to be examined whether there were enough evidence to show that the creditors were genuine.

When the appeal came up for consideration before the

Hon’ble Division Bench on 13th July, 2021, the Hon’ble Division

Bench noted that the tribunal while dismissing the revenue’s

appeal had taken note of two communications which were letters

submitted by the assessee dated 24th December, 2008 and 29th

December, 2008 explaining the movement of the creditors as well as

the details connected therewith. The Hon’ble Bench directed the

assessee to file an additional paper book to indicate as to

whether the two communications referred above were part of the

paper books submitted before the tribunal. In terms of the

directions issued by the Hon’ble Division Bench, a copy of the

paper book filed before the tribunal has been placed before us and

we find that those two letters referred by the tribunal form part

of the paper books. The larger question which would require

consideration is whether the assessing officer had adequate

opportunity to examine the additional materials placed by the

assessee admittedly produced for the first time before the CIT(A)

and subsequently before the tribunal. In terms of Rule 46A, there

is a procedure prescribed for accepting additional evidence. Sub-

rule (1) of Rule 46A says that the appellant shall not be entitled

to produce before the Commissioner of Appeals any evidence whether

oral or documentary other than the evidence produced before him

during the course of the proceedings before the assessing officer

except in the circumstances set out in Clauses (a) to (d) under

Sub-rule (1). The assessment was completed under Section 143(3)

of the Act by order dated 27th December, 2007. Admittedly, the

order of assessment being much prior to the letters dated 24th

December, 2008 and 29th December, 2008 the same could not have been

considered by the assessing officer. It is not in dispute that

these letters were placed before the CIT(A) for the first time.

From the observations made in the order passed by the CIT(A) more

particularly, in page 14 of the order of the CIT(A), there appears

to be an indication that the assessing officer participated in the

hearing held by the CIT(A). However, there is no positive finding

recorded by the CIT(A) that the assessee was granted liberty to

produce additional evidence for the first time before the CIT(A)

as the assessee’s case fall within one of the clauses namely, (a)

to (d) under Rule 46(A)(1). The tribunal has also taken note of

the additional documents and has made an observation that the

department’s representative in his written submission has made a

reference to the date-wise order sheet entries which are contained

in the additional documents. However, what is required to be seen

is whether these documents could have been produced before the

CIT(A) for the first time without recording the finding that the

assessee was prevented by sufficient cause from producing the

evidence which he was called upon to produce before the assessing

officer or producing any evidence which is relevant to any grounds

of appeal or to adduce evidence relevant to any grounds of appeal.

Thus, we find that the assessing officer did not have adequate

opportunity to examine the additional documents.

It is submitted by the learned counsel for the

respondent/assessee that the term “fictitious” as used by the

assessing officer is a misnomer as it gives an impression as if

the creditors are non-existent persons when factually the matter

is otherwise. In any event, we do not wish to record any finding

on facts as we are satisfied that the matter needs to be re-

examined by the CIT(A) by providing adequate opportunity to the

assessing officer to examine the additional documents placed

before the CIT(A) and make his submission and thereafter the

CIT(A) to pass fresh orders.

In the result, the appeal is allowed and the orders

passed by the tribunal as well as the CIT(A) are set aside on the

aforementioned technical ground and the matter is remanded to the

CIT(A) for fresh consideration. The CIT(A) is directed to issue

notice to the assessee as well as the assessing officer and

provide adequate opportunity to the assessing officer to file a

report on the additional documents placed by the assessee and

after affording sufficient opportunity, pass fresh orders on

merits in accordance with law. Consequently, the substantial

questions of law are left open.

We make it clear that the orders passed by the CIT(A) and

the tribunal have been set aside only on the issue which is

subject-matter of the present appeal and this judgment will not

have any impact on other issues which are not on appeal.

The connected application being GA/692/2018 accordingly

stands closed.

(T.S. SIVAGNANAM, J.)

(HIRANMAY BHATTACHARYYA, J.)