Facts of the Case

The assessee had not filed a return of income for AY 2017-18. Information available with the Department showed cash deposits of ₹11,42,000 in a bank account during the demonetization period (09.11.2016 to 30.12.2016). Despite issuance of notices under section 142(1), there was no response.

Accordingly, the Assessing Officer completed a best-judgment assessment under section 144, making an addition of ₹72,63,010 under section 69A as unexplained money and initiating penalty proceedings.

On appeal, the NFAC partly allowed relief by restricting the addition to ₹11,42,000 but passed the order ex parte and also enhanced income by estimating profit at 8% of turnover without issuing a notice of enhancement.

 Issues Involved

  1. Whether enhancement of income by the appellate authority without issuing notice under section 251(2) is legally sustainable.
  2. Whether demonetization cash deposits can be treated as unexplained money without examining explanation regarding cash in hand and sales.
  3. Whether ex-parte appellate orders violate principles of natural justice.

Petitioner’s Arguments

The assessee contended that the NFAC passed the order ex parte without giving opportunity to present the case. It was argued that enhancement of income by applying an 8% profit rate on turnover without issuing statutory notice under section 251(2) was illegal.

The assessee further submitted that the deposits comprised:

  • ₹5,44,000 deposited out of cash in hand as on 08.11.2016 (Specified Bank Notes)
  • ₹5,98,000 deposited out of cash sales during the demonetization period in valid currency

These details were verifiable from records, including audited financial statements and tax audit report.

Respondent’s Arguments

The Departmental Representative did not oppose restoration of the matter to the Assessing Officer for fresh consideration, subject to the assessee’s cooperation in future proceedings.

Court Order / Findings (ITAT Allahabad)

The Tribunal observed that the appellate authority had enhanced income without issuing the mandatory notice required under section 251(2), which violated principles of natural justice.

Considering that both assessment and appellate proceedings were effectively ex parte and that the assessee had plausible explanations for the deposits, the Tribunal held that the assessee deserved one more opportunity to present evidence.

Accordingly, the matter was restored to the file of the Assessing Officer for fresh adjudication after providing adequate opportunity of hearing. The assessee was directed to fully comply with notices during the set-aside proceedings, failing which the Assessing Officer could decide the matter based on available material.

Important Clarification

The Tribunal did not adjudicate the merits of the addition but emphasized that enhancement of income by an appellate authority without prior notice is invalid. Compliance with procedural safeguards under section 251(2) is mandatory before increasing assessed income.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771066978_VIKASHKUMARMIRZAPURVS.INCOMETAXOFFICERWARD32MIRZAPUR.pdf

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