Natural Justice | Ex-Parte Assessment Under Section 144 Income Tax Act Void Without Effective Opportunity of Hearing: ITAT Delhi

The Income Tax Appellate Tribunal, Delhi, has underscored the fundamental principle of natural justice by setting aside an ex-parte assessment order passed under Section 144 of the Income Tax Act, 1961. The Tribunal held that the Assessing Officer and the Commissioner of Income Tax (Appeals) failed to provide the assessee with an effective opportunity of hearing, rendering the impugned orders unsustainable in law. This ruling reinforces the mandatory requirement of affording a fair hearing before passing quasi-judicial orders, particularly in cases involving substantial additions under Section 69A of the Act.

Background & Facts

The Dispute

The appellant, Piyush Jain, proprietor of Piyush Enterprises, engaged in the business of fabrics, deposited cash aggregating Rs. 49,86,300 during the demonetization period (Rs. 8,92,200 in Axis Bank and Rs. 40,94,100 in Punjab National Bank). The assessee claimed these deposits were out of sales made before demonetization and duly recorded in the books of account. However, the Assessing Officer (AO) made an addition of Rs. 74,78,990 under Section 69A of the Income Tax Act, 1961, without rejecting the assessee’s books of account.

Key Facts

• The assessee operates a proprietorship business of fabrics under the name Piyush Enterprises
• Cash deposits during demonetization: Rs. 8,92,200 (Axis Bank) and Rs. 40,94,100 (Punjab National Bank)
• Total cash deposits claimed as disclosed in books: Rs. 49,86,300
• Addition made by AO: Rs. 74,78,990 under Section 69A for unexplained cash deposits
• Assessment order passed ex-parte under Section 144 of the Act

Procedural History

The timeline of notices and responses is critical to understanding the denial of opportunity:

• 23.08.2018: Notice u/s 143(2) issued; no response
• 18.09.2018: Second notice u/s 143(2); no response
• 15.01.2019: Notice u/s 142(1); no response
• 31.01.2019: Notice u/s 142(1); no response
• 14.03.2019: Notice u/s 142(1); assessee filed partial response (balance sheet and P&L account only)
• 26.04.2019: Notice u/s 142(1); no response
• 24.06.2019: Notice u/s 142(1); no response
• 18.10.2019: Notice u/s 142(1); no response
• 16.12.2019: Assessment order passed ex-parte u/s 144
• 21.08.2025: CIT(A)/NFAC dismissed appeal, upholding AO’s order
• 03.03.2026: ITAT hearing
• 29.04.2026: ITAT order allowing appeal for statistical purposes

The Parties' Positions

For the Appellant (Assessee):

• The AO passed the ex-parte order without affording an effective opportunity of hearing
• The AO did not reject the books of account, which contained sufficient explanation for the cash deposits
• The CIT(A) failed to note the procedural lapse and upheld the AO’s order, resulting in miscarriage of justice
• The matter should be restored to the AO for de-novo assessment with directions to afford a fair hearing

For the Respondent (Revenue):

• The assessee failed to furnish necessary documents despite eight opportunities
• The AO was constrained to pass an ex-parte order u/s 144 due to the assessee’s non-compliance
• The assessee’s conduct does not merit leniency, and the appeal should be dismissed

Relief Sought

The appellant sought:

• Setting aside of the impugned order dated 21.08.2025 and the assessment order dated 16.12.2019
• Restoration of the matter to the AO for de-novo assessment proceedings
• Direction to the AO to afford an effective opportunity of hearing to prove the source of cash deposits
• Compliance with principles of natural justice

The Legal Issue

The central question was whether the Assessing Officer and Commissioner of Income Tax (Appeals) were justified in passing and upholding an ex-parte order under Section 144 of the Income Tax Act, 1961, without providing the assessee with an effective opportunity of hearing, thereby violating the principles of natural justice.

Arguments Presented

For the Appellant

• The AO passed the ex-parte order without affording a meaningful opportunity to present evidence
• The books of account, which contained details of cash deposits, were not rejected by the AO
• The CIT(A) erred in upholding the AO’s order without addressing the denial of natural justice
• Reliance was placed on judicial precedents requiring adherence to principles of natural justice in quasi-judicial proceedings

For the Respondent

• The assessee failed to comply with eight notices issued by the AO
• The AO was justified in passing an ex-parte order u/s 144 due to the assessee’s non-cooperation
• The assessee’s books of account alone were insufficient to prove the genuineness of cash deposits without corroborative evidence
• The CIT(A) correctly dismissed the appeal as the assessee did not produce cogent evidence to substantiate the source of deposits

The Court's Analysis

The Tribunal meticulously examined the procedural history and the principles of natural justice. Key observations include:

1. Opportunity of Hearing is Mandatory: The Tribunal emphasized that the opportunity of hearing is not a mere formality but a sine qua non of quasi-judicial proceedings. The AO’s reliance on the assessee’s partial response to one notice (dated 14.03.2019) was insufficient, as no response was filed to subsequent notices dated 26.04.2019, 24.06.2019, and 18.10.2019.

2. Burden of Proof of Service: The Tribunal noted that there was no evidence on record to prove that the assessee received the subsequent notices. The AO failed to establish that the assessee was duly served, which is essential to conclude that an effective opportunity was granted.

3. CIT(A)’s Failure to Address Natural Justice: The CIT(A) erred in dismissing the appeal without addressing the denial of opportunity. The Tribunal observed:

   "Even the ld. CIT(A) has not afforded any opportunities to the assessee to file the requisite documents before him as para 7.2.3 to 7.3.4 of the impugned order extracted below would make it clear that the effective opportunities of hearing has been granted to the assessee neither by the AO nor by the ld. CIT(A)."

   The CIT(A) incorrectly relied on the AO’s assertion that repeated opportunities were granted, without verifying whether the assessee actually received them.

4. Judicial Precedents Distinguished: The CIT(A) distinguished judicial precedents cited by the assessee (ITO v. Zee Bangles Pvt. Ltd. and Durga Fire Works v. ITO) on the ground that those cases involved contemporaneous sales records produced and accepted by authorities. In contrast, the assessee in this case failed to produce cogent evidence to establish that the deposits were sourced from recorded sales.

5. Books of Account Alone Insufficient: The Tribunal reiterated that audited books of account do not automatically establish the genuineness of transactions unless supported by verifiable documentary evidence. The assessee’s failure to produce such evidence justified the AO’s addition under Section 69A, but the procedural lapse in denying a hearing vitiated the order.

The Verdict

The Tribunal allowed the appeal for statistical purposes and set aside the impugned order dated 21.08.2025, along with the assessment order dated 16.12.2019. The matter was restored to the file of the Assessing Officer for de-novo assessment proceedings with the following directions:

• The AO shall afford the assessee an effective opportunity of hearing to present necessary materials and submissions
• The assessee is directed to file all requisite documents and evidence within 60 days from the date of this order (29.04.2026)
• The AO shall decide the issue afresh after considering the assessee’s submissions and evidence

What This Means For Similar Cases

Natural Justice is Non-Negotiable

This judgment reaffirms that principles of natural justice are sacrosanct in quasi-judicial proceedings under the Income Tax Act, 1961. Practitioners must ensure:

• Service of Notices: The AO must prove that notices were duly served on the assessee. Mere issuance of notices is insufficient; receipt must be established
• Effective Opportunity: A partial response to one notice does not constitute compliance. The assessee must be given a fair chance to respond to all queries
• Appellate Scrutiny: The CIT(A) and higher authorities must scrutinize whether the AO adhered to procedural fairness before upholding ex-parte orders

Documentary Evidence is Critical

• Books of Account Alone Insufficient: Audited books of account are not conclusive proof of genuineness. Assessees must produce corroborative documentary evidence (e.g., invoices, bank statements, sales records) to substantiate cash deposits
• Burden of Proof: The assessee bears the burden of proving the source of unexplained cash deposits. Failure to produce evidence shifts the onus to the AO to make additions, but procedural fairness must still be observed

Remedies for Denial of Opportunity

• Restoration for De-Novo Proceedings: Where an ex-parte order is passed without affording a hearing, assessees can seek restoration of the matter for fresh adjudication
• Judicial Review: Tribunals and courts are empowered to set aside orders passed in violation of natural justice, even if the substantive addition is justified on merits
• Compliance with Directions: Assessees must strictly adhere to timelines set by courts (e.g., 60 days in this case) to avoid further adverse orders