Natural Justice Mandate | ITAT Pune Quashes Assessment Order for Non-Disclosure of Third-Party Replies Under Section 133(6) IT Act : ITAT Pune

The Income Tax Appellate Tribunal (ITAT), Pune, has underscored the principles of natural justice in income tax assessments by setting aside an order that failed to provide the assessee with copies of third-party replies obtained under Section 133(6) of the Income Tax Act, 1961. The Tribunal ruled that the Assessing Officer’s (AO) unilateral reliance on unverified discrepancies without confronting the assessee violated procedural fairness, warranting a remand for fresh adjudication.

Background & Facts

The Dispute

The appellant, Atul Mohan Bhandari (PAN: ABNPB2341K), an individual engaged in manufacturing automotive tubular components, job work, CNC machining, steel tube cutting, and trading of steel tubes, filed his return of income for Assessment Year (AY) 2023-24 on 31.10.2023, declaring a total income of Rs. 4,74,06,090. The case was selected for complete scrutiny on the grounds of substantially lower turnover in the Income Tax Return (ITR) compared to the GSTR 9C return and low profit margins relative to revenue from operations.

Key Facts

• The assessee’s gross receipts for AY 2023-24 were Rs. 1,10,12,94,799, while the GSTR 9C return showed Rs. 1,10,30,14,277.
• The assessee declared a net profit of Rs. 4,65,45,700.
• During scrutiny, the AO issued notices under Section 133(6) to sundry creditors to verify transactions. Discrepancies were noted in replies from some creditors, while 10 entities failed to respond.
• The assessee submitted multiple replies to the AO’s notices under Section 142(1), including:
  • Bank statements (Axis Bank and Standard Chartered Bank)
  • Purchase and sales registers
  • GST returns and Form GSTR 9C
  • Ledger accounts (capital, party-wise, raw material purchases, loading/unloading charges)
  • Profit and Loss Account and Balance Sheet as on 31.03.2023
  • Tax invoices (Tata Steel)
  • Fixed asset bills (plant and machinery, furniture, computers)
  • Rent bills and service expense bills

Procedural History

• 31.10.2023: Assessee filed return of income for AY 2023-24.
• 01.10.2024: AO issued notice under Section 142(1) seeking documents.
• 15.10.2024: Assessee submitted first reply with supporting documents.
• 16.10.2024: Assessee submitted second reply with additional documents.
• 03.02.2025: AO issued second notice under Section 142(1).
• 06.02.2025: Assessee submitted third reply with purchase registers, stock records, and invoices.
• 26.03.2025: AO passed assessment order under Section 143(3) r.w.s. 144B, rejecting the assessee’s books and estimating 7.5% profit margin on gross sales, resulting in an addition of Rs. 3,61,80,370 as business income.
• 05.05.2025: Assessee filed appeal before Ld. CIT(A).
• 16.08.2025: Ld. CIT(A) confirmed the addition.
• 20.05.2026: Hearing before ITAT Pune.
• 13.07.2026: ITAT pronounced order setting aside the assessment.

Relief Sought

The assessee challenged the assessment order on multiple grounds, including:

• Violation of natural justice by not providing copies of third-party replies under Section 133(6).
• Arbitrary estimation of profit margin (7.5%) without basis.
• Non-consideration of documentary evidence submitted during scrutiny.
• Mechanical confirmation of the AO’s order by the Ld. CIT(A).

The assessee sought quashing of the addition and remand for fresh adjudication with adherence to procedural fairness.

The Legal Issue

The Tribunal addressed two critical questions:

1. Whether the AO’s failure to provide the assessee with copies of third-party replies obtained under Section 133(6) violated the principles of natural justice?
2. Whether the AO’s estimation of profit margin at 7.5% was arbitrary and unsupported by cogent material?

Arguments Presented

For the Appellant

• Natural Justice Violation: The AO did not provide copies of replies received from third parties under Section 133(6), depriving the assessee of an opportunity to cross-verify discrepancies or submit rebuttal evidence.
• Arbitrary Profit Estimation: The AO’s 7.5% profit margin was based on vague market research without disclosing the source or methodology to the assessee.
• Non-Consideration of Evidence: The assessee submitted detailed documentary evidence, including bank statements, purchase registers, and GST returns, which the AO ignored without justification.
• Judicial Precedents: Cited judgments holding that mere variations in third-party data, without disproving the assessee’s books, cannot justify rejection of accounts under Section 145(2).

For the Revenue

• Discrepancies in Third-Party Data: The AO argued that differences in creditor confirmations and non-responses from 10 entities justified rejection of the assessee’s books.
• Low Profit Margins: The assessee’s declared net profit margin (4.2%) was unrealistically low compared to market standards (8-10%) for similar businesses.
• Failure to Reconcile: The assessee could not reconcile discrepancies, warranting estimation of income under Section 145(2).

The Court's Analysis

The ITAT meticulously examined the procedural lapses and substantive flaws in the assessment order:

1. Violation of Natural Justice:

   • The AO failed to provide copies of third-party replies received under Section 133(6), despite the assessee’s explicit request.
   • The Tribunal held that this omission deprived the assessee of a fair opportunity to explain discrepancies or challenge adverse inferences.

   "It is observed from the assessment order that apparently it seems that the AO had not provided copies of the replies received by the AO in reply to notices u/s 133(6) of the Act. Therefore, it is violation of principle of natural justice."

2. Arbitrary Profit Estimation:

   • The AO’s 7.5% profit margin was based on unspecified market research without disclosing the source or methodology to the assessee.
   • The Tribunal noted that the AO did not provide copies of documents relied upon to estimate profit margins, rendering the addition unsustainable.

3. Non-Responding Entities:

   • The AO noted 10 entities did not respond to Section 133(6) notices, but did not confront the assessee with this material.
   • The Tribunal directed the assessee to provide updated addresses of non-responding entities for fresh verification.

4. Remand for Fresh Adjudication:

   • The Tribunal set aside the assessment order and remanded the case to the AO with the following directions:
     • Provide the assessee with copies of third-party replies and documents relied upon for profit estimation.
     • Grant the assessee opportunity of hearing to rebut discrepancies.
     • Conduct fresh verification of non-responding entities.

The Verdict

The ITAT partly allowed the appeal for statistical purposes, setting aside the assessment order dated 26.03.2025 and appellate order dated 16.08.2025. The Tribunal directed:

• The AO to provide copies of third-party replies and supporting documents relied upon for profit estimation.
• The assessee to file fresh replies and provide updated addresses of non-responding entities.
• The AO to re-adjudicate the case after granting opportunity of hearing to the assessee.

Grounds Dismissed: The Tribunal dismissed Ground Nos. 2 and 3, holding that the Ld. CIT(A) provided adequate opportunity of hearing to the assessee.

What This Means For Similar Cases

Natural Justice in Third-Party Verification

• AO’s Duty to Disclose: Assessing Officers must provide copies of third-party replies obtained under Section 133(6) to the assessee, failing which the assessment order may be set aside for violating principles of natural justice.
• Opportunity to Rebut: Assessees must be confronted with adverse material (e.g., discrepancies, non-responses) to submit explanations or evidence.

Arbitrary Profit Estimation: A Risky Shortcut

• Basis for Estimation: Profit margins cannot be estimated based on vague market research without disclosing the methodology or source to the assessee.
• Documentary Evidence: AO’s must rely on cogent material and justify deviations from the assessee’s books with specific findings.

Remand as a Remedy for Procedural Lapses

• Fresh Adjudication: Tribunals may remand cases where procedural fairness is compromised, ensuring opportunity for rebuttal and transparent adjudication.
• Practical Takeaways for Assessees:
  • Request copies of third-party replies during assessment proceedings.
  • Challenge arbitrary profit estimations by demanding disclosure of methodology.
  • Maintain updated records of creditors/debtors to facilitate verification under Section 133(6).