The ITAT Ahmedabad has reaffirmed that even where an assessee deliberately ignores statutory notices and fails to participate in assessment or appellate proceedings, the right to a fair hearing under the Income-tax Act cannot be extinguished. The Tribunal set aside an ex-parte assessment not to condone neglect, but to uphold the foundational principle that tax adjudication must be decided on merits, not procedural technicalities.
Background & Facts
The Dispute
The appellant, Rajesh Pananalal Shah, engaged in metal scrap trading, filed his return for A.Y. 2022-23 declaring income of ₹28.82 lakh. The Assessing Officer selected the case for scrutiny under CASS due to discrepancies between TCS receipts and reported income, and unexplained liabilities. The AO issued notices under Section 143(2) and Section 142(1), but the assessee failed to respond. Consequently, the AO completed the assessment ex-parte under Section 144, making an addition of ₹1.00 crore under Section 68 for unexplained credits and disallowing ₹6.45 lakh in business expenses for lack of substantiation. The AO also invoked Section 115BBE and initiated penalty proceedings under Section 271AAC.
Procedural History
The case progressed through multiple stages:
- 20.10.2022: Assessee filed return declaring income of ₹28,82,250
- 01.06.2023: Notice under Section 143(2) issued; no response received
- 2023: Assessment completed ex-parte under Section 144
- 14.10.2025: CIT(Appeals) dismissed appeal ex-parte due to non-prosecution
- 2026: Appeal filed before ITAT Ahmedabad
Relief Sought
The appellant sought setting aside of the assessment order, arguing that the CIT(Appeals) erred in dismissing the appeal ex-parte and in upholding additions without proper scrutiny. He sought opportunity to present evidence and challenge the additions on merits.
The Legal Issue
The central question was whether an assessee’s deliberate non-participation in assessment and appellate proceedings forfeits their right to a fair hearing and de-novo adjudication under the Income-tax Act, or whether the Tribunal retains discretion to restore the matter for merits-based adjudication.
Arguments Presented
For the Petitioner
The appellant’s representative argued that while there was non-compliance, the appeal was filed within time and the issues involved substantial tax implications. He contended that the Tribunal has inherent power under Section 254 to set aside orders passed without proper opportunity, especially where the assessment is ex-parte and based on incomplete evidence. Reliance was placed on CIT v. M/s. S. R. D. Industries to argue that procedural lapses should not defeat substantive justice.
For the Respondent
The Department contended that the assessee had been given multiple opportunities through statutory notices issued via the e-filing portal, which is deemed valid service under Rule 126 of the Income-tax Rules. The non-appearance was intentional and amounted to abandonment of the appeal. The Department relied on CIT v. R. K. Jain to argue that ex-parte orders passed after due notice cannot be lightly set aside.
The Court's Analysis
The Tribunal acknowledged the assessee’s persistent failure to respond to notices, calling it a "deliberate and conscious disregard" for statutory process. It emphasized that the appellate mechanism is not a formality but requires active engagement. However, the Tribunal distinguished between penalizing non-cooperation and denying justice altogether.
"The appellate mechanism provided under the Act is meant to facilitate adjudication on merits through active participation by the parties and cannot be reduced to a mere formality of filing appeals without pursuing them diligently."
The Court noted that the additions under Section 68 involved a substantial sum and required verification of source and nature of credits - issues that could not be fairly determined without the assessee’s evidence. It held that while the conduct warranted censure, the principle of natural justice under Article 14 of the Constitution and the spirit of Section 254(2) required a final opportunity to be granted.
The Tribunal further clarified that setting aside the order was not an endorsement of the assessee’s conduct, but a recognition that tax liability must be determined on evidence, not silence. It imposed a cost of ₹20,000 to be deposited in the Prime Minister’s Relief Fund as a deterrent.
The Verdict
The appellant won. The ITAT set aside the CIT(Appeals) order and restored the matter to the Assessing Officer for de-novo adjudication. The Tribunal held that deliberate non-participation does not extinguish the right to a fair hearing, but may attract costs. The assessee must now substantiate claims with evidence before the AO.
What This Means For Similar Cases
Fair Hearing Survives Procedural Default
- Practitioners must advise clients that even if notices are ignored, the Tribunal may still restore the case for merits-based hearing
- The burden remains on the assessee to explain credits or expenses, but the AO cannot rely solely on silence to make additions
- This judgment reinforces that Section 144 assessments are not final if the taxpayer later seeks redressal through proper channels
Costs Are a Deterrent, Not a Punishment
- Tribunals may impose costs for non-cooperation, even while granting relief
- Costs must be linked to deterrence and public interest, not punitive intent
- Practitioners should counsel clients to comply with notices to avoid both adverse assessments and financial penalties
De-Novo Adjudication Is Not a Second Chance, But a Legal Obligation
- When substantial tax is at stake, courts and tribunals will prioritize substantive justice over procedural rigidity
- The AO must re-examine all issues afresh, including the validity of Section 68 additions and Section 115BBE applicability
- Documentary evidence submitted at this stage must be scrutinized with due diligence, not dismissed as belated
