The Income Tax Appellate Tribunal, Nagpur, has clarified that the Commissioner of Income Tax (Appeals) may set aside an assessment order under Section 251(1)(a) of the Income Tax Act, 1961, even when the assessee has responded to notices, if the Assessing Officer has failed to conduct a proper and adequate inquiry. This ruling reinforces the appellate authority’s duty to ensure fair ascertainment of income, irrespective of procedural compliance by the taxpayer.
Background & Facts
The Dispute
The assessee, Alexander Joseph Dominic Saldanha, is an individual engaged in the business of distributing recharge vouchers for Dish TV. He did not file a return of income for Assessment Year 2018-19. Based on information available to the Department, the Income Tax Officer (ITO), Ward-2(2), Nagpur, identified cash deposits of Rs. 3,14,57,195 in Bank of Maharashtra Account No. 3904 and Rs. 11,69,590 in Account No. 4058, along with commission income of Rs. 4,27,385 from Dish Infra Services Pvt. Ltd. A notice under Section 148 was issued, initiating reassessment proceedings under Section 147 read with Sections 144 and 144B.
Key Facts
- The assessee claimed the cash deposits were proceeds from the sale of recharge vouchers collected from 619 small dealers across Nagpur
- He employed five collection boys to collect cash and cheques from dealers, which were deposited into two Bank of Maharashtra accounts
- The total amount remitted to Dish TV during FY 2017-18 was Rs. 3,54,45,500, as evidenced by bank statements
- The assessee earned commission income of Rs. 4,27,385, as reflected in Form 26AS
- His total income, even without any expense deductions, was below Rs. 5,00,000, leading him to believe filing a return was not mandatory
- The assessee submitted detailed explanations, including monthly cash collection sheets from each collection boy, dealer lists, and a copy of the Direct Dealer Agreement with Dish TV
- He requested a 10-day extension to obtain dealer confirmations, but the Assessing Officer closed the filing tab without granting time
- The assessee had discontinued the business with Dish TV on 01.06.2018, making post-facto verification difficult
- The dealers, being small shopkeepers, did not maintain records and refused to sign affidavits or provide statements
Procedural History
- 01.04.2017 to 31.03.2018: Financial Year 2017-18 - business operations and cash collections
- 01.06.2018: Assessee discontinued business with Dish TV
- 20.03.2023: Assessment order passed under Section 147 read with Sections 144 and 144B, making additions of Rs. 3,14,57,195 (unexplained cash deposits) and Rs. 11,69,590 (unexplained cash deposits) under Section 69A, and Rs. 4,27,385 (commission income)
- 17.12.2024: CIT(A) set aside the assessment order under Section 251(1)(a), holding that the AO had not conducted adequate inquiry despite the assessee’s submissions
- 20.02.2026: Hearing before ITAT Nagpur
- 23.04.2026: Judgment pronounced
The Parties' Positions
For the Revenue (ITO): The CIT(A) erred in setting aside the assessment because the assessee had actively participated, submitted documents, and the AO had considered all responses. Remand under Section 251(1)(a) is only permissible when the assessee fails to respond or cooperate. The AO’s order was not perfunctory; it was based on available evidence.
For the Assessee: The AO failed to verify the nature and source of cash deposits, ignored the business model, and closed the proceedings prematurely despite a request for adjournment. The CIT(A) rightly exercised discretion under Section 251(1)(a) to ensure a fair and complete inquiry.
Relief Sought
The Revenue sought to set aside the CIT(A)’s order and uphold the assessment. The assessee sought confirmation of the CIT(A)’s order and dismissal of the Revenue’s appeal.
The Legal Issue
The central question was whether the Commissioner of Income Tax (Appeals) may set aside an assessment order under Section 251(1)(a) of the Income Tax Act, 1961, when the assessee has submitted responses during assessment proceedings, but the Assessing Officer has failed to conduct a proper and adequate inquiry into the source of income.
Arguments Presented
For the Appellant/Revenue
The Revenue contended that Section 251(1)(a) permits remand only in cases where the assessee has failed to respond to notices or has not cooperated in the assessment process. It argued that the Assessing Officer had considered all submissions, including bank statements, dealer lists, and the Direct Dealer Agreement. The CIT(A) misapplied discretion by treating a routine reassessment as inadequate, thereby abdicating appellate responsibility. The Revenue cited judicial precedents emphasizing that remand powers must be exercised sparingly and not for re-verification.
For the Respondent/Assessee
The assessee argued that Section 251(1)(a) confers wide discretionary powers on the CIT(A) to ensure a fair and complete ascertainment of income. The mere filing of replies does not equate to a proper inquiry. The AO failed to examine the business model, verify the chain of cash collection, or assess the plausibility of the explanation. The assessee had requested additional time to obtain dealer confirmations, which was denied. The CIT(A) acted in accordance with principles of natural justice by directing a fresh inquiry.
The Court's Analysis
The Tribunal examined the scope of Section 251(1)(a) and held that the power to set aside an assessment is not contingent upon the assessee’s non-cooperation. The provision empowers the CIT(A) to pass any order deemed appropriate, including remanding for fresh adjudication, if the original assessment is found to be based on inadequate inquiry or lack of application of mind.
"Mere filing of submissions does not ipso facto establish that the Ld. AO had conducted proper and adequate inquiry."
The Tribunal noted that the assessment order contained no detailed analysis of the cash deposit pattern, no verification of the dealer network, and no examination of the remittance records to Dish TV. The AO’s conclusion that the deposits were unexplained was reached without probing the business model, despite the assessee’s detailed explanation and documentary support.
The Tribunal rejected the Revenue’s argument that remand is permissible only when the assessee is non-responsive. It held that the legislative intent behind Section 251(1)(a) is to ensure justice and fairness, not merely procedural compliance. The CIT(A)’s decision to restore the matter to the AO was not an abdication of duty but a necessary step to ensure the income was correctly ascertained.
The Tribunal further emphasized that the AO’s premature closure of the filing tab, despite a request for time to obtain dealer confirmations, amounted to a violation of natural justice. The CIT(A) was therefore justified in invoking its discretionary powers to correct this procedural lapse.
The Verdict
The Revenue’s appeal was dismissed. The ITAT upheld the CIT(A)’s order dated 17.12.2024, which set aside the assessment order dated 20.03.2023 and directed the Assessing Officer to conduct a fresh inquiry. The cross objection filed by the assessee was dismissed as infructuous. The Tribunal directed the AO to afford the assessee a reasonable opportunity to produce further evidence, including any pending information from Dish TV, and to re-examine the source and nature of the cash deposits with due application of mind.
What This Means For Similar Cases
Inadequate Inquiry Justifies Remand Even With Responses
- Practitioners must now argue that Section 251(1)(a) is not limited to cases of non-cooperation; failure to verify plausibility of explanations constitutes inadequate inquiry
- If the AO accepts submissions at face value without independent verification, the CIT(A) has authority to remand
- Taxpayers should document all requests for adjournment or additional time - denial of such requests strengthens the case for remand
Natural Justice Trumps Procedural Formalities
- The Tribunal reaffirmed that natural justice is integral to income tax proceedings
- Closing the filing tab without granting time for critical evidence violates the right to be heard
- Assessing Officers must actively probe explanations, especially in cash-intensive businesses
- The burden of proof under Section 69A is not discharged by mere assertion; the AO must examine the plausibility of the source
CIT(A) Has Broad Discretion to Ensure Correct Assessment
- The CIT(A) is not a mere appellate body but a corrective mechanism to prevent erroneous assessments
- Remand is not an admission of weakness but a procedural safeguard
- Practitioners should cite this judgment when challenging assessments where the AO has not engaged with the substance of the taxpayer’s explanation
- This decision supports the principle that tax administration must be fair, not merely efficient
