IT Appellate Authority Must Pass Speaking Order, Hear AO Before Admitting Fresh Evidence: J&K&L High Court

The Jammu and Kashmir and Ladakh High Court has recently held that an appellate authority under the Income Tax law cannot allow a taxpayer to file fresh evidence at the appeal stage without first passing a reasoned order and giving the tax officer a fair chance to respond.

A bench of Justice Sanjeev Kumar and Justice Sanjay Parihar said, “We are also of the clear view that the opportunity to lead additional evidence at the appellate stage could not be granted by the First Appellate Authority under the Act without passing a speaking order indicating clearly that the conditions laid down in Clause 1 of Rule 46A are met."

The court added that the requirement of hearing the Assessing Officer is not optional. It observed, “The requirements of Rule 4A (3) are mandatory and not directory. Granting opportunity to Assessing Authority to examine the additional evidence and to lead evidence in rebuttal is not only the mandatory requirement of Rule 46A but is also the demand of Audi Alteram Partem rule of natural justice. ”

The case arose from a tax assessment of Kamraz Rural Bank for the financial year 2006 to 2007. The bank had declared an income of about 5.19 crore. During scrutiny, the Assessing Officer found that it had paid nearly 7.96 crore as interest on term deposits without deducting tax at source, which is required when such payments cross a prescribed threshold. As the bank could not furnish details of payments exceeding that threshold, the officer added the entire amount to its taxable income.

In appeal, it appears that the bank produced fresh documents to show that tax was actually required only on interest of about 24.18 lakh. The appellate authority accepted these documents and sharply reduced the addition without giving the Assessing Officer an opportunity to examine or rebut the material.

The Revenue argued that this violated the prescribed procedure and also disputed the Tribunal's observation that a remand report had been sought, maintaining that no such step was ever taken.

The High Court agreed with the Revenue. It found that the appellate authority had neither recorded reasons for admitting additional evidence nor given the Assessing Officer a chance to respond. It noted that no material on record showed that any remand report had in fact been called for.

Holding that admitting fresh evidence without following these safeguards vitiates the order, the court set aside the decisions of both the appellate authority and the tribunal. The matter has been sent back for fresh consideration, with directions that a proper speaking order be passed first and that the Assessing Officer be given a full opportunity to examine and rebut any additional material before it is relied upon.

For Appellant:  Advocate Umar Rashid Wani

For Respondent:  Advocate Saima Mehboob