Delhi High Court Sets Aside ₹16.74 Crore Tax Disallowance Enhancement Against Sahara India Over Lack of Notice

The Delhi High Court has held that the Commissioner of Income Tax (Appeals) cannot enhance a tax disallowance without first issuing a statutory notice to the assessee, observing that failure to do so violates both Section 251(2) of the Income Tax Act, 1961 and the principles of natural justice.

The division bench of Justices Dinesh Mehta and Rajneesh Kumar Gupta thus set aside the enhancement of a disallowance from ₹11.05 crore to ₹16.74 crore made against Sahara India Commercial Corporation Ltd..

The Court found that the mandatory requirement of issuing a notice before enhancement had not been complied with.

“It is obligatory on the part of the appellate authority to issue a notice and provide an opportunity of hearing to show cause against proposed enhancement or addition to the assessee,” it s

The appeal arose from an ITAT order affirming the enhancement made by the CIT(A).

Sahara India argued that although it had specifically contended before the Tribunal that the enhancement was made without issuing the mandatory notice under Section 251 of the Act, the Tribunal neither dealt with the submission nor examined its legal effect before affirming the addition.

Revenue on the other hand submitted that the appellate authority had thoroughly examined the ledger accounts and the company had participated in the proceedings before the CIT(A). It argued that the requirement of granting an opportunity had been substantially complied with even if evidence of service of a formal notice was unavailable.

At the outset, the High Court referred to Section 251(2) of the Income Tax Act and observed that the provision unequivocally requires the appellate authority to issue a notice and provide the assessee a reasonable opportunity to show cause before enhancing an assessment, penalty or reducing a refund.

The Court held that there was no material to indicate that any such notice had been issued before enhancing the disallowance by more than ₹5 crore.

The Court further clarified that merely discussing the merits of the proposed disallowance during the proceedings cannot substitute the statutory requirement of issuing a notice.

"Issuance of notice means the intention to take an action in explicit terms. Unless an assessee is put to notice about the proposed action, he cannot be expected to defend his cause. In the absence of such a notice having been served upon the assessee, not only his statutory rights but also fundamental rights guaranteed under Article 14 of the Constitution have been violated," it held.

As such, the Court partly allowed the appeal and set aside the orders of the CIT(A) and the ITAT to the extent they upheld the enhancement and remanded the matter to the CIT(A) for fresh consideration after issuing notice to the assessee.

For Appellant: Senior Advocate Ajay Vohra with Advocates Saksham Singhal and Ramkrishna Rao.

For Respondent: Senior Standing Counsel Ruchir Bhatia with Junior Standing Counsels Anant Mann and P. Gupta.