Victory for Natural Justice: How We Successfully Challenged an ₹8 Crore Tax Addition
Victory for Natural Justice: How We Successfully Challenged an ₹8 Crore Tax Addition
In a landmark decision, the National Faceless Appeal Centre (NFAC) recently ruled in Favor of our client, setting aside a massive addition of ₹8,00,00,000 made under Section 69B of the Income Tax Act. This case serves as a critical reminder of the importance of procedural fairness and the limitations of limited Scrutiny assessments.
The Background: A Transaction Between Brothers
The case originated from a Limited Scrutiny assessment for the Assessment Year 2018-19. Our client, an individual taxpayer, had sold unquoted equity shares to his real brother, resulting in a substantial Long-Term Capital Gain (LTCG). While the taxpayer had transparently declared these gains and claimed legitimate deductions under Sections 54EC and 54F, the Assessing Officer (AO) raised questions regarding a specific payment of ₹8 Crore made to the brother.
The Core Conflict: Procedural Lapses and Technical Hurdles
During the assessment, several critical issues arose that threatened the taxpayer’s position:
- The Limited Scrutiny Boundary: The case was originally selected only to verify refund claims and specific capital gains deductions. However, the AO exceeded this jurisdiction by investigating the ₹8 Crore payment without obtaining the mandatory prior approval from the Pr. CIT/CIT to convert the case into a Complete Scrutiny.
- The Communication Gap: A pivotal Show Cause Notice (SCN) was issued on June 4, 2021, A period during which the Income Tax Department’s e-filing portal was officially non-operational due to system migration.
- Violation of Natural Justice: Despite the portal issues and a statewide lockdown in Maharashtra, the AO passed a hasty assessment order on June 24, 2021, without providing the taxpayer a fair opportunity to explain the transaction.
Our Strategy: Proving the Source and the Law
Under the guidance of Shri Sachin P. Kumar, our legal team built a robust defence focused on two fronts:
- Evidentiary Proof: We demonstrated that the ₹8 Crore was not an unexplained investment but was paid directly out of the sale proceeds of the shares, which the AO had already verified and accepted. The transaction was conducted entirely through banking channels and confirmed by the brother.
- Legal Precedence: We argued that the AO had trespassed his jurisdiction in a limited scrutiny case. By citing CBDT Instruction No. 20/2015, we highlighted that an AO cannot stray into unrelated issues without formal approval.
The Ruling: Justice Delivered
The NFAC upheld our arguments, noting that the payment was clearly a redistribution of verified capital receipts and not an unexplained investment. The Appellate Authority agreed that the AO’s addition was unsustainable under law and directed its complete deletion.
Key Takeaways for Taxpayers
- Limited Scrutiny is Not Infinite: Tax authorities must stay within the scope of the reasons for which a case was selected unless they follow proper legal procedures to expand it.
- Banking Channels are Vital: Maintaining clear, transparent records of fund transfers through banking channels is your strongest defence against unexplained investment allegations.
- Natural Justice is a Right: If you are denied a fair hearing due to technical or external constraints (like portal downtime), you have strong grounds for appeal.
At Sachin P. Kumar & Associates, we specialize in navigating complex faceless assessments and protecting taxpayers’ rights against procedural overreach.
Is your case under scrutiny? Contact us today for a consultation.