Bombay High Court Quashes Income Tax Assessment Order, Citing Breach of Natural Justice

Assessment against KMG Wires Pvt Ltd Remanded for Fresh Evaluation Due to Procedural Oversights and Non-Consideration of Evidence

In a significant ruling, the Bombay High Court has quashed an income tax assessment order against KMG Wires Private Limited, finding it was issued in breach of the principles of natural justice. The court noted that crucial evidence provided by the company's supplier, Dhanlaxmi Metal Industries, was ignored, and non-existent judicial decisions were relied upon during the assessment process.

The case revolves around the National Faceless Assessment Centre's order, which increased the assessed income of KMG Wires from Rs. 3.09 Crores to Rs. 27.91 Crores for the assessment year 2023-24. The order faced scrutiny for disallowing purchases worth Rs. 2,15,89,932 based on the erroneous assumption that the supplier did not respond to a notice, despite evidence to the contrary. 

Additionally, an addition of Rs. 22,66,06,740 was made to the company's income concerning unsecured loans from directors. The court found that this addition was made without a proper show cause notice or a clear basis for the calculations, further compounded by reliance on judicial decisions that did not exist.

Highlighting the procedural lapses, the bench consisting of Justices B.P. Colabawalla and Amit S. Jamsandekar emphasized the necessity of cross-verifying information, especially in an era where artificial intelligence is increasingly used in quasi-judicial functions. The court underscored that decisions relied upon in any assessment must be valid and communicated to the concerned parties for rebuttal.

The High Court remanded the matter back to the Assessing Officer, directing that a fresh assessment be conducted. It mandated that a new show cause notice be issued, with sufficient opportunity for KMG Wires to respond, and insisted on a transparent process that includes a personal hearing. The court ordered that the revised assessment must be completed by December 31, 2025, ensuring that all due procedures are followed.

The petitioner, represented by Mr. Dharan V. Gandhi, had argued that the assessment order was passed without regard to natural justice principles, pointing to the oversight of crucial documents submitted by the supplier. The court’s decision to quash the order highlights the judicial system's commitment to ensuring fair and just tax assessments.

The ruling serves as a reminder to authorities about the importance of procedural fairness in tax assessments, especially when leveraging technology and AI in decision-making processes. The court's directive aims to prevent such oversights and ensure that all parties involved have a fair opportunity to present their case.

Bottom Line:

Income Tax - Assessment Order passed in breach of principles of natural justice - Addition made to purchases and peak balance without considering supplier's reply and relying on non-existent judicial decisions - Matter remanded back for fresh assessment.

Statutory provision(s): Article 226 of the Constitution of India, Income Tax Act, 1961 Sections 143(3), 144B, 133(6), 156, 271AAC, 274

KMG Wires Private Limited v. National Faceless Assessment Centre, Delhi, (Bombay)(DB) : Law Finder Doc Id # 2798600