Assessment Completed Without Video-Conference or Final Reply Violates Natural Justice, Requiring Remand for Fresh Adjudication

By | May 29, 2026
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Assessment Completed Without Video-Conference or Final Reply Violates Natural Justice, Requiring Remand for Fresh Adjudication

Issue

Whether the additions and disallowances made by the Assessing Officer under Sections 41(1) and 14A can be sustained when the assessment and appellate orders were passed in violation of the principles of natural justice without granting a requested video-conferencing hearing, waiting for the final reply, or obtaining a called-for remand report on additional evidence.

Facts

  • The assessee, a registered Non-Banking Financial Company (NBFC) providing financial services, filed its return and subsequent revised return for the Assessment Year 2019-20.

  • During the statutory assessment proceedings, the Assessing Officer (AO) issued a detailed questionnaire under Section 142(1) addressing multiple financial issues.

  • The assessee furnished partial details, formally notified the AO that the remaining information was being compiled, and explicitly requested an opportunity of hearing through video conferencing.

  • Without waiting for the final response or granting the requested video-conferencing session, the AO concluded the assessment under Section 143(3) read with Section 144B.

  • The AO made various additions and disallowances, specifically including a disallowance under Section 14A, a disallowance of sales promotion and club expenses, and an addition under Section 41(1) for remission or cessation of trading liability.

  • During the subsequent appellate proceedings, the assessee submitted additional evidence under Rule 46A to support its claims.

  • The Commissioner (Appeals) called for a remand report from the AO regarding this new evidence but ultimately disposed of the appeal without obtaining the report and without affording a final opportunity of hearing to the assessee.

Decision

  • Held, that the action of the Assessing Officer in passing the assessment order without waiting for the assessee’s final submission and denying the video-conference hearing amounts to a clear violation of the principles of natural justice.

  • Held, that the Commissioner (Appeals) further erred by deciding the matter prematurely without waiting for the statutory remand report that had been formally requested from the AO.

  • Held, that under Rule 29 of the ITAT Rules, 1963, the additional evidence submitted by the assessee is fit to be admitted to ensure a fair trial and proper determination of the case.

  • Held, that the entire matter must be restored and remanded back to the file of the Assessing Officer for fresh adjudication on all issues.

  • Held, that the AO is directed to pass a fresh order only after granting a comprehensive and adequate opportunity of being heard to the assessee.

Key Takeaways

  • Absolute Right to Visual Hearing: Under the faceless assessment regime (Section 144B), when an assessee explicitly requests a hearing via video conferencing to explain their compiled data, denying it violates the core tenets of natural justice.

  • Premature Appellate Disposal: An appellate authority cannot bypass its own procedural directives; disposing of an appeal without obtaining a called-for remand report on Rule 46A evidence invalidates the appellate conclusion.

  • Admission of Evidence under Rule 29: Where lower authorities fail to provide sufficient opportunity to present a complete case, the ITAT will exercise its power under Rule 29 to admit crucial additional documents to prevent a miscarriage of justice.

  • Remand as the Remedial Path: In cases where procedural fairness is compromised, the appropriate legal remedy is to reset the proceedings back to the assessment stage rather than deciding on the merits of the additions.

IN THE ITAT MUMBAI BENCH ‘F’
Mahindra and Mahindra Financial Services Ltd.
v.
Deputy Commissioner Income-tax*
Sandeep Gosain, Judicial Member
and BIJAYANANDA PRUSETH, Accountant Member
IT Appeal No. 5547 (MUM) of 2025
[Assessment year 2019-20]
APRIL  8, 2026
Kalpesh Unadkat for the Appellant. Ms. Kavitha Kaushik, SR DR for the Respondent.
ORDER
Bijyananda Pruseth, Accountant Member.- This appeal filed by the assessee emanates from the order passed under section 250 of the Income-tax Act, 1961 (in short, ‘Act’) by the learned Commissioner of Income-Tax, National Faceless Appeal Centre [in short, ‘CIT(A)’], Delhi, dated 16.07.2025 for the assessment year (AY) 2019-20.
2. The grounds of appeal raised by the assessee in ITA No.5546/Mum/2025 are as under:
“Assessment order passed without providing opportunity of hearing
“1 On the facts and the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the assessment order passed under section 143(3) read with section 1448 of the Act is passed without providing opportunity of hearing inasmuch as the Ld. AO did not issue a show cause notice with draft assessment order.
CIT(A) order passed in violation of principle of nature justice
2. On the facts and the circumstances of the case and in law, the CIT(A) order is passed in violation of principle of nature justice, ie. the Ld. CIT(A) did not provide an opportunity of being heard (including video conferencing), before passing the order.
Adhoc disallowance of Sales promotion expenses – Rs.94,83,750/-
3. On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the ad-hoc disallowance of 20% of the Sales promotion expenses i.e. Rs.94,83,750 made by the Ld. AO.
4. On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred by determining that the sales promotion expenses lack sufficient nexus to business results thereby erred in upholding the disallowance of sales promotion expenses of Rs.94,83,750 made by the Ld. AO.
5. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in not admitting the application for additional evidence pertaining to sales promotion expenses, filed before the Ld. CIT(A), without considering the fact that no show cause notice proposing to make the addition of sales promotion expenses was issued to the Appellant.
Disallowance under section 14A of the Act-Rs.6,92,24,000.
6. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance under section 14A of the Act, even though the Ld. AO failed to record a satisfaction as to why suo moto disallowance made by the Appellant as per Rule 80(2)(ii) was not acceptable.
7. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance at Rs. 11,00,96,382 under section 14A read with Rule 8D(2)(ii) of the Act, rejecting the contentions of the Appellant and the evidence adduced by the Appellant in this regard.
8. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in not restricting the disallowance under section 14A to the suo moto disallowed amount of Rs.4,08,72,383
9. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred by not restricting the applicability of Rule 8D(2)(ii) to only those investments yielding exempt income during the year.
10. On the facts and the circumstances of the case and in law, no disallowance under section 14A read with Rule 8D(2)(ii), can be made in respect of investments in growth units of mutual funds (which does not yield exempt dividend income) and in investment of foreign company, since the income from such investments are not exempt from tax.
11. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred by not accepting the judicial precedents relied upon by the Appellant only because the same were not placed on record during the assessment proceedings.
Disallowance of Club expenses – Rs.25,26,891
12. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of club expenses amounting to Rs.25,26,891 under section 37 of the Act, made by the Ld. AO.
13. On the facts and the circumstances of the case and in law, the Ld. CIT(A) erred in not admitting application for the additional evidence pertaining to club expenses, filed before the Ld. CIT(A), without considering the fact that no show cause notice proposing to make the addition of club expenses was issued to the Appellant.
Claim of deduction under section 80JJAA of the Act-Rs.10,19,85,582
14. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not granting the additional claim for deduction under section 80JJAA of the Act amounting to Rs.10,19,85,582.”
3. Fact of the case, in brief, are that the assessee is a registered NBFC and is engaged in providing financial services. It filed the return of income for AY 2019-20 on 29.11.2019 declaring total income at Rs.1595,64,44,780/- after claiming deduction of Rs.15,14,85,155/- under Chapter VIA of the Act. Subsequently, a revised return of income was filed on 11.08.2020 admitting total income of Rs.15,74,48,210/-. The case was selected for “complete scrutiny” under the Eassessment Scheme, 2019. After hearing the assessee, the AO added the difference of Rs.21,16,10,571/- between original and revised ROI because assessee did not explain or furnish any documents in support of the increased deduction. He also added Rs.88,82,80,954/- u/s 41(1) of the Act and disallowed Rs.94,83,750/- out of sales promotion expenses because assessee could not furnish complete details and supporting evidences. He also disallowed Rs.28,54,18,000/- u/s 14A of the Act. He further disallowed expenditure by way of penalty of Rs.20,00,788/- and club expenses of Rs.25,26,891/-. Lastly, he upheld the adjustment of Rs.3,07,01,090/- made u/s 143(1)(a) by the CPC. As a result, the total income was assessed at Rs.1717,48,56,254/- as against returned income of Rs.15,74,48,34,210/-.
4. Aggrieved by the order of AO, assessee preferred appeal before the CIT(A). In the meanwhile, the assessee had also filed an application for rectification u/s 154 of the Act. The AO passed an order u/s 154 of the Act and modified certain additions. The assessee has pursued the remaining additions before the CIT(A). The assessee also filed additional evidence during the appellate proceedings which had not been submitted before the AO and requested the CIT(A) to admit the same under Rule 46A of the Income-tax Rules, 1962. The CIT(A) did not admit the additional evidence on the ground that mere claim of inadequate opportunity without any evidence is not enough to admit additional evidence. However, he called for a remand report from the AO which was not submitted by him even after 22 months. Therefore, he proceeded to decide the appeal on the basis of materials available on record. The appellant has raised 15 grounds including grounds on validity of the assessment order and violation of principles of natural justice. The assessee had not pressed the ground on disallowance of penalty. The CIT(A) dismissed the grounds related to (i) validity of the order u/s 143(3) r.w.s. 144, (ii) disallowance of education cess, (iii) disallowance of sales promotion expenses, (iv) club expenses, (v) deduction u/s 36(1)(viia), (vi) deduction u/s 80JJAA, (vii) initiation of penalty u/s 271(1)(b) and 270A of the Act. The CIT(A) had partly allowed the ground on disallowance u/s 14A, short grant of TDS and interest u/s 244A and 234D of the Act.
5. Aggrieved by the order of CIT(A), the assessee have filed appeal before the Tribunal. The appellant has raised grounds regarding inadequate opportunity of hearing and violation of principles of natural justice. It has also raised grounds on ad hoc disallowance of sales promotion expenses, disallowance u/s 14A, disallowances of the club expenses and claim of deduction u/s 80JJAA of the Act. The appellant has also made an application for admission of additional evidence in respect of the sales promotion expenses and additional claim of deduction u/s 80JJAA. The appellant has also filed a paper book containing 12 items including the submissions and documents filed before the lower authorities at serial No.1 to 7 and additional evidence relating to section 80JJAA of the Act from serial No.8 to 12.
6. We shall first take up the request for admission of additional evidence in respect of deduction u/s 80JJAA of the Act. The Ld. AR submitted that during the course of appellate proceedings, the CIT(A) had issued a hearing notice dated 14.11.2022, in response to which appellant filed partial submission on 29.12.2022 and 07.09.2023. The appellant had also made a request for admission of additional evidence to the CIT(A). The appellant was issued a notice dated 19.11.2024 by the AO for the remand hearing in respect of the additional evidence. In response thereto, the appellant uploaded audit report u/s 80JJAA of the Act in Form No.10DA on the income tax portal on 02.12.2024. The appellant was in the process of preparing and compiling detailed submission with all factual documents to the AO. The CIT(A), however, without issuing any intimation about closer of the remand proceedings and the proceedings for final adjudication based on partial submission on record, disposed of the appeal vide order u/s 250 of the Act dated 16.07.2025. The Ld. AR submitted that the AO has not submitted the remand report but the CIT(A) has passed the order without remand report or final hearing on various issues. This is evident from the appellate order at page 2 and 3. He requested that the additional evidence may be admitted in the interest of justice and substantial cause.
7. On the other hand, the Ld. Sr. DR of the revenue has supported the order of the CIT(A).
8. We have both parties and perused the materials on record. It is evident from record that the appellant had filed part details to the AO on the remanded issues and the additional evidence. The appellant was in the process of filing complete details to the AO, which could not be filed because the CIT(A) passed the order without obtaining the remand report from the AO and without allowing the assessee opportunity of final hearing. We find that the additional evidence sought to be filed is relevant and crucial for proper adjudication of the issues involved in this appeal. After considering the entirety of the facts, we find that there was clear violation of the principles of natural justice. Rule 29 of the ITAT Rules, 1963 permits ITAT to admit additional evidence for any substantial cause. The intention behind the rule is that substantial justice should be done and the interest of justice should be the overriding consideration. The additional evidence filed by the appellant could not be filed before the lower authorities due to the facts discussed above. It was neither intentional nor deliberate and was due to circumstances beyond control of the appellant. Hence, in the interest of substantial justice, the additional evidence is admitted.
9. Ground No.1 and 2 pertains to the assessment order being passed without providing opportunity of being heard to the assessee. The appellant has also raised ground that the CIT(A) passed the order u/s 250 of the Act in violation of the principles of natural justice. The Ld. AR submitted that the AO passed the assessment order u/s 143(3) on 30.09.2021 without show cause notice with draft assessment order. This is clear from the assessment order where there is no mention about the show cause notice. Only one notice u/s 142(1) dated 22.07.2021 was issued to the assessee fixing the hearing on 06.08.2021. The questionnaire was lengthy and exhaustive covering 18 issues. The assessee had filed part details on 27.09.2021 and was in the process of filing complete details. However, without waiting for the final reply of the assessee, the AO passed the assessment order on 31.09.2021. Regarding violation of the principles of natural justice, the Ld. AR submitted that the CIT(A) did not wait for the remand report and passed the order without issuing any final show cause notice regarding the adverse findings.
10. On the other hand, the Ld. CIT-DR supported the orders of lower authorities and submitted that adequate opportunity of being heard was provided to the assessee by both AO and CIT(A).
11. We have both parties and perused the details submitted by the appellant. The AO issued notice u/s 143(2) on 31.03.2021. Subsequently, he issued notice u/s 142(1) on 22.07.2021 fixing the hearing on 06.08.2021. It is seen from the said notice that the AO had asked for various details vide 18 questions, which are at pages 18 to 23 of the paper book. The questionnaire is exhaustive and lengthy covering multiple issues. The assessee filed reply on 27.09.2021, wherein part details were furnished and the assessee informed that it was in the process of compiling the balance information, which would be filed at the earliest. The assessee also requested to provide opportunity of being heard (video conferencing) before drawing any adverse inference (page Nos. 24 to 31 of PB). However, the AO passed order u/s 143(3) r.w.s 144B immediately thereafter on 30.09.2021, without waiting for the final reply of the assessee or without providing opportunity of being heard through video conferencing. Therefore, it is clear from record that the assessment order was passed without providing adequate and reasonable opportunity of being heard to the assessee.
11.1 Regarding violation of the principle of natural justice by the CIT(A), we find that the appellant had filed written submissions to the CIT(A) on 29.12.2022 and 07.09.2023, which are at pages 32 to 50 of the paper book. The appellant had filed details before CIT(A), which were forwarded to the AO and a remand report was called from the AO. Following the direction of CIT(A), the AO had issued a notice dated 13.11.2024 to the assessee in relation to the additional evidence filed before the CIT(A). While the proceedings were going on before the AO and the remand report was yet to be submitted by AO, the CIT(A) disposed of the appeal without issuing any notice to the assessee and calling for its comment about the closer of remand proceedings and the adverse findings. The CIT(A) has passed the appellate order without obtaining the remand report or the reply of the assessee on the subject issues and the additional evidence. It is evident from the facts on record that there was clear violation of the principles of natural justice. The principles of natural justice are fundamental in Income-tax proceedings requiring the Income-tax authorities to act without bias and provide notice of charges and allow a fair hearing before passing the order. The core principles in Income-tax proceedings include audi alteram partem, which means no persons should be condemned unheard. This requires that the assessee is given a reasonable opportunity to present its case, submit necessary evidence and respond to the adverse findings. The assessee should be given the right to rebut the findings and evidence collected by the Income-tax authorities. In the instant appeal, such basic requirements were not fulfilled. Therefore, in the interest of justice, the order of CIT(A) is set aside and the matter is restored to the file of AO because he did not have the benefit of examining these documents. The AO is, accordingly, directed to pass a fresh order covering all the issues including sales promotion expenditure, disallowance u/s 14A, club expenses and deduction u/s 80JJAA of the Act after granting adequate and reasonable opportunity of being heard to the assessee. The AO shall consider the additional evidence and he may call for further details and evidences as deemed fit to arrive at a proper and logical conclusion in accordance with law. The assessee is also directed to be vigilant and furnish all the details and evidences by not seeking adjournment without valid reasons. The grounds are allowed for statistical purpose.
12. We make it clear that we have not expressed any opinion on the subject issue and the AO shall decide the matter independently in accordance with law.
13. In the result, the appeal of the assessee is statistical purpose.