Unnotified enhancement of disallowance by CIT(A) without express statutory notice is legally invalid and remanded
UnnotifiedUnnotified enhancement of disallowance by CIT(A) without express statutory notice is legally invalid and remanded
Issue
Whether the Commissioner (Appeals) can enhance a disallowance under Section 251 of the Income-tax Act, 1961 without issuing an express notice communicating the intention to enhance and affording the assessee an opportunity of being heard.
Facts
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Original Disallowance: For Assessment Year 2014–15, the Assessing Officer passed an assessment order under Section 143(3) making a disallowance of approximately Rs. 11.05 crores concerning advances at the assessee’s Mumbai and Lucknow branches.
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Enhancement by CIT(A): In the assessee’s appeal, the CIT(A) increased and enhanced the disallowance to approximately Rs. 16.75 crores regarding the advances at the Mumbai and Lucknow branches.
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Affirmation by Tribunal: The ITAT affirmed the order of the CIT(A) enhancing the disallowance.
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Procedural Flaw: The CIT(A) made the enhancement without issuing a formal statutory notice to the assessee explicitly conveying the proposal or intention to enhance the disallowance.
Decision
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Statutory Obligation: Section 251 explicitly makes it mandatory for the CIT(A) to issue a show-cause notice and provide a reasonable opportunity of hearing to the assessee before enhancing an assessment or disallowance.
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Merits Discussion Insufficient: General discussions on the merits of a disallowance or the mere scrutiny of ledger accounts during appellate hearings do not fulfill the legal requirement of a formal enhancement notice.
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Notice Requirements: A valid enhancement notice requires the appellate authority to expressly communicate its specific intention to make an enhancement, allowing the assessee to adequately defend its position.
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Restoration of Matter: Since the enhancement was made without issuing the mandatory notice, the order of the CIT(A) enhancing the disallowance was set aside, and the matter was restored for fresh adjudication after issuing proper statutory notice to the assessee.
Key Takeaways
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Mandatory Enhancement Notice: The power of enhancement under Section 251 cannot be exercised arbitrarily; issuing an explicit show-cause notice outlining the proposed enhancement is a non-negotiable statutory requirement.
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Violation of Natural Justice: Enhancing a tax assessment without puting the assessee on notice deprives them of a fair opportunity to defend, rendering the enhancement order legally unsustainable.
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Remand over Total Annulment: Procedural omissions in issuing an enhancement notice generally lead to the setting aside of the enhancement and remanding the case back to the CIT(A) to redo the proceedings after serving due notice.
HIGH COURT OF DELHI
Sahara India Commercial Corporation Ltd.
v.
Assistant Commissioner of Income-tax
Dinesh Mehta and Rajneesh Kumar Gupta, JJ.
IT Appeal No. 551 of 2026
JULY 23, 2026
Ajay Vohra, Sr. Adv., Saksham Singhal and Ramkrishna Rao, Advs. for the Appellant. Ruchir Bhatia, SSC, Anant Mann and P. Gupta, JSCs for the Respondent.
ORDER
1. The following substantial questions of law arise for consideration:
| (i) | Whether in the facts and circumstances of the case, the Tribunal was legally justified in confining the allowance of advertisement expenses incurred by the appellant proportionate to the appellant’s revenue to the total revenue of the Sahara Group on the reasoning that some indirect benefit may have accrued to other group entities of the appellant? |
2. Mr. Ajay Vohra, learned Senior Counsel for the appellant submitted that apart from the above question, one more question arises for consideration before this Court in this regard, learned Senior Counsel for the appellant, invited the Court’s attention towards paragraph 64 of the Tribunal’s order and submitted that the Tribunal has affirmed the addition made by the Commissioner of Income Tax (Appeals) [‘hereinafter referred to as CIT(A)’] to the tune of Rs. 16,74,78,648/- in relation to advances given at Mumbai Branch and Lucknow Branch, which was disallowed by the CIT(A) in the appeal filed by the appellant/assessee.
3. Learned Senior Counsel for the appellant, highlighted that, in spite of the fact that arguments were advanced and written submissions were made that such disallowance had been made by the CIT(A) without issuing any notice, which is a statutory requirement under Section 251 of the Income Tax Act, 1961, (‘hereinafter referred to as the Act’), the Tribunal has neither recorded such submissions nor dilated upon the same and has affirmed such addition in cursory manner. He further read the order of the CIT(A) and pointed out that no notice had been issued by the appellate authority showing any intention to enhance the disallowance.
4. Mr. Anant Mann, learned Standing Counsel for the respondent, is not in a position to satisfy the Court that any notice, before enhancing the disallowance, was issued to the assessee. He, however, submitted that the appellate authority had thoroughly examined the ledger accounts and record and, therefore, the requirement of providing an opportunity of hearing had been duly observed. He argued that since the appellant’s representative had appeared before the CIT(A), the requirement of issuance of notice had, in substance, been complied with and simply because evidence of service of notice is not available on record, no interference can be made.
5. Having heard learned Counsel for the parties, we are of the view that the following substantial question of law arises for our consideration:
| (i) | Whether in absence of a notice being issued to the assessee before enhancing the disallowance from Rs.11,05,12,445/- to Rs.16,74,78,649/-, can CIT(A) enhance the disallowance made? |
6. Before proceeding with the matter, it will not be out of place to reproduce sub-Section 2 of Section 251 of the Act.
“(2) The 1 [*** Commissioner (Appeals)] shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has hada reasonable opportunity of showing cause against such enhancement or reduction. Explanation.—In disposing ofan appeal, the 1 [*** Commissioner (Appeals)] may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the 1 [*** Commissioner (Appeals)] by the appellant.”
7. A simple look at the above-quoted provision leaves no manner of doubt that 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. Indisputably, the disallowances have been made/enhanced by more than a sum of Rs. 5,00,00,000/- and no notice in this regard appears to have been issued to the assessee.
8. Mere discussion on the merit of the disallowance or detailed directions in this regard for scrutiny of the ledger of the assessee does not conform to the requirement of issuance of notice and providing an opportunity. 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.
9. The question referred above is thus answered in favour of the assessee.
We have proceeded to answer this question at this stage because the decision of the question we have already framed may take substantial time. That apart, the above question which we have framed is involved in other appeals of the assessee which we have admitted and are pending consideration, and if we allow this question, the matter has to be remanded to the CIT(A), which itself may take time and the assessee or the Department may like to prefer an appeal thereagainst which would lie before the Tribunal. Such being a position, we are persuaded to decide the appeal in piecemeal.
10. The appeal is, therefore, partly allowed qua the aforesaid question. The order passed by the CIT(A) dated 31.01.2018 so also the order of the Tribunal dated 23.12.2025 to this extent are set aside. The matter is restored back to the CIT(A) to decide the above issue afresh in accordance with law, after issuing notice to the appellant/assessee.
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