Sea Castle An Ayurvedic And Leisure Hotel Vs ITO (Kerala High Court)
The Kerala High Court admitted and ruled upon a question of law challenging the sustainability of appellate orders that dismissed a statutory appeal without acknowledging a lack of natural justice in the original assessment order. The case involved Sea Castle An Ayurvedic and Leisure Hotel, which had its income tax returns for the assessment years 2010-11 to 2012-13 revised by the Assessing Officer (AO). The revision disallowed deductions claimed for interest and bank charges paid to the Kerala Financial Corporation under Section 43B of the Income Tax Act, which permits deduction only upon actual payment, and also disallowed excess remuneration, leading to demand notices in March 2018. The assessee’s subsequent statutory appeal to the Commissioner was dismissed in-limine in February 2023, as the assessee failed to utilize multiple opportunities to submit written responses. Following this, the assessee filed an appeal with the Income Tax Appellate Tribunal, which was dismissed in March 2025 solely on the grounds of a significant delay of 588 days, without addressing the merits or the concern that the initial AO order was passed ex facie without providing an opportunity of hearing.
The Kerala High Court determined that the AO’s order, passed under Sections 143(3), 147, and 154 of the Income Tax Act, failed to indicate that the assessee was afforded an opportunity to defend its claims for deduction of interest and bank charges. The court stressed that this lack of compliance with the principles of natural justice should have been considered by the Commissioner, even without the assessee’s representation. While acknowledging the assessee’s 588-day delay in approaching the Tribunal was unjustified and reflected a lackadaisical approach, the court noted that the law prefers to adjudicate matters on their merits, and procedural non-compliance can be compensated monetarily. Consequently, the High Court set aside the orders of both the Tribunal and the Commissioner, answering the question of law in favor of the assessee. The appeal before the Commissioner was restored to its original number, subject to the assessee paying a cost of to the Mediation and Conciliation Centre of the Court, making the payment a prerequisite for the restoration. The parties were directed to appear before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC).
