Validity of assessment after initial issue of Notice u/s 143(2) by non jurisdictional AO

Short overview: Where notice under section 143(2) was not issued within the time limit prescribed in proviso to section 143(2), the assessment framed under section 143(3) pursuant to such notice was invalid and accordingly, the same was liable to be quashed.

Assessee filed return of income on 14-9-2015, which was processed under section 143(1). Later on, AO, Amritsar issued notice under section 143(2) by observing that assessee’s case was selected for limited scrutiny. Thereafter the case was transferred to AO, Mohali, who issued detailed questionnaire along with notice under sections 142(1) and 143(2) to assessee on 22-5-2017. Accordingly, he framed assessment under section 143(3) and made an addition by observing that assessee purchased land in cash in violation of provisions of rule 6D.

It is held that it was an admitted fact that assessee filed return of income on 14-9-2015 mentioning the address at Mohali and in earlier years also, the returns of income were filed at the same address. Therefore, the AO, Mohali was having jurisdiction upon the case of assessee. In instant case, the AO, Amritsar who was not having the jurisdiction over assessee’s case issued notice under section 143(2), therefore, the said notice was beyond the jurisdiction. Further, AO, Mohali who was having jurisdiction, issued notice under section 143(2) beyond the time limit as per proviso to section 143(2). Therefore, the assessment framed under section 143(3), without issuing notice under section 143(2) within the time limit prescribed in proviso to section 143(2), was invalid and accordingly, the same was quashed.

Decision: In assessee’s favour.

Referred: Asstt. CIT & Anr. v. Hotel Blue Moon (2010) 321 ITR 362 (SC): 2010 TaxPub (DT) 1434 (SC).

IN THE ITAT, CHANDIGARH BENCH

N.K. SAINI, V.P.

H.P. Singh & Ors. v. ITO

ITA No. 1163/Chd/2018

Assessment Year: 2015-16

1 August, 2019

Assessee by: Salil Aggarwal, Advocate & Shailesh Gupta, Advocate

Revenue by: Chandrakanta, Sr. DR

N.K. Saini, V.P.

This is an appeal by the Assessee against the order of the learned Commissioner (Appeals)-2, Chandigarh dt. 14-6-2018.

2. Following grounds have been raised in this appeal :–

1. That the learned Commissioner (Appeals) has grossly erred both in law and on facts in sustaining an addition of Rs. 32, 32, 000 on account of cash payments disallowed under section 40A (3) of the Act.

1.1 That in doing so, the learned Commissioner (Appeals) has failed to appreciate the fact that the said disallowance made by learned assessing officer was outside the scope limited scrutiny and as such, the disallowances needed to be deleted on this ground alone.

1.2 That the learned Commissioner (Appeals), has further failed to appreciate the fact that the said cash payments were made at the insistence of farmers and was also governed by business/commercial expediency and thus, was covered by the conditions as envisaged in rule 6DD of the Income Tax Rules and as such, no disallowances was warranted on the facts of the case.

1.3 That further, the learned Commissioner (Appeals) has also failed to appreciate the fact that disallowance so made by learned assessing officer is based on preconceived notions and by arbitrarily brushing aside the detailed submissions/evidences/material placed on record, which were furnished in order to support the fact that no disallowance was called for in the instant case.

2 That the learned Commissioner (Appeals) has further erred in sustaining the aforesaid disallowances/additions in the hands of assessee-appellant without giving any fair and proper opportunity of being heard to the assessee and passing the order in undue haste, thereby, violating the principles of natural justice.

3. The Assessee also raised following additional ground and requested to admit the same by stating that it is purely a question of law.

“That the assessment order passed by learned assessing officer is without jurisdiction and void ab initio and is liable to be quashed, as proceedings initiated under section 143(3) of the Act are without satisfying the statutory conditions envisaged under the Act, as the notice under section 143(2) has been issued by an officer who had no jurisdiction over the assessee-appellant”.

4. During the course of hearing the learned Counsel for the Assessee submitted that the additional ground raised is purely a legal ground and it goes to the root of the matter therefore the same is to be admitted. Reliance was place on the judgment of Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. (NTPC) v. CIT reported in (1998) 229 ITR 383 (SC) : 1998 TaxPub(DT) 0342 (SC).

5. The learned Senior Departmental Representative opposed the admission of the additional ground and submitted that the assessee neither raised this ground before the assessing officer or the learned Commissioner (Appeals) therefore it may not be admitted at this stage.

6. I have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case it is not in dispute that the additional ground raised by the assessee at this stage is purely a legal ground and the relevant material is available on the record, so it deserves to be admitted as per the ratio laid down by the Hon’ble Apex Court in the case of NTPC v. CIT (Supra) wherein it has been held as under :–

“where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.”

7. Facts of the case in brief are that the assessee e-filed the return of income on 14-9-2015 declaring NIL income which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’). Later on the assessing officer i.e. ACIT, Circle-1, Amritsar issued the notice under section 143(2) by observing that the case was selected for limited scrutiny through CASS to verify the reason “Real estate business with high closing stock” and “ Mismatch in amount paid to related persons under section 40A(2)(b) reported in Audit Report and ITR”. Thereafter the case was transferred on 26-10-2016 to DCIT, Circle-6(1), Mohali who issued the detailed questionnaire alongwith notice under section 142(1) and 143(2) of the Act to the assessee on 22-5-2017. The assessing officer framed the assessment under section 143(3) of the Act and made an addition of Rs. 32,32,000 by observing that the assessee purchased the land in cash for Rs. 32,32,000 in violation of provisions of rule 6D of the Income Tax Rules, 1962.

8. Being aggrieved the assessee carried the matter to the learned Commissioner (Appeals) who sustained the addition made by the assessing officer under section 40A(3) of the Act.

9. Now the assessee is in appeal.

10. Learned Counsel for the assessee submitted that return for the year under consideration was filed by the Assessee on 14-9-2015, my attention was drawn towards page no. 27 of the assessee’s compilation which is the copy of acknowledgment of filing Income Tax Return. It was further submitted that in the said return the assessee had given the address as under :–

“39 West, Near Maloya, Sector 122, Mohali, Punjab”

10.1 It was further submitted that for the earlier assessment year i.e. 2013-14 and 2014- 15 the returns of income showing the same address were filed on 19-9-2013 and 17-9-2014 respectively, for the aforesaid contention my attention was drawn towards page no. 25 & 26 of the assessee’s compilation. It was stated that the jurisdiction upon the assessee was lying with the assessing officer Mohali and not with assessing officer Amritsar who issued the Notice, dated 12-8-2016 under section 143(2) of the Act, reference was made to page no. 23 of the assessee’s paper book which is the copy of the said notice. It was further stated that the assessee raised the objection against the said Notice, dated 12-8-2016 vide letter, dated 22-8-2016 written to the ACIT, Circle-1, Maqbool Road, CR Building, Amritsar by stating that the assessee was assessed under DCIT/ACIT, Circle-6(1), Mohali and that the addressee had already been changed in the PAN card also. It was contended that the ACIT, Circle-1, Amritsar transferred the file to the DCIT, Cicrle-6(1), Mohali who issued the Notice, dated 22-5-2017 under section 143(2) which was barred by limitation and the earlier Notice, dated 12-8-2016 issued by the ACIT, Circle-1, Amritsar was without jurisdiction. It was further submitted that as per the provision contained in proviso to section 143(2) of the Act, the notice under section 143(2) of the Act could have been issued to the assessee on or before 30-9-2016, but the assessing officer having the jurisdiction upon the assessee’s case i.e; ITO, Ward-6(4), Mohali had not issued any such notice within the stipulated time which is mandatory to frame the assessment under section 143(3) of the Act. It was further submitted that the case of the assessee was selected under limited scrutiny relating to income from Real estate business and mismatch of the payments to related persons, therefore the addition made by invoking the provision of section 40A(3) of the Act was beyond the scope of limited scrutiny. The reliance was placed on the following case laws :–

VMT Spinning Co. Ltd. v. CIT & Anr., (2016) 389 ITR 326 (P&H) : 2016 TaxPub(DT) 4428 (P&H-HC) 

ACIT & Anr. v. Hotel Blue Moon, (2010) 321 ITR 362 (SC) : 2010 TaxPub(DT) 1434 (SC) 

CIT v. Norton Motors, (2005) 275 ITR 595 (P&H) : 2005 TaxPub(DT) 1011 (P&H-HC)

11. In her rival submissions the learned Senior Departmental Representative strongly supported the orders of the authorities below and further submitted that the notice issued under section 143(2) of the Act dated 22-5-2017 was in continuation of the proceedings initiated by the ACIT, Amritsar by issuing the notice under section 143(2) of the Act on 12-8-2016. It was further submitted that since the assessee had not raised any objection before the assessing officer or the learned Commissioner (Appeals) therefore this issue may be remanded back to the learned Commissioner (Appeals) for adjudication. As regards to the merit of the case, learned Senior Departmental Representative reiterated the observations made by the learned Commissioner (Appeals) in para 7.1 of the impugned order.

12. I have considered the submissions of both the parties and perused the material available on the record. In the present case it is an admitted fact that the assessee e-filed the return of income on 14-9-2015 mentioning the address at Mohali, in the earlier years also, the returns of income were filed at the same address. Therefore the assessing officer Ward-6(4) Mohali was having the jurisdiction upon the case of the assessee. In the present case the ACIT, Circle-1, Amritsar who was not having the jurisdiction over the assessee’s case issued the notice under section 143(2) dated 12-8-2016 therefore the said notice was beyond the jurisdiction. To resolve the present controversy it is necessary to discuss the provisions contained in section 143(2) of the Act which reads as under :–

(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the assessing officer or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the assessing officer or to produce, or cause to be produced before the assessing officer any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.

From the proviso to sub section 2 of section 143 of the Act, it is clear that no notice under section 143(2) of the Act shall be served on the assessee after the expiry of six months from the end of the Financial Year in which the return was furnished. In the present case the assessee filed the return on 14-9-2015 and the Financial Year ended on 31-3-2016. Therefore the time available to issue the notice under section 143(2) was upto 30-9-2016 but the assessing officer who was having the jurisdiction i.e. the ITO, Ward 6(4) Mohali issued the notice under section 143(2) alongwith the questionnaire under section 142(1) of the Act to the assessee on 22-5-2017.

13. On a similar issue, the Hon’ble Supreme Court in the case of ACIT & Anr. v. Hotel Blue Moon, (2010) 321 ITR 362 (supra) held as under :–

“If the assessing officer, for any reason, repudiates the return filed by an assessee in response to notice under section 158BC(A) of the Income Tax Act, 1961 relating to a block assessment, the assessing officer must necessarily issue notice under section 143(2) of the Act within the time prescribed in the proviso to section 143(2).”

It has further been held as under :–

“Omission on the part of the assessing authority to issue notice under section 143(2) cannot be a procedural irregularity and is not curable. Therefore, the requirement of notice under section 143(2) cannot be dispensed with.”

14. As regards to curing the defect under section 292B of the Act the Hon’ble Jurisdictional High Court in the case of CIT v. Norton Motors (supra) held as under :–

“A reading of section 292B of the Income Tax Act, 1961, makes it clear that mistake, defect or omission in the return of income, assessment, notice, summons or other proceeding is not sufficient to invalidate an action taken by the competent authority, provided that such return of income, assessment, notice, summons or other proceeding in substance and effect is in conformity with or according to the provisions of the Act. To put it differently, section 292B can be relied upon for resisting a challenge to the notice, etc., only if there is a technical defect or omission in it. However, there is nothing in the plain language of that section from which it can be inferred that the same can be relied upon for curing a jurisdictional defect in the assessment notice, summons or other proceeding. In other words, if the notice, summons or other proceeding taken by an authority suffers from an inherent lacuna affecting his/its jurisdiction, the same cannot be cured by having resort to section 292B.”

15. In the present case as I have already pointed out in the former part of this order that the notice under section 143(2) of the Act was not issued in prescribed time limit as per the proviso to section 143(2) of the Act by the assessing officer having the jurisdiction upon the case of the assessee and the notice issued by the ACIT, Amritsar suffered from an inherent lacuna affecting his jurisdiction so the same could not be cured by having resort to the provisions of section 292B of the Act. Therefore the assessment framed under section 143(3) of the Act, by the assessing officer without issuing the notice under section 143(2) of the Act within the time limit prescribed in the proviso to section 143(2) of the Act was invalid and accordingly quashed.

16. In the result, appeal of the Assessee is allowed.