Income Tax Notice u/s 143(2) invalid as issued by ACIT instead of ITO

ORDER

Waseem Ahmed, Accountant Member – This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)-7, Kolkata dated 31.03.2015. Assessment was framed by ITO Ward-1, Haldia u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 20.03.2013 for assessment year 2010-11.

Shri Mahadeb Ghosh, Ld. Advocate appeared on behalf of assessee and Md. Ghayas Uddin, Ld. Departmental Representative appeared on behalf of Revenue.

2. The assessee has raised the additional grounds of appeal which were admitted after hearing both the parties. The additional grounds raised are as follows:—

3. We find that the above additional ground raised by the assessee for assumption of jurisdiction i.e. the AO having no territorial jurisdiction over the assessee, is issuing notice under section 143(2) of the Act is purely a legal ground which goes to the root of the matter and no new facts are required to be investigated or placed on record for the adjudicating the same. The Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 has held as under :

“We do not see any reason to restrict the power of the Tribunal under s. 254 only to decide the grounds which arise from the order of the CIT (A). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.”

In view of the above facts, the additional grounds raised by the assessee are apparently of a legal ground which goes to the root of the matter and no new facts are required to be investigated, we admit the ground and adjudicate the same.

4. At the very outset of the proceedings before us, it was observed that there was a delay of 91 days in filing the appeal before the Tribunal. The impugned order of the learned CIT (A) confirming the order of AO was passed vide order dt. 31.3.2015. Admittedly, the order was received by the assessee on 10.4.2015 and therefore the appeal for A.Ys 2010-11 ought to have been filed before this Tribunal on or before 9.6.2015. The appeal was however filed on 8.9.2015, thereby leading to a delay of 91 days.

4.1 Along with the appeal for Assessment Year, the assessee has filed separate petitions for condonation of delay of 91 days in filing the appeal before this Tribunal. The reasons for the said delay in filing the appeal was submitted by the assessee in the said petition that the necessary papers were handed over to the old counsel to file the appeal but he failed to do so. Therefore a new counsel was searched for filing the appeal to the Tribunal. Therefore the delay occurred for the reasons which were beyond the control of the assessee. Accordingly the assessee humbly prayed before for the condonation of the delay and to adjudicate the matter on merits in the interests of justice and equity. The assessee in support of its petition seeking condonation of delay also prayed the Tribunal to take a lenient view in the matter, condone the delay and dispose off the matter based on the merits of the case and not dismiss the matter on the basis of technicalities. On the other Ld. DR has not raised any objection if the petition for the delay of condonation is considered. Hence, we condone the delay and to proceed hearing of the appeal.

5. The first issue raised by assessee in this appeal is that the assessment framed u/s. 143(3) of the Act is invalid as the notice u/s. 143(2) of the Act was not issued by the jurisdictional Income Tax Officer.

6. At the outset, we find that assessee has challenged the re-assessment proceeding on the ground that no valid notice under section 143(2) of the Act has been issued. The Ld. AR before us submitted that as per the CBDT Instruction No. 1/2011, dated 31.1.2011 new monetary limits in Mofussil areas was fixed for selecting the case under scrutiny. Accordingly the ITOs were empowered to take up the case up to the income of Rs. 15 lacs for non-corporate assessee and Rs. 20 lacs for corporate assessees. It is pertinent to mention here that the assessee’s return income was Rs. 12,65,830/-. As per the CBDT Instruction No. 1/2011 dated 31.01.2011, the jurisdiction for scrutiny assessment vested to the ITO from 1.4.2011 and the notice u/s. 143(2) of the Act should/must be issued by the ITO, Ward – 1, Haldia and by none of the ACIT/DCIT. In the present case, the notice was issued by the ACIT, Circle-Haldia on 14.9.2011 much after the CBDT instruction. Certified copy of the notice u/s. 143(2) is attached in the paper Book marked as Annexure as – 3 which has been challenged. The ACIT, Circle-Haldia issued the notice u/s. 142(1) of the Act 3.7.2012 which is in the paper book. The said notice for issuing is beyond the jurisdiction of the ACIT, Haldia the as per the CBDT Instruction marked as Annexure – 4 in the paper book. The ld. AR further submitted the Section 119, strategically placed in Chapter XIII which deals with “income-tax authorities” and enabling power of the Central Board of Direct Taxes, which is recognized as an authority under the Income-tax Act u/s. 116(a). The Central Board of Direct Taxes under this section is empowered to issue such orders, instructions and directions to other income-tax authorities “as it may deem fit for proper administration of this Act”. Such authorities and all other persons employed in execution of this Act are bound to observe and follow such orders, instructions and directions of the Central Board of Direct Taxes. The proviso to sub-section (1) of Section 119 recognizes two exceptions to this power. The first exception is that the CBDT cannot require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner. The second is with regard to interference with the discretion of the Commissioner of (Appeals) in exercise of his appellate functions. Sub-section (2) of Section 119 provides for the exercise of power in certain special cases and enables the CBDT, if it considers it necessary or expedient so to do for the purpose of proper and efficient management of the work of assessment and collection of revenue, to issue general or special orders in respect of any class of incomes or class of cases, setting forth directions or instructions as to the guidelines, principles or procedures to be followed by other income-tax authorities in the discharge of their work relating to assessment or initiating proceedings for imposition penalties. The powers of the CBDT are wide enough to enable it to grant relaxation from the provisions of several sections enumerated in clause (a). Such orders may be published in the Official Gazette in the prescribed manner, if the CBDT is of the opinion that it is so necessary. The only bar on the exercise of power is that it is not prejudicial to the assessee. In the present case, assessee’s return income was Rs. 12,65,830/-. As per CBDT Instruction No. 1/2011, dated 31.1.2011, the jurisdiction over the assessee is of the ITO, Ward – 1, Haldia and not of the ACIT, Circle – Haldia. The notice u/s. 143(2) of the Act must be issued by the ITO, Ward -1, Haldia and by none of the ACIT, Circle – Haldia. The ACIT, Circle – Haldia was very much aware that he has no jurisdiction over the assessee from 1.4.2011 for scrutiny assessment and accordingly cannot issue the notice u/s. 143(2) of the I. T. Act, 1961 after the CBDT Instruction No. 1/2011, dated 31.1.2011. In this regard, it is important to read the provisions of section 143(2) of the I. T. Act 1961 as follows.

“143(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 shall (i) where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, serve on the assessee a notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him, on a date to be specified therein to produce, or cause to be produced, any evidence or particulars specified therein or on which the assessee may rely, in support of such claim;

(Provided that no notice under this clause shall be served on the assessee on or after the 1st day of June, 2003)

(ii) notwithstanding anything contained in clause (1), if he 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, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return.

(Provided that no notice under clause (ii) 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). ”

On a perusal of the foregoing provision, it is evident that the provisions of this section are mandatory in nature. If the Assessing Officer considers it necessary or expedient to verify the correctness and completeness of the return then he is bound to serve a notice under this sub section on the assessee requiring him, on a specified date, either to attend at the AO’s office or to produce or cause to be produced any evidence on which the assessee desire to rely in support of his return. The above view gets fortified by the decision of the Hon’ble Madras High Court in the case of CIT v. Gitsons Engg. Co. [2015] 370 ITR 87 wherein it is held that,

‘the word “shall” employed in section 143(2) of the Income tax Act, 1961, contemplates that the Assessing Officer should issue notice to the assessee so as to ensure that the assessee has not understated income or has not computed excessive loss or has not under paid the tax in any manner. It is therefore, clear that when the Assessing Officer considers it necessary and expedient to ensure that tax is paid in accordance with law, he should call upon the assessee to produce evidence before him to ensure that the tax is paid in accordance with law. The section makes it clear that service of notice under section 143(2) of the Act within the time limit prescribed is mandatory and it is not a mere procedural requirement.’

In the light of above submission, it is crystal clear that Instruction No. 1/2011 dated 31.01.2011 was applicable in the present case. In view of the specific stipulation in the Instruction “Non-corporate returns Income upto 15 lacs in Mofussil areas” are vested with the ITO’s and considering that in the present case the return income below Rs. 15 lacs. The notice u/s. 143(2) of the Act must be issued by the ITO. Ward – 1. Haldia. But in the instant case, the notice u/s. 143(2) was issued by the ACIT, Circle – Haldia without his jurisdiction over the assessee knowing fully well and he was very much aware that he has no jurisdiction over the assessee from 1.4.2011. In the instant case, there was no notice u/s. 143(2) of the Act was not issued by the ITO, Ward – 1, Haldia before the completion of the assessment proceedings. Therefore, the notice u/s. 143(2) issued by the ACIT, Circle – Haldia for scrutiny of the assessee’s case in contravention to CBDT Instruction is invlid, bad-in-law and liable to be annulled. And on the basis of notice u/s. 143(2) of the Act ACIT, Circle – Haldia the assessment was completed by the ITO, Ward -1, Haldia without issuing the notice u/s. 143(2) of the I. T. Act, 1961 is also invalid, bad-in-law, void ab initio and liable to be annulled.

7. On the other hand the ld. DR before us submitted that the assessee cannot raise the question on the jurisdiction of AO after the expiry of one month from the date on which he was served with the notice or after the completion of assessment, whichever is earlier in terms of the provisions of section 124(3) of the Act.

7.1 The ld. DR further submitted that as per the provisions of Section 127(3) of the Act no opportunity will be given to the assessee where the transfer of the jurisdiction is from one AO is to any other AO provided the offices all the such officers are situated in the same city, locality and place. In the instant case the notice was issued by the ACIT under section 143(2) of the Act and later it was transferred to ITO. The transfer of the file was within the same locality. Therefore the validity of the assessment framed by the AO cannot be challenged on the ground of non-issuance of notice by the ITO.

The ld DR also referred to the provisions of Section 129 of the Act which allows the succeeding income tax authority to continue the proceedings from the stage at which the proceeding was left by his predecessor. The ld DR vehemently supported the order of lower authorities.

8. We have heard rival submissions and gone through facts and circumstances of the case. We have also perused the assessment records. The crux of the issue in the case is that the notice under section 143(2) of the Act was not issued by the ITO in terms of the instruction No. 1/2011 [F.No. 187/12/2010-IT(A-I)], dated 31.1.2011. As per the instruction the notice was to be issued by the ITO but the notice was issued by the ACIT. Therefore in view of above the notice issued by the ACIT is invalid and consequently the assessment framed by the ITO becomes void. Now the issue before us arises so as to whether the notice issued by the ACIT u/s. 143(2) of the Act is without jurisdiction in terms of the aforesaid instruction. In this connection we consider it fit to incorporate the relevant portion of Instruction No. 1/2011 dated 31.1.2004 of the CBDT Circular in respect of issuance of notice to non-corporate assesses which reads as under :—

‘INSTRUCTION NO. 1/2011 [F.No. 187/12/2010-IT(A-I)] , DATED 31-1-2011

Reference have been received by the Board from a large number of taxpayers, especially from mofussil areas, that the existing monetary limits for assigning cases to ITOs and DCs/ACs is causing hardship o the taxpayers, as it results in transfer of their cases to a DC/AC who is located in a different station, which increases their cost of compliance. The Board had considered the matter and is of the opinion that the existing limits need to be revised to remove the abovementioned hardship.

An increase in the monetary limits is also considered desirable in view of the increase in the scale of trade and industry since 2001, when the present income limits were introduced. It has therefore been decided to increase the monetary limits as under:

Metro charges for the purpose of above instructions shall be Ahmedabad, Banagalore, Chennai, Delhi, Kolkata, Hyderabad, Mumbai and Pune.

The above instructions are issued in supersession of the earlier instructions and shall be applicable with effect from 1-4-2011.

-See more at: http://taxguru.in/income-tax/section-119-of-the-income-tax-act- 1961-instructions-too-subordinate-authorities-instdructions-regarding-inc-limits-for-assigning-cases-to-deputy-commissionersassistnt- commissionersitos.html#sthash.U17d65534.dpuf”

The notice u/s. 143(2) and order sheet entries which were referred by the ld. counsel for assessee are placed at Annexure no. 2 & 5 of the paper book respectively. Admittedly the notice u/s. 143(2) in the instant case was issued by the ld. ACIT to initiate the assessment proceedings which was later transferred to ITO. However, the ITO did not further issue any notice u/s. 143(2) of the Act. Therefore, ITO assumed the charge without issuing notice and consequently completed assessment u/s. 143(3) of the Act without jurisdiction. In similar facts and circumstances, the Co-ordinate Bench of this Tribunal has decided the issue in favour of assessee in the case of Ajanta Financial Services (P.) Ltd. v. ITO in ITA No. 1426/Kol/2011. We consider it fit to incorporate the relevant portion of the Tribunal order which is as under :—

‘5. We find that the Hon’ble Chhatishgarh High Court in the case of DCIT v. Sunita Finlease Ltd.(2011) 330 ITR 491 (Chh) has considered the same Instruction No. 9/2004 dated 20.09.2004 which are applicable in the present case also and quash the selection of scrutiny and completion of assessment by holding as invalid. Hon’ble Chattishgarh High Court in Sunita Finlease Ltd.’s case (supra) has considered section 119 of the Act by stating that Section 119 of the Act, empowers the Central Board of Direct Taxes to issue orders, instructions or directions for the proper administration of the Act or for such other purposes specified in sub-section (2) of the section. Hon’ble High Court further held that such an order, instruction or direction cannot override the provisions of the Act. Direction by issuing instructions to the officers for the process of selection of cases for scrutiny for returns for a particular financial year and allowing time of three months for completion of the same cannot be considered to override or detract from the provisions of the Act. It only directs that the above exercise should be completed within three months of the date of filing of return by the assessee, which amounts to an assurance to the assessee that the return filed by him can be scrutinized by the Assessing Officer within three months of filing of the return. The Hon’ble High Court, dismissing the appeal held that Instruction No. 9 of 2004 dated September 20, 2004, was applicable in the present case, in view of the specific stipulation in the circular that “for returns filed during the current financial year 2004-05, the selection of cases for scrutiny will have to be completed within three months of the date of filing the returns” and considering that the return had 5 ITA 1426/K/2011 Ajanta Financial Services Pvt. Ltd.

A.Y. 03-04 admittedly, been filed by the assessee on October 29, 2004, i.e., during the current financial year 2004-05. The selection for scrutiny of the assessee’s case and completion of the assessment was not valid.

6. We find that the Hon’ble Chhatishgarh High Court in Sunita Finlease Ltd.’s case (supra) has also considered the decision of Hon’ble Supreme Court in the case of UCO Bank (1999) 237 ITR 889 and quoted from page 896 as under:

“Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act, which are binding on the authorities in the administration of the Act. Under section 119(2) (a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorized as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities.”

The facts and circumstances in the present case are that the selection of scrutiny in this case is also completed beyond the prescribed period as prescribed in Instruction No. 9/2004 dated 20.09.2004. The assessee’s case was selected for scrutiny first time on 18.10.2004, as per copy of order sheet entry, and notice was issued fixing the hearing on 18.10.2004 itself. As per Instruction No. 9/2004 dated 20.09.2004, the process of selection of cases for scrutiny for returns filed up to 31.03.2004, in the present case assessee filed its return of income on 01.12.2003 must be completed by 15.10.2004. The factual position as noted by CIT (A) in his appellate order that notice u/s. 143(2) is dated 10.10.2004, is not supported by Ld. Sr. DR at the time of hearing rather assessee contested that this finding of fact is erroneous and actual case was selected by issuing notice as on 18.10.2004. Even the basis of recording this fact is only from the assessment order wherein it is mentioned that notice u/s. 143(2) is dated 10.10.2004 and the same was served on the assessee on 19.10.2004 fixing the date of hearing on 16.12.2004. When going through the order sheet entry, which is taken by assessee from the assessment records clearly reveals that factually notice u/s. 143(2) was first time issued on 18.10.2004 and not on 10.10./2004. This fact has not been contested by Ld. Sr. DR. Respectfully following the decision of Hon’ble Chhatisgarh High Court in the case of Sunita Finlease Ltd. (supra), we quash the issuance of notice u/s. 143(2) of the Act and subsequent assessment framed u/s. 143(3) of the Act. Appeal of assessee is allowed.’

Keeping in view of the above and the facts relating to ITA No. 1426/Kol/2011 this Tribunal has squashed the assessment framed u/s. 143(1) of the IT Act since the issuance of notice u/s. 143(2) of the Act is beyond the dates specified in Instruction No. 9 dated 20th September, 2004. At this juncture, we would like to clarify that Instruction No. 9/2004 dated 20th September, 2004 referred by the Tribunal in Ajanta Financial Services (P.) Ltd.’s case (supra) as well as the Hon’ble Chattisgarh High Court in the case of Dy. CIT v. Sunita Finlease Ltd. [2011] 330 ITR 491 are in respect of the corporate assesses. However, in the case of the non-corporate assesses similar instruction has been issued in Instruction No. 10 dated 20.09.2004. In this case also as per the order sheet entries incorporated in the preceding paragraphs, it is observed that the selection of scrutiny was made on 20.06.2005 and notice u/s. 143(2)(ii) and 142(1) was issued on 11.07.2005 i.e. beyond the period of the scrutiny as specified in Instruction No. 10/2004 dated 20.09.2004. Therefore, keeping in view of the decision of Hon’ble Chattisgarh High Court in the case of Sunita Finlease Ltd. (supra) as well as Tribunal’s order in ITA No. 1426/Kol/2011 in the case of Ajanta Financial Services (P.) Ltd. (supra).

8.1 In view of above we set aside the orders of the revenue authorities by squashing the order of the assessment framed u/s. 143(3) of the Act since the issue of notice u/s. 143(2) of the Act was not done by the ITO as specified in CBDT Instruction No. 1/2011 dated 31.1.2011. As the assessment proceedings u/s. 143(3) of the Act have been held as invalid, therefore in our considered view the other issues raised by the assessee do not require any adjudication. Hence the ground raised by the assessee is allowed.

9. In the result, assessee’s appeal stands allowed.