Case Law Details
Tapas Kumar Das Vs ITO (ITAT Kolkata)
In a recent order, the Income Tax Appellate Tribunal (ITAT), Kolkata bench, has set aside an income tax assessment for Assessment Year 2017-18, ruling that the initial notice for scrutiny issued to the assessee was invalid. The tribunal’s decision hinged on the tax department’s failure to comply with a binding instruction issued by the Central Board of Direct Taxes (CBDT) regarding the format of such notices.
The case involved Tapas Kumar Das, the assessee, whose income tax return for AY 2017-18 was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) system. Following this selection, the Assessing Officer (AO) issued notices under Section 143(2) and Section 142(1) of the Income Tax Act, 1961, along with a questionnaire.
According to the tribunal’s order, the assessee did not comply with the notices during the assessment proceedings. This led the AO to complete the assessment ex-parte under Section 144 of the Act on December 27, 2019. In this ex-parte assessment, the AO made a significant addition of ₹25,74,500 to the assessee’s income, categorizing it as unexplained money under Section 69A of the Act, reportedly linked to deposits made during the demonetization period.
The assessee appealed the AO’s order to the National Faceless Appeal Centre (NFAC), the Ld. CIT(A). However, the CIT(A) upheld the AO’s assessment, noting the lack of compliance from the assessee during the appellate proceedings as well.
Undeterred, the assessee took the matter to the ITAT, Kolkata. During the tribunal proceedings, the assessee raised an additional ground of appeal, a legal issue challenging the very foundation of the assessment: the validity of the notice issued under Section 143(2). The assessee contended that this notice, dated September 24, 2018, was not in conformity with the mandatory instructions laid down by the CBDT in its Instruction No. F.No. 225/157/2017/ITA-II dated June 23, 2017.
The ITAT, at the outset, addressed the admissibility of this additional legal ground. Citing the principles established by the Hon’ble Supreme Court in the cases of Jute Corporation of India Ltd. Vs CIT and National Thermal Power Co. Ltd v. CIT, which permit the raising of a pure legal issue for the first time before the tribunal if all necessary facts are on record, the ITAT admitted the additional ground for adjudication.
Examining the contested notice under Section 143(2), the tribunal found that it indeed did not match the format prescribed by the CBDT Instruction dated June 23, 2017. The ITAT held that notices issued under Section 143(2) must be in the format prescribed by the Act, and by extension, comply with binding instructions issued by the CBDT in this regard.
The tribunal referenced a decision by a co-ordinate bench of the Kolkata ITAT in the case of Shib Nath Ghosh Vs. ITO. In that case (ITA No. 1812/KOL/2024 for AY 2018-19, order dated November 29, 2024), the bench had similarly held that a Section 143(2) notice not issued in the format specified by the same CBDT instruction was invalid. The Shib Nath Ghosh decision had relied on the Supreme Court’s judgment in the UCO Bank case, which affirmed that circulars and instructions issued by the CBDT under its statutory powers are binding on the income tax authorities.
Applying the principle that mandatory instructions from the CBDT are binding on tax authorities, the ITAT concluded that the Section 143(2) notice issued to Tapas Kumar Das was invalid because it did not conform to the prescribed format. The tribunal held that an invalid notice under Section 143(2) renders all subsequent assessment proceedings null and void from the beginning (void ab initio).
Consequently, the ITAT quashed the ex-parte assessment order framed by the AO under Section 144. The tribunal noted that since the assessment itself was being quashed on this preliminary legal issue, it was not necessary to delve into the merits of the addition made by the AO regarding unexplained money. Those grounds were left open, should the need arise to decide them at a later stage, which would typically only happen if the initial procedural defect were somehow cured or if the matter were remanded for a fresh assessment after issuance of a proper notice, although the judgment as provided does not explicitly state a remand.
The ITAT’s decision in Tapas Kumar Das Vs ITO reinforces the importance of strict adherence by tax authorities to procedural requirements and binding instructions issued by the CBDT. It underscores that a valid notice under Section 143(2) is a jurisdictional prerequisite for conducting a scrutiny assessment, and non-compliance can vitiate the entire assessment process.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 11.06.2024 for the AY 2017-18.
02. At the outset, the ld. Counsel for the assessee brought to the notice of the Bench the additional ground is raised vide letter dated 04.11.2024, which is a legal issue and is against the issue of notice u/s 143(2) in violation of CBDT Circular No. F.NO.225/157/2017/ITA-11 on 23.06.2017. The said additional ground raised by the assessee is extracted below:-
“That the Ld. AO erred in issuing notice u/s 143(2) of the Act dated 24.09.2018 without complying to the CBDT Instruction F.No. 225/157/2017/ITA-II dated 23.06.2017 and so the notice issued u/s 14392) is not valid as per law.”
03. We find that the additional ground raised by the assessee is purely legal issue qua which all the facts are available in the appeal folder and no further verification of facts is required to be done at the end of the ld. AO and accordingly, we are inclined to admit the same for adjudication by following the ratio laid down by the Hon’ble Apex Court in the case of Jute Corporation of India Ltd. Vs CIT in 187 ITR 688(SC) and National Thermal Power Co. Ltd v. CIT [1998] 229 ITR 383 (SC).
04. The facts in brief are that the assessee filed the return of income on 30.10.2017, declaring total income of ₹3,75,780/-, which was selected for scrutiny under Computer Assisted Scrutiny Selection (CASS). Thereafter the notice u/s 143(2) and 142(1) of the Act were issued along with the questionnaire which were duly served upon the assessee. When there was no compliance in the assessment proceedings, , the AO framed the ex-parte assessment u/s 144 of the Act vide order dated 27.12.2019, wherein an addition of
₹25,74,500/- was made on account of unexplained money u/s 69A of the Act deposited in the bank account of the assessee during demonetization period.
05. In the appellate proceedings also the ld. CIT (A) confirmed the order of the ld. AO when there is no compliance made on the part of the assessee.
06. After hearing the rival contentions and perusing the materials available on record, we find that particularly the notice was issued u/s 143(2) of the Act, a copy of which is available at page no. 25 of the Paper Book. We note that the said notice has not been issued in consonance with the CBDT Instruction F No. 225/157/2017/ITA-II Dated 23.06.2017. The said notice is extracted below for the sake of ready reference:-
7. In our opinion, the notice issued u/s 143(2) of the Act which is not in the prescribed format as provided under the Act is an invalid notice and accordingly, all the subsequent proceedings thereto would be invalid and void ab initio. The case of the assessee find support from the decision of Shib Nath Ghosh Vs. ITO in ITA No. 1812/KOL/2024 for A.Y. 2018-19 vide order dated 29.11.2024, wherein the co-ordinate Bench has held as under:-
“10. After hearing both the sides and the materials available on record, we find that the notice issued u/s 143(2) dated 9th August, 2017 was not in any of the formats as provided in the CBDT instruction F.No.225/157/2017/ITA-II dated 23.06.2017. We have examined the notice, copy of which is available at page no.1 of the Paper Book and find that the same is not as per the format of CBDT Instruction F.No. 225/157/2017/ITA-II dated 23.06.2017 as stated above. In our opinion, the instruction issued by the CBDT are mandatory and binding on the Income tax authorities failing which the proceedings would be rendered as invalid. Hon’ble Apex Court in case of UCO Bank (supra) held that the circular issued by CBDT in exercise of its statutory powers u/s 119 of the Act, are binding on the authorities. The Hon’ble Apex court held as under:-
“The Central Board of Direct Taxes under section 119 of the Income-tax Act, 1961, 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 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. 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.
In order to aid proper determination of the income of money lenders and banks, the Central Board of Direct Taxes issued a circular dated October 6, 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, It need not be included in the assessee’s taxable income, provided the Income-tax Officer is satisfied that recovery is practically improbable. Twenty-six years later, on June 20, 1978, in view of the judgment of the Kerala High Court In STATE BANK OF TRAVANCORE v. CIT [1977] 110 ITR 336, the Board by another circular, withdrew with immediate effect the earlier circular. However, by circular dated October 9, 1984, the Board decided that Interest in respect of doubtful debts credited to suspense account by banking companies would be subjected to tax but Interest charged in an account where there has been no recovery for three consecutive accounting years would not be subjected to tax in the fourth year and onwards. The circular also stated that if there is any recovery in the fourth year or later, the actual amount recovered only would be subjected to tax in the respective years. This procedure would apply to assessment year 1979-80 and onwards.”
08. Considering the facts of the instant case in the light of the decision of the co-ordinate bench, we are inclined to hold that notice issued u/s 143(2) of the Act is invalid notice and accordingly, the assessment framed consequentially to that is also invalid and is hereby quashed.
09. The other grounds raised on merit are not being decided at this stage and are being left open to be decided if need arises for the same at later stage.
010. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 11.03.2025.
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