Valley Refractories Limited Vs DCIT (ITAT Kolkata)
Summary: The Kolkata Bench of the Income Tax Appellate Tribunal allowed the assessee’s appeal and quashed the penalty order after following the decision of the Hon’ble Third Member, who held that the assessee could challenge the validity of the underlying assessment in collateral or penalty proceedings.
The dispute before the Third Member arose because the Members of the Division Bench had agreed on the invalidity of the assessment order but differed on whether that invalidity could be raised by the assessee in an appeal against the consequential penalty. The Third Member recorded that there was no dispute that the impugned assessment was invalid in law. Both Members had agreed with the assessee that, in the absence of a valid notice under Section 143(2) of the Income Tax Act, 1961 issued by the Assessing Officer/Assistant Commissioner/Deputy Commissioner having jurisdiction over the assessee, the assessment was invalid.
The Judicial Member’s differing view was that the assessee could not challenge the validity of the assessment during collateral or penalty proceedings because the assessment order had attained finality.
The Revenue relied upon CIT vs. Hotel Highland Park, reported in [(2000) 246 ITR 130 (J&K)]. As recorded by the Third Member, the Jammu & Kashmir High Court had held that assessment and penalty proceedings were separate proceedings, that an appeal against penalty was confined to the penalty order, and that the validity of an assessment order which had attained finality could not be challenged in an appeal against the penalty order.
The Third Member, however, considered decisions taking a contrary view. In Jai Dayal Pyare Lal vs. CIT, reported in 1972 UPTC 596 (All.), it was held that an assessee could raise the validity of the assessment in an appeal against levy of penalty where the issue was a pure question of law and did not require investigation into facts because the relevant facts were already on record.
The Third Member also referred to the Rajasthan High Court decision in Deep Chand Kothari vs. CIT [(1988) 171 ITR 381 (Raj.)], which held, as quoted in the order, that an order passed by an authority without jurisdiction is a nullity and that its invalidity could be set up whenever and wherever it was sought to be enforced or relied upon.
The Third Member further relied upon the Supreme Court’s decision in National Thermal Power Co. Limited vs. CIT [(1998) 229 ITR 383 (SC)] for the proposition recorded in the order that the assessee could raise the question of validity of the assessment in an appeal against levy of penalty where the question was a pure question of law and did not involve investigation into facts already on record.
The Third Member also referred to the Supreme Court’s decision in Kiran Singh vs. Chaman Paswan, reported in AIR 1954 SC 340. The decision was cited for the fundamental principle that a decree passed without jurisdiction is a nullity and that its invalidity can be raised whenever and wherever the decree is sought to be enforced or relied upon, including in collateral proceedings.
On consideration of these authorities, the Third Member held that the assessee was entitled to challenge the validity of the assessment proceedings even in collateral or penalty proceedings, notwithstanding that the assessment had not been challenged before the appellate authorities. The Third Member further recorded that the decision relied upon by the Judicial Member in the case of Sumit Kr. Goel vs. CIT was not in existence and that no such decision or citation was available from the Hon’ble Allahabad High Court.
The Third Member accordingly concurred with the Accountant Member in holding that the penalty proceedings emanating from the invalid assessment were invalid and non-est in law. The penalty order passed under Section 271(1)(c) dated 19.09.2014 was consequently held to be invalid and non-est along with the subsequent proceedings.
Following the Third Member’s decision, the Division Bench observed that the assessment order had been held to be quashed and therefore the penalty order levied on the basis of that assessment also stood quashed.
Accordingly, the assessee’s appeal was allowed. The order was pronounced in the open Court on 03.07.2026.
Cases Discussed
- CIT vs. Hotel Highland Park, [(2000) 246 ITR 130 (J&K)] — relied upon by the Revenue for the proposition that the validity of an assessment order that had attained finality could not be challenged in an appeal against a penalty order.
- Jai Dayal Pyare Lal vs. CIT, 1972 UPTC 596 (All. ) — referred to for the proposition that the validity of an assessment could be raised in an appeal against penalty where the issue was a pure question of law based on facts already on record.
- Deep Chand Kothari vs. CIT, [(1988) 171 ITR 381 (Raj.)] — referred to for the principle that an order passed without jurisdiction is a nullity and its invalidity can be raised whenever and wherever it is sought to be enforced or relied upon.
- National Thermal Power Co. Limited vs. CIT, [(1998) 229 ITR 383 (SC)] — referred to in support of raising a pure question of law before the appellate authority where the relevant facts were already on record.
- Kiran Singh vs. Chaman Paswan, AIR 1954 SC 340 — relied upon for the principle that a decree or order passed without jurisdiction is a nullity and its invalidity may be raised even in collateral proceedings.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
In view of the decision of the Hon’ble Third Member, wherein the Hon’ble Third Member has held as follows:
“14. So far as this issue is concerned, after considering the orders passed by the Members of the Division Bench having dissenting view to each other, it appears from the record that there is no dispute about invalidity of the impugned assessment order. Therefore, undoubtedly the assessment order is invalid. It is an undisputed fact that the impugned assessment order is invalid in the eyes of law. Both the ld. Members are in agreement with the contention of the assessee that in absence of any valid notice under section 143(2) of the Act by AO/AC/DC having jurisdiction over the assessee, the impugned assessment is invalid. But the only difference of opinion expressed by the Judicial Member is that the assessee could not challenge the validity of assessment proceedings during the collateral proceedings/penalty proceedings since the assessment order attains finality.
15. Now the only issue before me is that as to whether the assesse can raise the question of validity of assessment in an appeal against the levy of penalty. The ld. D.R. relied on the decision of the Hon’ble Jammu & Kashmir High Court in the case of CIT vs. Hotel Highland Park reported in [2000] 246 ITR 130 (J&K) wherein the Hon’ble Court has held that “penalty proceedings and assessment proceedings are two separate proceedings. The scope and ambit of the appeal is restricted, to the order of penalty. The validity of an assessment order which has attained finality, cannot be challenged in such an appeal. The appellate authority cannot entertain any challenge to the validity of the assessment order in an appeal against the order of penalty”.
16. However, there are decisions on the same point in the case of Jai Dayal Pyare Lal -vs.- CIT, reported in 1972 UPTC 596 (All.) wherein it was held that “it is open to the assessee to set up/raise question of validity of assessment in the appeal against levy of penalty. Since question of validity of assessment made in the matter was raised, which was a pure question of law and not involving any investigation into the facts as the same were on record”. Similarly, Hon’ble Rajasthan High Court in the case of Deep Chand Kothari vs. CIT [1988] 171 ITR 381 (Raj.) held that “an order passed by an authority without jurisdiction is a nullity, and that its invalidity could be set up whenever and wherever it is sought to be enforced or relied upon”. Further, the decision of the Hon’ble Supreme Court in the case of National Thermal Power Co. Limited -vs.- CIT (1998) 229 ITR 383 (SC), wherein it was held that “it is open to the assessee to set up/raise the question of validity of assessment in the appeal against the levy of penalty. Since the question of validity of assessment made in the matter is raised, which is a pure question of law and not involving any investigation in to the facts as the same are on record”.
17. The recent judgment of the Hon’ble Supreme Court in the case of Kiran Singh vs. Chaman Paswan reported in AIR 1954 SC 340 at page 342, wherein it was categorically held as under:
“It is a fundamental principle well established that a decree passed by a court without jurisdiction is a nullity, and that its invalidly could be set up whenever and wherever it is sought to be enforced or relied upon, even at the stage of execution and even in collateral proceedings. A defect of jurisdiction whether it is pecuniary or territorial, or whether it is in respect of the subject matter of the action, strikes at the very authority of the court to pass any decree, and such a defect cannot be cured even by consent of parties”.
18. In view of the above decisions, I am of the firm view that even in the penalty proceedings, the assessee can challenge the validity of the assessment proceedings, though the assessee has not challenged the validity of the assessment proceedings before the appellate authorities, but he is entitled to set up new defence even in the penalty proceedings as per the ratio laid down by various Hon’ble High Courts and Supreme Court as discussed above. Moreover, the decision, which was relied by the ld. Judicial Member is not in existence and there is no such decision rendered by the Hon’ble High Court of Allahabad. In my view, he has wrongly cited and relied on the decision of the Hon’ble Allahabad High Court in the case of Sumit Kr. Goel -vs.- CIT. There is no such decision rendered by the Hon’ble Allahabad High Court and citation is also not available. Therefore, I am of the firm view that the assessee is entitled to challenge the validity of the assessment proceedings in collateral /penalty proceedings also. I concur with the view of the ld. Accountant Member treating the penalty proceedings emanated from the assessment order is invalid and non-est in the eyes of law and all the subsequent proceedings including the penalty order passed under section 271(1)(c) of the Act dated 19.09.2014 be invalid and non-est in the eyes of law. The decision of the Hon’ble Jammu & Kashmir High Court is in favour of the Revenue but subsequent judgments of the Hon’ble Allahabad and Rajasthan High Court, which are referred supra, are in favour of the assessee and also the Hon’ble Accountant Member also referred to the citations in favour of the assessee. Accordingly, the points of difference referred for my decision is decided in concurrence with the ld. Accountant Member. The appeal filed along with this order be placed before the Division Bench for passing an order of deciding the appeal in accordance with the majority view.”
In such circumstances, respectfully following the decision of the Hon’ble Third Member, the assessment order having been held to be quashed, the penalty order levied stands quashed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 03.07.2026.
