Non-jurisdictional ITO issues Section 148 notice beyond limitation period, assessment order quashed for lack of jurisdiction

ITAT Kolkata quashed the reassessment order on multiple grounds. The notice u/s 148 was issued by non-jurisdictional ITO instead of ACIT/DCIT who had proper jurisdiction over the returned income of Rs. 39,72,460. The notice dated 30.06.2021 was barred by limitation as it was issued after 31.03.2021 under the old regime which ceased to apply post-amendment. Additionally, the AO lacked jurisdiction under section 149(1)(b) as the escaped income was only Rs. 13 lakh, below the Rs. 50 lakh threshold, without supporting documents evidencing higher amounts. The AO failed to apply mind to the assessee's reply controverting allegations of accommodation entries. The assessment was declared invalid and quashed in favor of the assessee.

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The core legal issues considered by the Appellate Tribunal pertain to the validity and jurisdictional competence of the Assessing Officer (AO) in issuing notices under sections 148 and 148A of the Income Tax Act, 1961 (the Act), framing assessments under section 147 read with section 144B, and the limitation period applicable to such reassessment proceedings. The Tribunal also examined the application of CBDT instructions regarding pecuniary jurisdiction, the impact of legislative amendments effective from 01.04.2021 on reassessment notices, and the adequacy of the AO's application of mind in accepting or rejecting the assessee's explanations regarding alleged accommodation entries.

First, the Tribunal addressed whether the AO issuing the notice under section 148 and framing the reassessment had the requisite jurisdiction, particularly in light of CBDT Instruction No. 1/2011, which prescribes monetary limits for the assignment of cases to Income Tax Officers (ITOs) or Assistant/Deputy Commissioners of Income Tax (AC/DCs). The assessee declared income exceeding Rs. 15 lakhs, which under the instruction mandates that the assessment be conducted by ACIT/DCIT, not by an ITO. The notices in question were issued by ITO, Ward-2(1), Kolkata, who lacked jurisdiction. The assessee objected to this lack of jurisdiction in a timely manner, but the AO proceeded with the assessment without rectifying the jurisdictional defect.

In analyzing this issue, the Tribunal relied extensively on precedents including decisions by coordinate Benches and the Calcutta High Court, which consistently hold that issuance of notice by an officer lacking jurisdiction renders the entire proceeding void. The Tribunal cited the decision in PCIT vs. Shree Shoppers Ltd., where it was held that a notice under section 143(2) issued by a non-jurisdictional officer is invalid and vitiates subsequent proceedings. Similarly, in Smita Biswas and other cases, the absence of valid transfer orders under section 127 and non-compliance with CBDT instructions on pecuniary jurisdiction resulted in quashing of assessments. The Tribunal underscored that the jurisdictional defect is a legal issue going to the root of the matter and cannot be cured by subsequent proceedings or participation by the assessee. The Tribunal rejected the Revenue's reliance on the Supreme Court decision in DCIT (Exemption) vs. Kalinga Institute of Industrial Technology, clarifying that the assessee had objected within the prescribed period, thereby preserving the jurisdictional challenge.

Second, the Tribunal considered whether the reassessment notices issued under section 148 of the Act were barred by limitation, especially in light of the legislative changes effective from 01.04.2021. The Finance Act, 2021 repealed and replaced the old provisions of sections 147, 148, 149, and 151 with new provisions effective from that date, including the insertion of section 148A. The assessee contended that notices issued post 31.03.2021 under the old section 148 were invalid and barred by limitation. The Revenue argued that notifications issued under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) extended the limitation period.

The Tribunal undertook a detailed examination of the legislative history, including the promulgation of TOLA, subsequent notifications extending limitation periods, and the enactment of the Finance Act, 2021. It noted that the Finance Act, 2021 introduced a new reassessment regime without any savings clause for the old provisions, rendering the old provisions inoperative from 01.04.2021. The Tribunal relied on the recent Supreme Court judgment in M/s. Arati Marketing Pvt. Ltd. vs. Union of India & Ors., which held that applying the old regime, including TOLA extensions, beyond 31.03.2021 is impermissible and arbitrary. The Court emphasized that the new regime's provisions must be applied to notices issued after 01.04.2021, and any notice issued under the old section 148 after that date is barred by limitation. Consequently, the reassessment framed on the basis of such notice was held invalid.

Third, the Tribunal examined whether the AO had jurisdiction under the amended section 149(1)(b) to issue the reassessment notice, which requires that the escaped income amount to or likely amount to Rs. 50 lakhs or more if the notice is issued after three years but within ten years from the end of the relevant assessment year. In the instant case, the addition made was Rs. 35.50 lakhs, below the Rs. 50 lakh threshold. The Tribunal relied on the Jharkhand High Court decision in Ratan Bej vs. PCIT, which held that the AO must have in possession books of account or evidence revealing escaped income of Rs. 50 lakh or more to issue such notice beyond three years. Since the AO lacked such evidence, the reassessment was invalid.

Fourth, the Tribunal addressed the adequacy of the AO's application of mind in considering the assessee's objections to the notice under section 148A(b). The AO alleged that the assessee was a beneficiary of accommodation entries totaling Rs. 92.50 lakhs, citing transactions with various parties. The assessee provided detailed rebuttals supported by books of account, demonstrating discrepancies in the AO's allegations, including incorrect transaction dates and parties, and showing that the amounts were short-term loans duly repaid. The Tribunal noted that the AO failed to consider or controvert these explanations and passed a non-speaking order under section 148A(d), reflecting non-application of mind. The Tribunal relied on the jurisdictional High Court decision in Excel Commodity & Derivative Pvt. Ltd. vs. Union of India, which held that assessments framed without application of mind and without addressing the assessee's explanations are bad in law and liable to be quashed.

In the second appeal (ITA No. 1417/Kol/2023), the facts and issues were substantially similar, involving reassessment framed on a smaller addition of Rs. 13 lakhs, below the Rs. 50 lakh threshold, and the AO lacked requisite evidence to justify reopening beyond three years. The Tribunal applied the same reasoning and quashed the assessment.

Significant holdings include the following:

"It is a settled position of law that for carrying out the assessment proceedings u/s. 143(3) of the Act, the statutory requirement of serving of valid notice u/s. 143(2) of the Act is must and in absence thereof the subsequent proceedings become invalid."

"The jurisdiction of Income Tax Authorities may be fixed not only in respect of territorial area but also having regard to a person or classes of persons and income or classes of income also. Therefore, the CBDT having regard to the income as per return has fixed the jurisdiction of the Assessing Officers."

"When a notice is issued by an officer having no jurisdiction, Section 292BB of the Act does not come into play."

"The Finance Act, 2021 completely reformed the system of reassessment by bringing in a completely new procedure of reassessment with effect from April 1, 2021... the old Sections 147, 148, 149 and 151 stood repealed/abrogated and replaced by a new set of provisions."

"The provisions of TOLA applied only to the pre-amended law as applicable till 31.03.2021... The question of application of provisions of TOLA by the revenue in the case of notices on or after 1st April, 2021... does not arise and such exercise by the authority under TOLA... is wholly unwarranted and bad in law."

"The assessment framed by the AO without application of mind and without controverting the explanation given by the assessee is bad in law."

In conclusion, the Tribunal held that the reassessment notices issued by the non-jurisdictional ITO were invalid, the notices issued post 31.03.2021 under the old regime were barred by limitation, the AO lacked jurisdiction under section 149(1)(b) to issue notices for escaped income below Rs. 50 lakh beyond three years, and the AO failed to apply mind to the assessee's explanations. Accordingly, the reassessments framed on these grounds were quashed and the appeals allowed.

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