Reassessment proceedings quashed for invalid notice under section 143(2) sent via Speed Post instead of mandatory e-filing portal

ITAT Cuttack held that reassessment proceedings were invalid due to improper issuance of notice u/s.143(2). The Assessing Officer sent notice through physical mode via Speed Post instead of mandatory e-filing portal as required by CBDT Instruction No.1 dated 12th February 2018. Following SC precedent in Hotel Blue Moon case, the tribunal ruled that notice u/s.143(2) is mandatory, not procedural. Since notice was not validly issued through prescribed e-proceedings functionality, subsequent reassessment proceedings lacked jurisdiction and were quashed in favor of assessee.

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The core legal issues considered by the Tribunal in this appeal are as follows:

1. Whether the reassessment proceedings initiated and completed without issuance of a notice under section 143(2) of the Income-tax Act, 1961 (hereinafter "the Act") through the mandatory e-filing portal, as prescribed by the Central Board of Direct Taxes (CBDT) Instruction No. 01/2018 dated 12th February 2018, are valid and within jurisdiction.

2. Whether the addition of Rs. 36,50,000 made by the Assessing Officer (AO) on account of unexplained bank deposits is justified, considering the assessee's explanation that the deposits arose from agricultural income and sale of land, and whether the Assessing Officer and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the addition without providing adequate opportunity of hearing.

Issue-wise Detailed Analysis

Issue 1: Validity and Jurisdiction of Reassessment Proceedings Without Issuance of Notice under Section 143(2) through E-Filing Portal

Relevant Legal Framework and Precedents:

The reassessment proceedings were initiated under section 148 of the Act. After filing the return in response to the notice under section 148, the AO is required to issue a notice under section 143(2) for scrutiny assessment. The CBDT Instruction No. 01/2018 mandates that, except for search-related assessments, all scrutiny assessments shall be conducted electronically through the "E-Proceeding" functionality on the ITBA/E-filing portal. This instruction was issued to ensure compliance with the statutory requirement of issuing notices electronically and to facilitate transparency and ease of communication.

The Supreme Court in the case of Hotel Blue Moon held that the issuance of notice under section 143(2) is mandatory and not merely procedural. Failure to issue such notice within the prescribed period renders the assessment order invalid.

Court's Interpretation and Reasoning:

The Tribunal noted that in the instant case, although a notice under section 143(2) was issued physically through Speed Post, it was not issued via the e-filing portal as mandated by the CBDT Instruction No. 01/2018. The Tribunal emphasized that the instruction is binding and mandatory for all scrutiny assessments except search cases, and non-compliance with this instruction results in invalid issuance of notice.

The Tribunal examined the CBDT Instruction in detail, highlighting the requirement for electronic issuance and service of notices, use of digital signatures, and maintenance of records electronically. It noted that the only exceptions allowed were for stations with limited bandwidth, which was not applicable in the present case.

Reliance was placed on the Supreme Court's ruling in Hotel Blue Moon, affirming that the validity of the assessment depends on strict compliance with the statutory requirements for notice issuance.

Key Evidence and Findings:

The Assessing Officer provided a certified copy of the section 143(2) notice and evidence of service through Speed Post. However, no notice was issued through the e-filing portal as required. The assessee filed the return in response to the section 148 notice but was deprived of the mandatory electronic notice under section 143(2).

Application of Law to Facts:

The Tribunal held that since the notice under section 143(2) was not issued through the e-filing portal, the reassessment proceedings were without jurisdiction and consequently invalid. The physical issuance of notice did not satisfy the mandatory requirement under the CBDT Instruction, which had statutory backing.

Treatment of Competing Arguments:

The Revenue argued that the physical issuance of the notice and proof of service through Speed Post sufficed to validate the reassessment proceedings. The Tribunal rejected this contention, holding that the CBDT Instruction had made electronic issuance mandatory and that failure to comply with this renders the proceedings null and void.

Conclusion:

The reassessment order dated 5.12.2019 was quashed for being completed without jurisdiction due to non-compliance with the mandatory electronic issuance of notice under section 143(2) of the Act.

Issue 2: Justification of Addition of Rs. 36,50,000 on Account of Bank Deposits

Relevant Legal Framework and Precedents:

Under the Income-tax Act, unexplained cash credits or deposits in bank accounts can be treated as income and added to the assessee's total income if the assessee fails to satisfactorily explain the source of such deposits. However, if the assessee provides a plausible explanation supported by evidence, such as agricultural income or capital receipts from sale of land, the addition cannot be sustained.

Court's Interpretation and Reasoning:

The assessee contended that the deposits were from agricultural income and sale of land, which are not taxable under the Act. The AO made the addition ignoring these explanations, which was subsequently confirmed by the CIT(A). The assessee also contended that no sufficient opportunity of hearing was provided to substantiate these claims.

Key Evidence and Findings:

The record shows the assessee filed explanations and supporting documents. However, the Tribunal did not adjudicate this issue on merit because the reassessment order was quashed on jurisdictional grounds. Hence, the addition was not examined substantively.

Application of Law to Facts:

Since the reassessment order was quashed, the addition of Rs. 36,50,000 was not sustained. The Tribunal refrained from adjudicating this issue further.

Treatment of Competing Arguments:

The Revenue urged confirmation of the addition, relying on the AO's findings. The assessee argued for deletion based on valid explanations and procedural lapses in hearing. The Tribunal did not decide on these competing contentions due to the quashing of the reassessment order.

Conclusion:

This ground was not adjudicated as the reassessment order was quashed on jurisdictional grounds.

Significant Holdings

"Once the notice u/s.143(2) is not validly issued, consequent proceedings cannot be held as valid."

"The CBDT has mandated that after the issue of this instruction, all the notices should be sent through 'E-Proceedings' functionality in ITBA/E-filing. Failure to comply with this mandatory instruction renders the reassessment order invalid."

"The issue of notice u/s. 143(2) of the I.T. Act is mandatory and not procedural and if the notice is not served within the prescribed period, the assessment order is invalid."

The Tribunal conclusively held that the reassessment order completed without issuance of notice under section 143(2) through the e-filing portal as mandated by CBDT Instruction No. 01/2018 is without jurisdiction and liable to be quashed. Consequently, the appeal was allowed on this ground, and other grounds were not adjudicated.

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