Assessment proceedings under section 143(3) quashed for jurisdictional defects and improper notice by non-jurisdictional authority

ITAT Delhi quashed assessment proceedings under section 143(3) due to jurisdictional defects. Notice was issued by non-jurisdictional AO Ward 33(1) Delhi while appellant's jurisdiction was with AO Ward 26(1) Delhi for assessment years 2015-16 to 2017-18. Assessment completed by jurisdictional authority without proper notice rendered proceedings invalid. Transfer of jurisdiction under section 127 requires recorded reasons and hearing opportunity, which was absent. Additionally, addition under section 69A was deleted as cash deposits were substantiated by registered sale deed showing property sale proceeds, with AO accepting similar deposits from same source previously.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the assessment order dated 20.12.2019 passed under Section 143(3) of the Income Tax Act, 1961 (the Act) is valid, given that the notice under Section 143(2) was issued by a non-jurisdictional Assessing Officer (AO) (Ward 33(1), Delhi) whereas the assessment was completed by AO Ward 26(1), Delhi, who had jurisdiction over the assessee.
• Whether the transfer of jurisdiction from AO Ward 33(1) to AO Ward 26(1) Delhi was valid in the absence of a formal order under Section 127 of the Act recording reasons and affording opportunity of being heard.
• Whether the addition of Rs. 15,47,000/- made by the AO under Section 69A read with Section 115BBE of the Act, representing cash deposits during the demonetization period, is justified on merits.
• Whether the AO and the Commissioner of Income Tax (Appeals) (CIT(A)) erred in rejecting the explanation and documentary evidence furnished by the assessee regarding the source of cash deposits, including the sale of property consideration received in cash prior to the demonetization period.
• Whether the CIT(A) erred in upholding the addition based on assumptions and surmises without proper application of the "Theory of Human Probability" and without considering the cash book and financial records maintained by the assessee.
• Whether the provisions of Sections 69A and 115BBE of the Act are applicable in the facts and circumstances of the case.
• Whether the assessee can raise the issue of jurisdiction at the appellate stage, given that no objection was raised during assessment proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Assessment Order in Light of Jurisdictional Notice

Legal Framework and Precedents: The Income Tax Act mandates that assessment proceedings must be initiated and completed by the AO having jurisdiction over the assessee. Section 143(2) notice triggers the assessment process under Section 143(3). The jurisdictional AO is determined based on the territorial jurisdiction assigned. Section 127 of the Act governs the transfer of cases from one AO to another and requires recording of reasons and affording the assessee an opportunity of being heard. The Supreme Court and various High Courts have held that jurisdiction is a legislative function and cannot be conferred by consent or acquiescence (Kanwar Singh Saini vs Delhi High Court). Mere participation or acquiescence does not confer jurisdiction (CIT vs. Lalitkumar Bardia). Failure to issue valid jurisdictional notice vitiates the assessment.

Court's Interpretation and Reasoning: The Tribunal observed that the notice under Section 143(2) was issued by AO Ward 33(1), Delhi, who did not have jurisdiction over the assessee, whereas the assessment order was passed by AO Ward 26(1), Delhi, the correct jurisdictional authority. The transfer of the case from Ward 33(1) to Ward 26(1) was not supported by any order under Section 127 of the Act, which is mandatory. The Tribunal relied on the assessee's Income Tax Returns for AYs 2015-16, 2016-17, and 2017-18, which clearly indicated AO Ward 26(1) as the jurisdictional AO. The Tribunal cited several decisions supporting the principle that assessment orders passed without jurisdictional notice are invalid and must be quashed.

Key Evidence and Findings: The assessee's ITRs, the Memo of resolution of grievance from the AO, and the absence of any Section 127 order were critical. The Tribunal noted that the AO Ward 33(1) never had jurisdiction and no notice was issued by AO Ward 26(1).

Application of Law to Facts: The Tribunal held that since the jurisdictional AO did not issue the notice, and the non-jurisdictional AO issued the notice without authority, the assessment was invalid. The mandatory procedural safeguards under Section 127 were not complied with, rendering the assessment order void.

Treatment of Competing Arguments: The Revenue argued that the assessee did not raise jurisdictional objections during assessment and hence cannot do so at appeal stage, citing Sections 124(3)(a) and 292B of the Act. The Tribunal rejected this contention, emphasizing the fundamental nature of jurisdiction and the settled law that jurisdictional defects can be raised at any stage.

Conclusion: The Tribunal concluded that the assessment order was invalid due to lack of jurisdictional notice and improper transfer of case without compliance with Section 127, and therefore the assessment order was quashed.

Issue 2: Validity of Transfer of Jurisdiction Without Section 127 Order

Legal Framework and Precedents: Section 127 of the Income Tax Act requires that any transfer of cases from one AO to another must be preceded by a recorded order stating reasons and providing the assessee an opportunity of being heard. The Supreme Court in Ajanta Industries Vs. Central Board of Direct Tax emphasized the mandatory nature of this requirement.

Court's Interpretation and Reasoning: The Tribunal found that the case was transferred from AO Ward 33(1) to AO Ward 26(1) without any order under Section 127. This failure to comply with statutory procedure rendered the transfer invalid.

Application of Law to Facts: Since no Section 127 order was passed, the transfer was not legally effective, and the AO Ward 26(1) could not assume jurisdiction.

Conclusion: The transfer of jurisdiction was invalid and contributed to the invalidity of the assessment.

Issue 3: Merits of Addition Under Section 69A and 115BBE for Cash Deposits During Demonetization

Legal Framework and Precedents: Section 69A deals with unexplained cash credits and additions where the assessee fails to satisfactorily explain the source of cash deposits. Section 115BBE imposes higher tax rates on undisclosed income. The "Theory of Human Probability" is often applied to assess the credibility of explanations given for cash deposits.

Court's Interpretation and Reasoning: The AO made an addition of Rs. 15,47,000/- representing cash deposited during the demonetization period, treating it as undisclosed income. The assessee explained that the cash deposits were sourced from the sale of a property for Rs. 33,90,000/- in cash on 30.01.2015. The sale deed was furnished, and the AO accepted earlier cash deposits from the same source (Rs. 8,00,000/- on 01.10.2015 and Rs. 5,00,000/- on 12.08.2016). However, the AO rejected the explanation for the Rs. 15,47,000/- deposit without apparent reason. The Tribunal noted that the assessee maintained cash books and financial records, and the cash deposit trend was consistent with prior years.

Key Evidence and Findings: Registered sale deed, cash book, replies to questionnaires, and consistency of cash deposits were key evidentiary materials. The AO's failure to provide reasons for rejecting the explanation was significant.

Application of Law to Facts: The Tribunal applied the legal principle that where the assessee provides credible evidence and explanation for cash deposits, the addition under Section 69A cannot be sustained. The Tribunal also noted that the CIT(A) erred in not considering the cash book and the explanation on merits.

Treatment of Competing Arguments: The Revenue contended that the addition was justified due to the demonetization context and possible concealment. The Tribunal rejected this, emphasizing the acceptance of prior cash deposits from the same source and the lack of any contradictory evidence.

Conclusion: The addition of Rs. 15,47,000/- was held to be unsustainable and was deleted.

Issue 4: Applicability of Sections 69A and 115BBE

Legal Framework: Section 69A applies when cash credits are unexplained or inadequately explained, and Section 115BBE imposes a special tax rate on undisclosed income. Both require that the income be unexplained or concealed.

Court's Reasoning: Since the assessee satisfactorily explained the source of cash deposits through documentary evidence, the provisions were not applicable. The Tribunal observed that the CIT(A) erred in upholding the addition under these sections.

Conclusion: Sections 69A and 115BBE were not applicable in the facts of the case.

Issue 5: Raising Jurisdictional Objection at Appellate Stage

Legal Framework: Sections 124(3)(a) and 292B of the Act restrict raising certain grounds not raised before the AO. However, jurisdictional issues are fundamental and can be raised at any stage.

Court's Reasoning: The Tribunal held that jurisdictional defects go to the root of the matter and can be raised even at the appellate stage. The Revenue's objection to the jurisdictional ground being raised was rejected.

Conclusion: The assessee was entitled to raise jurisdictional objections at the appellate stage.

3. SIGNIFICANT HOLDINGS

"It is a settled law the assessment order has to be passed by the only authority having jurisdiction over an assessee. Mere participation in proceedings or acquiescence would not confer jurisdiction upon the Assessing Officer who otherwise was not the Assessing Officer of the assessee."

"The requirement of recording of reasons under Section 127(1) of the Act is a mandatory direction under the Law."

"Since the assessee has satisfactorily explained the source of cash deposits by producing the registered sale deed and consistent cash book entries, addition under Section 69A read with Section 115BBE is unsustainable."

"Jurisdictional objections can be raised at any stage of proceedings, including appellate stage, as jurisdiction is a fundamental condition precedent to the validity of assessment."

The Tribunal's final determinations were:

• The assessment order dated 20.12.2019 is invalid and quashed due to lack of jurisdictional notice and improper transfer of case without compliance with Section 127.
• The addition of Rs. 15,47,000/- under Sections 69A and 115BBE is deleted as the source of cash deposits was satisfactorily explained and documentary evidence furnished.
• All grounds of appeal challenging the addition and procedural irregularities were allowed in favor of the assessee.

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