2025 (5) TMI 529 - HC - Income Tax

Tax Assessment Invalidated: Procedural Errors Trump Potential Evasion Claims Under Section 143(3) of Income Tax Act

SC upheld ITAT's decision quashing an assessment order due to jurisdictional defect. The AO lacked proper jurisdiction to issue the notice and assessment ... Validity of order passed by AO challenged on lack of inherent jurisdiction - ITAT quashed assessment order passed u/s 143(3) - HELD THAT:- Tribunal took note of the facts and circumstances of the case and found that the assessee filed its return of income declaring the income to be nil. Subsequently, notice u/s 143(2) was issued on 10.9.2015 and notice u/s 142(1) was issued along with the questionnaire. Assessee contended that the notices were without jurisdiction and relied upon section 120 of the Act. In this regard, the assessee referred to the notification issued by the CBDT in Instruction No.1 of 2011. The learned Tribunal took into consideration the facts of the case and found that the assessment has been framed by the Assessing Officer, who inherently lacks jurisdiction to do so. Tribunal took note of the decision of Bhagyalaxmi Conclave (P) Ltd. [2021 (2) TMI 181 - ITAT KOLKATA]. Apart from other decisions and allowed the assessee’s appeal, the revenue had challenged the order passed in the case of Bhagyalaxmi Conclave (P) Ltd.[2022 (12) TMI 1514 - CALCUTTA HIGH COURT] the appeal filed by the department was dismissed wherein one of the questions framed is identical to the substantial questions of law suggested by the revenue in the instant case. Thus, we find that Tribunal was right in allowing the assessee’ appeal and setting aside the order passed by the AO on the ground of lack of inherent jurisdiction. Decided against revenue. 1. ISSUES PRESENTED and CONSIDEREDThe Court considered the following core legal questions:a. Whether the Income Tax Appellate Tribunal (ITAT) was justified in law in quashing the assessment order passed under Section 143(3) of the Income Tax Act, 1961, on the basis that the Assessing Officer (AO) lacked jurisdiction, particularly in light of Section 120 of the Income Tax Act and CBDT Instruction No. 1/2011, which governs equitable distribution of work and does not impose rigid jurisdictional limits.b. Whether the ITAT was justified in quashing the assessment order purely on technical grounds without delving into the merits of the additions made under Sections 68 and 69C of the Income Tax Act, specifically regarding the disallowance of the assessee's claim of exemption on alleged bogus Long Term Capital Gains (LTCG) arising from purported accommodation entries involving penny stocks.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Jurisdiction of the Assessing Officer and validity of the assessment order under Section 143(3)Relevant legal framework and precedents: The jurisdiction of an AO is governed primarily by Section 120 of the Income Tax Act, which empowers the Chief Commissioner or Commissioner to distribute cases equitably among AOs. CBDT Instruction No. 1/2011 clarifies that this distribution does not create rigid jurisdictional boundaries but is intended for equitable work allocation. The question was whether the AO who issued the notice and passed the assessment order had valid jurisdiction over the assessee's case, particularly with reference to PAN jurisdiction.Court's interpretation and reasoning: The Court observed that the ITAT found the AO lacked inherent jurisdiction to pass the assessment order. The assessee had challenged the jurisdiction of the AO on the basis of Section 120 and the CBDT Instruction. The ITAT relied on a co-ordinate Bench decision in Bhagyalaxmi Conclave (P) Ltd. vs. DCIT, which held that jurisdictional defects in issuance of notice under Section 143(2) and consequent assessment under Section 143(3) could vitiate the assessment order.Key evidence and findings: The assessee had filed a nil return and received notices under Sections 143(2) and 142(1) from the AO purportedly lacking jurisdiction. The ITAT examined these facts and concluded that the AO did not have jurisdiction over the assessee's case, rendering the assessment order invalid.Application of law to facts: The Court upheld the ITAT's approach, affirming that the AO's jurisdiction is a foundational requirement for valid assessment proceedings. The equitable distribution of work under Section 120 and CBDT instructions does not override the necessity of jurisdictional competence. Since the AO was found to lack jurisdiction, the assessment order was rightly quashed.Treatment of competing arguments: The revenue argued that the AO had PAN jurisdiction and that the CBDT instruction did not impose rigid jurisdictional limits, thus validating the notice and assessment. The Court rejected this, emphasizing that equitable distribution instructions do not confer jurisdiction where none exists.Conclusions: The ITAT was justified in quashing the assessment order on jurisdictional grounds. The Court dismissed the revenue's appeal on this issue, affirming the principle that jurisdictional competence is indispensable for valid assessment proceedings.Issue (b): Quashing assessment order on technical grounds without examining merits of additions under Sections 68 and 69CRelevant legal framework and precedents: Sections 68 and 69C of the Income Tax Act deal with unexplained cash credits and investments, often invoked to counter tax evasion through accommodation entries. The revenue had made additions amounting to Rs. 42,27,500/- under Section 68 and Rs. 1,48,657/- under Section 69C, disallowing exemption claimed on alleged bogus LTCG from penny stocks.Court's interpretation and reasoning: The ITAT quashed the assessment order without delving into the merits of these additions, essentially on the ground that the AO lacked jurisdiction. The Court found this approach appropriate given the foundational defect in jurisdiction, which vitiates the entire assessment process.Key evidence and findings: The revenue contended that the assessee attempted to evade taxes by obtaining accommodation entries disguised as penny stock transactions. However, since the assessment order was invalid due to jurisdictional defect, the merits of these allegations were not examined by the ITAT.Application of law to facts: The Court endorsed the ITAT's decision to not consider the merits of the additions in the absence of a valid assessment order. It recognized that jurisdictional competence is a threshold issue that must be resolved before substantive examination.Treatment of competing arguments: The revenue argued for sustaining the additions despite jurisdictional issues, emphasizing the organized nature of tax evasion. The Court, however, prioritized jurisdictional validity over substantive merits in this procedural context.Conclusions: The ITAT's quashing of the assessment order on jurisdictional grounds without addressing the merits of additions under Sections 68 and 69C was justified. The Court dismissed the revenue's challenge to this approach.3. SIGNIFICANT HOLDINGSThe Court held that:'The learned Tribunal was right in allowing the assessee's appeal and setting aside the order passed by the Assessing Officer on the ground of lack of inherent jurisdiction.'It established the core principle that jurisdiction of the Assessing Officer is a sine qua non for valid assessment proceedings and that equitable distribution instructions under Section 120 and CBDT guidelines cannot override this jurisdictional requirement.Further, the Court affirmed that where jurisdiction is lacking, the assessment order is liable to be quashed even if the revenue's allegations of tax evasion are serious. The Court emphasized that procedural validity must precede substantive adjudication.Accordingly, the Court dismissed the revenue's appeal and answered the substantial questions of law against the revenue, thereby preserving the ITAT's order quashing the assessment on jurisdictional grounds and declining to examine the merits of additions under Sections 68 and 69C.