Invalid return under section 148 makes assessment under section 147 valid without requiring section 143(2) notice

ITAT Raipur dismissed the assessee's appeal challenging PCIT's revision order u/s 263. The Tribunal held that non-verification of return filed u/s 148 rendered it invalid, making assessment u/s 147 r/w 144B valid without requiring notice u/s 143(2). Regarding revision jurisdiction, while addition u/s 68 was under appeal, PCIT could still exercise powers u/s 263 for separate issues of applying special tax rate u/s 115BBE and correct penalty provision u/s 271AAC instead of 271(1)(c). The AO's failure to apply mandatory provisions of section 115BBE on addition u/s 68 made the assessment order erroneous and prejudicial to revenue interest, justifying PCIT's revisionary jurisdiction.

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The primary issues considered in this appeal revolve around the validity and jurisdictional aspects of the assessment order framed under sections 147 read with 144B of the Income Tax Act, 1961 (the Act), the correctness of invoking revisionary powers under section 263 of the Act by the Principal Commissioner of Income Tax (PCIT), the applicability and initiation of penalty proceedings under the correct statutory provisions, and the adequacy of inquiries conducted by the Assessing Officer (AO) during the assessment proceedings.

Issue 1: Validity of the Assessment Order passed under section 147 read with 144B without issuance of notice under section 143(2)

The assessee challenged the validity of the assessment order dated 26.03.2022 passed under section 147 read with 144B on the ground that it was passed without issuance of notice under section 143(2), and the return filed in response to notice under section 148 was not e-verified, rendering the return invalid and the assessment order non-est in law. The assessee further contended that in the absence of a valid return, the assessment should have been passed under section 144, and the PCIT's revision under section 263 of such an invalid order exceeded jurisdiction.

The legal framework involves sections 139 (filing and verification of return), 143(2) (notice for scrutiny assessment), 144 (best judgment assessment), 147 (income escaping assessment), and 144B (special provisions for search cases). Section 139 mandates that a return must be verified in the prescribed manner to be valid. Section 144 applies only if the assessee fails to file a return or comply with notices as detailed in its clauses (a), (b), and (c).

The AO submitted a report clarifying that the return filed in response to notice under section 148 was not e-verified within the stipulated time, hence remained pending for verification. Consequently, the AO was not authorized to issue notice under section 143(2) through the ITBA portal, as a precondition for such notice is a valid return. The Tribunal noted that since the assessee had filed the original return under section 139(1) and complied with notices under section 142(1), none of the conditions for invoking section 144 applied. Therefore, the AO was justified in passing the assessment order under section 147 read with 144B.

The Tribunal further analyzed the requirement for a valid return under section 139(1)(b), emphasizing the mandatory e-verification. The failure to e-verify rendered the return invalid for processing, and thus, no notice under section 143(2) could be issued. The contention that the assessment order was invalid due to absence of section 143(2) notice was rejected, as the AO lacked authority to issue such notice without a valid return. The alternative plea that assessment should have been under section 144 was also dismissed on the ground that none of the conditions for section 144 applied.

Regarding the issue of whether the invalidity of the return and assessment order could be challenged before the Tribunal, the Tribunal observed that the quantum addition under section 68 was already under appeal before the Commissioner of Income Tax (Appeals) (CIT(A)), and the question of validity of assessment order on this ground was premature and better suited for adjudication before the CIT(A). Consequently, this ground and additional ground were dismissed.

Issue 2: Jurisdiction of the PCIT to invoke revisionary powers under section 263 when appeal is pending before CIT(A)

The assessee contended that the PCIT had no jurisdiction to revise the assessment order under section 263 when the same issue was pending appeal before the CIT(A), relying on the doctrine of merger and judicial precedents. The contention was that once an appeal is filed, the revisionary powers under section 263 are barred by Explanation 1(c) to section 263(1) of the Act.

Section 263(1), Explanation 1(c) provides that if any order passed by the AO is the subject matter of an appeal filed on or after 1 June 1988, the powers of the PCIT or Commissioner under section 263 extend only to matters not considered or decided in such appeal.

The Tribunal noted that the appeal challenging the addition under section 68 was filed on 13.04.2022 and was pending before the CIT(A) when the PCIT initiated revision proceedings under section 263 on 09.10.2023. The Tribunal referred to authoritative judicial pronouncements, including decisions of the Allahabad and Madras High Courts and ITAT rulings, holding that the PCIT cannot exercise revisionary powers under section 263 on issues that are the subject matter of a pending appeal before the CIT(A).

However, the Tribunal distinguished the issues raised by the PCIT under section 263 from those pending in appeal. The PCIT's revision focused on the AO's failure to apply the mandatory provisions of section 115BBE (special tax rate on income under section 68) and initiation of penalty under incorrect section 271(1)(c) instead of section 271AAC. These issues were not before the CIT(A). The Tribunal held that the PCIT's jurisdiction under section 263 extends to matters not considered or decided in the appeal. The pendency of appeal does not bar revision on distinct issues prejudicial to revenue.

Accordingly, the Tribunal rejected the assessee's contention and upheld the PCIT's jurisdiction to revise the assessment order on issues not covered in the appeal before CIT(A).

Issue 3: Legality of initiation of penalty proceedings under section 271AAC by PCIT when AO initiated penalty under section 271(1)(c)

The assessee challenged the PCIT's revision on the ground that initiation of penalty proceedings under section 271AAC was beyond the PCIT's jurisdiction and that penalty proceedings are independent and cannot be directed by the PCIT under section 263. The assessee relied on judicial precedents holding that penalty proceedings are separate from assessment proceedings and the PCIT cannot direct initiation or change of penalty proceedings under section 263.

The Tribunal examined the legal position, referring to authoritative judgments including those of the Rajasthan High Court and ITAT Jaipur, which held that penalty proceedings are independent and the PCIT cannot direct initiation of penalty proceedings or alter the section under which penalty is initiated via revisionary powers under section 263.

However, the Tribunal distinguished the present facts, noting that the AO had initiated penalty under an incorrect section (271(1)(c)) which was not applicable for the assessment year 2017-18 for additions under section 68. The PCIT's revision was not merely to initiate penalty but to correct the erroneous application of penalty provisions, which caused prejudice to revenue. The Tribunal held that such correction of legal errors affecting the interest of revenue is within the scope of revision under section 263. Therefore, the PCIT's revision to rectify the penalty section was justified and did not amount to impermissible direction to initiate penalty proceedings.

Accordingly, the Tribunal dismissed the assessee's ground and upheld the PCIT's order on this issue.

Issue 4: Adequacy of inquiries conducted by AO during assessment and justification for revision under section 263

The assessee contended that the AO had made adequate inquiries regarding the alleged bogus sales and had verified all necessary evidence and documents, making the PCIT's revision under section 263 arbitrary and unjustified.

The Tribunal analyzed the record and found that the PCIT's revision was based on the AO's failure to apply the mandatory provisions of section 115BBE relating to special tax rate on income under section 68, which was an apparent error causing prejudice to revenue. The Tribunal emphasized that the AO did not make any plausible or recorded application of section 115BBE, which is mandatory in such cases.

The Tribunal held that the adequacy of inquiries does not preclude the PCIT from exercising revisionary powers if the AO's order is erroneous and prejudicial to revenue. The PCIT was justified in revising the order for failure to apply mandatory provisions, notwithstanding the submissions of the assessee regarding inquiries.

Therefore, the Tribunal rejected the assessee's contention and upheld the revision under section 263 on this ground.

Significant Holdings:

1. "The return filed by the assessee in response to notice under section 148 which is not e-verified within the prescribed time is invalid and cannot be treated as a valid return for issuance of notice under section 143(2). Consequently, the assessment order passed under section 147 read with 144B is valid and not liable to be quashed for want of notice under section 143(2)."

2. "The powers of the Principal Commissioner or Commissioner under section 263 are barred in respect of matters that are the subject matter of any appeal pending before the Commissioner of Income Tax (Appeals). However, such powers extend to matters not considered or decided in such appeal. Therefore, pendency of appeal does not preclude revision on distinct issues not before the appellate authority."

3. "Penalty proceedings are independent of assessment proceedings and the Commissioner under section 263 cannot direct initiation or change of penalty proceedings. However, correction of an error in the assessment order relating to the incorrect invocation of penalty provisions causing prejudice to revenue can be made under section 263."

4. "Failure of the Assessing Officer to apply mandatory provisions of law, such as section 115BBE in case of additions under section 68, constitutes an erroneous order prejudicial to the interest of revenue, justifying exercise of revisionary powers under section 263."

5. "The absence of issuance of notice under section 143(2) due to non-verification of return filed under section 148 does not invalidate the assessment order passed under section 147 read with 144B, as the AO was divested of authority to issue such notice."

6. "The doctrine of merger does not prohibit the PCIT from revising the assessment order under section 263 on issues distinct from those pending in appeal before the CIT(A)."

7. "The Tribunal upheld the PCIT's order dated 13.03.2024 passed under section 263 revising the assessment order dated 26.03.2022, dismissing all grounds raised by the assessee challenging the revision."

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