Spot verification lacked mandatory Joint Commissioner approval under proviso to s.133A; orders under ss.201/201(1A) held invalid

ITAT JAIPUR - AT held that spot verification by the TDS wing was invalid for FY 2012-13 and 2013-14 as it lacked the mandatory approval of the Joint Commissioner/Joint Director under the proviso to s.133A; the only sanction produced related to FY 2011-12. Consequently, actions taken and orders under ss.201/201(1A) based on that verification were without authority of law, no cognizance could be taken of the illegal survey, and the assessee's appeal was allowed.

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1. ISSUES PRESENTED and CONSIDERED

• Whether the spot verification conducted under section 133A of the Income Tax Act, 1961, was valid in the absence of prior approval from the Joint Commissioner or Joint Director, and whether the consequent assessment order under sections 201/201(1A) is legal and sustainable.
• Whether the Assessing Officer erred in passing a consolidated assessment order for two distinct assessment years jointly, violating the statutory provisions relating to assessment years under the Income Tax Act.
• Whether the demand raised and confirmed during the pendency of a Supreme Court Special Leave Petition (SLP) and stay order, directing the bank not to recover tax from employees, was justified.
• Whether initiating proceedings solely against the deductor bank without issuing notices to employees who actually enjoyed the Leave Travel Concession (LTC) benefit violates principles of natural justice and whether such action amounts to contempt of court during pendency of higher court orders.
• Whether the bank can be treated as an assessee-in-default under section 201(1) despite its bona fide belief, based on internal circulars, that TDS was not deductible on LTC benefits, and the failure to initiate proceedings against employees liable to pay tax on LTC benefits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Spot Verification under Section 133A and Legality of Assessment Order

Relevant Legal Framework and Precedents: Section 133A of the Income Tax Act empowers income-tax authorities to conduct surveys or spot verifications for inspection of books of account or documents. The proviso to section 133A(1) mandates that no action under this section shall be taken by certain authorities (including Assessing Officers) without prior approval of the Joint Commissioner or Joint Director. Sub-section (2A), inserted w.e.f. 01.10.2014, provides specific powers for verifying TDS compliance.

Court's Interpretation and Reasoning: The spot verification in the instant case was conducted on 19.02.2014 and 22.03.2014, i.e., prior to the insertion of sub-section (2A) and without obtaining the mandatory approval from the Joint Commissioner or Joint Director as required under the proviso to section 133A(1). The sanction letter produced by the Revenue dated 22.03.2014 authorized verification only for the financial year 2011-12 and was issued by an Assistant Commissioner, not the Joint Commissioner or Joint Director. No approval was granted for the financial years 2012-13 and 2013-14, which are the years under dispute.

The show cause notices issued referred to the spot verification but pertained to different years than those authorized, and did not specify any default amount. The due dates for replies in the notices were also inconsistent with the dates of issuance, indicating procedural irregularities.

Key Evidence and Findings: The absence of proper authorization for the spot verification for the relevant years and procedural lapses in issuance of show cause notices were established on record.

Application of Law to Facts: Since the proviso to section 133A(1) explicitly prohibits action without approval from the designated higher authority, the spot verification conducted without such approval is illegal and without jurisdiction. Consequently, any assessment order based on such verification is void ab initio.

Treatment of Competing Arguments: The Revenue's reliance on the letter dated 22.03.2014 was examined and found insufficient as it did not constitute the required sanction. The assessee's contention of non-compliance with statutory procedure was accepted.

Conclusions: The spot verification was illegal, and the assessment order passed under sections 201/201(1A) based on it is quashed. The defect is not curable under section 292BB.

Issue 2: Legality of Passing a Single Assessment Order for Two Assessment Years

Relevant Legal Framework and Precedents: Section 2(9) defines an assessment year as a twelve-month period commencing on 1st April. Assessment and related proceedings under the Income Tax Act are year-specific. Section 201(1) and related provisions require separate proceedings for each assessment year. Precedents emphasize that consolidated assessment orders covering multiple years violate statutory mandates.

Court's Interpretation and Reasoning: The impugned order combined assessment years 2012-13 and 2013-14 into a single assessment order, which is contrary to the statutory requirement of year-wise assessment. The Tribunal cited relevant judicial pronouncements holding that notices and assessments must be issued separately for each assessment year.

Key Evidence and Findings: The assessment order dated 19.02.2015 consolidated demands for two years, which is not authorized by law.

Application of Law to Facts: The statutory scheme mandates distinct assessments for each assessment year, and the procedure for issuance of notices and passing of orders is year-specific. The impugned consolidated order is therefore invalid.

Treatment of Competing Arguments: The Revenue did not produce any legal provision or precedent supporting consolidated assessment orders for multiple years. The assessee's submission was supported by binding judicial authority.

Conclusions: The assessment order for two assessment years passed jointly is illegal and deserves to be quashed.

Issue 3: Raising and Confirming Demand During Pendency of Supreme Court Stay Order

Relevant Legal Framework and Precedents: The Supreme Court's interim order in SLP No. 16734/2023 dated 28.08.2023 stayed the operation of the Madras High Court judgment and directed the bank not to recover tax from employees during pendency of the SLP. Principles of judicial discipline and respect for higher court orders prevent enforcement of demands contrary to such stay.

Court's Interpretation and Reasoning: The CIT (Appeals) acknowledged the stay but proceeded to confirm the demand. The Tribunal observed that the Revenue was aware of the stay and the bank's binding obligation not to recover tax from employees during pendency of the SLP.

Key Evidence and Findings: The stay order and the CIT (Appeals) order explicitly referred to the stay and the bank's obligation.

Application of Law to Facts: Enforcement of the demand during the stay period is contrary to the Supreme Court's order and principles of natural justice.

Treatment of Competing Arguments: The Revenue did not dispute the existence or applicability of the stay order but urged upholding the demand. The Tribunal found this untenable.

Conclusions: The demand raised and confirmed during the pendency of the stay order is not sustainable and the assessment order deserves to be quashed or kept in abeyance.

Issue 4: Initiating Proceedings Solely Against Deductor Bank Without Issuing Notices to Employees and Natural Justice

Relevant Legal Framework and Precedents: Principles of natural justice require that all persons affected by proceedings be given an opportunity to be heard. Section 190 and 191(1) of the Income Tax Act impose responsibility on the employee to pay tax on income, including LTC benefits. The deductor bank's liability as assessee-in-default under section 201 is contingent and does not absolve the employee's primary liability.

Court's Interpretation and Reasoning: The Tribunal noted that the bank was bound by higher court orders during pendency, which prevented recovery from employees. The department did not issue notices to employees who enjoyed LTC benefits, initiating proceedings solely against the bank. This was held to violate natural justice and could amount to contempt of court.

Key Evidence and Findings: The absence of notices to employees and the bank's compliance with court orders were established.

Application of Law to Facts: The department's failure to issue notices to employees deprived them of the opportunity to respond, violating natural justice. The bank's position as bound by court orders further protected it from unilateral action.

Treatment of Competing Arguments: The Revenue did not justify the omission of notices to employees nor the initiation of proceedings solely against the bank.

Conclusions: The assessment order passed solely against the bank without involving employees is against the principles of natural justice and deserves to be quashed.

Issue 5: Treatment of Bank as Assessee-in-Default Despite Bona Fide Belief and Non-Initiation of Proceedings Against Employees

Relevant Legal Framework and Precedents: Section 201(1) imposes liability on a deductor who fails to deduct or pay TDS. However, the primary liability to pay tax on LTC benefits lies with the employee under section 4(1) read with sections 190 and 191(1). Internal circulars of the bank created a bona fide belief that TDS was not deductible on LTC benefits.

Court's Interpretation and Reasoning: The Tribunal recognized the bank's bona fide belief based on internal circulars and noted the absence of proceedings against employees who were liable to pay tax. The bank's liability as assessee-in-default is not absolute and must be considered in context.

Key Evidence and Findings: Bank circulars and lack of action against employees were on record. The bank's conduct was in good faith.

Application of Law to Facts: The bank cannot be treated as assessee-in-default when it acted on bona fide belief and the primary tax liability lies with employees. The department's failure to act against employees undermines the basis for treating the bank as assessee-in-default.

Treatment of Competing Arguments: The Revenue did not demonstrate willful default or malafide on part of the bank.

Conclusions: The bank should not be treated as assessee-in-default under the facts and circumstances, and the assessment order is liable to be quashed.

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