Assessment quashed as invalid s.143(2) notice violated CBDT instructions; entire additions under ss.69A, 40A(3) deleted accordingly

ITAT Kolkata-AT allowed the assessee's appeal. The assessee had been selected for CASS scrutiny for cash deposits during demonetisation and was subjected to additions under ss. 69A and 40A(3), which were upheld by CIT(A). On appeal, the Tribunal admitted an additional ground challenging the validity of the notice under s. 143(2), relying on SC precedent permitting such grounds at the appellate stage. ITAT held that the s. 143(2) notice was not in conformity with CBDT instructions, rendering the notice and the consequent assessment order invalid.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether an additional legal ground, challenging the validity of notice under section 143(2) of the Income-tax Act, 1961, can be raised for the first time before the Tribunal.

1.2 Whether the notice issued under section 143(2) of the Income-tax Act, 1961 was invalid for non-conformity with CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017.

1.3 Whether the assessment order passed under section 143(3) of the Income-tax Act, 1961 is void and liable to be quashed as a consequence of an invalid notice under section 143(2).

1.4 Whether, upon quashing the assessment on the legal issue, other grounds on merits require adjudication.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Raising additional legal ground before the Tribunal

Legal framework (as discussed)

2.1 The Tribunal referred to the principles laid down by the Supreme Court in Jute Corporation of India Ltd. v. CIT and National Thermal Power Co. Ltd. v. CIT, recognizing that pure legal grounds can be raised for the first time before an appellate authority if no fresh investigation into facts is required.

Interpretation and reasoning

2.2 The Tribunal noted that the additional ground relates to the legal validity of the notice under section 143(2) and goes to the root of the assessment.

2.3 It was observed that all relevant facts necessary to adjudicate the issue of validity of notice were already on record in the appellate folder and no further factual verification was required.

2.4 In these circumstances, the Tribunal treated the objection as a pure question of law, squarely falling within the permissible ambit of additional grounds as envisaged in the cited Supreme Court decisions.

Conclusions

2.5 The additional ground challenging the validity of the notice under section 143(2) was admitted for adjudication by the Tribunal.

Issue 2: Validity of notice under section 143(2) in light of CBDT Instruction dated 23.06.2017

Legal framework (as discussed)

2.6 The Tribunal considered CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017, which prescribes three specific formats for scrutiny notices under section 143(2): (i) Limited Scrutiny (Computer Aided Scrutiny Selection), (ii) Complete Scrutiny (Computer Aided Scrutiny Selection), and (iii) Compulsory Manual Scrutiny, and directs that all scrutiny notices "shall henceforth be issued in these revised formats only".

2.7 The Tribunal also relied on coordinate bench decisions holding that CBDT circulars/instructions issued under section 119 are binding on the income-tax authorities and that non-compliance with such instructions vitiates the proceedings.

Interpretation and reasoning

2.8 It was undisputed that the assessee's case was selected for scrutiny under CASS and that notice under section 143(2) dated 24.09.2018 was issued through the ITBA portal.

2.9 On examination of the notice under section 143(2), the Tribunal found that it merely mentioned "Scrutiny (Computer Aided Scrutiny Selection)" and did not specify whether the scrutiny was "Limited Scrutiny", "Complete Scrutiny" or "Compulsory Manual Scrutiny" in the manner prescribed by the CBDT Instruction.

2.10 The Tribunal held that the notice was not in conformity with any of the three prescribed formats mandated by the CBDT Instruction dated 23.06.2017.

2.11 The Departmental Representative's contention that the notice was computer-generated and therefore could not be modified to match the formats prescribed in the Instruction was not accepted as a valid justification for non-compliance with a binding CBDT Instruction.

2.12 The Tribunal followed earlier coordinate bench decisions, including those where identical non-conformity with the same CBDT Instruction had led to a finding that notices under section 143(2) were invalid.

2.13 It was reiterated, with reference to those decisions, that CBDT instructions issued under section 119 are mandatory for the authorities, and violation thereof renders the impugned notice invalid.

Conclusions

2.14 The Tribunal held that the notice issued under section 143(2) for the relevant assessment year was not issued in the prescribed format mandated by CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017.

2.15 Consequently, the notice under section 143(2) was declared invalid in law.

Issue 3: Effect of invalid notice under section 143(2) on the assessment order under section 143(3)

Interpretation and reasoning

2.16 The Tribunal observed that a valid notice under section 143(2) is a condition precedent for assuming jurisdiction to frame an assessment under section 143(3).

2.17 Having found the notice under section 143(2) to be invalid and non est, the Tribunal held that the very foundation for the assessment stood vitiated.

2.18 The Tribunal followed coordinate bench rulings which held that where the notice under section 143(2) is invalid due to non-compliance with the mandatory CBDT Instruction, all consequential assessment proceedings are rendered invalid and void ab initio.

Conclusions

2.19 The assessment order passed under section 143(3), being consequential to an invalid notice under section 143(2), was held to be invalid and was quashed.

2.20 The additional legal ground of the assessee challenging the jurisdiction and validity of the assessment was allowed.

Issue 4: Necessity of adjudicating other grounds on merits

Interpretation and reasoning

2.21 The Tribunal noted that, once the assessment itself is quashed on a preliminary legal ground relating to jurisdiction and validity of the notice, adjudication of remaining grounds on merits becomes academic.

2.22 The Tribunal also observed that such merits-related issues could be considered at a later stage, if ever required, in an appropriate proceeding.

Conclusions

2.23 In view of allowing the appeal on the legal issue of invalid notice and quashing of the assessment, the Tribunal declined to adjudicate the other grounds on merits and expressly left them open.

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