Objection to AO jurisdiction under s.124(3) fails; assessment remanded for breach of natural justice on remand report

ITAT Ahmedabad held that the assessee's objection to the AO's jurisdiction under s.124(3) was not maintainable as it was raised for the first time before the Tribunal and not before the AO or CIT(A). Section 124 was treated as a self-contained code, and the additional ground on jurisdiction was dismissed. However, the Tribunal found violation of principles of natural justice as CIT(A) relied on the AO's remand report without granting the assessee an opportunity to rebut it. The addition towards alleged long-term capital gains was therefore set aside and the matter remanded to the jurisdictional AO for fresh adjudication after providing due opportunity of hearing.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assessment order was bad in law and without jurisdiction, including on account of alleged violation of CBDT Instruction No. 1/2011, and whether the assessee could validly raise a jurisdictional objection at the appellate stage.

1.2 Whether the appellate authority erred in relying on the remand report without affording the assessee an opportunity to rebut it, and the consequent validity of the confirmation of addition on account of long-term capital gains.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Objection to jurisdiction and validity of assessment order

Legal framework

2.1 The Tribunal referred to section 124 of the Income-tax Act, 1961, particularly sub-sections (3) and (4), governing when and how an assessee may call in question the jurisdiction of an Assessing Officer.

2.2 Section 124(3)(a) provides that where the assessee has made a return under section 139(1), he is not entitled to question the jurisdiction of the Assessing Officer after the expiry of one month from the date on which he was served with a notice under section 142(1) or section 143(2), or after completion of the assessment, whichever is earlier.

2.3 Section 124(4) mandates that, subject to section 124(3), when an assessee objects to the jurisdiction of the Assessing Officer, the Assessing Officer, if not satisfied, shall refer the matter for determination in terms of section 124(2) before making the assessment.

Interpretation and reasoning

2.4 The Tribunal noted that the assessee voluntarily filed its return of income with the specified Assessing Officer (Ward-1(1)(1)), and thereafter the first notice under section 143(2) was issued on 03.08.2016, followed by several notices under section 142(1), none of which were responded to by the assessee.

2.5 Applying section 124(3)(a), the Tribunal held that the assessee could have questioned the jurisdiction only within one month from service of the first statutory notice (i.e., before 03.09.2016), and only before the Assessing Officer. No such objection was raised either before the Assessing Officer or before the first appellate authority.

2.6 The Tribunal held that, in view of section 124(3), the assessee was not entitled to raise the jurisdictional objection for the first time before the Tribunal by way of an additional ground after completion of assessment and appellate proceedings.

2.7 The Tribunal further held that section 124 constitutes a self-contained mechanism on jurisdiction, and that the case law relied upon by the assessee did not deal with section 124, particularly sub-section (3), and therefore did not assist the assessee.

2.8 As regards the reliance on CBDT Instruction/Circular No. 1/2011, the Tribunal observed that since the assessee itself filed the return of income before the concerned Assessing Officer, the contention that the assessment was without jurisdiction on the basis of that Instruction did not arise on the facts.

Conclusions

2.9 The Tribunal concluded that the assessee had no locus standi to question the Assessing Officer's jurisdiction at this stage in view of section 124(3)(a), and rejected the additional ground challenging the assessment as bad in law, illegal, or without jurisdiction, including the plea based on CBDT Instruction No. 1/2011.

Issue 2: Opportunity to rebut remand report and confirmation of long-term capital gain addition

Interpretation and reasoning

2.10 The Tribunal examined the appellate order and noted that the appellate authority had called for and relied upon a detailed remand report from the Assessing Officer, which was adverse to the assessee and formed the basis for confirming the addition on account of long-term capital gains.

2.11 It was observed that, although the remand report was relied upon extensively, the assessee was not given an effective opportunity to rebut or respond to the findings and discrepancies recorded therein.

2.12 The Tribunal found force in the assessee's contention that non-grant of such opportunity violated the principles of natural justice, particularly when the remand report was determinative in sustaining the addition.

Conclusions

2.13 The Tribunal held that the confirmation of the addition of Rs. 5,80,85,164/- on account of long-term capital gains, without affording the assessee an opportunity to controvert the remand report, was not sustainable.

2.14 In the interest of justice, the Tribunal set aside the matter to the file of the jurisdictional Assessing Officer, directing that one more opportunity of hearing be given to the assessee to substantiate its claim relating to long-term capital gains and supporting documentation.

2.15 The Tribunal clarified that the assessee must effectively utilise this final opportunity and that the Assessing Officer shall pass a fresh order on the merits of the case after providing due opportunity of being heard.

2.16 The appeal was accordingly treated as allowed for statistical purposes, with the quantum addition on long-term capital gains remitted for de novo consideration and not decided on merits at this stage.

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