2024 (11) TMI 1455 - AT - Income Tax

Invalid notice issued u/s 143 - HELD THAT - We find that the notice issued u/s 143(2) dated 9th August 2017 was not in any of the formats as provided in the CBDT-II dated 23.06.2017. We have examined the notice and find that the same is not as per the format of CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017 as stated above. In our opinion the instruction issued by the CBDT are mandatory and binding on the Income tax authorities failing which the proceedings would be rendered as invalid. Hon ble Apex Court in case of UCO Bank 1999 (5) TMI 3 - SUPREME COURT held that the circular issued by CBDT in exercise of its statutory powers u/s 119 of the Act are binding on the authorities. Therefore case of the assessee is therefore squarely covered by the ratio laid down in the above decisions and respectfully following the same we are inclined to hold the assessment as invalid being based on the invalid issue of notice u/s 143(2) of the Act. The first additional ground raised by the assessee is allowed. Since we have held the notice issued u/s 143(2) as invalid and so the consequential assessment framed. Ground raised by the assessee is allowed.

Summary

The core legal questions considered in this appeal include: (1) Whether the notice issued under section 143(2) of the Income Tax Act, 1961, dated 09.08.2017, was valid in law, particularly in light of the Central Board of Direct Taxes (CBDT) Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017; and (2) Whether the assessment order passed under section 143(3) was beyond the jurisdiction of the assessing officer (AO) because the scrutiny was limited to a specific issue, namely excess contribution to provident fund, superannuation fund, or gratuity fund, and whether the AO exceeded the scope of this limited scrutiny without requisite authorization.

Regarding the first issue, the relevant legal framework includes section 143(2) of the Income Tax Act, which empowers the AO to issue notices for scrutiny of returns, and the CBDT Instruction dated 23.06.2017 that prescribes mandatory formats for such notices. The instruction mandates issuance of notices in one of three specified formats: (i) Limited Scrutiny (Computer Aided Scrutiny Selection), (ii) Complete Scrutiny (Computer Aided Scrutiny Selection), or (iii) Compulsory Manual Scrutiny. The CBDT circular is issued under section 119 of the Act, which empowers the Board to issue binding instructions to ensure just, proper, and efficient administration of fiscal laws.

The Court examined the notice issued on 09.08.2017 and found that it did not conform to any of the three prescribed formats under the CBDT Instruction. The Court emphasized the binding nature of CBDT circulars, citing the Supreme Court's ruling that such circulars are binding on subordinate authorities and are intended to prevent undue hardship and ensure correct application of tax laws. The Court also referred to a High Court decision affirming the binding nature of CBDT circulars and the necessity of compliance with them.

The assessee argued that non-compliance with the CBDT Instruction rendered the notice invalid, and consequently, the assessment order based on that notice was also invalid. The revenue contended that the notices were computer-generated and beyond the AO's control, and thus the plea was not maintainable. However, the Court rejected this argument, holding that the mandatory nature of the CBDT Instruction cannot be circumvented by the mode of issuance.

Applying the law to the facts, the Court concluded that since the notice was not issued in the prescribed format, it was invalid. The Court relied on established precedents which hold that non-compliance with mandatory procedural instructions issued under section 119 results in invalidity of the proceedings. The Court stated: "The instruction issued by the CBDT are mandatory and binding on the Income tax authorities failing which the proceedings would be rendered as invalid."

On the second issue concerning the scope of scrutiny, the assessee contended that the case was selected for limited scrutiny on the issue of excess contribution to provident fund, superannuation fund, or gratuity fund, and that the AO made additions on unrelated issues without obtaining prior approval from the competent authority. The assessee relied on a recent High Court decision which held that an AO exceeding the scope of limited scrutiny without authorization acts without jurisdiction, rendering the additions invalid.

The revenue disputed this, asserting that the scrutiny was complete, not limited, and thus the AO was entitled to examine other issues. The Court did not adjudicate this issue on merits because it held the notice itself invalid, which vitiated the entire assessment process. The Court observed that since the notice was invalid, the consequential assessment order was also invalid, and therefore, the second issue and other grounds were left open for future adjudication if necessary.

In conclusion, the Court allowed the appeal on the ground that the notice issued under section 143(2) was invalid due to non-compliance with the mandatory CBDT Instruction. The Court held that the assessment framed pursuant to such invalid notice was also invalid. The Court stated: "Therefore case of the assessee is therefore squarely covered by the ratio laid down in the above decisions and respectfully following the same, we are inclined to hold the assessment as invalid being based on the invalid issue of notice u/s 143(2) of the Act."

Significant holdings include the reaffirmation that CBDT circulars issued under section 119 are binding on income tax authorities and that failure to comply with mandatory procedural instructions renders notices and consequent assessments invalid. The Court emphasized the beneficial nature of section 119 powers to prevent undue hardship and ensure correct application of tax laws. The Court's decision preserves the principle that procedural compliance is essential for the validity of tax proceedings.

The final determination was that the notice issued under section 143(2) dated 09.08.2017 was invalid, and accordingly, the assessment order passed under section 143(3) was quashed. The other issues raised were not adjudicated and remain open for future consideration if required.