2025 (5) TMI 674 - AT - Income Tax

Validity of assessment order passed by the ITO-3(3) Raipur in absence of any valid order of transfer u/s. 127 - Addition u/s 68 - unexplained cash deposits credit - HELD THAT - We find that the till date despite specific direction the department has failed to place on record any order of transfer u/s. 127 of the Act based on which the case records of the assessee were transferred from ITO-4(3) Raipur to ITO-3(3) Raipur. Framing of assessment by the ITO-3(3) Raipur in absence of any valid order of transfer u/s. 127 of the Act in absence of any valid assumption of jurisdiction by the latter cannot be sustained and is liable to be quashed. Addition u/s 68 - Ostensibly the assessee had in the course of the assessment proceedings produced his books of account and had come forth with an explanation that the subject cash deposits in SBNs of Rs. 25 lacs was sourced out of her business sale receipts. AO without rejecting the books of account of the assessee u/s. 145(3) of the Act much the less pointing out any infirmity in the same had whimsically held the subject cash deposits of Rs. 3 lacs (out of Rs. 25 lacs) as an unexplained cash credit u/s. 68. Thus unable to comprehend that as to how the aforesaid arbitrary action on the part of the A.O which thereafter had been upheld by the CIT(Appeals) can be sustained. Addition made/sustained by the lower authorities u/s. 68 cannot even otherwise be approved. Appeal of assessee allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the addition of Rs. 3,00,000 on account of unexplained cash deposits under section 68 of the Income-tax Act, 1961 (the Act) was justified.

2. Whether the assessment order passed under section 143(3) by the Assessing Officer (ITO-3(3), Raipur) was valid in the absence of a transfer order under section 127 of the Act from the original AO (ITO-4(3), Raipur).

3. Whether the notices issued under section 143(2) by ITO-4(3), Raipur were valid, given the alleged lack of territorial jurisdiction and absence of transfer orders.

4. Whether the assessment framed without valid jurisdiction and without compliance with procedural requirements under sections 124, 127, and 143(2) of the Act is liable to be quashed.

Issue-wise Detailed Analysis:

1. Legitimacy of Addition Under Section 68 for Unexplained Cash Deposits

Legal Framework and Precedents: Section 68 of the Act empowers the AO to treat any sum found credited in the books of an assessee as income if the assessee fails to explain the nature and source of such sum satisfactorily. The burden lies on the assessee to prove the genuineness of the cash deposits.

Court's Interpretation and Reasoning: The AO observed cash deposits of Rs. 25 lakhs made on a single day during demonetization, which was disproportionate to the assessee's declared turnover of approximately Rs. 53.65 lakhs for the year. The assessee explained the deposits as sale proceeds and produced a cash book to substantiate the source. The AO, without rejecting the books of account under section 145(3), made an addition of Rs. 3 lakhs, treating a portion of the deposits as unexplained cash credit under section 68. The CIT(A) upheld this addition, emphasizing the abnormality of a single-day large deposit constituting 62.12% of the proportionate turnover till December 2019, despite the assessee's explanation of shifting business premises and opening a new bank account.

Key Evidence and Findings: The assessee's books of account and cash book were produced, and no formal rejection of these books was made by the AO. The addition was based on the AO's subjective assessment of abnormality rather than any specific infirmity in the accounts.

Application of Law to Facts: The Tribunal found the addition arbitrary since the AO did not reject the books or point out any defect therein. The assessee had provided a plausible explanation supported by documentary evidence. Thus, the addition under section 68 was not sustainable.

Treatment of Competing Arguments: The AO and CIT(A) relied on the disproportionate nature of cash deposits; the assessee argued the deposits were legitimate business receipts supported by books. The Tribunal sided with the assessee, emphasizing the absence of rejection of accounts and arbitrary nature of addition.

Conclusion: The addition of Rs. 3 lakhs under section 68 was unjustified and liable to be deleted.

2. Validity of Assessment Order Framed by AO Without Transfer Order Under Section 127

Legal Framework and Precedents: Section 127 of the Act mandates that the Principal Director General, Director General, Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner may transfer cases between Assessing Officers (AOs) after recording reasons and giving reasonable opportunity to the assessee, wherever possible. Sub-section (3) exempts the requirement of hearing when transfers occur within the same city or locality but does not dispense with the requirement to record reasons or pass a transfer order.

Judicial precedents, including the High Court of Calcutta's decision in Kusum Goyal vs. ITO (2010), have held that a transfer order under section 127 is mandatory for valid assumption of jurisdiction by the transferee AO. An AO cannot unilaterally transfer a case without such an order. The Supreme Court in Ajanta Industries vs. CBDT (1976) emphasized the mandatory nature of recording reasons and communication thereof under section 127.

Court's Interpretation and Reasoning: The assessee challenged the validity of the assessment framed by ITO-3(3), Raipur on the ground that no order of transfer under section 127 was passed to transfer the case from ITO-4(3), Raipur. The Revenue initially claimed that a notice under section 143(2) was issued by ITO-3(3) after receiving the case on transfer, but the assessee produced e-proceeding records disproving this claim. The AO's letter admitted the absence of a transfer order. The Tribunal relied on the statutory mandate and binding precedents to hold that the absence of a transfer order renders the assessment order invalid and liable to be quashed.

Key Evidence and Findings: No transfer order under section 127 was produced by the Revenue. The case was transferred by a mere letter between officers without authority. The AO's own report confirmed the absence of a valid transfer order.

Application of Law to Facts: The statutory requirement of passing a transfer order with recorded reasons was not fulfilled. The transfer was intra-city but still required recording reasons and passing an order. The absence of such an order meant ITO-3(3) had no jurisdiction to frame the assessment.

Treatment of Competing Arguments: The Revenue argued that intra-city transfers do not require a transfer order or hearing. The Tribunal rejected this, relying on authoritative rulings that while hearing may be dispensed with, recording reasons and passing an order is mandatory. The Revenue's claim that jurisdiction automatically vested was also rejected.

Conclusion: The assessment order framed by ITO-3(3) without a valid transfer order under section 127 is invalid and liable to be quashed.

3. Validity of Notices Issued Under Section 143(2) by AO Without Territorial Jurisdiction

Legal Framework and Precedents: Section 143(2) requires the Assessing Officer to issue a notice initiating scrutiny assessment. The AO must have territorial jurisdiction as per section 124 and related notifications. The Supreme Court and High Courts have held that issuance of notice by an AO without jurisdiction vitiates the assessment proceedings.

Court's Interpretation and Reasoning: The assessee contended that notices under section 143(2) were issued by ITO-4(3), Raipur, who lacked territorial jurisdiction as per statutory notifications, and no valid transfer of jurisdiction occurred. The Tribunal examined the notifications and found no evidence of valid jurisdiction conferred on ITO-4(3). The absence of valid notice by the correct jurisdictional AO invalidated the assessment proceedings.

Key Evidence and Findings: The statutory notifications and departmental records showed the territorial jurisdiction belonged to ITO-3(3), Raipur. The notices issued by ITO-4(3) were thus invalid. The Revenue failed to produce any transfer order conferring jurisdiction.

Application of Law to Facts: Since the notices initiating assessment were invalid, subsequent assessment orders were also invalid. The Tribunal followed the precedent in Hotel Blue Moon (2010) (SC) which held that jurisdictional defects in notices render assessments void.

Treatment of Competing Arguments: The Revenue argued that jurisdictional issues were cured by subsequent notices or transfers. The Tribunal rejected this, emphasizing the mandatory nature of jurisdictional compliance at the notice stage.

Conclusion: The notices issued by AO without territorial jurisdiction were invalid, vitiating the assessment proceedings.

4. Quashing of Assessment for Lack of Valid Jurisdiction and Procedural Non-compliance

Legal Framework and Precedents: Valid assumption of jurisdiction is a fundamental prerequisite for assessment proceedings. Sections 124, 127, and 143(2) prescribe the framework for jurisdiction and procedural compliance. Non-compliance results in nullity of assessment orders. The Supreme Court and various High Courts have consistently held that assessments made without valid jurisdiction are liable to be quashed.

Court's Interpretation and Reasoning: The Tribunal found that the AO framed assessment without valid jurisdiction due to absence of transfer order under section 127 and invalid issuance of notices under section 143(2). The Tribunal relied on the Calcutta High Court's decision in Kusum Goyal and ITAT Raipur's precedents to hold that the assessment order was void ab initio. The Tribunal also rejected the Revenue's contention that intra-city transfers do not require transfer orders, clarifying that only the hearing requirement is dispensed with, not the order recording reasons.

Key Evidence and Findings: The absence of any transfer order under section 127, invalid notices under section 143(2), and failure of the Revenue to produce any valid notification conferring jurisdiction were determinative facts.

Application of Law to Facts: The statutory provisions and judicial precedents mandate that jurisdictional transfers must be effected by proper orders. The failure to comply rendered the assessment proceedings invalid.

Treatment of Competing Arguments: The Revenue's reliance on intra-city transfer exceptions and claims of automatic vesting of jurisdiction were rejected as contrary to settled law.

Conclusion: The assessment framed without valid jurisdiction and procedural compliance was quashed.

Significant Holdings:

"The framing of assessment by the ITO-3(3), Raipur in absence of any valid order of transfer u/s. 127 of the Act in absence of any valid assumption of jurisdiction by the latter cannot be sustained and is liable to be quashed."

"Requirement of recording reasons under section 127(1) is a mandatory direction under the law and non-communication thereof is not saved by showing that the reasons exist in the file although not communicated to the assessee."

"Though sub-section (3) of Section 127 of the Act dispenses with the requirement of affording a reasonable opportunity of being heard to the assessee in a case where the transfer of the case is within the same city, locality or place, it does not dispense with the statutory requirement of recording of the reasons for doing so by the concerned authority."

"The addition of Rs. 3 lakhs made/sustained by the lower authorities u/s. 68 of the Act cannot even otherwise be approved as the AO without rejecting the books of account had arbitrarily held the cash deposits as unexplained."

"The notices issued by an AO without territorial jurisdiction are invalid and vitiate the assessment proceedings."

In conclusion, the Tribunal allowed the appeal, quashing the assessment order for want of valid jurisdiction due to absence of transfer order under section 127 and invalid issuance of notices under section 143(2). The addition under section 68 was also set aside on merits for lack of justification and arbitrary treatment of the assessee's books of account.