2025 (6) TMI 286 - AT - Income Tax

Revision u/s 263 - validity of notice u/s 143(2) - PCIT set aside the order of assessment framed u/s 143(3) for two reasons (i) provision for bad and doubtful debts made by the assessee were in fact inadmissible and (ii) the excess addition to fixed assets which remained unexplained and resulted into under assessment of income to that extent. HELD THAT - Considering the defect in the issuance of notice we are off the considered view that the assessment framed on the basis of said notice is invalid and so is the revisionary proceeding based on the said assessment framed. The case of the assessee find support from the decision of Srimanta Kumar Shit 2024 (11) TMI 970 - ITAT KOLKATA We are inclined to hold that the assessment framed u/s 143(3) is invalid and so is the consequent revisionary proceedings u/s 263 of the Act. The appeal of the assessee is allowed by quashing the order passed u/s 263 of the Act as invalid and without jurisdiction. Decided in favour of assessee.

Summary

The core legal questions considered in this judgment are:

1. Whether the revisionary jurisdiction exercised by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act is valid, particularly whether the twin conditions prescribed under section 263 were satisfied.

2. Whether the notice issued under section 143(2) of the Income Tax Act dated 22.02.2019 is valid, given that it allegedly did not comply with the mandatory formats prescribed by the Central Board of Direct Taxes (CBDT) Instruction F.No.225/157/2017/ITA-II dated 23.06.2017.

3. Consequentially, whether the assessment order passed under section 143(3) and the revisionary proceedings under section 263, both based on the said notice, are valid or liable to be quashed for want of jurisdiction.

Issue-wise Detailed Analysis

Issue 1: Validity of Revisionary Jurisdiction under Section 263 of the Income Tax Act

Legal Framework and Precedents: Section 263 empowers the PCIT to revise any order passed by an Assessing Officer if it is found to be erroneous and prejudicial to the interests of the revenue. However, the exercise of this power is conditional upon satisfaction of the twin conditions: (i) the order is erroneous, and (ii) the order is prejudicial to the revenue. The Court also referred to established precedents emphasizing the strict compliance with these conditions.

Court's Reasoning and Application: The PCIT had set aside the assessment order on two grounds: inadmissible provision for bad and doubtful debts and unexplained excess addition to fixed assets. However, the Tribunal did not delve into the merits of these grounds because it found the foundational assessment order itself invalid due to procedural defects in the issuance of the notice under section 143(2). Since the assessment order was quashed, the revisionary proceedings based thereon were also held to be without jurisdiction.

Conclusion: The revisionary jurisdiction under section 263 was invalidly exercised because it relied on an assessment order that was itself void for want of valid notice.

Issue 2: Validity of Notice Issued Under Section 143(2) of the Income Tax Act

Legal Framework and Precedents: The CBDT Instruction F.No.225/157/2017/ITA-II dated 23.06.2017 mandates that all notices under section 143(2) must be issued in one of three specific formats: (i) Limited Scrutiny (Computer Aided Scrutiny Selection), (ii) Complete Scrutiny (Computer Aided Scrutiny Selection), and (iii) Compulsory Manual Scrutiny. This instruction is binding on the income tax authorities as per section 119 of the Act. The Supreme Court and High Courts have held that such instructions are mandatory and non-compliance renders the proceedings invalid. This principle was reinforced by reliance on decisions including Jute Corporation of India Ltd., National Thermal Power Co. Ltd., and UCO Bank.

Court's Interpretation and Reasoning: The Tribunal examined the notice dated 22.02.2019 and found it did not conform to any of the three prescribed formats. The assessee produced copies of the prescribed formats and the actual notice, establishing non-compliance. The CBDT instruction explicitly states that all scrutiny notices issued after 23.06.2017 must adhere to these formats. The Tribunal held that the instruction is mandatory and binding. The defense that the notice was generated online through the ITBA module, which was yet to be updated, was rejected as non-compliance cannot be excused on technical grounds.

Key Evidence and Findings: The physical copy of the notice, the CBDT instruction, and precedents from coordinate Benches (Srimanta Kumar Shit and Shib Nath Ghosh) confirmed that notices not conforming to the prescribed formats are invalid.

Application of Law to Facts: Since the notice was invalid, the assessment order passed pursuant to it was also invalid. The Tribunal relied heavily on the principle that the validity of the entire proceeding hinges on the validity of the notice initiating scrutiny.

Treatment of Competing Arguments: The Revenue's argument that the system's technical limitations justified the notice format was rejected. The Tribunal emphasized that statutory and binding instructions cannot be circumvented due to system constraints.

Conclusion: The notice issued under section 143(2) was invalid for non-compliance with mandatory CBDT instructions, rendering the subsequent assessment and revision proceedings invalid.

Issue 3: Consequences of Invalid Notice and Assessment Order

Legal Framework and Precedents: The principle that an invalid notice vitiates the entire assessment proceeding is well established. The Tribunal referred to the decisions of the Hon'ble High Courts and Supreme Court, including the Calcutta High Court and Apex Court rulings on the binding nature of CBDT circulars and instructions.

Court's Reasoning and Findings: The Tribunal held that since the notice under section 143(2) was invalid, the assessment order framed under section 143(3) was also invalid and a nullity in law. Consequently, the revisionary proceedings under section 263, which were based on this assessment, were without jurisdiction.

Application of Law to Facts: The Tribunal did not adjudicate the merits of the additions made in the assessment or the revisionary order, as these became academic once the foundational proceedings were quashed.

Conclusion: The entire chain of proceedings was quashed, and the appeal was allowed.

Significant Holdings

"All scrutiny notices under section 143(2) of the Act, shall henceforth, be issued in these revised formats only."

"The instruction issued by the CBDT are mandatory and binding on the Income tax authorities failing which the proceedings would be rendered as invalid."

"The assessment framed on the basis of said notice is invalid and so is the revisionary proceeding based on the said assessment framed."

"The Central Board of Direct Taxes under section 119 of the Income-tax Act, 1961, has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act."

"Since we have held the notice issued u/s 143(2) as invalid and so the consequential assessment framed, we are not adjudicating second legal issue raised in the additional ground no.2 as well the grounds in the memorandum of appeal and are left open to be adjudicated in future if the need arises for the same."

Core Principles Established

1. Compliance with CBDT instructions regarding the format of notices under section 143(2) is mandatory and non-compliance renders the notice and all subsequent proceedings invalid.

2. The validity of an assessment order under section 143(3) is contingent upon the validity of the notice issued under section 143(2).

3. Revisionary jurisdiction under section 263 cannot be exercised if the assessment order itself is void for want of valid initiation.

4. Technical or administrative lapses (such as delay in updating IT systems) do not justify non-compliance with mandatory statutory instructions.

Final Determinations

The Tribunal allowed the appeal of the assessee by quashing the order passed under section 263 of the Income Tax Act as invalid and without jurisdiction, on the ground that the notice issued under section 143(2) did not comply with the mandatory CBDT instruction formats, rendering the assessment and consequent revision proceedings invalid. The Tribunal declined to adjudicate other grounds as they became academic in view of this determination.