2025 (6) TMI 1772 - HC - Income Tax

Non quoting of Document Identification Numbers (DIN) in notices orders and directions issued - DIN was not generated electronically for DRP proceedings HELD THAT - Even a satisfaction note according to the Division Bench would fall within the scope of paragraph No.2 of the circular and therefore in our view there cannot be any doubt that the directions of the DRP which consists of a collegium of three Income Tax Commissioners also would fall within the scope of paragraph No.2 of the circular. 1Apart from the fact that DRP proceedings did not contain a valid DIN and is invalid for the reasons stated above we find that the assessment order also in this case does not contain a DIN. There is no explanation offered by appellant for not generating the DIN in the assessment order. Therefore the assessment order is invalid for both the reasons and we find no merit in the above appeal. The substantial questions of law are answered accordingly.

Summary

The core legal questions considered in this judgment revolve around the validity and compliance of communication issued by the Income Tax Department with the Central Board of Direct Taxes (CBDT) Circular No.19/2019 dated 14.08.2019, specifically regarding the generation and quoting of Document Identification Numbers (DIN) in notices, orders, and directions issued under the Income Tax Act, 1961. The issues include:

1. Whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that the Department failed to comply with the CBDT Circular No.19/2019 by not generating or quoting a valid DIN in the Dispute Resolution Panel (DRP) directions, despite subsequent communication containing a DIN.

2. Whether the electronic quoting of DIN is merely a procedural formality and non-mentioning of DIN in the DRP order electronically, but its subsequent generation and communication to the assessee, constitutes sufficient compliance with the Circular.

3. Whether the DRP directions require a DIN at all, given that they are not final orders but only guidance to the Assessing Officer, and if the final assessment order containing a valid DIN suffices for compliance.

4. The legal effect of non-compliance with the DIN requirements under the CBDT Circular, specifically whether communications without a valid DIN are invalid and deemed never to have been issued.

Issue-wise Detailed Analysis

Issue 1: Compliance with CBDT Circular No.19/2019 regarding DIN in DRP directions

The relevant legal framework is the CBDT Circular No.19/2019 issued under Section 119 of the Income Tax Act, which mandates that all communications issued by the Income Tax Department on or after 1st October 2019 must contain a computer-generated DIN to maintain a proper audit trail and ensure transparency. Paragraph 2 of the Circular mandates this requirement, while paragraph 3 allows exceptions under strictly defined circumstances, subject to prior written approval and recording of reasons in a prescribed format. Paragraph 4 declares any communication not conforming to these requirements as invalid and deemed never issued.

The Court noted that the DRP directions under Section 144C(5) of the Act are communications issued by the Income Tax Department and thus fall squarely within the ambit of the Circular. The appellant conceded that the DRP proceedings did not contain a valid DIN at the time of issuance but claimed that a DIN was generated and communicated subsequently.

The Court referred to a binding precedent from a Division Bench of the Bombay High Court which held that communications without a DIN, even if regularized later, remain invalid if they fail to comply with the procedural requirements of the Circular, including the prescribed format for reasons and prior approvals. The Court emphasized that the purpose of the Circular is to create an unbroken audit trail and ensure genuineness of communications.

Applying this framework, the Court found that the DRP directions in the instant case lacked a valid DIN at issuance, and the subsequent communication did not satisfy the conditions of paragraph 3 of the Circular, such as stating reasons in the prescribed format or prior written approval. Therefore, the DRP directions were invalid and deemed never issued.

Issue 2: Procedural nature of DIN and sufficiency of subsequent communication

The appellant argued that the electronic quoting of DIN is a procedural matter, primarily for audit purposes, and that the subsequent generation and communication of DIN to the assessee sufficed for compliance. It was contended that non-mentioning of DIN in the initial DRP order electronically should not invalidate the directions.

The Court rejected this submission, underscoring the binding nature of the CBDT Circular issued under Section 119. It held that the requirement to generate and quote DIN is mandatory and not merely procedural. The Circular explicitly states that communications not conforming to its requirements are invalid and deemed never issued. The Court observed that the subsequent communication did not meet the prescribed conditions for regularization under paragraph 3 of the Circular, such as recording reasons and obtaining prior approval.

The Court further noted that the purpose of DIN is to maintain transparency and an audit trail, which cannot be satisfied by after-the-fact communications that do not comply with the Circular's procedural safeguards.

Issue 3: Applicability of DIN requirement to DRP directions

The appellant contended that DRP directions are not orders of an income tax authority but only guidance to the Assessing Officer, and hence the Circular's DIN requirement should not apply to DRP proceedings. It was argued that the final assessment order containing a valid DIN suffices for compliance.

The Court dismissed this argument, observing that the appellant itself admitted that a DIN was required for DRP proceedings by conceding that a DIN was generated and noted in the DRP proceedings. The Court relied on the Bombay High Court Division Bench decision which held that even satisfaction notes and other communications issued by the Department fall within the scope of paragraph 2 of the Circular. Since DRP directions are communications issued by a collegium of Commissioners, they too fall within the Circular's ambit.

Therefore, the Court held that the DIN requirement applies to DRP directions, and failure to comply renders such directions invalid.

Issue 4: Validity of assessment order without DIN

It was undisputed that the assessment order impugned before the ITAT also did not contain a DIN. The appellant did not offer any explanation or justification for this non-compliance. The Court held that the assessment order is invalid for the same reasons as the DRP directions, i.e., failure to comply with the mandatory DIN requirement under the Circular.

The Court emphasized that since both the DRP directions and the assessment order lack valid DINs and no exceptions under paragraph 3 of the Circular apply, both communications are invalid and deemed never issued.

Treatment of competing arguments

The Court carefully considered the appellant's arguments regarding procedural nature and sufficiency of subsequent communication but found them untenable in light of the explicit provisions and binding effect of the CBDT Circular. The Court relied on authoritative precedent to reinforce the mandatory nature of the DIN requirement and the consequences of non-compliance. The respondent's submissions emphasizing the absence of valid DINs and failure to meet the Circular's conditions were accepted.

Conclusions

The Court concluded that the DRP directions without a valid DIN and the assessment order similarly lacking a DIN are invalid and deemed never issued. The ITAT was correct in quashing the assessment order on this ground. The substantial questions of law raised by the appellant were answered against the revenue, and the appeal was dismissed.

Significant Holdings

"Any communication which is not in conformity with Para-2 and Para-3 above, shall be treated as invalid and shall be deemed to have never been issued." (Paragraph 4 of CBDT Circular No.19/2019)

"The object and purpose of the issuance of the 2019 Circular... was to create an audit trail. Therefore, the communication relating to assessments, appeals, orders, etcetera... albeit without DIN, can have no standing in law." (Bombay High Court Division Bench)

"The binding nature of Circular issued under Section 119 of the Act... the consequences of contravention of the Circular set out above, therefore, ought to be given full effect to."

"The directions of the DRP which consists of a collegium of three Income Tax Commissioners also would fall within the scope of paragraph No.2 of the circular."

"The assessment order is invalid for both the reasons and we find no merit in the above appeal."

The core principles established include the mandatory nature of DIN generation and quoting in all communications issued by the Income Tax Department post 1st October 2019, the invalidity of communications without compliance with the Circular, and the applicability of these requirements to DRP directions as well as assessment orders. The judgment affirms that failure to comply with the Circular's procedural safeguards results in the communication being treated as never issued, thereby invalidating the assessment and related proceedings.