2025 (7) TMI 1105 - AT - Income Tax

Jurisdiction to issue notice u/s 143(2) - jurisdiction vested only with the DCIT /ACIT of Income Tax 1 (1) Raipur OR with ITO Ward 1(4) - Proper officer for assessment to be framed u/s. 143(3) - HELD THAT - Any action by the revenue authority without jurisdiction is bad in law void ab initio and hence liable to be struck down on the said count itself. The issue is no more res integra as per the judicial precedents that any right and li abilities specifically in a case of imposing liability for that matter whether it is income tax or any other financial burden on the assessee through legal dictate the said action can only be pronounced as legally valid if it is exercised within parameter of correct jurisdiction. Reverting to the facts of the present case as examined aforesaid it is clearly evidenced that the return of income was filed by the assessee above Rs. 10 lacs for which the jurisdiction vested only with the DCIT /ACIT of Income Tax 1 (1) Raipur and not with ITO Ward 1(4) and that since in the present case the assessment has been framed u/s. 143(3) of the Act dated 2 8 .12.201 7 by the ITO Ward 1(4) Raipur who lacked inherent jurisdiction therefore the same is held as invalid void ab initio and the order of assessment is quashed. That once the assessment order is quashed then all other subsequent proceedings becomes non est in the eyes of law. Appeal of the Assessee is allowed.

Summary

ISSUES:

Whether the assessment framed under section 143(3) of the Income Tax Act is valid when the notice under section 143(2) is issued by an Assessing Officer lacking jurisdiction as per departmental notifications and statutory provisions.Whether addition on account of non-deduction of TDS under section 194C is justified when payments were made for purchase of material and not for works contract, considering Explanation (iv)(e) to section 194C.Whether disallowance under section 40(a)(ia) is applicable when the expenditure is capitalized as Work In Progress (WIP) and not claimed in the Profit & Loss Account.Whether disallowance under section 40(a)(ia) can be made without ascertaining from the payees about discharge of their tax liabilities, in light of the proviso to section 201 and relevant judicial decisions.Whether the disallowance under section 40(a)(ia) should be limited to 30% of the amount on which tax was deductible but not deducted, as per the Finance (No.2) Act, 2014 amendment applicable to AY 2015-16.Whether disallowance of expenses included in opening WIP brought forward from preceding years is sustainable, especially when such expenses were not debited to the Profit & Loss Account and relate to ongoing projects.Whether additions on issues beyond the scope of "Limited Scrutiny" without prior approval and conversion to complete scrutiny are valid, referencing CBDT Instruction No. 20/2015.

RULINGS / HOLDINGS:

The assessment framed under section 143(3) is invalid, bad in law, and void ab initio where the notice under section 143(2) was issued by an Assessing Officer who lacked jurisdiction as per Notification No. 1/2014-15 dated 15.11.2014, since the total income exceeded the prescribed monetary limit for jurisdiction; hence, the assessment order is quashed.Addition on account of non-deduction of TDS under section 194C is not justified where payments were made for purchase of materials and not for works contract, as per Explanation (iv)(e) to section 194C, which excludes manufacturing or supplying products using purchased materials from the definition of "work".Disallowance under section 40(a)(ia) is not attracted where the expenditure was capitalized as WIP and not claimed as deduction in the Profit & Loss Account, making the addition contrary to facts, law, and legislative intent.Disallowance under section 40(a)(ia) without first ascertaining from payees about discharge of their tax liabilities is erroneous, as the proviso to section 201 exempts the assessee from being a "assessee in default" if payees have discharged their liabilities; thus, such disallowance is unsustainable.Disallowance under section 40(a)(ia) for AY 2015-16 must be limited to 30% of the amount on which tax was deductible but not deducted, in accordance with the Finance (No.2) Act, 2014 amendment; full disallowance is bad in law.Disallowance of expenses forming part of opening WIP from preceding years is unsustainable when such expenses were not debited to the Profit & Loss Account and relate to ongoing projects, consistent with accounting policies and judicial precedents.Additions made beyond the scope of "Limited Scrutiny" without prior approval and conversion to complete scrutiny, as required by CBDT Instruction No. 20/2015, are illegal, bad in law, and void ab initio.

RATIONALE:

The Court applied the statutory provisions of the Income Tax Act, 1961, particularly sections 143(2), 143(3), 194C, 40(a)(ia), and relevant amendments by the Finance (No.2) Act, 2014, alongside departmental Notification No. 1/2014-15 dated 15.11.2014, which delineates jurisdiction based on income thresholds.Judicial precedents from various High Courts and the Tribunal were relied upon to affirm that jurisdictional defects in notices under section 143(2) render subsequent assessments void ab initio, emphasizing the principle that quasi-judicial authorities must act within valid jurisdiction.The interpretation of Explanation (iv)(e) to section 194C was upheld to exclude purchase of materials from the definition of "work," negating the obligation to deduct TDS in such cases.The proviso to section 201 was invoked to clarify that an assessee is not a "assessee in default" if the payees have discharged their tax liabilities, requiring the Assessing Officer to verify such discharge before making disallowances under section 40(a)(ia).The amendment limiting disallowance to 30% under section 40(a)(ia) for AY 2015-16 was recognized as binding, restricting the quantum of disallowance.The Court emphasized adherence to accounting principles and consistent treatment of expenses as capitalized WIP in long-term projects, supported by relevant High Court rulings, to negate disallowance of such expenses.The Court underscored the mandatory compliance with CBDT Instruction No. 20/2015 regarding scope limitation in "Limited Scrutiny" assessments, invalidating additions made beyond authorized scope without procedural compliance.