The core legal questions considered in the appeals before the Appellate Tribunal (ITAT) Chennai are:

• Whether disallowance of expenses under Section 14A of the Income Tax Act, 1961 (the Act), read with Rule 8D of the Income Tax Rules, 1962 (the Rules), should be restricted only to investments yielding exempt income (dividend income under Section 10(38)) or applied more broadly.
• The correct rate of depreciation applicable to computer software licenses: whether depreciation at 60% (as claimed by the assessee) or at 20-25% (as held by the Assessing Officer and CIT(A)) is appropriate.
• Whether fresh claims for deduction of long-term capital loss (inadvertently not claimed in the return) and deduction of compounding fee paid to the Reserve Bank of India (RBI) under the Foreign Exchange Management Act, 1999, are admissible despite not being claimed originally in the return of income.
• Whether losses incurred by eligible units claiming deduction under Section 10AA of the Act can be set off against taxable income of other units or business segments.
• Whether disallowance under Section 14A read with Rule 8D(2) can be added back while computing book profit under Section 115JB of the Act for Minimum Alternate Tax (MAT) purposes.
• Whether lease equalization charges constitute an ascertained liability and are allowable deductions under Section 115JB of the Act or whether they should be added back to book profits.

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance under Section 14A read with Rule 8D - Scope of Disallowance

Legal Framework and Precedents: Section 14A of the Act disallows expenditure incurred in relation to income that does not form part of total income, i.e., exempt income. Rule 8D prescribes the method of computing such disallowance. The principle is to disallow expenses attributable to earning exempt income.

Court's Interpretation and Reasoning: The CIT(A) confirmed the Assessing Officer's (A.O.) disallowance but allowed the disallowance to be adjusted against business income eligible for deduction under Section 10AA, based on a prior ITAT decision. The assessee contended that disallowance should be restricted only to investments yielding exempt dividend income under Section 10(38). The Tribunal noted that this issue is settled by various High Courts and consistent Tribunal decisions holding that disallowance under Section 14A must be restricted to investments that yield exempt income. The A.O. must examine each investment portfolio to identify whether it yields exempt income and disallow expenses only in respect of such investments.

Application of Law to Facts: The Tribunal directed the A.O. to restrict disallowance only to investments generating exempt income and allowed the assessee's appeal on this issue for statistical purposes.

Treatment of Competing Arguments: The Revenue could not controvert the legal or factual basis of the assessee's contention. The Tribunal relied on binding precedents and consistent judicial views.

Conclusion: Disallowance under Section 14A must be confined to expenses relatable only to investments yielding exempt income.

Depreciation on Computer Software Licenses

Legal Framework and Precedents: Depreciation rates for assets are prescribed in the Income Tax Rules. Computer software is treated as an intangible asset. The question was whether software licenses qualify for depreciation at 60% (as computers) or at 20% (as intangible assets).

Court's Interpretation and Reasoning: The A.O. and CIT(A) restricted depreciation to 25%, treating software licenses as intangible assets under Part B of Appendix I. The assessee relied on the Madras High Court decision in CIT vs. Computer Age Management Services, which held that customized software licenses used in business qualify as computers under Entry 5 of Part A of Appendix I, allowing depreciation at 60%. The Tribunal followed this binding High Court precedent, noting the software licenses were customized and integral to business operations.

Application of Law to Facts: The assessee's software licenses were akin to computer assets and eligible for 60% depreciation.

Treatment of Competing Arguments: The Revenue's argument that software licenses are intangible assets was rejected based on the specific entry in the Rules and judicial precedent.

Conclusion: Depreciation on computer software licenses is allowable at 60% as per the Madras High Court ruling.

Fresh Claims for Long-Term Capital Loss and Deduction of Compounding Fee Paid to RBI

Legal Framework and Precedents: Generally, claims not made in the original return of income are not entertained unless allowed under specific provisions. Deduction for compounding fees under FEMA is debatable, depending on whether such payments are penalties or compensatory in nature.

Court's Interpretation and Reasoning: The assessee claimed long-term capital loss on redemption of preference shares and deduction for compounding fee paid to RBI, both not claimed originally. CIT(A) rejected these claims on merit and for non-maintainability due to non-claim in the return. The Tribunal observed that these claims require detailed examination and verification of facts and evidence.

Application of Law to Facts: The Tribunal remitted these issues to the A.O. for fresh adjudication with opportunity to the assessee to file evidence.

Treatment of Competing Arguments: The Tribunal did not decide on merits but emphasized procedural fairness and proper adjudication.

Conclusion: Claims for long-term capital loss and compounding fee deduction are remitted for fresh adjudication by the A.O.

Set-off of Losses of Units Eligible for Deduction under Section 10AA

Legal Framework and Precedents: Section 10AA provides deduction for profits of eligible units in Special Economic Zones (SEZ). The question is whether losses of such units can be set off against profits of other units or business segments. The Madras High Court and Supreme Court have held that deductions under Section 10A/10AA are to be computed at the level of the eligible undertaking independently, prior to aggregation with other income under Chapter VI.

Court's Interpretation and Reasoning: The A.O. disallowed set-off of losses of eligible units against profits of other units, relying on Karnataka High Court and ITAT decisions. CIT(A) allowed the set-off relying on binding Madras High Court decisions in the assessee's own case and the Supreme Court decision in CIT vs. Yokogawa India Ltd., which clarified that deductions under Section 10A are to be allowed prior to set-off under Chapter VI provisions.

Application of Law to Facts: The Tribunal followed the Madras High Court and Supreme Court rulings, holding that set-off of losses of eligible units against other business profits is not permissible and the losses must be set off within the eligible units.

Treatment of Competing Arguments: The Tribunal rejected the Revenue's reliance on contrary High Court and ITAT decisions, giving primacy to the jurisdictional High Court and Supreme Court rulings.

Conclusion: Losses of units eligible for deduction under Section 10AA cannot be set off against profits of other units; the set-off must be confined to eligible units.

Disallowance under Section 14A for Book Profit Computation under Section 115JB

Legal Framework and Precedents: Section 115JB provides for Minimum Alternate Tax (MAT) on book profits. The issue is whether disallowance under Section 14A can be added back to book profits while computing MAT.

Court's Interpretation and Reasoning: The Tribunal relied on the Special Bench decision in ACIT vs. Vireet Investments (P.) Ltd., which held that disallowance under Section 14A read with Rule 8D is not to be added back for computing book profits under Section 115JB. The Tribunal also referred to decisions of Delhi High Court, Karnataka High Court, and ITAT Chennai supporting this view.

Application of Law to Facts: The CIT(A) deleted the addition of Section 14A disallowance to book profits, and the Tribunal upheld this deletion.

Treatment of Competing Arguments: The Revenue could not produce any contrary binding decision.

Conclusion: Disallowance under Section 14A read with Rule 8D cannot be added back while computing book profits under Section 115JB.

Allowability of Lease Equalization Charges under Section 115JB

Legal Framework and Precedents: Lease equalization charges arise from accounting treatment of lease rentals under the principle of substance over form. The question is whether such charges are ascertained liabilities deductible for MAT purposes or unascertained liabilities to be added back.

Court's Interpretation and Reasoning: The A.O. treated lease equalization charges as unascertained liabilities and added them back. CIT(A) deleted the addition relying on the Supreme Court decisions in CIT vs. Yokogawa India Ltd. and CIT vs. Virtual Soft Systems Ltd., which upheld the accounting principle of lease equalization as valid and recognized the charges as ascertained liabilities.

The Supreme Court emphasized that bifurcation of lease rentals into principal and interest components is a valid accounting method capturing real income, and there is no bar in the IT Act against such bifurcation. The lease equalization charge is essential to reflect true income and cannot be treated as a mere notional provision.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s deletion of the addition, holding lease equalization charges as allowable deductions for book profit computation under Section 115JB.

Treatment of Competing Arguments: The Revenue's contention that the entire lease rental should be taxed was rejected based on the principle of substance over form and binding Supreme Court rulings.

Conclusion: Lease equalization charges are ascertained liabilities and allowable deductions under Section 115JB; they cannot be added back to book profits.

3. SIGNIFICANT HOLDINGS

"The Tribunal is consistently taking view that disallowance in relation to expenditure incurred on exempt income should be restricted only on the investments, which give rise to exempt income. The A.O will see each portfolio and will examine whether it gives exempt income or not and that investment only will be considered for the purpose of making disallowance under Rule 8D(2)(iii) of the Rules."

"The Hon'ble Madras High Court held that computer software licenses are eligible for depreciation at 60% under Entry 5 of Part A of New Appendix I, as computers including computer software, and not under Part B which deals with intangible assets."

"Though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. ... The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee."

"Disallowance u/s. 14A of the Act r/w Rule 8D of the Rules cannot be added back while computing the book profit u/s. 115JB of the Act."

"The method of accounting followed, as derived from the ICAI's Guidance Note, is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting ... lease equalization is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purposes of income tax."

Final determinations:

• Disallowance under Section 14A must be confined to expenses on investments yielding exempt income.
• Depreciation on computer software licenses is allowable at 60% as per Madras High Court precedent.
• Fresh claims for long-term capital loss and compounding fee deduction are remitted to the A.O. for fresh adjudication.
• Set-off of losses of units eligible for deduction under Section 10AA against profits of other units is not permissible; set-off must be within eligible units.
• Disallowance under Section 14A cannot be added back while computing book profits under Section 115JB.
• Lease equalization charges are ascertained liabilities and allowable deductions under Section 115JB; additions made by A.O. are deleted.

1. Issues Presented and Considered

The core legal questions addressed include:

• Validity and applicability of disallowance under section 14A of the Income Tax Act concerning expenditure related to exempt income.
• Applicability of the Minimum Alternate Tax (MAT) provisions under section 115JB to banking companies, particularly nationalized banks governed by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
• Allowability of additions to book profits under section 115JB.
• Deduction claims under section 36(1)(vii) for bad and doubtful debts and the interplay with provisions under section 36(1)(viia).
• Disallowance of RBI penalties and their characterization as either penal or routine/procedural payments.
• Allowability of CSR expenditures and compliance with business expediency requirements under section 37(1).
• Allowability of club expenses claimed by the assessee.
• Procedural issues including condonation of delay in filing appeals and validity of assessment orders under section 153.

2. Issue-wise Detailed Analysis

a) Disallowance under Section 14A

The Tribunal noted that the assessee had earned substantial tax-free dividend income and had itself made a suo motu disallowance under section 14A. The Assessing Officer (AO) invoked Rule 8D to make a further disallowance, which was upheld by the CIT(A). The assessee relied on the Supreme Court judgment in the South Indian Bank case and subsequent Karnataka High Court rulings, which held that no disallowance under section 14A is warranted where no expenditure has been incurred to earn exempt income, particularly dividends.

The Tribunal referred to coordinate Bench decisions in the assessee's own case for earlier years, which had settled the issue in favor of the assessee, emphasizing that "expenditure" under section 14A means an actual outgo and not a mere return on investment. The revenue's reliance on pending appeals before the Supreme Court was noted but did not override binding High Court decisions. Accordingly, the Tribunal allowed the ground raised by the assessee.

b) Applicability of Section 115JB (MAT) to Banking Companies

The assessee contended that it is not a company under the Companies Act, 1956, but a nationalized bank governed by a special statute, and hence section 115JB does not apply. The Tribunal relied on authoritative decisions, including a recent Delhi High Court ruling in a similar case and various Tribunal judgments, which held that the MAT provisions, as originally enacted, did not apply to banking companies.

The Tribunal analyzed the amendment introduced by the Finance Act, 2012, which modified section 115JB(2) to accommodate companies governed by other Acts, but noted that the assessee's status as a nationalized bank under a special Act exempts it from the proviso to section 211(2) of the Companies Act, which is central to the applicability of MAT provisions.

Applying the principle that charging and computation provisions form an integrated code, the Tribunal held that if the charging section does not apply, the computation provisions also fail. The Tribunal accordingly allowed the assessee's ground on this issue.

c) Additions to Book Profits under Section 115JB

Since the Tribunal held that section 115JB does not apply to the assessee, the issue of additions to book profits under this section became infructuous.

d) Deduction under Section 36(1)(vii) for Bad and Doubtful Debts

The assessee claimed deductions for bad debts written off, while the AO disallowed the claim on two grounds: (i) only advances made during the year should be considered for computing aggregate average rural advances, and (ii) some branches were treated as non-rural, disallowing deductions accordingly.

The Tribunal referred to extensive precedent including coordinate Bench decisions and Karnataka High Court rulings affirming the assessee's method of computation and allowing the deduction. The Tribunal discussed the distinction between actual write-off and prudential write-off, the requirement that bad debts be written off in individual accounts, and the interplay with provisions under section 36(1)(viia) concerning provisions for bad and doubtful debts.

The Tribunal remanded the issue to the AO for verification and consideration in accordance with law, partly allowing the ground for statistical purposes.

e) Disallowance of RBI Penalties

The AO disallowed penalty payments made to the RBI for non-compliance with RBI guidelines, treating them as penal in nature. The CIT(A) upheld this disallowance.

The Tribunal noted a coordinate Bench decision in Union Bank of India's case, which held that such payments are compensatory or routine fines rather than punitive penalties and should not be disallowed outright. However, since the nature of the payments requires detailed scrutiny, the Tribunal remanded the issue to the AO to verify the nature of the payments and decide accordingly.

f) Allowability of CSR Expenditure

The AO disallowed CSR expenditures on the ground that they were not incurred for business purposes. The CIT(A) allowed the claim, relying on the principle that for entities not governed by the Companies Act, CSR expenditure can be allowed if incurred based on government directions and for business expediency.

The Tribunal upheld the CIT(A)'s decision, citing coordinate Bench and High Court decisions that recognized CSR expenditure as deductible if it satisfies the business expediency test. The revenue's contrary submissions were not found persuasive.

g) Allowability of Club Expenses

The revenue challenged the allowance of club expenses, including entrance fees and subscriptions, on the ground that they were not for business purposes.

The Tribunal noted that neither the AO nor CIT(A) had verified the nature of the expenditure with respect to the beneficiaries. It directed the AO to verify whether the expenses were incurred for membership benefits of higher officials, which could justify the claim. Pending such verification, the Tribunal allowed the ground partly for statistical purposes.

h) Procedural Issues: Delay in Filing Appeals and Validity of Assessment Orders

The revenue's appeal was delayed by 109 days. The Tribunal considered the petition for condonation of delay, applying the principles laid down by the Supreme Court in Collector Land Acquisition v. Mst. Katiji, emphasizing the elastic and liberal approach to condonation to ensure substantial justice. Finding sufficient cause and absence of malafide intent, the Tribunal condoned the delay.

The assessee's challenge to the validity of the assessment order on the ground of non-service within the prescribed time under section 153 was left open for consideration in appropriate circumstances, with liberty granted to the assessee.

3. Significant Holdings

On the disallowance under section 14A, the Tribunal quoted the High Court judgment stating:

"The expenditure, the return of investment and cost of requisition are distinct concepts. Therefore the word 'incurred' in Section 14A of the Act have to be read in the context of the scheme of the Act... It is equally well settled that expenditure is a pay out... In the instant case, the assessee has admittedly not incurred any expenditure. This case pertains to income on dividend, which by no stretch of imagination can be treated to be an expenditure to attract the provisions of Section 14A of the Act."

On the applicability of section 115JB to banking companies, the Tribunal relied on the principle that the charging section and computation provisions form an integrated code, quoting:

"In a case where the computation provision cannot apply, it would be evident that such a case was not intended to fall within the charging section."

Regarding RBI penalties, the Tribunal followed the reasoning that payments to RBI for procedural non-compliance are compensatory and not punitive, warranting remand for detailed examination.

On CSR expenditure, the Tribunal recognized that compliance with government directions and business expediency justify allowability under section 37(1), citing:

"If an obligation springs from complying with the said guidelines, it has to be regarded as expenditure incurred on grounds of commercial expediency and allowed as a deduction."

On club expenses, the Tribunal emphasized the need for fact-based verification before disallowance, directing the AO to consider whether the expenses were for legitimate business purposes.

In conclusion, the Tribunal allowed several grounds raised by the assessee, partly allowed revenue's grounds for statistical purposes, condoned delay in filing appeals for revenue, and remanded certain issues for further verification by the AO. The decisions reflect a careful application of legal principles, binding precedents, and factual considerations to ensure substantive justice.

- Whether the amount of Rs.1,03,00,000/- seized from the petitioners can be released to the Income Tax Department under the provisions of the Code of Criminal Procedure and the Income Tax Act, 1961.

- Whether the Income Tax Department is entitled to claim the seized money under Section 132A of the Income Tax Act, 1961, while the money is in the custody of the court.

- Whether the learned Magistrate has the jurisdiction and authority under Section 451 of the Code of Criminal Procedure to direct the release of the seized money to the Income Tax Department and to impose a time frame for completion of assessment proceedings.

- Whether the petitioners are entitled to the release of the seized amount after the Income Tax Department failed to conclude the assessment proceedings within six months, as per the directions in a previous judgment.

- What conditions should be imposed on the release of the seized amount to ensure repayment or re-deposit if required.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement of the Income Tax Department to the seized amount under Section 132A of the Income Tax Act, 1961

- Relevant legal framework and precedents: Section 132A of the Income Tax Act, 1961 empowers the authorities to seize money or property suspected to be undisclosed income. However, the question arises whether the department can claim such money directly when it is in judicial custody.

- Court's interpretation and reasoning: The Court referred to the decision in Ravirajan R. v. State of Kerala, where it was held that the Income Tax Department is disentitled to stake a claim under Section 132A in respect of money in the custody of a court. The Court emphasized that the department cannot bypass procedural safeguards by directly claiming the money without completing assessment proceedings.

- Application of law to facts: Since the seized amount was in the custody of the court, the department could not claim it outright under Section 132A without following due process.

- Treatment of competing arguments: The Income Tax Department argued for release of the amount to it, but the Court found that such a claim was premature and not supported by law.

- Conclusion: The department is not entitled to the immediate release of the seized amount under Section 132A while the money remains under judicial custody.

Issue 2: Jurisdiction of the Magistrate under Section 451 of the Code of Criminal Procedure to direct release of the seized money and impose time limits on assessment

- Relevant legal framework and precedents: Section 451 of the Code of Criminal Procedure allows the Magistrate to deal with property seized during investigation. The Apex Court in J.R. Malhotra v. Additional Sessions Judge held that the Magistrate cannot direct revenue authorities to conclude assessment within a fixed time frame, as that would bypass statutory provisions.

- Court's interpretation and reasoning: The Court held that the Magistrate's order directing the Income Tax Department to complete assessment within six months and releasing the money to the department was incorrect and beyond jurisdiction. The Magistrate cannot impose such procedural timelines on the revenue authorities.

- Application of law to facts: The learned Magistrate relied on a previous order (Annexure II) directing release to the department with a six-month timeline. The Court found this reliance misplaced and held that such directions were not legally sustainable.

- Treatment of competing arguments: The petitioners challenged the Magistrate's order on this ground, and the Court agreed with the petitioners, rejecting the department's claim to enforce such timelines through the Magistrate's order.

- Conclusion: The Magistrate lacks authority to direct the release of seized money to the department by imposing assessment timelines.

Issue 3: Entitlement of petitioners to release of the seized amount after non-completion of assessment within six months

- Relevant legal framework and precedents: The previous order (Annexure II) allowed release of seized money to the claimants if the department failed to complete assessment within six months. The petitioners invoked Section 452 of the Code of Criminal Procedure to seek release on this basis.

- Court's interpretation and reasoning: The Court found that the petitioners were entitled to the release of the amount as no further proceedings were pending and the department failed to conclude assessment within the stipulated period. The Court relied on the principle that property seized should not be held indefinitely without due process.

- Application of law to facts: The department did not complete assessment within six months, and no other proceedings were pending. Hence, the petitioners' claim for release was justified.

- Treatment of competing arguments: The department opposed release, but the Court found the opposition untenable given the failure to complete assessment.

- Conclusion: Petitioners are entitled to the release of the seized amount subject to conditions ensuring repayment if required.

Issue 4: Conditions for release of the seized amount to ensure repayment or re-deposit

- Relevant legal framework: The Court has inherent powers to impose conditions on release of seized property to safeguard interests of the State and ensure availability of the property if needed later.

- Court's interpretation and reasoning: The Court ordered release of the amount to petitioners on executing a bond undertaking to repay/redeposit the amount if directed by the Magistrate or Income Tax Department. Additionally, the petitioners were required to furnish a bank guarantee for an equal amount from a Nationalised or Scheduled Bank.

- Application of law to facts: These conditions provide adequate security to the department while allowing the petitioners to access the seized amount pending final assessment.

- Treatment of competing arguments: The department's concerns were addressed by these security measures.

- Conclusion: Release subject to bond and bank guarantee is appropriate and lawful.

3. SIGNIFICANT HOLDINGS

- "The Income Tax Department is disentitled to stake a claim under Section 132A of the Income Tax Act, 1961 in respect of money in the custody of a court."

- "The Magistrate while exercising the powers under Section 451 of the Code cannot issue directions to the revenue to conclude the assessment proceedings within a time frame bypassing the provisions."

- "The order to hand over the amount to the revenue is incorrect."

- The Court confirmed that failure of the department to complete assessment within six months entitles the claimant to seek release of the seized amount, subject to furnishing adequate security.

- The seized amount of Rs.1,03,00,000/- shall be released to the petitioners on their executing a bond undertaking repayment/redeposit and furnishing a bank guarantee of equal amount from a Nationalised or Scheduled Bank.

Section 144C of the Act provides a mechanism for resolving disputes through the Dispute Resolution Panel (DRP). The petitioner, a 100% export-oriented unit, claimed deductions under Section 10B, which were initially accepted for prior assessment years. However, for the assessment year 2009-10, the Transfer Pricing Officer made adjustments, leading to a draft assessment order issued by the assessing officer. The petitioner filed objections with the DRP, which issued directions on 09.12.2013. The assessing officer was required to pass the final assessment order by 31.01.2014, but did so only on 27.03.2014, prompting the petitioner to seek judicial intervention.

The petitioner argued that the assessment order was non-est due to its issuance beyond the statutory time frame, relying on precedents that emphasize adherence to procedural timelines in tax assessments. The petitioner contended that Section 144C is a non-obstante provision, mandating strict compliance with its procedural requirements, and any deviation renders the order void. The petitioner further argued that the absence of evidence showing when the DRP's directions were received by the assessing officer supports their claim of the order being ultra vires.

The respondents argued that the petitioner had an alternative remedy through an appeal before the Income Tax Appellate Tribunal. They contended that the assessment order was a procedural formality in line with the DRP's directions and not a quasi-judicial order. They suggested that Section 144C is procedural, similar to the repealed Section 144B, and non-compliance does not invalidate the assessment.

The Court examined whether Section 144C is procedural or substantive. It noted that Section 144C, introduced to provide a fast-track dispute resolution mechanism, prescribes specific time limits for each step in the assessment process. The Court emphasized that these time limits are crucial to the provision's purpose and object, and any dilution would defeat its intent. The exclusion of Section 153, which provides longer time limits, from Section 144C's framework underscores the legislature's intention for strict adherence to the prescribed timelines.

The Court found that the respondents failed to provide evidence of the date the DRP's directions were received, and no reasons were given for the delay in issuing the assessment order. The Court held that Section 144C is not merely procedural but a substantive provision requiring strict compliance with its time limits. The Court referenced precedents that support the view that non-compliance with such statutory provisions results in illegality, not mere procedural irregularity.

Significant holdings include the Court's determination that Section 144C mandates strict adherence to its procedural timelines, as it is a substantive provision. The failure to comply with these timelines renders the assessment order void. The Court concluded that the impugned assessment order was issued beyond the prescribed period, making it unsustainable. Consequently, the writ petition was allowed, and the assessment order was set aside.

The core legal issues considered in this judgment include:

1. Whether the issuance of a notice under section 143(2) of the Income-tax Act, 1961, by an officer lacking pecuniary jurisdiction renders the assessment proceedings void ab initio.

2. Whether the absence of a statutory valid notice under section 143(2) by the jurisdictional officer invalidates the entire assessment proceedings.

3. The applicability of Section 292BB of the Income-tax Act in cases of non-issuance of a valid notice under section 143(2).

ISSUE-WISE DETAILED ANALYSIS

1. Jurisdictional Validity of Notice under Section 143(2)

- Relevant Legal Framework and Precedents: The legal framework involves section 143(2) of the Income-tax Act, which mandates the issuance of a notice for scrutiny assessment. The jurisdictional aspect is governed by CBDT Instruction No. 1/2011, which specifies that non-corporate assessees with taxable income above a certain threshold should be assessed by an authority of the rank of Assistant Commissioner or Deputy Commissioner (ACIT/DCIT).

- Court's Interpretation and Reasoning: The Tribunal noted that the initial notice under section 143(2) was issued by the Income Tax Officer (ITO), who lacked the jurisdiction as per the CBDT instruction due to the assessee's income level. The Tribunal emphasized that jurisdictional validity is crucial for the legality of the notice.

- Key Evidence and Findings: The notice under section 143(2) was issued by the ITO, Ward-1, Roorkee, whereas the jurisdiction should have been with the ACIT/DCIT due to the assessee's income exceeding Rs. 15 lakhs.

- Application of Law to Facts: The Tribunal applied the CBDT instruction to conclude that the notice issued by the ITO was void ab initio, as it was not issued by the competent authority.

- Treatment of Competing Arguments: The Department argued that the notice was issued under the Computer Assisted Selection of Cases for Scrutiny (CASS) and that section 292BB could rescue the proceedings. However, the Tribunal rejected this, stating that section 292BB applies to improper service of notice, not to the non-issuance of a valid notice.

- Conclusions: The Tribunal concluded that the entire assessment was void due to the lack of a valid notice under section 143(2) from the jurisdictional officer.

2. Absence of Statutory Valid Notice by Jurisdictional Officer

- Relevant Legal Framework and Precedents: Section 143(2) requires a valid notice to be issued by the jurisdictional officer. The Tribunal referenced several precedents, including decisions from the Punjab and Haryana High Court, Allahabad High Court, Madras High Court, and the Supreme Court, which support the necessity of jurisdictional validity for notices.

- Court's Interpretation and Reasoning: The Tribunal emphasized that the absence of a valid notice by the jurisdictional officer renders the proceedings void. It highlighted that the DCIT, who assumed jurisdiction, failed to issue a notice under section 143(2) within the prescribed time.

- Key Evidence and Findings: The DCIT did not issue a subsequent notice under section 143(2) after assuming jurisdiction, which was a critical procedural lapse.

- Application of Law to Facts: The Tribunal applied the statutory requirement and precedents to determine that the absence of a valid notice by the DCIT invalidated the assessment.

- Treatment of Competing Arguments: The Department's reliance on section 292BB was dismissed, as the Tribunal clarified that it does not apply to non-issuance of a notice.

- Conclusions: The Tribunal quashed the assessment proceedings due to the absence of a statutory valid notice by the jurisdictional officer.

SIGNIFICANT HOLDINGS

- The Tribunal held that the issuance of a notice under section 143(2) by an officer lacking jurisdiction renders the assessment void ab initio. It stated, "the entire scrutiny assessment framed u/s 143(3)/144 of the Act...without issuing a valid and legal notice u/s 143(2) of the Act become void ab initio and deserves to be quashed."

- The Tribunal established the principle that section 292BB does not cure the defect of non-issuance of a valid notice by the jurisdictional officer. It noted, "Section 292BB of the Act does not save the defect of non-issue of valid notice u/s 143(2) of the Act by the jurisdictional officer."

- The Tribunal quashed the assessment proceedings, allowing the assessee's appeal on the grounds of jurisdictional and procedural invalidity.

The revenue filed an appeal against the ITAT's order allowing deductions under Section 80IB(10) of the Income Tax Act, despite the assessee filing the return beyond the period prescribed under Section 139(1) and claiming deductions in a revised return. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had declined the deduction, citing the bar under Section 80AC, which mandates filing the return by the due date specified under Section 139(1). The ITAT held that a non-est return does not exist in the eyes of law and cannot be acted upon. However, it also stated that the CIT should have considered the claim in its appellate jurisdiction if the assessee was otherwise entitled to the deduction.

The assessee, a statutory organization, claimed that the delay in filing the return was due to the local Audit Department's delay. The ITAT held that the CIT(A) and ITAT had concurrently found the assessee entitled to certain deductions under Section 80IB(10). The only contention was the timing of the original return. The court noted that Section 139(4) allows filing a return before the end of the assessment year or before the completion of the assessment, whichever is earlier. The court referenced the Supreme Court's judgment in Prakash Nath Khanna, which stated that a return filed under Section 139(4) does not meet the requirements of Section 139(1) in the context of Section 80AC.

The court also considered the Delhi High Court's decision in B.U. Bhandari Nandgude Patil Associates, which emphasized that statutory time limits must be adhered to unless compelling reasons are shown. In this case, the assessee's reason for delay, late audit, was accepted by the appellant. The court held that the assessee had a reasonable and bona fide cause for the delay and should not be burdened with taxes it is not liable to pay under law.

For these reasons, the appeal was dismissed, and all pending applications were disposed of.

Issues involved:

Issue 1: Whether "empty bottles" can be considered as scrap.

The court concluded that empty bottles satisfy the conditions to be termed as 'scrap' as per Section 206(1) of the Act. The bottles are in the nature of waste and scrap, as they are not usable as such and can only be made usable through recycling. The process of opening the bottled liquor involves mechanical working, and the bottles are not usable as such due to breakage, cutting up, wear, and other reasons.

Issue 2: Whether TASMAC can be termed as a seller of scrap.

The court observed that TASMAC is a corporation established by an Act of the State Government with a significant turnover from the sale of eatables and collection of empty bottles. TASMAC continues to have rights over the empty bottles by giving tenders for collecting and selling them, thus making it a "seller" as per Section 206C of the Act.

Issue 3: Whether the successful bidders of contracts for running the bars can be termed as "buyers" of scrap.

The court noted that TASMAC bar contractors obtain the right to sell eatables and collect and sell empty bottles through tenders. The term "buyer" includes those who obtain goods or the right to receive goods through auction or tender. The court concluded that bar contractors are buyers as they get the benefit of collecting empty bottles, which they do not use for personal consumption but sell to vendors.

Issue 4: Whether only 1% of the license fee, i.e., the agency commission, accrues as the income of TASMAC.

The court found that there is no condition requiring TASMAC to collect 99% of the license fee separately for the State Government. TASMAC is responsible for collecting the tender amount from successful tenderers and remitting it to the Government. The liability to collect TCS/TDS arises at the time of making specified receipts/payments, regardless of whether any income is earned.

Conclusion:

The court held that the invocation of Sections 206C, 206CC, and 206CCA of the Income Tax Act, 1961, against the petitioner was misplaced and unwarranted. The petitioner is neither the owner of the bottles nor generates scrap as contemplated under the Income Tax Act. The activity of opening and uncorking bottles is not a "mechanical working of material." Therefore, the impugned orders were quashed, and the writ petitions were allowed.