The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has quashed reassessment proceedings against a non-corporate taxpayer after finding that the Income Tax Officer (ITO) who initiated and completed the proceedings lacked the requisite pecuniary jurisdiction under CBDT Instruction No. 1/2011. The ITO had jurisdiction only up to Rs. 20 lakh returned income.
The bench of Amit Shukla (Judicial Member) and Arun Khodpia (Accountant Member) has observed that an assessment framed by an officer who was not authorised to exercise jurisdiction over the taxpayer, considering the amount of returned income, was unsustainable in law. It consequently allowed the taxpayer’s appeal and dismissed the department’s cross-appeal. The defect concerned the very assumption of jurisdiction and went to the root of the reassessment proceedings.
BUY NOW: Think Before You Pay Cash: 50+ Landmark Rulings on Section 40A(3) Of The Income Tax Act, 1961
The dispute related to Assessment Year 2011-12. The taxpayer had filed a return declaring a total income of ₹31,55,524. Subsequently, the assessment was reopened and an order under Section 143(3), read with Section 147 of the Income Tax Act, 1961, was passed on December 27, 2017.
Through the reassessment order, the Assessing Officer made an addition of ₹14,02,96,481 under Section 68 of the Act. The officer also disallowed interest expenditure of ₹46,09,124 claimed under Section 24(b), unrealised rent of ₹2,83,290 and municipal taxes of ₹12,23,461.
The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, partly allowed the taxpayer’s appeal. The CIT(A) directed the deletion of the entire Section 68 addition and the disallowance concerning unrealised rent. The municipal tax claim was also allowed to the extent of the original disallowance of ₹12,23,461.
However, the CIT(A) sustained the disallowance of interest expenditure under Section 24(b), holding that the taxpayer had not produced sufficient evidence to show that the term loan obtained from Punjab National Bank had been utilised for acquiring the house property.
Both sides approached the Tribunal. The taxpayer challenged the validity of the reassessment, apart from contesting the remaining disallowances. The Revenue challenged the relief granted by the CIT(A), particularly the deletion of the Section 68 addition.
The principal contention raised by the taxpayer was that the reassessment had been undertaken by an ITO who lacked pecuniary jurisdiction.
Reliance was placed on CBDT Instruction No. 1/2011 dated January 31, 2011. The instruction prescribed monetary limits for assigning cases between ITOs and officers in the rank of Assistant Commissioner or Deputy Commissioner of Income Tax.
Under the instruction, in metropolitan cities such as Mumbai, an ITO could exercise assessment jurisdiction over a non-corporate taxpayer only where the returned income did not exceed ₹20 lakh. Where the returned income exceeded ₹20 lakh, jurisdiction was required to be exercised by an ACIT or DCIT.
Dhaval Shah, Counsel for the taxpayer argued that since the declared income was ₹31,55,524, the ITO could not lawfully assume jurisdiction, issue the statutory notices or pass the reassessment order.
The department opposed the plea and contended that the taxpayer had participated in the assessment proceedings without raising an objection to the jurisdiction within the prescribed period. It argued that the challenge was therefore barred under Section 124(3) of the Income Tax Act.
The Tribunal rejected the Revenue’s objection and distinguished a dispute concerning territorial jurisdiction from a challenge to the inherent or pecuniary competence of an Assessing Officer.
It explained that the statutory restriction under Section 124(3), which prevents a taxpayer from belatedly questioning the jurisdiction of an Assessing Officer, primarily operates in cases involving territorial jurisdiction. It does not validate an assessment made by an officer who lacked the pecuniary authority prescribed by binding CBDT instructions.
The Bench noted that the taxpayer was a non-corporate assessee and had admittedly returned an income exceeding ₹20 lakh. Despite this, the proceedings were undertaken by an ITO whose authority under the applicable CBDT instruction was confined to cases in which the returned income did not exceed ₹20 lakh.
“Thus, on the admitted facts, the Ld. AO was not vested with the requisite pecuniary jurisdiction to assume jurisdiction over the assessee’s case,” the Tribunal observed.
It held that this was not a minor procedural irregularity capable of being cured. The defect affected the assumption of jurisdiction itself and consequently invalidated the reassessment proceedings.
The Tribunal emphasised that instructions issued by the CBDT for the proper administration of the Income Tax Act are binding on departmental authorities.
It referred to judicial precedents holding that the Revenue cannot take a position contrary to an operative circular or instruction issued by the Board. Where an assessment or reassessment is undertaken in violation of the prescribed jurisdictional allocation, the resulting order cannot be sustained.
The Bench also relied upon decisions dealing with assessments founded on notices issued by non-jurisdictional officers. It observed that a valid assessment must be preceded by statutory notices issued by an officer legally competent to exercise jurisdiction over the taxpayer.
Since the ITO lacked the prescribed pecuniary jurisdiction, the notice and the proceedings arising from it were held to be legally defective.
The taxpayer had additionally challenged the reassessment on the ground that the Assessing Officer issued the notice under Section 143(2) along with the recorded reasons, without first allowing the taxpayer an opportunity to file objections and without disposing of such objections.
Reliance was placed on the Supreme Court’s decision in GKN Driveshafts (India) Ltd. v. ITO, which prescribes the procedure to be followed where a taxpayer objects to the reopening of an assessment.
The Tribunal found that the proceedings were not in conformity with the principles laid down by the Supreme Court. It also noted that the Section 143(2) notice had been issued by an officer who did not possess valid jurisdiction over the taxpayer’s case.
Accordingly, the reassessment could not survive either on the jurisdictional ground or in light of the procedural deficiencies identified by the Tribunal.
The Revenue’s appeal was primarily directed against the relief granted by the CIT(A) on the basis of a remand report.
The Department claimed that the document relied upon by the CIT(A) was merely a draft remand report that had appeared on the appellate portal because of a technical or system error. It argued that the report had neither been finalised by the Assessing Officer nor approved and transmitted by the Range Head in accordance with departmental procedure.
The Revenue therefore requested that the matter be restored to the CIT(A) or the Assessing Officer for fresh adjudication.
The Tribunal was not persuaded by the Revenue’s contentions. It noted that during the appellate proceedings, the CIT(A) had called for a remand report from the Assessing Officer. After examining the documents furnished by the taxpayer, the officer did not record any adverse finding capable of dislodging the taxpayer’s claims.
The CIT(A) had considered the available material as well as the remand report before directing the deletion of the additions.
The Tribunal observed that the Revenue had failed to point out any substantive infirmity in the CIT(A)’s conclusions. It had also not produced any contrary evidence or judicial authority warranting interference with the relief granted by the first appellate authority.
A factual finding recorded by the CIT(A) after examining the material on record could not be disturbed merely because the Revenue had challenged it, the Bench said. The Revenue was required to demonstrate a specific error or produce material contradicting the finding, which it had failed to do.
The Tribunal concluded that the taxpayer’s appeal deserved to be accepted on the jurisdictional issue as well as on merits.
It held that the ITO was not vested with the requisite pecuniary jurisdiction under CBDT Instruction No. 1/2011 to assume jurisdiction over a non-corporate taxpayer whose returned income exceeded ₹20 lakh.
“The assumption of jurisdiction by an authority not vested with the requisite pecuniary jurisdiction thus goes to the root of the validity of the reassessment proceedings,” the Tribunal stated.
The reassessment order dated December 27, 2017 was quashed as unsustainable in law. The Tribunal allowed the taxpayer’s appeal and dismissed the Revenue’s appeal.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
