The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has quashed an assessment involving a ₹1.88 crore addition after finding that the scrutiny notice was issued by an officer who lacked jurisdiction under the applicable Central Board of Direct Taxes (CBDT) instruction.
The bench of Beena Pillai (Judicial Member) and Ratna Dasgupta (Accountant Member) has observed that the notice under Section 143(2) of the Income-tax Act, 1961, had been issued by an Assistant Commissioner of Income Tax (ACIT), although the company’s nil returned income placed its case within the jurisdiction of an Income Tax Officer (ITO). The tribunal treated the defect as incurable and set aside the consequential assessment.
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The central legal issue was whether a scrutiny notice issued contrary to the monetary allocation of jurisdiction prescribed by CBDT could sustain an assessment, and whether the taxpayer’s participation in the proceedings could cure that defect.
The company filed its return on October 31, 2018, declaring nil total income. The tax department subsequently received information that it had sold immovable property for ₹17.50 lakh, whereas the stamp duty valuation was ₹2,26,85,600.
The company had disclosed long-term capital gains of ₹5.25 lakh, calculated by deducting an acquisition cost of ₹12.25 lakh from the sale consideration.
The Assessing Officer invoked Section 50C and adopted the stamp duty value as the deemed sale consideration. After allowing an indexed acquisition cost of ₹33.32 lakh, the officer computed long-term capital gains of ₹1,93,53,600. After adjusting the gains already disclosed, an addition of ₹1,88,28,600 was made.
The company disputed the valuation, contending that the land was encumbered, contained unauthorised structures and slum occupants, and had been sold on an “as is where is” basis, subject to occupants’ claims and rights.
It also challenged the failure to refer the valuation to the Departmental Valuation Officer under Section 50C(2), along with the computation of acquisition cost.
The Commissioner of Income Tax (Appeals) upheld the addition, observing that the company had not supported its claims concerning the property’s condition and encumbrances with cogent or conclusive evidence.
Before the tribunal, the company raised additional legal grounds challenging the validity of the scrutiny notice dated September 28, 2019.
Relying on CBDT Instruction No. 1/2011 dated January 31, 2011, it argued that jurisdiction over corporate taxpayers in metropolitan cities with returned income up to ₹30 lakh lay with the ITO. Since its returned income was nil, the ACIT could not validly issue the notice under Section 143(2).
The tribunal admitted the additional grounds because they raised purely legal questions going to the root of the assessment and the relevant facts were already on record. It relied on the Supreme Court’s decision in National Thermal Power Co. Ltd. v. CIT.
The Revenue maintained that the distribution of work between ITOs and ACITs or DCITs was an internal administrative arrangement. It argued that a departure from the monetary limits prescribed by CBDT should not invalidate the assessment.
The department also relied on Section 124(3), contending that the company had participated in the assessment without raising a timely objection to the officer’s jurisdiction.
Additionally, it invoked Section 292BB, which restricts certain objections concerning service of notice where a taxpayer has participated in assessment proceedings.
The company countered that the dispute concerned monetary jurisdiction rather than territorial jurisdiction, and that participation could not validate a notice issued by an officer without authority.
The tribunal held that a notice under Section 143(2) is mandatory for making the assessment and must be issued by the Assessing Officer having jurisdiction.
It found that the ACIT’s issuance of the notice, despite the company having declared nil income, did not comply with the applicable CBDT instruction.
The bench rejected the Revenue’s reliance on Hindustan Transport Co. v. IAC, observing that the decision predated the 2011 instruction under consideration. It also discussed subsequent tribunal decisions addressing challenges based on the monetary limits prescribed by that instruction.
On the Revenue’s objection concerning the timing of the jurisdictional challenge, the tribunal referred to decisions distinguishing territorial jurisdiction from pecuniary jurisdiction.
It noted judicial authority holding that the time limit for objecting to territorial or area-specific jurisdiction does not prevent a taxpayer from challenging action taken wholly without authority of law.
The bench also distinguished the Supreme Court decision in Kalinga Institute of Industrial Technology, relied upon by the department, on the facts.
The tribunal rejected the argument that Section 292BB protected the proceedings.
It explained that the provision addresses defects involving service of an otherwise valid notice, including non-service, delayed service or improper service. It does not cure an invalid issuance arising from an incorrect assumption of jurisdiction.
The bench therefore concluded that the jurisdictional notice had not been issued by the appropriate authority and that the inherent defect was incurable.
Allowing the appeal, the tribunal quashed the September 28, 2019 scrutiny notice and the April 9, 2021 assessment order passed under Section 143(3), read with Sections 143(3A) and 143(3B).
Consequently, the ₹1.88 crore addition made through that assessment could not survive. However, the tribunal did not decide the merits of the Section 50C valuation dispute, the request for a valuation reference or the acquisition-cost claims. Those grounds became academic and were left open.
The bench expressly clarified that its decision arose from the peculiar facts and circumstances of the case and should not be interpreted as applying to every case involving a challenge to a jurisdictional notice.
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