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Facts
The assessee filed a return for AY 2017-18, and the case was selected for scrutiny due to abnormal cash deposits during demonetization. An assessment order was passed under Section 143(3) making significant additions for unexplained cash and payments violating Section 40A(3). The assessee's appeal to the CIT(Appeals) was dismissed.
Held
The Tribunal found that the notice issued under Section 143(2) was not in the revised format prescribed by the CBDT Instruction F.No. 225/157/2017/ITA-II dated 23.06.2017. Citing the binding nature of CBDT instructions under Section 119, the Tribunal held the Section 143(3) assessment and subsequent Section 263 revisionary proceedings invalid and without jurisdiction. Consequently, the appeal was allowed.
Key Issues
Whether assessment proceedings initiated by a Section 143(2) notice are valid if the notice does not comply with the revised format specified in CBDT Instructions.
Sections Cited
139(1), 143(2), 143(3), 40A(3), 119, 263
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Income Tax Appellate Tribunal, ‘C’ BENCH, KOLKATA
Before: Shri Rajesh Kumar & Shri Pradip Kumar Choubey
Per Pradip Kumar Choubey, Judicial Member:- The present appeal is directed at the instance of assessee against the order of Id. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 20.03.2025 passed for Assessment Year 2017-2018.
(A.Y. 2017-2018) Mohammed Gyasuddin 2. Brief facts of the case are that the assessee filed his return of income for the A.Y.-2017-18 u/s. 139(1) of the Income-tax Act, 1961 on 01.11.2017 declaring total income of Rs.25,89,220/-. The case was selected for scrutiny "Abnormal increase in cash deposit during demonetization period as compared to pre-demonetization period” and notice under section 143(2) of the Income-tax Act,1961 was issued and duly served on the assessee. During the course of assessment proceeding, various notices were issued and after considering the reply, assessment order was passed u/s 143(3) of the Act on 30.12.2019 at total assessed income of Rs.1,94,81,720/- after making addition of Rs.1,60,00,000/-on account of unexplained cash deposit and Rs.8,92,500/- on account of unexplained payment in contravention to provisions of section 40A(3) of the Act.
3. Aggrieved by the order of the ld. Assessing Officer, the assessee preferred an appeal before the ld. CIT(Appeals), wherein the appeal of the assessee has been dismissed.
4. Being aggrieved and not being satisfied with the order of ld. CIT(Appeals), the ld. Authorized Representative of the assessee has challenged the impugned order by raising an additional ground, which reads as under:- “That the ld. AO erred in issuing notice u/s 143(2) of the Act dated 09.08.2018 without complying to the CBDT Instruction F. No. 225/157/2017/ITA-II dated 23.06.2017 and so the notice issued u/s 143(2) is not valid as per law and hence the entire assessment order and the assessment proceedings under the Act is bad in law”. (A.Y. 2017-2018) Mohammed Gyasuddin 5. The ld. A.R. of the assessee submits that the additional ground is a pure legal ground, which goes to the root of the matter so that the ground may be adjudicated at the earliest. The ld. A.R. also placed reliance on the judgment of the Coordinate Bench of Kolkata dated 15th January, 2025 passed in in the case of Nadia District Central Cooperative Bank Limited -vs.- Pr. CIT-1, Kolkata.
The ld. Departmental Representative supports the impugned order of ld. CIT(Appeals) and submitted that if the legal ground has not been taken by the assessee before the lower authorities, it cannot be permitted to raise the same at this stage. The ld. D.R. further submits that the CBDT vide its Instruction has prescribed revised formats to issue notice under section 143(3) of the Act, which was specified in the Instruction itself.
Upon hearing the submissions of the ld. Counsel of the respective parties, we have perused the notice issued under section 143(2) of the Act, which reads as follows:- Sir/ Madam/ M/s, This is for your kind information that the return of income filed by you for assessment year 2017-18 vide ack. no. 358689941080118 on 08/01/2018 has been selected for Scrutiny. 2. In this regard, an opportunity is being given to you to produce or cause to produce any evidence on which you may like to rely in support of the said return of income by 05/09/2018 at 12:15 PM. 3. The evidence/information specified above has to be furnished online electronically through your E-filing account in incometaxindiaefiling.gov.in. Subsequent assessment proceedings shall also be conducted electronically through the (A.Y. 2017-2018) Mohammed Gyasuddin 'E-Proceeding' facility of Income-tax Department. A brief note on 'E-Proceeding' is enclosed for your kind reference. 4. In course of assessment proceedings, if required, specific questionnaire(s) or requisition(s) for information/document shall be issued subsequently. 5. Please note that para 3 is applicable if you have an E- filing account.
8. We have also gone through the order passed by the Coordinate Bench of this Tribunal as relied by the ld. Authorized Representative of the assessee and the relevant portion of the order is reproduced herein below:- “07. After hearing the rival contentions and perusing the materials available on record, we find that though the appeal filed before us is against the revisionary order as passed by the ld. PCIT u/s 263 of the Act whereby the PCIT set aside the order of assessment framed u/s 143(3) dated 10.04.2021 for two reasons (i) provision for bad and doubtful debts made by the assessee were in fact inadmissible to the tune of ₹4,32,92,508/- and (ii) the excess addition to fixed assets by ₹65,69,270/- which remained unexplained and resulted into under assessment of income to that extent. The assessee has raised additional ground claiming therein that the assessment framed u/s 143(3) dated 10.04.2021, was framed consequent to issuance of notice u/s 143(2) read with section 12E of the Income Tax rules, 1962, dated 22.02.2019, which was not issued in accordance with the CBDT Instruction F.no. 225/157/2017/ITA-II dated 23.06.2017 which for ready reference is extracted the CBDT instruction:- "F.No.225/157/2017/1TA.11 Government of India Ministry of Finance Department of Revenue (CBDT) North Block, New Delhi, dated the 23rd of June, 2017 To All Pr. CCsIT/Pr. CCIT(International-tax)/CCIT(Exemptions)/Pr. DsGIT S Sir/Madam, Subject: - Issue of notices under section 143(2) of Income-tax Act, 1961 in revised format-regd.- 4 (A.Y. 2017-2018) Mohammed Gyasuddin With reference to the above, I am directed to state that Central Board of Direct Taxes has decided to modify format of notice(s) issued under section 143(2) of the Income-tax Act which intimate the concerned assesse about selection of his/her case for scrutiny. This has become necessary in view of Board's decision to utilise 'E-Proceeding' facility for electronic conduct of assessment proceedings in a widespread manner from this financial year.
The three formats of notice(s) are: (i)Limited Scrutiny (Computer Aided Scrutiny Selection) (ii) Complete Scrutiny (Computer Aided Scrutiny Selection) (iii) Compulsory Manual Scrutiny The revised format of 143(2) notice(s) with a note on benefits & Procedures of 'EProceeding' facility are enclosed for information of the field authorities.
I am further directed to state that all scrutiny notices under section 143 (2) of the Act, shall henceforth, be issued in these revised formats only. The Systems Directorate is effecting necessary changes in the IT BA module in this regard.
The above may be brought to the notice of all for necessary compliance. Enclosures(s): as above Sd/- (Rohit Garg) Director-ITA.II,"
After hearing the rival contentions and perusing the materials available on record including the above instruction, we find that the post 23.06.2017, the notice u/s 143(2) of the Act was required to be issued in any of the three formats mentioned in the said instructions above. We further note that in para 3 of the said instruction it is stated that all notice u/s 143(2) of the Act shall henceforth be issued in this revised format only. Therefore, we find merit in the contentions of the ld. AR that the notice dated 22.02.2019, issued u/s 143(2) of the Act is not conforming to the formats of notices as prescribed in the above said instruction.
Therefore considering the defect in the issuance of notice, we are ofd the considered view that the assessment framed on the basis of said notice is invalid and so is the revisionary proceeding based on the said assessment framed. The case of the assessee find support from the decision of the co-ordinate 5 (A.Y. 2017-2018) Mohammed Gyasuddin Bench in the case of Srimanta Kumar Shit (supra) as we referred to above. For the sake of ready reference, the operative part is reproduced below:- "12. A perusal of the above format would indicate that though in the heading, it exhibits limited scrutiny (Computer Aided Scrutiny Selection) but thereafter in the first paragraph, it only talks of scrutiny and then in second paragraph, it talks upon the opportunity being provided to the assessee what he wants to say in support of the return. It is pertinent to observe that in para one, the ld. AO has to identify the issues for examination. If this proforma is being read with the first paragraph of the assessment order, then, it would reveal that in the third line of the first paragraph, ld. Assessing Officer has used the expression "this return was selected for scrutiny in "CASH" on the issue of cash deposits during demonetization period". It would indicate that the case was selected for scrutiny but for the issue of cash deposit during demonetization, this mention of the issue would indicate that it was for a limited purpose of scrutinizing the cash depositsduring demonetization. Its scope for making other additions would only be enlarged by following due procedure laid down by the CBDT vide its Instruction No. 5 (reproduced supra).
The Hon'ble Jurisdictional High Court had an occasion to consider an identical situation in the case of Weilburger Coatings (India) (P.) Limited (supra), wherein Tribunal has followed the CBDT's Instruction bearing No. 5 of 2016. The questions before the Hon'ble High Court were - (a) whether in the facts and circumstances of the case and in law, the ld. Tribunal has committed substantial error in law in deleting the disallowance of carry forward of losses of earlier years? (b) whether the Learned Tribunal has substantially erred in law in holding that the Assessing Officer exceeded his jurisdiction in enquiring into those issues which were beyond the scope of limited scrutiny, without taking into consideration the fact that the claim of the assessee pertaining to carried forward losses was inadmissible since the beginning itself and therefore the Assessing Officer was justified in disallowing the same without converting the case into complete scrutiny?
(A.Y. 2017-2018) Mohammed Gyasuddin These questions have been decided in favour of the assessee and against the revenue. The Hon'ble High Court concurred with the ITAT that due procedure was not followed while converting limited scrutiny case to a full scrutiny.
Similarly, the order of the ITAT, Visakhapatnam Bench in the case of Vudatha Vani Rao -vs.- Income Tax Officer reported in [2024] 159 taxmann.com 1394 (Visakhapatnam) was relied upon by the ld. Counsel for the assessee. This 'SMC' order of the ITAT is also in the line of Hon'ble High Court's decision. The ld. Assessing Officer has not made any addition of cash deposit during demonetization period. The assessee has deposited small amounts, which have been accepted by the ld. Assessing Officer. Therefore, the assessment order itself is not sustainable because it has been passed by the ld. Assessing Officer by exceeding his limited powers. The ld. Assessing Officer ought to have followed the procedure contemplated in CBDT Instruction bearing No. 5 of 2016 for converting a limited scrutiny assessment into a full scrutiny. Accordingly, we quash the assessment order. Since we have quashed the assessment order, therefore, we do not deem it necessary to adjudicate the other issues on merit because they become academic in nature. Accordingly, we allow the appeal of the assessee."
Similarly in the case of Shib Nath Ghosh Vs. ITO (supra), the co- ordinate Bench has decided the issue in favour of the assessee by observing and holding as under:- After hearing both the sides and the materials available on record, we find that the notice issued u/s 143(2) dated 9th August, 2017 was not in any of the formats as provided in the CBDT instruction F.No.225/157/2017/ITA-II dated 23.06.2017. We have examined the notice, copy of which is available at page no.1 of the Paper Book and find that the same is not as per the format of CBDT Instruction F.No. 225/157/2017/ITA-II dated 23.06.2017 as stated above. In our opinion, the instruction issued by the CBDT are mandatory and binding on the Income tax authorities failing which the proceedings would be rendered as invalid. Hon'ble Apex Court in case of UCO Bank (supra) held that the circular issued by CBDT in exercise of its statutory powers u/s 119 of the Act, are binding on the authorities. The Hon'ble Apex court held as under:- "The Central Board of Direct Taxes under section 119 of the Income-tax Act, 1961, has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its 7 (A.Y. 2017-2018) Mohammed Gyasuddin statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act. Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases Which can be properly categorized as belonging to a class, can thus be given the benefit of relaxation of law by Issuing circulars binding on the taxing authorities. In order to aid proper determination of the income of money lenders and banks, the Central Board of Direct Taxes issued a circular dated October 6, 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, It need not be included in the assessee's taxable income, provided the Income-tax Officer is satisfied that recovery is practically improbable. Twenty-six years later, on June 20, 1978, in view of the judgment of the Kerala High Court In STATE BANK OF TRAVANCORE v. CIT [1977] 110 ITR 336, the Board by another circular, withdrew with immediate effect the earlier circular. However, by circular dated October 9, 1984, the Board decided that Interest in respect of doubtful debts credited to suspense account by banking companies would be subjected to tax but Interest charged in an account where there has been no recovery for three consecutive accounting years would not be subjected to tax in the fourth year and onwards. The circular also stated that if there is any recovery in the fourth year or later, the actual amount recovered only would be subjected to tax in the respective years. This procedure would apply to assessment year 1979- 80 and onwards." Similarly, Hon'ble Calcutta High Court in case of Amal Kumar Ghosh (supra), held as under:- "Held, allowing the appeal, (1) that even assuming that the intention of the Central Board of Direct Taxes was to restrict the time for selection of the cases for scrutiny to a period of three months, It could not be said that the selection in the case of the assessee was made within the period. The return was filed on October 29, 2004, and the case was selected for scrutiny on July 6, 2005. By any process of reasoning, it was not open to the Tribunal to come to a finding that the Department acted within the four corners of Circulars Nos. 9 and 10 Issued by the 8 (A.Y. 2017-2018) Mohammed Gyasuddin Central Board of Direct Taxes The circulars were evidently violated. The circulars were binding upon the Department under section 119." Therefore, case of the assessee is therefore squarely covered by the ratio laid down in the above decisions and respectfully following the same , we are inclined to hold the assessment as invalid being based on the invalid issue of notice u/s 143(2) of the Act. The first additional ground raised
by the assessee is allowed. Since we have held the notice issued u/s 143(2) as invalid and so the consequential assessment framed, we are not adjudicating second legal issue raised in the additional ground no.2 as well the grounds in the memorandum of appeal and are left open to be adjudicated in future if the need arises for the same. In the result, the appeal of the assessee is allowed.
11. Therefore, in view of the above decisions and considering the facts of the assessee's case, we are inclined to hold that the assessment framed u/s 143(3) is invalid and so is the consequent revisionary proceedings u/s 263 of the Act. The appeal of the assessee is allowed by quashing the order passed u/s 263 of the Act as invalid and without jurisdiction.
12. In the result, the appeal of the assessee is allowed”.
9. Keeping in view the judgment of the Coordinate Bench of this Tribunal and going over the notices issued under section 143(2), we are inclined to hold that the assessment framed under section 143(3) is invalid and the notices have not been produced as per the CBDT Instruction. Accordingly, the appeal of the assessee is hereby allowed by quashing the order passed under section 143(3) and all the orders which have been passed on the invalid notices.