2016 (1) TMI 1410 - AT - Income Tax

CIT(A) power to correct jurisdictional errors - Disallowance u/s 14A - Non-recording of satisfaction results - whether the basic functions assigned to the assessing officer in the Act can be discharged by CIT(A) while exercising his coterminous power or not? - HELD THAT - Under section 251 CIT(A) in an appeal against an order of assessment is empowered to confirm, reduce, enhance or annul the assessment but if the assessment order suffers from jurisdictional errors then CIT(A) has no power to correct such jurisdictional errors. The coterminous powers vested in CIT(A) does not imply that he can clothe himself with powers to correct the jurisdictional defects in the assessment order. It is well settled law that where the very initiation of assessment proceedings by the AO was invalid then Ld. CIT(A) cannot direct for making a fresh assessment. CIT(A) should annul the assessment where the assessment proceeding is a nullity in the sense that the AO had no jurisdiction ab initio to take the proceeding. AO could take up the issue regarding disallowance u/s 14A only after recording satisfaction. Non-recording of satisfaction results into creeping of illegality in the assessment order and not a mere irregularity. The jurisdiction of recording satisfaction for invoking section 14A lies with the assessing officer and once he has not recorded such satisfaction then the said basic function of AO which clothes him jurisdiction to make disallowance u/s 14A cannot be usurped by CIT(A). We, therefore set aside the order of CIT(A). - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act.
2. Jurisdictional errors in the assessment order.

Analysis:
1. The case involved an appeal by the Assessee against the order of the Ld. CIT(A)-V, New Delhi, regarding disallowance under Section 14A of the Income Tax Act. The Assessee, a Non-Banking Financial Company, declared a loss in its income tax return. The assessing officer made a disallowance under Section 14A of the Act, invoking Rule 8D, which the Assessee contested. The Ld. CIT(A) upheld the disallowance without the assessing officer recording satisfaction regarding the Assessee's claim. The Assessee argued that the AO's failure to record satisfaction as required by Section 14A(2) cannot be overlooked by higher authorities. The Tribunal noted that the satisfaction must be recorded by the assessing officer alone, and the CIT(A) cannot correct jurisdictional errors in the assessment order. As the AO did not record satisfaction, the Tribunal set aside the Ld. CIT(A)'s order, allowing the Assessee's appeal.

2. The Tribunal delved into the jurisdictional errors in the assessment order, emphasizing that the AO's failure to record satisfaction for invoking Section 14A resulted in a fundamental flaw, not a mere irregularity. It clarified that if the initiation of assessment proceedings by the AO was invalid due to the absence of recorded satisfaction, the CIT(A) cannot direct a fresh assessment. The Tribunal highlighted that the jurisdiction to record satisfaction for invoking Section 14A lies solely with the assessing officer, and the CIT(A) cannot usurp this basic function. Therefore, the Tribunal set aside the Ld. CIT(A)'s order, emphasizing the importance of adhering to procedural requirements for disallowances under Section 14A of the Income Tax Act.

This comprehensive analysis highlights the key issues addressed in the judgment, focusing on the disallowance under Section 14A and the jurisdictional errors in the assessment order, providing a detailed understanding of the Tribunal's decision and legal reasoning.