2025 (2) TMI 695 - AT - Income Tax

Challenging the notice u/s 143(2) issued by the ACIT Corporate Circle-1(2) Bhubaneshwar as being without jurisdiction - notice issued u/s 143(2) on the ground that the jurisdictional officer had not adjudicated upon returns as jurisdiction has been changed after returns had been filed - HELD THAT - Plain language of the sections determining jurisdiction (both territorial and pecuniary) reveals that the mechanism for challenging the jurisdiction of an AO is contained in Part B of Chapter XIII of the Act and it is clearly within the administrative domain. Since in this case the assessee never challenged the jurisdiction of the AO therefore there was no occasion to administratively consider that issue. The facts do not indicate that either of the two AOs ITO and ACIT did not have territorial jurisdiction the absence of which might have brought in a legal fatality. It is just that a division of work was affected on account of division on the basis of returned income limits of an assessee in other words the third limb of the categories of jurisdiction contained in section 120(3) of the Act indicating pecuniary jurisdiction. Catena of judgments relied upon in the earlier part of the discussion especially in the case of Kalinga Institute of Industrial Technology 2023 (6) TMI 1076 - SC ORDER and Mantoo Sarkar 2008 (12) TMI 719 - SUPREME COURT it is held that the pecuniary jurisdiction challenged at this stage is unjustified and is at best a curable defect if at all it can be called a defect considering the facts of the case. Ground No.3 and 4 of the assessee s appeal are accordingly dismissed. CIT(A) treated the entire quantum of sundry creditors as on 31.03.2015 as a discharged liability and used the provisions of section 41(1) of the Act to enhance the income - It is felt that there is an inherent error in this action in as much as the credits added contain entries belonging to earlier years and in case it can be shown that the impugned sums represent bogus entries then also they have to be added back in the appropriate year. Therefore we deem it fit to remand the matter back to the file of the AO to determine the genuineness or otherwise of the sundry creditors and in case of any adverse findings then additions if any need to be made in any appropriate previous year if the law permits reopening considering the limitations involved as per the relevant statute. The assessee would do well to present all the facts before the AO to enable him to assess his income correctly.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

(i) Whether the assessment proceedings were vitiated due to non-adherence to the pecuniary jurisdiction assigned to various levels of Income Tax Officers.

(ii) The validity of additions made under Sections 68 and 41(1) of the Income Tax Act concerning the verification of sundry creditors.

(iii) The imposition of penalty under Section 271(1)(c) of the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

(i) Assumption of Jurisdiction:

- Relevant Legal Framework and Precedents: The jurisdictional issue was analyzed under Sections 120 and 124 of the Income Tax Act, which delineate the jurisdiction of income-tax authorities based on territorial, pecuniary, and other criteria. The Tribunal considered the case law, including the Supreme Court's decision in DCIT vs. Kalinga Institute of Industrial Technology, which emphasized the requirement for timely objection to jurisdictional issues.

- Court's Interpretation and Reasoning: The Tribunal found that the initial notice under Section 143(2) was issued by an officer without proper pecuniary jurisdiction, but the assessee failed to challenge this at the appropriate time. The Tribunal relied on the principle that objections to jurisdiction must be raised promptly, as outlined in Section 124(3) of the Act.

- Key Evidence and Findings: The Tribunal noted that the assessee did not raise the jurisdictional issue before the Assessing Officer or the CIT(A) and participated in the proceedings without objection.

- Application of Law to Facts: The Tribunal concluded that the jurisdictional challenge was untimely and did not render the proceedings void.

- Treatment of Competing Arguments: The Tribunal considered the arguments from both sides, emphasizing that jurisdictional objections must be raised within statutory time limits.

- Conclusions: The Tribunal dismissed the jurisdictional challenge, finding it to be a curable defect rather than a fatal one.

(ii) Quantum Addition under Sections 68 and 41(1):

- Relevant Legal Framework and Precedents: Sections 68 and 41(1) of the Income Tax Act were central to the Tribunal's analysis. Section 68 deals with unexplained cash credits, while Section 41(1) pertains to remission or cessation of trading liabilities.

- Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) erred in treating the entire quantum of sundry creditors as a discharged liability under Section 41(1) without considering the specific years to which the credits pertained.

- Key Evidence and Findings: The Tribunal noted the lack of verification of creditors and the absence of proper documentation, which led to the initial addition of Rs. 1,88,60,982/- and further enhancement by the CIT(A).

- Application of Law to Facts: The Tribunal remanded the matter to the Assessing Officer to verify the genuineness of the sundry creditors and make appropriate additions in the correct assessment years, subject to statutory limitations.

- Treatment of Competing Arguments: The Tribunal considered the assessee's submission of new documentation at the appellate stage and the CIT(A)'s reliance on Section 41(1) for enhancement.

- Conclusions: The Tribunal remanded the issue of quantum addition for reassessment by the Assessing Officer.

(iii) Penalty under Section 271(1)(c):

- Relevant Legal Framework and Precedents: Section 271(1)(c) of the Income Tax Act imposes penalties for concealment of income or furnishing inaccurate particulars.

- Court's Interpretation and Reasoning: The Tribunal noted that since the quantum addition was remanded, the penalty could not be adjudicated at this stage.

- Key Evidence and Findings: The penalty was initially levied on the enhanced amount by the CIT(A).

- Application of Law to Facts: The Tribunal decided that the penalty issue would be consequential to the outcome of the reassessment of quantum addition.

- Treatment of Competing Arguments: The Tribunal did not specifically address competing arguments on the penalty, as it was contingent on the quantum reassessment.

- Conclusions: The Tribunal allowed the appeal concerning the penalty for statistical purposes, pending the outcome of the reassessment.

3. SIGNIFICANT HOLDINGS

- The Tribunal held that jurisdictional challenges must be raised promptly and that failure to do so results in waiver of the right to contest jurisdiction later.

- The Tribunal emphasized the importance of determining the genuineness of creditors and making additions in the correct assessment year, in line with statutory provisions.

- The Tribunal remanded the quantum addition issue for reassessment, highlighting the need for proper verification and documentation.

- The penalty issue was deferred, pending the outcome of the reassessment of quantum addition.