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TMI Blog2023 (2) TMI 1348X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT and not by ITO which is in direct contravention of the CBDT instruction No. 01/2011 conferring/allocating the pecuniary jurisdiction. It is settled position of law that the CBDT instruction is binding on all Income Tax Authorities. Therefore, the income tax authorities ought to have followed the CBDT instruction in letter spirit and any contravention will be offending Article 14 of the Constitution of India which tantamount to arbitrary action of the authorities and also against the basic feature of the Constitution of India i.e. Rule of Law , which require all authorities of the Government to act in accordance to the law. The expression Rule of law requires the Government to act in accordance to law and so the AO had to act in accordance to law as prescribed by the CBDT in this case. And it should be borne in mind that where a power is given to do a certain thing in a certain way, the thing must be done in that way or not at all. See RAO SHIV BAHADUR SINGH VERSUS STATE OF VINDHYA PRADESH [ 1954 (3) TMI 63 - SUPREME COURT] Therefore, as per the CBDT instruction (supra) in the present cases, only the territorial ITO had the jurisdiction to re-open the cases of the assessee (ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand he says that assessee is in to accommodation entry (which means only paper transactions for beneficiaries lieu of a small commission). Thus there is contradiction in the allegation itself. On a reading of the reasons recorded shows that the AO has resorted to reopening only for the purpose of roving inquiry which cannot be the ground (reason to believe escapement of income) rather it can be term as reason to suspect which is not the jurisdictional requirement for reopening an assessment. Therefore, re-opening is bad in law and the assessee succeeds in the legal challenge for reopening the assessment of M/s W Financials Ltd. Coming to the case of M/s W System it is noted from the analysis we had made about the reasons recorded by AO to re-open (supra) that again the AO has resorted to reopening the assessment for AY. 2009-10 for finding out the taxable income embedded in the transactions (accommodation entries) which also fall foul of the requirement of law for successfully reopening the assessee u/s 147 of the Act. At the most it (reason recorded) only gives rise to Right to Suspect and not Right to believe escapement of income, which is not sufficient to successfully re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in their return of income); and if it was above Rs. thirty (30) Lakhs the jurisdiction was vested with the DCIT. And drew our attention to the CBDT instruction No. 01/2011 wherein the CBDT has classified assessee s under two (2) categories (i) Corporate (ii) Non-corporate; and thereafter allocated the pecuniary jurisdiction of ITO or DC/AC s based on their returned income and depending whether the assessee s are from Mofussil area or Metro cities. And as per the CBDT instruction (supra) the assessee s being a corporate entities and registered at Mumbai City and their returned income (except for AY. 2009-10) was less than Rs. 30 Lakhs, the assessee s contention is that DC (Deputy Commissioner) has wrongly assumed jurisdiction over assessee s cases and therefore the action of re-opening of assessments for assessment years u/s 147 and issue of notice u/s 148 of the Act (except AY 2009-10) was bad in law. For buttressing this aspect, the Ld. AR drew our attention to the details of the return of income filed by both the assessee s which are given in the chart form below: - Chart No. 1 Watermark Systems (India) Pvt. Ltd. ITA. No. Asst. Yr Date Original return filed Income declared P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art-1 M/s. W. System) the income declared was loss to the tune of Rs. (-) 45,52,893/-; and for AY. 2009-10 for M/s W. Financial income declared was loss to the tune of Rs. (-)71,23,213/- which according to him, was well within the pecuniary jurisdiction/ taxable jurisdiction (since profit includes loss) of, the DCIT, Circle-3(3) and therefore he was competent to initiate the re-opening of the assessment for AY. 2009-10 for M/s. W. Systems M/s. W. Financials and accordingly has framed the assessment. In the facts discussed (supra) therefore, we segregate ITA. No. 4834/Mum/2016 for AY. 2009-10 in the case of M/s. Watermark System (India) Pvt. Ltd, and ITA. No. 4832/Mum/2016 for AY. 200910 in the case of M/s. Watermark Financial Consultants Ltd which will be adjudicated separately after deciding the other captioned appeals. 4. Coming to the other appeals (except ITA. No. 4834/Mum/2016 4832/Mum/2016 for AY. 2009-10), the other captioned appeals would be adjudicated first by taking into consideration the application filed by assessee under Rule 27 of the Rules. Objecting to the admission of the application of the Rule 27 of the Rules raised by the assessee, the Ld. CIT-DR drew our atten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not the competence of the AO to have framed the jurisdiction; in other words, the assessee having failed to assail the jurisdiction of the AO as envisaged u/s 124 of the Act is precluded from raising it by way of Rule 27 application. Since, the assessee never questioned this issue before the Ld. CIT(A) (the issue of pecuniary or territorial jurisdiction of the AO), according to her, the respondent assessee cannot at this belated stage raise the same before this Tribunal by taking support of the Rule 27 of the Rule. 7. Per contra, the Ld. AR of the assessee submitted that by way of Rule 27 application, the assessee is entitled to raise the legal issue of jurisdiction of AO (pecuniary jurisdiction) which if decided in favour of the assessee, it goes to the root of the very jurisdiction of the AO to have even recorded the reason for initiating the reopening of assessment for AY. 2006-07, AY. 2007-08, AY. 2008-09 AY. 201011 (excluding AY. 2009-10). According to him, legal issue can be raised at any stage even before the Hon ble Supreme in the case of NTPC Vs. CIT (229 ITR 383) (SC) wherein the Hon ble Supreme Court has held that the legal issue (regarding pecuniary jurisdiction of AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised the writ jurisdiction under Article 226 of the Constitution and quashed the action of AO finding it without jurisdiction. Thus Ld. CIT-DR pointed out that those cases as cited by Ld. AR cannot come to the rescue of these two assessee s, because these present assessees has raised it for the first time before this Tribunal at such a belated stage, so such a plea wrapped in Rule 27 should not be admitted. The Ld. CIT-DR also relied on the decision of the Hon ble Delhi High Court in the case of Shri Syam Sunder Infrastructure Pvt. Ltd. Vs. CIT decided on 04.02.2015 wherein the Hon ble High Court was pleased to set aside the action of the Tribunal (allowing such a plea of the assessee) holding that since the assessee has not challenged the jurisdiction of the AO as prescribed u/s 124(3) of the Act, it has lost the opportunity to challenge the jurisdiction of AO before the Tribunal. Thus, according to her, the assessee cannot raise the jurisdiction of the AO at this belated stage before this Tribunal by way of application filed under Rule 27 of the Rules. 8. We have heard both the parties and perused the records. On the issue of admission of grounds raised by assessee under Rule 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese steps has to be under-taken/ done by the AO having jurisdiction over the assessee both territorial/pecuniary (except in cases u/s 127 of the Act); and if not carried out by the jurisdictional AO, that defect/error itself would render the action (of re-opening the assessment and subsequent action of framing the assessment) without authority of law; and consequently bad in law. And for that the assessee has relied on the decision of the Hon ble Bombay High Court in the case of Shri Ashok Devichand Jain (supra) wherein deciding a similar ground of appeal of the assessee allowed the plea of assessee by observing as under: - the notice u/s 148 of the Act is jurisdictional notice and any inherent defect therein is not curable. In the facts of the case, notice having been issued by an officer who had no jurisdiction over the petitioner, such notice in our view, has not been issued validly and is issued without any authority in law. 10. In aforesaid case of Shri Ashok Devichand Jain (supra), we note that petitioner/assessee had declared in the return of income Rs. 64,34,663/- as his income; and according to the assessee the jurisdiction (pecuniary) as per the CBDT instruction No. 01/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the finding of the Tribunal that the notices of reopening of assessments in both the assessment years is sustainable in law? 11. And the Hon ble High Court answered the question of law as under: - 6. Regarding the first question we may notice that Section 253 of the Act pertains to appeals to Appellate Tribunal. Under subsection (1) of section 253 any assessee aggrieved by any of the orders mentioned therein could appeal to the Appellate Tribunal which includes an order passed by a Deputy Commissioner (Appeals) or, as the case may be, a Commissioner (Appeals) under various provisions contained in the Act. Under subsection (2) of section 253, the Principal Commissioner or Commissioner may, if he objects to any order passed by a Deputy Commissioner (Appeals), or a Commissioner (Appeals) as the case may be, passed under section 154 or 250 of the Act, could direct the Assessing Officer to appeal to the Appellate Tribunal against such order. Sub-section (3) of section 253 lays down the period of limitation for filing such appeals. Subsection (4) of section 253 pertains to cross-objections by the person against whom such appeal has been preferred before the Tribunal and reads as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Forum on all grounds including the ground, which may have been held against him by the lower authority or the Court, whose order is otherwise in his favour. 10. The contention of the counsel for the Revenue was that the assessee had to file independent appeals or cross-objections in terms of section 253 (4) of the Act to enable the assessee to raise the ground of validity of the notices for reopening of the assessments since the said ground was held by the Commissioner (Appeals) against the assessee. For multiple reasons, we cannot accept this contention. As noted, under subsection (1) of section 253, an appeal can be filed before the Appellate Tribunal by an assessee being aggrieved by the order of the Appellate Commissioner. Under sub-section (2) of section 253, only if the Principal Commissioner or the Commissioner objects to any order passed by the Appellate Commissioner, he would direct the Assessing Officer to file appeal before the Appellate Tribunal. Essentially therefore, an appeal before the Tribunal against the order of Appellate Commissioner would lie against an order which is adverse to the appellant. May be, on one out of two grounds if the appeal of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without filing an independent appeal or cross objection. 12. Rule 27 of the Rules is akin to Rule 22 Order XLI of the Civil Procedure Code. Sub-rule (1) provides that any respondent, though he may not have appealed from any part of the decree, may not only support the decree but may also state that the finding against him in the Court below in respect of any issue ought to have been decided in his favour; and may also take any cross-objection to the decree which he could have taken by way of an appeal. In case of Virdhachalam Pillai v. Chaldean Syrian Bank Ltd. AIR 1964 SC 1425 in context of the said Rule the Supreme Court observed as under: 32. Learned Counsel for the appellant raised a short preliminary objection that the learned Judges of the High Court having categorically found that there was an antecedent debt which was discharged by the suit-mortgage loan only to the extent of Rs. 59,000/- and odd and there being no appeal by the Bank against the finding that the balance of the Rs. 80,000/- had not gone in discharge of an antecedent debt, the respondent was precluded from putting forward a contention that the entire sum of Rs. 80,000/- covered by Exs. A and B went for the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for the assessee to feel aggrieved and hence, it was not necessary for the assessee to prefer an appeal. The position in law is well settled that a cross objection, for all intents and purposes, would amount to an appeal and the cross objector would have the same rights which an appellant has before the Tribunal. 18. Section 253 of the Act provides for appeal to the Tribunal. Under sub-section (1), an assessee is granted right to file an appeal; under sub-section (2), the Commissioner is granted a right to file appeal by issuing necessary direction to the assessing officer; sub-section (3) prescribes the period of limitation within which an appeal could be preferred. Section 253(4) of the Act lays down that either the assessing officer or the assessee, on receipt of notice that an appeal against the order of Commissioner (Appeals) has been preferred under subsection (1) or subsection (2) by the other party, may, notwithstanding that no appeal had been filed against such an order or any part thereof, within 30 days of the notice, file a memorandum of cross objections verified in the prescribed manner and such memorandum shall be disposed of by the Tribunal as if it were an appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act were not fulfilled, even without the necessity of filing any cross objections.?. 13. The relevant portion of the judgment of Hon ble Jurisdictional High Court is as under: - 30. Rule 27 of the Appellate Tribunal Rules, 1963 reads as follows: Respondent may support order on grounds decided against him. 27. The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him. 31. In this case, the assessees merely wanted to support the order made by the CIT (Appeals), which was entirely in their favor. The assessees wished to raise an issue, that was at least prima facie going to the root of jurisdiction to initiate proceedings under section 153C of the IT Act. Having regard to the provisions of rule 27 referred to above, the ITAT in our opinion should have permitted the assessees who were Respondents before it, to support the orders of CIT (Appeals) on this ground, even without the necessity of filing any cross-objections. ------------ --------------- --------------- --------- -- 38. In the present case, it is not as if the issue of non-fulfillment of jurisdictional parameters of Section 153C was raised but rejected by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o to the root of the jurisdiction of AO by explaining section 124 of the Act as under: - 44. The ITAT with respect has misconstrued the provisions of Section 124 of the IT Act. Sections 120 to 124 of the IT Act no doubt refer to the jurisdiction of the Income-tax Authorities. However, from the scheme of these provisions, it is apparent that reference is to the territorial jurisdiction of the authorities. Section 124(1) refers to direction or order issued under section 120 vesting with jurisdiction in the Assessing Officer over any area, limits of an area, etc. Section 124(2) provides that where a question arises under this Section as to whether the Assessing Officer has jurisdiction to assess any person, the question will have to be determined by the authorities specified which will include, in a given case the Board. Section 124(3) then provides that no person shall be entitled to call in question the jurisdiction of an Assessing Officer, where an action has been taken under section 132 or 132A after the expiry of one month from the date on which he was served with a notice under section 153C or after the completion of the assessment, whichever is earlier. Now, this provision refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and consequent issue of notice u/s 148 of the Act, without authority of law and in contravention to that of CBDT instruction No. 01/2011 [ F. No. 187/12/2010 IT (A-D) Dated 31.01.2011. For effective adjudication and easy reference, the ibid instruction of CBDT is reproduced below: - SECTION 119 OF THE INCOME-TAX ACT, 1961 - INCOME-TAX AUTHORITIES - INSTRUCTIONS TO SUBORDINATE AUTHORITIES INSTRUCTION No. 1/2011 [F. No. 187/12/2010-IT(A-1)], DATED 31-1-2011 References have been received by the Board from a large number of taxpayers, especially from mofussil areas, that the existing monetary limits for assigning cases to ITOs and DCS/ACS is causing hardship to the taxpayers, as it results in transfer of their cases to a DC/AC who is located in a different station, which increases their cost of compliance. The Board had considered the matter and is of the opinion that the existing limits need to be revised to remove the abovementioned hardship. An increase in the monetary limits is also considered desirable in view of the increase in the scale of trade and industry since 2001, when the present income limits were introduced. It has therefore been decided to increase the monetary limits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , where income declared/returned by any Non-Corporate assessee is up to Rs. 20 lakhs, then the jurisdiction will be of ITO and where the income declared returned by a Non Corporate assessee is above Rs. 20 Lakhs, the jurisdiction will be of DC/AC. 3. Petitioner has filed return of income of about Rs. 64,34,663/- and therefore, the jurisdiction will be that of DC/AC and not ITO. Mr. Jain submitted that since notice under section 148 of the Act has been issued by ITO, and not by DC/AC that is by a person who did not have any jurisdiction over Petitioner, such notice was bad on the count of having been issued by an officer who had no authority in law to issue such notice. 4. We have considered the affidavit in reply of one Mr. Suresh G. Kamble, ITO who had issued the notice under section 148 of the Act. Said Mr. Kamble, ITO, Ward 12(3)(1), Mumbai admits that such a defective notice has been issued but according to him, PAN of Petitioner was lying with ITO Ward (12)(3)(1), Mumbai and it was not feasible to migrate the PAN having returned of income exceeding Rs. 30 lakhs to the charge of DCIT, Circle 12(3)(1). Mumbai, as the time available with the ITO 12(3)(1) was too short to migrate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esh (AIR 1954 SC 322) and in a plethora of cases and recently in Zuari Cements Vs. ACIT (2015) 7 SCC 690. Therefore, as per the CBDT instruction (supra) in the present cases, only the territorial ITO had the jurisdiction to re-open the cases of the assessee (except AY 2009-10); and the DCIT by usurping this jurisdiction to re-open the assessment has wrongly assumed jurisdiction which he didn t enjoy. Therefore, the action of the DCIT in these cases to have recorded the reason for re-opening the assessment for AY. 2006-07, AY. 2007-08, AY. 2008-09 AY. 201011 (in respective cases) and consequent issue of notice u/s 148 of the Act is bad in law, since the issuance of notice u/s 148 of the Act is a jurisdictional notice and this defect, goes to the root of re-opening itself; and is not a curable defect; therefore, the ground raised in Rule 27 applications of assessee are allowed. And therefore, all the captioned appeals (except for AY 2009-10) of the revenue has been rendered academic. And therefore, the same stands dismissed. Viz ITA. No. 4836/Mum/2016, ITA. No. 4827/Mum/2016, ITA. No. 4828/Mum/2016, ITA. No. 4833/Mum/2016, ITA. No. 4830/Mum/2016 ITA. No. 4831/Mum/2016 are dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of share trading activity. Further, the assessee has also claimed substantial expenditure of Rs. 1.53,85,370/- under the head 'administrative expenses, which includes the expenditures in the form of business guest expenditure, travelling and conveyance. Since the expenditure under the above head is very high, the genuineness of such claims vis- -vis the business nexus thereon has to be examined for allowability of the said expenditure under the I.T. Act. Also the assessee has shown high value receipts from various entities which have been accounted under the head loan syndication fees! Therefore, the receipts from the said entities vis- -vis the TDS claims thereon needs full verification in light of the information received from the investigation agency. 5. From the above facts, it is evident that the assessee's books of account contain camouflage entries though the bank statements of the assessee company reveal high value transactions embedded with the element of taxable income which the assessee has not disclosed in the return of income. Therefore, I have reason to believe that income for the year under consideration has escaped assessment within the meaning of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded by him. He has to speak through the reasons . Their Lordship added The reasons recorded should be selfexplanatory and should not keep the assessee guessing for reason. Reason provide link between conclusion and the evidence . So as held by the jurisdictional High Court that while examining the jurisdiction of AO to have re-opened the assessment, we have to only consider the reasons recorded by the AO on a stand-alone basis and adjudicate as to whether AO has satisfied in the reasons recorded, the condition precedent i.e, reason to believe escapement of income) to validly reopen the assessment. 22. Since we are going to examine the validity of re-opening the assessment, we have to first examine the reasons recorded by AO as it is i.e. on a stand-alone basis (without making any addition or deletion; and the inference can be drawn only from the facts stated therein). So when we examine the reason recorded as such by AO in respect of M/s. W. Financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation since assessee has under gone scrutiny assessment u/s 143(3) dtd 24.03.2011). Further AO noted that assessee has claimed substantial expenditure of Rs. 1,53,85,370/- under the head administration expense which inter-alia includes guest expenditure, travelling etc. (No new facts are stated there in and the aforesaid facts are already known to the AO since it has been disclosed by it). Thereafter the AO notes that since expenditure is very high, the genuiness of the claim need to be examined especially the business nexus of the expenditure. (So AO wants to review the action of his predecessor AO regarding the expenses claimed by the assessee). Then AO observes that assessee has shown high value receipts from various entities which have been accounted under the need loan syndication fees (Nothing new, since AO admits that the assessee itself has shown the same, so no new facts). In the light of the above information from Investigation Agency, the AO states that the receipts from the said entities vis-a vis TDS claims needs full verification (only vague allegation without any new facts or relevant facts to base the allegations and finally the AO is saying he needs to fully verif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that income for the year under consideration has escaped assessment within the meaning of section 147 of the I. T. Act. 1961. Hence, notice u/s 148 issued to the assessee. 25. From the reading of the aforesaid reasons recorded by the AO to re-open the assessment in the case of M/s W System for AY 200910, the AO has noted that assessee had declared loss of Rs. 45,52,893/- by filling return of income on 30.09.2009. Thereafter the return was accepted u/s 143(1) of the Act on 06.11.2011 accepting the loss returned by the assessee. And the assessment for this relevant year has not been taken up for scrutiny. (All facts in Public Domain). And thereafter the AO notes the address of the assessee and states that Shri Arun Dalmia and Shri Harsh Dalmia are the directors of assessee company which are engaged in the business of trading in shares and other securities both listed and non-listed.(No new facts in the reason recorded). The AO thereafter notes that he has received information from investigation agency of the government (No names given) that the aforesaid directors had floated several dummy concerns including the assessee company which are providing accommodation entries. According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reasons recorded shows nonapplication of mind. Moreover, we note the main propose of reopening was to examine/verify the substantial expenditure made by the assessee. It is also noted that the AO states that assessee books of account contain entries (camouflage) which reveal high value transactions, which he suspects must be embedded with the element of taxable income which according to him has escaped assessment and on the other hand he says that assessee is in to accommodation entry (which means only paper transactions for beneficiaries lieu of a small commission). Thus there is contradiction in the allegation itself. On a reading of the reasons recorded shows that the AO has resorted to reopening only for the purpose of roving inquiry which cannot be the ground (reason to believe escapement of income) rather it can be term as reason to suspect which is not the jurisdictional requirement for reopening an assessment. Therefore, re-opening is bad in law and the assessee succeeds in the legal challenge it has raised against the action of AO to have reopened the assessment and therefore, we quash the notice issued by the AO u/s 148 of the Act for reopening the assessment of M/s W F ..... X X X X Extracts X X X X X X X X Extracts X X X X
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