ITAT Delhi Sets Aside Assessment Due to Invalid Service of Notice and Assessment Order Beyond Limitation Period
Introduction
A significant ruling from the Income Tax Appellate Tribunal (ITAT) Delhi bench has reinforced the importance of proper service of notices and assessment orders under the procedural safeguards provided in the Income Tax Act, 1961. The tribunal delivered a decisive verdict in the matter of Zeliant Corp Vs ITO (ITAT Delhi), wherein the entire assessment proceedings were declared void ab initio due to procedural irregularities in serving notices and the final assessment order as mandated under Section 282 read with Rule 127 of the Income Tax Rules.
The decision underscores that no matter how substantial the Revenue's case may appear on merits, failure to comply with statutory procedures renders the entire proceeding legally defective and unsustainable. This ruling serves as a crucial reminder to tax authorities about the mandatory nature of procedural compliance, particularly in the context of digital communication through the ITBA portal.
Background Facts of the Case
The appellant in this matter operates as a partnership firm, formally constituted through a partnership deed dated 31st July 2025 between two partners - Sh. Apurv Jain and Sh. Ishu Sharma. The dispute pertains to Assessment Year 2017-18, for which the assessee had not voluntarily filed any Income Tax Return.
Initial Detection and Proceedings
The tax authorities, while examining records available in the AIMS module of the ITBA Portal, discovered that the assessee had made substantial cash deposits amounting to ₹67,25,000/- in an account maintained with ICICI Bank, Gujranwala Town Branch, Delhi during the demonetization period. This prompted the department to initiate assessment proceedings.
The Assessing Officer issued a notice under Section 142(1) of the Act dated 24th November 2017 through the AIMS module of ITBA portal, requiring the assessee to file the return of income. The department claimed that this notice was duly served via email, but the assessee allegedly failed to comply with it.
Subsequently, additional notices under Section 142(1) were issued on 7th June 2019 and 9th September 2019. In response to the notice dated 9th September 2019, the assessee submitted a reply on 14th September 2019, explaining that the cash deposited during the demonetization period was received from relatives. Details of these relatives were furnished to the department.
Verification Attempts
The Assessing Officer attempted to verify the claims by issuing notices under Section 133(6) to the alleged relatives. However, the department concluded that none of the responses received satisfied the criteria to establish the identity, creditworthiness, and genuineness of the transactions claimed by the assessee.
Show cause notices were allegedly affixed at the known addresses of the assessees. Despite multiple notices, the assessee did not file the ITR in compliance with notices under Section 142(1). No books of account, including balance sheet, profit and loss account, or supporting documents were submitted.
Assessment Proceedings
Based on the non-compliance, the Assessing Officer proceeded to complete a best judgment assessment under Section 144A of the Act. After obtaining bank statements directly from ICICI Bank through a notice issued to the Bank Manager, the department observed total cash deposits of ₹72,82,000/- (comprising ₹67,25,000/- during demonetization period and ₹5,57,000/- during the remaining period of Financial Year 2016-17).
A final show cause notice under Section 144(1)(b) was issued on 26th December 2019, asking the assessee to explain cash deposits and credit deposits aggregating to ₹83,50,900/- and why these should not be treated as unexplained income under Section 69A read with Section 115BBE of the Act.
The AO concluded that no valid explanation was offered regarding the cash deposits and credit deposits. Consequently, an addition of ₹72,82,000/- (including ₹67,25,000/- during demonetization period) was made as unexplained money under Section 69A read with Section 115BBE, and penalty proceedings under Section 271AAC were initiated.
First Appellate Proceedings Before CIT(A)
Dissatisfied with the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi. The CIT(A) passed an order dated 11th February 2025, allowing the appeal for statistical purposes by restoring the matter to the Assessing Officer for fresh adjudication.
Observations of CIT(A)
The CIT(A) observed that the appellant had failed to comply with notices issued during assessment proceedings and had not filed the return of income under Section 139 for Assessment Year 2017-18. The first appellate authority noted that notices under Section 142(1) were issued but no response was made during the assessment proceedings.
However, recognizing that the appellant had made elaborate submissions during appellate proceedings including written submissions, copy of partnership deed, copy of ICICI Bank statement, copy of Form 26AS and other documents, the CIT(A) concluded that in the interest of natural justice, it would be appropriate to give cognizance to these submissions.
Accordingly, the CIT(A) set aside the assessment order passed under Section 144 on 28th December 2019, directing the Assessing Officer to decide the case afresh after verifying all new evidence and allowing the assessee a reasonable opportunity to explain the case. The assessee was also directed to furnish requisite details as required by the AO.
Grounds of Appeal Before ITAT
Aggrieved by the order of CIT(A), the assessee approached the Income Tax Appellate Tribunal, Delhi, raising the following substantive grounds:
Primary Ground - Invalidity Due to Non-Service
The principal contention raised was that the assessment order itself was void ab initio and liable to be quashed because notices and the assessment order were never served upon the appellant within the period prescribed under Section 153(1) of the Act and were never served in accordance with the procedure prescribed under Section 282 of the Act and the Rules framed thereunder.
Second Ground - Addition on Merits
On facts and circumstances, the authorities erred in making/upholding the addition of ₹83,50,900/- under Section 69A read with Section 115BBE, allegedly treating the credits in bank account as unexplained money while ignoring the submissions of the appellant.
Third Ground - Status Error
The assessment order was undertaken in the status of Association of Persons (AOP) under Section 2(31)(v), whereas the appellant is a partnership firm assessable as a firm under Section 2(31)(iv) of the Act. Therefore, such assessment order was passed without following the procedure for changing the status of the appellant.