ITAT Kolkata cancels Section 143(3) assessment due to non-jurisdictional notice and wrong territorial AO

1. Background of the dispute

The Kolkata Bench of the Income Tax Appellate Tribunal in J R Roadlines Pvt. Ltd. Vs DCIT (ITAT Kolkata) examined whether an assessment framed under Section 143(3) could survive when:

  • The statutory Section 143(2) notice was issued by an Income Tax Officer (ITO) who did not have pecuniary jurisdiction in view of CBDT Instruction No. 1/2011, and
  • The DCIT, Circle-1(1), Kolkata, who finally completed the assessment, did not possess territorial jurisdiction over the assessee, whose principal place of business and address fell in Gandhidham, Gujarat.

The assessee, a private limited company, had filed its return of income for Assessment Year 2012-13 on 11.09.2012 declaring income of Rs. 2,07,18,275. A scrutiny notice under Section 143(2) dated 09.08.2013 was issued from the office of the ITO, Ward-1(1), Kolkata, while the assessment order under Section 143(3) dated 25.03.2015 was passed by the DCIT, Circle-1(1), Kolkata.

The key jurisdictional questions before the Tribunal were:

  1. Whether a Section 143(3) assessment is valid when the Section 143(2) notice was issued by an officer who, due to CBDT’s pecuniary limits, had no authority over the case.
  2. Whether DCIT, Kolkata, could lawfully complete the assessment when the assessee’s principal business location and address were in Gandhidham, Gujarat, and an explicit request for transfer of jurisdiction had been made.

Both issues were ultimately decided in favour of the assessee, leading to the quashing of the entire assessment.

In the appeal before the CIT(A), the assessee had originally challenged:

  • Confirmation of the assessment order by the CIT(A);
  • Alleged violation of natural justice by not granting adjournment;
  • Sustaining the addition of Rs. 6,50,00,000 as unexplained cash credit under Section 68 without proper inquiry; and
  • A general liberty to modify, add, or delete grounds.

Before the Tribunal, the assessee raised additional legal grounds, going directly to the root of the Assessing Officer’s jurisdiction:

  1. The officer issuing the notice under Section 143(2) did not have jurisdiction over the case, rendering the notice and the resultant assessment invalid in law.
  2. The assessment order dated 25.03.2015 under Section 143(3) was without jurisdiction and therefore void.

Recognising that these additional grounds challenged the very competence of the officer to frame the assessment, the Tribunal admitted them and decided to address the jurisdictional issues first. It observed that once an assessment is held to be without jurisdiction, any adjudication on the merits (including the Section 68 addition of Rs. 6.50 crore) would become merely academic.

3. Pecuniary jurisdiction and the defective Section 143(2) notice

3.1 Income returned and applicable CBDT Instruction

From the opening paragraph of the assessment order itself, the Tribunal noted that the assessee’s returned income for AY 2012-13 was Rs. 2,07,18,275. The CBDT, by Instruction No. 1/2011 [F.No.187/12/2010-IT(A-I), dated 31-1-2011], has prescribed pecuniary limits for allocation of cases between ITOs and ACITs/DCITs, distinguishing between metro cities and mofussil areas.

For corporate assessees in metro cities (which include Kolkata), the Instruction specifically provides:

  • ITOs: Jurisdiction over corporate returns where income declared is up to Rs. 30 lakh
  • ACs/DCs: Jurisdiction over corporate returns where income declared is above Rs. 30 lakh

Kolkata being categorised as a metro city under this Instruction, corporate returns with income exceeding Rs. 30 lakh had to be handled by ACIT/DCIT. Therefore, in this case, only an ACIT/DCIT could exercise jurisdiction, including issuing the statutory Section 143(2) notice.

3.2 Actual issue of notice under Section 143(2)

The assessment order recorded that a Section 143(2) notice dated 09.08.2013 had been issued and duly served. A copy of that notice placed in the paper book showed it was issued from the office of:

Income Tax Officer, Ward-1(1), Kolkata.

The assessee’s counsel argued that:

  • In light of CBDT Instruction No. 1/2011, the ITO, Ward-1(1), Kolkata had no pecuniary jurisdiction when the returned income exceeded Rs. 30 lakh; and
  • Jurisdiction to issue Section 143(2) notice in such a corporate metro case rested only with the DCIT/ACIT.

The Tribunal accepted that the ITO lacked authority to issue the notice and that the jurisdictional DCIT never issued any notice under Section 143(2) prior to completing the assessment.

Relying on settled law, including the Supreme Court decision in ACIT Vs Hotel Blue Moon (321 ITR 362), the assessee contended that: