The Income Tax Appellate Tribunal, Special Bench, Bengaluru, in MD Sons v. Income Tax Officer, has settled an important controversy concerning the validity of scrutiny notices issued under Section 143(2) of the Income-tax Act, 1961. The Special Bench examined whether a notice issued on or after 23 June 2017, but not conforming to the format prescribed in the relevant CBDT instruction, would invalidate the consequential assessment notwithstanding Section 292B of the Act.
The Special Bench answered the reference in the negative and in favour of the Revenue. It held that non-conformity with the format prescribed by the CBDT does not, by itself, render a Section 143(2) notice invalid or vitiate the assessment proceedings. The defect was held to be procedural and capable of being cured under Section 292B, provided the notice substantially serves the statutory purpose and no prejudice is demonstrated by the assessee.
Background of the Dispute
The assessee, a partnership firm engaged in trading cigarettes and food items, filed its return for Assessment Year 2017–18 declaring a loss. The case was selected for scrutiny through the Computer Aided Selection Scrutiny system, and a notice under Section 143(2) was issued on 21 September 2018.
The assessee participated in the assessment proceedings, furnished information in response to notices under Section 142(1), and did not initially object to the format of the Section 143(2) notice. The assessment was subsequently completed under Section 143(3).
Before the Tribunal, the assessee raised an additional jurisdictional ground contending that the notice did not conform to the formats prescribed by CBDT Instruction dated 23 June 2017. According to the assessee, the notice failed to specify whether the case had been selected for limited scrutiny, complete scrutiny or compulsory manual scrutiny.
Conflicting decisions of different Benches of the Tribunal had emerged on this issue. Certain Benches had treated such notices as invalid, while the Bengaluru Bench in an earlier decision had held that the defect was procedural and protected by Section 292B. The matter was therefore referred to the Special Bench.
Question Referred to the Special Bench
The Special Bench was called upon to determine whether notices issued under Section 143(2) on or after 23 June 2017, which did not follow the format mentioned in the CBDT instruction, would render the consequential assessment orders invalid despite Section 292B.
Statutory Requirements of Section 143(2)
The Tribunal observed that Section 143(2) requires the Assessing Officer to issue a notice calling upon the assessee to attend the proceedings or produce evidence in support of the return. However, neither the Income-tax Act nor the Income-tax Rules prescribes a statutory form for such a notice.
The expressions “Limited Scrutiny”, “Complete Scrutiny” and “Manual Scrutiny” do not appear in Section 143(2). These classifications were described as administrative categories created by the Department for managing and regulating scrutiny proceedings.
Accordingly, the Tribunal held that failure to mention the category of scrutiny could not be treated as a failure to satisfy an express statutory condition for assuming jurisdiction.
CBDT Instructions Are Binding but Do Not Create New Jurisdictional Conditions
The Special Bench recognised that CBDT instructions are binding upon departmental officers in the administration and conduct of assessment proceedings. Nevertheless, it drew a distinction between the binding nature of an instruction and the legal consequence of every breach of that instruction.
An administrative instruction cannot create an additional jurisdictional requirement which Parliament has not incorporated into Section 143(2). While an Assessing Officer may face administrative consequences for non-compliance with a CBDT instruction, such non-compliance does not automatically nullify a notice that otherwise fulfils the statutory purpose.
The Tribunal observed that treating every deviation from an administrative format as a jurisdictional defect would effectively elevate executive instructions above the statute.
Application of Section 292B
Section 292B provides that a notice, assessment or other proceeding shall not be invalid merely because of a mistake, defect or omission, where it is in substance and effect in conformity with the intent and purpose of the Act.
In the present case, the notice informed the assessee that its return had been selected for scrutiny, was issued by the competent authority within the prescribed limitation period, and called upon the assessee to participate in the assessment proceedings.
The assessee fully participated in the proceedings, filed detailed submissions and did not establish any confusion or specific prejudice arising from the format of the notice. The essential statutory purpose of Section 143(2) was therefore fulfilled.
The Special Bench consequently held that the alleged defect was one of form rather than substance and fell within the curative protection of Section 292B.
Distinction Between Absence of Notice and Defect in Format
The Tribunal distinguished cases involving complete absence of a Section 143(2) notice, notices issued beyond limitation, notices issued by an incompetent authority, or notices addressed to non-existent or deceased persons.
Such cases involve foundational jurisdictional defects. In the present case, however, there was no dispute regarding the issuance, service, limitation, identity of the assessee or competence of the Assessing Officer. The controversy was confined to the format of an otherwise validly issued notice.
A defect in format could therefore not be equated with the complete absence of a jurisdictional notice.
Limited Scrutiny and Prejudice to the Assessee
The Special Bench clarified that the validity of a notice and the permissible scope of an assessment are separate matters. If an Assessing Officer travels beyond the permitted scope of a limited scrutiny assessment without obtaining the prescribed approval, the addition may independently be challenged as being beyond jurisdiction.
However, the mere omission to mention the category of scrutiny in the initial notice does not automatically invalidate the notice or the entire assessment.
The question of prejudice must be examined on the facts of each case. The assessee must demonstrate how the deviation caused confusion, denied an effective opportunity or resulted in an unlawful expansion of the proceedings.
Reliance on Delhi High Court Decision
The Tribunal also relied upon the decision of the Delhi High Court in Bharat Bansal v. NFAC, where the Court treated CBDT directions regarding scrutiny selection and the nature of scrutiny as matters of internal departmental administration.
The Delhi High Court had held that the Assessing Officer was not required to disclose in the Section 143(2) notice why a case had been selected for scrutiny. Specific issues and information could be communicated subsequently through notices under Section 142(1).
The Special Bench considered this reasoning supportive of the Revenue’s case that omission to specify the scrutiny category does not invalidate the notice.
Ruling of the Special Bench
The ITAT Special Bench held that a notice under Section 143(2) is not invalid merely because it does not conform to the format prescribed in CBDT Instruction dated 23 June 2017.
The omission is procedural and is curable under Section 292B where:
the notice is issued by the competent authority within limitation;
the assessee is informed that the return has been selected for scrutiny;
the assessee participates in the assessment proceedings;
the statutory purpose of Section 143(2) is achieved; and
no specific prejudice or confusion is established.
The reference was accordingly answered in favour of the Revenue. The individual appeals were directed to be placed before the regular Bench for disposal in accordance with law.
Significance of the Decision
The ruling provides authoritative guidance on the distinction between statutory jurisdictional requirements and administrative procedural directions. It confirms that the binding nature of a CBDT instruction does not necessarily mean that every breach invalidates the proceedings.
For taxpayers and professionals, the decision also underlines that an objection based solely on the format of a Section 143(2) notice may not succeed unless the defect affects the substance of the notice or results in identifiable prejudice.
At the same time, the ruling does not authorise Assessing Officers to disregard the limitations applicable to limited scrutiny assessments. Any enquiry or addition beyond the authorised scope may still be challenged independently.
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