Bombay High Court Sets Aside ITAT Order for Failure to Decide Jurisdictional Challenge Under Section 144B of Income Tax Act

In a significant ruling, the Bombay High Court has set aside an order of the Income Tax Appellate Tribunal (ITAT) after concluding that the Tribunal failed to adjudicate a crucial jurisdictional issue raised by the assessee under Section 144B of the Income Tax Act, 1961. The Court emphasized that such jurisdictional challenges, which strike at the root of the assessment proceedings, must be considered and decided by the ITAT.

The appeal arose from an assessment for the year 2021-22, where the assessee, engaged in the business of painting and advertising, faced a substantial disallowance of expenditure by the Assessing Officer (AO). The AO, after issuing multiple notices and conducting inquiries, disallowed a significant portion of the assessee’s purchases and labour charges, treating them as unexplained expenditure under Section 69C, and initiated penalty proceedings. The disallowance was primarily based on the inability to conclusively establish the identity and creditworthiness of the suppliers, some of whom had not filed income tax returns or could not be physically verified.

The assessee’s appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] resulted in partial relief, with the CIT(A) restricting the disallowance to 12.5% of the total expenditure, citing precedents where purchases were found to be inflated rather than entirely bogus. Both the assessee and the Revenue challenged the CIT(A)’s order before the ITAT, which ultimately upheld the CIT(A)’s findings and dismissed both appeals, reiterating concerns about the genuineness of the transactions and the lack of adequate evidence regarding the suppliers.

Subsequently, the assessee filed a Miscellaneous Application before the ITAT, contending that the Tribunal had failed to consider the jurisdictional issue of non-compliance with Section 144B, which mandates specific procedures for faceless assessment, including the issuance of a show-cause notice in a prescribed format and adherence to principles of natural justice. The ITAT dismissed the application on grounds of limitation and on merits, holding that the assessee was seeking a review rather than rectification.

The assessee then approached the High Court, which, in an earlier writ petition, clarified that the rectification application was filed within the prescribed time and permitted the assessee to raise all grounds, including the jurisdictional challenge, in the present appeal against the ITAT’s original order.

In its detailed judgment, the High Court found merit in the assessee’s contention that the ITAT had not adjudicated the jurisdictional issue under Section 144B, despite it being specifically raised in the Miscellaneous Application. The Court rejected the Revenue’s argument that the issue could not be raised for the first time before the High Court, noting that the assessee had indeed brought it to the ITAT’s attention.

The Court further observed that the jurisdictional challenge regarding compliance with Section 144B goes to the very root of the assessment proceedings and must be addressed at the threshold. The High Court also noted that the ITAT was required to consider the documentary evidence produced by the assessee to establish the genuineness and creditworthiness of the transactions, and that an opportunity should be given to the assessee to present its case fully.

Accordingly, the High Court set aside the ITAT’s order dated 10th December 2024 and remanded the matter to the ITAT for fresh adjudication, specifically directing the Tribunal to decide the jurisdictional issue under Section 144B and to consider all other relevant issues on merits.

This decision underscores the importance of procedural compliance in faceless assessments and affirms that jurisdictional challenges must be addressed by appellate authorities before proceeding to the merits of the case.