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Judgment
PER AMITABH SHUKLA, AM
This appeal filed by the Assessee is directed against the order of Ld. Commissioner of Income Tax (Appeals)/NFAC, New Delhi, dated 27.11.2025 arising out of assessment order dated 28.03.2025 passed by ITO, Ward-1, Karnal, under section 143(3) of the Act for the Assessment Year 2011-12. The word ‘Act’ herein this order would mean Income Tax Act, 1961.
The assessee has raised following grounds of appeal:-
1.On the facts and circumstances of the case, the order passed by the Ld. Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eyes of law as well as on the facts of the case.
2.On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the assessment order which was passed without the prior approval from the prescribed authority.
3.On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the assessment order which was passed by the AO without having jurisdiction over the assessee, making the assessment invalid and liable to be quashed.
4.(i) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the addition on the basis of material recovered during the course of search at a third party.
(ii)That the CIT(A) has erred both on facts and in law in confirming the aforesaid addition without having any incriminating material found during the course of search at the third party.
5.On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the addition merely on the basis of statement recorded of third parties without giving the appellant an opportunity to cross examine the same.
6.That the statutory presumption u/s 292C has been wrongly applied against the appellant, even though the documents were not found from the possession OR control of the appellant, and the presumption under law is at best rebuttable and limited.
7.(i) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the assessed income at Rs. 3,73,80,194/- as against the declared income of Rs. 7,92,400/-.
(ii)That the AO has erred in assessing the income of the appellant under section 147 r.w.s. 143(3) of the Act despite the fact that the assessment has been initiated u/s 143(3) of the Act.
8.(i) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the addition of Rs. 2,87,95,697/- u/s 69C of the Act on account of unexplained expenditure.
(ii)That the CIT(A) has erred both on facts and in law in confirming the said addition alleging that the appellant has made cash payments of Rs. 2,87,95,697/- for purchase of scrap despite the fact that the said amount is not matching with the transactions undertaken with the said company.
(iii)That the CIT(A) has erred both on facts and in law in confirming the aforesaid addition despite the fact that all the purchase transactions were made through proper banking channels and supported by agreements.
(iv)That the aforesaid addition has been confirmed arbitrarily rejecting the explanation and evidences brought on record by the appellant.
(v)That the Ld. CIT(A) failed to appreciate that no evidence whatsoever exists on record showing availability, withdrawal, movement, possession or utilization of cash by the appellant.
9.(i) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the addition of unsecured loans made by the AO of Rs. 77,75,716/- under section 68 of the Act despite the fact that the appellant has established the identity, creditworthiness of the parties and genuineness of the transactions. (ii) That the aforesaid addition has been confirmed arbitrarily rejecting the explanation and evidences brought on record by the appellant. (iii) That the Ld. CIT(A) failed to appreciate that creditworthiness cannot be judged solely on returned income, ignoring capital, savings, agricultural income and other legitimate sources.
Brief facts of the case are that the appellant, an individual engaged in the proprietorship business of trading scrap material under the name & style M/s Shiva Fiber, filed original return of income declaring total income of Rs.7,92,400 for A.Y. 2023-24. The case was selected for compulsory scrutiny due to search and seizure operations conducted in the group case of M/s Goyal MG Gases Private Limited, during which documentary evidence and statements revealed unaccounted cash transactions for scrap purchases involving the appellant. Accordingly, notice u/s 143(2) was issued on 27.06.2024 and duly served upon the appellant. Subsequently, despite multiple statutory notices issued under sections 143(2) and 142(1) of the Income Tax Act and opportunities to provide explanations and supporting documents, vide SCN issued on 14.02.2025, the appellant failed to satisfactorily explain the source of substantial cash payments for purchases amounting to Rs. 2,87,95,679, which led to an addition of the said amount towards unexplained expenditure under section 69C of the Act. Further scrutiny of unsecured loans disclosed in the books revealed that the appellant failed to adequately substantiate the creditworthiness of the lenders, particularly for significant loans received from Mahinder Pal Singh and Mohd Wasim Malik, resulting in the addition of Rs. 77,75,716 as unexplained credits under section 68 of the Act. The loans received from other parties were found to be satisfactorily explained. The assessment also noted a reduction in gross and net profit margins compared to the preceding year. Upon due consideration of the appellant's submissions and supporting documents-including audited financials, ledgers, and tax returns-no adverse inference was drawn regarding profit margin variation, as the books were not found to be defective. 3.3 In addition, interest income of Rs.16,381 from savings bank account was found to have been omitted from the return. The omission was admitted by the appellant and the amount was added to total income under the head "Income from Other Sources". Consequently, the total assessed income was determined at Rs.3,73,80,194, against returned income of Rs.7,92,400/- on account of additions made on the above discussed issues aggregating to Rs.3,65,87,794, vide assessment order passed on 28.03.2025. The ld. CIT(A) concurred with the findings of ld. Assessing Officer and confirmed the additions made by the ld. Assessing Officer. Being aggrieved by the impugned appellate order, the appellant has filed the instant appeal.
We have heard rival submissions in the light of material placed on records.
At the outset, the ld. Counsel for the assessee submitted that it is contesting the validity of the assessment order as the same is based upon an invalid notice under section 143(2) of the Act. It was submitted that the same being the legal ground of appeal no.2 and 3 be decided first in preference to other grounds. The ld. Counsel submitted that the impugned notice u/s 143(2) dated 27.06.2024 is invalid as the same is in violation of CBDT Instruction No…… dated 03.05.2024. Thus, the ld. Counsel invited attention to the impugned notice u/s 143(2) and the CBDT Instruction extracted hereinbelow.
“GUIDELINES FOR COMPULSORY SELECTION OF RETURNS FOR
COMPLETE SCRUTINY DURING FINANCIAL YEAR 2024-25 -PROCEDURE FOR COMPULSORY SELECTION IN SUCH CASES
LETTER F.NO. 225/72/2024/ITA-II, DATED 3-5-2024
Kindly refer to the above.
2.The parameters for compulsory selection of returns for Complete Scrutiny during Financial Year 2024-25 and procedure for compulsory selection in such cases are prescribed as under:—
S. Parameter Procedure for Compulsory Selection No.
Cases pertaining to survey u/s 133A of the Income-tax Act, 1961 (Act) Assessments as a result of Survey u/s 133A of The cases shall be selected for compulsory the Income-tax Act, 1961 (other than survey scrutiny with prior administrative approval u/s 133A(2A) of the Act) leading to detection of Pr.CIT/Pr.DIT/CIT/DIT concerned, who of specific information/ material pointing out shall ensure that such cases are transferred tax evasion. to Central Charges u/s 127 of the Act within 15 days of service of notice u/s 143(2) of the Act by the Jurisdictional Assessing Officer (JAO) concerned. (For Assessing Officers in International Taxation and Central Circle charges: refer Para 4.1 at Page No. 5)
(2)Cases pertaining to Search and Seizure
(i)Search & seizure/ requisition prior to 1-4- The cases shall be selected for scrutiny with 2021: Assessments in search & seizure cases prior administrative approval of Pr. to be made under Section 153C, read with CIT/Pr. DIT/CIT/DIT concerned, who shall section 143(3) of the Act, and also for return ensure that such cases are transferred to filed for assessment year relevant to previous Central Charges u/s 127 of the Act within year in which the search was conducted u/s 15 days of service of notice u/s 132 or requisition was made u/s 132A of the 143(2)/142(1) of the Act by the Act. Jurisdictional Assessing Officer concerned. Where such cases are not centralized and Return of Income is filedin response to notice u/s 153C, the Jurisdictional Assessing Officer concerned shall serve notice u/s 143(2) of the Act. Where such cases are not centralized and no Return of Income is filed in response to notice u/s 153C, the Jurisdictional Assessing Officer concerned shall serve notice u/s 142(1) of the Act calling for information.
(iii)Search & seizure/ requisition on or after 1-4- The cases shall be selected for scrutiny with 2021: Assessments in search & seizure cases/ prior administrative approval of Pr. requisitions cases u/s 132/132A conducted on CIT/Pr. DIT/CIT/DIT concerned, who shall or after 1-4-2021. ensure that such cases are transferred to Central Charges u/s 127 of the Act within 15 days of service of notice u/s 143(2)/142(1) of the Act by the Jurisdictional Assessing Officer concerned.
(3)Cases in which notices u/s 142(1) of the Act, calling for return, have been issued & no returns have been furnished Cases where no return has been furnished in Jurisdictional Assessing Officers (JAOs) response to a notice u/s 142(1) of the Act. shall upload the underlying documents on the basis of which notice u/s 142(1) was issued on ITBA, for access by National Faceless Assessment Centre (NaFAC). The Directorate of Income-tax (Systems) shall forward these cases to NaFAC, which will take further necessary action. Further action as per the provisions of the Act shall be taken through NaFAC. (For Assessing Officers in International Taxation and Central Circle charges: refer Para 4.1 at Page No. 5)
(4)Cases in which notices u/s 148 of the Act have been issued Cases where return is either furnished or not (i) Cases, where notices u/s 148 of the Act furnished in response to notice u/s 148 of the have been issued pursuant to search & Act. seizure/survey actions conducted on or after the 1st day of April, 2021: These cases shall be selected for compulsory scrutiny with prior administrative approval of Pr.CIT/Pr.DIT/CIT/DIT concerned who shall ensure that such cases, if lying outside Central Charges, are transferred to Central Charges u/s 127 of the Act within 15 days of service of notice u/s 143(2)/142(1) of the Act calling for information by the Jurisdictional Assessing Officer concerned. (subject to para 4.2)
(ii)Cases other than search & seizure/survey:
(a)For those cases which are to be completed by NaFAC on or before 31.03.2025, Jurisdictional Assessing Officers (JAOs) shall upload the underlying documents, on the basis of which notice u/s 148 was issued, on ITBA, for access by NaFAC. The Directorate of Income-tax (Systems) shall forward these cases to NaFAC, which will take further necessary action. Notice u/s 143(2)/142(1) of the Act calling for information shall be served on the assessee through NaFAC. (For Assessing Officers in International Taxation and Central Circle charges: refer Para 4.1 at Page No. 5)
(5)Cases related to registration/ approval under various sections of the Act, such as 12A, 12AB, 35(1)(ii)/ (iia)/ (iii), 10(23C)(iv)/(v)/(vi)/(via), etc. Cases where registration /approval under The Jurisdictional Assessing Officers various sections of the Act, such as sections (JAOs) shall prepare a list of cases falling 12A, 12AB, 35(l)(ii)/(iia)/(iii), under this parameter with prior 10(23C)(iv)/(v)/(vi)/(via), etc. have not been granted or have been cancelled/withdrawn by administrative approval of the Competent Authority, yet the assessee has Pr.CIT/Pr.DIT/CIT/DIT concerned. been found to be claiming tax- The consolidated list of such cases shall be exemption/deduction in the return. However, submitted by the Pr.CIT/Pr.DIT/CIT/DIT where such orders of withdrawal of to the Pr.CCIT concerned. Pr.CCIT registration/approval have been reversed/set- concerned shall forward this list of cases to aside in appellate proceedings, those cases Directorate of Income-tax (Systems). will not be selected under this clause. Notice u/s 143(2) of the Act shall be served on the assessee through NaFAC. The Jurisdictional Assessing Officers shall upload the underlying documents containing specific information regarding this parameter immediately. (For Assessing Officers in International Taxation and Central Circle charges: refer Para 4.1 at Page No. 5)
(6)Cases involving addition in an earlier assessment year(s) on a recurring issue of law or fact and/or law and fact
Where the addition in an earlier assessment The Jurisdictional Assessing Officers year(s) on a recurring issue of law or fact (JAOs) shall prepare a list of cases falling and/or law and fact (including transfer under this parameter with prior pricing issue) is: administrative approval of
a. exceeding Rs. 25 lakh in eight Pr.CIT/Pr.DIT/CIT/DIT concerned. metro charges at Ahmedabad, The consolidated list of such cases shall be Bengaluru, Chennai, Delhi, submitted by the Pr.CIT/Pr.DIT/CIT/DIT Hyderabad, Kolkata, Mumbai and to the Pr.CCIT concerned. Pr.CCIT Pune; concerned shall forward this list of cases to
b. exceeding Rs. 10 lakh in charges Directorate of Income-tax (Systems). other than eight metro charges; Notice u/s 143(2) of the Act shall be served on the assessee through NaFAC.
and where such an addition: The Jurisdictional Assessing Officers shall
(i)has become final, as no further upload the underlying documents appeal has been preferred against containing specific information regarding the assessment order; or this parameter immediately.
(ii)has been upheld by the Appellate (For Assessing Officers in International Authorities in favour of Revenue; Taxation and Central Circle charges: refer even if further appeal of assessee is Para 4.1 at Page No. 5) pending, against such order.
(7)Cases related to specific information regarding tax-evasion Cases, in respect of which: The Jurisdictional Assessing Officers
(a)specific information pointing out (JAOs) shall prepare a list of cases falling tax-evasion for the relevant under this parameter with prior assessment year is provided by any administrative approval of law-enforcement agency, Pr.CIT/Pr.DIT/CIT/DIT concerned. (Investigation Wing/ Intelligence/ The consolidated list of such cases shall be Regulatory Authority/ Agency, submitted by the Pr.CIT/Pr.DIT/CIT/DIT etc.); and to the Pr.CCIT concerned. Pr.CCIT
(b)the return for the relevant concerned shall forward this list of cases to assessment year is furnished by the Directorate of Income-tax (Systems). assessee. Notice u/s 143(2) of the Act shall be served on the assessee through NaFAC. The Jurisdictional Assessing Officers shall upload the underlying documents containing specific information regarding this parameter immediately. (For Assessing Officers in International Taxation and Central Circle charges: refer Para 4.1 at Page No. 5)
3.It is clarified that where return has been furnished in response to notice u/s 142(1) of the Act and such notice u/s 142(1) of the Act was issued due to the information contained in NMS Cycle/ AIS/ Statement of Financial Transactions (SFT)/ CPC-TDS information/ information received from Directorate of I&CI, such return will not be taken up for compulsory scrutiny. Selection of such cases for scrutiny will be done through CASS cycle.
4.The cases shall be selected for compulsory scrutiny by the International Taxation and Central Circle charges following the above prescribed parameters and procedure with prior administrative approval of Pr.CIT/Pr.DIT/CIT/DIT concerned. The information pertaining to Compulsory Scrutiny may not be transferred to NaFAC unless the case itself transferred. It is further clarified that communication to NaFAC for access and/or further action after selection for Compulsory Scrutiny will not apply to the International taxation and Central charges.
4.1.The cases which are selected for compulsory scrutiny by the International Taxation and Central Circle charges following the above parameters and procedure prescribed at Para 2, shall continue to be handled by International Taxation and Central Circle charges respectively, as earlier.
4.2.During the course of Search & Seizure action, information relating to some other persons, who may have one-off/ very few or limited financial transaction(s) with the main assessee group covered in the search u/s 132/132A of the Act, may be found. Such persons are not integrally connected with the core business of the main assessee searched and do not belong to the same business group. Often such persons are also not residing in the same city as that of the main assessee. In such cases, the relevant information is generally passed on to the jurisdictional AO for assessing them u/s 148 (for searches conducted/requisition made after 1-4-2021) of the Income-tax Act, 1961. Accordingly, with reference to above-referred Parameter (4) of Para 2 of these Guidelines, it is clarified that all such non-search cases selected are not required to be transferred to the Central Charges unless covered by the Board's guidelines under F.No. 299/107/2013-IT(Inv.III)/1568, dated 25-4-2014.
5.As per the amendments brought by Finance Act, 2021, the time limit for service of notice u/s 143(2) of the Act has been reduced to three months from end of the Financial Year in which the return is filed. Therefore, for the ITRs filed in the Financial Year (FY) 2023-24, the time limit for service of notice u/s 143(2) of the Act is 30-6-2024,
(i)Accordingly, the following timelines shall be followed with regards to returns filed in the Financial Year (FY) 2023-24:
Sl.No. Action Last Date
1.Selection and transfer of cases, for actions related to cases 31-5-2024 under Parameters at Sl.Nos. 4(ii), 5, 6 and 7 of Para 2 above, wherein assessments have to be completed in faceless manner, to NaFAC.
2.Service of Notice u/s 143(2) of the Act in cases selected for 30-6-2024 Compulsory Scrutiny
6.These instructions may be brought to the notice of all concerned for necessary compliance.”
The short point raised by the ld. Counsel for the appellant is that as per observations of the ld. Assessing Officer on page-1 of his order, its case was selected for complete scrutiny under compulsory selection guidelines on account of search and seizure action conducted upon Goyal MG Gases Pvt. Ltd. on 10.01.2023. The ld. Counsel submitted that its case was selected in Financial year 2024-25 and that therefore the CBDT Guidelines for complete scrutiny issued vide F No.225/72/2024/ITA-II, dated 03.05.2024 were fully applicable. The ld. Counsel said that its case fell either in item no.ii on page-2 of the instruction or item no.7 on page-4 of the impugned instruction. The ld. Counsel submitted that as per impugned instruction the notice u/s 143(2) could only have been issued to the assessee with prior approval by the competent authority and that since the impugned notice did not bear any such approval, the same is an invalid notice is deserves to be quashed along with consequential assessment order.
The ld. Counsel drew our attention to a catena of judgments of this Tribunal as well as of Hon’ble Delhi High Court postulating compliance of CBDT instructions by the assessing authorities. Thus, reliance was placed upon decision of Hon’ble Delhi High Court in the case of Raja Arora in ITA No.132/2025 dated 14.05.2025, of this Tribunal in the case of Ajay Kumar in ITA No.6362/Del/2025 dated 17.04.2026 and of Chennai Tribunal in the case of Yelamarthi Satya Anand, Chennai in ITA No.74/Chny/2025. It was accordingly submitted that the impugned notice u/s 143(2), dated 27.06.2024 and consequent assessment order u/s 143(3) dated 28.03.2025 deserves to be quashed as suffering from jurisdictional insufficiency.
The ld. DR vehemently argued in favour of the order of lower authorities. It was submitted that the case was selected through CASS module and hence there was no need for any approval.
We have noted that the Assessing Officer has clearly written on page-1 of the order that the case of the assessee was selected in FY 2024-25 for complete scrutiny under compulsory selection regime on account of search in Goyal Gas Group. The Assessing Officer was bound to have followed the CBDT guidelines for compulsory selection of complete scrutiny dated 03.05.2024 (supra). There is nothing on the notice u/s 143(2) dated 27.06.2024 that the Assessing Officer had taken any approval of any authority as mentioned in CBDT Instruction dated 03.05.2024 (supra). We have noted that a Co-ordinate Bench of this Tribunal in the case of Ajay Kumar in ITA No.6362/Del/2025 on nearly identical facts of compliance to CBDT instruction observed as under:-
8.We first deal with the additional ground and the corresponding issue pertains to the validity of the manual selection of the assessee's case for scrutiny and the consequent assumption of jurisdiction under section 143(2) of the Income-tax Act, 1961.As the same is pure legal issue it is admitted for hearing.
9.The case of the assessee was selected for scrutiny by issuance of a mandatory notice under section 143(2) dated 25.09.2017. In the said notice, it has been specifically mentioned that the case was selected on the basis of the return of income filed on 14.09.2016 and that the reason for selection falls under Para 1(i) of the Manual Compulsory Scrutiny Guidelines issued by the CBDT vide Instruction No. 5/2017 dated 07.07.2017. The said notice was issued by the DCIT, Central Circle, Noida, and a copy thereof is placed at page Nos. 126-129 of the Paper Book. The relevant snapshot is reproduced for your ready reference:-
10.That plain reading of Para 1(i) of CBDT Instruction No: 5/2017 dated 07.07.2017 makes it abundantly clear that manual selection for scrutiny under this clause is permissible only in cases where additions have been made in earlier assessment years on a recurring issue of law and such additions exceed 10 lakhs in non-metro charges and 25 lakhs in metro charges. Thus, the Instruction prescribes specific and mandatory preconditions for invoking manual scrutiny under the said category.
11.In the present case, the assessee falls within a non- metro charge. However, it is an undisputed fact that no addition whatsoever had been made in the earlier assessment years, nor had any order been passed sustaining any addition on a recurring issue. In support thereof, the relevant order sheet and assessment records have been placed at page No. 155-161of the Paper Book, which clearly demonstrate that no such additions existed in the preceding years. Therefore, Department could not contest and deny that the essential condition precedent for invoking Para 1(1) of Instruction No. 5/2017 was wholly absent in the case of the assessee.
12.Ld. Counsel has submitted that once the notice under section 143(2) of the Act was issued by specifically invoking Para 1(i) of the aforesaid Instruction, the validity of the selection must be examined strictly on that basis alone. The Revenue cannot subsequently improve upon or alter the reasons for selection by contending that the case could have been selected under some other clause of the Instruction. The selection must stand or fall on the reasons recorded at the time of issuance of notice.
13.It is well settled that circulars and instructions issued by the CBDT under section 119 of the Act are binding upon the Revenue authorities and reliance for this can be placed on the decision of the Hon'ble Supreme Court in Customs v. Indian Oil Corporation Ltd. (267 ITR 272). Therefore, compliance with Instruction No. 5/2017 was mandatory and not discretionary. Furthermore, the settled law is that AO is strictly liable to follow the circulars and instructions and for this proposition reliance can be placed on the decision in UCO Bank v. Commissioner of Income-tax [1999] 104 Taxman 547 (SC) and KeshavjiRavji And Co. Versus Commissioner of income-Tax 1990 (2) TMI 1-Supreme Court.
14.Ld. Counsel has placed reliance on the decision of Coordinate Bench of the in the case of DCIT, ITO, New Delhi v. Raja Arora 2024 (11) TMI 158to contend that Co-ordinate Benchhas dealt with CBDT Instruction No. 5/2017 dated 07.07.2017. The case therein had been selected under Para 1(vi) of the Manual Compulsory Scrutiny Guidelines; however, the mandatory approval as contemplated under the said Instruction was not found to have been properly accorded on record. The Coordinate Bench categorically held that the Instructions issued by the CBDT are binding on the Departmental authorities and are required to be strictly complied with. Since the procedural safeguards and mandatory conditions prescribed in the Instruction were not adhered to, the Tribunal held that the assumption of jurisdiction was invalid and the assessment was liable to be quashed. The Revenue carried the matter further before the Hon'ble High Court in the case of Principal Commissioner of Income-tax v. Raja Arora 174 taxmann.com 1065 and the Hon'ble High Court dismissed the appeal and affirmed the view taken by the Tribunal, thereby upholding the principle that CBDT Instruction No. 5/2017 must be strictly followed and any deviation therefrom vitiates the proceedings.
15.In the present case also the conditions prescribed under Para 1(i) of the Instruction were admittedly not satisfied. Therefore, the selection itself being contrary to the binding CBDT Instruction, the consequent notice under section 143(2) and the assessment framed pursuant thereto are liable to be held as invalid and without jurisdiction. As submitted by ld. DR, the defect in the present case is not a mere procedural irregularity but goes to the root of the assumption of jurisdiction and such jurisdictional defect cannot be cured under section 292BB of the Act. In view of the foregoing facts and settled legal position, the manual selection of the assessee's case under Para 1(i) of Instruction No. 5/2017 being contrary to the binding CBDT guidelines renders the notice issued under section 143(2) invalid and without jurisdiction. Consequently, the assessment framed under section 263 read with section 143(3) of the Act, being founded upon such invalid notice, is bad in law and void ab initio. The addition made by the Assessing Officer pursuant to such illegal assumption of jurisdiction is, therefore, liable to be deleted.
16.The additional ground deserves to be sustained. The appeal is allowed.”
We have further noted that Hon’ble Chennai Tribunal in the case of Yelamarthi Satya Anand (supra) has held as under:-
7.We have heard the rival submissions and perused the record of the case and case law referred on the legal issue. We settled that the guidelines prescribed by the CBDT are binding on the AO and the selection of the case for scrutiny assessment in violation of the scrutiny selection guidelines prescribed by the CBDT invalidates such assessment. We further find that the AO in manual selection of cases for scrutiny assessment has to mandatorily comply with the criterion prescribed by the CBDT (referred supra), which has not been followed in this present case.
8.The Hon'ble Andhra Pradesh High Court in the case of CIT V. Smt. Nayana P. Dedhia [2004] 141 Taxman 603 (Andhra Pradesh) / [2004] 270 ITR 572 (AP) (pages 7 to 9 of the case laws paper book) relied upon the judgment of the Hon’ble Supreme Court in the case of UCO Bank v. CIT [1988] 237 ITR 889/[1999] 104 Taxman 547 (SC) [Para 4] and Smt. Amiya Bala Paul v. CIT [2003] 262 ITR 407/ 130 Taxman 511 (SC), has approved the decision of the Income Tax Appellate Tribunal in holding the assessment as bad in law for selecting the case of the assessee for scrutiny against the norms laid down by the CBDT and held as under:
3.A very short question is involved. Admittedly the Department issued a circular by way of press release on March 12, 1996. These guidelines were regarding "Scrutiny assessment guidelines for assessment year 1996-97". By these guidelines, it was notified that the Income-tax Department had decided not to select returns for the assessment year 1996-97 for detailed scrutiny, if the total income declared is at least 30% more than the total income declared for the assessment year 1995-96. The case of respondent before the Tribunal was that the Department had decided not to have detailed scrutinies for the assessment year 1996-97 if the income declared was at least 30% more than the income declared in 1995-96, therefore, the assessment itself was bad. The Tribunal accepted this contention. However, the learned Counsel for appellant submits that these instructions were not binding on the Tribunal or Court or were not available for execution to any Judicial authority.
4.There is no dispute about circular having been issued, which reads as under:
"749A. Scrutiny assessment guidelines for assessment year 1996-97. The Income-tax Department has decided not to select returns for the assessment year 1996-97 for detailed scrutiny if the total income declared is at least 30% more than the total income declared for the assessment year 1995-96.
The following further conditions should be fulfilled:
(a)the total income for both the assessment years should exceed the basis exemption limit;
(b)the total income for the assessment year 1995-96 should not exceed Rs. 5 lakhs; and
(c)tax is fully paid for the assessment year 1996-97 before the return is filed.
In these cases the taxpayers will not be required to attend incometax offices in connection with their assessments. However, some of these cases will be scrutinized if there is positive information of tax evasion or there is a large claim of refund."
The conditions laid down in the circular are also fulfilled by the respondent and there is no dispute on that also. Now, the only question, which needs an answer is, as to what is the status of these circulars. Circular had admittedly been issued by the Central Board of Direct Taxes under section 119(1) of the Act. What is the scope of such circulars should not detain us because of the authoritative pronouncement of the Hon’ble Supreme Court in UCO Bank v. CIT [1988] 237 ITR 889 1. The Supreme Court noted:
"What is the status of these circulars? Section 119(1) of the Income tax Act, 1961, provides that, ‘the Central Board of Direct Taxes may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board. Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner; or (b) so as to interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions’. Under sub-section (2) of section 119, without prejudice to the generality of the Board’s power set out in sub-section (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases, setting forth directions or instructions, not being prejudicial to assessees, as to the guidelines, principles or procedures to be followed in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorized as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities." (p. 895)
The Supreme Court in this judgment, which is clear from the paragraph quoted above, held in no uncertain terms that:
The authorities responsible for administration of the Act shall observe and follow any such orders, instructions and directions of the Board;
(b)such instructions can be by way of relaxation of any of the provisions of the section specified therein or otherwise;
(c)the Board has power inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act;
(d)the circulars can be adverse to the Income-tax Department, but still, are binding on the authorities of the Income-tax Department, but cannot be binding on assessee, if they are adverse to assessee;
(e)the authority, which wields the power for its own advantage under the Act, has a right to forego the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law by issuing instructions in terms of section 119 of the Act. This judgment leaves no room to doubt that the Tribunal was right in holding that the Income-tax authorities could have not selected the case for detailed scrutiny in view of the circular issued by the Board.
The learned Counsel for appellant however, relies on a judgment of the Supreme Court in Smt. Amiya Bala Paul v. CIT [2003] 262 ITR 4071. This
case is not relevant for the purpose of present controversy. 6. For these reasons, the appeal is dismissed. No costs.
The Hon'ble Delhi High Court in the case of CIT V.Best Plastics (P.) Ltd [2008] 169 Taxman 4 (Delhi) / [2007] 295 ITR 256 (Delhi) also held as under:
1.The Commissioner of Income-tax and the Income-tax-Appellate Tribunal have both relied upon a decision of the Supreme Court in Commissioner of Customs v. Indian Oil Corpn. Ltd. [2004] 267 ITR 272 to have that the circulars issued by the Central Board of Direct Taxes (CBDT) binding on the officers of the Income-tax Department. To the same effect is the decision of the Supreme Court in UCO Bank v. CIT [1999] 237 ITR 889.
2.The respondent-assessee's return was in the instant case taken up for scrutiny in violation of the Central Board of Direct Taxes circular according to which if the returned income is 30 per cent more than the income of the earlier assessment year, the case of the assessee should not be scrutinised under Instruction No. 1922, dated 9-3-1995, extended the operation of the circulars to the assessment year 1995-96 also as is evident from the following paragraphs appearing in the same :
"Under Board's Instruction No. 1917, dated 3-6-1994, certain categories of cases were kept outside the scope of sample scrutiny during the financial year 1994-95. On such category consisted of those assessees who declared a total income for the assessment year 1994-95 that was more by 30 per cent of the total income returned for the assessment year 1993-94 subject to the conditions that :
(a)the income for both the assessment years exceeded the basic exemption limit;
(b)the total income for the assessment year 1993-94 was Rs. 5 lakhs or less; and
(c)the tax was fully paid for the assessment year 1994-95 before the return was filed.
2.Suggestions have been received to extend this scheme for the assessment year 1995-96 also. After considering them, it has been decided that the above norm of exclusion from sample scrutiny could be extended for the assessment year 1995-96 also in such cases where the following criteria are satisfied :
(i)the income returned for the assessment year 1995-96 is at least 30 per cent more than the total income returned for the assessment year 1994- 95."
3.The assessment order passed by the Assessing Officer has in the light of the above been set aside by the Commissioner which order has been upheld by the Tribunal in appeal. No substantial question of law arises for our consideration in the light of the settled legal position emanating from the aforementioned judgments of the Supreme Court. This appeal accordingly fails and is hereby dismissed.
The decision of the Pune Bench of the Income Tax Appellate Tribunal in the case of S F Chougule v. JCIT in ITA No. 458 / PN/ 2012wherein the ITAT has held as follows:
“... In the above circumstances, where the order has been passed against the norms laid down by the CBDT Vide its guidelines which were binding upon the Assessing officer, then the order passed by the Assessing Officer is bad in law. The instructions issued by the CBDT are to be strictly followed by theauthorities i.e. Assessing Officer and in the absence of the same, the assessment order passed in the case is annulled. Such is the proposition laid down by the Hon'ble High Court of Andhra Pradesh in CIT Vs. Smt. Nayana P. Dedhia (supra) and the Hon'ble High Court of Delhi in CIT Vs. Best Plastics (P) Ltd. (supra). In view thereof, we hold that where the Assessing Officer has failed to follow the guidelines issued for selecting the cases for scrutiny and in the facts of the present case, where the case was selected manually for scrutiny, but no previous approval of CCIT was obtained, then the Assessing Officer lacks jurisdiction to carry out the scrutiny assessment in the present case and accordingly, assessment order passed by the Assessing Officer is bad in law."
Further the recent decision of the Allahabad Bench of the Income Tax Appellate Tribunal in the case of Girdhar Gopal Rastogi v. CIT [2022] 142 taxmann.com 142 (Allahabad - Trib) (pages 12 to 21 of the case laws paper book),wherein the ITAT has held as under (relevant para 10 at page 21 of the case laws paper book):
“….Since the conditions as prescribed in clause (d) of para 3 of the Instruction no. 13/2013 are not satisfied therefore, the Assessing Officer was not having the jurisdiction and authority to take up the case for compulsory scrutiny. Accordingly, the initiation of the compulsory scrutiny proceedings by issuing the notice under section 143(2) dated 11-6-2013 is invalid and consequently the assessment framed by the Assessing Officer is vitiated as invalid in law. Hence, the impugned assessment framed by the Assessing Officer is liable to be quashed being passed without jurisdiction."
Therefore, in the light of the above settled law and in the facts of the case, we find that the AO has not mandatorily fulfilled / followed the Central Board of Direct Taxes (CBDT) Circular No. F.No.225/81/2022/1TA-I dated 11.05.2022 modified on 03.06.2022. The legal position established by the aforementioned decisions isthat the circulars and instructions issued by the Central Board of Direct Taxes (CBDT) are binding on the Assessing Authorities. It has further been held that where the CBDT has laid down specific guidelines or norms for selection of cases for scrutiny, such norms must be strictly adhered to. Any deviation from these guidelines renders the assessment proceedings null and void. Therefore, we are of the considered view that the action of the Assessing Officer in selecting the assessee's case for scrutiny is nothing but as fragrant violation of the binding circular and the resulting assessment therefore, invalid and unsustainable in law. Hence, G.No.2 of the assessee is allowed. Other grounds on merits are academic in nature hence infructuous...
We have further noted that Hon’ble Delhi High Court in its decision dated 14.05.2025 in the case of Raja Arora in ITA No.132/2025 has held as under:-
“..6. Mr. Bhatia states that no notice under Section 153A or 153C of the Act was issued. He also confirms the communication issued clarifying that the return was selected for scrutiny on the basis of paragraph 1(vi) of Instruction No. 5/2017, being the guidelines for selection of cases for scrutiny during Financial Year 2017-18, issued by the CBDT.
7.However, he also submits that although a search was conducted in the Airwill Group of cases, the Assessee’s return was picked up for scrutiny relying on paragraph 1(iii) of the said instructions. The relevant extract (instruction no.5 of 2017) issued by the CBDT are set out below: -
1.In supersession of earlier instructions on the above subject, the Board hereby lays down the following procedure and criteria for compulsory manual selection of returns/cases requiring scrutiny during the financial-year 2017-2018:-
(iii)Assessments in search and seizure cases to be made under Section(s) 158B, 158BC, 158BD, 153A & 153C read with Section 143(3) of the Act and also for the returns filed for the assessment year relevant to the previous year in which authorization for search and seizure was executed u/s 132 or 132A of the Act. xxxxxx
(vi)Cases in respect of which specific and verifiable information pointing out tax-evasion is given by any Government Department/Authority. However, before selecting a case for scrutiny under this criterion, Assessing Officer shall take prior administrative approval from the concerned jurisdictional Pr.CIT/Pr.DIT/CIT/DIT.
8.In terms of paragraph 1(iii) of the said instruction, the assessment in search and seizure cases is to be made under Section 158B, 158BC, 158BD, 153A and 153C of the Act read with Section 143(3) of the Act. Further, the return filed for the assessment year relevant to the previous year in which authorization for the search or requisition was executed under Section 132 or 132A of the Act, is also required to be picked up for scrutiny. It is apparent from the plain language of Clause (iii) of paragraph.1 of the Instruction No.5/2017 that it is applicable only in cases where the search has been conducted in the case of an assessee or where assessments are required to be framed based on any incriminating material found during the said search in case of an assessee being a person other than the searched person. In the present case, none of the said conditions are satisfied.
9.In cases where the AO has any verifiable information pointing to tax evasion given by the Government department or Authoirty, it will be open for the AO to select the return for scrutiny in exercise under Clause (vi) of paragraph.1 of the Instruction No.5 of 2017. In the present case, a notice dated 29.09.2017 was issued by the DCIT on the basis that the said authority had such verifiable information pointing towards tax evasion. It is not necessary for this Court to examine whether the DCIT had, in fact, any such information. However, it is undisputed that if the DCIT had any such information, it could select the Assessees return for AY 2016-17 for scrutiny subject to the necessary approval of the concerned jurisdictional Pr.CIT/Pr.DIT/CIT/DIT.
10.Admittedly, in the present case no such approval was taken.
11.In the aforesaid view, we find no infirmity with the decision of the learned ITAT in setting aside the assessment framed in the case of the Assessee for AY 2016-17…”
Thus, we have noted that facts of the present case regarding the issuance of notice u/s 143(2) without mandatory approval of competent authority are identical to those discussed in judicial precedents enumerated hereinabove. Accordingly, in respectful compliance to the impugned decisions, we are of the considered view that notice u/s 143(2) dated 27.06.2024 issued by ld. Assessing Officer suffers from jurisdictional insufficiency and is therefore bad in law. We, therefore, set-aside and quash the orders of the lower authorities. Consequently, the assessment order u/s 143(3) dated 28.03.2025 which is resting on the impugned notice u/s 143(2) is also bad in law. Accordingly, we quash the notice u/s 143(2) dated 27.06.2024. The consequent assessment order u/s 143(3) dated 28.03.2025 is also quashed. The legal grounds of appeal nos.2 and 3 raised by the assessee are therefore allowed.
As the assessee has succeeded in its legal grounds of appeal nos.2 and 3, all other grounds raised by the assessee qua merits of the addition have become academic and hence left open.
In the result, the appeal of the assessee is allowed.