The Kerala High Court recently halted income tax assessment proceedings in a batch of cases over discrepancies in the format of scrutiny notices issued by the Income Tax Department. [Sreedhanya Construction Company v The Assistant Commissioner of Income Tax & Anr.]

Justice Ziyad Rahman AA passed the order halting proceedings till November 18 and granted time to the Standing Counsel of the Income Tax department to get instructions on the matter.

The batch of petitions in this case was filed under Article 226 of the Constitution of India challenging notices issued under Section 143(2) of the Income-tax Act, 1961.

The main ground raised by the petitioners was that the notices were issued without jurisdiction as they directly violated circular No. F. No. 225/157/2017/ITA-II dated June 23, 2017 issued by the Central Board of Direct Taxation (CBDT).

This circular mandated that every notice issued under Section 143(2) must explicitly specify the nature of the scrutiny being initiated, such as limited scrutiny, complete scrutiny and compulsory manual scrutiny, using the prescribed format.

The petitioners, including Sreedhanya Construction Company, contended that the notices issued to them were patently illegal and void ab initio as it failed to adhere to the mandatory procedural requirement prescribed in this CBDT circular.

Relying on the judgment of the Supreme Court in UCO Bank, Calcutta v. CIT, the petitioners argued that the circulars issued by CBDT under Section 119 of the Income-tax Act are binding on all Income Tax Authorities.

"Non-compliance with the binding instructions of the CBDT, governing the commencement of scrutiny, constitutes a fundamental jurisdictional defect", the petition moved by Sreedhanya Construction Company stated.

The petitioners, therefore, sought orders from the Court quashing the notices sent to them and the proceedings initiated or sought to be initiated pursuant to said notices.

The batch of cases will be taken up next on November 18.

The petitioners were represented by advocates Chandapillai Abraham PG, Isaac Thomas and John Vithayathil.

Standing Counsel Jose Joseph appeared for the Income Tax Department.