DCIT vs Ayodhya Faizabad Development Authority: ITAT Lucknow on Section 143(2) Notice Validity in Reassessment

This case study examines a September 2025 ruling from the Income Tax Appellate Tribunal, Lucknow, in which the Tribunal was called upon to adjudicate whether a reassessment order passed under section 147 read with section 143(3) of the Income Tax Act, 1961 could survive when the mandatory notice under section 143(2) was alleged to have never been properly served on the assessee — M/s Ayodhya Faizabad Development Authority. The ruling carries significance for reassessment proceedings generally, particularly for cases involving statutory development authorities where the jurisdictional requirement of issuing a valid section 143(2) notice is contested.

This page is a research summary of one specific Indian tax judgment, NOT legal advice. Always verify against the full judgment and consult a professional for case-specific guidance.

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The case at a glance

• Parties: Dy. Commissioner Of Income Tax vs M/S Ayodhya Faizabad Developement
• Bench: Income Tax Appellate Tribunal - Lucknow
• Date: 25 September 2025
• Court level: Tribunal (ITAT)
• Sections engaged: 147, 143(2), 143(3)
• Outcome: Partial relief — Revenue's appeal dismissed; assessee's cross-objection partly allowed

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Facts of the case

M/s Ayodhya Faizabad Development Authority filed its return of income for Assessment Year 2011-12 on 30 September 2011 declaring nil income, after claiming exemption under section 11. The case was initially scrutinised under section 143(3) and the assessment was completed on 28 March 2014 at the returned income. Subsequently, proceedings under section 148 were initiated by way of a notice under section 148 of the Act. The assessee did not initially comply with that notice, leading the Assessing Officer to issue a notice under section 142(1), a penalty notice under section 271(1)(b), and, eventually, a notice for best judgment assessment under section 144 dated 30 November 2016.

The assessee's representative appeared on 5 December 2016 and filed a letter stating that the original return should be treated as filed in compliance with the section 148 notice. The assessee subsequently obtained the reasons to believe and on 9 December 2016 submitted written objections to the section 148 notice, which were disposed of on the same date. The Assessing Officer then analysed the accounts and concluded that since the assessee's activities were akin to real estate business, the first proviso to section 2(15) applied and the exemption under section 11 was not available. The AO relied, among other things, on the Supreme Court's rejection of an SLP filed by Jammu Development Authority — where the High Court had dismissed appeals against an ITAT order upholding cancellation of registration of that Development Authority — as a basis for treating the Ayodhya Faizabad Development Authority's activities as commercial rather than charitable. On this footing, the AO declined to make additions on account of depreciation, capital expenditure, or prior period expenses, but made an addition of Rs. 4,19,46,586/- on account of an unutilised tourism grant received from the State Government that had not been taken into the income and expenditure account.

Aggrieved by the assessment order, the assessee appealed to CIT(A)-2, Lucknow, and raised an additional ground contending that no notice under section 143(2) had been served upon it, rendering the assessment proceedings bad in law. The CIT(A) accepted this additional ground and annulled the assessment order. The Revenue filed ITA No. 525/LKW/2017 before the ITAT challenging the CIT(A)'s annulment, while the assessee filed Cross Objection No. 20/LKW/2017 in support of the CIT(A)'s order and also contesting the denial of exemption under section 11 and the addition of Rs. 4,19,46,586/-.

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Issues raised

• Whether the CIT(A)-2, Lucknow had jurisdiction to entertain and decide the assessee's appeal, given a Pr. CCIT direction allocating Faizabad and Gonda Range appeals to CIT(A)-1 or CIT(A)-4.
• Whether a valid notice under section 143(2) was issued and served upon the assessee, such that the reassessment order under section 147 read with section 143(3) was legally sustainable — or whether non-service of such a notice rendered the assessment bad in law.
• Whether section 292BB could be invoked by the Revenue to cure any defect in service of the section 143(2) notice, given that the assessee's representative appeared during the proceedings.
• Whether the CIT(A) erred in admitting the additional ground on the section 143(2) issue without affording proper opportunity to the AO.
• Whether the AO was justified in disallowing exemption under section 11 and in adding Rs. 4,19,46,586/- on account of the unutilised tourism grant, which the assessee characterised as a capital receipt not exigible to tax.

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What the court held

The ITAT dismissed the Revenue's appeal and partly allowed the assessee's cross-objection, resulting in partial relief for the taxpayer. The operative outcome — as reflected in CASE_FACTS.outcome_reasoning — is that the Revenue's challenge to the CIT(A)'s annulment of the reassessment did not succeed before the Tribunal.

On the central section 143(2) issue, the CIT(A) had held that the issuance and service of a valid notice under section 143(2) is a mandatory jurisdictional pre-condition for completing an assessment under section 143(3) in the context of reassessment proceedings under section 147. The assessee's additional ground before the CIT(A) was that no such notice had been served after the section 148 objections were disposed of on 9 December 2016; a notice purportedly issued on 5 December 2016 predated the disposal of those objections and the assessee contended that no further section 143(2) notice was issued thereafter. The CIT(A) accepted this contention and annulled the order. The Revenue's principal counter — that the notice dated 5 December 2016 was issued and that the assessee's representative's appearance during proceedings attracted section 292BB — did not prevail at the first appellate stage, and the ITAT upheld that conclusion by dismissing the Revenue's appeal.

On the assessee's cross-objection, the Tribunal partly allowed it, indicating that at least some of the substantive or procedural grounds raised by the assessee in support of the CIT(A)'s order — and potentially the additional grounds concerning the denial of section 11 exemption and the Rs. 4,19,46,586/- tourism grant addition — were addressed, though the cross-objection was only partly successful.

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Strategy observations

1. An additional ground was raised before the CIT(A) on the section 143(2) notice issue — a purely jurisdictional and procedural point — which the CIT(A) admitted and sustained. The outcome illustrates that a threshold procedural defect in service of a mandatory notice can result in annulment of the entire assessment without adjudication of substantive additions.

2. The assessee filed a cross-objection before the ITAT in support of the CIT(A)'s order and also pressed substantive grounds relating to the section 11 exemption and the character of the tourism grant as a capital receipt. The cross-objection being only partly allowed indicates that not all substantive grounds were accepted.

3. The Revenue raised a section 292BB argument — that the assessee's appearance during proceedings cured any defect in service of the section 143(2) notice — but this argument did not succeed. The source preview records that the assessee's representative attended proceedings on 5 December 2016 primarily to file a letter treating the original return as compliant with the section 148 notice, and the assessee maintained that the section 143(2) notice was never issued after the objections were disposed of on 9 December 2016. This chronological sequence was central to the dispute.

4. The Revenue also questioned CIT(A)-2's jurisdiction, contending that the Pr. CCIT had directed Faizabad-range appeals to CIT(A)-1 or CIT(A)-4. The ITAT's dismissal of the Revenue's appeal indicates this jurisdictional challenge did not override the CIT(A)-2's annulment order, though the reasoning on this point is not fully reproduced in the source preview.

5. The case arose from a reassessment proceeding that was initially completed under section 143(3) (original assessment on 28 March 2014 at returned income) and then subjected to reopening under section 147. The interplay between the original assessment, the reopening process, and the requirement to issue a fresh section 143(2) notice in the reassessment context is the procedural axis on which the entire dispute turned.

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Why this case matters

This ruling reinforces the principle — consistently applied by courts and tribunals across India — that the issuance and service of a notice under section 143(2) is not a directory but a mandatory requirement for the valid completion of a reassessment order under section 147 read with section 143(3). Where the notice is not served within the prescribed period or at all after the return is treated as filed in compliance with a section 148 notice, the resulting assessment order is liable to be annulled as void for want of jurisdiction. The case is particularly instructive because the Revenue invoked section 292BB — arguing that the assessee's participation cured the defect — and that argument failed, suggesting that mere appearance does not substitute for the statute's explicit notice requirement where the assessee has actively contested notice issuance.

The case also touches on a recurring question concerning statutory development authorities and charitable status under section 11, with the AO seeking to apply the first proviso to section 2(15) to deny exemption. While the annulment of the assessment on procedural grounds made the substantive section 11 question academic for the Revenue's appeal, the assessee's cross-objection on those substantive grounds was only partly allowed — meaning the factual and legal battle over the development authority's tax status remains relevant for future proceedings. Tax researchers tracking the intersection of reassessment procedures and charitable organisation exemption disputes will find this order a useful data point.

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Source

This case is drawn from the TaxNoticeAI structured legal corpus (16,101 Indian tax judgments, CBIC circulars, ITAT rulings, AAR rulings, GSTAT rulings), sourced from indiankanoon.org and official court portals. Original document: https://indiankanoon.org/doc/28834365/