Issue for consideration
Section 143 of the Income-tax Act, 1961 (‘the Act’) provides for assessment by an Assessing Officer (‘AO’) of the tax payable by an assessee for a particular assessment year. Section 143 is a purely procedural or machinery section laying down the procedures for making assessment in various contingencies. Broadly, section 143 prescribes two types of assessment — ‘summary assessment’ u/s.143(1) and ‘scrutiny assessment’ u/s.143(2).
The proviso to section 143(2)(ii) of the Act prescribes the service of notice on the assessee within a particular period as a pre-requisite to enable the AO to complete an assessment other than summary assessment. The notice should specify a date and should call upon the assessee either to attend before the officer on that date or produce or cause to be produced before the officer, on that date, any evidence which the assessee may rely upon in support of his return and it is then up to the assessee to satisfy the officer by producing necessary material that the return is correct and complete. At present, the proviso to section 143(2)(ii) specifies six months from the end of the financial year in which the return is furnished, as the time-limit within which notice needs to be served on the assessee for valid assessment of his return of income.
Section 143(2)(ii) and the proviso thereto, read as under:
“Section 143(2) Where a return has been furnished u/s.139, or in response to a notice u/ss.(1) of section 142, the Assessing Officer shall, —(i) ........(ii) notwithstanding anything contained in clause (i), if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice requiring him, on date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return;Provided that no notice under clause (ii) shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.”
The controversy sought to be discussed here, revolves around the issue as to whether the expression ‘served’ used in the proviso to section 143(2)(ii) of the Act needs to be given a literal meaning of ‘actual physical receipt of notice by the assessee’ or otherwise needs to be construed as giving a meaning of ‘issue’ of notice by the AO.
The Punjab and Haryana High Court had an occasion to deal with this issue, holding that the date of receipt of notice by the assessee was not relevant to determine whether the notice had been served within the prescribed time, and that the expression ‘serve’ meant the date of ‘issue of notice’. In deciding the issue, the Punjab and Haryana High Court specifically dissented with the findings of other earlier judgments of the Punjab and Haryana High Court on the subject.
V.R.A. Cotton Mills’ case
The issue came up recently before the Punjab and Haryana High Court in the case of V.R.A. Cotton Mills (P) Ltd. v. Union of India and Others, (CWP No. 18193 of 2011) dated 27 September 2011 (reported in www.itatonline.org).
V.R.A. Cotton Mills filed a writ petition challenging the notice dated 30 September 2010 issued by the AO u/s.143(2) for A.Y. 2009-10, on the ground that the notice was not served within the prescribed time limit and accordingly, claimed that the initiation of assessment proceedings by the AO was bad in law. The Court opined that the expressions ‘serve’ and ‘issue’ were interchangeable, relying on the following legal precedents to construe the expression ‘serve’ as the date of issue of notice:
- Banarsi Debi and Anr. v. ITO, (53 ITR 100);
- Collector of Central Excise v. M/s. M. M. Rubber & Co., (1991 AIR 2141 SC);
- Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co., (AIR 1966 SC 543); and
- State of Punjab v. Khemi Ram, (AIR 1970 SC 214).
The High Court dissented from its own earlier judgment in the case of CIT v. AVI-OIL India (P.) Ltd., (323 ITR 242), on the ground that the legal precedents referred to above were not placed before the Court in the case of AVI-OIL India (supra) and therefore, the Court, in ignorance of law, had given literal meaning to the word ‘served’ in that case. Treating the decision of AVI-OIL India (supra) as per incuriam, the Court in V.R.A. Cotton Mills case (supra) held that the purpose of the statute would be better served, only if the expression ‘served’ was considered as being issue of notice. The Court, in light of the aforesaid findings, dismissed the writ petition of the assessee and construed the expression ‘served’ as meaning ‘issue’ of notice.
AVI-OIL India’s case
This issue had come up earlier before the Punjab and Haryana High Court in the case of CIT v. AVI-OIL India (P.) Ltd. (supra).
In that case, the assessee filed its return of income on 29 October 2001 for A.Y. 2001-02 and notice u/s.143(2) was issued on 29 October 2002. The notice server visited the factory premises of the assessee company on 31 October 2002 and as per the report of the notice server, the office was found closed. The AO then directed the notice server to serve the notice by affixture. This mode of service of notice by affixture was challenged in appeal and the Court upheld the decision of the Tribunal that such service of notice was not in accordance with section 282 of the Act and Rules as prescribed under the Code of Civil Procedure, 1908.
In addition, another notice dated 30 October 2002, was also issued by the AO and sent by Registered post on 30 October 2002. This notice was served upon the assessee on 1 November 2002. Relying on the proviso to section 143(2)(ii) of the Act, the assessee- ompany submitted that the second notice was non est in law considering that it was served on the assessee beyond the then prescribed time limit of 12 months from the end of the month in which the return was furnished.
On perusal of section 143(2) of the Act, the Court held that a notice under that section is not only to be issued but also has to be served upon the assessee within the time-limit as provided under the proviso to section 143(2)(ii) for a valid assessment. The Court further held that belated service of notice cannot be considered as curable u/s.292B of the Act, as this section deals with issue of notice and not service of notice.
In light of these facts, the Court upheld the decision of the Tribunal of service of notice on the assessee not being a valid service of notice u/s.143(2).
Observations
Section 143 of the Act corresponds in material particulars to section 23(1) to section 23(3) of the Income-tax Act, 1922 (‘the 1922 Act’). Section 143 has received major overhauls due to changes in the assessment procedures vide Taxation Laws (Amendment) Act, 1970 and Direct Tax Laws (Amendment) Act, 1987. Over the years, amendments have been carried out in the provisions of section 143, to reach its present form. The condition of service of notice on the assessee and the time-limit thereof was introduced in section 143 by the Direct Tax Laws (Amendment) Act, 1987. Circular No. 549, dated 31 October 1989 issued by the Central Board of Direct Taxes (CBDT), 182 ITR 19 (St.), explains the scope of the amendment in the proviso to section 143(2) of the Act, as under:
“5.10 Commencement of proceedings for scrutiny and completion of scrutiny proceedings [s.s (2) and (3) of section 143] — . . . . . .5.12 Since, under the provisions of s.s (1) of new section 143, an assessment is not to be made now, the provisions of s.s (2) and (3) have also been recast and is entirely different from the old provisions . . . . . .5.13 A proviso to s.s (2) provides that a notice un der the sub-section can be served on the assessee only during the financial year in which the return in furnished or within six months from the end of the month in which the return in furnished, whichever is later. This means that the Department must serve the said notice on the assessee within this period, if a case is picked up for scrutiny. It follows that if an assessee, after furnishing the return of income does not receive a notice u/s.143(2) from the Department within the aforesaid period, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return.”
The Legislature, by inserting proviso to section 143(2) has intended that if no notice is received by the assessee within the prescribed time-limit, then the assessee can consider that the return filed by him has become final and that no scrutiny proceedings have been started. The notice can only be received on actual service, and therefore the intention seems to have been to place a time-limit for actual service, and not merely for issue, of the notice.
This position is further supported by Circular No. 621, dated 19 December 1991, 195 ITR 154 (St.), which clarifies as under:
“Extending the period of limitation for the service of notice u/ss.(2) of section 143 of the Income-tax Act — 49. Under the existing provisions of section 143 of the Income-tax Act relating to the assessment procedure, no notice u/ss.(2) thereof can be served on the assessee after the expiry of the financial year in which the return is furnished or the expiry of six months form the end of the month in which the return is furnished, whichever is later.49.1 The aforesaid period of limitation for the service of notice u/ss.(2) of section 143 does not allow sufficient time to the Assessing Officers to select the returns for scrutiny before assessment. Therefore, s.s (2) has been amended to provide that the notice thereunder can be served on the assessee within twelve months from the end of the month in which the return in furnished.”
This interpretation of the proviso to section 143(2)(ii) of the Act is also supported by the enactment of sections 282 and 292BB. Section 282 prescribes the procedure and manner in which service of noticeneeds to be generally effected under the provisions of the Act and further, section 292BB of the Act vide a legal fiction holds certain notices as valid service of notice under the Act, based on satisfaction of certain conditions.
Further, section 34 of the 1922 Act corresponds to section 148, section 149 and section 150 of the Act (collectively referred to as ‘reassessment provisions’) which deals with procedure and conditions for reassessment of income of the assessee for a particular assessment year. On comparison of the language of section 143(2) of the Act with the reassessment provisions, one finds that the reassessment provisions have used both the expressions ‘issue of notice’ and ‘service of notice’, as against the provisions of section 143(2), which have consistently used only the expression ‘service of notice’.
The decision of the Supreme Court in the case of Banarsi Debi and Anr. v. ITO (supra) relied upon by the High Court in the V.R.A. Cotton Mills’ case (supra) was delivered in the context of section 34 of the 1922 Act. The Apex Court was considering an amendment in section 34 of the 1922 Act vide section 4 of the Amending Act of 1959, which sought to save the validity of notices issued beyond the prescribed period. Since section 34 used the term ‘served’ and not the term ‘issued’ while the amendment sought to cover notices ‘issued’ beyond the prescribed time, the Supreme Court, in that case, held as under:
(1) The clear intention of the Legislature was to save the validity of notice as well as the assessment from an attack on the ground that the notice was served beyond the prescribed period;(2) That intention could be effectuated if a wider meaning was given to the expression ‘issued’, whose dictionary meaning took into account the entire process of sending the notice as well as the service thereof;(3) The word ‘issued’ in section 4 of the Amending Act had to be construed as interchangeable with the word ‘served’ or otherwise the amendment would become unworkable.
On perusal of these findings, one notices that the Apex Court confirmed that the expression ‘issue of notice’ had two meanings. The word ‘issue of notice’ was equated to as being ‘service of notice’ in a wider sense and of ‘notice sent’ in a narrower sense. In order to make the section workable and to further the intention of the Legislature of enacting section 4 of the Amending Act, 1959, the Court had to interpret the word ‘issue of notice’ as ‘service of notice’ in a contextual sense.
When the applicability of these findings were sought to be applied to corresponding reassessment provisions of the 1961 Act, the Supreme Court in the case of R. K. Upadhyaya v. Shanabhai P. Patel, (166 ITR 163), distinguished the decision of Banarsi Debi and Anr. v. ITO, (supra) holding that the scheme of the 1961 Act so far as notice for reassessment was concerned was quite different; and that a clear distinction had been made out between the ‘issue of notice’ and ‘service of notice’ under the 1961 Act.
The decision of Banarsi Debi and Anr. v. ITO (supra) was also distinguished by the High Courts in the following decisions on similar lines:
- Jai Hanuman Trading Co. Ltd. v. ITO, (110 ITR 36) (P&H) (FB);
- CIT v. Sheo Kumari Devi, (157 ITR 13) (Pat) (FB);
and
- New India Bank Ltd. v. ITO, (136 ITR 679) (Del.)
Further, the following extracts of observations in the context of ‘issue of notice’ and ‘service of notice’ of the Full Bench of the Patna High Court in the case of Sheo Kumar Devi (supra), need to be noted:
“Once the maze of precedents is out of the way, one might as well examine the issue refreshingly on principle. To my mind, the fallacy that seems to have crept in this context is to suggest that (barring some very peculiar or compulsive textual compulsion) in plain ordinary English, the word ‘issue’ and the word ‘serve’ are synonyms or identical in terms. With great respect, it is not so. Their plain dictionary meaning runs directly contrary to any such assumption. No dictionary says that the issuance of an order is necessarily the service of order on a person as well, or in reverse, that the service of an order on a person is the mathematical equivalent to its issuance. In Chamber’s Twentieth Century Dictionary, the relevant meanings given to the word ‘issue’ are act of sending out, to put forth, to put into circulation, to publish, to give out for use. On the other hand, the word ‘serve’ in the same dictionary has been given the meaning, as a term of law, to deliver or present formally, or give effect to. Similarly in the New Illustrated Dictionary, the relevant meaning attributed to the word ‘issue’ is come out, be published, send forth, publish, put into circulation whilst the relevant meanings attributed to the word ‘serve’ are to supply a person with, make legal delivery of (writ, etc.), deliver writ, etc., to a person. Thus it would appear that the words ‘issue’ and ‘serve’ are distinct and separate and the indeed the gap between the two may be wide, both in point of time and place. An order or notice may be issued today, but may be served two years later. An order or notice may be issued at one place and may be served at a point 1,000 or more miles away. An order issued may not require any service at all . . . . shape of notification . . . . Merely because a statute may provide that an order issued should also be properly served subsequently on the person directly affected would not, in my view, in any way render the words ‘issue’ and ‘serve’ as either synonymous or identical. A very peculiar situation in a statute and the compulsion of sound cannon of construction may sometimes require the enlargement or extension of a word to save the legislation from being rendered nugatory. That, indeed, was the situation in Banarsi Debi case (supra).”
On similar lines, the other decisions as relied on by the Court in the case of V.R.A. Cotton Mills (supra) are not relevant in the context of the issue under consideration, since none of these decisions dealt with the expression ‘issue; or ‘service’ of notice.
On the contrary, the following decisions of the High Courts, delivered in the context of section 143(2), upholding the interpretation of service of notice not being synonymous with issue of notice, were not considered by the High Court in the case of V.R.A. Cotton Mills (supra):
- CIT v. Shanker Lal Ved Prakash, (300 ITR 243) (Del.) — in this case, the High Court even issued directions to AOs to dispatch notices at least a fortnight before the expiry of the date of limitation;
- CIT v. Yamu Industries Ltd., (306 ITR 309) (Del.) — the principles of section 282 were also applied in this case in interpreting the expression ‘service’ of notice;
- CIT v. Cebon India Ltd., (34 DTR 119) (P&H);
- CIT v. Pawan Gupta and Others, (318 ITR 322) (Del.) and Rajat Gupta v. CIT, (41 DTR 265) (Del.) — In context of block assessment;
- CIT v. Bhan Textiles (P) Ltd., (287 ITR 370) (Del.);
- CIT v. Vardhman Estate (P) Ltd., (287 ITR 368) (Del.); and
- CIT v. Dewan Kraft Systems (P) Ltd., (165 Taxman 139) (Del.).
One also needs to keep in mind that the requirement of service of notice within the specified period, and not issue of notice within that time, has been provided for to ensure that AOs do not show a notice as having been issued at an earlier date, though issued and dispatched much later, as that could have resulted in possible harassment of assessees.
In the light of the above, the better view is that the expression ‘served’ as referred to in section 143(2)(ii) of the Act and its proviso thereof, has to be given literal meaning of ‘actual receipt of notice by the assessee’ as against the meaning of issue of notice. The decision of the Punjab and Haryana High Court in the case of V.R.A. Cotton Mills case (supra), with due respect, therefore requires reconsideration.
Further, the principle of judicial propriety and judicial discipline demanded that the matter in the case of V.R.A. Cotton Mills Ltd. (supra) should have been referred to a Larger Bench of the Punjab and Haryana High Court, more particularly after the fact that the same High Court in the cases of Cebon India (supra) and AVI-OIL India Ltd. (supra) had decided otherwise in the context of section 143(2).
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