Tuesday, 27 October 2015

Whether to make assessment u/s 143(3) it is mandatory to service Sec 143(2) notice only after return filed is actually scrutinised - YES: HC


THE issue before the Bench is - Whether in order to make assessment u/s 143(3), it is mandatory for an AO to serve the notice under Section 143(2) only after the return filed by the Assessee is actually scrutinized. YES is the answer.
Facts of the case
The assessee company filed its return of income, which was accepted by the Department and an acknowledgement was issued u/s 143(1). Subsequently the return was picked up for scrutiny. After recording reasons, notice was issued by the AO to assessee u/s 148. It was not in dispute that this notice was never served on the Assessee. Subsequently, a notice was issued u/s 143(2) by AO stating that there were certain points in connection with the return filed for the AY in question on which the AO "would like some further information". Again, it was not in dispute that this notice u/s 143(2) was also never served on the Assessee. Finally on the hearing day, the assessee informed the AO that the return originally filed on 16th September, 2008 should be treated as the return filed pursuant to the notice u/s 148. AO then proceeded to pass an assessment order whereby, an addition of Rs.1 crore was made to the income of assessee u/s 68 as unexplained credits. On appeal before CIT(A), assessee raised the issue that in absence of a notice u/s 143(2) the order of re-assessment was invalid. The CIT(A) negatived the above contention holding that no specific notice was required to be issued u/s 143(2) and that questionnaires issued by the AO had provided the assessee's sufficient opportunity to support his return by documentary evidence. Secondly, it was held that non issue of notice u/s 143(2) did not render the reassessment invalid. On further appeal, Tribunal allowed the assessees' appeal and held that for completing the assessment u/s 148 compliance with the procedure u/s 143 (2) was mandatory. It was held that if notice was not issued to the Assessee before completion of the re-assessment, then such reassessment was not sustainable in law.
Held that,
++ no notice u/s 143(2) was issued to assessee after 16th December 2010, the date on which the Assessee informed the AO that the return originally filed should be treated as the return filed pursuant to the notice under Section 148. In DIT v. Society for Worldwide Interbank Financial Telecommunications 2010-TIOL-278-HC-DEL-IT, this Court invalidated an reassessment proceedings after noting that the notice under Section 143(2) was not issued to the Assessee pursuant to the filing of the return. In other words, it was held mandatory to serve the notice under Section 143(2) of the Act only after the return filed by the Assessee is actually scrutinised by the AO. In CIT v. Rajeev Sharma 2010-TIOL-381-HC-ALL-IT it was held that a plain reading of Section 148 reveals that within the statutory period specified therein, it shall be incumbent to send a notice under Section 143(2). In a subsequent judgment in CIT v. Salarpur Cold Storage (P.) Ltd. 2014-TIOL-1522-HC-ALL-IT it was held that once the deeming fiction comes into operation, the assessee is precluded from raising a challenge about the service of a notice, service within time or service in an improper manner. The proviso to Section 292BB, however, carves out an exception to the effect that the Section shall not apply where the assessee has raised an objection before the completion of the assessment or reassessment. Section 292 BB cannot obviate the requirement of complying with a jurisdictional condition. For AO to make an order of assessment under Section 143 (3), it is necessary to issue a notice under Section 143 (2) and in the absence of a notice under Section 143 (2), the assumption of jurisdiction itself would be invalid. In the same decision in v. Salarpur Cold Storage (P.) Ltd., the Allahabad High Court noticed that the decision of the Supreme Court in ACIT v. Hotel Blue Moon where in relation to block assessment, the Supreme Court held that the requirement to issue notice under Section 143(2) was mandatory. It was not "a procedural irregularity and the same is not curable and, therefore, the requirement of notice under Section 143(2) cannot be dispensed with;
++ the Madras High Court held likewise in Sapthagiri Finance & Investments v. ITO 2012-TIOL-608-HC-MAD-IT. The facts of that case were that a notice under Section 148 was issued to the Assessee seeking to reopen the assessment for AY 2000-01. However, the Assessee did not file a return and therefore a notice was issued to it under Section 142 (1). Pursuant thereto, the Assessee appeared before the AO and stated that the original return filed should be treated as a return filed in response to the notice under Section 148. The High Court observed that if thereafter, the AO found that there were problems with the return which required explanation by the Assessee then the AO ought to have followed up with a notice under Section 143(2). As already noticed, the decision of this Court in CIT v. Vision Inc. proceeded on a different set of facts. In that case, there was a clear finding of the Court that service of the notice had been effected on the Assessee under Section 143 (2). As already further noticed, the legal position regarding Section 292BB has already been made explicit in the aforementioned decisions of the Allahabad High Court. That provision would apply insofar as failure of "service" of notice was concerned and not with regard to failure to "issue" notice. In other words, the failure of the AO, in re-assessment proceedings, to issue notice under Section 143(2), prior to finalising the re-assessment order, cannot be condoned by referring to Section 292BB. The resultant position is that as far as the present case is concerned the failure by the AO to issue a notice to the Assessee under Section 143(2) subsequent to 16th December 2010 when the Assessee made a statement before the AO to the effect that the original return filed should be treated as a return pursuant to a notice under Section 148, is fatal to the order of re-assessment. Consequently, there is no legal infirmity in the impugned order of the ITAT. No substantial question of law arises. The appeal is dismissed.

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