2001 (2) TMI 126 - HC - Income Tax

High Court Upholds Tribunal's Decision on Tax Notice Timing

Commissioner Of Income-Tax Versus Punjab National Bank

The High Court affirmed the Tribunal's decision that the action under section 154 was not permissible after the issuance of notice under section 143(2). ... Assessment, Notice, Procedure, Rectification 1. ISSUES PRESENTED AND CONSIDERED Whether an assessing authority may exercise the power of rectification under section 154 of the Income-tax Act after issuance of a notice under section 143(2) (i.e., after proceedings for regular assessment under section 143(3) have been commenced). How the intimation under section 143(1)(a) (given on the basis of the return) operates vis-à-vis the power to proceed under section 143(2) and make a regular assessment under section 143(3); whether the intimation precludes or coexists with scrutiny proceedings. Whether sections 154 and 143(2) are mutually exclusive or whether rectification under section 154 can be resorted to while scrutiny/assessment proceedings under section 143(2)/(3) are pending. Whether the Assessing Officer's rectification under section 154 to recompute book profits for purposes of section 115J (and thereby charge additional tax) after issuance of notice under section 143(2) was proper. Whether principles of natural justice are violated where recourse is had to section 154 to rectify an intimation under section 143(1)(a) while proceedings under section 143(2) are on. Whether established precedent and statutory interpretation support the Tribunal's conclusion that rectification under section 154 is not permissible once section 143(2) proceedings have been initiated. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether rectification under section 154 is permissible after issuance of notice under section 143(2) Legal framework: Section 143(1)(a) (intimation on the basis of return), section 143(2) (power to call for evidence where Assessing Officer considers necessary), section 143(3) (regular assessment after inquiry), and section 154 (rectification of mistakes apparent from the record). Precedent treatment: The Court referred to prior decisions (including this Court's earlier ruling) recognizing that an intimation under section 143(1)(a) is 'without prejudice to the provisions of section 143(2)' and that issuance of an intimation does not oust the Assessing Officer's right to proceed under section 143(2). Interpretation and reasoning: The Court distinguished the concepts of 'intimation' under section 143(1)(a) and a regular assessment under section 143(3). The 143(1)(a) intimation is a limited exercise (acceptance of the return subject to specified adjustments) and expressly saved the right to proceed under section 143(2). Once notice under section 143(2) is issued and proceedings for regular assessment are on, any change required should be effected in the subsequent assessment under section 143 and not by invoking section 154. The expression 'without prejudice to the provisions of section 143(2)' preserves the Assessing Officer's power to scrutinize and makes rectification under section 154 during pendency of 143(2)/(3) proceedings improper as a mode of making substantive adjustments that ought to be made in the regular assessment. Ratio vs. Obiter: Ratio - where section 143(2) proceedings have commenced, rectification under section 154 to alter an intimation given under section 143(1)(a) is inappropriate; adjustments should be made in the regular assessment under section 143(3). Observations about the distinction between 'intimation' and 'assessment order' and legislative intent are ratio insofar as they support this conclusion. Conclusions: The Tribunal's holding that rectification under section 154 should not be used after initiation of section 143(2) proceedings is supported. The intimation under section 143(1)(a) does not preclude initiation of section 143(2) proceedings, and rectification by section 154 during such proceedings is not the correct mode for effecting substantive changes. Issue 2: Interplay between section 143(1)(a) intimation and section 143(2)/(3) proceedings Legal framework: The statutory text (as amended over time) of section 143(1)(a) and subsection (2) and (3), together with the provisos and explanations introduced by successive Finance Acts; deeming of intimation to be notice of demand under section 156 for recovery purposes. Precedent treatment: The Court followed prior authority recognizing that intimation under section 143(1)(a) was intended to reduce routine work and that the right to selective scrutiny under section 143(2) was preserved. Interpretation and reasoning: The Court emphasized the legislative distinction between 'intimation' and 'assessment'. The 1989 and later amendments made 'intimation' distinct and limited; the Assessing Officer's power under section 143(2) remains intact despite an intimation being issued. The intimation is a machinery device (including being deemed a notice of demand) and cannot be treated as the final or exclusive mode of altering tax liability where scrutiny is invoked. The mandatory/ministerial nature of acknowledgments/intimations in certain periods reinforces that an intimation is not equivalent to a considered assessment order. Ratio vs. Obiter: Ratio - intimation under section 143(1)(a) is without prejudice to section 143(2) and does not prevent subsequent scrutiny and regular assessment under section 143(3). Observations on legislative history and policy are explanatory support for the ratio. Conclusions: The Court affirmed that intimation under section 143(1)(a) coexists with the power to issue a notice under section 143(2); such intimation does not bar the Assessing Officer from initiating scrutiny proceedings and making adjustments in the subsequent assessment order. Issue 3: Whether sections 154 and 143(2) are mutually exclusive Legal framework: Section 154 (rectification of mistakes apparent from record) in relation to pending assessment proceedings under section 143(2)/(3). Precedent treatment: The Court acknowledged existing authorities delineating the scope of section 154 and the limits where the supposed 'mistake' involves substantial questions of law or fact requiring deliberation. Interpretation and reasoning: The Court held that sections 154 and 143(2) are not to be treated as strictly mutually exclusive in the abstract, but functionally rectification under section 154 is not a proper device to make substantive changes to an intimation once scrutiny proceedings have commenced. If a change is permissible, it should be made in the assessment arriving out of section 143(3). The Court declined to finally decide whether the particular alteration was a 'mistake apparent from record', noting that where the issue involves interpretation of law or matters requiring deliberation, section 154 is inapplicable. Ratio vs. Obiter: Ratio - section 154 is not the appropriate route to alter an intimation while section 143(2)/(3) proceedings are pending; substantive changes should be made in the regular assessment. Obiter - general observations that sections are not strictly mutually exclusive but subject to functional limits. Conclusions: While not declaring absolute mutual exclusivity, the Court concluded that rectification under section 154 cannot be used to supersede or substitute the assessment process initiated under section 143(2); the correct forum for substantive adjustment is the 143(3) assessment. Issue 4: Validity of Assessing Officer's recomputation of book profits under section 154 in light of section 143(2) notice Legal framework: Section 115J (computation of book profit), section 143(1)(a), section 143(2), and section 154. Precedent treatment: The Court noted that the Commissioner of Income-tax (Appeals) had treated the matter as a rectifiable arithmetical omission, whereas other observations indicated that it might involve points of law requiring deliberation. Interpretation and reasoning: The Court observed that if the alleged mistake was a substantive legal question or required long-drawn deliberations (e.g., inclusion/exclusion of items for book profit), section 154 would not apply. The Court declined to decide whether the particular recomputation constituted a 'mistake apparent from record' because the Tribunal had not considered that aspect; instead the Court confined itself to the principle that rectification under section 154 during pending 143(2)/(3) proceedings was not the appropriate route. Ratio vs. Obiter: Ratio - where notice under section 143(2) has issued, recomputation that amounts to substantive adjustment should be undertaken in assessment under section 143(3) rather than by section 154. Obiter - the Court did not decide factual/legal correctness of the particular computation under section 115J. Conclusions: The Assessing Officer's use of section 154 to recompute book profits after issuance of notice under section 143(2) was held to be an improper procedure; the Court did not adjudicate the substantive correctness of the recomputation itself and left that question open. Issue 5: Whether principles of natural justice were violated by resort to section 154 during pending section 143(2) proceedings Legal framework: Doctrine of audi alteram partem in tax assessment context; distinction between intimation (no hearing) and regular assessment (opportunity to be heard under section 143(3)). Precedent treatment: The Court noted that section 143(1)(a) intimation is given without opportunity to be heard whereas regular assessment under 143(3) involves hearing and consideration of evidence. Interpretation and reasoning: The Court did not express a final view on whether natural justice principles were breached in the particular facts because it confined its decision to procedural impropriety of invoking section 154 during pending scrutiny. The implication is that substantive changes which affect tax liability ought to be made in proceedings where the assessee has an opportunity to be heard (i.e., under section 143(3)), thereby preserving natural justice. Ratio vs. Obiter: Obiter - the Court declined to make a definitive pronouncement on violation of natural justice in the facts of this case. Conclusions: The Court did not decide whether natural justice was violated but indicated that substantive adjustments affecting tax liability should be made in proceedings where the assessee has an opportunity to be heard, rather than by unilateral rectification under section 154 while 143(2) proceedings are pending. Cross-reference: Issues concerning the proper mode of adjustment (section 154 vs. section 143(3)) are interlinked with the characterization of an alleged error as a mere arithmetic/mistake apparent from record versus a question of law/fact requiring deliberation. The Court confined its determination to the correct procedural route and left the factual/legal classification of the alleged 'mistake' open for consideration in appropriate proceedings.