2000 (11) TMI 83 - HC - Income Tax

Court Allows Regular Assessment under Section 143(3) Despite Delay

The court held that regular assessment under section 143(3) can proceed for the year in which returns were filed but not assessed till the date of search. ... Assessment under Chapter XIV-B of the Income-tax Act is in addition to regular assessment - Validity and effect of Explanation to section 158BA - Jurisdiction to issue notices under sections 142 and 143(2) for years included in block period - Scope of computation under section 158BB and effect on pending regular returns - Avoidance of double taxation of income assessed under regular assessment and block assessmentJurisdiction to issue notices under sections 142 and 143(2) for years included in block period - Assessment under Chapter XIV-B of the Income-tax Act is in addition to regular assessment - Whether Assessing Officer could issue notices under sections 142 and 143(2) and proceed to complete regular assessment for an assessment year which falls within the block period while block assessment proceedings under Chapter XIV-B were pending. - HELD THAT: - The Court examined divergent High Court decisions and the legislative amendment (Explanation to section 158BA) and held that Chapter XIV-B provides a procedure for assessing undisclosed income of the block period but does not oust the power to make regular assessments. Construing the scheme so as to avoid escapement of income, the Court accepted the view that regular assessment under section 143(3) can be proceeded with in respect of a year included in the block period in addition to the block assessment. The Explanation to section 158BA clarifies that assessment under Chapter XIV-B is in addition to regular assessment, and that income assessed in a regular assessment shall not be included in computing the undisclosed income of the block period. Consequently notices under sections 142 and 143(2) directed to complete regular assessment for such a year are not invalid merely because the year falls within the block period.Notices under sections 142 and 143(2) and consequent regular assessment for the assessment year falling within the block period were held valid; both block assessment and regular assessment can proceed (and proceed simultaneously) subject to the proviso that income assessed in one is not taxed again in the other.Scope of computation under section 158BB and effect on pending regular returns - Avoidance of double taxation of income assessed under regular assessment and block assessment - Whether the computation of undisclosed income under section 158BB precludes the Assessing Officer from making a different computation of total income for the purpose of regular assessment under section 143(3), and whether returns pending on the date of search must be processed only under Chapter XIV-B. - HELD THAT: - The Court analysed the definition of 'undisclosed income' and the mechanics of section 158BB(1)(b), and concluded that returns pending on the date of search should not be processed exclusively within Chapter XIV-B. If pending returns were processed only under Chapter XIV-B, disclosed income assessable after scrutiny might be subjected to higher block rates or escape regular scrutiny, producing absurd or undesirable results. The statutory scheme, read with the Explanation, contemplates that income disclosed in returns pending on the date of search may still be subjected to regular assessment (section 143(3)) so that improper deductions or bogus claims can be examined and taxed appropriately, while the block assessment deals with undisclosed income. The Explanation ensures that income once assessed in a regular assessment will not be taken again as part of the undisclosed income of the block period.Computation under section 158BB does not bar a regular assessment under section 143(3) in respect of returns pending on the date of search; regular assessment remains the appropriate forum to examine disclosed returns and prevent escapement of income.Validity and effect of Explanation to section 158BA - Whether the Explanation inserted in section 158BA (clarifying that block assessment is in addition to regular assessment and that incomes assessed under one shall not be included in the other) is clarificatory and intra vires. - HELD THAT: - The Court considered legislative intent, the history of conflicting High Court decisions, and the explanatory memorandum accompanying the amendment. The Explanation was held to be clarificatory of the legislative scheme and directed to settle the controversy whether block assessment subsumes regular assessment. Construed purposively to avoid absurdity and to give effect to Parliament's intention that proceedings under Chapter XIV-B and regular assessments are complementary, the Explanation was not ultra vires.The Explanation to section 158BA is clarificatory and valid; it confirms that block assessment is in addition to regular assessment and prevents double inclusion of income.Final Conclusion: The appeal is allowed. The High Court judgment setting aside notices under sections 142 and 143(2) and quashing the regular assessment for assessment year 1995-96 is set aside. Notices were valid; regular assessment for the year falling within the block period may be completed in addition to the block assessment; the Explanation to section 158BA is clarificatory and intra vires; the assessment order for assessment year 1995-96 stands and the appeal before the Commissioner is restored. Issues Involved:1. Validity of notices u/s 142 and 143(2) of the Income-tax Act, 1961.2. Jurisdiction of the Assessing Officer (AO) to proceed with regular assessment during the block assessment period.3. Interpretation of 'undisclosed income' and its assessment under Chapter XIV-B.4. Clarification and validity of the Explanation inserted in section 158BA.Summary:1. Validity of Notices u/s 142 and 143(2):The Revenue appellant contended that the learned single judge wrongly held the notices u/s 142 and 143(2) bad in law and set aside the assessment for the assessment year 1995-96. The learned single judge directed that the regular assessment should be completed within six months of finalizing the block assessment based on the returns filed by the assessee.2. Jurisdiction of the AO to Proceed with Regular Assessment:The learned single judge observed that once the total incomes u/s 158BB are computed, the AO has no further scope to make any computation for the concerned assessment year for regular assessment. The AO should only correct arithmetical or clerical mistakes as allowed u/s 143(1). The AO had no jurisdiction to arrive at different computations for the same assessment year under sections 158BB and 143(3).3. Interpretation of 'Undisclosed Income':The AO can proceed with regular assessment for any period within the block period based on the returns filed. The 'undisclosed income' assessable under Chapter XIV-B is based on material seized during the search, and the income declared in regular returns cannot be assessed under Chapter XIV-B. The Gujarat High Court and subsequent decisions clarified that the assessment under Chapter XIV-B is in addition to regular assessment.4. Clarification and Validity of Explanation in Section 158BA:The Explanation inserted by the Finance (No. 2) Act, 1998, clarified that the assessment under Chapter XIV-B is in addition to regular assessment. The Kerala High Court in Malayil Bankers' case overruled its earlier decision, aligning with the view that regular assessment can proceed alongside block assessment. The Explanation ensures that the undisclosed income for the block period does not include income assessed in regular assessment.Conclusion:The court set aside the judgment of the learned single judge, holding that there can be a regular assessment u/s 143(3) for the year for which returns were filed u/s 139 or 147 but not assessed till the date of search. The assessment order for the assessment year 1995-96 stands, and the appeal pending before the Commissioner of Income-tax is restored. The notices issued u/s 142 and 143(2) were deemed valid. The appeal was allowed with no order as to costs.