Mandatory notice before rejecting an incomplete tax return invalidates the assessment when the statutory opportunity is denied.

Where the Income-tax Officer proposes to assess a return as incorrect or incomplete, service of notice under section 23(2) is treated as mandatory because it gives the assessee the statutory opportunity to produce evidence in support of the return. Prior informal examination of accounts, even where the assessee's servants were present and no further evidence was requested, does not amount to compliance with that requirement or to waiver of notice. The absence of the notice was held to prejudice the assessee and invalidate the assessment, so the reference was answered in favour of the assessee and the matter remitted for fresh disposal in accordance with law.

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Issues: Whether the Income-tax Officer was bound to serve notice under section 23(2) before making an assessment on the footing that the return was incorrect or incomplete, and whether the absence of such notice was cured by the assessee's production and examination of accounts.

Analysis: The statutory scheme gave the assessee two stages of opportunity: first, under section 22, to furnish the return and supporting accounts or documents; and secondly, under section 23(2), to produce evidence in support of the return after the Income-tax Officer formed the view that the return was incorrect or incomplete. One view held that the examination of the accounts over two days, in the presence of the assessee's servants, and the absence of any request for further evidence amounted to waiver of the formal notice, because the assessee had already had a fair opportunity to explain the items disallowed. The opposing view held that section 23(2) imposed a mandatory obligation to serve notice, ordinarily indicating the points on which evidence was required, and that prior informal examination of accounts did not amount to compliance or waiver. On that view, the failure to serve notice deprived the assessee of the further opportunity contemplated by the statute and prejudiced him.

Conclusion: The statutory notice under section 23(2) was treated as mandatory, and its non-service invalidated the assessment.

Final Conclusion: The reference was answered in favour of the assessee, and the assessment was set aside for fresh disposal in accordance with law.

Ratio Decidendi: Where the Income-tax Officer proposes to reject a return as incorrect or incomplete and proceed to assess on his own judgment, compliance with the statutory notice requirement is mandatory, and failure to give that opportunity invalidates the assessment.

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