2012 (8) TMI 523 - HC - Income Tax

Reassessment under Section 148 invalid without mandatory Section 143(2) notice after Section 142(1) response

M/s SAPTHAGIRI FINANCE & INVESTMENTS Versus THE INCOME TAX OFFICER, KANDHIPURAM

The HC held that reassessment proceedings under section 148 are invalid if no notice under section 143(2) is issued after the assessee's response to the ... Validity of reassessment proceedings made in absence of any notice issued u/s 143(2) - notice issued u/s 142(1) to which assessee responded - subsequently no notice issued u/s 143(2) - Held that:- On the reply to the notice u/s 142(1), reiterating the original return which was found incorrect, the AO should have follow up by a notice u/s 143(2). Merely because the matter was discussed with the assessee and the signature is affixed, it does not mean the rest of the procedure of notice u/s 143(3) stood complied with. In completing the assessment u/s 148, compliance of the procedure laid down u/s 142 and 143(2) is mandatory. On the admitted fact that beyond notice u/s 142(1), there was no notice issued u/s 143(2), and in the light of the fact that the very basis of the reassessment was the failure on the part of the assessee in not disclosing the capital gains arising on the transfer of property for assessment and that admittedly the assessee had requested the officer to accept the original return as a return filed in response to Section 148, we hold that there was total failure on the part of the Revenue from complying with the procedure laid down u/s 143(2), which is mandatory. Although on merits, contention of the assesee that the capital gains would not be assessable at the hands of the firm is not acceptable, yet for the reasons that in the absence of notice u/s 143(2) reassessment could not be held to be validly made - Decided in favor of assessee Issues Involved:1. Assessment of capital gains in the hands of the firm.2. Distinction between partners and the firm regarding the transfer of property.3. Waiver of notice under Section 143(2) by the appellant.4. Issuance of notice under Section 143(2) within the prescribed time limit.Detailed Analysis:1. Assessment of Capital Gains in the Hands of the Firm:The court examined whether the capital gains from the sale of a property should be assessed in the hands of the firm or the individual partners. The property in question, although purchased by the partners individually, was funded by the firm and later shown as an asset in the firm's balance sheet. When the property was sold, the sale proceeds were credited to the firm's accounts. The court upheld the Tribunal's decision that the capital gains should be assessed in the hands of the firm, as the property was effectively part of the firm's assets until its sale.2. Distinction Between Partners and the Firm Regarding the Transfer of Property:The court addressed whether the transfer of property by partners in their individual capacity could be deemed a transfer by the firm. It was held that without proper registration, the transfer of property from the firm to the individual partners could not be considered valid. Thus, the Tribunal was correct in treating the capital gains as assessable in the hands of the firm.3. Waiver of Notice Under Section 143(2) by the Appellant:The Tribunal inferred that the appellant waived the requirement of notice under Section 143(2) based on the appearance of the assessee before the Assessing Officer and the discussions held. However, the court found no evidence of a conscious waiver by the assessee. The court emphasized that waiver must be an intentional act with full knowledge of the right being waived. There was no material to show that the assessee intentionally abandoned the right to notice under Section 143(2).4. Issuance of Notice Under Section 143(2) Within the Prescribed Time Limit:The court examined the necessity of issuing a notice under Section 143(2) for reassessment proceedings under Section 148. It was held that the issuance of notice under Section 143(2) is mandatory for the validity of the reassessment. The failure to issue such a notice could not be treated as a procedural irregularity but a fatal flaw, rendering the reassessment invalid. The court cited the Supreme Court's decision in ASST. CIT v. HOTEL BLUE MOON, which established that omission to issue notice under Section 143(2) is not curable and cannot be dispensed with.Conclusion:The court concluded that the reassessment proceedings were invalid due to the failure to issue notice under Section 143(2). Although the court did not agree with the assessee's contention on the merits regarding the assessment of capital gains, the procedural lapse necessitated setting aside the Tribunal's order. The court emphasized the mandatory nature of compliance with the procedural requirements under Sections 142 and 143(2) in reassessment proceedings.