Court Upholds Decision Annulling Assessment; Circular Guidance Valid

The court upheld the decision annulling the assessment, stating it was not in accordance with law, and relied on a CBDT circular. It held that the circular was not contrary to the Act and correctly guided the assessing officer on the procedure before making a best judgment assessment. The court emphasized the requirement of issuing a notice under Section 139(2) or Section 148 before proceeding with a best judgment assessment under Section 144, rejecting the Revenue's argument that a notice under Section 143(2) sufficed. The decision confirming the annulment was upheld, and the Revenue's appeal was dismissed.

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Issues Involved:
1. Validity of assessment under Section 144 of the Income Tax Act, 1961.
2. Applicability and binding nature of CBDT Circular No.281 dated 22-09-1980.
3. Requirement of issuing notice under Section 139(2) or Section 148 before making a best judgment assessment under Section 144.

Detailed Analysis:

1. Validity of assessment under Section 144 of the Income Tax Act, 1961:
The respondent/assessee filed its return of income for the assessment year 1986-1987 admitting a loss. The assessing officer issued a notice under Section 143(2) of the Act, which went unanswered. Several extensions were requested by the assessee but no information was provided. Consequently, the assessing officer completed the assessment based on available information under Section 144 of the Act, making various additions and assessing the net taxable income. The assessee appealed, and the C.I.T. (Appeals-II) annulled the assessment, stating it was not in accordance with law, and relied on a CBDT circular. The I.T.A.T. upheld this decision. The Revenue challenged this annulment, contending that the C.I.T. (Appeals) and I.T.A.T. erred in annulling the assessment.

2. Applicability and binding nature of CBDT Circular No.281 dated 22-09-1980:
The C.I.T. (Appeals-II) and I.T.A.T. relied on CBDT Circular No.281, which clarified that if a return is defective and not rectified, it should be treated as an invalid return, necessitating a notice under Section 139(2) or Section 148 before proceeding under Section 144. The Revenue argued that the circular, while binding on assessing officers, was not binding on appellate authorities and was contrary to the Act's provisions. The court, however, held that the circular was not contrary to the Act and correctly guided the assessing officer on the procedure before making a best judgment assessment. The circular was deemed beneficial to the assessee, providing an additional opportunity to correct income details.

3. Requirement of issuing notice under Section 139(2) or Section 148 before making a best judgment assessment under Section 144:
The court examined the interplay between Sections 139(2), 139(9), and 144 of the Act. Section 144(1)(a) (as it stood then) allowed best judgment assessment if an assessee failed to make the return required by a notice under Section 139(2). Section 144(1)(c) allowed it if the assessee, having made a return, failed to comply with a notice under Section 143(2). The court rejected the Revenue's contention that the notice under Section 143(2) sufficed for a best judgment assessment under Section 144(1)(c). It emphasized that treating a defective return as invalid required following the procedure outlined in the CBDT circular, which mandated a notice under Section 139(2) or Section 148 before proceeding under Section 144.

The court concluded that the CBDT circular was binding on assessing officers and provided a correct procedural guide. The assessing officer should have treated the defective return as invalid and issued a notice under Section 139(2) or Section 148 before making a best judgment assessment. The decision of the I.T.A.T. confirming the C.I.T. (Appeals-II) was upheld, and the appeal by the Revenue was dismissed.

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