2015 (11) TMI 809 - HC - Income Tax

Failure to Issue Mandatory Section 143(2) Notice Before Reopening Assessment Under Sections 147/148 Invalidates Reassessment

PR. Commissioner of Income Tax -18 Versus Silver Line

The HC held that failure by the AO to issue a notice under Section 143(2) before reopening assessment under Sections 147/148 is fatal to reassessment ... Reopening of assessment - non issue of notice - whether the failure by the AO to issue a notice to the Assessee u/s 143(2) of the Act is fatal to the reassessment proceedings under Sections 147/148 of the Act? Held that:- The wording of Section 143(2)(ii) of the Act, which is applicable in the present case, requires the AO to be satisfied on examining the return filed that prima facie the Assessee has “understated the income” or has “computed excessive loss” or has “underpaid the tax in any manner”. The AO has the discretion to issue a notice under Section 143 (2) if he considers it “necessary or expedient” to do so. This exercise by the AO under Section 143 (2) of the Act is qualitatively different from the issuance of a notice under Section 142(1) of the Act, which as noted hereinbefore, is in a standard proforma. In the present case all that the AO did was to send a notice under Section 142 (1) of the Act. The Assessee was not made aware as to why he was required to file a return. Had a notice been issued to him under Section 143 (2) of the Act, the AO would have been obliged to let the Assessee know why he was being asked to file a return notwithstanding his letter dated 1st April 2011. In the circumstances, the Assessee was justified in proceeding on the basis that it had not committed any default in communicating to the AO that the return already filed should be treated as the return filed pursuant to the notice under Section 148 of the Act. The proposal to reopen an assessment under Section 147 of the Act is to be based on reasons to be recorded by the AO. Such reasons have to be communicated to the Assessee. However, merely because the Assessee participates in the proceedings pursuant to such notice under Section 148 of the Act, it does not obviate the mandatory requirement of the AO having to issue to the Assessee a notice under Section 143(2) of the Act before finalising the order of the reassessment. With the legal position being abundantly clear that a reassessment order cannot be passed without compliance with the mandatory requirement of notice being issued by the AO to the Assessee under Section 143(2) of the Act, the ITAT was in the present case right in concluding that the reassessment orders in question were legally unsustainable. - Decided in favour of assessee. Issues Involved:1. Whether the failure by the Assessing Officer (AO) to issue a notice under Section 143(2) of the Income Tax Act, 1961 is fatal to the reassessment proceedings under Sections 147/148 of the Act.2. Whether the Assessee was precluded from raising the point concerning the non-issuance of notice under Section 143(2) of the Act at the stage of proceedings before the Income Tax Appellate Tribunal (ITAT) in terms of the proviso to Section 292BB of the Act.3. Whether Section 292BB of the Act, introduced with effect from 1st April 2008, applies retrospectively to the Assessment Years (AYs) 2005-06, 2006-07, and 2007-08.4. Whether the ITAT was correct in permitting the Assessee to raise the point concerning the non-issuance of notice under Section 143(2) of the Act for the first time in the appeal before the ITAT.5. Whether the reassessment orders passed without issuing a notice under Section 143(2) of the Act are legally unsustainable.Issue-wise Detailed Analysis:1. Failure to Issue Notice under Section 143(2):The central issue was whether the failure by the AO to issue a notice under Section 143(2) of the Act is fatal to the reassessment proceedings under Sections 147/148 of the Act. The court noted that the issuance of a notice under Section 143(2) is a jurisdictional requirement that cannot be dispensed with. The court held that the reassessment orders in question were legally unsustainable due to the AO's failure to issue the mandatory notice under Section 143(2).2. Preclusion from Raising the Point under Section 292BB:The Revenue argued that the Assessee was precluded from raising the point concerning the non-issuance of notice under Section 143(2) due to the proviso to Section 292BB of the Act. The court clarified that Section 292BB is a rule of evidence that validates service of notice in certain circumstances and does not dispense with the mandatory requirement of issuance of notice under Section 143(2). The court held that the Assessee was not precluded from raising this jurisdictional issue at the ITAT stage.3. Retrospective Application of Section 292BB:The court found merit in the Assessee's contention that Section 292BB, introduced with effect from 1st April 2008, does not apply retrospectively to AYs 2005-06 to 2007-08. The court cited precedents to support the view that Section 292BB is prospective in its application, thus not applicable to the AYs in question.4. Permitting the Assessee to Raise the Point at ITAT:The court upheld the ITAT's decision to permit the Assessee to raise the point concerning the non-issuance of notice under Section 143(2) for the first time in the appeal. The court reasoned that the requirement of issuance of such notice is a jurisdictional one, and it goes to the root of the matter. The court cited Supreme Court and High Court precedents to support the view that such a point could be raised at the ITAT stage as it involves a pure question of law.5. Legality of Reassessment Orders without Notice under Section 143(2):The court reiterated the legal position that a reassessment order cannot be passed without compliance with the mandatory requirement of issuing a notice under Section 143(2). The court cited various judgments to support this view and concluded that the reassessment orders in question were legally unsustainable due to the AO's failure to issue the mandatory notice.Conclusion:The court dismissed the appeals, holding that no substantial question of law arises for determination. The reassessment orders were deemed legally unsustainable due to the AO's failure to issue the mandatory notice under Section 143(2) of the Act. The court upheld the ITAT's decision, affirming the jurisdictional requirement of issuing a notice under Section 143(2) before finalizing reassessment orders.