2008 (11) TMI 144 - HC - Income Tax

High Court invalidates time-barred notice under Section 143(2) of Income Tax Act

The High Court ruled in favor of the assessee, finding the notice issued under Section 143(2) of the Income Tax Act to be invalid due to being ... Assessee contested the legality of notice issued u/s 143(2) on the ground that the notice should have been issued within prescribed period – only issue before Commissioner was whether the return was valid – Commissioner conclusion that return was valid on finding delay in filing revised return condonable, by itself would not remove the bar of limitation prescribed and would not entitle the AO to issue any notice u/s 143(2) – so, notice was invalidly issued and assessment made in pursuance thereto was also invalid Issues Involved1. Validity of the notice issued under Section 143(2) of the Income Tax Act.2. Validity of the assessment made in pursuance of the notice under Section 143(2).Detailed AnalysisIssue 1: Validity of the Notice Issued Under Section 143(2)The primary issue in this case was whether the notice issued under Section 143(2) of the Income Tax Act was validly issued. The appellant (assessee) argued that the notice was issued beyond the prescribed period of one year, making it invalid. The timeline of events is crucial here:- The assessee filed the original return on 29 December 1989, declaring a loss.- The Assessing Officer (A.O.) identified defects in the return and asked for rectification within 15 days from 22 March 1990.- The assessee filed a revised return on 19 April 1990, 27 days after receiving the notice.- The A.O. issued another letter on 24 May 1990, asking again for rectification, which implied an extension of time.- The A.O. later ignored the return, claiming it was invalid as the defects were not rectified within the initial 15-day period.- The assessee filed a rectification application, which was rejected by the A.O. on 17 February 1992.The CIT(A) ruled that the original return was valid and the defects were rectified within the extended period. No appeal was filed by the Revenue against this order. The A.O. issued a notice under Section 143(2) on 14 September 1995, which the assessee contested as time-barred.The Tribunal initially upheld the notice, stating that the CIT(A)'s order implied a direction to proceed with the assessment, lifting the bar of limitation under Section 153(3)(ii). However, the High Court disagreed, stating that the CIT(A)'s order did not constitute a valid finding or direction to lift the limitation period.Issue 2: Validity of the Assessment Made in Pursuance of the NoticeThe second issue was whether the assessment made under Section 143(3) following the notice under Section 143(2) was valid. The assessee argued that since the notice was invalid, the subsequent assessment was also invalid. The CIT(A) had previously quashed the assessment order, agreeing with the assessee that the notice was time-barred.The High Court referred to several precedents, including the Supreme Court's decisions in Income Tax Officer vs. Murlidhar Bhagwan Das and Rajinder Nath vs. Commissioner of Income Tax, to interpret the term 'finding.' The Court concluded that a finding must be necessary for the disposal of the appeal and directly involved in the case. Since the issue of assessment was not before the CIT(A), any finding related to it would be extraneous and invalid.The High Court ruled that the Tribunal erred in holding that the notice under Section 143(2) was validly issued. Consequently, the assessment made in pursuance of the invalid notice was also invalid.ConclusionThe High Court allowed the appeal, ruling in favor of the assessee and against the Revenue. The notice issued under Section 143(2) was deemed invalid, and the subsequent assessment was also invalid. The Court emphasized that any finding or direction related to the assessment, which was not directly involved in the appeal before the CIT(A), would be extraneous and of no consequence.