2016 (11) TMI 76 - HC - Income Tax

Court allows one appeal, sets aside assessment order due to lack of notice, dismisses another for proper notice issuance. (2)

The court allowed ITA 221/2015, setting aside the assessment order for the year 2009-10 due to the absence of a notice under Section 143(2). ITA 228/2015 ... Assumption of jurisdiction under Section 147 - notice under Section 143(2) - Section 292BB estoppel - use of survey materials and statements recorded under Section 133A - best judgment estimation for escaped income - mandatory notice requirement for assessment jurisdictionAssumption of jurisdiction under Section 147 - reason to believe - Validity of the Assessing Officer's assumption of jurisdiction to reopen assessment under Section 147. - HELD THAT: - The Court held that Section 147 is a self-contained power exercisable when the Assessing Officer has 'reason to believe' that income has escaped assessment and such belief may be founded on materials independently collected (survey records and statements). The Assessing Officer recorded reasons (survey, impounded documents and absence of supporting bills in books) which furnished relevant material on which a reasonable person could form the requisite belief. The ITAT's conclusion that there was valid cause to assume jurisdiction under Section 147 was upheld. [Paras 19, 20, 21, 22, 23]Assumption of jurisdiction under Section 147 was valid and justified.Notice under Section 143(2) - Section 292BB estoppel - mandatory notice requirement for assessment jurisdiction - Whether omission to issue the mandatory notice under Section 143(2) vitiates the assessment for AY 2009-10 and whether Section 292BB can cure that omission. - HELD THAT: - The Court analysed statutory scheme and precedents holding that a notice under Section 143(2) is a mandatory precondition for regular assessment proceedings under Section 143 and that omission to issue such notice is not a mere procedural irregularity but goes to jurisdiction. Section 292BB creates an estoppel only where a notice required to be served has in fact been validly issued; it cannot be read as empowering the Assessing Officer to dispense with the statutory requirement of issuance. On the record it was virtually admitted no valid Section 143(2) notice was issued for AY 2009-10; the purported 'posting' notice could not be treated as a Section 143(2) notice. Consequently Section 292BB did not cure the absence of the mandatory notice and the assessment for 2009-10 had to fail. [Paras 31, 32, 33, 34, 35]Absence of a valid Section 143(2) notice vitiates the assessment for AY 2009-10 and Section 292BB does not cure that defect.Use of survey materials and statements recorded under Section 133A - best judgment estimation for escaped income - Admissibility of survey materials/statements under Section 133A and the validity of pro rata extrapolation and best-judgment estimation of suppressed receipts. - HELD THAT: - The Court observed that statements recorded under Section 133A are not sworn statements under Section 132(4) but may be relied upon unless resiled from; in this case the representative's admissions and the impounded documents were not recanted and remained uncontroverted. On that foundation the Assessing Officer's method of pro rata adoption of four months' impounded figures for the whole year and extrapolation to the next year (with adjustment for declared growth) was a rational best-judgment estimate. The ITAT's acceptance of that estimation method did not raise a question of law warranting interference. [Paras 24, 26, 27]Survey materials and the unrecanted Section 133A statements could be used; the pro rata and extrapolation method for assessment was valid on facts and not a legal infirmity.Final Conclusion: The appeal in ITA 221/2015 (AY 2009-10) is allowed and the assessment for 2009-10 is set aside for want of a valid notice under Section 143(2); the appeal in ITA 228/2015 (AY 2010-11) is dismissed and that assessment is upheld. Issues Involved:1. Assumption of jurisdiction under Section 147 of the Income Tax Act.2. Service of notice under Section 143(2) of the Income Tax Act.3. Method adopted by the authorities in arriving at the quantum of assessment.Issue-Wise Detailed Analysis:1. Assumption of Jurisdiction under Section 147 of the Income Tax Act:The court examined whether the Assessing Officer (AO) had sufficient reasons to issue a notice for reassessment under Section 147 of the Income Tax Act. The AO's reasons included findings from a survey under Section 133A, discrepancies in the assessee’s receipts, and the absence of copies of bills issued to patients. The court referenced the Supreme Court's ruling in ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd., which states that the AO needs 'reason to believe' that income has escaped assessment, which can be based on materials independently collected. The court concluded that the AO was justified in assuming jurisdiction under Section 147 and that the notice issued under Section 148 was valid.2. Service of Notice under Section 143(2) of the Income Tax Act:The court emphasized the necessity of issuing a notice under Section 143(2) before making an assessment or reassessment. The absence of such a notice would invalidate the assessment proceedings. The court cited the Supreme Court's decision in Assistant Commissioner of Income Tax v. Hotel Blue Moon, which held that the omission to issue a notice under Section 143(2) is not a procedural irregularity but a jurisdictional defect that cannot be cured. The court found that no notice under Section 143(2) was issued for the assessment year 2009-10, which invalidated the proceedings for that year. However, for the assessment year 2010-11, the court upheld the assessment as the notice under Section 143(2) was issued.3. Method Adopted by the Authorities in Arriving at the Quantum of Assessment:The court reviewed the method used by the AO to estimate the assessee's income. The AO had based the assessment on documents impounded during the survey and the statement given by the assessee's representative, which indicated suppressed receipts. The AO extrapolated the figures from the impounded documents for the entire year and applied a 24% increase for the subsequent year. The court found this method to be rational and upheld the ITAT's approval of the AO's approach. The court rejected the assessee's contention that the materials impounded during the survey and the statement had no evidentiary value, referencing the Supreme Court's judgment in Pullangode Rubber Produce Co. Ltd. v. State of Kerala, which allows for admissions to be retracted, but noted that the assessee had not done so.Conclusion:The court allowed ITA 221/2015, setting aside the assessment order for the year 2009-10 due to the absence of a notice under Section 143(2). ITA 228/2015 was dismissed, upholding the assessment order for the year 2010-11, as the mandatory notice under Section 143(2) was issued. The court did not award costs, noting that the relief granted to the appellant was based on technical grounds.