2020 (9) TMI 924 - HC - Income Tax

Appeal allowed, reassessment notice invalid due to limitation period error.

The appeal was allowed, and the orders passed by the Assessing Officer, CIT(A), and the Tribunal were set aside. The substantial questions of law were ... Validity of the reopening of assessment - validity of the notice u/s 148 - wrong understanding of the legal position - Whether assessee was estopped from challenging the validity of the notice under Section 148? - HELD THAT:- CIT(A) issued a direction in the order to the Assessing Officer to assess the turnover as commission received. There were two options open to the assessee. One was to prefer an appeal against the order passed by the CIT(A) dated 20.10.2005, which, in fact, was an order in an appeal filed for the assessment year 2002-03. The other option open to her was to contest the matter before the Assessing Officer upon issuance of the notice under Section 148 of the Act. The assessee, in the case on hand, chose the second option, which, in law, was permissible to be done by the assessee. Therefore, both the CIT(A) as well as the Tribunal fell in error in holding that the assessee was estopped from challenging the validity of the notice under Section 148 of the Act dated 22.12.2005. Period of limitation exceeded on the date of issuance of the notice u/s 148 - As per Section 149 of the Act as it stood prior to amendment by the Finance Act 2001 with effect from 01.6.2001, the limitation provided under Section 149(b)(iii) of the Act was seven years, but not more than 10 years from the end of the relevant assessment year unless income chargeable to tax, which has escaped assessment, amounts to or is likely to amount to ₹ 50,000/- or more for that year. After amendment, in terms of Section 149(1)(b) of the Act, no notice under Section 148 shall be issued for the relevant assessment year if four years, but not more than six years have lapsed from the end of the relevant assessment year unless the income chargeable to tax, which has escaped assessment, amounts to or is likely to amount to one lakh rupees or more for that year. Admittedly, the notice under Section 148 of the Act was issued by the AO on 22.12.2005 and the law applicable as on date prescribed the limitation of four years, but not more than six years. Thus, the notice issued on or after 31.3.2004 would suffer from lack of jurisdiction as it is clearly hit by the limitation prescribed under the Statute. Unfortunately, the Tribunal failed to take note of this very important legal issue, which has been settled by the Hon'ble Supreme Court. In fact, the assessee, at the earliest point of time, referred to the decision of the Hon'ble Supreme Court in the case of K.M.Sharma [2002 (4) TMI 7 - SUPREME COURT] which was erroneously distinguished by the Assessing Officer, the CIT(A) and the Tribunal and they committed an error in gross violation of the Statute. - Decided in favour of assessee. Issues Involved:1. Validity of the reopening of assessment for the assessment year 1997-98.2. Whether the Tribunal was justified in confirming the direction of the Commissioner (Appeal) to issue notice for reassessment under Section 149 of the Income Tax Act.3. Whether the Tribunal ignored the contention that the Assessing Authority simply followed the direction of the Commissioner (Appeal) ignoring Section 150(2).4. Whether the Tribunal ignored the contention that the direction given by the Commissioner (Appeal) for the assessment year 2002-03 cannot affect the assessment for the assessment year 1997-98.5. Whether the reassessment is barred by limitation and void ab initio.Detailed Analysis:1. Validity of the Reopening of Assessment for the Assessment Year 1997-98:The primary issue was the validity of the reopening of the assessment for the assessment year 1997-98. The assessee filed her return of income for the assessment year 1997-98 on 31.3.1999. The return was processed under Section 143(1) of the Income Tax Act. The CIT(A) noted a discrepancy of Rs. 5,58,449/- in the assessee's income for the assessment year 1997-98 and directed the Assessing Officer to reassess this amount. The Assessing Officer issued a notice under Section 148 on 22.12.2005 based on the CIT(A)'s direction. The assessee contested this reopening on the grounds of limitation, referencing the Supreme Court decision in K.M. Sharma Vs. ITO.2. Tribunal's Justification in Confirming the Direction of the Commissioner (Appeal):The Tribunal dismissed the appeal on the grounds that the assessee did not challenge the CIT(A)'s direction dated 20.10.2005 and hence, could not contest the validity of the notice under Section 148 issued on 22.12.2005. The Tribunal held that the direction by the CIT(A) had become final and binding.3. Ignoring the Contention Regarding Section 150(2):The Tribunal and the lower authorities erred by not considering Section 150(2), which restricts the reopening of assessments that have attained finality due to the bar of limitation. The Tribunal failed to interpret the law of limitation correctly, as highlighted in the Delhi High Court's decision in C.B. Richards Ellis Mauritius Ltd. Vs. Assistant Director of Income-tax, which clarified that the procedural law, including limitation periods, should be applied as it stands on the date of the notice.4. Direction for Assessment Year 2002-03 Affecting Assessment Year 1997-98:The Tribunal incorrectly held that the direction given by the CIT(A) for the assessment year 2002-03 could affect the assessment for the year 1997-98. The legal position is that directions for one assessment year cannot extend to another unless explicitly provided for by law.5. Reassessment Barred by Limitation:The reassessment notice issued on 22.12.2005 was beyond the permissible period of limitation as prescribed by Section 149 of the Act. The law applicable at the time prescribed a limitation of four years, but not more than six years, from the end of the relevant assessment year. The notice issued after 31.3.2004 was thus barred by limitation, making the reassessment void ab initio. The Tribunal failed to consider this critical aspect, despite the assessee's reliance on the Supreme Court decision in K.M. Sharma, which emphasizes strict construction of limitation laws.Conclusion:The appeal was allowed, and the orders passed by the Assessing Officer, CIT(A), and the Tribunal were set aside. The substantial questions of law were answered in favor of the assessee, emphasizing that the reassessment notice was barred by limitation and thus invalid. The Tribunal and lower authorities committed errors in interpreting the legal provisions concerning the limitation period and the applicability of directions for reassessment.