Order under Section 163 required before Notice under Section 148 for assessment proceedings

The case involved determining whether an order treating a person as an agent of a non-resident under section 163 of the Income-tax Act must precede the issuance of a notice under section 148. The court held that such an order is necessary before initiating assessment proceedings. Additionally, filing a return under protest does not cure the procedural defect. The judgment emphasized the importance of a formal determination of agency status before commencing assessment proceedings and awarded costs to the assessee for the reference.

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Issues Involved:

1. Whether a person should first be treated as an agent of a non-resident by an order under section 163 of the Income-tax Act, 1961, before a notice under section 148 can be validly issued against him.
2. If the first question is answered in the affirmative, whether the fact that the assessee filed a return as an agent of Didar Singh Chug without admitting that it was his agent cured the assessment order of the illegality in the initiation thereof.

Issue-wise Detailed Analysis:

Issue 1: Treatment as Agent Before Issuing Notice Under Section 148

The core question was whether the Income-tax Officer must first pass an order under section 163 of the Income-tax Act, 1961, treating a person as an agent of a non-resident before issuing a notice under section 148. The Tribunal and one of the judges (B. R. Tuli J.) opined that the change in the statutory language from the 1922 Act to the 1961 Act necessitated such a preliminary determination. They emphasized that section 163(2) of the 1961 Act requires an opportunity of being heard before treating someone as an agent, and section 149(3) uses the term "treated as the agent," implying a formal decision must precede the notice under section 148. The introduction of a right to appeal under section 246(g) against an order treating someone as an agent further reinforced this view.

Conversely, D. K. Mahajan J. argued that the change in the phraseology did not affect the applicability of the Privy Council's decision in Commissioner of Income-tax v. Nawal Kishore Kharaiti Lal. He maintained that it was not necessary for the Income-tax Officer to decide the question of agency before initiating assessment proceedings. The officer could determine agency status and assess simultaneously. This view was supported by legal commentators who interpreted that the procedural requirements were satisfied if the agent was given a notice and an opportunity to be heard, even if the final determination of agency was postponed until the assessment.

Issue 2: Filing Return Under Protest

The second issue was whether the assessee filing a return under protest cured the alleged illegality in the initiation of proceedings. B. R. Tuli J. held that the submission of a return under protest did not rectify the defect in the initiation of proceedings under section 148. The return was filed with a note denying the status as an agent, and thus, the procedural irregularity remained unaddressed.

Final Judgment:

Given the difference of opinion, the matter was referred to a third judge, Harbans Singh C.J. He concurred with B. R. Tuli J., affirming that an order under section 163 must precede the issuance of a notice under section 148. He emphasized that the legislative intent, reflected in the provision for an appeal against an order treating a person as an agent, indicated that such a determination should be made before initiating assessment proceedings. Consequently, the first question was answered in the affirmative, and the second question was answered in the negative, reinforcing that the return filed under protest did not cure the procedural defect.

Conclusion:

The judgment concluded that a formal order under section 163 is required before issuing a notice under section 148, and filing a return under protest does not remedy the procedural deficiency. The assessee was awarded costs for the reference.

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