TaxTMI 
TaxTMI 
2006 (12) TMI 169
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....01 informing the Assessing Officer that the return of income was filed on 2-11-1998 and it was submitted therein that the same return may be treated as return filed in pursuance to notice under section 148. Thereafter, the Assessing Officer issued notice under section 142(1) and in response to that, Sri Rajan Gala, CA appeared and submitted details to the Assessing Officer. In course of reassessment proceedings, it was noted by the Assessing Officer that the assessee has declared loss on sales of shares under the head 'Capital gains'. The Profit & Loss Account shows share-jobbing income of Rs. 7,40,786. Against this income, the assessee claimed interest expenses of Rs. 9,67,727. It was also noticed by the Assessing Officer that the borrowings of the assessee was Rs. 134.33 lakhs as on 31-3-1997 and Investment in Shares on that date was Rs. 128.70 lakhs. Margin Money given to Bombay Stock Exchange was Rs. 9.41 lakhs only on 31-3-1997. Margin money as on 31-3-1998 was Rs. 10.61 lakhs. During the year ended on 31-3-1998, most of the shares were sold out, on which, loss was incurred and shown under the head 'Capital gains'. The amount of borrowed funds as on 31-3-1998 was Rs. 73.61 lak....
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....of Hon'ble Rajasthan High Court rendered in the case of Tiwari Kanhaiya Lal v. CIT [1985] 154 ITR 109. (c) It is also submitted that section 14A cannot be invoked in course of reassessment proceedings in view of the proviso to section 14A. (d) It is also submitted that dividend income was exempt from 1-6-1997 and, hence, interest expenses is allowable for 2 months, i.e., up to 31-5-1997 under the head 'Income from other sources', even if it is held that borrowings was not for business but for investment in shares. (e) A further argument was raised that in addition to dividend income, the assessee has earned an income of Rs. 114 on account of 'Fraction Entitlement', which has been declared under the head 'Income from other sources' and is accepted as such and, hence, the interest expenses are allowable expenses under the head 'Income from other sources' for the whole year. (f) In support of this contention that assessment order is not valid because no notice was issued under section 143(2), reliance was placed on the judgment of the Special Bench of the Tribunal rendered in the case of Raj Kumar Chawla v. ITO [2005] 94 ITD 1 (Delhi). 5. As against this, learned DR of the revenu....
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....ufficient compliance if the return was already filed prior to the issue of notice under section 148 and the assessee informs the Assessing Officer about the same and requests him that the same may be treated as return filed in compliance to notice under section 148. In the present case, the assessee has made such request as noted by the Assessing Officer on page No. 2 of the assessment order and, therefore, we hold that valid return was filed by the assessee in pursuance to notice under section 148. B. Now, we have to decide the main issue, i.e., the validity of the assessment order, when admittedly, no notice was issued by the Assessing Officer under section 143(2). In this regard, we find it appropriate to mention that as per the assessment order, the Assessing Officer made enquiries by issuing notice under section 142(1). The assessee submitted replies and the Assessing Officer duly considered the same. In our opinion, the real purpose behind the requirement to issue notice under section 143(2) is to provide opportunity to the assessee to support his return and this purpose was not defeated and the assessee was provided proper opportunities, which was duly availed by him and th....
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....pursuance of the assessment under that sub-section, which is disputed by the assessee, insofar as such amount does not relate to any adjustment referred to in sub-clause (l) of clause (b) of sub-section (1), and further no interest shall be chargeable under sub-section (2) of section 220 in respect of such disputed amount." Section 143(2) after 1-4-1989 on-the statute book in the relevant assessment year, i.e., 1998-99:- "(2) Where a return has been made under section 139 or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce or cause to be produced there, any evidence on which the assessee may rely in support of the return: Provided that no notice under this sub-section shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished." 9. From the comparison of the above provisions o....
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.... Tiwari Kanhaiya Lal. Therefore, it cannot be said that the assessment proceedings was not validly initiated and, therefore, on this ground, it cannot be said that assessment proceedings were void ab initio. 12. The next question is whether it can be said that assessment was without jurisdiction. Once the notice under section 148 has been issued validly, the Assessing Officer is vested with the powers to assess or reassess under section 147 of the Income-tax Act. Therefore, jurisdictional power for making reassessment is vested in the Assessing Officer by virtue of section 147 and, therefore, it cannot be said that the assessment order was without jurisdiction. Similar issue arose in the case of Nawal Kishore & Sons Jewellers v. Dy. CIT [2003] 87 ITO 407 (Luck.) (SB). In that case, question arose whether the block assessment made without issuance of notice under section 143(2) could be said to be null and void Special Bench referred to the provisions of section 158BA for holding that power to assess is vested in the Assessing Officer by virtue of such provisions and, therefore, the other provisions for making assessment are purely procedural in nature and, therefore, non-complianc....
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....r of the Assessing Officer to assess undisclosed income in accordance with Chapter XIV-B. It was also held that section 148 is substantive section whereas section 158BC was procedural section. Although in this case, the issue before Hon'ble Bombay High Court was regarding interpretation of section 158BC, but in the process, Their Lordships have compared the provision of section 148 with section 158BC on pages 257 and 258 of this report and a clear finding is given that notice under section 148 provides jurisdiction to the Assessing Officer for assessment under section 147 whereas notice under section 158BC only provides for procedure to be adopted for block assessment and hence notice under section 158C cannot be equated with notice under section 148(1). These observations of Hon'ble Bombay High Court fortifies our view that once the notice under section 148 has been issued validly, the Assessing Officer is vested with the powers to assess or reassess under section 147 of the Income-tax Act and, therefore, jurisdictional power for making reassessment is vested in the Assessing Officer by virtue of section 147 the moment the valid notice under section 148 is issued and, therefore, t....
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....irect the ITO to make further inquiry and report the result of the same to the AAC.' 8. The second part of this sub-section clearly empowers the AAC to give directions to the ITO to make further inquiry. The power of setting aside the order of assessment, where it is illegal, is inherent in any appellate court and the AAC has passed a perfectly legal order in directing the ITO to issue notice to the assessee before making an assessment because he was not satisfied regarding the correctness of the assessee's return. We do not see how this order prejudices the assessee: in fact the order is in favour of the assessee rather than against him. The AAC had ample jurisdiction either to call for a report or to give directions to the ITO to comply with the requirements of law. 17. Following the aforesaid two judgments, the Hon'ble Rajasthan High Court in the case of Gyan Prakash Gupta held that when the return is filed, the Assessing Officer gets seisin over the case and he has jurisdiction over it. Failure to comply with provisions of section 143(2) would not render the assessment as null and void. Though it was held that assessment order passed without notice under section 143(2) is inv....
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....ion over it, but on failure to comply with section 143(2) of the Act, the only limited restriction is that he cannot complete the assessment. In these circumstances, the assessment orders completed without service of notice under section 143(2) cannot be said to be ab initio void and when it is not so, the assessment order cannot be annulled. 16. Having considered the reasons given by the Allahabad and Jammu and Kashmir High Courts in Sant Baba Mohan Singh's case and Rattan Lal Tiku's case, we are of the opinion that, in the circumstances of the case which have already been adverted to above, the order that the AAC should have passed on account of the failure of the ITO to serve notices on all the legal representatives of Mohanlal Gupta or for that matter on Smt. Dayawati Gupta, in whose favour, the Will was executed by the deceased, Mohanlal Gupta, was to set aside the assessment order passed by the ITO in respect of the assessment year 1965-66 and not to annul the assessment. We respectfully agree with the view taken by the Allahabad High Court and Jammu and Kashmir High Court, as it is in conformity with the provisions of section 143(3) and section 159 of the Act." 18. Hon'ble....
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......'. In the circumstances, we reject the application. In view of the novelty of the points and particularly the contentions raised regarding procedural irregularity and procedural illegality, we make no order as to costs." 19. Similarly, Hon'ble Apex Court in the case of Jai Prakash Singh held as under:- "7. Before we proceed to answer the question, it is necessary to keep in mind the facts of this case. B.N. Singh died on 16-4-1967. He failed to file a return for the assessment years 1965-66 and 1966-67 within the time prescribed. So AR of the assessee as the assessment year 1967-68 is concerned, he, of course, died before the expiry of the period prescribed for filing the return. No return was filed for assessment year 1967-68 also within the prescribed period. Jai Prakash Singh, however, wanted to take advantage of the provision contained in section 139(4) which enables an assessee to 'furnish the return for any previous year at any time before the end of the period specified in clause (b)' provided the assessment is not made by the time of filing of return. [Clause (b) of the said sub-section specifies various periods of limitation; in respect of assessment years concerned he....
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....an assessment provided the requirement of a reasonable opportunity of being heard was complied with, the learned CIT(A) set aside the assessment directing the ITO to give a fresh hearing by issue of notice under section 143(2). The action taken by the CIT is not opposed to the principles in the cases decided by the Supreme Court to which we have referred, viz., Kapurchand Shrimal's case and Swadeshi Cotton Mills' case. The action taken by the CIT is also in conformity with the ratio of the decision of the Allahabad High Court in Sant Baba Mohan Singh's case. In the light of these findings, we are unable to agree with the learned counsel for the assessee that there was any error in the manner in which the learned CIT(A) exercised his discretion as far as setting aside the assessment is concerned and directing a fresh assessment in accordance with law after giving due opportunity of being heard." 21. Similarly, this Tribunal in the case of Vakil Chand Jain held as under:- "In the instant case, the Assessing Officer has not issued the notice under section 143(2) of the Act, without which, he could not have made the assessment under section 143(3) of the Act. The only claim of the as....
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.... proceedings, issued a notice to the assessee, calling for his explanation, which was considered, after which, he again imposed penalty. It was observed with reference to the action of the officer in the remand proceeding that, his action of restarting the proceedings from the point where he had committed the illegality, was proper. Since, in the instant case, the Assessing Officer having merely failed to follow the rule of issuing of a notice, before framing of the assessment, the assessment so framed is not conforming to the ordinary rule and, therefore, is an irregularity or a defect or a mistake, which is not fatal to the assessment framed. It only makes the assessment imperfect and to enable him to remove the imperfection, the proper course to be followed, is to set aside the assessment. The argument of the assessee, that, such remands would result in extending the time-limit prescribed under section 153(1) of the Income-tax Act, in our opinion is not justified. It is for irregular or imperfect assessments, that the first appellate authority has been conferred with the power of remand and considering such situation of remand that, the Legislature has provided in section 153(2A....
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....ee of being heard. 24. At this stage, it may be mentioned that if the Legislature can confer the jurisdiction upon the Assessing Officer to assess or reassess, it can also withdraw or take away such jurisdiction by enacting appropriate provisions. For example, the jurisdiction vested with the Assessing Officer ceases on the expiry of time provided in section 153 of the Act and consequently, the assessment made after the expiry of such period would be without jurisdiction. Similarly, the Legislature in its wisdom enacted the proviso to section 143(2) effective from 1-4-1989, which provides that notice under section 143(2) would not be served after the expiry of the period mentioned therein. Thus, the Legislature has taken away the jurisdiction to assess after a particular period. But that does not mean that service of notice under section 143(2) confers jurisdiction on the Assessing Officer. The service of notice under section 143(2) is part of procedural provisions as laid down by the Hon'ble Supreme Court in the case of R. Dalmia v. CIT [1999] 236 ITR 480, but the period of limitation prescribed in the proviso to section 143(2) affects the jurisdiction of Assessing Officer to ass....
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....o the Assessing Officer to make scrutiny assessment. It is also clear that in such cases, this notice under section 143(2) is not for the purpose to enable the assessee to assume, believe and take note that the return filed by him has become final and no scrutiny proceedings are to be started because as per the amended provisions, such notice can be issued at any point of time before the expiry of time-limit for completion of assessment. In the light of this amendment, it is clear that notice under section 143(2) in cases like the present case (i.e., the cases where the return is filed in pursuance to notice under section 148) is not for the purpose to provide jurisdiction to the Assessing Officer to make scrutiny assessment and it is not for the purpose to make his intention clear to the assessee that he wants to make scrutiny assessment. We feel that after this change regarding making the notice under section 143(2) valid even if the same is issued after prescribed period of 12 months but before the expiry of time-limit for completion of assessment, the purpose of issuing notice is nothing but to provide natural justice to the assessee to enable him to explain his case before the....
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....ssing Officer has considered the submissions made by the assessee. The issue of setting aside of assessment order in such a case merely to give a fresh notice to the assessee has been discussed elaborately by the Special Bench of Lucknow ITAT in the case of Nawal Kishore & Sons Jewellers. In this case, it has been held that if principles of natural justice have otherwise been met then setting aside the assessment order would be a futile exercise and in such a situation, the appellate authority should proceed to decide the case on merits. Para 56 of this judgment reads as under:- "Having held that non-issuance of Notice under section 143(2) is not a nullity but is an irregularity, the question may arise as to what course should be adopted in such cases by the appellate authority. One easy course would be to set aside the assessment and restore the matter to the file of the Assessing Officer for fresh assessment after giving reasonable opportunity of being heard to the assessee. But there may be cases where sufficient opportunity might have already been given by the Assessing Officer or the assessee might have participated in the proceedings before the Assessing Officer or there may....
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....res held by the shareholder on a record date, the assessee's entitlement of bonus shares may not be in round No. and in such cases, the entitlement to the extent of round No. of shares is given to the assessee in the form of shares but the 'Fraction Entitlement' cannot be issued in form of shares and in such cases, the company accumulates all such 'Fraction Entitlement' of various shareholders and taking together, it comes to a round number and then the company sells these shares in the market and the proceeds is distributed among those shareholders. Profit on sale of bonus shares received by the assessee is taxable under the head "Income from capital gains" and, hence, we are of the considered opinion that this receipt on account of 'Fraction Entitlement' is also taxable under the same head. The contention of the assessee is that in this case, shares are sold before the assessee receives it. We are not in agreement with him because the assessee is entitled to the fraction of a share on the basis of the ratio of bonus shares to be issued and the No. of shares held by him on the record date and since a fraction of the share cannot be practically issued to a shareholder, all such fra....