CIT (Central) Vs C. Ramaiah Reddy (Karnataka High Court)
The Karnataka High Court considered the Revenue’s appeal under Section 260A of the Income-tax Act concerning AY 2005-06. The appeal challenged the ITAT order dated 27 January 2012, which had annulled the reassessment on the ground that the Assessing Officer had not issued a notice under Section 143(2). The High Court had admitted the appeal on two substantial questions concerning whether such notice was mandatory in reassessment proceedings under Sections 147 and 148 and whether Section 292B could validate the reassessment despite its absence.
The assessee, an individual engaged in real estate business, had filed a return declaring a loss of Rs.65,49,770 for AY 2005-06. The Assessing Officer subsequently completed reassessment under Section 143(3) read with Section 147 on 31 December 2008, determining taxable income at Rs.12,10,51,209 after making additions of Rs.12,14,68,180 as long-term capital gains and Rs.61,32,800 as short-term capital gains under Section 45(2).
Before the CIT(A), the assessee challenged the validity of the reassessment on the ground that no notice under Section 143(2) had been issued. The CIT(A) rejected the objection, holding that the assessee had not raised the issue of non-service before the Assessing Officer and that Section 292B applied. The CIT(A) also considered the treatment of lands received by the assessee through family partition and upheld the assessment.
The ITAT subsequently held that for completing reassessment under Section 143(3) read with Section 147, issuance of notice under Section 143(2) within the prescribed period was mandatory. Since no such notice had been issued, it held that the proceedings were vitiated in law, while granting the Revenue liberty to take appropriate curative steps.
Before the High Court, the Revenue fairly conceded that no notice under Section 143(2) had been issued, but argued that the omission constituted only a procedural irregularity. It relied on substantial compliance and Sections 292B and 292BB to contend that the assessment should not be invalidated. The Revenue also sought to distinguish ACIT Vs. Hotel Blue Moon on the basis that it concerned search and block assessment proceedings.
The assessee relied upon ACIT Vs. Hotel Blue Moon and CIT Vs. Laxman Das Khandelwal, submitting that the absence of a Section 143(2) notice was fundamentally different from a defect or omission in a notice that had actually been issued. The assessee also relied upon several High Court decisions supporting the mandatory nature of the notice requirement in reassessment proceedings.
The High Court examined Sections 148 and 143(2), including the first and second provisos to Section 148 inserted by the Finance Act, 2006 with retrospective effect from 1 October 1991. The Court observed that these provisions created a legal fiction validating certain Section 143(2) notices issued after the prescribed twelve-month period for returns furnished between 1 October 1991 and 30 September 2005. Since the assessee had filed its return on 19 September 2006, those provisos did not apply. The Court held that the legislative scheme demonstrated that issuance of Section 143(2) notice was mandatory for assessment proceedings under Section 147.
The Court further held that Section 292B could not cure the complete absence of a Section 143(2) notice. That provision applies where there is a defect or omission in a notice that has already been issued. Similarly, Section 292BB could not validate proceedings where the required notice had never been issued; it could address procedural irregularities in service but not the complete absence of the notice.
Following the Supreme Court decisions in ACIT Vs. Hotel Blue Moon and CIT Vs. Laxman Das Khandelwal, the High Court held that the reassessment order under Section 143(3) read with Section 147 was ab initio void. The substantial questions of law were answered against the Revenue and in favour of the assessee. The Revenue’s appeal was consequently dismissed.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2005-06. The appeal was admitted by a bench of this Court vide order dated 26.09.2012 on the following substantial questions of law:
(i) Whether on the facts and circumstances of the case the tribunal was right in law in annulling the reassessment made under Section147 of the Act on the ground of non-issuance of notice under Section 143(2) of the Act would invalidate the assessment, which is not a prerequisite as per scheme of the provisions of Section 147 and 148 of the Act?
(ii) Whether on the facts and circumstances of the case the tribunal was right in law in annulling the reassessment made under Section 147 especially when the provisions of Section 292B of the Act introduced w.e.f. 01.10.1975, would govern that such reassessment and makes it valid in law when the assessment made was in substance and effect, in conformity with or according to the intent and purpose of the Act?
2. Facts leading to filing of the appeal briefly stated are that assessee is an individual engaged in real estate business. The assessee filed the return of income for the Assessment year 2005-06 declaring loss of Rs.65,49,770/- and subsequently filed the audit report. The assessing officer completed the reassessment under Section 143(3) read with Section 147 of the Act and by an order dated 31.12.2008 determined the taxable income at Rs.12,10,51,209/- after making an addition of Rs.12,14,68,180/- as long term capital gains and a sum of Rs.61,32,800/- as short term capital gains by invoking Section 45(2) of the Act.
3. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) on the ground that reopening of assessment is invalid since, no notice under Section 143(2) of the Act was issued. The Commissioner of Income Tax (Appeals) vide order dated 26.11.2010 inter alia held that assessee has not raised any objection with regard to non service of notice under Section 143(2) before the assessing officer and therefore, the objection raised in appeal is not maintainable in light of the provisions contained in Section 292B of the Act. It was further held that on family partition if assets are allotted to the assessee, the character of the assets in the hands of the assessee is only capital asset. It was further held that the assessee had treated the lands received by him in partition as stock in trade in his books and had offered business income on the sale of the lands. Thus, no infirmity was found with the order passed by the assessing officer and the appeal was dismissed.
4. The assessee thereafter approached the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal by an order dated 27.01.2012 inter alia held that for reassessment to be completed under Section 143(3) read with Section 147, notice under Section 143(2) has to be issued within the prescribed limit. It was further held that no notice under Section 143(2) of the Act was issued, therefore, the proceedings are vitiated in law. However, the revenue was granted the liberty to take appropriate curative steps. In the result, the appeal was partly allowed. In the aforesaid factual background, the revenue is in appeal before us.
5. Learned counsel for the revenue submitted that in response to the notice under Section 147 of the Act, the assessee appeared. However, it was fairly submitted that notice under Section 143(2) of the Act was not issued. It is argued that non issuance of notice under Section 143(2) of the Act is a procedural irregularity and would not vitiate the proceeding of assessment under Section 143(3) read with Section 147 of the Act. It is contended that substantial compliance has been made even though in the notice issued under Section 147 there is no reference to Section 143(2) of the Act. It is submitted that the defect is a curable defect and in this connection, our attention has been invited to provisions contained in Section 292B and 292BB of the Act. It was also pointed out that the tribunal ought to have appreciated that the Supreme Court in ‘ACIT VS. HOTEL BLUE MOON’, (2010) 321 ITR 362 (SC) was dealing with a case of search and re assessment.
6. On the other hand, learned Senior Counsel for the assessee submitted that the issue involved in this appeal is no longer res integra and has been answered by decisions of Supreme Court in ‘ACIT VS. HOTEL BLUE MOON supra and ‘CIT VS. LAXMAN DAS KHANDELWAL’, (2019) 417 ITR 325 (SC). It is also submitted that if a notice would have been issued under Section 143(2) of the Act, then any technical defect or omission would have been covered under Section 292B and 292BB of the Act. In the instant case, since, no notice under Section 143(2) of the Act has been issued, therefore, the aforesaid provisions are not attracted. It is also submitted that grievance with regard to non issuance of notice under Section 143(2) of the Act was made before the assessing officer as well as Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal. In support of aforesaid submissions, reference has been made to decisions in LAXMAN DAS KANDELWAL supra and decision of Punjab and Haryana High Court in ‘COMMISSIONER OF INCOME TAX VS. NORTAN MOTORS’, (2005) 275 ITR 595 (P&H), ‘ACIT VS. HOTEL BLUE MOON’, (2010) 321 ITR 362 (SC), ‘PCIT VS. PARAMOUND BIOTECH INDUSTRIES LTD’, (2017) 398 ITR 701 (DELHI), ‘ PCIT VS. OBEROI HOTELS PVT LTD’, (2018) 409 ITR 132 (CAL), ‘ALPINE ELECTRONICS ASIA PVT LTD VS. DGIT AND OTHERS’, (2012) 341 ITR 247 (DELHI), ‘ PAL VINOD VS. DCIT (2013) 353 ITR 622 (KARNATAKA), ‘ CIT VS. RAJEEV SHARMA’, (2011) 336 ITR 678 (ALLAHABAD)’, ACITKL VS. GREATER NOIDA INDUSTRIAL DEVELOPMENT AUTHORITY’, (2015) 379 ITR 14 (ALLAHABAD), ‘ACIT VS. GENO PHARMACEUTICALS LTD.,’, (2013) 214 TAXMAN 83 (BOMBAY), ‘ CIT VS. GITSONS ENGINEERING CO.’, (2015) 370 ITR 87 (MADRAS), ‘PCIT VS. RAVNET SOLUTIONS PVT. LTD.,’, (2017) 399 ITR 567 (DELHI), ‘CIT VS. BIHARI LAL AGRAWAL’, (2012) 346 ITR 67 (ALLAHABAD), ‘NAWAL KISHORE AND SONS JEWELLERS VS. CIT’, (2012) 79 DTR (ALL) 241 (ALLAHABAD), ‘PCIT VS. SHRI JAI SHRI JAI SHIV SHANKAR TRADERS PVT LTD.’, (2016) 129 DTR (DEL) 63, ‘TRAVANCORE DIAGNOSTICS PVT LTD. VS. ACIT’, (2017) 390 ITR 167 (KER), ‘INDUS TOWERS LTD. VS. DCIT’, (2017) 82 TAXMANN.COM 430 (DELHI), ‘DCITK VS. CAMERON SIGNAPORE PVT LTD’, (2019) 418 ITR 272 (RAJ.), ‘NITTUR VASANTH KUMAR MAHESH VS. ACIT’, (2019) 106 TAXMANN.COM 399 (GUJARAT), ‘BIHAR POLICE BUILDING CONSTRUCTION CORPORATION PVT LTD. VS. PCIT’, (2019) 108 TAXMNN.COM 48 (PATNA), ‘PCIT VS. SILVER LINE’, (2016) 383 ITR 455 (DELHI), ‘CIT VS. SMT.MEENAKSHI DEVI’, (2015) 229 TAXMAN 365 (ALLAHABAD).
7. We have considered the submissions made on both the sides and have perused the record. The short question which arises for consideration in this appeal is whether non issuance of notice under Section 143(2) of the Act is a prerequisite as per scheme of the provisions of Section 147 and Section 148 of the Act and whether non issuance of the notice under Section 143(2) of the Act would invalidate the assessment. Before proceeding further, it is apposite to take note of the relevant extract of provisions of Section 148(1) and Section 143(2) of the Act, which are reproduced below for the facility of reference:
148. (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139 :
Provided that in a case—
(a) xxxxxxxx
(b) xxxxxxx
Provided further that in a case—
(a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005, in response to a notice served under this section, and
(b) subsequently a notice has been served under clause (ii) of sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to clause (ii) of sub-section (2) of section 143, but before the expiry of the time limit for making the assessment, reassessment or recomputation as specified in sub-section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid notice.
Explanation.—For the removal of doubts, it is hereby declared that nothing contained in the first proviso or the second proviso shall apply to any return which has been furnished on or after the 1st day of October, 2005 in response to a notice served under this section.
Section 143(2) of the Act:
143(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall-
(i) xxxxxxxx
(ii) notwithstanding anything contained in clause (i) 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 under paid the tax in any manner, serve on the assessee a notice requiring him, on a ate to be specified therein, either to attend has office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return:
Provided that no notice under clause (ii) shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished.
8. It is pertinent to note that first and second proviso to Section 148 of the Act were inserted by Finance Act, 2006 with retrospective effect i.e., from 01.10.1991. The aforesaid proviso were incorporated and created a legal fiction to the effect that a notice issued under Section 143(2) after expiry of twelve months as specified in Section 143(2) but before completion of expiry of time limit for making assessment, reassessment or recomputation as specified in Section 153(2) in respect of return furnished between the period 01.10.1991 to 30.09.2005 will be valid. A legal fiction has been created in respect of issue of notice under Section 143(2) of the Act only in respect of returns furnished upto 30.09.2005. Thus, by insertion of the aforesaid provisos the legislature has made its intention manifest that notice under Section 143(2) of the Act has to be mandatorily issued for the initiation of assessment proceedings under Section 147 of the Act. In the instant case, the assessee filed the return of income on 19.09.2006. Therefore, the amendment made to Section 148 of the Act do not apply to the fact situation of the case and in absence of notice under Section 143(2) of the Act, the order of assessment under Section 143(3) read with Section 147 is ab initio void.
9. It is also noteworthy that Section 292B only covers a situation where there is a defect or omission in a notice, which has already been issued by the assessment officer. In the instant case, the assessing officer has not issued notice under Section 143(2) of the Act, therefore, the question of curing a defect or omission, in a notice which has not been issued does not arise. Similarly, Section 292BB of the Act does not validate the proceeding in absence of notice. In order to attract the applicability of Section 292BB, the notice must have been issued by the assessing officer and the aforesaid provision also seeks to cure only procedural irregularities and does not cure the complete absence of notice.
10. The aforesaid legal position is even otherwise no longer res integra and is settled by Supreme Court in view of decisions rendered in HOTEL BLUE MOON supra and LAXMAN DAS KHANDELWAL supra as well as other decisions referred to supra.
In view of preceding analysis, the substantial question of law framed by this court is answered against the revenue and in favour of the assessee. In the result, we do not find any merit in the appeal. The same fails and is hereby dismissed.
