Original Assessment annulled due to failure to issue notice U/s. 143(3)- Reassessment not permissible to rectify the mistake

CIT Vs Rameshwar Prasad Sharma (Rajasthan High Court)

Since, the first assessment was subject matter of appeal before appellate authority, therefore, on the same issue when it was found that assessment has been annulled it cannot be a subject matter of reopening of the assessment. There must be some fresh material or new information which authorizes the AO to issue notice u/s 148. There are so many cases when return had been filed by the respective assessee has been acepted u/s 143(1) on the same material. No notice u/s 148 can be issued as held by various courts. There must be reason to believe and there must be some material before AO to hold that any part of income has escaped assessment.

15. In the present case there was no fresh material at all. The material which was available before the AO was only original assessment order which was annulled. Once an assessment has been annulled then department cannot adopt a recourse to corret their mistake committed originally not issuing notice u/s 143(2) in time.

23. Again such facts are not in the case in hand as the reason were recorded on the basis of annulled assessment only. Therefore, the ratio of this decision is also not applicable on the facts of the present case.

FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT

1. By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has allowed the appeal of the assessee and dismissed the appeal of the department and further modified the order of the CIT(A) which was party allowed the appeal of the assessee.

2. This court while admitting the appeal on 27.9.2012 framed following substantial question of law:-

1. Whether the tribunal was legally justified in reversing the finding of CIT(A) and annulling the reassessment u/s 147 which was done on the basis of material found during the course of survey and not on the basis of annulled assessment u/s 143(3)?

2. Whether the tribunal was legally justified in annulling the reassessment done u/s 147 when the return of income filed by the assessee reassumes the same status after the annulled assessment u/s 143(3)as if on which no assessment has been carried out?

3. The facts of the case are that the assessee respondent is a contractor who filed the return of income on 31.10.2001 for Rs.65,172/- after adjusting brought forward loss of Rs.10,59,233/- out of total loss of Rs.11,3337,535/-. The income in the return represented income from other sources. The return was processed and a notice u/s 143(2) was issued on 23.10.02.

3.1 Further again notice u/s 143(2) and 142(1) along with questionnaries were issued and duly served to the assessee. The assessee sought adjournments and did not furnish the required details. Since the required documents were not submitted despite several opportunities, again a notice u/s 143(2) and 142(1) were served. No details and books of accounts as called for by the AO were produced by the assessee. A survery u/s 133A was carried out at the business premises of the assessee on 18.2.03.

3.2 During the course of survey operations, some books of accounts/documents as cash book, ledger, small diary and loose papers were found and impounded relating to various years. Out of them some documents as A-1, A-5, A-6, A-19, A-27, A-28 and A-20 relating to F.Y. 200-01 i.e. assessment year 200-01 the year under consideration. The assessee was asked to verify the entries appearing in these impounded documents with the regular books of accounts and required the assessee firm to file other details but same was not complied with. The assessee did not produce any books of accounts and vouchers of the expenses. Since assessee firm could not get verified entries in these incriminatory documents from the regular books of accounts which were never produced for verification, hence looking to the facts of the case and complexities involved, the case was referred for special audit with the prior approval of the CIT.

3.3 The case was referred for special audit nominating Sh. K.K. Gupta CA, Bhartpur for conducting special audit u/s 142(2A) and the assessee was asked vide this office letter no.843 dt. 30.3.04 to get its accounts audited from the nominated by CA by 30.5.04. Assessee was requested to extend its full cooperation getting its accounts audited. On the request of assessee firm, certified photo copy of all impounded documents relating to the F.Y. 2000-01 Annexures A, A-1 to M-6, A-19, A-25, A-26, A-27, A-28 & A-29 were again provided to the assessee inspite of the facts that Xerox copies of all impounded material had already been supplied to the firm. Assessee firm sought extension of time for getting its account audited from the nominated CA several times.

3.4 Assessee was granted extension of time upto 23.9.04. But he could not get its account audited from the nominated CA till the last date. The nominated CA vide his letter dt. 22.9.04 appeared of the facts of the case that in circumstances under which he could not conduct the audit u/s 142(2A). The letter of the special auditor indicates that the firm did not provide him any information/books of accounts/documents/vouchers of expenses and other relevant papers which are necessary for conducting special audit. The income of the assessee was determined Rs.3,56,78,146/- against declared income of Rs.65,172/- vide order dt. 23.11.04.

4. Counsel for the appellant has taken us to the order of CIT(A) in which it has been observed as under:-

“In the first ground of appeal the appellant has claimed that the assessment under reference has been passed without jurisdiction, therefore, same is liable to be quashed.

During the appellate proceedings the AR of the appellant at the outset challenged the jurisdiction of the AO with regard to assesssment under reference. It was claimed that the notice u/s 143(2) for the assessement under reference was served upon the appellant first time on 11.12.03 while the appellant filed its return of income on 31.10.2001. Therefore, it was contended that since the valid notice u/s 143(2) was not issued to the appellant within the time stipulated under the section, the entire proceedings for assessment were null and void.

Keeping in view the grounds of the appellant and the evidences filed by him during the appellate proceedings the matter was referred to the ACIT, Cricle-Bharatpur vide this office’s letter dt. 20.1.05 No.1056. The AO was asked to give his comments on the ground raised by the AR of the appellant and also provide the factual position with regard to service of notice u/s 143(2) to the appellant. The AO’s report was received through the CIT, Alwar vide his office’s letter No.493 dt. 10.2.05. The relevant extracts of the report are as under:-

(a) The assessee firm filed its return of income on 31.10.2001 in the office of ITO, Ward-I, Bharatpur.

(b) Later on the then AO was submitted scrutiny proposal to the worthy CIT, Alwar after recording due reasons and worthy CIT, Alwar has accorded his permission vide their letter no.1080 dt. 22.10.02 for selecting the case under scrutiny.

(c) After receiving permission for scrutiny from the CIT, Alwar the then AO entered the name of above assessee in his scrutiny register.

(d) ITO Ward-I, Bharatpur issued notice u/s 143(2) of the IT Act, 1961 on 23.10.02 which was served upon the partner of the first Smt. Geeta Sharma on the same day i.e. 23.10.02 but inadvertently the name of assessee firm was written in the notice as Sh. Rameshwar Prasad Sharma in place of M/s. Rameshwar Prasad Sharma which was purely a clerical mistake.

(e) As per notice u/s 143(2) dt. 23.10.02 case was fixed for 29.10.02 and in response thereto AR of the assessee firm M/s. Rameshwar Prasad Sharma contractor, attended the office on the fixed date i.e. 29.10.02 and requested for an adjournment of firm case.

(f) Vide this office letter dt. 19.3.04 it was informed to the assessee firm that mistake in the notice issued u/s 143(2) on 23.10.02 was a purely clerical mistake and as per provision of Sec.292 of the IT Act, 1961 no notice can be declared invalid on the basis of clerical mistake and hence the service of notice is valid.

It is pertinent to mention here that the assessee firm itself accepting this type of clerical mistake in may TDS certificates issued from various departments in various years to assessee firm in those certificates name of Sh. Rameshwar Prasad Sharma. All these certificates are accepted by the firm and claiming benefit of tax from various departments including Income Tax Department on the basis of these certificates which were issued only in the name of Sh. Rameshwar Prasad Sharma and the department is also giving due credit to the assessee on the basis of such TDS certificates enclosed by the assessee with the return of income, despite the fact that they are not in the name of firm but in the name of Sh. Rameshwar Prasad Sharma. Thus departments is ignoring such technical lapse appearing in TDS certificates and assessee has never raised any objection as to why he is given undue benefits when he does not deserves for the same. Thus the assessee firm as well as various departments are ignoring this type of clerical mistake and accepting all these certificates as of firm (M/s. Rameshwar Prasad Sharma Contractor) instead of individual Sh. Rameshwar Prasad Sharma in whose name the certificates are issued. When there is a matter to the benefit for the assessee then assessee firm did not raise any objection on technical mistake appearing in TDS certificates relating to assessee firm. Other hand any technical mistake committed by the department in the notice us/ 143(2) then firm wants to raise objections in respect of technical mistake for taking benefit from the same hence, objection raised by the assessee are baseless and away from the truth.

(g) As per provision of Section 292B of the Act, no notice issued from the department shall be invalid or shall be deemed to be invalid merely by the reason of any mistake defect or omissions in such notice. Such types of mistakes are curable u/s 292B of the IT Act, 1961.

(h) The contents and view of the provisions 292B of the Act clearly explained and supported by the Judgment of Hon’ble Guwahati High Court reported in 227 ITR 512. Hon’ble Court has held that Section 292B provides that no proceedings taking in pursurance of any of the provisions of the Act shall be invalid by reason of any mistake or defect in the proceedings if it is in effect in confirmatory with or according to the intent of purpose of the Act.

(I) From the above mentioned facts it is clear that notice issued to the assessee firm come under the purview of provision of Section 292B and valid one. An assessee firm filed its return of income for assessment year 2001-02 on 31.10.2001 and notice u/s 143(2) was served on 23.10.02 to the assessee firm. The notice issued for taking the case under scrutiny is well in time as prescribed by the Act. Hence objection raised by the assessee is not sustainable. Notice u/s 143(2) was issued legally and as per provisions of the Act.”

4.1. She also taken us to the order of the CIT(A) in which it has been held as under:-

“5.3 On the basis of foregoing discussion it can safely be concluded that the appellant was not served a valid notice 143(2) by the AO in the stipulated time. Therefore, the assessment proceedings carried out by him subsequently were without valid jurisdiction. Hence, the proceedings were void-ab-initio. In view of this the assessment under reference is hereby annulled.”

4.2. She contended that reasons were recorded after the order of CIT(A) u/s 148 and all reasons were given after issuing the notice.

4.3 However CIT(A) vide Annexure-5, while considering the case of the assessee observed as under:

“5.4 The AO is, however, free to resort to Section 147 of the Act to bring the escaped income, if any to tax.”

4.4 After taking into consideration the factual position and other material on record, the CIT(A) partly allowed the appeal and holding as under:-

“On the above issue the ld. AR has submitted that the provisions of Sec.234D is applicable to cases where the refund has been made in excess u/s 143(1)(a) or ‘No refund is due in regular assessment. Regular assessment includes first time assessment u/s 147 also (vide explanation to Sec.234D) w.e.f. 1.6.03’, the ld. AR also submitted that the imposition of interest being substantive law, interest u/s 234D cannot be charged in respect of assessment years prior to coming into force of these provisions i.e. w.e.f. 1.6.03, hence it is not applicable to A.Y. 2001-02 and relied upon the decision in the case of M/s. Agarwal Marbles & Industries Ltd. Vs. ACIT (2007) 37 TAX WORLD 25 (ITAT-Jaipur Bench). The ld. AR also submitted that the interest under Sec.234B is to be calculated with reference to the total tax demand minus tax deducted at source.

On considering the arguments advanced by the ld. AR and case as above cited I am of the considered opinion that there is substance in the connection of the ld. AR that section 234D has come into effect from 1.6.03 and thus not applicable in the present case of assessment year 2001.02. The same views has been confirmed by the Hon’ble ITAT Jaipur Bench ‘A” in the case of ACIT vs. M/s. GAD FASHION (2008) XI, TAX WORLD 156 (ITAT-JP). Therefore, the interest charged under section 234D is thus directed to be deleted. However in respect of interest charge u/s 234B is consequential of the above findings.”

4.5 She further contended that when the assessment was annulled, on the basis of judgment in the case of Babulal Lath, 83 ITD 691 rendered by Mumbai Bench of the Tribunal, there was no reason for the department to take further proceedings.

4.6 She also taken us to the order of CIT(A) wherein it has been observed as under:-

“4.3 The rival submission has been considered by me. The contention of learned AR is not acceptable as the notice issued 148 was well in power of the learned AO and as per direction of the CIT(A) vide his order dt. 28.3.2005 as is mentioned by the learned AR. Therefore, the actions of the learned AO has been confirmed.”

5. Counsel for the respondent has taken us to the order of the Tribunal wherein it has been observed as under:-

8. We have heard rival submissions and considered them carefully. Before proceeding further, we would like to produce here the computation of income made in the original assessment order dt. 22.11.2004:-

This order was challenged before ld. CIT(A) who annulled the assessment by observing that notice u/s 143(2) issued was barred by limitation by his order dt. 28.3.2005. Thereafter, AO recorded reason on 8.7.2005 before issuing notice u/s 148. As per reasons recorded, the AO observed that the following amount of income has escaped assessment:-

In response to notice u/s 148, the assessee submitted reply on 25.7.05 and stated that return filed on 31.10.2001
under Sec.139(1) may kindly be treated as filed in response to notice u/s 148 and also demanded a copy of reasons recorded. The same was replied on 29.7.2005. Subsequently notice u/s 143(2) as well as questionnaire was issued to the assessee. In response to the same, the detailed reply was filed before the AO and it was submitted that assessment completed originally has been quashed and no appeal has been filed against that order by the department. It was further submitted that now issuing notice u/s 148 for reassessment of income is not valid and accordingly it was submitted that the notice issued u/s 148 is ultra vires and illegal. Reliance was placed on various case laws before AO i.e. in case of CIT vs. Mrs. Ratanbai N.K. Dubhash, 230 ITR 495 (Bom.). In this judgment it has been held that the assessment was not set aside as the same was annulled and in case of annulled assessment the order passed originally u/s 143(3) becomes non est. It was also submitted that the assessment cannot be reopened u/s 147/1048 as there should be fresh material or information for issuing notice u/s 148. As there is no fresh material or information, therefore, on the basis of completed assessment originally notice u/s 148 cannot be issued.

9. Reliance was placed on the decision of Hon’ble Punjab & Haryana High Court in the case of Vipin Khanna, 255 ITR 220 and also on the decision of Hon’ble Supreme Court in the case of Sun Engineering, 198 ITR 297.

10. After considering these submissions, the objection raised by assessee was not found satisfied by the AO. Accordingly these submissions were rejected by the AO. Therefore, the AO proceeded to complete the assessment and various details were asked for which were filed from time to time and ultimately the assessment was completed by making following additions:-

11. Against this order, the assessee preferred appeal before ld. CIT(A). The proceedings initiated u/s 148 were also challenged. The ld. CIT(A) uphold the reopening of the assessment. However, appeal of the assessee on merit was allowed in part as certain additions were sustained i.e. trading addition by applying n.p. rate at 10.5% confirming the addition of Rs.3,25,000/- in the name of Sh. S.K. Upadhyay and not treating the interest on fixed deposit income as business income. The remaining additions were deleted by ld. CIT(A).

12 The department is in appeal against deleting the additions by ld. CIT(A) and assessee is challenging confirming the reopening the assessment and addition on account of applying n.p. rate of 10.5% and addition made in the name of Sh. S.K. Upadhyay at Rs.3,25,000/-.

14.1 Once an assessment has been completed and the same was subject matter of appeal, therefore, in our considered view on the same issue reassessment cannot be framed after issuing notice u/s 148. Notice u/s 143(2)
was not issued in time, therefore, the assessment was annulled and this action of the ld. CIT(A) has been accepted by the department as no second appeal has been preferred against the order of ld. CIT(A).Now taking a recourse of reopening of the assessment cannot be permitted either in the eyes of law or in the facts of the present case. Language of provisions of Section 147 which provides:-

“If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to provisions of Section 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned.”

It has been further provided that no assessment completed u/s 143(3) can be reopened after expiry of four years from the end of the relevant assessment year unless any such income has escaped assessment by reason of failure on the part of the assessee to make a return u/s 139(1). It is further provided that AO may assess or reassess such income other than income involving matters which are subject matter of any appeal, reference or revision which is chargeable to tax and has escaped assessment. After analyzing the provisions of section 147, we are of the view that there was no material with the AO to hold any income has escaped assessment. Original return was filed u/s 139(1) which was subject matter of scrutiny assessment and assessment u/s 143(3) was completed. Huge additions were made, they were challenged before ld. CIT(A) and on legal point it was found that the assessment completed by issuing notice u/s 143(2) issued was barred by limitation. Since, the first assessment was subject matter of appeal before appellate authority, therefore, on the same issue when it was found that assessment has been annulled it cannot be a subject matter of reopening of the assessment. There must be some fresh material or new information which authorizes the AO to issue notice u/s 148. There are so many cases when return had been filed by the respective assessee has been acepted u/s 143(1) on the same material. No notice u/s 148 can be issued as held by various courts. There must be reason to believe and there must be some material before AO to hold that any part of income has escaped assessment.

15. In the present case there was no fresh material at all. The material which was available before the AO was only original assessment order which was annulled. Once an assessment has been annulled then department cannot adopt a recourse to corret their mistake committed originally not issuing notice u/s 143(2) in time.

23. Again such facts are not in the case in hand as the reason were recorded on the basis of annulled assessment only. Therefore, the ratio of this decision is also not applicable on the facts of the present case.

24. Few more cases on which reliance has been placed by ld. D/R i.e. in case of Raymond Woollen Mills Ltd. Vs. ITO 236 ITR 34 (SC), Claggat Brachi Co. Ltd. Vs. CIT 177 ITR 409 (SC) and Kalyan Mavji and Co. Vs. CIT 102 ITR 287 (SC). In all these cases certain information was received during the assessment proceedings and, therefore, notice u/s 148 was issued and held as valid. However, in the present case no such facts are involved as no information was received during the assessment proceedings. We have also seen various other case laws on which reliance has been placed by ld. D/R and found that these cases are also distinguishable.

25. In view of the above facts and circumstances and in view of the direct decision of Mumbai Bench of the Tribunal in the case of Babu Lal Lath (supra), we hold that reassessment completed was ab initio void and liable to be annulled. Accordingly the same is annulled.”

6. We have heard both the sides.

7. Before proceeding with the matter, it will not be out of place to mention that the judgment which sought to be relied upon by the tribunal in the case of Babulal Lath (supra) has not been diluted by any other court.

8. Apart from that tribunal while considering the matter has given reason in para no.23-24, after taking into consideration, the Supreme Court decision in Raymond Woolen Mills Ltd. Vs. ITO, 236 ITR 34 (SC), Claggat Brachi Co. Ltd. Vs. CIT 177 ITR 409 (SC) and Kalyan Mavji & Co. Vs. CIT 102 ITR 287 (SC) which was relied upon by the Mumbai Tribunal in Babulal Lath (supra).

9. In that view of the matter, we are of the considered opinion the tribunal has rightly held that the matter of re-assessment u/s 147 was done on the basis of material found during survey subsequent to assessment on 18.3.03. Therefore, we are of the opinion that tribunal rightly decided the issue in favour of the assessee and first issue is required to be answered in favour of the assessee. With regard to second issue in view of finding on issue no.1, this issue is also answered in favour of the assessee.

10. We make it clear that the order of tribunal is not reversed therefore, if it is taken that the order is reversed, it will be open for the department to make appropriate application for reconsideration.

11. The appeal accordingly stands dismissed.