PCIT Vs Nilkanth Quarry Works LLP Vs (Gujarat High Court)
Summary: The Gujarat High Court considered a Revenue appeal under section 260A challenging the Income Tax Appellate Tribunal, Surat order dated 09.10.2024 in ITA No. 406/SRT/2024 for AY 2015-2016. The Revenue proposed two questions concerning the validity of reassessment under section 147 in the absence of a section 143(2) notice, and the sustainability of revision under section 263 when the underlying reassessment order was invalid. :contentReference[oaicite:1]{index=1}
The assessee was incorporated as an LLP on 22.06.2016, after the relevant previous year, and the erstwhile M/s Shree Nilkanth Quaryy Works partnership firm was converted into the LLP on 04.07.2016. The partnership firm had filed its return for AY 2015-2016 on 30.09.2015 declaring total income of Rs.57,43,190/-. The Assessing Officer subsequently received information from the ADIT (Inv.), Unit-1(2), Ahmedabad regarding transactions of Rs.1,55,55,450/- with M/s Maruti Enterprises, described as providing accommodation entries. Reassessment proceedings were initiated against the LLP with prior approval under section 151. :contentReference[oaicite:2]{index=2}
According to the assessee, it could not file a return in response to the section 148 notice because of a system problem on the income-tax portal and because the LLP was incorporated only on 22.06.2016. The Assessing Officer observed that the return should be filed manually and that the order should also be passed manually, but stated that this was not possible in the faceless scheme. The assessment dated 28.03.2022 was accordingly framed under sections 147 read with 144 and 144B at Rs. ‘Nil’ income without making any addition. :contentReference[oaicite:3]{index=3}
The PCIT thereafter examined the record and found that the accommodation-entry issue had not been considered and that income had been under-assessed. In the section 263 show cause notice dated 07.02.2024, the PCIT stated that the Assessing Officer had neither verified the Investigation Wing information nor finalised the assessment manually, leaving the alleged accommodation entries of Rs.1,55,55,450/- unexplained. The assessee maintained that the manual return and financial figures were Nil because the LLP was not in existence in 2015-16 and sought the Investigation Wing information, details of the alleged accommodation entries, admissions, bank statements and other evidence. :contentReference[oaicite:4]{index=4}
The PCIT rejected that explanation, treated the conversion of the partnership firm into an LLP as material, relied on information that M/s Maruti Enterprises was a proven paper concern, and observed that the Assessing Officer had not called for the assessee’s bank account or issued notice under section 133(6) to the bank. The PCIT set aside the assessment and directed verification of the alleged accommodation entry and a fresh assessment after reasonable and sufficient opportunity to the assessee. :contentReference[oaicite:5]{index=5}
Before the Tribunal, the assessee raised, among other grounds, that no notice under section 143(2) had been issued and that the assessment proceedings were void ab initio. The Tribunal accepted that ground after finding no mention of such notice in the assessment order, noting that the Revenue had not controverted the assertion, and observing that the Revenue had not confirmed issuance after being asked to verify the record. Relying on DCIT vs. Mahi Valley Hotels and Resorts, PCIT vs. Silver Line, ACIT vs. Hotel Blue Moon and CIT vs. Nagendra Prasad, the Tribunal held that the reassessment under section 147 was null and void in the absence of notice under section 143(2). :contentReference[oaicite:6]{index=6}
The Tribunal further held that the section 263 revision could not be sustained because the underlying order under section 147 read with sections 144 and 144B was invalid. It reasoned that a valid order of the Assessing Officer is a condition precedent for assuming jurisdiction under section 263 and that an invalid order cannot be regarded as an order in the eyes of law. The Tribunal referred to S. S. Brahma Education Trust vs. PCIT and Westlife Development Ltd. for the proposition that legality of the original proceeding can be examined at a later stage to determine whether collateral proceedings rest on a valid legal platform. :contentReference[oaicite:7]{index=7}
The High Court agreed with the Tribunal’s findings that no notice under section 143(2) had been issued and that the Revenue had not controverted that position before the Tribunal. It held that, in view of the settled legal position, absence of notice under section 143(2) meant that there was no assessment order and therefore no question arose of revision under section 263 of a nonest order. The Revenue’s appeal was accordingly dismissed. :contentReference[oaicite:8]{index=8}
Cases Discussed
- DCIT vs. Mahi Valley Hotels and Resorts, 287 ITR 360 (Guj.)
- PCIT vs. Silver Line, 383 ITR 455 (Del.)
- ACIT vs. Hotel Blue Moon, 321 ITR 362 (SC)
- CIT vs. Nagendra Prasad, (2023) 156 taxmann.com 19 (Pat.)
- S. S. Brahma Education Trust vs. PCIT, ITA No. 107/CTK/2024
- Westlife Development Ltd., (2016) 49 ITR (T) 406 (Mum)
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Heard learned Senior Standing Counsel Mr. Rutvij R. Patel for the appellant.
2. This appeal is filed under section 260A of the Income Tax Act, 1961 (For short “the Act”) by the Revenue challenging the judgment and order dated 09.10.2024 passed by the Income Tax Appellate Tribunal, Surat (For short “the Tribunal”) in ITA No. 406/SRT/2024 for Assessment Year 2015-2016 by proposing the following questions of law:
“(i) Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was correct in holding that the reassessment order passed u/s. 147 of the Act is null and void in absence of notice u/s. 143(2) of the Act, without considering that the assessee has never filed return of income in response to notice u/s. 148 of the Act, as required?
(ii) Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was correct in holding that the order passed u/s. 263 cannot be sustained since order u/s. 147 of the Act itself is not valid, without considering the fact that the Assessing Officer has passed valid order u/s. 144 r.w.s. 147 which was prejudicial to the interest of revenue which was rightly revised u/s. 263 of the Act?”
3. Brief facts of the case are that the assessee is a Limited Liability Partnership Firm (For short, ‘LLP’) and was incorporated on 22.06.2016. The LLP agreement was entered into by three partners namely, Mr.Pratapsingh Ranjitsing Rajput, Mr. Shailendrasingh Pratapsingh Rajput and Mrs. Shwetasingh S. Rajput. M/s Shree Nilkanth Quaryy Works (partnership firm) was converted into LLP on 04.07.2016.
4. The assessee firm had filed its return of income for Assessment Year 2015-2016 on 30.09.2015 declaring total income of Rs.57,43,190/-. Subsequently, information was received by the Assessing Officer from the ADIT (Inv.), Unit- 1(2), Ahmedabad that the above firm had transactions of Rs.1,55,55,450/- with M/s Maruti Enterprises, which was providing accommodation entries during the year under consideration. As the partnership firm was converted into LLP with the same name with all assets and liabilities of the erstwhile firm with a new PAN, proceeding under section 147 of the Act was initiated against the assessee LLP with prior approval of the competent authority under section 151. In response thereto, the assessee submitted that it was not able to file return in response to notice under section 148 due to system problem in the income-tax portal. Since the LLP was incorporated on 22.06.2016 i.e., after 31.03.2015, it was not allowed to file return for Assessment Year 2015-2016. In view of such facts, the Assessing Officer observed that return should be filed by assessee manually and order should also be passed manually. Since it was not possible in faceless scheme, the Assessing Officer vide order dated 28.03.2022 framed assessment under section 147 read with sections 144 and 144B of the Act at Rs. ‘Nil’ income without making any addition.
5. The Principal Commissioner of Income Tax (PCIT) examined the records and found that the assessee had received accommodation entries of Rs.1,55,55,450/- from M/s Maruti Enterprises. Learned PCIT observed that the issue was not considered by the Assessing Officer and the income has been under assessed. Therefore, the order passed u/s 144r.w.s. 147 of the Act was both erroneous and prejudicial to the interests of Revenue. In the show cause notice under section 263 dated 07.02.2024, the learned PCIT stated that the Assessing Officer neither verified the information provided by the Investigation Wing nor finalized the assessment manually and therefore, the accommodation entries of Rs.1,55,55,450/- in the hands of the assessee remain unexplained.
6. In the reply to show cause notice, the assessee submitted that in the manual return income was declared as ‘Nil’ and figures of balance sheet and profit and loss account was also shown at Rs. ‘Nil’ because Shree Nilkanth Quarry Works LLP was not in existence in 2015-16 (FY.2014-15) and there is no question of any accommodation entry because assessee was not in existence. The assessee further requested to supply the information received from Investigation Wing, nature of accommodation entries, admission and other evidences for M/s Maruti Enterprises, proof of accommodation entries such as bank statement etc. and other documents.
7. The learned PCIT considered the submission of the assessee and rebutted the argument by stating that the partnership firm was converted into LLP and the income and liabilities of the erstwhile firm were also transferred to the newly created LLP. Therefore, LLP cannot deny the fact of accommodation entry. He further stated that there was credible information received from ADIT (Inv.), Unit 1(2), Ahmedabad that assessee received accommodation entry from M/s Maruti Enterprises, who is a proven paper concern engaged in the activity of providing accommodation entries. Rs.1,55,55,450/- was received by assessee from the bank account of M/s Maruti Enterprises. However, the Assesing Officer has not called for the bank account of assessee and has also not issued notice under section 133(6) of the Act to the bank and obtained various details along with KYC. The Assessing Officer has simply accepted the contention of assessee that LLP was not in existence during the relevant time and it had not received any accommodation entry. It was observed that the acceptance of the submission of assessee by the Assessing Officer without proper enquiry has rendered the order erroneous as well as prejudicial to the interests of Revenue. The learned PCIT set aside the assessment order and directed the Assessing Officer to call for the bank account of the assessee and verify the alleged accommodation entry taken by assessee. He also directed the Assessing Officer to obtain bank account of M/s Maruti Enterprises and verify when the accommodation entry of Rs.1,55,55,450/- was given to the assessee. The learned PCIT accordingly set aside the assessment order with a direction to the Assessing Officer to frame fresh assessment order after giving reasonable and sufficient opportunity of being heard to the assessee.
8. Being aggrieved by the order passed by learned PCIT, the assessee preferred an appeal before the Tribunal contending various grounds and one of the ground was that no notice under section 143(2) of the Act was issued by the Assessing Officer and therefore, the assessment proceedings are void ab initio.
9. The Tribunal after considering the submissions of both the sides allowed the appeal on the ground of non issuance of notice under section 143(2) of the Act by observing as under:
“11. The next issue is completion of the assessment without issue of notice u/s 143(2). It is seen from the assessment order that there is no mention about issue of notice u/s 143(2). The Ld. CIT-DR has also not controverted the assertion of the Ld. AR that no notice u/s 143(2) was issued by the AO. The revenue was asked to verify the record and confirmed if any notice u/s 143(2) was issued by the AO. They have not confirmed about issuance of the said notice. Hence, it is clear that the order was passed without issue of notice u/s 143(2). As argued by the Ld. AR, the reassessment order passed without issue of notice u/s 143(2) of the Act is not valid. For this, he has relied on the decision in case of DCIT vs. Mahi Valley Hotels and Resorts, 287 ITR 360 (Guj.). From the facts discussed above, we find that no notice u/s 143(2) was issued by AO. The Hon’ble jurisdictional High Court in the case of Mahi Valley Hotels and Resorts (supra) has held that where notice u/s 143(2) was issued beyond statutory period, Tribunal was justified that assessment was void ab initio. The case of the appellant is stronger because notice u/s 143(2) has not at all been issued to the assessee. The Hon’ble Delhi High Court in case of PCIT vs. Silver Line, 383 ITR 455 (Del.) held that merely because assessee participated in proceedings pursuant to notice u/s 148, it would not obviate mandatory requirement of AO to issue assessee a notice u/s 143(2) before finalizing order of reassessment. It upheld the decision of the Tribunal that the reassessment order in question was legally unsustainable. The Hon’ble Supreme Court in case of ACIT vs. Hotel Blue Moon, 321 ITR 362 (SC) held that if an assessment is to be completed u/s 143(2) r.w.s. 158BC, notice u/s 143(2) should be issued within one year from filing of the block return. Omission on part of AO to issue notice u/s 143(2) cannot be a procedural irregularity and the same is not curable. The requirement of notice u/s 143(2) cannot be dispensed with. The Hon’ble Patna High Court in case of CIT vs. Nagendra Prasad, (2023) 156 taxmann.com 19 (Pat.) held that where notice was issued by AO u/s 148 requiring assessee to file a return within thirty days but return was filed after eight and a half months, since return was filed by assessee in response to said notice through delayed, there should have been a notice issued u/s 143(2) as requirement to issue notice could not be dispenses with. The appeal of the revenue was dismissed. Following the above decisions, we hold that the reassessment order u/s 147 of the Act is null and void in absence notice u/s 143(2) of the Act.
12. Since the impugned order of the AO has been held to be invalid, the question that arises is whether the action of the Ld. PCIT u/s 263 of the Act could be sustained. The Ld. AR has argued that proceedings u/s 263 of the Act is invalid because reopening u/s 147 as well as subsequent assessment order is unsustainable in law. We have upheld validity of the reopening but held that the order passed u/s 147 r.w.s. 144 & 144B of the Act is unsustainable. Since the order u/s 147 of the Act itself, is not valid, any revision order u/s 263 cannot be sustained. In order to assume jurisdiction u/s 263 of the Act, the primary condition is that the order passed by the AO should be erroneous insofar as it is prejudicial to the interests of revenue. Therefore, existence of a valid order is the condition precedent for assumption of jurisdiction by the Ld. PCIT u/s 263 of the Act. An invalid order cannot be said to be an order in the eyes of law. When there is no order in the first instance, there is no question of invoking provisions of section 263 of the Act. The ITAT, Cuttack in case of S. S. Brahma Education Trust vs. PCIT, ITA No.107/CTK/2024 held that during the appellate proceedings against order passed u/s 263 of the Act, the legality of order passed u/s 147 of the Act, from which such proceedings have been originated, could be examined. The Tribunal referred to the decision of the ITAT, Mumbai in case of Westlife Development Ltd., (2016) 49 ITR (T) 406 (Mum) wherein it was held that if the order passed in the original proceeding itself is illegal, then that cannot give rise to valid revision proceedings. Validity of the order passed in the primary (original) proceedings should be examined even at subsequent stages, only for the limited purpose of examining whether the collateral (subsequent) proceedings have been initiated on a valid legal platform or not. At para 15 of the order the Tribunal held that since the order passed u/s 147 r.w.s. 144 & 144B of the Act is an invalid, any further proceedings originated from the said order cannot be held as valid proceedings, which includes the revisionary proceedings initiated by the Ld. PCIT. The facts of the instant appeal are similar. There is no reason to differ from decision of the ITAT, Cuttack cited supra. Hence, the revision order passed u/s 263 is quashed.”
10. In view of the above observations and findings arrived at by the Tribunal and findings of fact that no notice under 143(2) of the Act was issued, which was also not controverted by CIT-DR before the Tribunal, we are of the opinion that no interference is called for in view of settled legal position that in absence of notice under section 143(2) of the Act, there is no assessment order and therefore, question of revision under section 263 of the Act order would not arise as held by the Tribunal.
11. Appeal is accordingly dismissed.
