HC on Validity of Service of notice by post, in person and then by affixture

Full Text of the High Court Judgment / Order is as follows:-

The assessee is an incorporated company and this appeal relates to its assessment in the year 2008-09. It has been submitted on behalf of the assessee before us that the assessment year 2008-09 was its first year of assessment. For the relevant previous year, according to the assessee, it had no income. In that year, share capital of Rs. 24,68,000 was infused in the assessee- company at a premium of Rs. 5,68,32,000, the latter sum being reflected in the balance-sheet under the head “reserves and sur­plus”. A copy of the balance-sheet has been produced before us by Mr. Agarwal, learned counsel representing the assessee. The assessee had filed its return for the financial year 2007-08 showing loss of Rs. 6,812. Total income of the assessee was shown to be nil. The return of the assessee was duly processed by the assessing officer, who had accepted the return. It appears from annexure “A” to the stay petition (GA No. 3855 of 2015) taken out by the assessee in connection with this appeal that it was observed from the submission made by the assessee on 19-2-2010 that it had earned consultancy fees of Rs. 32,500 in cash, which was not included in its gross total income shown in the profit and loss account. In such circumstances, notice was issued under section 148 of the Income Tax Act, 1961 taking into account the said sum of Rs. 32,500 as the sum which had escaped assessment. The assessee’s response was that the return filed by it was its final return. Thereafter, notice was issued under sections 143(2) and 142(1) of the Income Tax Act, 1961. Finally, assessment was completed by passing an order on 9-4-2010 adding back Rs. 32,500 with the total income of the assessee.

2. As regards infusion of share capital at a premium, to which we have referred to in the preceding paragraph, the assessee’s case is that it had issued 2,36,000 shares having face value of Rs. 10 each at a premium of Rs. 240 and 10,000 shares at Rs. 10 each to different body corporates. It is also the assessee’s case that the assessing officer had made queries regarding infusion of share capital and the assessee had furnished details thereof. Notices were issued to the share subscribing companies, which exercise the assessee refers to as “on test check basis”. The share applicants, according to the assessee, had given their response. The order was passed on 9-4-2010 in the reassessment proceeding computing the total income of the assessee to be Rs. 30,890, and income-tax payable was calculated on that basis.

3. A proceeding under section 263 was initiated by the Commissioner, Kolkata- III in respect of the assessment of the assessee and the reason for initiation of such proceeding would appear from the first two paragraphs of the order passed by the Commissioner under the aforesaid provision on 22-3-2013 :–

“In this case return of income was filed on 28-7-2008 declaring total income of Rs. nil. Subsequently, it was found that the company has earned consultancy fees to the tune of Rs. 32,500 which had not been offered for tax in the return of income filed by them. The assessing officer issued notice under section 148 and subsequently passed order under section 147/143(3) on 9-4-2010 determining total income to be Rs. 30,890.

Subsequently, a show-cause notice under section 263 of the Act was issued vide letter dated 1-2-2013. In this show-cause notice it has stated that on examination of records it was found that 2,46,800 shares were issued by the said company at face value of Rs. 10 at a premium of Rs. 230 per share. In other words, the asses-see-company raised a paid up share capital of Rs. 24.68 lakhs with premium of Rs. 5.6 crores. It was further stated that on perusal of the assessment records it was found that the requisite inquiries were not conducted regarding the issue as to what prompted the subscribers to the shares to pay such substantial premium on shares of a little known company having no or insignificant business activities. It was also observed that it was apparent that the order was passed without application of mind.

The show-cause notice also stated that proper inquiry was not con­ducted regarding the identity and creditworthiness of the shareholders. It was stated that the order was passed mechanically which was liable to turn the assessment erroneous and cause prejudice to the interests of the Revenue. In view of these facts, the assessee was asked to explain as to why the assessment should not be set aside under sec­tion 263.” (quoted verbatim)

4. The Commissioner in that order issued on 22-3-2013 observed and directed :–

“I have considered the facts of the case and the decisions of the superior courts cited above. I am of the opinion that the assessing officer by not pursuing the inquiries to their logical end has made the order erroneous and prejudicial to the interests of the Revenue. The order is, therefore, set aside and the assessing officer is directed to carry out thorough and detailed inquiries in the case. He should carry out inquiries about the various layers through which the share capital has been rotated. The assessing officer is also directed to summon the present and past directors of the assessee- company and the sub­scriber companies and examine them. The assessing officer should also examine as to when this company was sold. At that point of time the fictitious assets such as shares in other companies or loans given to other companies is converted back into cash by credit in the asses-see-company’s bank account. The source of this money also needs to be examined. The assessing officer is also directed to look into the investment in shares or stock of shares, as the case may be with a view to verify as to whether the assessee’s name appears in the list of shareholders of those companies whose shares the assessee is hold­ing. Further, information should be sent to the assessing officers of the subscriber companies and to the other companies through which the capital has been rotated regarding the findings of the assessing officer. Subsequent to the inquiries and verification of all relevant aspects of the case, the assessing officer should pass a speaking order after providing adequate opportunity to the assessee.” (quoted verbatim)

5. The assessee went up in appeal against the order before the Income Tax Appellate Tribunal. The appeal of the assessee was registered as ITA No. 1707/Kol./2013. That appeal was heard along with 24 other appeals of dif­ferent assessees involving similar legal issues. All these appeals were dis­missed by a composite order passed by the Tribunal on 10-8-2015. In the proceeding before the Tribunal, all the assessees were represented by their learned advocates. The Tribunal, following an earlier order passed by it in Subhlakshmi Vanijya (P) Ltd. v. CIT (ITA No. 1104/Kol/2014 assess­ment year 2009-10–(2015) 43 ITR (Trib) 48 (Kolkata)) on 30-7-2015, dismissed the appeals of the twenty-five assessees including that of the appellant. On the same legal question, it appears from the order of the Tri­bunal, more than 400 appeals had been filed before the Tribunal, and these appeals were being heard in separate batches. It is also recorded in the judgment impugned that the authorized representatives of the assessees had admitted before the Tribunal that facts and circumstances of all the cases were mutatis mutandis similar to those argued. In respect of the appeals of some of the assessees which had special features, these were argued separately. But in this appeal, these distinct points are not involved. One of such decisions of the Tribunal was appealed against before this court by the assessee in the case of Rajmandir Estates (P) Ltd. v. Principal CIT the decision in which has been (2016) 386 ITR 162 (Cal). In that judgment die Tribunal upheld the Commissioner’s order in the pro­ceedings under section 263 of the Act.

6. The co-ordinate Bench of this court delivered the judgment in Rajmandir Estates Private Limited (supra) upon considering the decision of the Tribunal in Subhlakshmi Vanijya (P) Ltd. (supra). On the same points of law and similar factual issues, we had considered ten appeals of different assessees and by a composite judgment delivered by us on 7-3-2017 in Pragati Financial Management (P) Ltd. v. CIT (ITAT No. 178 of 2016) (2017) 394 ITR 27 (Cal), we dismissed those appeals, finding the points raised therein to be covered by Rajmandir (supra). The broad points raised by the assessees in those two appeals were that till certain amendments were effected to sections 68 and 56 of the. Act by the Finance Act, 2012, the inquiry as directed by the Commissioner in his order under section 263 of the Act was impermissible. By amendment of section 68 by the Finance Act, 2012 two provisos were added specifying circumstances under which explanation of the assessee as regards infusion of funds as share appli­cation money, share capital and share premium would be deemed to be not satisfactory. Cash credits under similar heads, again under certain cir­cumstances were mandated to be chargeable to income-tax under the head–”Income from other sources” by insertion of sub-clause (viib) to sub-section (2) of section 56 of the Act under the Finance Act, 2012. The assessees’ contentions were based mainly on the grounds that there could not be any further enquiry in respect of capital receipts and with regard to source of such funds through which there was infusion of share capital with high premium. There were certain other grounds also on which those appeals were founded, but the co-ordinate Bench in Rajmandir (supra) and this Bench in Pragati (supra) had repelled all the contentions of the asses­sees.

7. Mr. Agarwal in this appeal has not raised the grounds which stand already covered by the said two judgments of this court. He sought to argue this appeal on certain revised questions of law suggested by him. These are :–

“(1) Whether the learned Tribunal was justified in not adjudicating the specific issue raised before it that the alleged lack of proper inquiries as to the issue of share capital/ premium in the course of proceedings under section 147 cannot be considered as erroneous and prejudicial to the interests of the Revenue when reopening was done for the specific purpose unconnected with the issue of share capital/premium ?

(2) Whether on the facts and circumstances of the case, the learned Tribunal was justified in holding that addition in the hands of a com­pany can be made under section 68 in its first year of incorporation when the issue stands decided in CIT v. Bharat Engineering and Construction Co. (1972) 83 ITR 187 (SC) ?

(3) Whether on the facts and circumstances of the case, the learned Tribunal was justified in upholding the proceedings under section 263 in spite of the fact that the proceedings were concluded in gross vio­lation of the principles of natural justice and/or improper service of show-cause notice ?

(4) Whether the learned Tribunal was justified in holding that the first proviso to section 68 which has been inserted by the Finance Act 2012 with effect from 1-4-2013 applies to the assessment year 2008-09 ?

(5) Whether the purported finding of the learned Tribunal that the issue of share capital/share premium has not been properly looked into or investigated by the assessing officer is wholly perverse and/or is based on no material and/or is based on mere conjectures and sur­mises ?”

8. On the first question suggested by him, submission of Mr. Agarwal is that the Commissioner ought to have confined his decision, while exer­cising power under section 263 of the Act, only to the issue on which reassessment was made under section 147/143(3) of the Act. The Com­missioner, Mr. Agarwal has asserted, could not have had travelled beyond the grounds which triggered off the reassessment process. Mr. Agarwal’s case is that in the earlier judgments of this court, this question was not addressed to. The authorities relied upon by him on this point are (i) CIT v. Alagendran Finance Ltd. (2007) 293 ITR 1 (SC) and Ranbaxy Laboratories Ltd. v. CIT (2011) 336 ITR 136 (Delhi). In the latter case, the assessing officer had issued notice under section 148 of the 1961 Act on the ground that certain items from the assessee’s accounts had escaped assessment. The assessing officer was satisfied with the assessee’s explanation over these heads and no dis allowance was made by the assessing officer in respect of these items. In the reassessment proceeding, however, the assessing officer found certain other deductions to have had been wrongly claimed and reduced the claim of deduction. This was found to be imper­missible by the Delhi High Court. It was held that an assessing officer had the jurisdiction to reassess issues other than the issues in respect of which proceedings were initiated but he was not justified to undertake such exer­cise when the reasons for initiation of the proceeding did not survive.

In the case of Alagendran Finance Ltd. (supra), the revisional power of the Commissioner was in issue before the Supreme Court, but it was in relation to the question of limitation. In that case also, reassessment was made under certain specific heads. The Commissioner thereafter exercised his revisional jurisdiction in relation to part of the assessment order involv­ing certain other items not involved in the reassessment proceeding. These items did not form the basis of reassessment proceeding. The jurisdiction of the Commissioner to invoke his revisional power was questioned on the ground of limitation, as provided for in sub-section (2) of section 263 of the 1961 Act. In the factual context of that case, the Commissioner’s power to exercise his revisional jurisdiction could be retained if the date of reassess­ment was treated to be the starting point for computing the period of limi­tation. But such revisional power became incapable of being exercised because of limitation provisions if the date of initial assessment under sec­tion 143(3) of the Act was taken to be the starting point. The Supreme Court’s opinion in that case was that if revisional power was sought to be exercised in relation to items which did not form the basis of reassessment proceeding, then the Commissioner’s jurisdiction could not be exercised because of the limitation provision contained in section 263(2) of the 1961 Act.

9. The ratio of these two authorities does not apply in the facts of the case out of which this appeal arises. It is apparent from the reassessment order, a copy of which has been made annexure “A” to the stay petition, that the issue of share capital at premium was examined by the assessing officer in the reassessment proceeding. There is specific reference to that aspect of the appellant’s account in that order passed on 9-4-2010. The said order also records that detail with respect to increase of share capital sub­mitted by the assessee was examined through issue of notice under section 133(6) of the Act. Though the question of issue of share capital was not a factor which prompted the proceeding for reassessment, the triggering fac­tor, being consultancy fees which had escaped assessment, was accepted by the assessing officer for undertaking the exercise of reassessment. Thus, it was permissible for the reassessing authority to widen the scope of reassessment. The judgment of the Delhi High Court in the case of Ranbaxy (supra) does not aid the appellant in its endeavor to invalidate the revisional proceeding. The principles enunciated in the case of Alagendran Finance (supra) also cannot rescue the appellant, as infusion of share capi­tal formed part of the reassessment procedure. The revisional proceeding was thus commenced within the limitation period prescribed under section 2-3(2) of the Act. The Tribunal has rightly held in the order impugned that limitation period for passing the order is to be counted from the date of passing the order under section 147 read with section 143(3) of the Act and not the date of intimation issued under section 143(1) of the Act.

We, as such, do not find the first suggested question to contain any sub­stantial question of law.

10. Mr. Agarwal also ought to contend that there was no error in the order of reassessment and it could not be said to be prejudicial to the interests of the Revenue. But this point also stands covered in our judgment in the case of Pragati (supra) following the decision of the co-ordinate Bench in Rajmandir (supra). In the Commissioner’s orders passed under section 263 of the Act in both these appeals, inquiries were directed under similar factual context.

11. Next point urged before us by Mr. Agarwal is that there could be no addition to income of the company in the very first year of its incorpora­tion. On that question, he relied on the cases of CIT v. Bharat Engineering and Construction Co. (1972) 83 ITR 187 (SC), CIT v. Smt. P.K. Noorjahan (1999) 237 ITR 570 (SC) and also Mitesh Rolling Mills (P) Ltd. v. CIT (2002) 258 ITR 278 (Guj). The last decision was delivered following the judgment of the Supreme Court in the case of Smt. P.K. Noorjahan (supra). His submission is that both sections 68 and 69 of the Act vest the assessing officer with a discretion to add back to the income of the asses-see, cash credits or investments from unexplained source, but such adding back is not an automatic process. His specific submission, relying on these authorities, is that even if explanation of the assessee is rejected, the assessing officer would still have to exercise his discretion to decide whether the sum is to be added back to the income of the assessee or not after looking into in the facts and circumstances of the case. So far as the factual context of this appeal is concerned, that situation, involving adding back to the income of the assessee has not arisen as yet. In the order of the Commissioner, with which the appellant is aggrieved, only inquiry has been directed. The questions of explanation, its rejection and thereafter exercise of discretion, if such discretion is exercised against the assessee followed by adding back of income would have to be dealt with at the appropriate time by the appropriate forum.

12. It has also been submitted on behalf of the appellant, relying on the aforesaid three authorities, that no direction ought to have been issued by the Commissioner as the relevant financial year was the assessee’s first year of commencement of business. In the case of Bharat Engineering and Construction Co. (supra) the controversy arose out of the Indian Income Tax Act, 1922. In that case, there were five cash credit entries of the assesses in the year the assessee commenced business. The Tribunal found that though the explanation in respect of those cash credit entries were not true, yet from the proved circumstances those cash credits could not be held to be the income of the assessee. The Revenue failed in their appeal before the High Court and also the Supreme Court. The Supreme Court, inter alia, held (page 189 of 83 ITR ) :–

“In our opinion, though the order of the Tribunal is not happily worded, its finding appears to be that in the very nature of things the assessee could not have earned such a huge amounts as profits very soon after it commenced its activities.”

The Supreme Court further observed in this judgment (page 189 of 83 ITR ) :–

“Hence, it is reasonable to assume that those cash credit entries are capital receipts though for one reason or other the assessee had not come out with true story as regards the person from whom it got those amounts.”

13. That judgment was delivered, as we have already observed, under the 1922 Act. The question relating to cash credit receipts was also considered by the Gujarat High Court in the case of Mitesh Rolling Mills (P) Ltd. (supra) and it has been observed in this judgment that the 1922 Act did not have any provision corresponding to the provisions of sections 68 and 69 of the 1961 Act. Moreover, in the judgment of Rajmandir (supra), while con­struing the provisions of section 68 of the 1961 Act, the co-ordinate Bench found no flaw on the part of the Revenue in examining the source of funds received on capital account. In Pragati (supra), we have followed the same reasoning. In our view, the mere fact that the assessment year is the year of commencement of business of the assessee cannot insulate it from an inquiry directed towards steps contemplated under section 68 of the 1961 Act.

The decision in the case of P.K. Noorjahan (supra) involved application of the provisions of section 69 of the 1961 Act. This decision is an authority for the proposition that even if the assessing officer finds the explanation of the assessee on source of investment income to be inadequate, still the assessing officer would have to use his discretion as to whether such sum shall be added as income or not. As we have already indicated, that situ­ation has not yet arisen in this appeal. The judgment in the case of Mitesh Rolling Mills (P) Ltd. (supra) carries same line of reasoning.

For the reasons already discussed earlier in this judgment, we do not find the second suggested point to involve any substantial question of law.

14. The third question, which has been argued before us at length, is that no notice to show cause before passing the order under section 263 of the Act was served upon the assessee. In the order of the Commissioner, this aspect has been dealt with in the following manner :–

“However, the notice was returned by the postal authorities with the remark ‘not found’. Subsequently, an Inspector was deputed to serve the notice. He also could not locate the assessee at the given address and could not contact any of the directors/representatives/employees of the assessee- company. In view of this, the notice had to be served by affixture at the given address. There has been no com­pliance and under the circumstances, I have no option but to pass the order ex parte.”

The Tribunal, in its order dismissing the assessee’s appeal, quoting from the conclusion in its earlier judgment of Subhlakhshmi Vanijya (P) Ltd., observed :–

“In the given facts and circumstances of all such cases, the notices under section 263 were properly served through affixture or other­wise. Further the law does not require the service of notice under sec­tion 263 strictly as per the terms of section 282 of the Act. The only requirement enshrined in the provision is to give an opportunity of hearing to the assessee, which has been complied with in all such cases.”

15. Mr. Agarwal has relied on the judgment of the Supreme Court in the case of CIT v. Ramendra Nath Ghosh (1971) 82 ITR 888 (SC) to contend that there was no proper service of the notice to show-cause and the order passed by the Commissioner under section 263 of the 1961 Act was in breach of the principles of natural justice. In that case, it was held, on the aspect of non-service of notice, that substituted service in the manner pro­ vided under the Code of Civil Procedure ought to have been resorted to if service through regular course could not be effected. That was a judgment delivered under the provisions of the 1922 Act. The said Act provided that a notice there under could be served on the person named therein either by post or, as if it were a summons issued by a court, under the Code of Civil Procedure. The dispute in that case was also over service of notice relating to proceedings under the 1922 Act and there was evidence of notices of the proceeding being served 16 days after the orders were passed. The authorities sought to justify service on affixing of notice. It was held by an Appellate Bench of the High Court that service was not properly effected, and appeal against the decision of the Appellate Bench was dismissed by the Supreme Court. Another judgment of the Supreme Court, CIT v. Electro House (1971) 82 ITR 824 (SC) on the point of service of notice has been referred to on behalf of the appellant. In that judgment, delivered in the context of section 33B of the 1922 Act, the question which was examined by the Supreme Court was whether the Commissioner before assuming jurisdiction to proceed against an assessee was required to give any notice or not. This decision does not strengthen the appellant’s case on the point of service of notice.

16. So far as the present Act is concerned, section 282(1) provides :–

“282. (1) The service of a notice or summon or requisition or order or any other communication under this Act (hereafter in this section referred to as ‘communication’) may be made by delivering or trans­mitting a copy thereof, to the person therein named,–

(a) by post or by such courier services as may be approved by the Board; or

(b) in such manner as provided under the Code of Civil Procedure, 1908 (5 of 1908) for the purposes of service of summons; or

(c) in the form of any electronic record as provided in Chapter IV of the Information Technology Act, 2000 (21 of 2000); or

(d) by any other means of transmission of documents as provided by rules made by the Board in this behalf.”

It is apparent from the aforesaid provision that various modes of service specified therein are in the alternative and there is no mandatory require­ment of following the Code of Civil Procedure. We are of the view that service by post, which had been returned with the endorsement “addressee not found”, followed by an attempt at personal service and subsequent affixture would constitute substantial compliance of the provisions of sec­tion 282 of the Act. In Ramendra Nath Ghosh (supra), there is observation of the Supreme Court to the effect that the question whether the assessees had been served in accordance with the law or not, is essentially a question of fact. The Tribunal, being the highest fact finding body, has already come to the finding that there has been proper service. Furthermore, we find from the order of the Tribunal that the appellant was heard at length on factual as well as legal issues. We do not consider it necessary to go into the question as to whether section 282 of the Act requires compliance or not for effecting service of notice in respect of a proceeding under section 263 of the Act as we are of the opinion that substantial compliance of the provision of section 282(1) has been effected in the case of the assessee. We do not find any perversity on the finding of the Tribunal on this issue. This issue also, in our opinion, does not involve any substantial question of law warranting our interference.

17. The questions Nos. 4 and 5, which were suggested by Mr. Agarwal, are already covered by our judgment in the case of Pragati (supra) and in the judgment of the co-ordinate Bench in the case of Rajmandir (supra). In Pragati (supra), we have specifically held that the exercise which is con­templated by the impugned order of the Commissioner was permissible under section 68 of the 1961 Act, as it stood prior to its amendment by the Finance Act, 2012. We found, in that judgment, that it was not necessary to deal with the question of retroactivity of the said provision. We do not find any reason for following a different course in this judgment. As such, we do not find any substantial question of law is involved in this appeal. The appeal and the application are accordingly dismissed.