2007 (1) TMI 110 - HC - Income Tax

Undisclosed income of the block period - Non-issuance of notice u/s 143(2) - Non-issuance of notice u/s 143(2), did not invalidate the assessment relating to the block period and was at best a mere procedural irregularity? - HELD THAT - It is true that the return was filed by the assessee in response to a notice u/s 158BC(a). Clause (b) of section 158BC provides that the provisions of section 142 as well as sub-sections (2) and (3) of section 143 shall apply even in the case of a block assessment so far as may be. There is no dispute that in the case of assessment under Chapter XIV, a notice u/s 143(2) is mandatory where the Assessing Officer proceeds to make an inquiry as provided in section 142. Similarly, the provision of section 143(2) will be mandatorily applicable in the case of a block assessment also where the Assessing officer in repudiation of the return filed u/s 158BC(a) proceeds to make an inquiry in the proceeding under Chapter XIV-B. Once the power of inquiry u/s 142 is invoked, the Assessing Officer has no option but to follow the provisions of section 143(2). Thus, we hold that the provisions of section 142 and sub-sections (2) and (3) of section 143 will have mandatory application in a case where the Assessing Officer in repudiation of the return filed in response to a notice issued u/s 158BC(a) proceeds to make an inquiry. The defects crept in cannot be cured at this stage in view of the limitation provided in section 143(2). The assessment order in the instant case thus suffers from both procedural and jurisdictional error. The option left with the Assessing Officer is to compute the income and levy taxes on the basis of the return filed by the assessee. The question formulated is answered against the Revenue and in favour of the assessee. Consequent thereupon, the orders passed by the authorities below are set aside. The appeal, accordingly, stands allowed.

Issues Involved:
1. Validity of assessment without issuance of notice under section 143(2) of the Income-tax Act, 1961.
2. Interpretation of procedural requirements under section 158BC and section 143(2) in block assessment cases.

Issue-Wise Detailed Analysis:

1. Validity of assessment without issuance of notice under section 143(2):

The primary issue revolves around whether the non-issuance of notice under section 143(2) invalidates the assessment for the block period. The appellant argued that the assessment without such notice is invalid, while the Revenue contended that the notice is a procedural formality that can be dispensed with in block assessments.

The court noted that the appellant, an assessee under the Income-tax Act, faced a search and seizure operation, leading to the issuance of a notice under section 158BC. The appellant filed a return, but the Assessing Officer completed the assessment without issuing a notice under section 143(2). The Commissioner of Income-tax (Appeals) and the Tribunal both held that the omission of notice under section 143(2) was a procedural irregularity and did not invalidate the assessment.

The court, however, emphasized that if the Assessing Officer proceeds to make an inquiry under section 142, the provisions of section 143(2) become mandatory. The court referred to the Supreme Court's interpretation in R. Dalmia v. CIT, which highlighted that procedural provisions cannot be excluded by the phrase "so far as may be." The court concluded that the words "so far as may be" in section 158BC(b) do not grant the Assessing Officer discretion to dispense with the notice under section 143(2) when making an inquiry.

2. Interpretation of procedural requirements under section 158BC and section 143(2):

The court examined the procedural requirements under Chapter XIV-B, which deals with block assessments following search and seizure operations. Section 158BC outlines the procedure for block assessments, requiring a notice under section 158BC(a)(ii) and adherence to the provisions of sections 142 and 143(2) and (3) "so far as may be."

The court clarified that if the Assessing Officer accepts the return filed in response to a notice under section 158BC, he can proceed to determine the tax payable without further inquiry. However, if the Assessing Officer decides to scrutinize the return, he must issue a notice under section 143(2). The court highlighted that section 143(2) requires the issuance of a notice under two circumstances: when the Assessing Officer believes a claim in the return is inadmissible or when he considers it necessary to ensure the correctness of the return.

The court further emphasized that in block assessment cases, the Assessing Officer must follow the provisions of section 143(2) if he proceeds to make an inquiry. The court cited various judgments, including CIT v. M. Chellappan and Vipan Khanna v. CIT, which supported the necessity of issuing a notice under section 143(2) before making an assessment.

The court also referred to a circular issued by the Board of Direct Taxes, which mandates the issuance of a notice under section 143(2) within a specified period if the case is picked up for scrutiny. This circular, although not binding on the court, clarifies the legal requirement for issuing a notice under section 143(2).

Conclusion:

The court concluded that the Assessing Officer's failure to issue a notice under section 143(2) in the case of block assessment invalidated the assessment order. The court held that the provisions of section 142 and sections 143(2) and (3) are mandatory when the Assessing Officer proceeds to make an inquiry in repudiation of the return filed under section 158BC(a). Consequently, the assessment order suffered from procedural and jurisdictional errors. The court answered the question in favor of the assessee and set aside the orders passed by the authorities below, allowing the appeal.

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