2007 (11) TMI 663 - AT - Income Tax

Validity Of Initiation of Proceedings u/s 147/148 - Escaped assessment - belief that (HUF) has not filed the return of income - assumption of justification u/s 148 - Status of HUF - Notice u/s 148 was sent to the HUF and assessment made in the hands of individual - HELD THAT - In our view, the IT Act recognizes the status of the HUF different from individual status of Karta of the HUF. Two are treated as different legal entities. Therefore, it is necessary that notice u/s 148 of the Act should be sent in the correct status because jurisdiction to make assessment is assumed by issuing valid notice. Admittedly, in this case, the notice u/s 148 was sent to the HUF and assessment has been made in the hands of individual. In our view after having issued notice u/s 148 of the Act to HUF, the AO has no jurisdiction to make the assessment in the case of individual. In the case of CIT vs. K. Adinarayana Murty 1967 (4) TMI 1 - SUPREME COURT held that; individual and the HUF are treated as separate units of assessment and if a notice u/s 34 of the Act is wrongly issued to the assessee in the status of an individual and not in the correct status of an HUF, the notice is illegal and all proceedings taken under that notice are ultra vires and without jurisdiction. Thus, it is clear from the above that the Department cannot be permitted to change the status from the HUF to individual. Thus, assessment framed u/s 148/144 is not legally sustainable. Reasons recorded by the AO - We are of the view that the reopening has been done on the basis of the reason recorded on incorrect facts. That being so, the reasons are, in fact, no reasons at all. This view find support from the decision in the case of CIT vs. Atlas Cycle Industries 1989 (4) TMI 48 - PUNJAB AND HARYANA HIGH COURT . Further, it is seen from the reason recorded that the purpose of reopening was to make verification of the investment made by the assessee. In the case of Manish Ajmera vs. Asstt. CIT 2005 (3) TMI 388 - ITAT CHANDIGARH-A it has been held that the assessment made u/s 143(1) without issue of notice u/s 143(2) could not be reopened in the absence of any fresh material to show that income has escaped assessment and reopening for making fishing inquiry was not valid. Therefore, we hold that the initiation of the proceedings u/s 148 of the Act is not legally sustainable and as such assessment framed in pursuance of the said notice is liable to be quashed on this ground alone. Since we have quashed the assessment made in the matter on the legal ground as aforesaid, the other grounds taken by the assessee will not survive. In the result, the appeal filed by the assessee is allowed.

Issues Involved:
1. Validity of initiation of proceedings under sections 147/148 of the IT Act.
2. Non-compliance and ex parte assessment under section 144 of the IT Act.
3. Legality of assessment based on incorrect status (HUF vs. individual).
4. Validity of reopening for verification purposes.

Detailed Analysis:

1. Validity of Initiation of Proceedings under Sections 147/148 of the IT Act:
The first issue pertains to the validity of the initiation of proceedings under sections 147/148 of the IT Act. The AO issued a notice under section 148 based on the belief that an investment of Rs. 17,36,227 had escaped assessment. This belief was formed during the wealth-tax assessment, which was completed ex parte. The AO noted that the assessee had not filed an IT return for the assessment year 1998-99, leading to the conclusion that the investment remained unexplained. However, the assessee contended that the return was duly filed on 28th October 1998 and processed under section 143(1)(a) on 10th May 1999. The Tribunal found that the reopening of the assessment was based on incorrect facts, as the return had indeed been filed. The Tribunal held that the initiation of proceedings under section 148 was not legally sustainable due to the incorrect basis for the AO's belief.

2. Non-compliance and Ex Parte Assessment under Section 144 of the IT Act:
The AO completed the assessment ex parte under section 144 due to non-compliance by the assessee despite multiple opportunities. The CIT(A) upheld the AO's action, noting that the assessee had repeatedly failed to respond to statutory notices and provide the necessary details. The Tribunal, however, quashed the assessment on the grounds that the initiation of proceedings was not valid, rendering the ex parte assessment under section 144 void.

3. Legality of Assessment Based on Incorrect Status (HUF vs. Individual):
The AO issued the notice under section 148 to Shri Raj Kumar Duggar (HUF) but made the assessment in the status of Shri Raj Kumar Duggar (individual). The Tribunal emphasized that the IT Act treats HUF and individual as distinct legal entities, and a notice issued to one cannot confer jurisdiction to assess the other. Citing the Supreme Court decision in CIT vs. K. Adinarayana Murty, the Tribunal held that the assessment made in the status of an individual following a notice issued to HUF was ultra vires and without jurisdiction.

4. Validity of Reopening for Verification Purposes:
The Tribunal noted that the reasons recorded for reopening were primarily for verification, which is not a valid ground for reopening an assessment. Citing the case of Manish Ajmera vs. Asstt. CIT, the Tribunal held that reopening for making a fishing inquiry without fresh material showing income escapement is invalid. The Tribunal concluded that the reopening was based on incorrect facts and intended for verification, making it legally unsustainable.

Conclusion:
The Tribunal quashed the assessment made under sections 147/148 and 144 of the IT Act, holding that the initiation of proceedings was based on incorrect facts and the assessment was made in the wrong status. The appeal filed by the assessee was allowed, and the other grounds raised by the assessee were deemed unnecessary to address due to the quashing of the assessment on legal grounds.

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