2012 (9) TMI 129 - HC - Income Tax

Completion of assessment ex-parte u/s 144 - defective return filed by assessee in response to a notice u/s 139 (2) - Held that - The C.B.D.T. circular No.281, dated 22-09-1980 is in the nature of a clarification to the assessing authorities that when there is a default in rectifying a defect in the return as intimated by the I.T.O. by the assessee, the return of income has to be treated as an invalid return and further proceedings will have to be taken on the footing that the assessee had failed to file the return. The C.B.D.T. has rightly directed that in case where the return is furnished voluntarily under Section 139 (1), the I.T.O. cannot proceed to make ex parte assessment under Section 144 without serving notice under Section 139 (2) or as the case may be under Section 148. This circular is binding on the AO. As in the present case when the assessee filed a defective return, and did not rectify the defects which were pointed out by the I.T.O., the AO was bound to treat the return of income as invalid and take further proceedings on the footing that the assessee had failed to furnish the return & could not have proceeded to make ex parte assessment u/s 144 without serving notice u/s 139 (2) or as the case may be u/s 148 - against revenue.

Summary

Issues Involved:
1. Validity of assessment under Section 144 of the Income Tax Act, 1961.
2. Applicability and binding nature of CBDT Circular No.281 dated 22-09-1980.
3. Requirement of issuing notice under Section 139(2) or Section 148 before making a best judgment assessment under Section 144.

Detailed Analysis:

1. Validity of assessment under Section 144 of the Income Tax Act, 1961:
The respondent/assessee filed its return of income for the assessment year 1986-1987 admitting a loss. The assessing officer issued a notice under Section 143(2) of the Act, which went unanswered. Several extensions were requested by the assessee but no information was provided. Consequently, the assessing officer completed the assessment based on available information under Section 144 of the Act, making various additions and assessing the net taxable income. The assessee appealed, and the C.I.T. (Appeals-II) annulled the assessment, stating it was not in accordance with law, and relied on a CBDT circular. The I.T.A.T. upheld this decision. The Revenue challenged this annulment, contending that the C.I.T. (Appeals) and I.T.A.T. erred in annulling the assessment.

2. Applicability and binding nature of CBDT Circular No.281 dated 22-09-1980:
The C.I.T. (Appeals-II) and I.T.A.T. relied on CBDT Circular No.281, which clarified that if a return is defective and not rectified, it should be treated as an invalid return, necessitating a notice under Section 139(2) or Section 148 before proceeding under Section 144. The Revenue argued that the circular, while binding on assessing officers, was not binding on appellate authorities and was contrary to the Act's provisions. The court, however, held that the circular was not contrary to the Act and correctly guided the assessing officer on the procedure before making a best judgment assessment. The circular was deemed beneficial to the assessee, providing an additional opportunity to correct income details.

3. Requirement of issuing notice under Section 139(2) or Section 148 before making a best judgment assessment under Section 144:
The court examined the interplay between Sections 139(2), 139(9), and 144 of the Act. Section 144(1)(a) (as it stood then) allowed best judgment assessment if an assessee failed to make the return required by a notice under Section 139(2). Section 144(1)(c) allowed it if the assessee, having made a return, failed to comply with a notice under Section 143(2). The court rejected the Revenue's contention that the notice under Section 143(2) sufficed for a best judgment assessment under Section 144(1)(c). It emphasized that treating a defective return as invalid required following the procedure outlined in the CBDT circular, which mandated a notice under Section 139(2) or Section 148 before proceeding under Section 144.

The court concluded that the CBDT circular was binding on assessing officers and provided a correct procedural guide. The assessing officer should have treated the defective return as invalid and issued a notice under Section 139(2) or Section 148 before making a best judgment assessment. The decision of the I.T.A.T. confirming the C.I.T. (Appeals-II) was upheld, and the appeal by the Revenue was dismissed.