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2012 (9) TMI 573 - AT - Income TaxValidity of Notice issued u/s 143(2) Assessee files ROI 29/06/2007 for the AY 2003-04 & 2005-06 in response to notice u/s 147 Notice issued u/s 143(2) on 15/07/2008 for the both of years - AO dismissed the same on the ground that Sec. 143(2) amended w.e.f. 1.4.2008 prescribed that notice shall not be issued after the expiry of 6 months from the end of the F.Y. in which the return was filed Held that - As per the explanatory note issued by CBDT vide circular no. 1 of 2009, reveals that the amended provision of Sec. 143(2) shall apply to all such returns (irrespective of the assessment year, to which the returns pertain) where notice u/s 143(2) can still be issued on 1.4.2008, under the pre-amended provision. Therefore, circulars or general directions, issued by the CBDT would be binding u/s 119, on all officers and persons, employed in the execution of the Act. Appeal decides in favour of revenue Disallowance due to change in accounting method AO rejecting method of accounting employed by the assessee u/s 145(3) - Assessee accounting for the incomes on cash basis and the expenses were claimed on mercantile basis under the head PGBP - which is neither cash nor mercantile Held that - As the Tribunal direct the AO to consider the allowability of the expenses in question namely interest, salaries and rent in the year of their payment in accordance with law. Appeal decides in favour of revenue
Issues Involved:
1. Validity of the notice issued under Section 143(2) beyond the stipulated period. 2. Legality of proceedings initiated under Section 147/148 of the Income-tax Act. 3. Addition of income on account of interest, salary, rent, and legal charges. 4. Rejection of hybrid system of accounting and adoption of cash system of accounting. Issue-wise Detailed Analysis: 1. Validity of the notice issued under Section 143(2) beyond the stipulated period: The assessee argued that the notice issued under Section 143(2) dated 11.07.2008 and served on 15.07.2008 was beyond the 12-month period from the date of filing the return, thus making it invalid. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] contended that the amendment to Section 143(2) effective from 01.04.2008 was procedural and applied to pending matters. The AO issued the notice within the permissible period as per the amended provisions. The Tribunal upheld the AO's action, referencing CBDT Circular No. 1 of 2009, which clarified that the amended provision of Section 143(2) applies to all returns where notice could still be issued as of 01.04.2008. Hence, the notices were deemed valid. 2. Legality of proceedings initiated under Section 147/148 of the Income-tax Act: The assessee challenged the initiation of proceedings under Sections 147/148, arguing that the notices were issued beyond the permissible period. The AO and CIT(A) maintained that the notices were issued within the statutory period. The Tribunal found that the AO issued notices under Section 148 on 05.06.2007, and the assessee filed returns on 29.06.2007. The Tribunal upheld the AO's action, noting that the notices were issued in accordance with the amended provisions and relevant CBDT circular, thus making the proceedings valid. 3. Addition of income on account of interest, salary, rent, and legal charges: The assessee contested the additions made by the AO on account of interest, salary, rent, and legal charges. The AO justified the additions based on the rejection of the hybrid system of accounting and the adoption of the cash system. The CIT(A) upheld the AO's findings. The Tribunal referred to its earlier decision in the assessee's case for the assessment year 2004-05, where it upheld the AO's action in rejecting the hybrid system of accounting. The Tribunal directed the AO to consider the allowability of expenses in the year of actual payment, thus dismissing the assessee's grounds of appeal. 4. Rejection of hybrid system of accounting and adoption of cash system of accounting: The AO rejected the hybrid system of accounting employed by the assessee, which accounted for income on a cash basis and expenses on a mercantile basis. The AO adopted the cash system of accounting, citing the mandatory provisions of Section 145(1) of the Act. The CIT(A) supported the AO's decision, and the Tribunal upheld the rejection of the hybrid system, referencing its previous ruling in the assessee's case. The Tribunal noted that the statutory provisions required the use of either the cash or mercantile system, and the hybrid system was no longer permissible. Consequently, the Tribunal dismissed the assessee's grounds of appeal related to the accounting method. Conclusion: The Tribunal dismissed both appeals of the assessee, upholding the validity of the notices issued under Section 143(2) and the legality of the proceedings initiated under Sections 147/148. The Tribunal also supported the AO's rejection of the hybrid system of accounting and the additions made on account of interest, salary, rent, and legal charges. The Tribunal's decision was based on statutory provisions, relevant case laws, and CBDT circulars.
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