2015 (9) TMI 969 - HC - Income Tax

Reopening of assessment - 54% of the total interest income accrued on different FDRs was escaped assessment - whether notice issued under Section 148 of the Act for reassessment was hopelessly time barred in view of the provisions of Section 149 read with Section 150 and 153 (3) Explanation 3 of the Income Tax Act? - Held that - Bare perusal of Explanation 3 of Section 153 (3) of the Act shall demonstrate that excluded income of original assessee, can be assessed in the income of third party, if third party was heard by the Authority, making observations or issuing direction that excluded income is of third party, therefore, shall be excluded from the income of original assessee. Meaning thereby, the third person whose liability is found by the assessing authorities while making assessment against the original assessee, such third party has to be heard before fixing his liability. If such third party is heard then only reassessment under Section 148 read with Sections 149 and 150 of the Act is permissible. However, if he is not heard, then notice for reassessment has to be issued within the period of limitation, as provided under Section 149 (1) (b) of the Act.In the present case, admittedly, assessee was not heard by ITAT, Lucknow Bench, while observing that out of total income derived from the interest on FDRs, tax liability of UPFC is only to the extent of 46% and liability on the total interest income to the extent of 54 % shall be of UFDC. Therefore, we do not find any illegality in the order passed by ITAT, Delhi Bench H , New Delhi. Therefore, question is answered against the Revenue and in favour of the assessee.

Summary

Issues:
Appeal against re-assessment orders for assessment years 2002-03, 2003-04, and 2004-05 based on the limitation period for issuing notice under Section 148 of the Income Tax Act.

Analysis:
The appeals challenged a common judgment by the Income Tax Appellate Tribunal, Delhi Bench 'H', allowing the assessee's appeals on the ground that the notice under Section 148 was time-barred. The case involved the Uttar Pradesh Forest Corporation (UPFC) and the Uttarakhand Forest Development Corporation (UFDC) regarding the tax liability on interest income earned. The ITAT, Lucknow Bench held UPFC liable for 46% tax on total interest income, with the remaining 54% attributable to UFDC. Subsequently, a notice under Section 148 was issued to UFDC, leading to the current dispute.

The key legal provisions examined were Sections 149, 150, and Explanation 3 of Section 153(3) of the Income Tax Act. Section 149 sets out the time limit for issuing a notice under Section 148, with specific conditions for extending the limitation period. Section 150 allows for issuing a notice at any time to give effect to findings or directions in an order passed by an authority. Explanation 3 of Section 153(3) deals with the assessment of excluded income on another person, requiring that the other person must have been given an opportunity to be heard.

The judgment emphasized that if a third party's liability is determined during assessment against the original assessee, the third party must be heard before reassessment. Failure to provide this opportunity necessitates issuing the notice within the statutory limitation period. Citing a Delhi High Court case, it was established that before issuing a notice beyond the prescribed time limits, the excluded income must be attributed to another person who was given a chance to be heard.

In this case, since UFDC was not heard by the ITAT, Lucknow Bench regarding its tax liability, the reassessment notice issued under Section 148 was deemed time-barred. The judgment favored the assessee, upholding the ITAT, Delhi Bench 'H', decision. Consequently, all appeals were dismissed, affirming the legality of the ITAT's ruling and rejecting the Revenue's challenge.

In conclusion, the judgment clarified the importance of providing a hearing to third parties whose liability is determined during assessment and highlighted the necessity of adhering to statutory limitations when issuing reassessment notices under the Income Tax Act.