2017 (5) TMI 162 - AT - Income Tax

Rectification proceedings carried out u/s. 154 - non-service of rectification notice - Held that - Issuance of notice or handing over the notice to the dispatch section is not sufficient. Unless and until a notice is served upon the assessee or is returned back by the postal authorities with comments of refuse to receive, it cannot be presumed that notice was served upon the assessee. In the absence of a valid service of notice, all other proceedings would be vitiated for not following the basic principle of natural justice. Only on this count the order of the FAA deserves to be reversed. However, we find that the order passed by the AO u/s. 143(3) of the Act became final after the judgment of the Hon ble High Court of Bombay wherein it had upheld the order of the Tribunal wherein the revisionary proceedings, initiated by the CIT, u/s. 263 of the Act, were set aside. As a result, the claim made by the assessee for carry forward and set off of unobserved loss/ depreciation had to be allowed. Thus, the AO had wrongly held that no depreciation was available in the AY. 2003-04, that the unabsorbed loss/depreciation was being carried forward from the earlier years. Thus order passed by the FAA has to be reversed. - Decided in favour of assessee.

Summary

Issues:
1. Rectification proceedings under section 154 of the Income Tax Act.
2. Validity of rectification notice and opportunity to be heard.
3. Correctness of AO's order regarding set off of losses/depreciation.
4. Compliance with principles of natural justice in rectification proceedings.

Analysis:
1. The appeal was filed by the assessee against the order of the CIT(A)-20, Mumbai, challenging the rectification proceedings carried out by the Assessing Officer (AO) under section 154 of the Income Tax Act. The AO had issued a notice proposing rectification due to an alleged mistake in the assessment order, which resulted in a revised total income for the assessee.

2. The assessee argued before the First Appellate Authority (FAA) that the rectification order was illegal and contrary to the provisions of the Act, as the notice under section 154 was not duly served upon them. The FAA referred the matter back to the AO, who upheld the rectification order, stating that the assessee did not refute the factual findings and that the rectification was as per law.

3. During the appeal hearing, the Authorized Representative contended that the AO did not comply with the statutory requirements of providing a reasonable opportunity to be heard before passing the rectification order. The AO had withdrawn the set off of losses/depreciation, claiming they were brought forward from a different assessment year. However, the Tribunal found that the AO's decision was incorrect, as the losses/depreciation were rightfully claimed and allowed in the original assessment order.

4. The Tribunal noted that the service of notice under section 154 was a crucial requirement for passing a rectification order. It emphasized that mere issuance of notice was not sufficient, and valid service upon the assessee was essential. As the notice was not proven to have been served, the Tribunal held that the proceedings were flawed for not adhering to the principles of natural justice. The Tribunal also considered the jurisdictional issue in favor of the assessee and reversed the FAA's order, allowing the appeal.

In conclusion, the Tribunal allowed the appeal filed by the assessee, overturning the rectification order and emphasizing the importance of adhering to procedural requirements and principles of natural justice in such proceedings.