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2017 (12) TMI 1331 - AT - Income TaxValidity of reopening of assessment - non issue of notice - Held that - In reassessment proceedings u/s 147/148 of the Act, to issue notice u/s 143(2) of the Act prior to finalisation of reassessment order cannot be condoned on the strength of Sec. 292BB of the Act Assessing Officer had failed to issue notice u/s 143(2) of the Act before finalising the reassessment proceedings, the impugned assessment is illegal and unsustainable and is hereby directed to be quashed. Since we have held the assessment order itself to be illegal and unsustainable, the other Grounds raised by the assessee in the Memo of appeal reproduced above, are rendered academic and are not being adjudicated for the present.- Decided in favour of assessee.
Issues Involved:
1. Treatment of Long Term Capital Gain as Interest Income. 2. Transaction of Transfer of Bonds as a Colorable Device. 3. Redemption of Deep Discount Bonds as a Transfer within Section 2(47). 4. Validity of Notice under Section 148. 5. Validity of Reopening of Assessment under Section 147. 6. Non-Issuance of Notice under Section 143(2). Issue-wise Detailed Analysis: 1. Treatment of Long Term Capital Gain as Interest Income: The primary issue was whether the income earned on the redemption of IDBI deep discount bonds should be treated as long-term capital gain or interest income. The Assessing Officer (AO) treated the income of ?1,06,95,000/- as interest income under the head 'Income from Other Sources' instead of long-term capital gain. This was based on the premise that the transaction was a sham intended to reduce tax liability, as the income would have been taxed as interest income if the bonds were redeemed directly by the assessee. 2. Transaction of Transfer of Bonds as a Colorable Device: The AO considered the transaction of transferring bonds between the assessee and his brother as a colorable device, designed to reclassify the income from interest to capital gains to benefit from concessional tax rates. The AO noted that the transaction was intended to lower the ultimate tax liability, as evidenced by the TDS certificate issued by IDBI, which categorized the income as interest income. 3. Redemption of Deep Discount Bonds as a Transfer within Section 2(47): The assessee argued that the redemption of deep discount bonds constitutes a transfer within the meaning of Section 2(47) of the Income Tax Act, 1961, as it involves the extinguishment and relinquishment of rights. However, the AO disagreed, treating the proceeds from the redemption as interest income. 4. Validity of Notice under Section 148: The assessee contended that the notice issued under Section 148 was bad in law. The AO had issued a notice under Section 148 on 29.01.2004, which was revised on 13.05.2004. The assessee responded by requesting that the revised return filed on 07.08.2003 be treated as a return filed in response to the notice. The assessment was finalized under Section 143(3) read with Section 147 on 24.03.2005. 5. Validity of Reopening of Assessment under Section 147: The assessee challenged the reopening of the assessment under Section 147, claiming it was not valid. The CIT(A) upheld the AO's decision, but the Tribunal found that the AO did not issue the mandatory notice under Section 143(2) before finalizing the assessment, rendering the reassessment proceedings invalid. 6. Non-Issuance of Notice under Section 143(2): The Tribunal admitted the additional ground raised by the assessee regarding the non-issuance of notice under Section 143(2) before finalizing the assessment. The Tribunal found that the AO had failed to issue the mandatory notice, which is a jurisdictional requirement. The absence of this notice invalidated the assessment proceedings. The Tribunal relied on various judicial precedents, including the Hon'ble Supreme Court's judgment in Hotel Blue Moon, which emphasized the necessity of issuing a notice under Section 143(2) within the prescribed period. Conclusion: The Tribunal concluded that the assessment order passed by the AO under Section 143(3) read with Section 147 was illegal and unsustainable due to the non-issuance of the mandatory notice under Section 143(2). Consequently, the Tribunal quashed the assessment order, rendering the other grounds raised by the assessee academic and not adjudicated. The appeals of both the assessee and his brother were allowed on similar grounds, directing the AO to recompute the income in consonance with the Tribunal's findings.
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