2014 (12) TMI 473 - AT - Income Tax

Validity of assessment u/s 143(3) r.w. section 147 Notice not served as provided u/s 143(2) - Whether the reopening of assessment was made in absence of reason to believe and material on records and whether there was service of notice u/s.143(2) much less a proper service as per Rule 17 of Order V of CPC Held that - The limitation prescribed is mandatory the format of provision being in negative terms - if the requirements of a statute which prescribes the manner in which something is to be done are expressed in negative language that is to say if the statute enacts that it shall be done in such a manner and in no other manner such requirements are in all cases absolute and neglect to attend to such requirement will invalidate the whole proceeding in Assistant Commissioner of Income-tax vs. Hotel Blue Moon 2010 (2) TMI 1 - SUPREME COURT OF INDIA - the AO has to necessarily follow the provisions of section 142 and sub-sections (2) and (3) of section 143 - assessee has filed his objection before the AO and such objection has also been noted by the AO in his assessment order to the effect that assessee has objected non service of notice u/s.143(2) during the course of assessment proceedings itself - Thus participation of assessee in the assessment proceedings will not disentitle the assessee his right to object to the service of notice u/s.143(2) of the I.T. Act 1961. Notice issued u/s 143(2) dated 17-7-2012 returned unserved by postal authorities - notice was affixed by the Inspector on 28-7-2012 - Serving Officer had not set out reason for passing subsequent entry nor for adopting the mode for service by affixture and without stating the reasons for doing so the adoption of the mode of substituted service could not be legally justified - Notice was served by affixture - the adoption of mode of substituted service was not legally justified - there is no mention of name and address of the person who had identified the house of the assessee and in whose presence the notice u/s 143(2) was affixed - there was no valid service of notice u/s 143(2) by way of affixation - the department has not been able to demonstrate that notice u/s.143(2) was served within the statutory time limit the assessment made on the basis of such invalid notice could not be treated to be valid assessment and such assessment order deserves to be treated as null and void and liable to be quashed and annulled Decided in favour of assessee.

Issues Involved:
1. Legality of the assessment framed under section 143(3) read with section 147 of the Income Tax Act due to non-service of notice under section 143(2).
2. Validity of reopening the assessment in the absence of "reason to believe" and material on record.
3. Addition of loan/advances as deemed dividend under section 2(22)(e).

Detailed Analysis:

Issue 1: Legality of the assessment framed under section 143(3) read with section 147 due to non-service of notice under section 143(2).

The assessee argued that the assessment framed under section 143(3) read with section 147 was invalid due to the non-service of notice under section 143(2). The statutory time limit for serving this notice was until 30-9-2012, six months from the end of the financial year in which the return was filed. The assessee contended that no such notice was issued or served before the completion of the assessment. The assessee had filed an objection against the jurisdiction, which was not disposed of by the AO, who proceeded with the assessment regardless.

The Tribunal examined the assessment records and found that the notice issued under section 143(2) dated 17-7-2012 was returned unserved by postal authorities. Subsequently, the notice was affixed by the Inspector on 27-7-2012. However, the service by affixture did not comply with Rule 17 of Order V of the CPC, which requires diligent search for the person to be served and proper documentation of the process, including names and addresses of witnesses.

The Tribunal referenced the Supreme Court's decision in CIT Vs. Ramendra Nath Ghosh, which emphasized the necessity of strict compliance with the procedure for service by affixture. The Tribunal found that the Inspector's report lacked essential details, such as the names and addresses of witnesses and verification by affidavit, rendering the service by affixture invalid.

The Tribunal concluded that there was no valid service of notice under section 143(2) within the statutory time limit, making the assessment invalid. Consequently, the assessment order was quashed and annulled.

Issue 2: Validity of reopening the assessment in the absence of "reason to believe" and material on record.

The assessee argued that the reopening of the assessment was invalid due to the absence of "reason to believe" and material on record. The Tribunal did not delve into this issue in detail, as the appeal was allowed on the primary legal issue of non-service of notice under section 143(2).

Issue 3: Addition of loan/advances as deemed dividend under section 2(22)(e).

The assessee contested the addition of loan/advances between two entities as deemed dividend under section 2(22)(e). However, since the Tribunal allowed the appeal on the legal issue of non-service of notice under section 143(2), it did not address the merits of the addition made on account of deemed dividend.

Conclusion:

The Tribunal allowed the appeals on the legal issue of non-service of notice under section 143(2), rendering the assessments invalid. Consequently, the stay applications filed by the assessees became infructuous and were dismissed. The judgments in both cases were applied mutatis mutandis, and the appeals were allowed, while the stay applications were dismissed. The order was pronounced in the open court on 9th September 2014.

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