2017 (10) TMI 63 - AT - Income Tax

Scope of rectification of mistake order - no reasonable opportunity of being heard to the Assessee given - Held that - The principle of natural justice was not followed by the Assessing Officer while rectifying the original assessment order and the said fact was admitted by the CIT(A). It is not proper to improve the Assessing Officer s defect by the CIT(A) which is not permissible under the Income-Tax statute wherein the notice has to be given to the assessee when there is an increase in tax liability on the assessee. As per Section 154(3) of the Act amendment/rectification which has effect of enhancement of an assessment or reducing a refund or otherwise increasing the liability of the assessee shall not be made unless the authority concerned gives notice to the assessee of its intention to do so. Therefore, it is obligatory under the statute to issue notice by the Assessing Officer to give a reasonable opportunity of being heard to the Assessee. This is clearly set out u/s 154 of the Income Tax Act and it has to be followed by the tax authorities at the initial stages. If this procedure is not followed of issuing the notice and giving reasonable opportunity of being heard, further exercise will be non est. Therefore, the assessment order itself becomes void ab initio. The order u/s 154/254 of the Act is set aside. In all the Assessment Years the issue is identical; hence all the appeals of the assessee are allowed.

Summary

Issues involved:
Appeal against orders passed by CIT(A)-XI, New Delhi for various assessment years; Rectification order passed by Assessing Officer under Section 154 of the Income Tax Act; Opportunity of being heard not given to the assessee; Calculation and charging of interest under various sections of the Act; Compliance with principles of natural justice; Validity of orders passed by Assessing Officer and CIT(A).

Analysis:

Issue 1: Rectification order passed by Assessing Officer under Section 154 of the Income Tax Act
The Assessing Officer rectified the original assessment order under Section 154 of the Income Tax Act due to an apparent error in the calculation of interest charged under various sections. The rectification led to a reduction in the overall tax liability of the assessee. The CIT(A) acknowledged the Assessing Officer's authority to make such rectifications as per Section 154(2) of the Act. However, it was noted that the Assessing Officer did not provide the assessee with an opportunity to be heard regarding the enhancement in interest amounts under specific sections, leading to a breach of principles of natural justice.

Issue 2: Compliance with principles of natural justice
The appellant argued that the failure to provide an opportunity for the assessee to present objections regarding the increased tax liability violated the principles of natural justice. Citing a Supreme Court judgment, the appellant emphasized the importance of allowing the assessee to explain reasons for any tax-related discrepancies before finalizing the assessment. The appellant contended that the Assessing Officer and the CIT(A) erred in passing orders against the assessee without following this fundamental procedural requirement.

Issue 3: Validity of orders passed by Assessing Officer and CIT(A)
The Assessing Officer and the CIT(A) defended their actions, stating that the rectification was justified based on the errors found in the original assessment order. The CIT(A) admitted the lack of opportunity given to the assessee for presenting objections and subsequently provided a chance for the assessee to address the computation of interest under specific sections. However, the failure to adhere to the procedural requirement of issuing a notice and providing a reasonable opportunity of being heard was deemed significant. The tribunal emphasized that under Section 154 of the Income Tax Act, the issuance of a notice to the assessee before enhancing the tax liability is mandatory. The failure to follow this procedure rendered the assessment order void ab initio, leading to the setting aside of the order passed under Section 154/254 of the Act.

Conclusion:
The tribunal allowed all the appeals of the assessee, emphasizing the importance of compliance with procedural requirements and principles of natural justice in tax assessments. The failure to provide the assessee with an opportunity to be heard before enhancing the tax liability was deemed a critical flaw, resulting in the setting aside of the rectification order passed by the Assessing Officer. The judgment underscored the necessity of following statutory procedures and ensuring fair treatment of taxpayers in tax proceedings.