2019 (9) TMI 1042 - HC - Income Tax

Block assessment u/s 158BC - non-service of notice under Section 143(2) - procedure for assessment of such cases under Chapter XIV-B of the Income Tax Act, 1961, which includes, inter alia, Section 158BC - Assessee seeks to urge the ground based upon non-service of notice under Section 143(2) - Whether non-issuance of notice under Section 143(2) of the Income Tax Act, 1961 vitiates that assessment proceedings under Section 158 BC? - substantial question of law - HELD THAT - There is no dispute from the record that notice under Section 143(2) of the Income Tax Act was never issued to the Assessee before initiating of proceedings under Section 158BC of the Income Tax Act. The Commissioner (Appeals), in his Order dated 13.09.2004 has given several reasons as to why the issuance of such notice was not a prerequisite for initiating of assessment proceedings under Section 158 BC - According to us, such reasoning cannot any longer prevail after the ruling of the Hon'ble Apex Court in the case of Hotel Blue Moon 2010 (2) TMI 1 - SUPREME COURT as held that the requirements of issuance of notice under Section 143(2) within the prescribed period is not some procedural formality or a procedural irregularity to hold that such a requirement is mandatory and non-dispensable. Such defect of non-issuance of notice under Section 143(2) of the Income Tax Act is not even a curable defect. Record also indicate that this issue was precisely raised by the Assessee before the ITAT. The ITAT however, after recording that such issue was raised before it, failed to decide such issue one way or the other because, the ITAT held in favour of the Assessee on some other grounds. Substantial question of law will have to be decided in favour of the Assessee in view of the decision of the Hon'ble Apex Court in Hotel Blue Moon (supra). Issuance of notice under Section 143(2) of the Income Tax Act, 1961 is a mandatory requirement and not some mere procedural irregularity and the same can be said to be curable. Even for the purpose of Chapter XIV-B of the Income Tax Act for determining of undisclosed income for block assessment in proceedings under Section 158BC, provisions of Section 142, 143(2) and 143(3) are applicable and no assessment can be made without issuing notice under Section 142 of the said Act - Decided in favour of the Assessee and against the Revenue.

Summary

Issues Involved:

1. Whether the ITAT was correct in holding that the amount of ?11,23,36,500/- representing bogus claim of bad debts was not chargeable to tax as undisclosed income.
2. Whether the ITAT was right in law in holding that the sum constituted genuine bad debts.
3. Whether the surcharge under Section 113 of the Income Tax Act was leviable.
4. Whether non-issuance of notice under Section 143(2) of the Income Tax Act vitiates the assessment proceedings under Section 158BC.

Detailed Analysis:

1. Chargeability of ?11,23,36,500/- as Undisclosed Income:
The ITAT held that the amount of ?11,23,36,500/- representing bogus claim of bad debts was not chargeable to tax as undisclosed income under the amended Sections 158B(b) and 158BB(1) of the Income Tax Act. The High Court noted that the substantial questions of law framed in the order dated 27.08.2008 relate to the ITAT's decision to grant relief to the assessee on the ground that this was not a case of "undisclosed income," which is a prerequisite for assessment under Chapter XIV-B.

2. Genuine Nature of Bad Debts:
The ITAT concluded that the sum of ?11,23,36,500/- constituted genuine bad debts of the assessee. The Revenue's contention that the debtor disclosed the same as outstanding debts in their accounts was not upheld by the ITAT. The High Court did not delve into this issue further due to the jurisdictional issue regarding the non-issuance of notice under Section 143(2).

3. Levy of Surcharge under Section 113:
The ITAT held that the surcharge under Section 113 of the Income Tax Act was not leviable on the assessee, which was contrary to the Supreme Court's decision in "CIT V/s. Suresh N. Gupta" (2008) 297 ITR 322. However, the High Court did not address this issue in detail due to the jurisdictional issue.

4. Non-Issuance of Notice under Section 143(2):
The High Court framed an additional substantial question of law regarding whether the non-issuance of notice under Section 143(2) vitiates the assessment proceedings under Section 158BC in light of the Supreme Court's decision in "Assistant Commissioner of Income Tax And Another v/s. Hotel Blue Moon" (2010) 3 SCC 259. The Court observed that the requirement of issuance of notice under Section 143(2) within the prescribed period is mandatory and non-dispensable. The omission to issue such notice is not a curable defect and goes to the root of jurisdiction.

The Court noted that the ITAT failed to decide the issue of non-service of notice under Section 143(2) even though it was raised by the assessee. The High Court decided this substantial question of law in favor of the assessee, holding that the non-issuance of notice rendered the assessment proceedings incompetent. Consequently, there was no necessity to decide the other substantial questions of law framed at the time of admission of the appeal.

Conclusion:
The High Court dismissed the appeal, deciding the jurisdictional issue in favor of the assessee. The Court held that the assessment proceedings were vitiated due to the non-issuance of notice under Section 143(2), rendering the other substantial questions of law moot. The Miscellaneous Civil Application No. 179 of 2016 regarding condonation of delay in filing cross-objections was also disposed of as academic.