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Deputy Commissioner Of Income-Tax v. Mahi Valley Hotels And Resorts
Factual and Procedural Background
This is an appeal by the Revenue from an order dated March 11, 2004 of the Income-tax Appellate Tribunal, Ahmedabad Bench “B”. The Revenue framed two questions arising out of the Tribunal's order. The questions challenged the Tribunal's confirmation of the Commissioner of Income-tax (Appeals)'s order that an assessment framed under section 143(3) of the Income-tax Act, 1961 is void ab initio if the notice under section 143(2) was issued beyond the prescribed time limit. The Revenue relied on (a) the fact that the assessee did not challenge the jurisdiction of the Assessing Officer during assessment proceedings on limitation grounds and (b) an earlier High Court decision (H.R. Rai v. CIT) and (c) a Tribunal decision in Rakesh S. Mardia which, it was argued, was distinguishable or pending challenge before the High Court.
Relevant dates and facts mentioned in the opinion: the return of income for assessment year 1997–98 was filed on March 30, 1997, and a notice under section 143(2) was first issued on August 20, 1998. It was therefore admitted that the notice was issued beyond the twelve-month period prescribed by the proviso to section 143(2). The Tribunal had upheld the Commissioner (Appeals)'s conclusion that the assessment was void ab initio for failure to issue the notice within the statutory period. The present appeal by the Revenue challenged that conclusion.
Legal Issues Presented
- Whether the Income-tax Appellate Tribunal was correct in law and on facts in holding that an assessment is void ab initio where a notice under section 143(2) is issued beyond the statutory time limit (the Tribunal's reliance being stated to follow Mrs. C. Malthy), particularly when the assessee did not challenge the issuance of the notice before the Assessing Officer and reliance is placed on the decision in H.R. Rai v. CIT.
- Whether the Tribunal was correct in its treatment of the decision in Rakesh S. Mardia v. Deputy CIT [2002] 74 ITJ (Ahd) 836, especially given that that Tribunal decision was being challenged by way of Tax Appeal No. 420 of 2000, which was admitted and pending before the Gujarat High Court.
Arguments of the Parties
Appellant-Revenue's Arguments
- The Tribunal wrongly confirmed the Commissioner (Appeals)'s order that the assessment was void ab initio because the notice under section 143(2) was issued beyond the statutory one-year period.
- The assessee did not challenge the jurisdiction of the Assessing Officer during assessment proceedings on the ground that the section 143(2) notice was time-barred; the challenge was raised for the first time before the Commissioner (Appeals), and therefore could not be entertained.
- By participating in the assessment proceedings before the Assessing Officer the assessee had acquiesced and waived any objection to jurisdiction; such participation should validate the assessment notwithstanding late issuance of the notice.
- The Tribunal and Commissioner (Appeals) erred in treating the proviso to section 143(2) as mandatory so as to render the assessment void ab initio.
- The Revenue pointed to the decision in H.R. Rai v. CIT (Madhya Pradesh High Court) in support of its position, and relied on the Rakesh S. Mardia Tribunal decision (which it noted was itself under challenge in the Gujarat High Court).
The opinion does not set out a detailed, separate narrative of the assessee's submissions in adversarial form; however, the Tribunal and Commissioner (Appeals) had concluded that the notice issued beyond the statutory period rendered the assessment void ab initio, a position accepted by this Court.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Mrs. C. Malthy (referred to in the Tribunal's reasoning) | That when an assessment under section 143(3) is framed by issuing a statutory notice beyond the prescribed time limit, the assessment is bad in law and has to be quashed (as stated in the question framed by Revenue). | The Tribunal relied on that line of reasoning to hold the assessment void ab initio; the Court accepted the Tribunal and Commissioner (Appeals)'s reading that the proviso to section 143(2) prescribes a mandatory limitation, aligning with the effect attributed to Mrs. C. Malthy in the Tribunal's decision. |
| H.R. Rai v. CIT, [1984] 145 ITR 809 (Madhya Pradesh High Court) | Invoked by the Revenue as authority to challenge the proposition that late issuance of notice inexorably renders an assessment void. | The Revenue referred to this decision in support of its challenge; the Court did not accept the Revenue's contention that reliance on H.R. Rai undermined the Tribunal's conclusion. The Court concluded the proviso to section 143(2) is mandatory and dispositive in the present facts. |
| Rakesh S. Mardia v. Deputy CIT, [2002] 74 ITJ (Ahd) 836 | Raised by the Revenue as a conflicting Tribunal decision and noted to be under challenge by Tax Appeal No. 420 of 2000 before the Gujarat High Court. | The Court observed that the earlier Tribunal decision in Rakesh S. Mardia was in a different context—specifically in the light of block assessment—and thus distinguishable from the present case. |
Court's Reasoning and Analysis
The Court proceeded through statutory interpretation and the statutory scheme of assessment under the Income-tax Act, 1961.
First, the Court described the statutory framework: the Act permits (i) acceptance of returned income, (ii) acceptance with permissible adjustments under section 143(1) by intimation, and (iii) scrutiny assessment under section 143(3). The notice under section 143(2) is issued in the course of scrutiny assessment.
The Court analyzed section 143(2): the main subsection requires the Assessing Officer to be prima facie satisfied that the assessee has understated income, computed excessive loss, or underpaid tax before issuing a notice to attend or to produce evidence. The proviso to sub-section (2) provides that no notice shall be served after the expiry of twelve months from the end of the month in which the return was furnished.
On plain reading, the Court held the proviso's limitation is mandatory. It relied on the legal principle that where a statute prescribes the manner in which something is to be done using negative language (i.e., "shall be served" and "in no other manner"), such requirements are absolute and failure to comply invalidates the proceeding. The Court applied that principle to conclude that serving notice beyond the twelve-month period invalidates subsequent scrutiny proceedings that depend on such notice.
The Court also relied on contemporaneous administrative exposition: Central Board of Direct Taxes Circular No. 549 (dated October 31, 1989) explained that if no section 143(2) notice is received within the prescribed period an assessee can treat the return as final. When the period was extended to twelve months by the Finance (No. 2) Act, 1991, Circular No. 621 (dated December 19, 1991) gave an explanatory note for the extension. The Court stated that departmental circulars are explanatory and the departmental authorities are bound by them; they provide contemporaneous exposition supporting the mandatory character of the proviso.
The Court rejected the Revenue's contention that the assessee’s participation in assessment proceedings amounted to acquiescence or waiver such that the late notice could be validated. The Court noted the admitted dates (return filed March 30, 1997; notice issued August 20, 1998) and concluded the notice was beyond the twelve-month statutory period. The Court also observed that the Commissioner (Appeals) has powers co-extensive with those of the Assessing Officer and that a purely legal issue arising under the provisions of the Act can be raised at any stage.
Concluding its analysis, the Court found the Tribunal and the Commissioner (Appeals) had correctly interpreted the statute and the circulars, and therefore there was no substantial question of law arising from the impugned order.
Holding and Implications
HOLDING: The appeal is dismissed. The Court upheld the Tribunal's and the Commissioner (Appeals)'s conclusion that an assessment under section 143(3) is void ab initio if the notice under section 143(2) was served after the expiry of the twelve-month period prescribed by the proviso to section 143(2).
Implications:
- The Court treated the proviso to section 143(2) as a mandatory limitation; failure to issue the section 143(2) notice within the prescribed twelve months invalidates scrutiny proceedings predicated on that notice in the facts of this case.
- The Court endorsed the contemporaneous departmental circulars (CBOT Circular Nos. 549 and 621) as explanatory of the statutory position and observed departmental authorities are bound by such circulars.
- The Court rejected the Revenue's arguments of waiver or acquiescence by the assessee through participation in assessment proceedings and observed that a legal issue as to jurisdiction/limitation can be raised before the Commissioner (Appeals), whose powers are co-extensive with the Assessing Officer for determining correct income.
- The Court distinguished the earlier Tribunal decision in Rakesh S. Mardia, noting it related to a different context (block assessment) and was not decisive for the facts before the Court.
- No new law beyond the application of the statutory provision and explanatory circulars was laid down; the direct effect is that the specific assessment under challenge is to be treated as void for want of timely issuance of the section 143(2) notice.
D.A Mehta, J.:— The appellant-Revenue has proposed the following two questions stated to arise out of order dated March 11, 2004, made by the Income-tax Appellate Tribunal, Ahmedabad Bench “B”.
“(1) Whether the hon'ble Income-tax Appellate Tribunal was right in law and on facts in holding that the assessment void ab initio following the decision of the Tribunal in the case of Mrs. C. Malthy (supra) holding that when an assessment is framed under section 143(3) of the Act by issuing statutory notice beyond the prescribed time limit, the said assessment is bad in law and has to be quashed, ignoring the fact that the assessee has not challenged the jurisdiction of the Assessing Officer during the course of assessment proceedings on the ground that notice under section 143(2) was served beyond the time limit prescribed under the Act and ignoring the decision of the Madhya Pradesh High Court in the case of Dr. H.R Rai v. CIT, [1984] 145 ITR 809?”
(ii) Whether the hon'ble Income-tax Appellate Tribunal was right in law and on facts in holding the decision of the Tribunal in the case of Rakesh S. Mardia v. Deputy CIT, [2002] 74 ITJ (Ahd) 836, more particularly when the decision of the Income-tax Appellate Tribunal in the said case is challenged by way of Tax Appeal No. 420 of 2000, which has been admitted vide order dated December 20, 2002 and is pending before the hon'ble High Court of Gujarat?”
2. Heard Mr. K.M Parikh, learned standing counsel appearing for the appellant-Revenue. It is submitted by him that the Tribunal has wrongly confirmed the order of the Commissioner of Income-tax (Appeals) holding that as the notice under section 143(2) of the Income-tax Act, 1961, was issued beyond the statutory time of one year from the end of the month in which the return was filed the assessment was void ab initio. It was urged by him that the assessee had not challenged the issuance of notice under section 143(2) of the Act as being barred by limitation before the Assessing Officer and had raised the challenge before the Commissioner (Appeals) only for the first time. It was further submitted that the assessee having participated in the proceedings before the Assessing Officer there was acquiescence and waiver on the part of the assessee which would result in the assessment being valid in law and the Commissioner of Income-tax (Appeals) and the Tribunal were wrong in reading the provisions as being mandatory so as to treat the assessment void ab initio. The contention that the challenge was raised for the first time before the Commissioner (Appeals) and not before the Assessing Officer and hence could not have been entertained does not merit acceptance. The position in law is well settled that the Commissioner (Appeals) has the same powers that an Assessing Officer has and his powers are co-extensive with those of the Assessing Officer while determining the correct income liable to tax in accordance with the provisions of the Act. Even otherwise, the issue raised is purely a legal issue based on the provisions of the Act and the assessee can raise the same at any stage.
3. The second contention regarding there being acquiescence and/or waiver on the part of the assessee by participating in the proceedings also does not merit acceptance. It is an admitted position that the return of income was filed on March 30, 1997, for the assessment year 1997–98 and the notice under section 143(2) of the Act came to be issued for the first time only on August 20, 1998. Therefore, the notice was admittedly beyond the period of 12 months which is the statutory period of limitation prescribed under the proviso to sub-section (2) of section 143 of the Act.
4. The scheme of the Act broadly permits the assessment in three formats; (i) acceptance of the returned income; (ii) acceptance of the returned income subject to permissible adjustments under section 143(1) of the Act by issuance of intimation; and (iii) scrutiny assessment under section 143(3) of the Act. This scheme was originally introduced by the Direct Tax Laws (Amendment) Act, 1989 with effect from April 1, 1989. The issuance of notice under section 143(2) of the Act is in the course of assessment in the third mode, namely, scrutiny assessment.
5. Section 143(2) of the Act requires that where a return has been made by an assessee, if the Assessing Officer considers it necessary or expedient to ensure that the assessee has not understated the income, or has not computed excessive loss, or has not underpaid tax in any manner, he shall serve on the assessee a notice requiring him either to attend his office, or to produce, or cause to be produced there, any evidence on which the assessee may rely in support of the return. Therefore, the language of the main provision requires the Assessing Officer to prima facie arrive at satisfaction of existence of any one of the three conditions. The proviso under the said sub-section states: Provided that no notice under this sub-section shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished. On a plain reading of the language in which the proviso is couched it is apparent that the limitation prescribed therein is mandatory, the format of the provision being in negative terms. The position in law is well-settled that 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.
6. When the provision was first introduced in the statute the Central Board of Direct Taxes issued departmental Circular No. 549 dated October 31, 1989 (see [1990] 182 ITR (St.) 1) and the necessity of the proviso as well as the consequences flowing on failure to issue notice within the limitation have been explained in the following words (page 24):
“5.13 A proviso to sub-section (2) provides that a notice under the sub-section can be served on the assessee only during the financial year in which the return is furnished or within six months from the end of the month in which the return is furnished, whichever is later. This means that the Department must serve the said notice on the assessee within this period, if a case is picked up for scrutiny. It follows that if an assessee, after furnishing the return of income does not receive a notice under section 143(2) from the Department within the aforesaid period, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return”.
(Ref: Central Board of Direct Taxes Circular No. 549, dated 31st October, 1989, Chaturvedi and Pithisaria's Income-tax Law, Fifth edition, Vol. 3, page 4737 at page 4742).
7. Originally the period of limitation was provided as “during the financial year in which the return is furnished” or within six months from the end of the month in which the return is furnished. By the Finance (No. 2) Act, 1991, the proviso was substituted by the present proviso extending the period of limitation to twelve months and vide departmental Circular No. 621 dated December 19, 1991 (see [1992] 195 ITR (St.) 154), it was stated in paragraph No. 49.1 of the circular that : “The aforesaid period of limitation for the service of a notice under sub-section (2) of section 143 of the Act does not allow sufficient time to the Assessing Officers to select returns for scrutiny before assessment. Therefore, the provision was amended to provide that the notice can be served within twelve months from the end of the month in which the return is furnished”.(Ref: Central Board of Direct Taxes Circular No. 621, dated December 19, 1991 Chaturvedi & Pithisaria's Income-tax Law, Fifth edition, Vol. 3, page 4747 at page 4748).
8. It goes without saying that the departmental authorities are bound by the circulars issued by the Central Board of Direct Taxes. In the circumstances, it is not open to the Revenue to contend otherwise. These circulars are explanatory. They give contemporaneous exposition of the legal position. Even otherwise, on a plain reading of the section and the proviso it is more than abundantly clear that the proviso prescribes a mandatory period of limitation in the light of the scheme of assessment wherein the majority of returns are required to be accepted without scrutiny and only certain returns are taken up for scrutiny. The orders of the Commissioner (Appeals) and the Tribunal reflect the correct reading of the statutory scheme of the Act which is plain, unambiguous and clear, as well as in consonance with the circulars of the Board. In these circumstances, no substantial question of law arises from the impugned order of the Tribunal. The appeal is accordingly dismissed.
9. Before parting it is necessary to note that the earlier decision of the Tribunal in the case of Rakesh S. Mardia (Tax Appeals Nos. 420, 421 and 422 of 2000) is entirely in a different context, i.e, in the light of block assessment which provides for a different scheme of assessment.
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