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G.N. Mohan Raju v. Ito

Income Tax Appellate Tribunal

Oct 10, 2014

Judgment

Subsequent
References

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Tribunal Order — Concise Analytical Summary

Factual and Procedural Background

The present appeals were filed by the assessee against the orders dated 21st December 2012 of the Commissioner of Income Tax (Appeals)-III, Bangalore, in respect of the impugned assessment years. The assessee originally filed returns on 10th July 2007 and 15th July 2008 respectively. Those returns were processed under section 143(1) of the Income-tax Act, 1961 ("the Act").

Subsequently, notices under section 148 (reopening notices) dated 24th December 2009 were despatched to the assessee on 30th December 2009. The Assessing Officer (AO) issued, and the record shows despatch of, notices under section 143(2) by registered post on 23rd September 2010 (the notices bear the date 17th October 2009 but were despatched on 23rd September 2010). An authorised representative of the assessee appeared before the AO on 5th October 2010 and requested that the returns originally filed be treated as returns filed pursuant to the section 148 notices. Thereafter the AO completed assessments under section 143(3) read with section 147, bringing to tax Rs. 1 crore under section 28(va) and levying interest under section 234B. The assessee appealed against the CIT(A) challenging, inter alia, the validity of the notices and the assessments for non-service of notices under section 143(2).

Legal Issues Presented

Whether the Assessing Officer validly issued notices under section 148 and assumed jurisdiction under section 147.
Whether the assessment completed under section 143(3) read with section 147 is valid where no notice under section 143(2) was served on the assessee in compliance with the statutory procedure.
Whether a return filed prior to issuance of a section 148 notice can be treated, without any request by the assessee, as a return filed in response to that section 148 notice.
Whether consideration of Rs. 1 crore received under a share subscription and shareholders' agreement is chargeable to tax under section 28(va).
Whether interest under section 234B is leviable on the assessments made.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee submitted that returns for the impugned years were filed on the stated dates and were processed under section 143(1), showing certain amounts as exempt.
The assessee contended that notices under section 143(2) — mandatory even in reopened assessments — were never validly issued in relation to returns treated as filed pursuant to section 148. The authorised representative relied on the decision of the Supreme Court in Asstt. CIT v. Hotel Blue Moon to support the proposition that a valid notice under section 143(2) is mandatory.
The authorised representative stated that the assessee first requested on 5th October 2010 that the previously filed returns be treated as returns filed pursuant to the section 148 notices, and thus any section 143(2) notices issued prior to that date could not be said to have been issued in respect of returns filed pursuant to section 148.
The assessee argued that the AO could not, without the assessee's request, treat a return filed prior to a section 148 notice as a return pursuant to that notice; if the AO wished otherwise, it had to direct the assessee to file a fresh return or proceed under best judgment (section 144) if no compliance followed.
The assessee disputed levy of tax on the Rs. 1 crore receipt under section 28(va) and denied liability to pay interest under section 234B (these grounds were raised but not adjudicated because the Tribunal decided the appeal on procedural grounds).

Respondent's (Departmental) Arguments

The Departmental Representative argued that the assessee did not file a return within 30 days of the section 148 notice (despatched 30th December 2009), and therefore the AO was entitled to treat the original returns as those filed in pursuance of the section 148 notices.
The Departmental Representative asserted that notices under section 143(2) were in fact issued and despatched to the assessee on 23rd September 2010 (the notices bear the date 17th October 2009 but were despatched on 23rd September 2010), and that those notices must be treated as served by registered post.
The Departmental Representative relied on the proviso to section 147 to argue that income escaping assessment may be assessed even where the assessee failed to respond to a section 148 notice, and placed reliance on the Madras High Court's decision in Areva T & D India Ltd., which had characterized issue of section 143(2) notices as procedural in nature.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Asstt. CIT v. Hotel Blue Moon [2010] 321 ITR 362 / 188 Taxman 113 (SC)	Authority relied upon by the assessee that the issue of a valid notice under section 143(2) is mandatory even in proceedings under section 148/147.	The Tribunal records that the assessee relied on this apex Court decision to contend that section 143(2) notice is mandatory in reassessment; the decision is part of the jurisprudential background considered by the Tribunal.
Areva T & D India Ltd. v. Asstt. CIT [2007] 294 ITR 233 / 165 Taxman 123 (Mad.)	Held (by Madras High Court) that issue of notice under section 143(2) is procedural in nature.	The Department relied on this decision to argue that non-issue of section 143(2) is procedural; the Tribunal noted this position but treated it as contrary to the view of the Delhi High Court and a Coordinate Bench of the Tribunal.
Alpine Electronics Asia PTE Ltd. v. DGIT [2012] 341 ITR 247 / 205 Taxman 190 / 18 taxmann.com 246 (Delhi HC)	Held that section 143(2) is applicable to proceedings under section 147/148 and that a notice under section 143(2) is mandatory in reassessment proceedings (after considering Hotel Blue Moon).	The Tribunal followed the Delhi High Court's reasoning, treating section 143(2) as mandatory in reassessment proceedings and relying on Alpine as controlling authority for that proposition.
Amit Software Technologies (P.) Ltd. v. ITO — ITA No. 540 (Mum.) of 2012 (Coordinate Bench, dated 7-2-2014)	Co-ordinate Bench held that section 143(2) is a mandatory requirement and not merely procedural; it considered both the Madras and Delhi High Court decisions.	The Tribunal referred to this Coordinate Bench decision as supporting the view that section 143(2) is mandatory; the Tribunal adopted the view that section 143(2) must be complied with where assessments are completed under section 143(3) read with section 147 after the assessee has requested that earlier returns be treated as returns filed pursuant to section 148.

Court's Reasoning and Analysis

The Tribunal reviewed the assessment record, the sequence of events and the rival submissions. Its analysis proceeded in the following steps, strictly based on the material in the record and the authorities referred to in the opinion:

Confirm factual chronology from the record:
- Returns originally filed and processed under section 143(1) (AO accepted returned income at that stage).
- Section 148 notices dated 24th December 2009 despatched on 30th December 2009.
- Section 143(2) notices were recorded in the assessment records as having been despatched on 23rd September 2010 (the notices bear the date 17th October 2009 but were despatched on 23rd September 2010).
- The assessee's authorised representative first requested on 5th October 2010 that the original returns be treated as returns filed pursuant to the section 148 notices (this request is recorded in the order-sheet and is quoted in the opinion).
Examination of statutory text and timing constraints:
- The Tribunal considered the language of section 143(2), including the proviso which limits service of the section 143(2)(ii) notice to within six months from the end of the financial year in which the return is furnished.
- The Tribunal observed that once an original return has been processed under section 143(1) and no section 143(2) notice issued within the proviso time-frame, the processing under section 143(1) is treated as having run its course.
Analysis of the legal effect of the assessee's request to treat the earlier return as filed in response to the section 148 notice:
- The Tribunal reasoned that there is no provision that permits the AO, of his own accord and without a direction or request from the assessee, to treat an earlier return processed under section 143(1) as a return filed in response to a later section 148 notice.
- The Tribunal set out three possible ways the AO could respond to an assessee's request to treat an earlier return as one filed pursuant to section 148: (a) refuse and require filing of a fresh return, (b) refuse because the 30-day period in the section 148 notice has expired, in which case best judgment assessment procedure would apply, or (c) accept the request and treat the earlier return as a return in response to the section 148 notice and proceed under section 143(3). The Tribunal emphasised that if the AO accepts the request, it becomes obligatory to issue a valid section 143(2) notice in respect of that return.
Application of authority and conclusion on mandatory nature of section 143(2):
- The Tribunal examined conflicting precedents: Madras High Court's Areva (treating section 143(2) as procedural) and the Delhi High Court's Alpine (holding the notice mandatory in reassessment), along with a Coordinate Bench decision in Amit Software (holding section 143(2) mandatory).
- Following the reasoning in Alpine and Amit Software, and having regard to the apex Court decision in Hotel Blue Moon as part of the matrix, the Tribunal concluded that section 143(2) is mandatory in reassessment proceedings under sections 147/148 where the AO accepts the assessee's request to treat a previously filed return as one filed pursuant to a section 148 notice.
Specific application to the facts:
- Because the assessee's request to treat the originally filed returns as returns in response to the section 148 notices was first made on 5th October 2010, any section 143(2) notices despatched prior to that date could not be treated as notices issued "on a return ... in response to a notice under section 148." The Tribunal therefore concluded there was no valid issue of section 143(2) notice in relation to returns that the AO treated as having been filed pursuant to the section 148 notices.
- Given the lack of a valid section 143(2) notice in the factual matrix (as the AO had accepted the assessee's request and proceeded under section 143(3) read with section 147), the Tribunal held that the assessments were completed without fulfilling the mandatory requirement under section 143(2), rendering the subsequent proceedings invalid.
Result of analysis:
- The Tribunal quashed the assessments for the impugned assessment years on the ground of non-compliance with the mandatory requirement of issuance of a valid section 143(2) notice in the circumstances of this case.
- Because the appeals were allowed on the basis of this procedural defect (ground 3 in the assessee's grounds), the Tribunal did not adjudicate the other substantive grounds (e.g., taxability under section 28(va) and the levy of interest under section 234B).

Holding and Implications

CORE RULING: The appeals of the assessee are allowed and the assessments for the impugned years are quashed for failure to comply with the mandatory requirement of issuing a valid notice under section 143(2) in the factual circumstances of this case.

Implications:

Direct effect on the parties: The assessments completed under section 143(3) read with section 147 for the impugned years are set aside (quashed) for non-compliance with section 143(2) as applied to the specific factual sequence in this case.
Because the Tribunal allowed the appeals on the procedural ground (non-issue of a valid section 143(2) notice in relation to returns treated by the AO as filed pursuant to section 148 after the assessee's request), the Tribunal did not decide the remaining substantive questions raised by the assessee (chargeability under section 28(va) and levy of interest under section 234B).
The Tribunal applied existing case law (including the Delhi High Court decision in Alpine and a Coordinate Bench decision in Amit Software) to hold that compliance with section 143(2) is mandatory in the circumstances where an earlier return is accepted by the AO as being filed pursuant to a section 148 notice. The Tribunal did not purport to lay down any novel legal principle beyond the application of those authorities to the facts before it.

End of summary — the above reproduces and analyzes only information contained in the provided Tribunal order.

Show all summary ...

ORDER

Abraham P. George Accountant Member - These are appeals filed by the assessee directed against the orders dt. 21st Dec, 2012 of CIT(A)-III, Bangalore, for the impugned assessment years. The grounds taken by the assessee for both the years are identical and these are reproduced hereunder :

"1. The order passed by the learned CIT(A)-III, Bangalore, to the extent prejudicial to the appellant, is bad in law and liable to be quashed.

2. The learned CIT(A)-III, Bangalore, has erred in confirming the action of the AO in issuing notice under s. 148 and assuming jurisdiction under s. 147. The condition precedent for the issue of notice under s. 148 and assumption of jurisdiction under s. 147 not being satisfied, the order passed by the AO is bad in law, void ab initio and liable to be quashed.

3. The learned CIT(A)-III, Bangalore, has erred in confirming the action of the AO in framing the assessment and passing the order under s. 143(3) r/w s. 147 without serving notice under s. 143(2). The appellant having not received notice under s. 143(2), the assessment made and the order passed under s. 143(3) r/w s. 147 is a nullity, bad in law and liable to be quashed. Sec. 143(2), the assessment made and the order passed under s. 143(3) r/w s. 147 is a nullity, bad in law and liable to be quashed.

4. The learned CIT(A)-III, Bangalore, has erred in confirming the action of the AO in assessing the sum of Rs. 1 crore received under the share subscription and shareholders' agreement under s. 28(va) of the Act. On facts and in the circumstances of the case and law applicable, consideration received for the grant of 'right of first refusal' is not chargeable to tax.

5. The learned CIT(A)-III, Bangalore, has erred in confirming the levy of interest under s. 234B of the Act. On facts and in the circumstances of the case and law applicable, interest under s. 234B is not leviable. The appellant denies its liability to pay interest under s. 234B.

6. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT(A)-III, Bangalore, to the extent prejudicial to the appellant, be quashed.

Or in the alternative

(i) Sum received under the share subscription and shareholders' agreement amounting to Rs. 1 crore be held as not chargeable to tax.

(ii) Interest levied under s. 234B be deleted."

2. As is clear from the above, one of the grounds raised by the assessee is non-service of notice under s. 143(2) of the Income-tax Act, 1961 (in short The Act'). The learned counsel for the assessee submitted that assessee had filed returns for the impugned assessment years on 10th July, 2007 and 15th July, 2008, respectively. According to the learned Authorised Representative, in the computation filed along with such returns a net capital receipt of Rs. 97,80,000 and Rs. 3,85,67,825 was specifically mentioned as exempt from income-tax.

3. As per the learned Authorised Representative, returns were initially processed under s. 143(1) of the Act. Thereafter, on 24th Dec, 2009 notices under s. 148 of the Act were issued reopening the assessment for the impugned assessments years. Further, as per the learned Authorised Representative, an Authorised Representative of the assessee had appeared before the AO on 5th Oct., 2010, and stated that the returns filed originally could be treated as returns filed pursuant to the notices under s. 148 of the Act. Submission of the learned Authorised Representative was that notices under s. 143(2) which was mandatory even in a reopened assessment, were never issued. Learned Authorised Representative submitted that even if such notices were issued these were prior to the appearance of the representative of the assessee on 5th Oct., 2010, and had no validity. Only on that date, assessee had requested the AO to treat the returns originally filed as pursuant to the notices issued under s. 148 of the Act. Relying on the decision of the Hon'ble apex Court in the case of Asstt. CIT v. Hotel Blue Moon [2010] 321 ITR 362/188 Taxman 113 (SC) , the learned Authorised Representative submitted that issue of a valid notice under s. 143(2) was mandatory even in a s. 148 proceedings. There being a failure to issue valid notice under s. 143(2) of the Act, as per the learned Authorised Representative, proceedings culminating in the assessments dt. 3rd Dec, 2010 were null and void. Further, as per the learned Authorised Representative, though a notice under s. 142(1) was issued by the AO on 5th Oct., 2010, there was no notice issued under s. 143(2) of the Act for either of the years. Relying on the note sheet, forming part of the assessment record, copy of which has been filed by the learned Departmental Representative, it was submitted by the learned Authorised Representative that obviously, the notices claimed to have been issued by the Revenue under s. 143(2) of the Act, were prior to 5th Oct., 2010.

4. In reply, learned Departmental Representative submitted that assessee pursuant to the s. 148 notice dt. 24th Dec, 2009, despatched on 30th Dec, 2009 had not filed a return within the 30 days time period, prescribed in the said notice. Assessee having failed to do so, as per the learned Departmental Representative, AO was well within his rights to treat the returns originally filed by the assessee to be the returns filed in pursuance of notices under s. 148 of the Act. There was no need for any directions in this regard from the assessee. As per the learned Departmental Representative, it was clear from the assessment records that the AO had despatched on 23rd Sept., 2010 a notice under s. 143(2) dt. 17 Sept., 2010, by registered post. As per the learned Departmental Representative, the AO having treated the original returns filed by the assessee, as filed in pursuance to the notice issued under s. 148 of the Act, had rightly issued notices under s. 143(2) of the Act. Therefore, as per the learned Departmental Representative, assessee could not claim that no notice was ever issued under s. 143(2) at all. Relying on proviso to s. 147 of the Act, learned Departmental Representative submitted that income escaping assessment could be considered for assessment even in a case where there was failure on the part of the assessee to respond to a notice issued under s. 148 of the Act. Learned Departmental Representative placed reliance on the judgment of the Hon'ble Madras High Court in the case of Areva T & D India Ltd. v. Asstt. CIT [2007] 294 ITR 233/165 Taxman 123 (Mad.) and submitted that the requirement under s. 143(2) was only procedural in nature.

5.Ad libitum reply of the learned Authorised Representative was that AO could not treat a return filed prior to issue of notice under s. 148 of the Act as a return filed by the assessee, pursuant to such notice unless and until assessee had given a direction or request on these lines. As per the learned Authorised Representative, operation of s. 143(2) of the Act was with reference to a return filed by the assessee. The assessment for both the years, as per the learned Authorised Representative, was completed under s. 143(3) r/w s. 147 of the Act and not under s. 144 of the Act. Unless and until the assessee had either filed a return pursuant to the notice under s. 148 of the Act or made a request for treating the earlier return filed by it to be one filed pursuant to notice under s. 148 of the Act, AO could not proceed with an assessment under s. 143(3) of the Act. As per learned Authorised Representative, there could be no presumption that a return filed prior to a notice issued under s. 148 of the Act is one under or in pursuance to such notice. Assessee had given the request to treat earlier returns filed by it as return filed pursuant to the notices under s. 148 of the Act, only on 5th Oct., 2010 and subsequent to that date there was no issue of any notices under s. 143(2) of the Act. Further, according to him, requirement set out in s. 143(2) was not a procedural one, as held by the Hon'ble Delhi High Court in the case of Alpine Electronics Asia PTE Ltd. v. DGIT [2012] 341 ITR 247/205 Taxman 190/18 taxmann.com 246 . Reliance was also placed on the decision of a Co-ordinate Bench of this Tribunal in the case Amit Software Technologies (P.) Ltd. v. ITO [IT Appeal No. 540 (Mum.) of 2012, dated 7-2-2014]. According to learned Authorised Representative, even s. 292BB would not aid the Revenue, in a case where there was no issue of notice under s. 143(2) of the Act, in accordance with the procedure laid down under the Act.

6. We have perused the orders and heard the rival contentions. There is no dispute that return originally filed by the assessee for both the years were only subject to proceedings under s. 143(1) of the Act. The AO himself has stated in the assessment order that returns for both the years were processed under s. 143(1) of the Act, accepting the returned income. There is also no dispute that notices under s. 148 of the Act for both the years, dt. 24th Dec, 2009, were despatched to the assessee on 30th Dec, 2009. From the verification of the assessment records, it is clear from that the AO had issued notices under s. 143(2) of the Act, and despatched them to the assessee on 23rd Sept., 2010 by registered post with acknowledgement due. The notices dt. 17th Oct., 2009 despatched on 23rd Sept., 2010, have to be considered as served on the assessee, since these were sent by registered post.

7. This brings us to the crux of the issue i.e., whether notices under s. 143(2) are mandatory in a reopened procedure and whether notices issued prior to the reopening would satisfy the requirement specified under s. 143(2) of the Act. That issue of a notice under s. 143(2) of the Act, is mandatory even in a reassessment proceeding initiated under s. 148 of the Act has been clearly laid down by the Hon'ble Delhi High Court in the case of Alpine Electronics Asia PTE Ltd. (supra). Hon'ble Delhi High Court had reached this conclusion after considering the decision of the Hon'ble apex Court in the case of Hotel Blue Moon (supra). At para 24 of the judgment, their Lordship have held that s. 143(2) was applicable to proceedings under s. 147/148 also, since proviso to s. 148 of the Act, granted certain specific liberties to the Revenue, with regard to extension of time for serving such notices. No doubt, Hon'ble Madras High Court in the case of Areva T & D India Ltd. (supra) had held that issue of notice under s. 143(2) was procedural in nature. However, Co-ordinate Bench in the case of Amit Software Technologies (P.) Ltd. (supra) after considering the decision of the Hon'ble Madras High Court as well as Delhi High Court had held that s. 143(2) of the Act was a mandatory requirement and not a procedural one. Of course, in the case before us, a notice under s. 143(2) of the Act has been issued to the assessee, but on the date when such notice was issued viz., 23rd Sept., 2010 assessee had not filed any return pursuant to the reopening notice under s. 148 of the Act. First instance when the assessee requested the AO to treat the returns originally filed by it as returns filed pursuant to the notices under s. 148 of the Act, was on 5th Oct., 2010 which is clear from the narration in the order-sheet which is reproduced here under :

"Sri M. Srinivas Rao Mannan, CA, appeared in response to notices issued under ss. 143(2) and 142(1) and requested that the return of income filed originally shall be treated as return of income filed in response to notice under s. 148. He has been asked to explain as to why a sum of Rs. 1,00,00,000 (Rs. one crore) received from Wifi Networks (P) Ltd., should not be treated as revenue receipt and taxed accordingly. The case is posted for final hearing on 20th Oct., 2010 at 3.30 PM. No further adjournment will be granted. If no compliance is forthcoming on that day, assessment will be completed bringing to tax Rs. 1 (Rs. one crore) as revenue receipt as per the provisions of s. 28(va) of the Act."

8. A look at s. 143(2) is called for at this juncture. It is reproduced hereunder :

"143(2) Where a return has been furnished under s. 139, or in response to a notice under sub-s. (1) of s. 142, the AO shall —

(i) where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, serve on the assessee a notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him, on a date to be specified therein to produce, or cause to be produced, any evidence or particulars specified therein or on which the assessee may rely, in support of such claim :

Provided that no notice under this clause shall be served on the assessee on or after the 1st June, 2003.

(ii) notwithstanding anything contained in cl. (1), if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his officer or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return :

Provided that no notice under cl. (ii) shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished."

Once the original return filed by the assessee was subject to processing under s. 143(1) of the Act, the procedure of assessment pursuant to such a return, in our opinion, came to an end, since AO did not issue any notice within the 6 months period mentioned in proviso to s. 143(2)(ii). No doubt, if the income has been understated or the income has escaped assessment, an AO is having the power to issue notice under s. 148 of the IT Act. Notice under s. 148 of the Act, issued to the assessee required it to file a return within 30 days from the date of service of such notice. There is no provision in the Act, which would allow an AO to treat the return which was already subject to a processing under s. 143(1) of the IT Act, as a return filed pursuant to a notice subsequently issued under s. 148 of the Act. However, once an assessee itself declared before the AO that his earlier return could be treated as filed pursuant to notice under s. 148 of the IT Act, three results can follow. AO can either say no, this will not be accepted, you have to file a fresh return or he can say that 30 days time period being over, I will not take cognizance of your request or he has to accept the request of the assessee and treat the earlier returns as one filed pursuant to the notice under s. 148 of the IT Act. In the former two scenarios, AO has to follow the procedure set out for a best of judgment assessment and cannot make an assessment under s. 143(3).

On the other hand, if the AO chose to accept assessee's request, he can indeed make an assessment under s. 143(3). In the case before us, assessments were completed under s. 143(3) r/w s. 147. Or in other words, AO accepted the request of the assessee. This in turn makes it obligatory to issue notice under s. 143(2) after the request by the assessee to treat his earlier return as filed in pursuance to notices under s. 148 of the IT Act was received. This request, in the given case, has been made only on 5th Oct., 2010. Any issue of notice prior to that date cannot be treated as a notice on a return filed by the assessee pursuant to a notice under s. 148 of the Act. Or in other words, there was no valid issue of notice under s. 143(2) of the IT Act, and the assessments were done without following the mandatory requirement under s. 143(2) of the IT Act. This, in our opinion, rendered the subsequent proceedings all invalid. Learned CIT(A) had only adjudicated on a position where there was no service of notices under s. 143(2) of the IT Act. He had not dealt with the scenario, where notice was issued prior to the filing of return by the assessee. We therefore, quash the assessments done for the impugned assessment years. Since the appeals of the assessee are allowed on its ground 3, other grounds are not adjudicated.

9. In the result, appeals of the assessee are allowed.