KIRAN NAGJI NISAR v. INCOME TAX OFFICER
[Citation -2006-LL-1220-4]

Citation 2006-LL-1220-4
Appellant Name KIRAN NAGJI NISAR
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 20/12/2006
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags principles of natural justice • time-limit for completion of • opportunity of being heard • reassessment proceedings • disallowance of interest • procedural irregularity • retrospective amendment • reasonable opportunity • sufficient compliance • period of limitation • procedural in nature • legal representative • condition precedent • undisclosed income • issuance of notice • prescribed period • service of notice • speculation loss • block assessment • business purpose • fresh assessment • original return • prescribed time
Bot Summary: Vs. CIT relied upon by the learned Authorised Representative of the assessee supports the case of the assessee that filing of return in compliance to the notice under s. 148 is not compulsory and it is sufficient compliance if the return was already filed prior to the issue of notice under s. 148 and the assessee informs the AO about the same and requests him that the same may be treated as return filed in compliance to notice under s. 148. The requirement to issue notice before completion of assessment was earlier also because no such notice under s. 143(2) could be issued after completion of the assessment even under the old provisions of s. 143(2) although there was no such specific restriction. In view of the above discussion, we are of the view that only the procedural part of s. 143(2) can be applied to block assessment proceedings and consequently, provisions of s. 143(2) cannot be applied for invoking the power/jurisdiction to proceed to assess the undisclosed income which directly flows from the provisions of s. 158BA r/w s. 158BC(b). CIT 203 CTR 621: 287 ITR 242, wherein it has been held that in order to assume jurisdiction for assessment under s. 147, notice under s. 148(1) is a condition precedent; whereas the scheme of Chapter XIV-B of the Act suggests that s. 158BA is the section which provides for jurisdiction in favour of the AO to assess undisclosed income in accordance with Chapter XIV-B. It was also held that s. 148 is substantive section whereas s. 158BC was procedural section. These observations of Hon ble Bombay High Court fortify our view that once the notice under s. 148 has been issued validly, the AO is vested with the powers to assess or reassess under s. 147 of the IT Act and therefore, jurisdictional power for making reassessment is vested in the AO by virtue of s. 147 the moment the valid notice under s. 148 is issued and therefore, the assessment order cannot be said to be without jurisdiction merely on the ground of non compliance of rules of natural justice. The omission to issue a notice under s. 23(2) merely prevents the ITO from making an assessment under s. 23(3), and after he rectifies the omission by issuing that notice, he can proceed further to next stage, that is, to exercise the power of completing the assessment under to next stage, that is, to exercise the power of completing the assessment under s. 23(3). In view of the amendment in s. 148 as noted above, in the cases, where the return is filed in pursuance to notice under s. 148 during 1st Oct., 1991 to 30th Sept., 2005, the AO can serve notice under s. 143(2) even beyond this prescribed period of 12 months but before the expiry of time-limit for completion of assessment.


A.K. GARODIA, A.M.: This is assessee s appeal directed against order of learned CIT(A) XIX, Mumbai, dt. 25th Feb., 2003 for asst. yr. 1998-99. Grounds Nos. 1 to 3 are regarding validity of assessment order mainly f o r reason that no notice was issued under s. 143(2). Ground No. 4 is regarding disallowance of interest of Rs. 9,67,727. Briefly stated, facts are that assessment was first completed under s. 143(1) on 30th March, 2001 and subsequently, it was noted by AO that figure of business loss included speculation loss of Rs. 51,757 claimed twice and that interest expenses of Rs. 9,67,727 was incurred on funds utilized for personal withdrawals and investment in shares. For these reasons, assessment was reopened and notice under s. 148 was issued on 31st May, 2001. In reply to same, assessee filed letter dt. 25th June, 2001 informing AO that return of income was filed on 2nd Nov., 1998 and it was submitted therein that same return may be treated as return filed in pursuance to notice under s. 148. Thereafter, AO issued notice under s. 142(1) and in response to that, Sri Rajan Gala, chartered accountant, appeared and submitted details to AO. In course of reassessment proceedings, it was noted by AO that assessee has declared loss on sales of shares under head Capital gains . P&L a/c shows share-jobbing income of Rs. 740,786. Against this income, assessee claimed interest expenses of Rs. 967,727. It was also noticed by AO that borrowings of assessee were Rs. 134.33 lacs as on 31st March, 1997 and investment in shares on that date was Rs. 128.70 lacs. Margin money given to Bombay Stock Exchange was Rs. 9.41 lacs only on 31st March, 1997. Margin money as on 31st March, 1998 was Rs. 10.61 lacs. During year ended on 31st March, 1998, most of shares were sold out, on which loss was incurred and shown under head Capital gains . amount of borrowed funds as on 31st March, 1998 was Rs. 73.61 lacs. AO was of view that borrowed funds were utilized for purposes other than business. AO required assessee to explain as to why interest of Rs. 9,67,727 should not be disallowed. It was replied by assessee that loans were fully and entirely utilized for purpose of business and also for margin money required to be deposited with Bombay Stock Exchange for dealing in shares. AO was not convinced because he was of view that shares of Rs. 120.26 lacs were held as investment and not as stock-in-trade since income/loss on sale of shares was declared under head Capital gains and therefore, to that extent, funds had been used for investments and not for business. margin money required for business was only Rs. 9,41,565 and was less than capital of assessee. He therefore, held that interest expense was not for business purpose and same was disallowed. On appeal, learned CIT(A) upheld validity of assessment order and also disallowance of interest and now assessee is in further appeal before us. It is submitted by learned Authorised Representative of assessee before us that notice under s. 142(1) was issued but no notice under s. 143(2) was issued. He has drawn our attention to para No. 6.2 on p. 4 of order of learned CIT(A), wherein, clear finding is given by him that notice under s. 143(2) was indeed not issued to assessee. Following submissions were made by him: (a) It is submitted that amendment to s. 148 by Finance Act, 2006, w.r.e.f. 1st Oct., 1991 does not help case of Revenue because as per this amendment also, notice issued under s. 143(2) can be issued late but before expiry of time-limit for making assessment or reassessment, etc., and since in this case, no notice was issued at all under s. 143 (2), assessment order is without jurisdiction and hence null and void and therefore, not valid even after this amendment in s. 148. (b) Regarding non-filing of return in compliance to notice under s. 148, it was submitted that letter dt. 25th June, 2001 informing AO that return of income was filed on 2nd Nov., 1998 is sufficient compliance of notice under s. 148 and in support of this contention, reliance was placed on judgment of Hon ble Rajasthan High Court rendered in case of Tiwari Kanhaiya Lal & Ors. vs. CIT (1985) 47 CTR (Raj) 187: (1985) 154 ITR 109 (Raj). (c) It is also submitted that s. 14A cannot be invoked in course of reassessment proceedings in view of proviso to s. 14A. (d) It is also submitted that dividend income was exempt from 1st June, 1997 and hence, interest expenses is allowable for 2 months, i.e., upto 31st May, 1997 under head Income from other sources , even if it is held that borrowings was not for business but for investment in shares. (e) further argument was raised that in addition to dividend income, assessee has earned income of Rs. 114 on account of "Fraction Entitlement", which has been declared under head "Income from other sources" and is accepted as such and hence, interest expense is allowable expense under head "Income from other sources" for whole year. (f) In support of this contention that assessment order is not valid because no notice was issued under s. 143(2), reliance was placed on judgment of Special Bench of Tribunal rendered in case of Raj Kumar Chawla vs. ITO (2005) 92 TTJ (Del)(SB) 1245: (2005) 94 ITD 1 (Del)(SB). As against this, learned Departmental Representative of Revenue supported orders of authorities below. He submitted copy of reasons recorded by AO for reopening of assessment and it is pointed out by him that there is no mention of s. 14A in reasons recorded by AO for reopening of assessment. Reliance was placed on Tribunal judgment rendered in case of K. K. Patel and N. A. Khan & Co. vs. ITO (1985) 11 ITD 151 (Hyd). This Tribunal judgment was relied upon in support of this contention that even if assessment is completed ex parte without serving notice under s. 143(2) on assessee, it cannot be said that assessment order passed by AO is illegal and null and void. It is also submitted by him that in this Tribunal judgment, judgment of Hon ble apex Court rendered in case of Swadeshi Cotton Mills vs. Union of India AIR 1981 SC 818 was considered. Copy of this judgment of Hon ble apex Court was also submitted. Reliance was placed on following judgments also in support of this contention that mere non-issue of notice to assessee under s. 143(2) cannot make assessment illegal and void: (i) CIT vs. Jai Prakash Singh (1996) 132 CTR (SC) 262: (1996) 219 ITR 737 (SC); (ii) Ratan Lal Tiku vs. CIT (1974) 97 ITR 553 (J&K); (iii) CIT vs. Gyan Prakash Gupta (1986) 54 CTR (Raj) 69: (1987) 165 ITR 501 (Raj); (iv) Vakil Chand Jain vs. ITO (1992) 43 ITD 442 (Del); (v) Intracraft India vs. CIT (1985) 154 ITR 662 (Del); (vi) Sant Baba Mohan Singh vs. CIT (1973) 90 ITR 197 (All). In rejoinder, it was submitted by learned Authorised Representative of assessee that in case of Raj Kumar Chawla (supra), Special Bench of Tribunal has considered difference in provisions of s. 143(2) prior to 1st April, 1989 and thereafter. Regarding Tribunal judgment in case of K. K. Patel and N. A. Khan & Co. vs. ITO (supra), it was submitted that in this case, assessment year involved is 1979-80 and hence, amended provisions of s. 143(2) after 1st April, 1989 were not considered. We have considered rival submissions and have gone through materials on record and orders of authorities below and judgments cited by both sides. We find that judgment rendered in case of Tiwari Kanhaiya Lal & Ors. vs. CIT (supra) relied upon by learned Authorised Representative of assessee supports case of assessee that filing of return in compliance to notice under s. 148 is not compulsory and it is sufficient compliance if return was already filed prior to issue of notice under s. 148 and assessee informs AO about same and requests him that same may be treated as return filed in compliance to notice under s. 148. In present case, assessee has made such request as noted by AO on page No. 2 of assessment order and therefore, we hold that valid return was filed by assessee in pursuance to notice under s. 148. Now, we have to decide main issue i.e., validity of assessment order, when admittedly, no notice was issued by AO under s. 143(2). In this regard, we find it appropriate to mention that as per assessment order, AO made enquiries by issuing notice under s. 142(1). assessee submitted replies and AO duly considered same. In our opinion, real purpose replies and AO duly considered same. In our opinion, real purpose behind requirement to issue notice under s. 143(2) is to provide opportunity to assessee to support his return and this purpose was not defeated and assessee was provided proper opportunities, which were duly availed by him and AO duly considered his explanations. Tribunal judgment in case of K. K. Patel and N. A. Khan & Co. vs. ITO (supra) supports case of Revenue, but assessment year involved in that case was asst. yr. 1979-80 and it is contention of learned Authorised Representative of assessee that there is change in provisions of s. 143(2) w.e.f. 1st April, 1989 and Tribunal judgment rendered in case of K. K. Patel and N. A. Khan & Co. vs. ITO (supra) was rendered as per old provisions. It is also submitted that judgment rendered by Tribunal in case of Raj Kumar Chawla vs. ITO (supra) is as per amended provisions of s. 143(2) and hence this latter judgment of Special Bench is to be followed. At this juncture, we feel it appropriate to consider difference in provisions of s. 143 (2) prior to 1st April, 1989 and thereafter and hence, we reproduce these provisions. Sec. 143 (2) prior to 1st April, 1989: "(2) Where return has been made under s. 139, and (a) assessment having been made under sub-s. (1), assessee makes within one month from date of service of notice of demand issued in consequence of such assessment, application to AO objecting to assessment, or (b) whether or not assessment has been made under sub-s. (1), AO considers it necessary or expedient to verify correctness and completeness of return by requiring presence of assessee or production of evidence in this behalf, AO shall serve on assessee notice requiring him, on date to be therein specified, either to attend at AO s office or cause to be there produced, any evidence on which assessee may rely in support of return: Provided that, in case, where assessment has been made under sub- s. (1), notice under this sub-section except where such notice is in pursuance of application made by assessee under cl. (a) shall not be issued by AO unless previous approval of Dy. CIT has been obtained to issue of such notice: Provided further that in case where assessment has been made under sub-s. (1) is objected to by assessee by application under cl. (a), assessee shall not be in default in respect of whole or any part of amount of tax demanded in pursuance of assessment under that sub- section, which is disputed by assessee, insofar as such amount does not relate to any adjustment referred to in sub-cl. (i) of cl. (b) of sub-s. (1), and further no interest shall be chargeable under sub-s. (2) of s. 220 in respect of such disputed amount." Sec. 143(2) after 1st April, 1989 on statute book in relevant asst. yr. i.e., 1998-99: "(2) Where return has been made under s. 139 or in response to notice under sub-s. (1) of s. 142, AO shall, if he considers it necessary or expedient to ensure that assessee has not understated income or has not computed excessive loss or has not underpaid tax in any manner serve on assessee notice requiring him, on date to be specified therein, either to attend his office or to produce or cause to be produced there, any evidence on which assessee may rely in support of return: Provided that no notice under this sub-section shall be served on assessee after expiry of twelve months from end of month in which return is furnished." From comparison of above provisions of s. 143(2) prior to 1st April, 1989 and thereafter, we find that after 1st April, 1989, one restriction is put on AO that he cannot issue notice under this section to assessee after expiry of period of 12 months from end of month in which return is furnished. But, this restriction in this section after 1st April, 1989 is not relevant in present case because of retrospective amendment w.e.f. 1st Oct., 1991 made by Finance Act, 2006, in s. 148. As per this amendment, such notice under s. 143(2) issued after this specified period of 12 months is also valid if same is issued before completion of assessment, in cases, where returns are filed during 1st Oct., 1991 to 30th Sept., 2005 in response to notice issued under s. 148. requirement to issue notice before completion of assessment was earlier also because no such notice under s. 143(2) could be issued after completion of assessment even under old provisions of s. 143(2) although there was no such specific restriction. In view of this, we find no merit in this contention of learned Authorised Representative of assessee that Tribunal judgment rendered in case of K. K. Patel and N. A. Khan & Co. vs. ITO (supra) is not relevant after 1st April, 1989 because of changes in s. 143(2). Now, question for our consideration is whether reassessment made by AO is without jurisdiction and, consequently, null and void. In our opinion, answer to this question is in negative. assessment can be said to be null and void when assessment proceedings itself are void ab initio or when assessment itself is without jurisdiction. Assessment proceedings commence either when notice to file return is issued by AO or when return is filed by assessee, as case may be as held by Hon ble Supreme Court in case of Gyansyamdas vs. Regional Asstt. CST (1964) 51 ITR 557 (SC). In present case, admittedly, notice under s. 148 was issued validly. return was also deemed to have been filed by assessee by virtue of letter dt. 25th June, 2001 wherein, it was stated that original return filed by him should be treated as filed in pursuance of notice under s. 148. We have already held in preceding para that this amounted to filing of return in view of Rajasthan High Court Judgment in case of Tiwari Kanhaiya Lal & Ors. vs. CIT (supra). Therefore, it cannot be said that assessment proceedings were not validly initiated and therefore, on this ground, it cannot be said that assessment proceedings were void ab initio. next question is whether it can be said that assessment was without jurisdiction. Once notice under s. 148 has been issued validly, AO is vested with powers to assess or reassess under s. 147 of IT Act. Therefore, jurisdictional power for making reassessment is vested in AO by virtue of s. 147 and therefore, it cannot be said that assessment order was without jurisdiction. Similar issue arose in case of Naval Kishore & Sons Jewellers vs. Dy. CIT (2003) 81 TTJ (Luck)(SB) 362: (2003) 87 ITD 407 (Luck)(SB). In that case, question arose whether block assessment made without issuance of notice under s. 143(2) could be said to be null and void. Special Bench referred to provisions of s. 158BA for holding that power to assess is vested in AO by virtue of such provisions and therefore other provisions for making assessment are purely procedural in nature and therefore, non-compliance of procedural provisions would not lead to assessment being null and void. Relevant portion of decision is quoted below: "37. above discussion reveals that legislature has made independent substantive provisions regarding power to proceed to make assessment under s. 143(2) as well as under s. 158BC. Sec. 158BC r/w s. 158BA, being special provisions of proceeding to assess undisclosed income of assessee in search matters, would override provisions of s. 143(2) as far as power/jurisdiction to proceed to make assessment is concerned inasmuch as it is settled legal position that special provisions override general provisions. view which has been taken by us can be illustrated by pointing out that s. 142 has also been made applicable to block assessment proceeding but such provisions cannot be applied for asking assessee to file return since specific provisions have been made by legislature in this regard by enacting cl. (a) of s. 158BC. Perhaps, because of such reasons, legislature has used expression so far as may be . In view of above discussion, we are of view that only procedural part of s. 143(2) can be applied to block assessment proceedings and consequently, provisions of s. 143(2) cannot be applied for invoking power/jurisdiction to proceed to assess undisclosed income which directly flows from provisions of s. 158BA r/w s. 158BC(b). Hence, proviso to s. 143(2), which is part of jurisdictional aspect, as also contended by assessee s counsel, would be inapplicable to block assessment proceedings. Accordingly, only that portion of s. 143(2) would apply which provides for serving of notice to assessee. That means where return has been filed under s. 158BC, notice as prescribed in s. 143(2) will have to be issued unless there are justifiable reasons for deviation." Above view has been upheld by Bombay High Court in case of Shirish Madhukar Dalvi vs. Asstt. CIT (2006) 203 CTR (Bom) 621: (2006) 287 ITR 242 (Bom), wherein it has been held that in order to assume jurisdiction for assessment under s. 147, notice under s. 148(1) is condition precedent; whereas scheme of Chapter XIV-B of Act suggests that s. 158BA is section which provides for jurisdiction in favour of AO to assess undisclosed income in accordance with Chapter XIV-B. It was also held that s. 148 is substantive section whereas s. 158BC was procedural section. Although in this case, issue before Hon ble Bombay High Court was regarding interpretation of s. 158BC, but in process, their Lordships have compared provision of s. 148 with s. 158BC on pp. 257 and 258 of this report and clear finding is given that notice under s. 148 provides jurisdiction to AO for assessment under s. 147 whereas notice under s. 158BC only provides for procedure to be adopted for block assessment and hence notice under s. 158BC cannot be equated with notice under s. 148(1). These observations of Hon ble Bombay High Court fortify our view that once notice under s. 148 has been issued validly, AO is vested with powers to assess or reassess under s. 147 of IT Act and therefore, jurisdictional power for making reassessment is vested in AO by virtue of s. 147 moment valid notice under s. 148 is issued and therefore, assessment order cannot be said to be without jurisdiction merely on ground of non compliance of rules of natural justice. Now, we would refer to certain judgments where it has been held that assessment cannot be said to be null and void for non-compliance of procedural provisions. Hon ble Allahabad High Court in case of Sant Baba Mohan Singh vs. CIT (supra) has elaborately discussed this issue and held as under: "The omission of ITO to issue notice under s. 23(2) does not affect ab initio jurisdiction enjoyed by ITO in respect of proceeding. ITO has seisin over case, he has overall jurisdiction over case and in that sense had power to initiate proceeding. omission to issue notice under s. 23(2) merely prevents ITO from making assessment under s. 23(3), and after he rectifies omission by issuing that notice, he can proceed further to next stage, that is, to exercise power of completing assessment under to next stage, that is, to exercise power of completing assessment under s. 23(3). All these are steps within overall jurisdiction vested in ITO over entire assessment proceeding. We are of definite opinion that failure of ITO to issue notice under s. 23(2) does not call for order by AAC annulling assessment. AAC was right in merely setting aside assessment." In above case, their Lordships were dealing with s. 23(2) of 1922 Act, which is in pari materia with s. 143 (2) of 1961 Act. Therefore, ratio laid down in above judgment would be fully applicable to present case. Similarly, Hon ble Jammu & Kashmir High Court in case of Rattan Lal Tiku vs. CIT (supra) held as under: "7. Coming now to third question as to validity of order passed by AAC, we do not find any ground to differ from view taken by AAC. learned counsel for assessee submitted that, as mandatory provisions of s. 143 (2) of Act had not been complied with by ITO, AAC should have annulled rather than set aside assessment and remanded case for giving fresh notice. We are, however, unable to accept this argument. As appellate Court AAC had plenary powers to make any order he liked on facts and circumstances of case. In fact, s. 250(4) of Act runs thus: AAC may, before disposing of appeal, may make further enquiry as he thinks fit, or may direct ITO to make further inquiry and report result of same to AAC. second part of this sub-section clearly empowers AAC to give directions to ITO to make further inquiry. power of setting aside order of assessment, where it is illegal, is inherent in any appellate Court and AAC has passed perfectly legal order in directing ITO to issue notice to assessee before making assessment because he was not satisfied regarding correctness of assessee s return. We do not see how this order prejudices assessee; in fact, order is in favour of assessee rather than against him. AAC had ample jurisdiction either to call for report or to give directions to ITO to comply with requirements of law." Following aforesaid two judgments, Hon ble Rajasthan High Court in case of CIT vs. Gyan Prakash Gupta (supra) held that when return is filed, AO gets seisin over case and he has jurisdiction over it. Failure to comply with provisions of s. 143(2) would not render assessment as null and void. Though it was held that assessment order passed without notice under s. 143(2) is invalid and vitiated but on that account, assessment order cannot be declared as null and void and course open to appellate authorities is to restore matter to file of AO to give opportunity to assessee by issue of notice under s. 143(2). Relevant portion of said judgment is extracted below: "15. We may at once state that there cannot be any quarrel with above statement of law, but question before us is whether failure to serve notice on legal representative of deceased renders assessment order null and so it has to be annulled. Annulment means to make null, to reduce to nothing, to abolish. AAC has power to annul assessment under s. 251(1)(a) of Act, Equally, he has power to set it aside. It is not disputed by learned counsel for Revenue and assessee that notice was required to be given to legal representatives of deceased, Mohanlal Gupta, or for that matter to Smt. Dayawati Gupta before completing assessment under s. 143(2), according to which, principles of natural justice would have been complied with or that opportunity of hearing should have been given before making assessment. This is what is statutorily required. To issue notice under s. 143(2) is mandatory and, therefore, if assessment is made without complying with s. 143(2), then assessment is, ordinarily, invalid. But, contention of Mr. Arora is that in such situation, correct order to be passed by AAC is to set aside assessment, whereas according to Mr. Balia, it should have been annulled. As stated above, assessment order passed without notice under s. 143(2) is invalid and it is vitiated, but invalidity is not, however, of such nature which goes to root of proceedings and that being so, AAC having found it to be invalid, that invalidity did not go to root of matter. It could be set aside for being redone de novo. He should not have annulled it. Failure to serve notice on assessee under s. 143(2) of Act is merely irregularity and ITO, until and unless he gets notice served, cannot complete assessment. We find it difficult to hold that ITO has no jurisdiction in respect of proceedings. As soon as return is filed, he gets seisin over case. He has jurisdiction over it, but on failure to comply with s. 143(2) of Act, only limited restriction is that he cannot complete assessment. In these circumstances, assessment orders completed without service of notice under s. 143(2) cannot be said to be ab initio void and when it is not so, assessment order cannot be annulled. Having considered reasons given by Allahabad and Jammu and Kashmir High Courts in Sant Baba Mohan Singh s case (supra) and Rattan Lal Tiku s case (supra), we are of opinion that, in circumstances of case which have already been adverted to above, order that AAC should have passed on account of failure of ITO to serve notices on all legal representative of Mohanlal Gupta or for that matter on Smt. Dayawati Gupta, in whose favour, will was executed by deceased, Mohanlal Gupta, was to set aside assessment order passed by ITO in respect of asst. yr. 1965-66 and not to annul assessment. We respectfully agree with view taken by Allahabad High Court and Jammu and Kashmir High Court, as it is in conformity with provisions of s. 143(3) and s. 159 of Act." Hon ble Delhi High Court in case of Intar Craft India vs. CIT (supra), also took same view and held as under: "The real point urged by Mr. Aggarwal was that once revised return is filed ITO must stop proceedings and must give fresh notice under s. 143(2) and only then can he proceed with case. Mr. Wadhera referred to order-sheet of ITO showing that after revised return was filed, proceedings continued for number of hearings and revised return was taken into consideration while making assessment order. It does not appear that any objection was raised to this procedure by assessee before ITO Mr. Wadhera pointed out that no particular procedure is required for giving notice under s. 143(2) and if revised return is filed in course of hearing, it can be taken that notice has been given and taken by assessee. We think this controversy is bit unnecessary at this stage because after remand, assessment has been made. Assuming that assessment was made after procedural irregularity in giving notice, it was open to AAC to set aside order and remand case. Mr. Aggarwal submitted that this was illegality, which could not be rectified. But, we do not see why this is so. Mr. Wadhera has pointed out that after remand has been made, there is further period granted by Act in which assessment can be completed de novo by ITO and he has referred to s. 151(2A) and also to some of decided cases. It, therefore, appears that contention that proceedings had come to end because no notice under s. 143(2) had been issued in respect of revised return seems out of place now, because after remand, if no such notice is issued, it may be open to assessee to raise this very contention in respect of assessment made after remand. We do not think that any question of law arises in case because this is mere case of remand for re-decision by ITO, and remand is perfectly in accordance with powers of AAC under s. 251(1)(a). For convenience, this power can be set out here: (a) In appeal against order of assessment, he may confirm, reduce, enhance or annul assessment; or he may set aside assessment and refer case back to ITO for making fresh assessment in accordance with directions given by AAC.............. In circumstances, we reject application. In view of novelty of points and particularly contentions raised regarding procedural irregularity and procedural illegality, we make no order as to costs." Similarly, Hon ble apex Court in case of CIT vs. Jai Prakash Singh (supra) held as under: "7. Before we proceed to answer question, it is necessary to keep in mind facts of this case. B.N. Singh died on 16th April, 1967. He failed to file return for asst. yrs. 1965-66 and 1966-67 within time prescribed. So, Authorised Representative of assessee as asst. yr. 1967-68 is concerned, he, of course, died before expiry of period prescribed for filing return. No return was filed for asst. yr. 1967-68 also within prescribed period. Jai Prakash Singh, however, wanted to take advantage of provision contained in s. 139(4) which enables assessee to furnish return for any previous year at any time before end of period specified in cl. (b) provided assessment is not made by time of filing of return. (Clause (b) of said sub-section specifies various periods of limitation; in respect of assessment years concerned herein, it is four years from end of relevant assessment year). returns were filed voluntarily disclosing income received by B.N. Singh during relevant accounting years by one of his legal representatives inviting assessment. names of all legal representatives were already intimated to ITO (as found recorded in orders of AAC and Tribunal though occasion for giving such information is not evident from record. It is also not clear who gave information regarding death of B.N. Singh and not by other nine legal representatives and in which connection). It is true that returns were signed only by Jai Prakash Singh and not by other nine legal representatives, but it should also be remembered that when notices under ss. 142(1) and 143(2) were issued to Jai Prakash Singh, he appeared through his Authorised Representative and produced relevant books of account on basis of which assessments were made. Jai Prakash Singh did not raise objection before ITO that unless and until notices to all other legal representatives are sent, assessment orders cannot be made. He raised this question for first time in appeals preferred by him before AAC and thereafter before Tribunal. It appears rather curious that Jai Prakash Singh who had voluntarily filed returns of income should raise this issue; no other legal representative of B.N. Singh has come forward with such plea. We do not wish to go into question whether Jai Prakash Singh should at all have been allowed to so turn round and raise this plea in appeal, for reason that said issue is not before us in these appeals. We are of opinion that High Court was not right in holding in above circumstances that assessment was null and void. They are not. At t h e worst, they are defective proceedings or irregular proceedings as has been rightly held by AAC and Tribunal" Similarly, this Tribunal in case of K. K. Patel and N. A. Khan & Co. Similarly, this Tribunal in case of K. K. Patel and N. A. Khan & Co. (supra) held as under: "We have to consider action of learned CIT(A), in present case, in aforesaid background. assessee did not have opportunity of being heard before assessee was saddled with assessment. This is violative of principles of natural justice. But, since ITO had already valid jurisdiction to make assessment provided requirement of reasonable opportunity of being heard was complied with, learned CIT(A) set aside assessment directing ITO to give fresh hearing by issue of notice under s. 143(2). action taken by CIT is not opposed to principles in cases decided by Supreme Court to which we have referred, viz. Kapurchand Shrimal s case (supra) and Swadeshi Cotton Mills case (supra). action taken by CIT is also in conformity with ratio of decision of Allahabad High Court in Sant Baba Mohan Singh s case (supra). In light of these findings, we are unable to agree with learned counsel for assessee that there was any error in manner in which learned CIT(A) exercised his discretion as far as setting aside assessment is concerned and directing fresh assessment in accordance with law after giving due opportunity of being heard." Similarly, this Tribunal in case of Vakil Chand Jain vs. ITO (supra) held as under: "In instant case, AO has not issued notice under s. 143(2) of Act, without which, he could not have made assessment under s. 143(3) of Act. only claim of assessee is that non-issuance of notice must be held to invalidate assessment. This claim clearly implies that but for failure to issue notice under s. 143(2), framing of assessment under s. 143(3) is in conformity and according to intent and purpose of Act. In fact, AO had proceeded to frame assessment, after hearing assessee and also, considering relevant material. As observed earlier, issuing of notice, being mandatory for making of assessment under s. 143(3) of Act, non-issue of such notice, in view of s. 292B of Act, in circumstances, of case, has only to be treated as omission or defect or mistake. Therefore, to remedy this mistake or defect or omission, AO has only to be told to follow mandatory requirement of issuing notice and to redo assessment. purpose of IT Act being to determine tax payable by every taxpayer, it prescribes various procedures to be followed by tax collector and one such procedure is determination of total income. This in turn contains several related procedures, one of which is issuing of notice. Therefore, non-following of prescribed procedure, would only result in procedural mistake. This is what has been amplified by s. 292B of Act. There is subtle difference between irregularity and illegality. irregular action can be cured, but illegal action would not contain any cure in any statute. term irregular means not conforming to rule or to ordinary rule. term illegal means contrary to law. Therefore, irregular action could be cured, by adhering to rule, but, illegal action, which is contrary to law, could not be cured. In case of Intercraft India (supra) cited by counsel for assessee, Delhi High Court had considered ratio laid down by Supreme Court of India in Guduthur Bros. vs. ITO (1960) 40 ITR 298 (SC). In Guduthur Brother s case (supra), penalty was imposed without affording opportunity to assessee and it was held that, order imposing penalty was tainted with illegality. It was observed that, AAC had held order imposing penalty as defective, because opportunity of being heard was not provided and set aside penalty order. officer, in remand proceedings, issued notice to assessee, calling for his explanation, which was considered, after which, he again imposed penalty. It was observed with reference to action of officer in remand proceeding that, his action of restarting proceedings from point where he had committed illegality, was proper. Since, in instant case, AO having merely failed to follow rule of issuing of notice, before framing of assessment, assessment so framed is not conforming to ordinary rule and therefore, is irregularity or defect or mistake, which is not fatal to assessment framed. It only makes assessment imperfect and to enable him to remove imperfection, proper course to be followed, is to set aside assessment. argument of assessee, that such remands would result in extending time-limit prescribed under s. 153(1) of IT Act, in our opinion, is not justified. It is for irregular or imperfect assessments, that first appellate authority has been conferred with power of remand and considering such situation of remand that legislature has provided in s. 153(2A) of Act, time-limit of two years has been allowed for making of assessment, from end of financial year, in which order of remand was made. appeal of assessee is rejected." combined reading of all these judgments leads to only one conclusion that provisions of s. 143(2) are only procedural provisions though mandatory and do not give jurisdiction to assess and do not vest in AO power to make assessment. real purpose behind provisions of s. 143(2) is to provide effective opportunity to assessee to support and explain return filed by him and books of account maintained by him. This requirement is part of natural justice, which has been incorporated in Act. Non-compliance of same may invalidate assessment order but certainly it does not render assessment without jurisdiction. Accordingly, we hold that non-compliance of provisions of s. 143(2) in present case does not render assessment as null and void since valid jurisdiction was vested in AO by virtue of clear provisions of s. 147/148 itself. This view of ours is also fortified by recent judgment dt. 8th Nov., 2006 of Hon ble Madras High Court rendered in case of Areva T & D India Ltd. vs. Asstt. CIT (2007) 207 CTR (Mad) 497: 2006-TIOL-371-HC-MAD-IT. facts of that case are similar to facts of present case. In that case also, notice under s. 148 was issued on 17th Nov., 2003 and further letter dt. 7th Dec., 2004 was issued by AO asking assessee to file return of income and to produce records. After that, return was filed by assessee by filing letter dt. 18th Dec., 2004 requesting AO to treat original return filed on 31st Dec., 1999 as return to notice issued under s. 148. In that case also, reassessment was completed on 28th March, 2005 without issuing notice under s. 143(2). Under these facts, it was held in that case that not issuing notice under s. 143(2) and not considering objections of assessee for reopening were only irregularities and matter was set aside to AO with direction to consider matter afresh, particularly objection given by assessee for reopening and to issue notice under s. 143(2) of Act and after providing opportunity to assessee of being heard. At this stage, it may be mentioned that if legislature can confer jurisdiction upon AO to assess or reassess, it can also withdraw or take away such jurisdiction by enacting appropriate provisions. For example, jurisdiction vested with AO ceases on expiry of time provided in s. 153 of Act and consequently, assessment made after expiry of such period would be without jurisdiction. Similarly, legislature in its wisdom enacted proviso to s. 143(2) effective from 1st April, 1989, which provides that notice under s. 143(2) would not be served after expiry of period mentioned therein. Thus, legislature has taken away jurisdiction to assess after particular period. But, that does not mean that service of notice under s. 143(2) confers jurisdiction on AO. service of notice under s. 143(2) is part of procedural provisions as laid down by Hon ble Supreme Court in case of R. Dalmia vs. CIT (1999) 152 CTR (SC) 383: (1999) 236 ITR 480 (SC), but period of limitation prescribed in proviso to s. 143(2) affects jurisdiction of AO to assess. Thus, such distinction has to be kept in mind while adjudicating such issue. Reliance was placed by learned Authorised Representative for assessee on judgment of Special Bench of Tribunal rendered in case of Raj Kumar Chawla (supra). Let us now consider applicability and relevance of this judgment in view of amendment in s. 148 by way of inclusion of proviso w.r.e.f. 1st Oct., 1991 vide Finance Act, 2006. As per this amendment, in case of returns filed in response to notice under s. 148 during 1st Oct., 1991 to 30th Sept., 2005, notice under s. 143(2) served after expiry of 1 2 months but before expiry of time-limit for completion of assessment, reassessment, etc., is deemed to be valid notice. In view of this amendment, very basis on which issue was decided in case of Raj Kumar Chawla (supra) has ceased to exist. In case of Raj Kumar Chawla (supra), issue was decided in favour of assessee mainly on basis that time-limit provided for issuing notice under s. 143(2) is for purpose that if assessee does not receive notice under s. 143(2) within prescribed time, he can take it that return filed by him has become final and no scrutiny proceedings are to be started. This can be seen from para No. 26 of this judgment, wherein Tribunal has reproduced Circular No. 545, dt. 31st Oct., 1989 as reported in 182 ITR (St) 1. In para No. 27 of this judgment, it is stated by Tribunal that AO has no power to make scrutiny assessment unless he serves notice in prescribed time of 12 months making his intentions clear to assessee. In view of amendment in s. 148 as noted above, in cases, where return is filed in pursuance to notice under s. 148 during 1st Oct., 1991 to 30th Sept., 2005, AO can serve notice under s. 143(2) even beyond this prescribed period of 12 months but before expiry of time-limit for completion of assessment. This changes whole purpose and character of this provision regarding issue of notice under s. 143(2). Since, in such type of cases, which are covered by this proviso to s. 148, notice under s. 143(2) can be issued anytime before expiry of time-limit for completion of assessment, it is clear that in such cases, this notice under s. 143(2) does not give jurisdiction to AO to make scrutiny assessment. It is also clear that in such cases, this notice under s. 143(2) is not for purpose to enable assessee to assume, believe and take note that return filed by him has become final and no scrutiny proceedings are to be started because as per amended provisions, such notice can be issued at any point of time before expiry of time-limit for completion of assessment. In light of this amendment, it is clear that notice under s. 143(2) in cases like present case (i.e. cases where return is filed in pursuance to notice under s. 148) is not for purpose to provide jurisdiction to AO to make scrutiny assessment and it is not for purpose to make his intention clear to assessee that he wants to make scrutiny assessment. We feel that after this change regarding making notice under s. 143(2) valid even if same is issued after prescribed period of 12 months but before expiry of time-limit for completion of assessment, purpose of issuing notice is nothing but to provide natural justice to assessee to enable him to explain his case before AO completes assessment. In view of this, we are of considered opinion that after this amendment in s. 148, this Tribunal judgment rendered in case of Raj Kumar Chawla (supra) is not valid in present case because in present case also, return is deemed to have been filed by assessee in pursuance to notice under s. 148 issued during this period, i.e., during 1st Oct., 1991 to 30th Sept., 2005. But, there is one other important point in present case i.e., that in present case, it is admitted position that no notice under s. 143(2) was issued. This does not change position as noted by us in para No. 22 above because in various judgments of Hon ble apex Court, various High Courts and also of Tribunal, requirement of service of notice under s. 143(2) was there. Obviously, it was to be served before completion of assessment and not afterwards although, no time-limit was provided in s. 143(2) before insertion of proviso to s. 143 (2) w.e.f. 1st April, 1989. On combined reading of various judgments noted by us above, we have reached to conclusion that non-compliance of provisions of s. 143(2) in cases like present case does not render assessment null and void. We want to make it clear that this judgment is on basis of amendment to s. 148 as per which, time-limit to serve notice under s. 143(2) within 12 months of filing return of income was extended to extent that in can be served any time before completion of assessment. Hence, cases, which do not fall in this category, are still covered by judgment of Special Bench of Tribunal rendered in case of Raj Kumar Chawala (supra). Having held that impugned assessment order is only irregular and not illegal, we feel that correct course of action is to set aside same and restore matter to AO for framing fresh assessment order after issuing notice under s. 143(2) to assessee but, we also feel that this whole exercise will be academic only and will not serve any real purpose because in present case, although, no notice under s. 143(2) was issued but queries were raised by issuing notice under s. 142(1) and assessee has participated in assessment proceedings, has submitted his explanations and AO has considered submissions made by assessee. issue of setting aside of assessment order in such case merely to give fresh notice to assessee has been discussed elaborately by Special Bench of Lucknow Tribunal in case of Naval Kishore & Sons Jewellers (supra). In this case, it has been held that if principles of natural justice have otherwise been met then setting aside assessment order would be futile exercise and in such situation, appellate authority should proceed to decide case on merits. Para 56 of this judgment reads as under: "Having held that non-issuance of notice under s. 143(2) is not nullity but "Having held that non-issuance of notice under s. 143(2) is not nullity but is irregularity, question may arise as to what course should be adopted in such cases by appellate authority. One easy course would be to set aside assessment and restore matter to file of AO for fresh assessment after giving reasonable opportunity of being heard to assessee. But, there may be cases where sufficient opportunity might have already been given by AO or assessee might have participated in proceedings before AO or there may be sufficient materials on record for adjudication. In such cases mere restoration may prove to be futile exercise. Therefore, in such cases, appellate authority may adjudicate issue itself after giving reasonable opportunity to assessee to explain his case. These observations are mere guidelines and no limitations are being placed on powers of appellate authority. appellate authority would be free to choose right course depending upon facts of each case." In view of this judgment and considering facts of this case, we do not set aside assessment order but we want to make it clear that where proper opportunity was not provided to assessee, assessment order should be invariably set aside under these circumstances. Now, we deal with arguments of learned Authorised Representative of assessee regarding merit of addition made by AO of interest of Rs. 9,67,727: (a) First argument is that s. 14A cannot be invoked to reassess under s. 147. In this regard, we find that s. 14A was inserted by Finance Act, 2001, and notice under s. 148 was issued on 31st May, 2001 and there is no mention of s. 14A in reasons recorded for reassessment prior to issue of notice under s. 148. There is no mention of s. 14A in assessment order also dt. 31st Oct., 2002 and hence this objection of assessee has no merit. (b) One more argument is raised by Authorised Representative of assessee that in view of fact that amount of Rs. 114 was offered to tax under head "Income from other sources" on account of Fraction entitlement and same is accepted, it is to be accepted that investment in shares was not only to earn exempt dividend but also to earn taxable Fraction entitlement and hence interest has to be allowed as deduction in full under head "Income from other sources". We are not in agreement with him. First, we discuss nature of this receipt of Rs. 114 on account of Fraction entitlement and also as to whether it can be accepted that investment in shares is to earn Fraction entitlement taxable under head Income from other sources . Regarding Fraction entitlement , it is to be noted that when company comes out with bonus issue of shares against existing shares and as per ratio of bonus shares to be issued for each number of original shares held by shareholder on record date, assessee s entitlement of bonus shares may not be in round number and in such cases, entitlement to extent of round number of shares is given to assessee in form of shares but Fraction entitlement cannot be issued in form of shares and in such cases, company accumulates all such Fraction entitlement of various shareholders and taking together, it comes to round number and then company sells these shares in market and proceeds are distributed among those shareholders. Profit on sale of bonus shares received by assessee is taxable under head "Income from capital gains" and hence we are of considered opinion that this receipt on account of Fraction entitlement is also taxable under same head. contention of assessee is that in this case, shares are sold before assessee receives it. We are not in agreement with him because assessee is entitled to fraction of share on basis of ratio of bonus shares to be issued and number of shares held by him on record date and since fraction of share cannot be practically issued to shareholder, all such fractions are cumulatively sold by company and proceeds are distributed among such shareholders as per their entitlement. sale of shares by company is on behalf of those shareholders and it is at par with sale by shareholders. Hence, nature of income remains same i.e., capital gains. Since, in present case, it was offered by assessee wrongly under head "Income from other sources", it cannot assume character of "Income from other sources" although AO accepts same but still it cannot be held t h t investment in shares is also for purpose of earning Fraction entitlement taxable under head other sources. We, therefore, reject this contention of assessee also. (c) Last contention of assessee is that since dividend income was taxable upto 31st May, 1997, deduction of interest should be allowed for two months i.e., upto 31st May, 1997. We find force in this argument of learned Authorised Representative of assessee and we direct AO that deduction should be allowed for interest expenses incurred during 1st April, 1997 to 31st May, 1997. He should quantify amount of deduction allowable for these 2 months after providing adequate opportunity of being heard to assessee. issue is restored to him for allowing deduction on account of interest for this period of 2 months. Ground Nos. 1 to 3 are rejected and ground No. 4 is partly allowed. Ground No. 5 was not pressed by learned Authorised Representative of assessee and hence same is dismissed as not pressed. In result, this appeal of assessee stands partly allowed. *** KIRAN NAGJI NISAR v. INCOME TAX OFFICER
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