INCOME TAX OFFICER v. PERICLES FOODS (P) LTD
[Citation -2007-LL-0731-7]

Citation 2007-LL-0731-7
Appellant Name INCOME TAX OFFICER
Respondent Name PERICLES FOODS (P) LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 31/07/2007
Assessment Year 2001-02
Judgment View Judgment
Keyword Tags income from house property • initiation of reassessment • reassessment proceedings • reasonable opportunity • period of limitation • income from business • reason to believe • void ab initio • sub-tenancy
Bot Summary: Assessee s claim that whatever assessee received for providing amenities should be treated as business income was also rejected by the AO. He further found that the administrative expenses, financial charges and depreciation to the tune of Rs. 3,53,999 claimed by the assessee w a s not deductible under income from other sources. Assessee s Representative submitted that the assessment order has not been passed as per the provisions of s. 143(3)(i) but it has been passed as per the provisions of s. 143(3)(ii) of the Act. On consideration of the same, it is held that the AO is not justified in changing the head of income under limited scrutiny and he has transgressed the powers vested in him under s. 143(2)(i) r/w s. 143(3)(i) of the Act. How the assessee can contend that the proviso to s. 143(2) prevent the AO from making an assessment under s. 143(3)(ii) even if the notice issued is under s. 143(2)(ii). Assessee s representative submitted that notice under s. 143(2)(ii) is to be issued within 12 months from the end of the month in which the return was filed. Assessee s representative submitted that the order of the CIT(A) annulling the AO s order is correct for the following reasons: As the AO had not served a notice under s. 143(2)(ii), he did not have the necessary jurisdiction to pass the order, being devoid of jurisdiction, and therefore the learned CIT(A) was justified in annulling the AO s order. Re: Query in para 6(b) The setting aside of the AO s order would be improper for the following reasons: AO cannot be invested with a power to frame assessment under s. 143(3)(ii) after the period of limitation 2 years prescribed under s. 153.


This appeal by Revenue is directed against order of CIT(A) in quashing order under s. 143(3)(i) passed by AO and holding that same as null and void ab initio. Assessee filed return on 10th Oct., 2001 declaring income at Rs. 69,120. Subsequently refund of Rs. 1,19,998 was given to assessee. Thereafter case was selected for scrutiny. Notice was issued under s. 143(2)(i) on 30th Oct., 2002. AO found that assessee claimed expenses against rent income of Rs. 6 lakhs. This should have been disallowed. Assessee is engaged in business of investment and trading as per return. It was claimed that income derived by assessee was not rent because assessee was not owner of premises. Assessee has taken premises on sub-tenancy from Trust. In support of above, assessee filed copy of agreement entered into with Shree Basant Kumar Somani Memorial Trust. Assessee also produced copy of Leave & License Agreement. It was further submitted that assessee provided certain amenities in form of furniture, fixtures, air conditioners, EPABX Telephone systems, etc. against which assessee received some compensation. To claim that assessee s receipts were business income, assessee relied upon following decisions: (i) CIT vs. Associated Building Co. Ltd. (1982) 28 CTR (Bom) 252: (1982) 137 ITR 339 (Bom); (ii) CIT vs. National Storage (P) Ltd. (1967) 66 ITR 596 (SC); (iii) Karnani Properties Ltd. vs. CIT (1971) 82 ITR 547 (SC); (iv) Russel Properties (P) Ltd. vs. CIT (1982) 26 CTR (Cal) 330: (1982) 137 ITR 358 (Cal). Assessee s claim that its receipts should be treated as business income was rejected by AO and held this income from subletting is to be taxed under head "Income from other sources". Assessee s claim that whatever assessee received for providing amenities should be treated as business income was also rejected by AO. He further found that administrative expenses, financial charges and depreciation to tune of Rs. 3,53,999 claimed by assessee w s not deductible under income from other sources. He held that what is allowable under s. 57(iii) is only to be allowed. Aggrieved by above order assessee approached first appellate authority. It was submitted before CIT(A) that assessee had not claimed loss, exemption, deduction, allowance or relief in return, which was not admissible at all. It was contended that if AO has reason to believe that any inadmissible deductions have been claimed, then for limited scrutiny to disallow these items, he can issue notice under cl. (i) of sub-s. (2) of s. 143 and for that purpose, assessment order is to be passed under s. 143(3)(i) of Act. It was further contended that if AO wants to make detailed scrutiny then notice is to be issued under cl. (ii) of sub-s. (2) of s. 143 of IT Act. It was contended that in instant case AO passed this order after making detailed scrutiny. As result of scrutiny AO has changed head Income from business to Income from other sources which was never intended by AO in notice issued under s. 143(2)(i) of IT Act. In notice he intended to treat business income as income from house property, which is also not requirement of s. 143(2)(i). Assessee s Representative submitted that assessment order has not been passed as per provisions of s. 143(3)(i) but it has been passed as per provisions of s. 143(3)(ii) of Act. AO issued notice under s. 143(2)(i) to change head of income from business to property and later on it was changed from property to other sources. Hence, assessee s Representative submitted that AO failed to follow provisions of limited scrutiny but has done detailed scrutiny and disallowed expenses. Hence, he contended, order is to be annulled. Claim of assessee was allowed by CIT(A) observing as under: "I have considered facts as stated by AO in assessment order and provisions of law relating to limited and detailed scrutiny as per new procedure. On consideration of same, it is held that AO is not justified in changing head of income under limited scrutiny and he has transgressed powers vested in him under s. 143(2)(i) r/w s. 143(3)(i) of Act. Therefore, assessment order passed in violation of specific provisions of limited scrutiny cannot be held as legally valid order. Hence, this assessment order is held void ab initio and it is, therefore, annulled. Once assessment is annulled/quashed, no judgment is required to be given on merits. This view gets support from following decisions of various High Courts as cited below: (1) Hon ble Madhya Pradesh High Court in case of CIT vs. Agha Abdul Jabbar Khan (1991) 93 CTR (MP) 14: (1991) 187 ITR 587 (MP) has held that in appeal preferred by assessee before AAC, only question that required justification was where any facts and circumstances of case ITO had jurisdiction to reopen assessment under s. 147(a) of Act and whether order of reassessment was liable to be quashed. Once AAC came to conclusion that ITO had no jurisdiction to reopen case under s. 147(a) and that assessment order should be quashed, he had no jurisdiction to make any further direction for re-computation of amount of capital gains. (2) Hon ble Calcutta High Court in case of Rawatmal Harakchand vs. CIT 1978 CTR (Cal) 157: (1981) 129 ITR 346 (Cal) had held that deletion of o n e of items had been made on sole ground that initiation of reassessment proceedings was invalid. In that view of matter, it was open to assessee to contend within frame work of question referred that addition of Rs. 45,711 was incorrect. This was not new question. assessee had preferred appeals before Tribunal and there was no question of any waiver of invalidity of initiation of proceedings. As initiation of proceedings was invalid, addition of Rs. 45,711 could not be sustained. (3) Hon ble Rajasthan High Court in case of Deep Chand Kothari vs. CIT (1988) 67 CTR (Raj) 117: (1988) 171 ITR 381 (Raj) has held that order passed by authority without jurisdiction is nullity and it is invalid can be challenged whenever and wherever it is sought to be enforced or relied upon. It has also been further held that objection regarding lack of jurisdiction is to be decided first. Only after its decision holding that Court or Tribunal has jurisdiction, other questions relating to merits of case arise for decision, otherwise not. In view of above, appeal is allowed and order passed by AO is quashed." Revenue is in appeal before Tribunal. learned Departmental Representative supported order of AO whereas learned Representative of assessee submitted that apparently AO issued notice dt. 28th Oct., 2002 under s. 143(2)(i) as he desired to verify t h e claim of loss, exemption, deduction, allowance or relief claimed by assessee against rent income of Rs. 6 lakhs. However, instead of restricting himself to limited notice issued under s. 143(2)(i) AO not only enquired into nature of receipts but also classified receipts under head "Income from other sources" as against head of "Business income" under which return was filed by assessee. While hearing matter, question was put to assessee why order of AO should be annulled since he has erred to frame assessment under s. 143(3)(ii) as well. Further Bench sought clarification from assessee why order should not be set aside and send back to AO to decide issue after giving reasonable opportunity to assessee. How assessee can contend that proviso to s. 143(2) prevent AO from making assessment under s. 143(3)(ii) even if notice issued is under s. 143(2)(ii). assessee made written submission dt. 17th April, 2007 briefly as under: "A reading together of relevant provisions of ss. 143(2), 143(3) and 153 reveals that firstly assessment under s. 143(3)(i) could be made only if notice under s. 143(2) is issued and served upon assessee within 12 months from end of month in which return was filed. It is further submitted that such notice can be issued only for conducting enquiry into assessee s claim of loss, exemption, deduction, allowance or relief. Hence it is submitted that AO s jurisdiction is limited and he could only allow or reject such claim of loss, exemption, deduction, allowance or relief contemplated under notice and that too within two years from end of assessment year. Assessee s representative submitted that notice under s. 143(2)(ii) is to be issued within 12 months from end of month in which return was filed. Notice is to be issued for ensuring that assessee has not understated his income nor has computed excessive loss or has not under paid tax in any manner and such assessment is to be made within two years from end of assessment year. It was submitted proviso to s. 143(2), including proviso thereto, are mandatory. For this proposition assessee relied upon following decisions: (i) Mrs. C. Malathy vs. CIT (2004) 89 TTJ (Chennai) 938: (2004) 88 ITD 37 (Chennai); (ii) Mahendra Kumar Agarwal vs. ITO (1987) 27 TTJ (Del) 529: (1986) 19 ITD 474 (Del). Hence, assessee s representative submitted that order of CIT(A) annulling AO s order is correct for following reasons: As AO had not served notice under s. 143(2)(ii), he did not have necessary jurisdiction to pass order, being devoid of jurisdiction, and therefore learned CIT(A) was justified in annulling AO s order. On above propositions Respondent relied upon following: (a) CIT vs. Mrs. Ratanbai N.K. Dubhash (1998) 146 CTR (Bom) 450: (1998) 230 ITR 495 (Bom) (See paras 9 and 10) (b) (2004) 89 TTJ (Chennai) 938: (2004) 88 ITD 37 (Chennai) (supra) (See para 7) (c) ITO vs. Smt. Nankibai (1987) 28 TTJ (Indore) 152: (1986) 19 ITD 488 (Indore) (See para 5) (ii) Secondly, learned CIT(A) disposed off respondent s appeal by passing order on 16th Feb., 2004. On that date period of 12 months specified in proviso to s. 143(2) had already expired. learned CIT(A) had not power to remove bar of limitation prescribed under proviso to s. 143(2). prescribed under proviso to s. 143(2). He, therefore, could not confer jurisdiction upon AO to serve notice under s. 143(2)(ii) upon Respondent and if at all such direction was issued it would be neither lawful nor valid. On this proposition respondent relies upon (i) N. Naganatha Iyer vs. CIT (1966) 60 ITR 647 (Mad) (See paras 4, 15 and 16) (ii) CIT vs. Estate of Late Sri N. Veeraswami Chettiar (1963) 49 ITR 13 (Mad) (See para 13). (c) Re: Query in para 6(b) setting aside of AO s order would be improper for following reasons: (i) AO cannot be invested with power to frame assessment under s. 143(3)(ii) after period of limitation 2 years prescribed under s. 153. On this proposition Respondent relied upon (1938) 6 ITR 370 (Lahore) where it is held that power to set aside cannot be exercised to override limitation (See para 12). (ii) If assessment is set aside at this stage it would empower AO to issue notice under s. 143(2)(ii) thereby making proviso to s. 143(3)(ii) redundant. It is not open to authorities working under provisions of statute to state that proviso to s. 143(2) is redundant. On this proposition Respondent relies upon Rakesh S. Mardia vs. Dy. CIT (2002) 74 TTJ (Ahd) 836 (See para 8.1)." Hearing rival submissions, we are of view that appeal by Revenue is liable to be dismissed. Sec. 143(2)(i) introduced w.e.f. 1st June, 2002 by Finance Act, 2002 reads as under: "where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in return is inadmissible, serve on assessee notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him, on date to be specified therein t o produce, or cause to be produced any evidence or particulars specified therein or on which assessee may rely, in support of such claim." Reading of above makes it clear that if AO has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in return is inadmissible then AO may serve on assessee notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require it to produce evidence or particulars specific therein or on which assessee may rely in support of claim. Further, if AO considers that it is necessary or expedient to ensure that assessee had not understated income or has not computed excessive loss, etc. then he may issue notice under s. 143(ii). scope of s. 143(2)(i) is very limited. It could operate only against loss, exemption, and allowance or relief claimed which is inadmissible. According to revenue change of head with regard to income from business to other sources falls within scope of this limited scrutiny assessment and not within scope of s. 143(2) on which we are unable to subscribe to. Further, reading of s. 143(3)(i) makes it clear that as per s. 143(2)(i) power of AO is limited. s. 143(3)(i) says that AO shall by order in writing, allow or reject claim or claims specified in such notice and make assessment determining total income or loss accordingly,. . .The wording allow or reject claim specified in such notice makes it clear that AO can allow or reject claim or claims specified in such notices and make assessment determining total income or loss accordingly. This means that his power does not go beyond claim or claims specified in notice. If he wants to go further for full scrutiny then he has to issue notice under s. 143(3)(ii) wherein there is no such restriction has been put. In view of above, we are of view that his going beyond scope of notice is improper and therefore CIT(A) rightly decided issue in favour of assessee. In result, appeal by Revenue fails and dismissed. *** INCOME TAX OFFICER v. PERICLES FOODS (P) LTD.
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