Income Tax Appellate Tribunal - Mumbai
Shri Kiran Nagji Nisar vs Ito on 20 December, 2006
Equivalent citations: [2008]300ITR286(MUM), (2007)112TTJ(MUM)773
ORDER
A.K. Garodia, Accountant Member
1. This is an assessee's appeal directed against the order of learned CIT(A)- XIX, Mumbai dated 25.02.2003 for the assessment year 1998 - 99.
2. Grounds No. 1 to 3 are regarding validity of the assessment order mainly for the reason that no notice was issued Under Section 143 (2). Ground No. 4 is regarding the disallowance of interest of Rs. 967,727/-.
3. Briefly stated, the facts are that the assessment was first completed under Section 143 (1) on 30.03.2001 and subsequently, it was noted by the assessing officer that the figure of business loss included speculation loss of Rs. 51,757/- claimed twice and that interest expenses of Rs. 967,727/- was incurred on funds utilized for personal withdrawals and investment in shares. For these reasons, the assessment was reopened and notice Under Section 148 was issued on 31.05.2001. In reply to the same, the assessee filed a letter dated 25.06.2001 informing the assessing officer that the return of income was filed on 02.11.1998 and it was submitted therein that the same return may be treated as return filed in pursuance to notice Under Section 148. Thereafter, the assessing officer issued notice under Section 142 (1) and in response to that, Sri Rajan Gala, C. A. appeared and submitted details to the assessing officer. In course of reassessment proceedings, it was noted by the assessing officer that the assessee has declared loss on sales of shares under the head 'Capital Gains'. The Profit & Loss Account shows share-jobbing income of Rs. 740,786/-. Against this income, the assessee claimed interest expenses of Rs. 967,727/-. It was also noticed by the assessing officer that the borrowings of the assessee was Rs. 134.33 Lacs as on 31.03.1997 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 31.03.1997. Margin money as on 31.03.1998 was Rs. 10.61 Lacs. During the year ended on 31.03.1998, most of the shares were sold out, on which, loss was incurred and shown under the head 'Capital Gains'. The amount of borrowed funds as on 31.03.1998 was Rs. 73.61 Lacs. The assessing officer was of the view that borrowed funds were utilized for the purposes other than business. The assessing officer required the assessee to explain as to why the interest of Rs. 967,727/- should not be disallowed. It was replied by the assessee that the loans were fully and entirely utilized for the purpose of business and also for margin money required to be deposited with Bombay Stock Exchange for dealing in shares. The AO was not convinced because he was of the view that the 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 the head 'Capital gains' and therefore, to that extant, funds had been used for investments and not for business. The margin money required for the business was only Rs. 941,565/- and was less than the capital of the assessee. He therefore, held that the interest expense was not for business purpose and the same was disallowed. On appeal, learned CIT (A) upheld the validity of the assessment order and also the disallowance of interest and now the assessee is in further appeal before us.
4. It is submitted by the learned AR of the assessee before us that notice under Section 142 (1) was issued but no notice Under Section 143 (2) was issued. He has drawn our attention to Para No. 6.2 on page 4 of the order of learned CIT (A), wherein, a clear finding is given by him that notice Under Section 143 (2) was indeed not issued to the assessee. Following submissions were made by him:
a) It is submitted that amendment to Section 148 by the Finance Act, 2006 w.r.e.f. 01.10.1991 does not help the case of the revenue because as per this amendment also, notice issued Under Section 143 (2) can be issued late but before the expiry of time limit for making the assessment or reassessment etc. and since in this case, no notice was issued at all Under Section 143 (2), the assessment order is without jurisdiction and hence null & void and therefore, not valid even after this amendment in Section 148.
b) Regarding non filing of return in compliance to notice Under Section 148, it was submitted that the letter dated 25.06.2001 informing the assessing officer that the return of income was filed on 02.11.1998 is sufficient compliance of notice under Section 148 and in support of this contention, reliance was placed on the judgment of Hon'ble Rajasthan High Court rendered in the case of Tiwari Kanhaiya Lal and Ors. v. CIT as reported in 154 ITR 109.
c) It is also submitted that Section 14A cannot be invoked in course of reassessment proceedings in view of the proviso to Section 14A.
d) It is also submitted that dividend income was exempt from 01.06.1997 and hence, interest expenses is allowable for 2 months i.e. up to 31.05.1997 under the head Income from other Sources, even if it is held that borrowings was not for business but for investment in shares.
e) A further argument was raised that in addition to dividend income, the assessee has earned an income of Rs. 114/- on account of "Fraction Entitlement", which has been declared under the head "Income from other sources" and is accepted as such and hence, the interest expenses is allowable expenses under the head "Income from other sources" for the whole year.
f) In support of this contention that assessment order is not valid because no notice was issued Under Section 143 (2), reliance was placed on the judgment of the special bench of the tribunal rendered in the case of Raj Kumar Chawla v. ITO 94 ITD 1 (Del.) (SB).
5. As against this, learned DR of the revenue supported the orders of authorities below. He submitted a copy of the reasons recorded by the assessing officer for reopening of the assessment and it is pointed out by him that there is no mention of Section 14A in the reasons recorded by the assessing officer for reopening of the assessment. Reliance was placed on the tribunal judgment rendered in the case of K. K. Patel & N. A. Khan & Co. v. ITO as reported in 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 the notice under Section 143 (2) on the assessee, it cannot be said that assessment order passed by the AO is illegal and null & void. It is also submitted by him that in this tribunal judgment, the judgment of Hon'ble Apex Court rendered in the case of Swadeshi Cotton Mills v. Union of India was considered. Copy of this Judgment of Hon'ble Apex Court was also submitted. Reliance was placed on the following judgments also in support of this contention that mere non issue of notice to the assessee under Section 143 (2) cannot make the assessment illegal and void:
a) CIT v. jai Prakash Singh 219 ITR 737 (SC)
b) Ratan Lal Tiku v. CIT 97 ITR 553 (J & K)
c) CIT v. Gyan Prakash Gupta 165 ITR 501 (Raj.)
d) Vakil Chand Jain v. ITO 43 ITD 442 (Delhi)
e) Intracraft India v. CIT 154 ITR 662 (Delhi)
f) Sant Baba Mohan Singh v. CIT 90 ITR 197 (All.),
6. In the rejoinder, it was submitted by the learned AR of the assessee that in the case of Raj Kumar Chawla (Supra), the special bench of the tribunal has considered the difference in the provisions of Section 143 (2) prior to 01.04.1989 and thereafter. Regarding the tribunal judgment in the case of K. K. Patel & N. A. Khan & Co. v. ITO (Supra), it was submitted that in this case, the assessment year involved is 1979 - 80 and hence the amended provisions of Section 143 (2) after 01.04.1989 were not considered.
7. We have considered the rival submissions and have gone through the materials on record and the orders of the authorities below and the judgments cited by both sides. We find that the judgment rendered in the case of Tiwari Kanhaiya Lal and Ors. v. CIT (Supra) relied upon by the learned AR of the assessee supports the case of the assessee that filing of return in compliance to the notice under Section 148 is not compulsory and it is sufficient compliance if the return was already filed prior to the issue of notice under Section 148 and the assessee informs the assessing officer about the same and requests him that the same may be treated as return filed in compliance to notice Under Section 148. In the present case, the assessee has made such request as noted by the assessing officer on page No. 2 of the assessment order and therefore, we hold that valid return was filed by the assessee in pursuance to notice under Section 148.
8. Now, we have to decide the main issue i.e. the validity of the assessment order, when admittedly, no notice was issued by the assessing officer Under Section 143 (2). In this regard, we find it appropriate to mention that as per the assessment order, the assessing officer made enquiries by issuing notice under Section 142 (1). The assessee submitted replies and the assessing officer duly considered the same. In our opinion, the real purpose behind the requirement to issue notice under Section 143 (2) is to provide opportunity to the assessee to support his return and this purpose was not defeated and the assessee was provided proper opportunities, which was duly availed by him and the assessing officer duly considered his explanations. The tribunal judgment in the case of K.K. Patel & N.A. Khan & Co. v. ITO (Supra) supports the case of the revenue but the Assessment year involved in that case was A. Y. 1979-80 and it is the contention of the learned AR of the assessee that there is change in the provisions of Section 143 (2) with effect from 01.04.1989 and the tribunal judgment rendered in the case of K. K. Patel & N. A. Khan & Co. v. ITO (Supra) was rendered as per old provisions. It is also submitted that the judgment rendered by the tribunal in the case of Raj Kumar Chawla v. ITO (Supra) is as per amended provisions of Section 143 (2) and hence this latter judgment of the special bench is to be followed. At this juncture, we feel it appropriate to consider the difference in the provisions of Section 143 (2) prior to 01.04.1989 and thereafter and hence, we reproduce these provisions.
Section 143 (2) prior to 01.04.1989:
(2) Where a return has been made under Section 139, and-
a) an assessment having been made under Sub-section (1), the assessee makes within one month from the date of service of notice of demand issued in consequence of such assessment, an application to the Assessing Officer objecting to the assessment, or
b) whether or not an assessment has been made under Sub-section (1), the assessing officer considers it necessary or expedient to verify the correctness and completeness of the return by requiring the presence of the assessee or the production of the evidence in this behalf, the assessing officer shall serve on the assessee a notice requiring him, on a date to be therein specified, either to attend at the Assessing officer's office or cause to be there produced, any evidence on which the assessee may rely in support of the return:
Provided that, in a case, where an assessment has been made under Sub-section (1), the notice under this sub section [ except where such notice is in pursuance of an application made by the assessee under Clause (a) ] shall not be issued by the assessing officer unless the previous approval of the Deputy Commissioner has been obtained to the issue of such notice:
Provided further that in a case where the assessment has been made under Sub-section (1), is objected to by the assessee by an application under Clause (a), the assessee shall not be in default in respect of the whole or any part of the amount of the tax demanded in pursuance of the assessment under that subsection, which is disputed by the assessee, in so far as such amount does not relate to any adjustment referred to in Sub-clause (i) of Clause (b) of Sub-section (1), and further no interest shall be chargeable under Sub-section (2) of Section 220 in respect of such disputed amount.
Section 143(2) after 01.04.1989 on the statute book in the relevant A. Y. i.e. 1998-99:
(2) Where a return has been made under Section 139 or in response to a notice under Sub-section (1) of Section 142, the assessing officer shall, 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 underpaid the tax in any manner serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce or cause to be produced there, any evidence on which the assessee may rely in support of the return:
Provided that no notice under this sub section shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished.
9. From the comparison of the above provisions of Section 143 (2) prior to 01.04.1989 and thereafter, we find that after 01.04.1989, one restriction is put on the assessing officer that he cannot issue notice under this section to the assessee after the expiry of a period of 12 months from the end of the month in which the return is furnished. But this restriction in this section after 01.04.1989 is not relevant in the present case because of the retrospective amendment w.e.f. 01.10.1991 made by the Finance Act, 2006 in Section 148. As per this amendment, such notice Under Section 143 (2) issued after this specified period of 12 months is also valid if the same is issued before the completion of the assessment, in cases, where returns are filed during 01.10.1991 to 30.09.2005 in response to a notice issued under Section 148. The requirement to issue notice before completion of assessment was earlier also because no such notice Under Section 143 (2) could be issued after completion of the assessment even under the old provisions of Section 143 (2) although there was no such specific restriction. In view of this, we find no merit in this contention of the learned AR of the assessee that the tribunal judgment rendered in the case of K. K. Patel & N. A. Khan & Co. v. ITO (Supra) is not relevant after 01.04.1989 because of changes in Section 143 (2).
10. Now the question for our consideration is whether the reassessment made by the Assessing Officer is without jurisdiction and, consequently, null and void. In our opinion, answer to this question is in negative. An assessment can be said to be null and void when the assessment proceedings itself are void ab intio or when the assessment itself is without jurisdiction. Assessment proceedings commence either when the notice to file the return is issued by the Assessing Officer or when the return is filed by the assessee, as the case may be as held by Hon'ble Supreme Court in the case of Gyansyam Das v. Regional Asstt. Commissioner of Sales Tax as reported in 51 ITR 557.
11. In the present case, admittedly, the notice Under Section 148 was issued validly. The return was also deemed to have been filed by the assessee by virtue of letter dated 25.06.2001 wherein, it was stated that original return filed by him should be treated as filed in pursuance of notice Under Section 148. We have already held in the preceding Para that this amounted to filing of return in view of the Rajasthan High Court Judgment in the case of Tiwari Kanhaiya Lal and Ors. v. CIT (supra). Therefore, it cannot be said that the assessment proceedings was not validly initiated and therefore on this ground, it cannot be said that assessment proceedings were void ab inito.
12. The next question is whether it can be said that assessment was without jurisdiction. Once the notice Under Section 148 has been issued validly, the Assessing Officer is vested with the powers to assess or reassess Under Section 147 of the I.T. Act. Therefore, jurisdictional power for making reassessment is vested in the Assessing Officer by virtue of Section 147 and therefore it cannot be said that the assessment order was without jurisdiction. Similar issue arose in the case of Navalkishore and Sons Jewellers reported in 87 ITD 407 (SB). In that case, question arose whether the block assessment made without issuance of notice Under Section 143(2) could be said to be null and void. Special Bench referred to the provisions of Section 158 BA for holding that power to assess is vested in the Assessing Officer by virtue of such provisions and therefore the other provisions for making assessment are purely procedural in nature and therefore, non-compliance of procedural provisions would not lead to the assessment being null and void. Relevant portion of the decision is quoted below.
37. The above discussion reveals that the legislature has made independent substantive provisions regarding the power to proceed to make assessment Under Section 143(2) as well as under Section 158BC. Section 158BC r.w.s. 158BA, being special provisions of proceeding to assess the undisclosed income of the assessee in search maters, would override the provisions of Section 143(2) as far as power/Jurisdiction to proceed to make assessment is concerned in as such as it is the settled legal position that special provisions override the general provisions. The view which has been taken by us can be illustrated by pointing out that Section 142 has also been made applicable to block assessment proceeding but such provisions cannot be applied for asking the assessee to file the return since specific provisions have been made by the legislature in this regard by enacting Clause (a) of Section 158BC. Perhaps, because of such reasons, the legislature has used the expression "so far as may be".
38. In view of the above discussion, we are of the view that only the procedural part of Section 143(2) can be applied to block assessment proceedings and consequently, provisions of Section 143(2) cannot be applied for invoking the power/jurisdiction to proceed to assess the undisclosed income which directly flows from the provisions of Section 158BA r.w.s. 158BC (b). Hence, the proviso to Section 143(2), which is part of jurisdictional aspect, as also contended by the assessee's counsel, would be inapplicable to block assessment proceedings. Accordingly, only that portion of Section 143(2) would apply which provides for serving of notice to assessee. That means where a return has been filed Under Section 158BC, notice as prescribed in Section 143(2) will have to be issued unless there are justifiable reasons for deviation.
13. Above view has been upheld by the Bombay High Court in the case of Shirish Madhukar Dalvi v. ACIT, as reported in 287 ITR 242, wherein it has been held that in order to assume jurisdiction for assessment under Section 147, notice under Section 148 (1) is a condition precedent; whereas the scheme of Chapter XIV - B of the Act suggests that Section 158BA is the section which provides for jurisdiction in favour of the assessing officer to assess undisclosed income in accordance with Chapter XIV -B. It was also held that Section 148 is substantive section whereas Section 158 BC was procedural section. Although in this case, the issue before Hontile Bombay High Court was regarding interpretation of Section 158 BC, but in the process, Their Lordships have compared the provision of Section 148 with Section 158 BC on page 257 and 258 of this report and a clear finding is given that notice under Section 148 provides jurisdiction to the assessing officer for assessment under Section 147 whereas notice under Section 158 BC only provides for procedure to be adopted for block assessment and hence notice under Section 158 BC cannot be equated with notice under Section 148 (1). These observations of Hon'ble Bombay High Court fortifies our view that once the notice Under Section 148 has been issued validly, the Assessing Officer is vested with the powers to assess or reassess Under Section 147 of the I.T. Act and therefore, jurisdictional power for making reassessment is vested in the Assessing Officer by virtue of Section 147 the moment the valid notice under Section 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.
14. Now, we would refer to certain judgments where it has been held that assessment cannot be said to be null & void for non-compliance of the procedural provisions. Hon'ble Allahabad High Court in the case of Sant Baba Mohan Singh v. CIT (supra) has elaborately discussed this issue and held as under:
The omission of the ITO to issue a notice under Section 23 (2) does not affect the ab initio jurisdiction enjoyed by the ITO in respect of the proceeding. The ITO has seisin over the case, he has overall jurisdiction over the case and in that sense had power to initiate the proceeding. The omission to issue a notice under Section 23 (2) merely prevents the ITO from making an assessment under Section 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 Section 23 (3). All these are steps within the overall jurisdiction vested in the ITO over the entire assessment proceeding. We are of definite opinion that the failure of the ITO to issue a notice under Section 23 (2) does not call for an order by AAC annulling the assessment. The AAC was right in merely setting aside the assessment.
15. In the above case, Their Lordships were dealing with Section 23 (2) of 1922 Act, which is in Para meteria with Section 143 (2) of the 1961 Act. Therefore, the ratio laid down in the above judgment would be fully applicable to the present case.
16. Similarly, Hon'ble J & K High Court in the case of Rattan Lal Tiku v. CIT (Supra) held as under:
7. Coming now to the third question as to the validity of the order passed by the AAC, we do not find any ground to differ from the view taken by the AAC. The learned Counsel for the assessee submitted that, as the mandatory provisions of Section 143 (2) of the Act had not been complied with by the ITO, the AAC should have annulled rather than set aside the assessment and remanded the case for giving a fresh notice. We are, however, unable to accept this argument. As an appellate court the AAC had plenary powers to make any order he liked on the facts and circumstances of the case. In fact, Section 250 (4) of the Act runs thus:
The AAC may, before disposing of the appeal, may make further enquiry as he thinks fit, or may direct the ITO to make further inquiry and report the result of the same to the AAC.
8. The second part of this sub-section clearly empowers the AAC to give directions to the ITO to make further inquiry. The power of setting aside the order of assessment, where it is illegal, is inherent in any appellate court and the AAC has passed a perfectly legal order in directing the ITO to issue notice to the assessee before making an assessment because he was not satisfied regarding the correctness of the assessee's return. We do not see how this order prejudices the assessee: in fact the order is in favour of the assessee rather than against him. The AAC had ample jurisdiction either to call for a report or to give directions to the ITO to comply with the requirements of law.
17. Following the aforesaid two judgments, the Hon'ble Rajasthan High Court in the case of CIT v. Gyan Prakash Gupta (supra) held that when the return is filed, the Assessing Officer gets seisin over the case and he has jurisdiction over it. Failure to comply with provisions of Section 143(2) would not render the assessment as null and void. Though it was held that assessment order passed without notice Under Section 143(2) is invalid and vitiated but on that account, assessment order cannot be declared as null and void and the course upon to the Appellate Authorities is to restore the matter to the file of the Assessing Officer to give an opportunity to the assessee by issue of notice Under Section 143(2). Relevant portion of the said Judgment is extracted below:
15. We may at once state that there cannot be any quarrel with the above statement of law, but the question before us is whether failure to serve the notice on the legal representative of the deceased renders the assessment order null and so it has to be annulled. "Annulment" means to make null, to reduce to nothing, to abolish. The AAC has power to annul the assessment under Section 251(1)(a) of the Act, Equally, he has power to set it aside. It is not disputed by learned Counsel for the Revenue and the assessee that the notice was required to be given to the legal representatives of the deceased, Mohanlal Gupta, or for that matter to Smt. Dayawati Gupta before completing the assessment under Section 143(2), according to which, principles of natural justice would have been complied with or that an opportunity of hearing should have been given before making the assessment. This is what is statutorily required. To issue a notice under Section 143(2) is mandatory and, therefore, if the assessment is made without complying with Section 143(2), then the assessment is, ordinarily, invalid. But the contention of Mr. Arora is that in such a situation, the correct order to be passed by the AAC is to set aside the assessment, whereas according to Mr. Balia, it should have been annulled. As stated above, the assessment order passed without notice under Section 143(2) is invalid and it is vitiated, but the invalidity is not, however, of such a nature which goes to the root of the proceedings and that being so, the AAC having found it to be invalid, that invalidity did not go to the root of the matter. It could be set aside for being redone de novo. He should not have annulled it. Failure to serve notice on the assessee under Section 143(2) of the Act is merely an irregularity and the ITO, until and unless he gets the notice served, cannot complete the assessment. We find it difficult to hold that the ITO has no jurisdiction in respect of the proceedings. As soon as the return is filled, he pets seisin over the case. He has jurisdiction over it, but on failure to comply with Section 143(2) of the Act, the only limited restriction is that he cannot complete the assessment. In these circumstances, the assessment orders completed without service of notice under Section 143(2) cannot be said to be ab initio void and when it is not so, the assessment order cannot be annulled.
16. Having considered the reasons given by the 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 the opinion that, in the circumstances of the case which have already been adverted to above, the order that the AAC should have passed on account of the failure of the ITO to serve notices on all the legal representative of Mohanlal Gupta or for that matter on Smt. Dayawati Gupta, in whose favour, the will was executed by the deceased, Mohanlal Gupta, was to set aside the assessment order passed by the ITO in respect of the A.Y. 1965-66 and not to annul the assessment. We respectfully agree with the view taken by the Allahabad High Court and Jammu and Kashmir High Court, as it is in conformity with the provisions of Section 143(3) and Section 159 of the Act.
18. Hon'ble Delhi High Court in the case of Intar Craft India v. CIT (supra), also took the same view and held as under:
The real point urged by Mr. Aggarwal was that once a revised return is filed the ITO must stop the proceedings and must give afresh notice Under Section 143(2) and only then can he proceed with the case. Mr. Wadhera referred to the order sheet of the ITO showing that after the revised return was filed, the proceedings continued for a number of hearings and the revised return was taken into consideration while making the assessment order. It does not appear that any objection was raised to this procedure by the assessee before the ITO Mr. Wadhera pointed out that no particular procedure is required for giving a notice Under Section 143(2) and if a revised return is filed in the course of hearing, it can be taken that notice has been given and taken by the assessee. We think this controversy is a bit unnecessary at this stage because after the remand, the assessment has been made.
Assuming that the assessment was made after procedural irregularity in giving the notice, it was open to the AAC to set aside the order and remand the case. Mr. Aggarwal submitted that this was an illegality, which could not be rectified. But, we do not see why this is so. Mr. Wadhera has pointed out that after a remand has been made, there is a further period granted by the Act in which the assessment can be completed de novo by the ITO and he has referred to Section 1S1(2A) and also to some of the decided cases. It, therefore, appears that the contention that the proceedings had come to an end because no notice Under Section 143(2) had been issued in respect of the revised return seems out of place now, because after the remand, if no such notice is issued, it may be open to the assessee to raise this very contention in respect of the assessment made after remand. We do not think that any question of law arises in the case because this is a mere case of a remand for re-decision by the ITO, and the remand is perfectly in accordance with the powers of AAC Under Section 251(1)(a). For convenience, this power can be set out here:
(a) In an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; or he may set aside the assessment and refer the case back to the ITO for making a fresh assessment in accordance with the directions given by the AAC..."In the circumstances, we reject the application. In view of the novelty of the points and particularly the contentions raised regarding procedural irregularity and procedural illegality, we make no order as to costs.
19. Similarly, Hon'ble Apex Court in the case of CIT v. Jai Prakash Singh (Supra) held as under:
7. Before we proceed to answer the question, it is necessary to keep in mind the facts of this case. B.N. Singh died on 16th April, 1967. He failed to file a return for the A.Ys. 1965-66 and 1966 67 within the time prescribed. So AR of the assessee as the A.Y. 1967-68 is concerned, he, of course, died before the expiry of the period prescribed for filing the return. No return was filed for A.Y. 1967-68 also within the prescribed period. Jai Prakash Singh, however, wanted to take advantage of the provision contained in Section 139(4)-which enables an assessee to "furnish the return for any previous year at any time before the end of the period specified in Clause (b)" provided the assessment is not made by the time of filing of return. [Clause (b) of the said sub-section specifies various periods of limitation; in respect of assessment years concerned herein, it is four years from the end of the relevant assessment year]. The returns were filed voluntarily disclosing the income received by B.N. Singh during the relevant accounting years by one of his legal representatives inviting an assessment. The names of all the legal representatives were already intimated to the ITO (as found recorded in the orders of the AAC and the Tribunal though the occasion for giving such information is not evident from the record. It is also not clear who gave the information regarding the death of B.N. Singh and not by the other nine legal representatives and in which connection). It is true that the returns were signed only by Jai Prakash Singh and not by the other nine legal representatives, but it should also be remembered that when notices under Sections 142(1) and 143(2) were issued to jai Prakash Singh, he appeared through his Authorised Representative and produced the relevant books and accounts on the basis of which assessments were made. Jai Prakash Singh did not raise an objection before the ITO that unless and until notices to all the other legal representatives are sent, assessment orders cannot be made. He raised this question for the first time in the appeals preferred by him before the AAC and thereafter before the Tribunal. It appears rather curious that Jai Prakash Singh who had voluntarily filed the returns of income should raise this issue; no other legal representative of B.N. Singh has come forward with such a plea. We do not wish to go into the question whether Jai Prakash Singh should at all have been allowed to so turn round and raise this plea in appeal, for the reason that the said issue is not before us in these appeals.
8. We are of the opinion that the High Court was not right in holding in the above circumstances that the assessment was null and void. They are not. At the worst, they are defective proceedings - or irregular proceedings - as has been rightly held by the AAC and the Tribunal
20. Similarly, this tribunal in the case of K. K. Patel and N. A. Khan & Co. (Supra) held as under:
We have to consider the action of learned CIT(A), in the present case, in the aforesaid background. The assessee did not have an opportunity of being heard before the assessee was saddled with an assessment. This is violative of the principles of natural justice. But since, the ITO had already valid jurisdiction to make an assessment provided the requirement of a reasonable opportunity of being heard was complied with, the learned CIT (A) set aside the assessment directing the ITO to give a fresh hearing by issue of notice Under Section 143(2). The action taken by the CIT is not opposed to the principles in the cases decided by the Supreme Court to which we have referred, viz. Kapurchand Shrimal's case (supra) and Swadeshi Cotton Mills' case (supra). The action taken by the CIT is also in conformity with the ratio of the decision of the Allahabad High Court in Sant Baba Mohan Singh's case (supra). In the light of these findings, we are unable to agree with the learned Counsel for the assessee that there was any error in the manner in which the learned CIT(A) exercised his discretion as far as setting aside the assessment is concerned and directing a fresh assessment in accordance with law after giving due opportunity of being heard.
21. Similarly, this tribunal in the case of Vakil Chand Jain v. ITO (Supra) held as under:
In the instant case, the Assessing Officer has not issued the notice Under Section 143(2) of the Act, without which, he could not have made the assessment Under Section 143(3) of the Act. The only claim of the assessee is that, the non-issuance of the notice must be held to invalidate the assessment. This claim, clearly implies that, but for the failure to the issue the notice Under Section 143(2), the framing of the assessment Under Section 143(3) is in conformity and according to the intent and the purpose of the Act. In fact, the Assessing Officer had proceeded to frame the assessment, after hearing the assessee and also, considering the relevant material. As observed earlier, the issuing of the notice, being mandatory for the making of the assessment Under Section 143(3) of the Act, non-issue of such notice, in view of Section 292B of the Act, in the circumstances, of the case, has only to be treated as an omission or defect or mistake. Therefore, to remedy this mistake or defect or omission, the Assessing Officer has only to be told to follow the mandatory requirement of issuing the notice and to redo the assessment. The purpose of the I.T. Act being to determine the tax payable by every taxpayer, it prescribes various procedures to be followed by the tax collector and one such procedure is the determination of the total income. This in turn contains several related procedures, one of which, is the issuing of the notice. Therefore, non-following of the prescribed procedure, would only result in a procedural mistake. This is what has been amplified by Section 292B of the Act. There is subtle difference between irregularity and illegality. An irregular action can be cured, but an illegal action would not contain any cure in any statute. The term 'irregular' means not conforming to rule or to the ordinary rule. The term 'illegal' means contrary to law. Therefore, an irregular action could be cured, by adhering to the rule, but, an illegal action, which is contrary to law, could not be cured. In the case of Intercraft India (supra) cited by the counsel for the assessee, Delhi High Court had considered the ratio laid down by the Supreme Court of India in Guduthur Bros. v. ITO . In Guduthur Brother's case, the penalty was imposed without affording an opportunity to the assessee and it was held that, the order imposing penalty was tainted with illegality. It was observed that, the AAC had held the order imposing the penalty as defective, because opportunity of being heard was not provided and set aside the penalty order. The officer, in the remand proceedings, issued a notice to the assessee, calling for his explanation, which was considered, after which, he again imposed penalty. It was observed with reference to the action of the officer in the remand proceeding that, his action of restarting the proceedings from the point where he had committed the illegality, was proper."
Since, in the instant case, the Assessing Officer having merely failed to follow the rule of issuing of a notice, before framing of the assessment, the assessment so framed is not conforming to the ordinary rule and therefore, is an irregularity or a defect or a mistake, which is not fatal to the assessment framed. It only makes the assessment imperfect and to enable him to remove the imperfection, the proper course to be followed, is to set aside the assessment. The argument of the assessee, that, such remands would result in extending the time limit prescribed Under Section 153(2) of the I.T. Act, in our opinion is not justified. It is for irregular or imperfect assessments, that the first appellate authority has been conferred with the power of remand and considering such situation of remand that, the legislature has provided in Section 153(2A) of the Act, the time limit of two years has been allowed for the making of the assessment, from the end of the financial year, in which the order of remand was made. The appeal of the assessee is rejected.
22. The combined reading of all these Judgments leads to the only one conclusion that the provisions of Section 143(2) is only the procedural provisions though mandatory and does not give jurisdiction to assess and does not vest in the Assessing Officer to make the assessment. The real purpose behind provisions of Section 143(2) is to provide an effective opportunity to the assessee to support and explain the return filed by him and the books of account maintained by him. This requirement is part of the natural justice, which has been incorporated in the Act. Non-compliance of the same may invalidate the assessment order but certainly it does not render the assessment without jurisdiction. Accordingly, we hold that non-compliance of provisions of Section 143(2) in the present case docs not render the assessment as null and void since valid jurisdiction was vested in the Assessing Officer by virtue of clear provisions of Section 147/148 itself.
23. This view of ours is also fortified by the recent judgment dated 08.11.2006 of Hon'ble Madras High Court rendered in the case of Areva T & D India Limited v. ACIT as reported in 2006 - TIOL - 371 - HC - MAD - I.T. The facts of that case are similar to facts of the present case. In that case also, notice under Section 148 was issued on 17.11.2003 and a further letter-dated 07.12.2004 was issued by the assessing officer asking the assessee to file return of income and to produce records. After that, the return was filed by the assessee by filing a letter dated 18.12.2004 requesting the assessing officer to treat the original return filed on 31.12.1999 as Return to the notice issued under Section 148. In that case also, reassessment was completed on 28.03.2005 without issuing notice under Section 143 (2). Under these facts, it was held in that case that not issuing the notice under Section 143 (2) and not considering the objections of the assessee for reopening were only irregularities and the matter was set aside to the assessing officer with a direction to consider the matter afresh, particularly the objection given by the assessee for reopening and to issue notice under Section 143 (2) of the Act and after providing opportunity to the assessee of being heard.
24. At this stage, it may be mentioned that if the legislature can confer the jurisdiction upon the Assessing Officer to assess or reassess, it can also withdraw or take away such jurisdiction by enacting appropriate provisions. For example, the jurisdiction vested with the Assessing Officer ceases on the expiry of time provided in Section 153 of the Act and consequently, the assessment made after the expiry of such period would be without jurisdiction. Similarly, the legislature in its wisdom enacted the proviso to Section 143(2) effective from 1.4.1989, which provides that notice Under Section 143(2) would not be served after the expiry of the period mentioned therein. Thus, the legislature has taken away the jurisdiction to assess after a particular period. But that does not mean that service of notice Under Section 143(2) confers jurisdiction on the Assessing Officer. The service of notice Under Section 143(2) is part of procedural provisions as laid down by the Hon'ble Supreme Court in the case of R. Dalmia 236 ITR 480, but the period of limitation prescribed in the proviso to Section 143(2) affects the jurisdiction of Assessing Officer to assess. Thus, such distinction has to be kept in mind while adjudicating such issue.
25. Reliance was placed by the learned AR for the assessee on the Judgment of the Special Bench of the Tribunal rendered in the case of Raj Kumar Chawla (Supra). Let us now consider the applicability and relevance of this judgment in view of the amendment in Section 148 by way of inclusion of a proviso w.r.e.f. 01.10.1991 vide Finance Act, 2006. As per this amendment, in case of returns filed in response to notice under Section 148 during 01.10.1991 to 30.09.2005, notice Under Section 143 (2) served after the expiry of 12 months but before the expiry of time limit for completion of assessment, reassessment etc. is deemed to be a valid notice. In view of this amendment, the very basis on which the issue was decided in the case of Raj Kumar Chawla (Supra) has ceased to exist. In the case of Raj Kumar Chawla (Supra), the issue was decided in favour of the assessee mainly on the basis that the time limit provided for issuing notice Under Section 143 (2) is for the purpose that if the assessee does not receive notice Under Section 143 (2) within the prescribed time, he can take it that the 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 the tribunal has reproduced the circular No. 545 dated 31.10.1989 as reported in 182 ITR (St.) 1. In Para No. 27 of this judgment, it is stated by the tribunal that the assessing officer has no power to make scrutiny assessment unless he serves a notice in the prescribed time of 12 months making his intentions clear to the assessee. In view of the amendment in Section 148 as noted above, in the cases, where the return is filed in pursuance to notice Under Section 148 during 01.10.1991 to 30.09.2005, the assessing officer can serve notice Under Section 143 (2) even beyond this prescribed period of 12 months but before the expiry of time limit for completion of assessment. This changes the whole purpose and character of this provision regarding issue of notice Under Section 143 (2). Since, in such type of cases, which are covered by this proviso to Section 148, the notice Under Section 143 (2) can be issued anytime before the expiry of time limit for completion of assessment, it is clear that in such cases, this notice under Section 143 (2) does not give jurisdiction to the assessing officer to make scrutiny assessment. It is also clear that in such cases, this notice under Section 143 (2) is not for the purpose to enable the assessee to assume, believe and take note that the return filed by him has become final and no scrutiny proceedings are to be started because as per the amended provisions, such notice can be issued at any point of time before the expiry of time limit for completion of assessment. In the light of this amendment, it is clear that notice under Section 143 (2) in cases like the present case (i.e. the cases where the return is filed in pursuance to notice Under Section 148) is not for the purpose to provide jurisdiction to the assessing officer to make scrutiny assessment and it is not for the purpose to make his intention clear to the assessee that he wants to make scrutiny assessment. We feel that after this change regarding making the notice under Section 143 (2) valid even if the same is issued after prescribed period of 12 months but before the expiry of time limit for completion of assessment, the purpose of issuing notice is nothing but to provide natural justice to the assessee to enable him to explain his case before the assessing officer completes the assessment. In view of this, we are of the considered opinion that after this amendment in Section 148, this tribunal judgment rendered in the case of Raj Kumar Chawla (Supra) is not valid in the present case because in the present case also, return is deemed to have been filed by the assessee in pursuance to notice Under Section 148 issued during this period i.e. during 01.10.1991 to 30.09.2005.
26. But, there is one other important point in the present case i.e. that in the present case; it is an admitted position that no notice under Section 143 (2) was issued. This does not change the position as noted by us in Para No. 22 above because in the various judgments of Hon'ble Apex Court, various High Courts and also of the tribunal, requirement of service of notice under Section 143 (2) was there. Obviously, it was to be served before the completion of the assessment and not afterwards although, no time limit was provided in Section 143 (2) before insertion of the proviso to Section 143 (2) w.e.f. 01.04.1989. On the combined reading of various judgments noted by us above, we have reached to the conclusion that non-compliance of provisions of Section 143(2) in the cases like the present case does not render the assessment null and void. We want to make it clear that this judgment is on the basis of the amendment to Section 148 as per which, the time limit to serve notice under Section 143 (2) within 12 months of filing return of Income was extended to the extent that in can be served any time before the completion of assessment. Hence the cases, which do not fall in this category, are still covered by the Judgment of the Special Bench of the tribunal rendered in the case of Raj Kumar Chawala (Supra).
27. Having held that the impugned assessment order is only irregular and not illegal, we feel that the correct course of action is to set aside the same and restore the matter to the A. O. for framing a fresh assessment order after issuing notice Under Section 143 (2) to the assessee but we also feel that this whole exercise will be academic only and will not serve any real purpose because in the present case, although, no notice Under Section 143 (2) was issued but queries were raised by issuing notice under Section 142 (1) and the assessee has participated in the assessment proceedings, has submitted his explanations and the assessing officer has considered the submissions made by the assessee. The issue of setting aside of assessment order in such a case merely to give a fresh notice to the assessee has been discussed elaborately by the Special Bench of Lucknow, ITAT in the case of Navalkishore and Sons Jewellers (Supra). In this case, it has been held that if principles of natural justice have otherwise been met then setting aside the assessment order would be a futile exercise and in such a situation, the appellate authority should proceed to decide the case on merits. Para 56 of this judgment reads as under:
Having held that non-issuance of Notice under Section 143(2) is not a nullity but is an irregularity, the question may arise as to what course should be adopted in such cases by the appellate authority. One easy course would be to set aside the assessment and restore the matter to the file of the Assessing Officer for fresh assessment after giving reasonable opportunity of being heard to the assessee. But there may be cases where sufficient opportunity might have already been given by the Assessing Officer or the assessee might have participated in the proceedings before the Assessing Officer or there may be sufficient materials on the record for adjudication. In such cases mere restoration may prove to be a futile exercise. Therefore, in such cases, the appellate authority may adjudicate the issue itself after giving reasonable opportunity to the assessee to explain his case. These observations are mere guidelines and no limitations are being placed on the powers of the appellate authority. The appellate authority would be free to choose the right course depending upon the facts of each case.
28. In view of this judgment and considering the facts of this case, we do not set aside the assessment order but we want to make it clear that where proper opportunity was not provided to the assessee, the assessment order should be invariably set aside under these circumstances.
29. Now, we deal the arguments of the learned AR of the assessee regarding the merit of the addition made by the assessing officer of interest of Rs. 967,727/-:
a) First argument is that Section 14A cannot be invoked to reassess Under Section 147. In this regard, we find that Section 14A was inserted by the Finance Act, 2001 and the notice Under Section 148 was issued on 31.05.2001 and there is no mention of Section 14A in the reasons recorded for reassessment prior to issue of notice Under Section 148. There is no mention of Section 14A in the assessment order also dated 31.10.2002 and hence this objection of the assessee has no merit.
b) One more argument is raised by the AR of the assessee that in view of the fact that an amount of Rs. 114/- was offered to tax under the head "Income from other Sources" on account of 'Fraction Entitlement' and the 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 the interest has to be allowed as deduction in full under the head "Income from other Sources". We are not in agreement with him. First, we discuss the 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 the head Income from other sources. Regarding 'Fraction Entitlement', it is to be noted that when a company comes out with a Bonus issue of Shares against existing shares and as per the ratio of bonus shares to be issued for each number of original shares held by the shareholder on a record date, the assessee's entitlement of bonus shares may not be in round No. and in such cases, the entitlement to the extent of round No. of Shares is given to the assessee in the form of shares but the 'Fraction Entitlement' cannot be issued in form of shares and in such cases, the company accumulates all such 'Fraction Entitlement' of various shareholders and taking together, it comes to a round number and then the company sells these shares in the market and the proceeds is distributed among those shareholders. Profit on sale of Bonus Shares received by the assessee is taxable under the head "Income from Capital Gains" and hence we are of the considered opinion that this receipt on account of 'Fraction Entitlement' is also taxable under the same head. The contention of the assessee is that in this case, shares are sold before the assessee receives it. We are not in agreement with him because the assessee is entitled to the fraction of a share on the basis of the ratio of bonus shares to be issued and the No. of shares held by him on the record date and since a fraction of the share cannot be practically issued to a shareholder, all such fractions are cumulatively sold by the company and proceeds is distributed among distributed among such shareholders as per their entitlement. The sale of shares by the company is on behalf of those shareholders and it is at par with sale by the shareholders. Hence, the nature of income remains same i.e. Capital Gains. Since, in the present case, it was offered by the assessee wrongly under the head "Income from other Sources", it cannot assume the character of "Income from other Sources" although the assessing officer accepts the same but still it cannot be held that the investment in shares is also for the purpose of earning 'Fraction Entitlement' taxable under the head other sources. We, therefore, reject this contention of the assessee also.
c) Last contention of the assessee is that since Dividend income was taxable up to 31.05.1997, deduction of interest should be allowed for two months i.e. up to 31.05.1997. We find force in this argument of the learned AR of the assessee and we direct the assessing officer that deduction should be allowed for interest expenses incurred during 01.04.1997 to 31.05.1997. He should quantify the amount of deduction allowable for these 2 months after providing adequate opportunity of being heard to the assessee. The 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.
30. Ground No. 5 was not pressed by the learned AR of the assessee and hence the same is dismissed as not pressed.
31. In the result, this appeal of the assessee stands partly allowed.
The order was pronounced in the court on 20th December, 2006.