COMMISSIONER OF INCOME TAX vs. PAWAN GUPTA

Whether Reporters of local papers may be allowed to see the judgment ?

To be referred to the Reporter or not ?

Whether the judgment should be reported in Digest ? YES BADAR DURREZ AHMED, J

In view of this decision, the Tribunal accepted the contention advanced on behalf of the assessee that since notice under section 143 (2) of the Income Tax Act, 1961 (hereinafter referred to as “the said Act”) had not been issued, the block assessment under section 158 BC of the said Act cannot be upheld and that the same was liable to be quashed. The Tribunal also noted that the department had been given full opportunity to produce evidence in 2009:DHC:1436-DB

The Revenue, being aggrieved by the said decision and other similar decisions of the Tribunal in the connected matters has preferred these appeals. Mr. Jolly, the learned counsel appearing on behalf of the revenue in some of the appeals, submitted that the time limit prescribed under the proviso to section 143 (2) is only for ensuring that in cases where an assessee files a return under section 139, the assessing Officer must either issue the intimation under section 143 (1) or issue a notice under section 143 (2) for completing assessment under section 143(3). He submitted that the requirement of a notice under section 143 (2) is essential for production of material by the assessee. This is so because in regular assessments the assessing officer in the first instance has no material available to him except the return. He submitted that chapter XIV B provides a special procedure for search cases and is a complete code in itself. Referring to the provisions of the said Chapter, Mr. Jolly submitted that the expressions “block period” and “undisclosed income” are defined in section 158-B. Section 158 BA provides for assessment of undisclosed income as a result of search. He submitted that in such a case the material is already found and is in the knowledge of the assessing officer. This is distinct and different from the 2009:DHC:1436-DB

Mr. Jolly submitted that although section 143 (2) has been specifically mentioned in the above provision it is to be applicable only to the extent possible and that is why the expression "so far as may be" is used in the said provision. He further contended that the computation of undisclosed income of the block period has to be done in accordance with the provisions of section 158 BB and that too on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the assessing officer and relatable to such evidence. He, once again, laid stress on the difference in the assessment procedures under chapter XIV B and normal assessment. It was, therefore, contended by him that the issuance of a notice under section 143 (2) is not an essential requirement in block proceedings. Consequently, he submitted that the questions be answered in favour of the Revenue and the appeals be allowed. 2009:DHC:1436-DB

Mrs Bansal who also appeared for the Revenue in some of the appeals made similar submissions with regard to there being a distinction between the procedure of regular assessment under chapter XIV and the procedure of block assessment in search cases under chapter XIV B. She also contended that chapter XIV B of the said act is a self-contained code dealing with the substantive as well as procedural aspects of search cases. Under section 139 an assessee has to file the income tax return voluntarily if he is exigible to income tax. But, under chapter XIV B, there is no provision for filing the return voluntarily. She submitted that in the case of normal assessment if the assessee does not file a return under section 139 (1) then the assessing officer may call upon the assessee to file a return under section 142 (1) (i) of the said act. Where a return is filed either under section 139 or under section 142 (1) and if the assessing officer considers it necessary or expedient to ensure that the assessee has not understated the income etc then he is required to serve on the assessee a notice requiring him to attend on a specified date or to produce such evidence as he may rely upon in support of the return. According to the learned counsel, section 143 (2) has two limbs. The first limb deals with juri iction and the second with procedure. She submitted that the proviso to section 143 (2) puts an embargo on the assessing officer to exercise juri iction after the expiration of 12 months from the end of the month 2009:DHC:1436-DB

In distinction to this procedure, the learned counsel submitted, under the special procedure prescribed in chapter XIV B there is no discretion left with the assessing officer. The source and origin of a block assessment is the search which has been conducted under section 132 of the said act. Once the search has been carried out, the assessing officer is left with no discretion but to proceed with block assessment of the undisclosed income.

Continuing with the contention that regular assessment proceedings and block assessment proceedings were different and distinct, Mrs Bansal submitted that in a normal assessment, tax is to be charged at the rate prescribed in the Finance Act whereas under the provisions of section 158- BA(2), undisclosed income is to be charged to tax at the rate prescribed in section 113. She further submitted that it is a well-established principle of law that block assessment is in 2009:DHC:1436-DB

It was further contended that in a case of regular assessment, the decision to complete the assessment under section 143 (3) is taken after the filing of the voluntary return whereas the decision to make the block assessment is taken before the filing of the return pursuant to the section 158 BC notice. The submission is that while the notice under section 143 (2) is passed on the filing of a return under section 139, the return filed under section 158 BC (a) is the consequence of search and the assumption of juri iction to ascertain undisclosed income.

Mrs Bansal submitted that in the case of a regular assessment the interaction with the assessee starts by the assessing officer issuing a questionnaire under section 142 (1)(ii) and (iii). She submitted that section 158 BC(b) prescribed the same manner for determining undisclosed income as is adopted in the case of a regular assessment but this is qualified by the words “so far as may be” which, according to her means to the extent it is possible and practicable It was her 2009:DHC:1436-DB

Summing up her submissions thus far, Mrs Bansal submitted that the provisions of section 142, 143 (2), 143 (3) and 144 are to be observed by the assessing officer for the purposes of observing principles of natural justice, that is, to interact with the assessee so as to give him an opportunity of being heard. She submitted that an interaction with the assessee pre-supposes some sort of formal notice by the assessing officer. The question would therefore be whether the notice under section 158 BC had the same effect as a notice to be issued under section 143 (2) of the said act. Referring to the decision 2009:DHC:1436-DB

Another submission made by her was that a notice under section 143 (2) read with section 158 BC (b) does not entail any juri ictional aspect inasmuch as juri iction to proceed already stands bestowed on the assessing officer by virtue of the provisions of section 158BA. From this, she concluded that the requirement of a notice under section 143 (2) read with section 158 BC (b) impinges only upon the procedural aspect of assessment. Thus, the embargo placed by the proviso to section 143 (2) in respect of regular assessments would not be applicable to a block assessment proceeding. She also submitted that when chapter XIV B was introduced the limitation for completion of a 2009:DHC:1436-DB

She submitted that in the case of a block assessment proceeding if there was some lapse on the part of the assessing officer in the issuance of a notice under section 143 (2) then such lapse would not render the block assessment invalid and would only be a curable irregularity. It was her contention that it is a well-established principle of law that where there is a lapse with regard to some procedural aspect then the same can be cured afterwards and would not render the consequential assessment order null and void. For this proposition she placed reliance on a decision of the Supreme Court in the case of CIT v. Jai Prakash Singh: 219 ITR 77. 15. It was also her submission that once the search is valid and some incriminating material is found during the search, the assessing officer has no option but to issue a notice under section 158 BC (a) and once such notice is validly issued then the assessing officer would be in seizin of the case and have juri iction to determine the undisclosed 2009:DHC:1436-DB

Finally, she submitted that in all the appeals, the assessee had participated in the block assessment proceedings. It is not the case that no opportunity of hearing had been given to the assessee. In virtually all the cases the assessing officer had issued notices to the assessee requiring some material or the other. Since there is no specific proforma prescribed for the issuance of a notice under section 143 (2), such notices/letters could be treated as having been issued under section 143 (2). She submitted that even if section 143 (2) is made applicable to block assessment proceedings by virtue of section 158 BC, the proviso would not be applicable to such proceedings.

Mr. Salil Aggarwal, the learned counsel who appeared for the assessees in ITA 200/2008 and connected matters, submitted at the outset that mere participation in the block assessment proceeding would not amount to conferring juri iction on a person who otherwise lacks juri iction. For this proposition he placed reliance on a decision of a Division Bench of this court in the case of Swaran Yash v. CIT: 138 ITR 734 (Del) He submitted that mandatory provisions cannot be 2009:DHC:1436-DB

Thereafter, Mr. Aggarwal submitted that there are three processes for assessment. The first process is where a return is filed voluntarily under section 139 (1) or on the asking of the assessing officer under section 142 (1). If the assessing officer wants to tinker with the return so filed, he has to issue a notice under section 143 (2). Thereafter, the assessee is required to produce evidence in support of the return and the assessment is completed under section 143 (3) after hearing or at least giving an opportunity of hearing to the assessee. The second stream for assessment is when no return is filed pursuant to a section 142 (1) notice. In such an eventuality, the assessing officer proceeds to make the best judgement assessment under section 144 of the said act. The third stream or process of assessment relates to the escapement of income and is initiated through the procedure prescribed under section 147/148 of the said act. This also follows the route of a regular assessment under section 143 (3) of the said Act. Referring to the decision of a division bench of this court in the case of Janki Exports International v. Union of India: 278 ITR 296 (Del), Mr. Aggarwal submitted that the provisions of section 158 BD have been found to be analogous to section 148 insofar as the procedure that is 2009:DHC:1436-DB

It was further contended that after a notice under section 158 BC is issued the assessee is required to file a return within the stipulated period. Once the return is filed, it is open to the assessing officer to accept the same or to require further investigation. If he accepts the return of undisclosed income as it is then, there would be no necessity of issuing any notice under section 143 (2) of the said act. However, if the assessing officer is not satisfied with the return so filed then he is required to issue a further notice under section 143 (2) before an assessment order is passed. At this juncture, it would be appropriate to refer to the provisions of section 143 (2) as applicable to the present appeals:- "(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 under-paid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his 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."

Reading the said provision, Mr. Salil Aggarwal submitted that it is 2009:DHC:1436-DB

He further contended that the expression "so far as may be" which appears in section 158BC (b) is referable to situations. For example, section 142 is mentioned in section 158 BC (b) and would apply only to the situation where no return is filed pursuant to the section 158 BC notice.

It was further submitted that where a return has been filed pursuant to a notice under section 158 BC, the assessing officer cannot determine undisclosed income contrary to the return unless a notice under section 143 (2) is issued. The learned counsel made a reference to the Supreme Court decision in the case of R Dalmia v. CIT: 236 ITR 480. He submitted that although that decision pertained to the provisions of section 148, the ratio would be applicable to block proceedings also. A reference was also made to the Bombay High Court decision in the case of CWT v. HUF of JM Scindia: 2009:DHC:1436-DB

Mr. Aggarwal referred to the decision in Vikrant Tyres v. First ITO: 247 ITR 821 wherein it was observed thus:- "It is a settled principle in law that the courts while construing revenue acts will have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning thereby that no tax or levy can be imposed on a subject by an act of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject. In this process, the courts must adhere to the words of the statute and the so-called equitable construction of those words of the statute is not permissible. The task of the court is to construe the provisions of the taxing enactments according to the ordinary and natural meaning of the language used and then to apply that meaning to the facts of the case and in that process if the taxpayer is brought within the net he is caught, otherwise he has to go free."

It was next contended by Mr. Aggarwal that it is also a well-established 2009:DHC:1436-DB

Mr. Aggarwal summed up his arguments by submitting that the proviso to section 143(2) was applicable to chapter XIV B proceedings. Since section 143(2) was a condition precedent for a regular assessment under section 143 (3) it was equally so for computing undisclosed income.

Mr. Ashwini Taneja, advocate, appearing for the respondent assessee in ITA 1139/2008 pointed out that the decision of the Gauhati High Court in Bandana Gogoi (supra) was taken in appeal before the Supreme Court by the Department. However, the special leave petition was dismissed by the Supreme Court on 05.09.2008 on the ground of delay though the question of law was kept open. He also contended that in case an assessing officer wants to make a variation to the return as filed, a notice has to be issued under section 143 (2) and that, too, within the time limit prescribed by the proviso thereto. He further submitted that section 158 BC of the said act prescribes the procedure for block assessment. Sub-clause (a) thereof requires the 2009:DHC:1436-DB

He also referred to Circular No. 717 dated 14.08.1995 (215 ITR 70 statutes at page 95). The said circular inter alia explained the procedure for making a block assessment as under:-

Thus, it was contended that even as per the understanding of the Department the provisions of sub-sections (2) and (3) of section 143 were to apply to block assessment proceedings.

The learned counsel appearing on behalf of the respondent/assessee in ITA 1202/2008 referred to the principle of incorporation. In that context he placed reliance on the decision of the Supreme Court in the case of M/s Surana Steels Pvt. Ltd v. The Deputy Commissioner of Income Tax and Ors: 237 ITR 777. The Supreme Court quoted the following passage from the Principles of Statutory Interpretation (7th edition, 1999) by Justice GP Singh:- "Incorporation of an earlier act into a later act is a legislative device adopted for the sake of convenience in order to avoid verbatim reproduction of the provisions of the earlier act into the later. When an earlier act or certain of its provisions are incorporated by reference into a later act, the provisions so incorporated become part and parcel of the later act as if they had been „bodily transposed into it‟. The effect of incorporation is admirably stated by Lord Escher, M.R.: „if a subsequent act brings i t it lf b f f th l f f t th 2009:DHC:1436-DB

Mr. Anoop Sharma, the learned counsel appearing for the assessee respondents in ITA 655/2008 and ITA 862/2008, pointed out that there is a difference between nullity and irregularity. He placed reliance on the Gujarat High Court decision reported in Doshi v. Commissioner of Income-tax, Gujarat: 113 ITR 22 (Guj) wherein the following observations were made:- “The settled distinction between invalidity and nullity is now well brought out in the decision in Dhirendra Nath Gorai v. Sudhir Chandra Ghosh, AIR 1964 SC 1300, 1304, where their Lordships had gone into this material question as to whether the 2009:DHC:1436-DB

Therefore, Mr. Anoop Sharma submitted that neither can the provisions of section 143 (2) be waived nor would the non-compliance of the said provision be a mere irregularity.

Mrs Bansal, in rejoinder submitted that section 143 (2) in the case of a regular assessment was mandatory as it went to the root of juri iction. But, insofar as proceedings under chapter XIV B are concerned, juri iction is vested in the assessing officer by the fact of search itself. The evidence is already with the assessing officer. She reiterated that a default in a procedural aspect does not vitiate the assessment.

The aforesaid detailed resume clearly discloses that the learned counsel appearing on both sites have made compelling and forceful arguments. We have given a great deal of thought to the said arguments. In the ultimate analysis, the arguments and submissions made on behalf of the assessees/respondents have found favour with us. 2009:DHC:1436-DB

We have the benefit of the decision of the Gauhati High Court in the case of Bandana Gogoi (supra). The very provision which calls for interpretation in the present appeals has been construed by that High Court. Although the Supreme Court, while dismissing the special leave petition preferred from that judgement, on the ground of delay, has left the question of law open, it does not mean that the Supreme Court has overturned that decision. The Gauhati High Court in Bandana Gogoi (supra) was clearly of the view that the words "so far as may be" appearing in section 158 BC (b) would have to be construed as mandatory or merely directory depending upon what action the assessing officer takes. If the assessing officer accepts the return of undisclosed income as it is then obviously there is no necessity to issue a notice under section 143 (2). However, if the assessing officer does not agree in the first instance with the return of undisclosed income filed by an assessee pursuant to a notice under section 158 BC then the only course left to the assessing officer is to investigate further into the matter and have an interaction with the assessee. This further interaction can only be done by following the procedure of issuance of notice prescribed under section 143 (2).

While we do not entirely agree with the analysis that the provision becomes mandatory or directory depending upon what action the assessing 2009:DHC:1436-DB

However, where the assessing officer is not inclined to accept the return of undisclosed income filed by the assessee then the procedure prescribed in section 143 (2) would have to be followed. If he does not issue 2009:DHC:1436-DB

Both Mr. Jolly and Mrs Bansal appearing for the revenue forcefully argued that the scheme of things under chapter XIV for a regular assessment and under chapter XIV B for block assessments were different. They had submitted that while no assessment under section 143 (3) could be completed without the issuance of a notice under section 143 (2), the same restriction would not be applicable in the case of a block assessment. There is no doubt that there are several distinguishing features between the two processes of assessment. But, this does not enable us to detract from the position that section 158 BC (b) itself requires that the provisions of section 143 (2) be followed. The intention of the legislature is quite clear inasmuch as specific provisions have been mentioned. The qualifying words “so far as may be” have already been construed by us to indicate situations where a notice under section 143(2) would or would not be required That is a secondary issue The 2009:DHC:1436-DB

Thus, we are of the clear view that where the assessing officer is not inclined to accept the return of undisclosed assessment filed by the assessee issuance of a notice under section 143(2) is a prerequisite for framing the block assessment order under chapter XIV B of the Income Tax Act, 1961. We are also of the view that if an assessment order is passed in such a situation without complying with section 143(2), it would be invalid and not be merely irregular.

Consequently, we answer both the questions against the revenue. The decision of the Tribunal in each of the appeals is upheld. The appeals are dismissed. The parties are left to bear their own costs.