SANGHI TEXTILES PRIVATE LIMITED,HYDERBAD vs. ITO., WARD-3(1), HYDERABAD

The Id. CIT(A) ought to have fairly considered that the Ld. AO has rejected the books of accounts and resorted to estimation of income, and that the AO could not legally and logically make separate disallowances or additions based on the same rejected books, as such action leads to double taxation and is contrary to the settled principles of law.

The Ld. CIT(A) erred in upholding that the Ld. AO disallowing the expenses 20 percent of total expenses claimed of Rs. 4,72,79,447/- on ad-hoc basis without pointing out any defects in the books of accounts maintained as same were allowable u/s 37(1) of the Act.

Succinctly stated, the AO based on information that the assessee company during the subject year had carried out substantial financial transactions/receipt of income, viz. (i) receipt of payments towards contracts: Rs.3,20,42,152/-; (ii) interest income: Rs.92,069/-; and (iii)

During the course of the assessment proceedings, the AO issued notice under section 142(1) of the Act, dated 22/11/2021, calling upon the assessee company to comply with the same on 06/12/2021, but the same was not acted upon by the latter. Thereafter, the AO issued notice under section 142(1) of the Act, dated 09/12/2021, seeking compliance of the same on 17/12/2021. In compliance, the assessee company furnished a part reply. Thereafter, the AO issued notice under section 142(1) of the Act, dated 28/12/2021, seeking compliance of the same on 04/01/2022. In compliance, the assessee company once again filed a part reply. Thereafter, the AO issued notice under section 142(1) of the Act, dated 07/02/2022, seeking compliance on 14/02/2022. In response, the assessee company filed an objection to the validity of the notice issued under section 148 of the Act. In response, the AO vide his letter, dated 23/03/2022, rebutted the objections filed by the assessee company to the notice issued by the AO under section 148 of the Act, dated 27/03/2021 and called upon it to furnish the reply to the remaining 5 Sanghi Textiles Privarte Limited vs. ITO queries on or before 25/03/2022. In reply, the assessee company filed its written submissions along with some documents and further sought a time of 15 days for furnishing the required information. The AO, after perusing the details/reply that was filed by the assessee company on 25/03/2022, observed that it had nothing more to say in the matter before him.

Coming to the merits of the case, the AO observed that the assessee, being a company, was mandatorily required to file its return of income for the subject year, had failed to do so and violated the provisions of section 139(1) of the Act. Accordingly, the AO, observing that the assessee company had not filed its return of income under section 139(1) of the Act, i.e., up to the “due date” of 31/10/2013, disallowed its claim for carry forward loss of Rs. 27,58,236/-.

The AO observed that the information available on record revealed that the assessee company had contractual receipts of Rs. 3,20,42,152/- on which tax was deducted at source (TDS) under section 194C of the Act. As the assessee company had failed to come forth with any details regarding the subject contractual receipts, therefore, the AO computed the income on the same @8% of the gross receipts of Rs. 3,20,42,152/-, which, thus, resulted to an addition of Rs. 25,63,372/-.

The AO further observed that the assessee company, during the year under consideration, had invested in time deposits of Rs. 19,54,348/-. As the assessee company had failed to come forth with any explanation regarding the source of the subject investment, therefore, the AO added the same by treating it as its unexplained investment under section 69B of the Act.

Further, the AO observed that as the assessee company had failed to furnish the requisite details in respect of various expenses that it had claimed to have incurred during the subject year, therefore, its book results were not subject to verification and thus, not reliable. Accordingly, the AO, after rejecting the books of account of the assessee company under section 145A of the Act, disallowed on an ad hoc basis 20% of its claim of expenses of Rs. 4,72,79,447/- and worked out a disallowance of Rs. 94,55,889/- which was added to the returned income of the assessee company.

Thereafter, the AO vide his order passed under section 147 r.w.s 144B of the Act, dated 30/03/2022, after making the aforesaid additions/disallowances, determined the income of the assessee company at Rs. 1,40,65,678/-.

Aggrieved, the assessee company carried the matter in appeal before the CIT(A) but without success.

For the sake of clarity, the observations of the CIT(A) are culled out as under: “5. Discussion and Decision: The present appeal is directed against the reassessment order passed u/s 147 r.w.s. 144 of the Income-tax Act, 1961 ("the Act") dated 30.03.2022 by the Assessing Officer (AO), wherein total income was assessed at Rs. 1,40,65,678/- as against NIL income declared by the appellant. The additions broadly relate to:

We have heard the Learned Authorised Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements 10 Sanghi Textiles Privarte Limited vs. ITO that have been pressed into service by them to drive home their respective contentions.

Shri P. Murali Mohan Rao, the Learned Authorized Representative (for short, “Ld. AR”) for the assessee company, at the threshold of hearing of the appeal, submitted that the AO had grossly erred in law and facts of the case in assuming jurisdiction and framing the assessment vide the impugned order passed by him under section 147 r.w.s 144B of the Act, dated 30/03/2022. Elaborating on his contention, the Ld. AR submitted that though the assessee company, in response to notice under section 148 of the Act, dated 27/03/2021, had filed its return of income for the subject year on 21/10/2021, declaring its income at Rs. NIL, but the AO had thereafter proceeded with and framed the impugned assessment without issuing any notice under section 143(2) of the Act. The Ld. AR to fortify his contention had drawn our attention to the order passed by the AO under section 147 r.w.s 144B of the Act, dated 30/03/2022. The Ld. AR submitted that as the AO, in the absence of a valid assumption of jurisdiction, had framed the assessment, therefore, the same cannot be sustained and is liable to be struck down on the said ground itself. The Ld. AR to buttress his contention, had drawn support from the judgments of the Hon’ble Supreme Court in the case of ACIT vs. Hotel Blue Moon (2010) 321 ITR 362 (SC) and CIT vs. Laxman Das Khandelwal (2019) 417 ITR 325 11 Sanghi Textiles Privarte Limited vs. ITO (SC). The Ld. AR submitted that the Hon’ble Apex Court in both of its orders had held that issuance of notice under section 143(2) of the Act is mandatory for valid assumption of jurisdiction by the AO to frame the assessment.

Dr. Narendra Kumar Naik, Ld. CIT-DR, on being confronted by the Ld. AR’s contention that no notice under section 143(2) of the Act was issued by the AO, fairly admitted the said factual position. However, the Ld. CIT-DR submitted that no statutory obligation was cast upon the AO to issue notice under section 143(2) of the Act for framing the assessment pursuant to the notice issued under section 148 of the Act, dated 27/03/2021. The Ld. CIT-DR had come forth with two fold contentions in support of his aforesaid claim, viz. (i) that the assessee company had failed to file the return of income in compliance to notice under section 148 of the Act, dated 27/03/2021 within the prescribed time period as was allowed by the said notice; and (ii) pursuant to the notice issued under section 148 of he Act, dated 27/03/2021, no obligation was cast upon the AO to issue notice under section 143(2) of the Act for framing the assessment vide order passed by him under section 147 r.w.s 144B of the Act, dated 30/03/2022. Elaborating on his contention, the Ld. DR submitted that as per section 143(2) of the Act (as was available on the statute at the relevant point of time), the AO was obligated to issue notice under section 143(2) of the Act, in a case 12 Sanghi Textiles Privarte Limited vs. ITO where the return of income had been furnished by the assessee under section 139 of the Act, or in response to a notice under sub-section (1) of section 142 of the Act. The Ld. AR submitted that as the assessment in the present case was framed under section 147 r.w.s 144B of the Act, dated 30/03/2022, therefore, no statutory obligation was cast upon the AO to issue a notice under section 143(2) of the Act as a precondition for framing the assessment. The Ld. CIT-DR to buttress his contention had relied upon the judgment of the Hon’ble High Court of Madras in the case of B. Kubendran vs. DCIT (2021) 126 taxmann.com 107 (Madras). The Ld. CIT-DR submitted that the Hon’ble High Court in its order had observed that as the judgment of the Hon’ble Supreme Court in ACIT vs. Hotel Blue Moon (supra) was rendered in context of the erstwhile Chapter-XIVB of the Act, which regulated the framing of a “block assessment”, therefore, the said judicial pronouncement would not come to the aid of the petitioner before them where the issue involved was as to whether or not the issuance of a notice under section 143(2) of the Act was mandatory in context of an assessment framed under section 153A/153C of the Act. The Ld. CIT-DR submitted that section 153A(1)(a) of the Act, inter alia, provided that the provisions of the Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139 of the Act. Carrying his contention further, the Ld. AR submitted that section 148 of the Act (as was available on the statute at the relevant point of time) provided for 13 Sanghi Textiles Privarte Limited vs. ITO the same terms, i.e., ….and the provisions of this Act, shall, so far as may be apply accordingly as if such return were a return required to be furnished under section 139 of the Act. The Ld. CIT-DR submitted that as the returns of income filed under the aforesaid statutory provisions, i.e., under section 153A of the Act and under section 148 of the Act were to be similarly construed, i.e., as if such return was required to be furnished under section 139 of the Act, therefore, the judgment of the Hon’ble High Court of Madras in the case of B. Kubendran vs. DCIT (supra), which though was rendered in context of a return of income filed by the assessee under section 153A of the Act was to be similarly adopted and applied for the purpose of a return of income filed in response to notice under section 148 of the Act, i.e., to what extent the same was to be treated as a return of income filed under section 139 of the Act. To sum up, the Ld. CIT-DR submitted that as no obligation was cast upon the AO to issue a notice under section 143(2) of the Act in response to the return of income filed by an assessee under section 153A of the Act, therefore, based on the pari materia language used in section 148 of the Act, i.e. to the extent the return of income filed in response to the notice issued under the said section was to be considered as return of income under section 139 of the Act, no obligation was cast upon the AO to issue notice under section 143(2) of the Act for framing the assessment in response to the return of income filed in response to the notice issued under section 148 of the Act, dated 14 Sanghi Textiles Privarte Limited vs. ITO 27/03/2021. Apart from that, the Ld. CIT-DR also pressed into service the judgment of the Hon’ble High Court of Delhi in the case of Ashok Chadda vs. ITO (2011) 37 ITR 399 (Delhi), wherein it was held that the issue of notice under section 143(2) is not mandatory for finalisation of an assessment under section 153A of the Act. The Ld. CIT-DR based on his aforesaid contentions submitted that based on the aforesaid judicial pronouncements the AO in the present case was not obligated to issue any notice under section 143(2) of the Act pursuant to the return of income filed by the assessee company in response to notice under section 148 of the Act, dated 27/03/2021, and, thus, had validly assumed jurisdiction and framed the assessment vide his order under section 147 r.w.s 144B of the Act, dated 30/03/2022.

Shri P. Murali Mohan Rao, CA, the Learned Authorised Representative (for short, “Ld. AR”) for the assessee company, vehemently rebutted the aforesaid contentions of the revenue. The Ld. AR submitted that the issuance of a notice under section 143(2) of the Act is a sine qua non for valid assumption of jurisdiction for framing an assessment in a case where the same is initiated on the basis of a notice issued under section 148 of the Act. The Ld. AR to support his contention had relied on the judgment of the Hon’ble High Court of Delhi in the case of Shaily Juneja vs. ACIT (2022) 476 ITR 665 (Delhi) and that of the Hon’ble High Court of Karnataka in the case of Principal 15 Sanghi Textiles Privarte Limited vs. ITO Commissioner of Income Tax vs. Cherian Abraham (2022) 444 ITR 420 (Karnataka). Apart from that, the Ld. AR had relied on the order of the ITAT (Special Bench), Delhi, in the case of Raj Kumar Chawla vs. ITO (2005) 1 SOT 934 (Delhi) (SB). The Ld. AR submitted that as the framing of the assessment under section 147 r.w.s 144B of the Act, dated 30/03/2022, presupposes the issuance of notice under section 143(2) of the Act, which in the present case had not been done, therefore, the assessment order so passed cannot be sustained and is liable to be knocked down.

We have thoughtfully considered the contentions advanced by the Learned Authorized Representatives of both parties in the backdrop of the orders of the authorities below.

As observed herein above the controversy involved in the present appeal is double facet, viz., (i) that as to whether or not a return of income filed in response to the notice issued by the AO under section 148 of the Act, dated 27/03/2021 after the lapse of the prescribed time period is to be construed as a return of income filed by the assessee?; and (ii) that as to whether or not pursuant to the return of income filed by an assessee in response to notice under section 148 of the Act the issuance of notice under section 143(2) of the Act by the AO is mandatory?.

We shall now deal with the core issue involved in the present appeal, i.e., whether the AO, in response to the return of income filed by the assessee company for the subject year, i.e., AY 2014-15, on 21/10/2021, in compliance to the notice issued under section 148 of the Act, before proceeding with and framing the impugned assessment was statutorily obligated to issue a notice under Section 143(2) of the Act. We find that section 143(2) of the Act contemplates that where the 18 Sanghi Textiles Privarte Limited vs. ITO return of income has been furnished under section 139 of the Act, or in response to a notice under sub-section (1) of section 142, the AO or the prescribed income-tax authority, as the case may be, if, 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, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence, which the assessee may rely in support of the return of income. Although, at the first blush it appeared that issuance of the notice under section 143(2) of the Act is restricted only in a case where the return of income is filed by the assessee under section 139 of the Act, or in response to a notice under subsection (1) of section 142, and, thus, cannot be stretched to a case where the return of income is filed in response to a notice under section 148 of the Act, but we stand corrected on our aforesaid view. We say so, for the reason that section 148 of the Act (as was available on the statute at the relevant point of time) contemplated that the provisions of the Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139 of the Act. Accordingly, a return of income filed in response to notice under section 148 of the Act is to be treated as a return of income required to be furnished under section 139 of the Act. We thus, are of the view that as the return of income filed in 19 Sanghi Textiles Privarte Limited vs. ITO response to the notice under section 148 of the Act is to be construed as a return of income filed under section 139 of the Act with all the provisions of the Act to be applied in the similar manner as it would apply to a return of income filed under section 139 of the Act, therefore, the AO to ensure that the assessee had not under stated the income disclosed by him in the return of income filed in response to notice under section 148 of the Act remains under a statutory obligation to issue a notice under section 143(2) of the Act, i.e., in a similar manner as if he would have done in response to a return of income furnished under section 139 or under section 142(1) of the Act.

Although the Ld. CIT-DR had tried to impress upon us that for framing of assessment under section 148 of the Act, there is no obligation cast upon the AO to issue a notice under section 143(2) of the Act, but we are unable to concur with the same. We say so, for two reasons, viz., (i) as observed by us herein above, the return of income filed by the assessee in response to notice under section 148 of the Act is to be construed as if it is a return of income filed under section 139 of the Act; and (ii) that section 148 of the Act though provides for a notice to be issued to the assessee calling upon him to file his return of income, but the machinery for framing of the assessment is not provided in the said section and for the said limited purpose the return of income so filed by the assessee is to be construed as a return of income filed 20 Sanghi Textiles Privarte Limited vs. ITO under section 139 of the Act, and, thus, for framing of the assessment pursuant to the return of income filed by the assessee in response to the notice under section 148 of the Act notice under section 143(2) of the Act is mandatorily required to be issued.

We find that the Ld. CIT-DR had relied upon the judgment of the Hon’ble High Court of Madras in the case of B. Kubendran vs. DCIT (supra) and had emphasized upon the fact that though the same was rendered on the issue as to whether or not a notice under section 143(2) of the Act was mandatory in the context of an assessment under section 153A/153C of the Act, but the same is to be similarly applied with all the force on the same terms for framing of an assessment pursuant to the return of income filed by an assessee in response to the notice issued under section 148 of the Act. The Ld. CIT-DR, to drive home his contention, had vehemently emphasized that section 153A(1)(a) of the Act contemplates that the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139. The Ld. AR submitted that the same language has been employed by the legislature in section 148 of the Act. Elaborating further on his contention, the Ld. AR had tried to impress upon us that the view taken by the Hon’ble High Court of Madras in the case of B. Kubendran vs. DCIT (supra), wherein it was held that for framing an assessment under section 153A, the issuance of notice under section 21 Sanghi Textiles Privarte Limited vs. ITO 143(2) of the Act is not mandatory will equally apply with the same force for framing of an assessment on a return of income filed by an assessee in response to notice issued under section 148 of the Act.

We have given thoughtful consideration to the aforesaid contentions of the Ld. CIT-DR, which at the threshold of hearing appeared to be very appealing, but, are unable to persuade ourselves to subscribe to the same. We say so, for the reason that as observed by us at length herein above, section 148 of the Act can though facilitate calling upon the assessee to file his return of income in response thereto, but does not take within its fold the machinery and the procedure for framing of the assessment for which the legislature in all is wisdom had specifically provided that the return of income filed in response to notice under section 148 of the Act is to be treated as a return of income under section 139 of the Act, which, thus, would entail issuance of a notice under section 143(2) of the Act for framing of the assessment in the hands of the assessee.

Our aforesaid view that a notice under section 143(2) is mandatorily required to be issue where the assessee has filed a return of income in response to notice under section 148 of the Act is supported by the judgment of the Hon’ble High Court Allahabad in the case of Commissioner of Income Tax (CIT) v. Rajeev Sharma (2011) 336 ITR 678 (All). It was observed that, where the return of income is 22 Sanghi Textiles Privarte Limited vs. ITO filed by the assessee in response to notice under section 148 of the Act, the AO, before proceeding to decide the controversy with regard to the escaped assessment, is mandatorily required to issue notice under section 143(2) of the Act. Also, a similar view had been taken by the Hon’ble High Court of Madras in the case of CIT v. M. Chellappan

Considering the aforesaid host of judicial pronouncements, wherein it has been held that pursuant to a return of income filed by the assessee in response to notice issued under section 148 of the Act, it is incumbent on the part of the AO to issue notice under section 143(2) of the Act for framing the assessment, we respectfully follow the same.

Before parting, we may herein observe that though the Ld. CIT- DR in order to buttress his claim that for framing of an assessment pursuant to the return of income filed by an assessee in response to notice under section 148 of the Act, no obligation is cast upon the AO to issue a notice under section 143(2) of the Act, had relied upon two judicial pronouncements, viz., (i) B. Kubendran vs. DCIT (2021) 126 taxmann.com 107 (Madras); and (ii) Ashok Chadda vs. ITO (2011) 37 ITR 399 (Delhi), but considering the fact that there are judgments of the non-jurisdictional High Courts taking a view to the contrary, i.e., the issue of notice under section 143(2) of the Act is mandatory for framing of an assessment based on the return of income filed by the assessee in response to notice issued under section 148 of the Act, we being guided by the judgment of the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC), wherein it is held that If two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted, respectfully follow the latter view .

We, thus, in terms of our aforesaid observations are of the considered view that pursuant to the notice issued by the AO under section 148 of the Act, dated 27/03/2021, though the assessee company had filed its return of income in response thereto on 21/10/2021 declaring NIL income, but as the AO without issuing any notice under 26 Sanghi Textiles Privarte Limited vs. ITO section 143(2) of the Act had proceeded with and framed the impugned assessment vide his order under section 147 r.w.s 144B of the Act, dated 30/03/2022, therefore, he had grossly erred in law and facts of the case in assuming jurisdiction and framing the impugned assessment, which, thus cannot be sustained and is liable to be struck down for want of valid assumption of jurisdiction on his part.

As we have quashed the assessment for want of a valid assumption of jurisdiction by the AO, we refrain from adverting to and adjudicating the other grounds based on which the impugned assessment order has been assailed before us, which, thus, are left open.

Resultantly, the appeal filed by the assessee company is allowed in terms of our aforesaid observations.