Introduction

1. Question of valid jurisdiction has often arisen in income-tax proceedings. The income-tax statute, like any other statute is governed by the law of notices and law of limitation. The Code of Civil Procedure lays down that the sine qua non of acquiring valid jurisdiction by the authorities is only through issue of valid notice as prescribed under the statute since, income-tax assessment proceedings are quasi-judicial in nature. The question that arises for consideration is whether the non-issuance of such notices is fatal to the order or is mere procedural irregularity is that can be cured by providing opportunity of hearing. This question was answered by the Special Bench of Tribunal in the case of Rajkumar Chawla v. ITO[2005] 94 ITD 1 (Delhi). The issue was decided against the department with the Tribunal holding that issuance of notice under section 143(2) of the Act after the prescribed period of 12 months shall be invalid even in a case where the case has been reopened under section 147/148 of the Act.

The decision of the Special Bench was meant to settle the controversy at least at the level of the Tribunal because that is the underlying purpose of constituting a Special Bench. However, the Legislature thought otherwise and, hence, it brought in an amendment in the statute itself by adding a proviso to section 148 of the Act. The said amendment, due to inherent vagueness and incompleteness instead of sorting out the assessee’s woes, added to it. The amendment further divided the courts creating a cleavage of judicial views. The issue can only be resolved through a properly drafted and complete amendment or when the Apex Court decides the issue.

Decisions in favour of the department

2. One of the earliest decisions on the issue was the decision of the Rajasthan High Court in the case of CIT v. Gyan Prakash Gupta [1987] 165 ITR 501/[1986] 26 Taxman 1 . The Rajasthan High Court considered the question whether the non-issuance of notice under section 143(2) during reassessment proceedings is fatal to reassessment proceedings so as to make it null and void or it is merely an irregularity which can be cured by setting aside the assessment to the file of the Assessing Officer for fresh assessment after issuance of notice under section 143(2). The view of the court was that such a default is not fatal and that fresh assessment could be directed. The said decision was rendered by the Rajasthan High Court when the time-limit of 12 months for issuance of notice under section 143(2) was not prescribed in the statute. Hence, it was held by the court that such a notice is not jurisdictional notice.

Similar view was taken by the Madras High Court in the case of Areva T & D India Ltd. v. Asstt. CIT [2007] 294 ITR 233/ 165 Taxman 123 . The Madras High Court relied upon the decision of the Rajasthan High Court in the case of Gyan Prakash Gupta (supra) and held that non-issuance of notice under section 143(2) is merely procedural irregularity since the notice under section 143(2) is not a jurisdictional notice. Incidentally, the fact that there has been an amendment in the provisions of section 143(2) with effect from April 1, 1998 by prescribing the time-limit under section 143(2) was not brought to the notice of the court and, hence, the effect of such an amendment in the statute on the nature of section 143(2) notice remained unadjudicated.

Decisions in favour of assessee

3. At the Tribunal stage however, various benches decided to take a different view due to amendment to the provisions of section 143(2) with effect from April 1, 1989. The said amendment laid down a time-limit for issuance of notice under section 143(2). Hence, the Benches interpreted that such an amendment in the Act has clothed the notice under section 143(2) as a jurisdictional notice after April 1, 1989. Therefore, the failure to issue the said notice within the prescribed time will render entire proceeding invalid. One of the early decisions in this regard was of the Mumbai Tribunal in the case of Uma Polymers (P.) Ltd. v. Asstt. CIT [2002] 123 Taxman 226 (Mag.) which held that non-issuance of notice under section 143(2) is fatal to order of reassessment. It held that requirement to issue notice under section 143(2) is not merely procedural but mandatory and not following the said mandatory procedure will render the assessment order invalid.

A similar view was also taken by the Punjab & Haryana High Court in the case of Rama Sinha v. CIT [2002] 256 ITR 481/ 130 Taxman 139 . Interest- ingly, in this case, the department took a plea that the proceedings of reassessment are governed by the notice under section 143(2) and the order has to be passed under section 143(3). The Court upheld the department’s contention holding that once a return is filed in response to a notice under section 148, it becomes a return under section 139. Thereafter, all the provisions would apply mutatis mutandis to such a return as would apply to a return normally filed under section 139. One such provision is the issuance of notice under section 143(2) and consequent order under section 143(3). Hence, observance of provisions of section 143(2) and 143(3) is required even in a reassessment proceeding undertaken under section 148.

Subsequent Courts’ decisions - Dissenting from abovesaid view

4. However, there were certain other Benches of the Tribunal which did not concur with this view. The Agra Bench in the case of Chander Bhan Bansal v. Dy. CIT [2001] 79 ITD 639was the first to dissent. It held that the law-makers have abundantly made clear that the time-limit of 12 months is applicable in case of a return filed under section 139 and not under section 148. Therefore, a notice under section 143(2) issued after the prescribed period would not render the reassessment proceedings as barred by limitation. It further held that the purpose of a notice under section 143(2) is merely to afford an opportunity of hearing which if provided to the assessee, then no fault can be found with the order of reassessment.

In short, these Benches held that the notice under section 143(2) is not a jurisdictional notice since the proceedings are reassessment proceedings. Hence, the notice under section 148 is a jurisdictional notice and not notice under section 143(2). These Benches were of the view that the amendment in statute by introducing the time-limit under section 143(2) with effect from April 1, 1998 did not have a bearing on the nature of the notice under section 143(2) in reassessment proceedings. They held that the notice under section 143(2) is a notice only for affording an opportunity of hearing.

Final words by ITAT ...

5. Since there was a difference of opinion between different Benches of the Tribunal, the matter was referred to the Special Bench of the Tribunal in the case of Raj Kumar Chawla[2005] 92 TTJ (Delhi) 1245/ 145 Taxman 12 (Delhi). The Special Bench considered all the decisions rendered in the past on the issue and in a detailed order held that the notice under section 148 does not make the assessment as mandatory. If the Assessing Officer is satisfied with the return filed in response to the reassessment notice, it need not necessarily pass an order under section 143(3). In such a case a notice under section 143(2) shall not be required. However, where the Assessing Officer decides to vary the returned income, then he has to mandatorily follow the procedure laid down in section 143(2) and 143(3).

The Special Bench further interpreted the phrase ‘so far as may be’ appearing in section 148. It held that the phrase ‘the provisions of section 143(2) and 143(3) shall so far as may be apply’ cannot be interpreted to make the provisions of section 143(2) inapplicable to the reassessment proceedings. Such an interpretation which would leave the provisions otiose should be avoided. Therefore, the Special Bench held that the non-issuance of notice under section 143(2) within 12 months of filing the return in response to notice under section 148 nullified the entire assessment order.

Legislature jumps into the fray

6. Subsequent to the above decision of the Special Bench, the Legislature in its wisdom sought to undo the damage by bringing in an amendment vide the Finance Act, 2006 wherein section 148 was enlarged with retrospective effect, i.e., October 1, 1991. Proviso was added to the said section which effectively stated that where a return has been filed in response to a notice under section 148 between period October 1, 1991 and September 30, 2005, then a notice issued under section 143(2) after 12 months of filing the return in response to notice under section 148 but before the reassessment order is passed shall be deemed to be a valid notice.

The above amendment instead of settling the issue, brought with it another form of dispute and litigation. The amendment stopped short of addressing a situation where the notice under section 143(2) was not at all issued in the reassessment proceedings. This question, not having been answered by the Legislature in its amendment, was left at the doors of the courts to be debated, discussed and differed which resulted in a cleavage of judicial views.

Changed mood of ITAT

7. The above amendment unsettled the issue which was settled by the Special Bench. Soon after the amendment, the Benches which were taking a view in favour of the assessee sought to change their view. In post-amendment period, the decision of the Special Bench in Raj Kumar Chawla’s case (supra) was distinguished by the Mumbai Tribunal in the case of Kiran Nagji Nisar v. ITO [2008] 114 ITD 319 . The Bench held that after the amendment made by the Finance Act, 2006, to section 148 by inserting proviso with effect from October 1, 1991, the position of law has undergone a change. It held that once the Legislature had withdrawn the time period laid down for issuance of section 143(2) notice in reassessment proceedings, the said notice no longer remained a jurisdictional notice and became merely procedural in nature. As per the Bench, once the notice ceases to be jurisdictional in nature the non-issuance of, it is merely an irregularity which could be removed by setting aside the matter to the file of the Assessing Officer.

The decision of the Special Bench in Raj Kumar Chawla’s case (supra) was also not followed by the Jodhpur Bench of Tribunal in the case of Hari Singh & Associates v. ITO [2009] 118 ITD 564 . The Jodhpur Bench toed the line of the Rajasthan High Court in the case of Gyan Prakash Gupta (supra) and the Madras High Court’s, decision in the case of Areva T & D India Ltd. (supra). It also relied upon the amendment brought about by the Finance Act, 2006 with effect from October 30, 1991 to hold that after amendment, absence of notice under section 143(2) merely remains a procedural irregularity which does not make the assessment order passed under section 148 read with section 143(3) as null and void.

Once again changed mood of Judiciary

8. At about the same time, another order was passed by the Mumbai Bench in the case of ITO v. Malvika Arun Somaiya [IT Appeal No. 3041 (Mum.) of 2004, dated September 27, 2007] wherein the issue under consideration was dealt with in detail after considering all the amendments. The Bench anlaysed the amendment made to section 148 by the Finance Act, 2006 and also the decision of the Special Bench in the case of Raj Kumar Chawla (supra). It held that the Special Bench’s decision still holds water in the cases where the notice under section 143(2) is not at all issued. The Bench highlighted the following two situations :

(i)where the notice under section 143(2) is issued after the expiry of 12 months from the end of the month in which return is filed in response to notice under section 148.

(ii)where the notice under section 143(2) is not at all issued.

It was held by the Bench that in the first situation the amendment would apply and such a notice even if issued belatedly is a valid notice for the purpose of reassessment proceedings under section 148. However, the amendment does not legalise the order which is passed in total absence of notice under section 143(2). Hence, non-issuance of notice under section 143(2) is still fatal to the order as has been held by the Special Bench in Raj Kumar Chawla’s case (supra).

This order of the Mumbai Tribunal was contested in appeal by the department before the Mumbai High Court. The Mumbai High Court in an unreported decision [ITA (Lodging) No. 994 of 2008] dated September 9, 2008 upheld the contention of the Mumbai Tribunal and dismissed departmental appeal. While doing so, the Court placed reliance upon the decision of the Rajasthan High Court in the case of Tiwari Kanahaiya Lal v. CIT [1985] 154 ITR 109 wherein the Court has held that a return in response to a notice under section 148 is a fresh return and should be treated as a return under section 139.

The Mumbai High Court further relied upon its own decision in the case of CWT v. HUF of H.H. Late Shri J.M. Scindia [2008] 300 ITR 193/ 174 Taxman 1. In the said decision, the Mumbai High Court has while interpreting section 17, read with section 16(2) of the Wealth-tax Act (which is pari materia to section 143(2) read with section 148) held that once a return is filed in response to a notice of reassessment, all the substantive and machinery provisions as are applicable to a regular return becomes applicable. Hence, the department cannot contend that the provisions of scrutiny notice under section 16(2) [or section 143(2)] shall not apply. The Mumbai High Court on this interpretation held that the assessment order was without jurisdiction.

The Chennai Bench of Tribunal in the case of Dy. CIT v. Indian Syntans Investments (P.) Ltd. [2007] 107 ITD 457 also followed the same view. The Bench held that the amendment made by the Finance Act, 2006 cures a situation where the notice under section 143(2) has been issued after 12 months but does not affect the legal position where no notice under section 143(2) at all has been issued. Hence, in absence of notice under section 143(2), the entire assessment order is null and void.

The above issue recently once again came up before the Mumbai Bench of the Tribunal in the case of Chandra R. Gandhi v. ITO [2009] 120 TTJ (Mum.) 786. The department placed reliance upon the decision of the Madras High Court in the case of Areva T&D India Ltd. v. Asstt. CIT [2007] 294 ITR 233/ 165 Taxman 123. On the other hand, the assessee placed reliance upon the decision of the Special Bench of the Tribunal in the case of Raj Kumar Chawla. The Bench followed the Special Bench holding that the Special Bench’s decision is binding upon the Tribunal over the High Court decision as it is not a jurisdictional High Court. The decision of the Mumbai Tribunal Bench in the case of Malvika Somaiya and its upholding by the Mumbai High Court was not brought to the notice of the Bench, probably because these are unreported orders. Otherwise asfaras the Mumbai Tribunal is concerned, the issue is covered in the assessee’s favour.

Conclusion

9. With different Benches of the Tribunal taking different views and even High Courts differing in their opinion, we have still not heard the last word in the matter. Added to the litigation is the introduction of new provision in section 292BB of the Act which effectively lays down that an assessee is barred from raising a plea of non-receipt of notice for the first time before an appellate body. This provision has its own share of litigation with already a Special Bench order of the Tribunal having been passed in Kuber Tobacco’s case (supra) laying down the effective date of its application. This provision will witness much more litigation. Hence, even this attempt of the Legislature in curbing litigation on non-issuance of mandatory notice, has ironically added to litigation. The time has come when a properly drafted and specific amendment be brought in the statute which is in spirit of public accountability of authorized officers and follows the general law of issuance of notices and law of limitation.