The Supreme Court has held that income tax reassessment proceedings are invalid when the Assessing Officer fails to issue the mandatory notice under Section 143(2) of the Income Tax Act, 1961, even if the taxpayer participates in the proceedings without objecting to the omission.
A Bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva clarified that Section 292BB, which addresses defects in the service of notices in certain circumstances, cannot cure the complete absence of a notice. The Court also ruled that neither a taxpayer’s adoption of an earlier income tax return nor a subsequent communication under Section 142(1) dispenses with the statutory requirement.
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The taxpayers had originally furnished their income tax returns under Section 139, and assessments had been completed under Section 143(3). The department subsequently sought to reopen those assessments under Section 147 and issued notices under Section 148 requiring returns to be furnished.
In response, Orissa Mining Corporation requested that its original returns be treated as returns furnished pursuant to the reopening notices. In Mohanty’s case, the judgment recorded that the earlier returns were refiled.
However, the department admittedly did not issue notices under Section 143(2). The Assessing Officers proceeded with reassessment, issued notices under Section 142(1) seeking documents and information, and ultimately passed reassessment orders.
The taxpayers challenged the reassessments before the Commissioner of Income Tax (Appeals), arguing, among other grounds, that the failure to issue notices under Section 143(2) vitiated the proceedings.
The appellate authority rejected this contention. It reasoned that the taxpayers had participated in the proceedings following notices under Sections 148 and 142(1), and therefore could not raise the objection for the first time in appeal.
The Income Tax Appellate Tribunal disagreed and set aside the reassessment orders for want of the mandatory notices. The High Court upheld the Tribunal’s decisions, prompting the Revenue to approach the Supreme Court.
The Supreme Court drew a distinction between a defect in the service of a notice and the failure to issue a notice altogether.
Section 292BB creates a deeming rule where a taxpayer appears in proceedings or cooperates in an inquiry relating to assessment or reassessment. Subject to its proviso, the provision prevents objections that a notice was not served, was served late, or was served improperly.
The Court explained that this rule presupposes that the Revenue has issued the notice. It cannot operate when the Department itself admits that no notice was sent.
Accordingly, the taxpayer’s participation could not supply the jurisdiction that the Assessing Officer lacked because of the missing statutory notice.
The Bench held that an Assessing Officer cannot undertake reassessment under Section 143(3), read with Section 147, without issuing a notice under Section 143(2). Cooperation by the taxpayer does not remove that requirement.
The Court also rejected the contention that a notice under Section 143(2) becomes unnecessary when a taxpayer asks the Department to treat an earlier return as the return furnished in response to a Section 148 notice.
It explained that a taxpayer responding to a reopening notice may furnish a fresh return or reiterate the return already filed under Section 139. Where the taxpayer chooses to rely on the earlier return, the taxpayer remains bound by it.
The Court further clarified that reiterating the earlier return does not require the taxpayer to submit another copy of that return.
However, this course does not relieve the Revenue of its obligation to issue the scrutiny notice. The taxpayer must still receive the statutory opportunity to produce evidence supporting the return before the reassessment is framed.
Another question was whether a letter issued during reassessment, requiring the taxpayer to explain matters concerning the proposed reassessment, could constitute sufficient compliance with Section 143(2).
The Supreme Court answered this in the negative.
A communication under Section 142(1), seeking information or documents during the proceedings, cannot substitute for the mandatory notice under Section 143(2). A letter sent after the proceedings have commenced cannot repair the omission or validate proceedings that were invalid for want of the required notice.
The ruling therefore confirms that compliance with Section 142(1) does not, by itself, establish compliance with Section 143(2).
The Bench relied on Assistant Commissioner of Income Tax and Another v. Hotel Blue Moon, which held that failure to issue a notice under Section 143(2) is not a procedural irregularity capable of being cured.
The Court reiterated that the notice provides the taxpayer an opportunity to produce evidence or particulars supporting the return and the relief claimed. Its issuance is a mandatory prerequisite for the reassessment proceedings considered in these appeals.
The Bench also referred to Commissioner of Income Tax v. Laxman Das Khandelwal, which distinguished infirmities in the service of a notice from its complete absence.
Applying these precedents, the Court held that Section 292BB could not save the reassessments.
The Supreme Court upheld the Tribunal’s conclusions, as affirmed by the High Court, and dismissed the Revenue’s appeals.
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