2007 (10) TMI 344 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act, 1961.
2. Justification for issuing notice under Section 148 during the pendency of the original return and refund claim.

Detailed Analysis:

Issue 1: Validity of Reassessment Proceedings under Section 147
The primary contention raised by the assessee was that the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, were invalid. The assessee argued that the conditions precedent for acquiring jurisdiction under Section 147 were absent. Specifically, the assessee contended that the original return filed on 28th November 1997, which declared a loss of Rs. 30,000 and included a refund claim of Rs. 1,72,000, was still pending when the notice under Section 148 was issued on 27th May 1999. Therefore, according to the assessee, there could be no escapement of income, making the reassessment notice invalid.

The department, on the other hand, argued that the law regarding reassessment of escaped income had undergone substantial changes effective from the assessment year 1989-90, and the pendency of proceedings under Section 143(1) did not amount to the pendency of assessment in the scheme of assessment contemplated under Section 143(3). The department relied on Explanation 2(b) to Section 147, which allows for reassessment even if no assessment has been made, provided it is noticed that the assessee has understated income or claimed excessive loss, deduction, allowance, or relief.

Issue 2: Justification for Issuing Notice under Section 148
The assessee argued that the reassessment notice under Section 148 was issued while the original return and the refund claim were still pending, which, according to settled principles of law, invalidated the reassessment proceedings. The assessee relied on the Supreme Court's decision in Trustees of H.E.H. The Nizam's Supplemental Family Trust vs. CIT and the Delhi High Court's decision in CIT vs. Ved & Co., which held that reassessment proceedings could not be initiated while the original return was still pending.

The department countered by arguing that the reassessment notice was valid under Explanation 2(b) to Section 147, which allows for reassessment if it is noticed that the assessee has understated income or claimed excessive loss, even if no assessment has been made. The department also cited several case laws supporting their position that reassessment proceedings could be initiated even if the original return had not been processed.

Tribunal's Findings:
The Tribunal held that the reassessment proceedings initiated by the Assessing Officer (AO) were invalid. The Tribunal noted that the original return filed by the assessee on 28th November 1997, along with the refund claim, was still pending when the notice under Section 148 was issued on 27th May 1999. The Tribunal relied on the Supreme Court's decision in Trustees of H.E.H. The Nizam's Supplemental Family Trust, which held that no reassessment proceedings could be initiated while the original return was still pending. The Tribunal also referred to the Delhi High Court's decision in Ved & Co., which supported the same principle.

The Tribunal concluded that the initiation of reassessment proceedings by issuing a notice under Section 148 during the pendency of a valid return and refund claim was not justifiable and, therefore, not a valid action in law. Consequently, the Tribunal quashed the reassessment proceedings initiated by the AO under Section 148 and allowed the assessee's appeal on this ground.

Conclusion:
The Tribunal quashed the reassessment proceedings initiated under Section 147 and held that the notice issued under Section 148 was invalid. The Tribunal did not find it necessary to discuss the merits of the case, as the reassessment proceedings were quashed on legal grounds. The appeal was allowed in favor of the assessee.