PROCEEDINGS UNDER SECTION 154 OF THE INCOME ACT, 1961 FOR RECTIFICATION CANNOT BE INITIATED AFTER ISSUANCE OF NOTICE UNDER SECTION 143(2) BY THE ASSESSING OFFICER TO THE ASSESSEE.

[Mr. M. GOVINDARAJAN]

                        Sec. 143 of the Income Tax Act, 1961 (‘Act’ for short) deals with assessment.   Sec. 154 deals with rectification of mistake.  The scope of the proceedings under Section 143(2) is far wider.   The competent authority may take a view in the matter and issue a notice under Section 143(2) to the assessee.   This notice is normally issued to ensure that the assessee has not understated the income or has not computed excessive loss or underpaid the tax.  It is only consideration of the matter and on being satisfied that it is necessary expedient to do so that the Assessing Officer may issue the notice under Section 143(2).  Once that has been done, the Assessing Officer has to proceed under Section 143(3) and make an assessment of the total income or loss of the assessee and determine the sum, if any, payable by it.   The consequences follow under Section 143(4).

                        The issue to be considered in this article whether proceedings under Section 154 of the Act for rectification can be initiated after issuance of notice under Section 143(2) by the Assessing Officer to the assessee.  The same cannot be initiated.   This is discussed with reference to decided case laws which are in favor or against to this concept.

                        In ‘Janata Tile Works Limited  V. Commissioner of Income Tax’ – 2006 -TMI - 9586 – (KERALA High Court)  the assessee had filed return of income of 31.12.1990 which was processed under Section 143(1)(a) on 20.08.1991 accepting the returned loss.   The intimation was rectified under Section 154 of the Act on 26.08.1992 and additional tax was levied under Section 143(1A).   The assessee contended that after completion of regular assessment under Section 143(3) on 27.03.1992 intimation under Section 143(1)(a) did not survive and recourse to Section 154 of the Act was unwarranted.  The assessee further contended that the levy of additional tax was unjustified.   The High Court rejected the contentions of the assessee.

                        In ‘Coates of India Limited V. Deputy Commissioner of Income Tax (No. 1)’ – 1994 -TMI - 19329 – (CALCUTTA High Court) it was held that where the order under Section 143(1)(a) is followed by a regular assessment under Section 143(3), the order under Section 143(1)(a), in so far as it is contrary to the regular assessment under Section 143(3) ceases to be executable and becomes ineffective.   It was also held that apart from the fact that no notice under Section 154 being permissible in the circumstances of the case, the Assessing Officer himself could not have decided any debatable issue under Section 143(1)(a)

                        In ‘Commissioner of Income Tax V. Punjab National Bank’ – 2001 -TMI - 14431 – (DELHI High Court) it was held that rectification of an intimation cannot be made after issuance of notice under Section 143(2) and during the pendency of proceedings under Section 143(3).  It was held that if any change was permissible to be effected, the same can be done in the assessment under Section 143(3) and not by exercising power under Section 154 to rectify the intimation under Section 143(1)(a).

                        In ‘Commissioner of Income Tax V. Arihant Industries Limited’ – 2002 -TMI - 12794 – (PUNJAB AND HARYANA High Court) the High Court held that the power under Section 154 can be invoked only to correct an error apparent on the record.  While a notice is issued under Section 143(2) the section 154 cannot be invoked.   If parallel proceedings are permitted it would only result in waste of time.   It would serve no purpose.

                        In ‘Commissioner of Income Tax V. Haryana State Handloom and Handicrafts Corporation Limited’ – (2011) 336 ITR 699 (P&H) the assessee is a corporation owned by the State Government.   It filed its return on 28.12.1992 declaring NIL income.   The said return was processed under Section 143(1)(a) vide intimation dated 22.01.1993.   The assessee, thereafter, filed a revised return accompanied by the audited accounts and report on 16.12.1993 declaring a loss of Rs.47,62,880/-,  While processing the revised return the loss of the assessee was taken at Rs.22,90,904/- vide intimation dated 25.08.1994.    The Assessing Officer took regular assessment of the assessee by issuing a notice dated 26.08.1994.   Again a revised return was filed by the assessee.   The said return was treated as invalid.  The Assessing Officer in his intimation letter found that the audited balance sheet showed that previous year’s income at Rs.29,28,368/- claimed in the profit and loss account was not added in the said intimation.   Thereafter he initiated proceedings under Section 154 of the Act by issuance of notice dated 26.09.1994.    On 06.12.1999 the passed an order added the said amount of Rs.29,28,368/-and reduced the loss claimed to Rs.18,34,512/-.   Therefore additional tax of Rs.3,03,086 was imposed. 

                        The assessee filed an appeal against the order of Assessing Office before the Commissioner of Income Tax (Appeals).   The Commissioner (Appeals) confirmed the order of the lower authority.  The assessee against this order filed an appeal before the Tribunal.   The Tribunal allowed the appeal holding that the order of the Assessing Officer which was upheld by the Commissioner of Income tax (Appeals) was not valid. 

                        The Department filed an appeal before the High Court against the order of the Tribunal.  Before the High Court the Department contended that there is no bar under the provisions of the Act to take recourse to Section 154 of the Act even when a notice under Section 143(2) of the Act had been issued.    The High Court considered the point that where notice under Section 143(2) of the Act had been issued, could proceedings be initiated for rectifying the intimation dated 25.08.1994 by taking recourse to  Section 154 of the Act.   The Department mainly relied on the judgment in ‘Janatha Tile Works Limited’ (supra) .  The High Court also analyzed the various decisions of high courts and held that the decision in ‘Janatha Tile Works Limited’ cannot be acceptable.  By taking into consideration of the facts of the case and decisions of various High Court it was held that proceedings under Section 154 of the Act for rectification cannot be initiated after issuance of notice under Section 143(2) by the Assessing officer to the Assessee.   The appeal was dismissed by the High Court.