TMI Blog2006 (12) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... ce u/s 148 has been issued validly, the Assessing Officer is vested with the powers to assess or reassess u/s 147 of the Income-tax Act. Therefore, jurisdictional power for making reassessment is vested in the Assessing Officer by virtue of section 147 and, therefore, it cannot be said that the assessment order was without jurisdiction. The combined reading of all the judgments leads to the only one conclusion that the provisions of section 143(2) is only the procedural provisions though mandatory and does not give jurisdiction to assess and does not vest in the Assessing Officer to make the assessment. The real purpose behind provisions of section 143(2) is to provide an effective opportunity to the assessee to support and explain the return filed by him and the books of account maintained by him. This requirement is part of the natural justice, which has been incorporated in the Act. Noncompliance of the same may invalidate the assessment order but certainly it does not render the assessment without jurisdiction. Accordingly, we hold that non-compliance of provisions of section 143(2) in the present case does not render the assessment as null and void since valid jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT in the case of Nawal Kishore Sons Jewellers [ 2003 (8) TMI 194 - ITAT LUCKNOW] . In this case, it has been held that if principles of natural justice have otherwise been met then setting aside the assessment order would be a futile exercise and in such a situation, the appellate authority should proceed to decide the case on merits. Thus, we do not set aside the assessment order but we want to make it clear that where proper opportunity was not provided to the assessee, the assessment order should be invariably set aside under these circumstances. Deduction on account of interest - HELD THAT:- The sale of shares by the company is on behalf of those shareholders and it is at par with sale by the shareholders. Hence, the nature of income remains same, i.e., capital gains. Since, in the present case, it was offered by the assessee wrongly under the head 'Income from other sources', it cannot assume the character of 'Income from other sources' although the Assessing Officer accepts the same but still it cannot be held that the investment in shares is also for the purpose of earning 'Fraction Entitlement' taxable under the head 'Other sources&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was Rs. 134.33 lakhs as on 31-3-1997 and Investment in Shares on that date was Rs. 128.70 lakhs. Margin Money given to Bombay Stock Exchange was Rs. 9.41 lakhs only on 31-3-1997. Margin money as on 31-3-1998 was Rs. 10.61 lakhs. During the year ended on 31-3-1998, most of the shares were sold out, on which, loss was incurred and shown under the head 'Capital gains'. The amount of borrowed funds as on 31-3-1998 was Rs. 73.61 lakhs. The Assessing Officer was of the view that borrowed funds were utilized for the purposes other than business. The Assessing Officer required the assessee to explain as to why the interest of Rs. 9,67,727 should not be disallowed. It was replied by the assessee that the loans were fully and entirely utilized for the purpose of business and also for margin money required to be deposited with Bombay Stock Exchange for dealing in shares. The Assessing Officer was not convinced because he was of the view that the Shares of Rs. 120.26 lakhs were held as Investment and not as Stock in trade since income/loss on sale of shares was declared under the head 'Capital gains' and, therefore, to that extant, funds had been used for investments and not for business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as such and, hence, the interest expenses are allowable expenses under the head 'Income from other sources' for the whole year. (f) In support of this contention that assessment order is not valid because no notice was issued under section 143(2), reliance was placed on the judgment of the Special Bench of the Tribunal rendered in the case of Raj Kumar Chawla v. ITO [2005] 94 ITD 1 (Delhi). 5. As against this, learned DR of the revenue supported the orders of authorities below. He submitted a copy of the reasons recorded by the Assessing Officer for reopening of the assessment and it is pointed out by him that there is no mention of section 14A in the reasons recorded by the Assessing Officer for reopening of the assessment. Reliance was placed on the Tribunal judgment rendered in the case of K.K. Patel N.A. Khan Co. v. ITO [1985] 11 ITD 151 (Hyd.). This Tribunal judgment was relied upon in support of this contention that even if assessment is completed ex parte without serving the notice under section 143(2) on the assessee, it cannot be said that assessment order passed by the Assessing Officer is illegal and null and void. It is also submitted by him that in this Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment order, the Assessing Officer made enquiries by issuing notice under section 142(1). The assessee submitted replies and the Assessing Officer duly considered the same. In our opinion, the real purpose behind the requirement to issue notice under section 143(2) is to provide opportunity to the assessee to support his return and this purpose was not defeated and the assessee was provided proper opportunities, which was duly availed by him and the Assessing Officer duly considered his explanations. The Tribunal judgment in the case of K.K. Patel N.A. Khan Co. supports the case of the revenue but the assessment year involved in that case was assessment year 1979-80 and it is the contention of the learned AR of the assessee that there in change in the provisions of section 143(2) with effect from 1-4-1989 and the Tribunal judgment rendered in the case of K.K. Patel N.A. Khan Co. was rendered as per old provisions. It is also submitted that the judgment rendered by the Tribunal in the case of Raj Kumar Chawla is as per amended provisions of section 143(2) and, hence, this latter judgment of the Special Bench is to be followed. At this juncture, we feel it appropriate to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax in any manner serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce or cause to be produced there, any evidence on which the assessee may rely in support of the return: Provided that no notice under this sub-section shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished." 9. From the comparison of the above provisions of section 143(2) prior to 1-4-1989 and thereafter, we find that after 1-4-1989, one restriction is put on the Assessing Officer that he cannot issue notice under this section to the assessee after the expiry of a period of 12 months from the end of the month in which the return is furnished. But this restriction in this section after 1-4-1989 is not relevant in the present case because of the retrospective amendment with effect from 1-10-1991 made by the Finance Act, 2006 in section 148. As per this amendment, such notice under section 143(2) issued after this specified period of 12 months is also valid if the same is issued before the completion of the assessment, in cases, where returns are filed during 1-10-1991 to 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jewellers v. Dy. CIT [2003] 87 ITO 407 (Luck.) (SB). In that case, question arose whether the block assessment made without issuance of notice under section 143(2) could be said to be null and void Special Bench referred to the provisions of section 158BA for holding that power to assess is vested in the Assessing Officer by virtue of such provisions and, therefore, the other provisions for making assessment are purely procedural in nature and, therefore, non-compliance of procedural provisions would not lead to the assessment being null and void Relevant portion of the decision is quoted below: "37. The above discussion reveals that the Legislature has made independent substantive provisions regarding the power to proceed to make assessment under section 143(2) as well as under section 158BC. Section 158BC read with section 158BA, being special provisions of proceeding to assess the undisclosed income of the assessee in search matters, would override the provisions of section 143(2) as far as power/jurisdiction to proceed to make assessment is concerned in as such as it is the settled legal position that special provisions override the general provisions. The view which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quated with notice under section 148(1). These observations of Hon'ble Bombay High Court fortifies our view that once the notice under section 148 has been issued validly, the Assessing Officer is vested with the powers to assess or reassess under section 147 of the Income-tax Act and, therefore, jurisdictional power for making reassessment is vested in the Assessing Officer by virtue of section 147 the moment the valid notice under section 148 is issued and, therefore, the assessment order cannot be said to be without jurisdiction merely on the ground of noncompliance of rules of natural justice. 14. Now, we would refer to certain judgments where it has been held that assessment cannot be said to be null and void for noncompliance of the procedural provisions. Hon'ble Allahabad High Court in the case of Sant Baba Mohan Singh has elaborately discussed this issue and held as under:- "The omission of the ITO to issue a notice under section 23(2) does not affect the ab initio jurisdiction enjoyed by the ITO in respect of the proceeding. The ITO has seisin over the case, he has overall jurisdiction over the case and in that sense had power to initiate the proceeding. The omission t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e directions to the ITO to comply with the requirements of law. 17. Following the aforesaid two judgments, the Hon'ble Rajasthan High Court in the case of Gyan Prakash Gupta held that when the return is filed, the Assessing Officer gets seisin over the case and he has jurisdiction over it. Failure to comply with provisions of section 143(2) would not render the assessment as null and void. Though it was held that assessment order passed without notice under section 143(2) is invalid and vitiated but on that account, assessment order cannot be declared as null and void and the course upon to the Appellate Authorities is to restore the matter to the file of the Assessing Officer to give an opportunity to the assessee by issue of notice under section 143(2). Relevant portion of the said Judgment is extracted below:- "15. We may at once state that there cannot be any quarrel with the above statement of law, but the question before us is whether failure to serve the notice on the legal representative of the deceased renders the assessment order null and so it has to be annulled. 'Annulment' means to make null, to reduce to nothing, to abolish. The AAC has power to annul the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representatives of Mohanlal Gupta or for that matter on Smt. Dayawati Gupta, in whose favour, the Will was executed by the deceased, Mohanlal Gupta, was to set aside the assessment order passed by the ITO in respect of the assessment year 1965-66 and not to annul the assessment. We respectfully agree with the view taken by the Allahabad High Court and Jammu and Kashmir High Court, as it is in conformity with the provisions of section 143(3) and section 159 of the Act." 18. Hon'ble Delhi High Court in the case of Intracraft India, also took the same view and held as under:- 'The real point urged by Mr. Aggarwal was that once a revised return is filed the ITO must stop the proceedings and must give afresh notice under section 143(2) and only then can he proceed with the case. Mr. Wadhera referred to the order sheet of the ITO showing that after the revised return was filed, the proceedings continued for a number of hearings and the revised return was taken into consideration while making the assessment order. It does not appear that any objection was raised to this procedure by the assessee before the ITO Mr. Wadhera pointed out that no particular procedure is required for givin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled for assessment year 1967-68 also within the prescribed period. Jai Prakash Singh, however, wanted to take advantage of the provision contained in section 139(4) which enables an assessee to 'furnish the return for any previous year at any time before the end of the period specified in clause (b)' provided the assessment is not made by the time of filing of return. [Clause (b) of the said sub-section specifies various periods of limitation; in respect of assessment years concerned herein, it is four years from the end of the relevant assessment year]. The returns were filed voluntarily disclosing the income received by B.N. Singh during the relevant accounting years by one of his legal representatives inviting an assessment. The names of all the legal representatives were already intimated to the ITO (as found recorded in the orders of the AAC and the Tribunal though the occasion for giving such information is not evident from the record. It is also not clear who gave the information regarding the death of B.N. Singh and not by the other nine legal representatives and in which connection). It is true that the returns were signed only by Jai Prakash Singh and not by the other ni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the learned CIT(A) exercised his discretion as far as setting aside the assessment is concerned and directing a fresh assessment in accordance with law after giving due opportunity of being heard." 21. Similarly, this Tribunal in the case of Vakil Chand Jain held as under:- "In the instant case, the Assessing Officer has not issued the notice under section 143(2) of the Act, without which, he could not have made the assessment under section 143(3) of the Act. The only claim of the assessee is that, the non-issuance of the notice must be held to invalidate the assessment. This claim, clearly implies that, but for the failure to the issue the notice under section 143(2), the framing of the assessment tinder section 143(3) is in conformity and according to the intent and the purpose of the Act. In fact, the Assessing Officer had proceeded to frame the assessment, after hearing the assessee and also, considering the relevant material. As observed earlier, the issuing of the notice, being mandatory for the making of the assessment under section 143(3) of the Act, non-issue of such notice, in view of section 292B of the Act, in the circumstances, of the case, has only to be trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le him to remove the imperfection, the proper course to be followed, is to set aside the assessment. The argument of the assessee, that, such remands would result in extending the time-limit prescribed under section 153(1) of the Income-tax Act, in our opinion is not justified. It is for irregular or imperfect assessments, that the first appellate authority has been conferred with the power of remand and considering such situation of remand that, the Legislature has provided in section 153(2A) of the Act, the time-limit of two years has been allowed for the making of the assessment, from the end of the financial year, in which the order of remand was made. The appeal of the assessee is rejected." 22. The combined reading of all these judgments leads to the only one conclusion that the provisions of section 143(2) is only the procedural provisions though mandatory and does not give jurisdiction to assess and does not vest in the Assessing Officer to make the assessment. The real purpose behind provisions of section 143(2) is to provide an effective opportunity to the assessee to support and explain the return filed by him and the books of account maintained by him. This requiremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the Legislature has taken away the jurisdiction to assess after a particular period. But that does not mean that service of notice under section 143(2) confers jurisdiction on the Assessing Officer. The service of notice under section 143(2) is part of procedural provisions as laid down by the Hon'ble Supreme Court in the case of R. Dalmia v. CIT [1999] 236 ITR 480, but the period of limitation prescribed in the proviso to section 143(2) affects the jurisdiction of Assessing Officer to assess. Thus, such distinction has to be kept in mind while adjudicating such issue. 25. Reliance was placed by the learned AR for the assessee on the Judgment of the Special Bench of the Tribunal rendered in the case of Raj Kumar Chawla. Let us now consider the applicability and relevance of this judgment in view of the amendment in section 148 by way of inclusion of a proviso with retrospective effect from 1-10-1991 vide Finance Act, 2006. As per this amendment, in case of returns filed in response to notice under section 148 during 1-10-1991 to 30-9-2005, notice under section 143 (2) served after the expiry of 12 months but before the expiry of time-limit for completion of assessment, reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer to make scrutiny assessment and it is not for the purpose to make his intention clear to the assessee that he wants to make scrutiny assessment. We feel that after this change regarding making the notice under section 143(2) valid even if the same is issued after prescribed period of 12 months but before the expiry of time-limit for completion of assessment, the purpose of issuing notice is nothing but to provide natural justice to the assessee to enable him to explain his case before the Assessing Officer completes the assessment. In view of this, we are of the considered opinion that after this amendment in section 148, this Tribunal judgment rendered in the case of Raj Kumar Chawla is not valid in the present case because in the present case also, return is deemed to have been filed by the assessee in pursuance to notice under section 148 issued during this period, i.e., during 1-10-1991 to 30-9-2005. 26. But, there is one other important point in the present case, i.e., that in the present case; it is an admitted position that no notice under section 143(2) was issued. This does not change the position as noted by us in Para No. 22 above because in the various judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion may arise as to what course should be adopted in such cases by the appellate authority. One easy course would be to set aside the assessment and restore the matter to the file of the Assessing Officer for fresh assessment after giving reasonable opportunity of being heard to the assessee. But there may be cases where sufficient opportunity might have already been given by the Assessing Officer or the assessee might have participated in the proceedings before the Assessing Officer or there may be sufficient materials on the record for adjudication. In such cases mere restoration may prove to be a futile exercise. Therefore, in such cases, the appellate authority may adjudicate the issue itself after giving reasonable opportunity to the assessee to explain his case. These observations are mere guidelines and no limitations are being placed on the powers of the appellate authority. The appellate authority would be free to choose the right course depending upon the facts of each case." 28. In view of this judgment and considering the facts of this case, we do not set aside the assessment order but we want to make it clear that where proper opportunity was not provided to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered opinion that this receipt on account of 'Fraction Entitlement' is also taxable under the same head. The contention of the assessee is that in this case, shares are sold before the assessee receives it. We are not in agreement with him because the assessee is entitled to the fraction of a share on the basis of the ratio of bonus shares to be issued and the No. of shares held by him on the record date and since a fraction of the share cannot be practically issued to a shareholder, all such fractions are cumulatively sold by the company and proceeds is distributed among such shareholders as per their entitlement. The sale of shares by the company is on behalf of those shareholders and it is at par with sale by the shareholders. Hence, the nature of income remains same, i.e., capital gains. Since, in the present case, it was offered by the assessee wrongly under the head 'Income from other sources', it cannot assume the character of 'Income from other sources' although the Assessing Officer accepts the same but still it cannot be held that the investment in shares is also for the purpose of earning 'Fraction Entitlement' taxable under the head 'Other sources'. We, therefore ..... 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