Facts of the Case

  1. A search was conducted on 18.01.2001 and was completed in March 2001.
  2. Notice under Section 158BC was served upon the assessee on 03.12.2001.
  3. The assessee filed the block return on 31.12.2002.
  4. Under the proviso to Section 143(2), notice was required to be served within twelve months from the end of the month in which the return was filed.
  5. Accordingly, the last permissible date for service of notice under Section 143(2) was 31.12.2003.
  6. The Assessing Officer issued the notice under Section 143(2) only on 05.07.2004.
  7. Block assessment order under Section 158BC(c) was passed on 30.07.2004.
  8. The assessee had also filed an application before the Settlement Commission under Section 245C on 10.01.2003.
  9. The Settlement Commission rejected the application under Section 245D(1), and the order was received by the Commissioner on 03.06.2004.
  10. The Revenue claimed exclusion of this period for limitation purposes under Explanation 1 to Section 158BE.

 

Issues Involved

  1. Whether notice under Section 143(2) was issued beyond the prescribed limitation period.
  2. Whether delayed issuance of notice under Section 143(2) rendered the block assessment order under Section 158BC(c) invalid.
  3. Whether the period during which the settlement application remained pending before the Settlement Commission could be excluded for computing limitation relating to issuance of notice under Section 143(2).
  4. Whether filing of an application before the Settlement Commission created any bar on the Assessing Officer from continuing assessment proceedings.

 

Petitioner’s (Assessee’s) Arguments

  • The return was filed on 31.12.2002 and therefore notice under Section 143(2) ought to have been served on or before 31.12.2003.
  • The notice was actually issued on 05.07.2004, which was beyond the statutory limitation period.
  • Service of notice under Section 143(2) is mandatory in block assessment proceedings.
  • Reliance was placed on:
    • CIT v. Pawan Gupta (318 ITR 322)
    • ACIT v. Hotel Blue Moon (321 ITR 362, SC)
  • Filing of an application before the Settlement Commission does not automatically stay assessment proceedings.
  • The Assessing Officer remained free to proceed with assessment and issue notice under Section 143(2) within the prescribed time.
  • Exclusion of time under Section 158BE applies only for passing the assessment order and not for issuing notice under Section 143(2).
  • Reliance was also placed upon:
    • CIT v. Hindustan Bulk Carriers (259 ITR 449, SC)
    • CIT v. Damani Brothers (259 ITR 475, SC)
    • Deen Dayal Didwania v. Union of India (160 ITR 12, Delhi)

 

Respondent’s (Revenue’s) Arguments

  • The assessee had filed a settlement application before the Settlement Commission on 10.01.2003.
  • The application remained pending until rejection under Section 245D(1), and the order was received by the Commissioner on 03.06.2004.
  • Under Explanation 1(iv) to Section 158BE, this entire period should be excluded while computing limitation.
  • After exclusion, the assessment completed on 30.07.2004 was within time.
  • The Revenue argued that issuance of notice under Section 143(2) formed part of the overall assessment proceedings.
  • Reliance was placed on:
    • Auto & Metal Engineers v. Union of India (229 ITR 399, SC)
  • It was contended that if time stood excluded for completing the assessment, the same exclusion should also extend to issuance of notice under Section 143(2).

 

Court Findings

The Delhi High Court held:

1. Notice under Section 143(2) is Mandatory

The Court reaffirmed that where the Assessing Officer does not accept the return filed by the assessee, issuance of notice under Section 143(2) is mandatory.

The Court relied upon:

  • CIT v. Pawan Gupta
  • ACIT v. Hotel Blue Moon

The Court observed that failure to issue notice under Section 143(2) within the prescribed period is not a procedural irregularity but a jurisdictional defect.

2. Limitation for Notice under Section 143(2) is Independent

The Court held that:

  • The limitation period prescribed in the proviso to Section 143(2) is independent.
  • Such limitation cannot be enlarged merely because exclusion is available for passing an assessment order.

3. Settlement Application Does Not Stay Assessment Proceedings

The Court observed that:

  • Mere filing of an application under Section 245C does not create any automatic stay.
  • The Assessing Officer remains free to continue assessment proceedings.
  • Therefore, there was no impediment preventing issuance of notice under Section 143(2) within the prescribed time.

4. Exclusion under Section 158BE Applies Only to Assessment Order

The Court clarified that:

  • Explanation 1 to Section 158BE excludes time only for computation of limitation relating to passing the block assessment order.
  • It does not extend to computation of limitation for service of notice under Section 143(2).

5. Auto & Metal Engineers Distinguished

The Court held that the decision in Auto & Metal Engineers was distinguishable because:

  • It related to assessment years when no statutory limitation existed for issuance of notice under Section 143(2).
  • Present law specifically prescribes a limitation period for such notice.
  • Therefore, the ratio of that judgment could not be applied.

 

Court Order

The Delhi High Court held that:

  • Notice under Section 143(2) issued on 05.07.2004 was beyond the prescribed limitation period.
  • The mandatory requirement of service of notice within time was not complied with.
  • Consequently, the block assessment order passed under Section 158BC(c) was invalid and bad in law.
  • The order of the Tribunal was set aside.
  • The appeal of the assessee was allowed.
  • No order as to costs was passed.

 

Important Clarifications

Mere Filing Before Settlement Commission Does Not Stop Assessment Proceedings

Until the Settlement Commission allows the application to be proceeded with, the Assessing Officer retains authority to continue assessment proceedings.

Mandatory Nature of Section 143(2)

Service of notice under Section 143(2) within the prescribed limitation period is a jurisdictional requirement and not a curable procedural defect.

Exclusion of Time Has Limited Application

Exclusion available under Explanation 1 to Section 158BE is confined to computation of limitation for passing assessment orders and does not enlarge the time available for issuing notice under Section 143(2).

Block Assessments Must Follow Statutory Procedure

Failure to comply with mandatory procedural safeguards under Chapter XIV-B invalidates the entire assessment.

Sections Involved

  • Section 143(2), Income-tax Act, 1961
  • Section 158BC
  • Section 158BE
  • Section 245C
  • Section 245D
  • Section 260A
  • Chapter XIV-B (Block Assessment Proceedings)
  • Chapter XIX-A (Settlement of Cases)


Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:3270-DB/BDA05072010ITA8842009.pdf

 

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