ITA Nos.200/08&Ors Page 1 of 31 THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on:. 15.04.2009 + ITA.No.200/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - PAWAN GUPTA ...Respondent WITH ITA.No.1173/2007 COMMISSIONER OF INCOME TAX ...Appellant - versus - TULIKA MISHRA ...Respondent WITH ITA.No.1034/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - NAREASH KUMAR ARORA ...Respondent WITH ITA.No.916/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - ATUL GLASS INDUSTRIES LTD. ...Respondent WITH ITA.No.203/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - ITA Nos.200/08&Ors Page 2 of 31 KAMAL GUPTA ...Respondent WITH ITA.No.862/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - SUNITA SAXENA ...Respondent WITH ITA.No.655/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - ANAND SAXENA ...Respondent WITH ITA.No.204/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - AMAR GUPTA ...Respondent WITH ITA.No.1139/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - ASHOK KHETRAPAL ...Respondent WITH ITA.No.1202/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - ITA Nos.200/08&Ors Page 3 of 31 PRASHANT KUMAR DASH ...Respondent WITH ITA.No.831/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - NAREASH KUMAR ARORA ...Respondent WITH ITA.No.1323/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - KHATRI HOTELS PVT. LTD. ...Respondent WITH ITA.No.202/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - VEENU JEWELLERS (INDIA) ...Respondent WITH ITA.No.209/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - GOVIND RAM GUPTA ...Respondent WITH ITA.No.207/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - ITA Nos.200/08&Ors Page 4 of 31 PADAM CHAND GUPTA ...Respondent WITH ITA.No.915/2008 COMMISSIONER OF INCOME TAX ...Appellant - versus - ATUL GLASS INDUSTRIES LTD. ...Respondent Advocates who appeared in this case: For the Appellants : Ms P.L. Bansal with Mr Sanjeev Rajpal and Mr R.D. Jolly with Ms Anshul Sharma and Ms Rani Kiyala For Respondents : Mr Prakash Kumar in ITA 200/08. Mr Satyen Sethi with Mr Johnson Bara for Respondent in ITA 831/08 and 1034/08 Mr Manu Kumar Giri with Mr Anoop Sharma for the respondent in ITAs 655/08 and 862/08. Ms Aarti Saini for the respondent in ITA 1139/08. Mr M.P. Rastogi for the Respondent in ITA 1202/08. Mr Salil Aggarwal with Mr Prakash Kumar for the respondent in ITA 915/08 and 916/08. CORAM:- HON'BLE MR. JUSTICE BADAR DURREZ AHMED HON’BLE MR. JUSTICE RAJIV SHAKDHER 1. Whether Reporters of local papers may be allowed to see the judgment ? YES 2. To be referred to the Reporter or not ? YES 3. Whether the judgment should be reported in Digest ? YES BADAR DURREZ AHMED, J 1. In this batch of appeals the following substantial questions of law have been framed:- “(I) Whether issuance/service of notice under section 143 (2) within the prescribed period of time is a prerequisite of framing the block assessment order under chapter XIV B of the Income-tax Act, 1961 ? (II) If yes, whether such assessment would be invalid or irregular? ” ITA Nos.200/08&Ors Page 5 of 31 2. ITA 200/2008 entitled CIT v. Pawan Gupta was taken as the lead matter. This case is part of a batch of 5 other appeals of assesses, all belonging to the same group. The appeal in Pawan Gupta has been preferred against the common order dated 27.04.2007 passed by the Income-tax Appellate Tribunal (hereinafter referred to as „the Tribunal‟) pertaining to the block assessment period 01.04.1986 to 10.10.1996. The grounds which were inter alia pressed by the assessees before the ITAT were:- “a) That the assessing officer has erred both in law as well as in the facts of the case in passing the impugned block assessment order under section 158 BC of the act without serving on the assessee any notice under section 143 (2) of the act. b) That the block assessment so made without serving any notice under section 143 (2) of the act is without jurisdiction and deserves to be quashed. c) That the completion of the block assessment under section 158 BC of the act without allowing any opportunity under section 143 (2) of the act is in violation of the principles of natural justice and is therefore null and void ab initio.” 3. Before the Tribunal, the assessees had pressed into service the decision of the Gauhati High Court in the case of Smt. Bandana Gogoi v. CIT: 289 ITR 28. The question before the Gauhati High Court was as under:- “Whether, on the facts and in the circumstances of the case, the decision of the learned Tribunal is not erroneous in holding that non-issuance of notice under section 143(2) of the Income-tax Act, 1961, did not invalidate the assessment relating to the block period and was at best a mere procedural irregularity ?” ITA Nos.200/08&Ors Page 6 of 31 The facts were that the proceedings for block assessment were initiated after search and seizure and the assessee therein submitted the return in response to a notice issued under section 158BC. The Assessing Officer also issued the notice under section 142(1), and completed the assessment under section 158BC and section 143(3) of the Act. Admittedly, no notice had been issued under section 143(2). The Gauhati High Court held as under:- “Under Chapter XIV, the powers of assessment under sub-section (3) in determining the total income or loss could be invoked only after service of notices as contemplated under clauses (i) and (ii) of sub-section (2). In the case of block assessment under Chapter XIV-B, where the Assessing Officer does not proceed to make an assessment and determine the tax payable on the basis of the return filed in response to a notice under section 158BC(a), he has to follow the provisions of sub-section (2) of section 143. The requirement of a notice under sub-section (2) of section 143 cannot be dispensed with in a case where the Assessing Officer proceeds to make an inquiry for the purpose of assessment, and determination of taxes payable after issuing notice under section 142(1) as well.” “In the instant case, the Assessing Officer did not act upon the return filed in response to the notice issued under section 158BB(a). He had issued a notice under section 142(1). He had proceeded to make an inquiry. This could not be done without a notice under sub-section (2) of section 143. The provisions of sub-section (3) quoted above clearly show that the powers under this sub-section could be invoked only after service of notices under sub-section (2). In the instant case, the Assessing Officer admittedly did not follow the provisions of sub-section (2) of section 143.” “The words “so far as may be”, will thus become mandatory where the Assessing Officer proceeds to make an inquiry in repudiation of the return filed in response to a notice issued under section 158BC. Similarly, application of the provisions of section 142 and sub-sections (2) and (3) of section 143 will become directory where the Assessing Officer does not embark upon an inquiry to determine the loss or profit reflected in the return filed.” ITA Nos.200/08&Ors Page 7 of 31 “It is true that the return was filed by the assessee in response to a notice under section 158BC(a). Clause (b) of section 158BC provides that the provisions of section 142 as well as sub-sections (2) and (3) of section 143 shall apply even in the case of a block assessment so far as may be. There is no dispute that in the case of assessment under Chapter XIV, a notice under section 143(2) is mandatory where the Assessing Officer proceeds to make an inquiry as provided in section 142. Similarly, the provision of section 143(2) will be mandatorily applicable in the case of a block assessment also where the Assessing officer in repudiation of the return filed under section 158BC(a) proceeds to make an inquiry in the proceeding under Chapter XIV-B. Once the power of inquiry under section 142 is invoked, the Assessing Officer has no option but to follow the provisions of section 143(2). For this reason, we hold that the provisions of section 142 and sub- sections (2) and (3) of section 143 will have mandatory application in a case where the Assessing Officer in repudiation of the return filed in response to a notice issued under section 158BC(a) proceeds to make an inquiry. The defects crept in cannot be cured at this stage in view of the limitation provided in section 143(2). The assessment order in the instant case thus suffers from both procedural and jurisdictional error. The option left with the Assessing Officer is to compute the income and levy taxes on the basis of the return filed by the assessee.The question formulated is answered against the Revenue and in favour of the assessee. Consequent thereupon, the orders passed by the authorities below are set aside. The appeal, accordingly, stands allowed.” 4. In view of this decision, the Tribunal accepted the contention advanced on behalf of the assessee that since notice under section 143 (2) of the Income Tax Act, 1961 (hereinafter referred to as “the said Act”) had not been issued, the block assessment under section 158 BC of the said Act cannot be upheld and that the same was liable to be quashed. The Tribunal also noted that the department had been given full opportunity to produce evidence in support of the issuance of a notice under section 143 (2), if any, but the Department could not do so. Consequently, the Tribunal, following similar ITA Nos.200/08&Ors Page 8 of 31 decisions which in turn followed the said Gauhati High Court decision, allowed the assessees‟ appeals. 5. The Revenue, being aggrieved by the said decision and other similar decisions of the Tribunal in the connected matters has preferred these appeals. Mr. Jolly, the learned counsel appearing on behalf of the revenue in some of the appeals, submitted that the time limit prescribed under the proviso to section 143 (2) is only for ensuring that in cases where an assessee files a return under section 139, the assessing Officer must either issue the intimation under section 143 (1) or issue a notice under section 143 (2) for completing assessment under section 143(3). He submitted that the requirement of a notice under section 143 (2) is essential for production of material by the assessee. This is so because in regular assessments the assessing officer in the first instance has no material available to him except the return. He submitted that chapter XIV B provides a special procedure for search cases and is a complete code in itself. Referring to the provisions of the said Chapter, Mr. Jolly submitted that the expressions “block period” and “undisclosed income” are defined in section 158-B. Section 158 BA provides for assessment of undisclosed income as a result of search. He submitted that in such a case the material is already found and is in the knowledge of the assessing officer. This is distinct and different from the situation of an ordinary assessment where the assessing officer does not have ITA Nos.200/08&Ors Page 9 of 31 any material other than the return. Mr. Jolly then referred to the provisions of section 158 BC (b) of the said act which reads as under:- "(b) the assessing officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158 BB and the provisions of section 142, sub-sections (2) and (3) of section 143, section 144 and section 145 shall, so far as may be, apply;" 6. Mr. Jolly submitted that although section 143 (2) has been specifically mentioned in the above provision it is to be applicable only to the extent possible and that is why the expression "so far as may be" is used in the said provision. He further contended that the computation of undisclosed income of the block period has to be done in accordance with the provisions of section 158 BB and that too on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the assessing officer and relatable to such evidence. He, once again, laid stress on the difference in the assessment procedures under chapter XIV B and normal assessment. It was, therefore, contended by him that the issuance of a notice under section 143 (2) is not an essential requirement in block proceedings. Consequently, he submitted that the questions be answered in favour of the Revenue and the appeals be allowed. ITA Nos.200/08&Ors Page 10 of 31 7. Mrs Bansal who also appeared for the Revenue in some of the appeals made similar submissions with regard to there being a distinction between the procedure of regular assessment under chapter XIV and the procedure of block assessment in search cases under chapter XIV B. She also contended that chapter XIV B of the said act is a self-contained code dealing with the substantive as well as procedural aspects of search cases. Under section 139 an assessee has to file the income tax return voluntarily if he is exigible to income tax. But, under chapter XIV B, there is no provision for filing the return voluntarily. She submitted that in the case of normal assessment if the assessee does not file a return under section 139 (1) then the assessing officer may call upon the assessee to file a return under section 142 (1) (i) of the said act. Where a return is filed either under section 139 or under section 142 (1) and if the assessing officer considers it necessary or expedient to ensure that the assessee has not understated the income etc then he is required to serve on the assessee a notice requiring him to attend on a specified date or to produce such evidence as he may rely upon in support of the return. According to the learned counsel, section 143 (2) has two limbs. The first limb deals with jurisdiction and the second with procedure. She submitted that the proviso to section 143 (2) puts an embargo on the assessing officer to exercise jurisdiction after the expiration of 12 months from the end of the month in which the return was filed by the assessee. It is the discretion of the ITA Nos.200/08&Ors Page 11 of 31 assessing officer to accept the return as it is or to proceed further with the assessment of income. Once the assessing officer decides to proceed he has to issue a notice under section 143 (2) within the prescribed time to make the assessee aware that his return has been selected for scrutiny assessment. 8. In distinction to this procedure, the learned counsel submitted, under the special procedure prescribed in chapter XIV B there is no discretion left with the assessing officer. The source and origin of a block assessment is the search which has been conducted under section 132 of the said act. Once the search has been carried out, the assessing officer is left with no discretion but to proceed with block assessment of the undisclosed income. 9. Continuing with the contention that regular assessment proceedings and block assessment proceedings were different and distinct, Mrs Bansal submitted that in a normal assessment, tax is to be charged at the rate prescribed in the Finance Act whereas under the provisions of section 158- BA(2), undisclosed income is to be charged to tax at the rate prescribed in section 113. She further submitted that it is a well-established principle of law that block assessment is in addition to regular assessment. What is included in regular assessment, ITA Nos.200/08&Ors Page 12 of 31 cannot be assessed again in the course of a block assessment. Similarly, what is assessed in block assessment, cannot be the subject matter of a regular assessment. While section 158 BB provides for computation of undisclosed income, there is no such provision in the case of a normal assessment. 10. It was further contended that in a case of regular assessment, the decision to complete the assessment under section 143 (3) is taken after the filing of the voluntary return whereas the decision to make the block assessment is taken before the filing of the return pursuant to the section 158 BC notice. The submission is that while the notice under section 143 (2) is passed on the filing of a return under section 139, the return filed under section 158 BC (a) is the consequence of search and the assumption of jurisdiction to ascertain undisclosed income. 11. Mrs Bansal submitted that in the case of a regular assessment the interaction with the assessee starts by the assessing officer issuing a questionnaire under section 142 (1)(ii) and (iii). She submitted that section 158 BC(b) prescribed the same manner for determining undisclosed income as is adopted in the case of a regular assessment but this is qualified by the words “so far as may be” which, according to her, means to the extent it is possible and practicable. It was her submission that once this search has been conducted, the assessee is ITA Nos.200/08&Ors Page 13 of 31 already aware of the block assessment proceeding. She however admitted that for the purpose of observing the principles of natural justice, section 158 BC (b) has prescribed a manner of assessment similar to the manner stipulated for regular assessment. For this purpose, she submitted that, in terms of the provisions of section 143 (3), income is to be determined on the basis of evidence voluntarily filed by the assessee under section 143 (2) or as required by the assessing officer under section 142 (1). By observing the same procedure as that in the case of a regular assessment, the assessing officer, in the case of block assessment, can gather evidence for making the assessment. 12. Summing up her submissions thus far, Mrs Bansal submitted that the provisions of section 142, 143 (2), 143 (3) and 144 are to be observed by the assessing officer for the purposes of observing principles of natural justice, that is, to interact with the assessee so as to give him an opportunity of being heard. She submitted that an interaction with the assessee pre-supposes some sort of formal notice by the assessing officer. The question would therefore be whether the notice under section 158 BC had the same effect as a notice to be issued under section 143 (2) of the said act. Referring to the decision of the Supreme Court in the case of Dr. Pratap Singh v. Director of ITA Nos.200/08&Ors Page 14 of 31 Enforcement: 155 ITR 166, she submitted that the words "so far as may be" have always been construed to mean to the extent possible. Therefore the provisions of section 143(2) and other provisions mentioned in section 158 BC (b) are to be applied only to the extent possible/practical and not in the literal sense. Since the provisions incorporated in the chapter XIV B constitute a special code to assess the undisclosed income in search cases, they would override the provisions of chapter XIV being the procedure for normal assessments. She submitted that it is a settled legal position that the special provisions would override the general provisions. 13. Another submission made by her was that a notice under section 143 (2) read with section 158 BC (b) does not entail any jurisdictional aspect inasmuch as jurisdiction to proceed already stands bestowed on the assessing officer by virtue of the provisions of section 158BA. From this, she concluded that the requirement of a notice under section 143 (2) read with section 158 BC (b) impinges only upon the procedural aspect of assessment. Thus, the embargo placed by the proviso to section 143 (2) in respect of regular assessments would not be applicable to a block assessment proceeding. She also submitted that when chapter XIV B was introduced the limitation for completion of a block assessment was one year from the end of the month in which the ITA Nos.200/08&Ors Page 15 of 31 last of the authorisations under section 132 was executed. This was provided in section 158 BE of the said act. From this alone it is apparent that the Legislature never intended to apply the provisions of section 143 (2) strictly in the case of block assessment proceedings and, particularly so, the proviso thereto. 14. She submitted that in the case of a block assessment proceeding if there was some lapse on the part of the assessing officer in the issuance of a notice under section 143 (2) then such lapse would not render the block assessment invalid and would only be a curable irregularity. It was her contention that it is a well-established principle of law that where there is a lapse with regard to some procedural aspect then the same can be cured afterwards and would not render the consequential assessment order null and void. For this proposition she placed reliance on a decision of the Supreme Court in the case of CIT v. Jai Prakash Singh: 219 ITR 77. 15. It was also her submission that once the search is valid and some incriminating material is found during the search, the assessing officer has no option but to issue a notice under section 158 BC (a) and once such notice is validly issued then the assessing officer would be in seizin of the case and have jurisdiction to determine the undisclosed income. Once this jurisdiction is validly assumed then any lapse in the ITA Nos.200/08&Ors Page 16 of 31 procedural part would not render the assessment order to be null and void. It was her contention that the procedural part of section 143 (2) is nothing but the incorporation of the rule of the audi alterem partem. 16. Finally, she submitted that in all the appeals, the assessee had participated in the block assessment proceedings. It is not the case that no opportunity of hearing had been given to the assessee. In virtually all the cases the assessing officer had issued notices to the assessee requiring some material or the other. Since there is no specific proforma prescribed for the issuance of a notice under section 143 (2), such notices/letters could be treated as having been issued under section 143 (2). She submitted that even if section 143 (2) is made applicable to block assessment proceedings by virtue of section 158 BC, the proviso would not be applicable to such proceedings. 17. Mr. Salil Aggarwal, the learned counsel who appeared for the assessees in ITA 200/2008 and connected matters, submitted at the outset that mere participation in the block assessment proceeding would not amount to conferring jurisdiction on a person who otherwise lacks jurisdiction. For this proposition he placed reliance on a decision of a Division Bench of this court in the case of Swaran Yash v. CIT: 138 ITR 734 (Del). He submitted that mandatory provisions cannot be waived. For this, he placed reliance on PV Doshi v. CIT, Gujarat: 113 ITA Nos.200/08&Ors Page 17 of 31 ITR 22 (Guj) and Inventors Industrial Corporation Ltd v. CIT: 194 ITR 548 (Bom). 18. Thereafter, Mr. Aggarwal submitted that there are three processes for assessment. The first process is where a return is filed voluntarily under section 139 (1) or on the asking of the assessing officer under section 142 (1). If the assessing officer wants to tinker with the return so filed, he has to issue a notice under section 143 (2). Thereafter, the assessee is required to produce evidence in support of the return and the assessment is completed under section 143 (3) after hearing or at least giving an opportunity of hearing to the assessee. The second stream for assessment is when no return is filed pursuant to a section 142 (1) notice. In such an eventuality, the assessing officer proceeds to make the best judgement assessment under section 144 of the said act. The third stream or process of assessment relates to the escapement of income and is initiated through the procedure prescribed under section 147/148 of the said act. This also follows the route of a regular