ITA No.884/09 Page No.1 of 27 THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 05.07.2010 + ITA 884/2009 RAJAN GUPTA ..... Appellant versus COMMISSIONER OF INCOME TAX ..... Respondent Advocates who appeared in this case: For the Appellant : Mr M.P. Rastogi with Mr R. Kumar and Mr K.N. Ahuja For the Respondent : Ms Prem Lata Bansal CORAM:- HON’BLE MR JUSTICE BADAR DURREZ AHMED HON’BLE MR JUSTICE V.K. JAIN 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. This is an appeal under Section 260A of the Income-tax Act, 1961 (hereinafter referred to as ‗the said Act‘) and it arises out of the order dated 30.01.2009 passed by the Income-tax Appellate Tribunal in ITA 385/Del/05 in respect of the block period 01.04.1990 to 18.01.2001. The following substantial questions of law arise for consideration in this appeal:- ―1. Whether, in the facts and circumstances of the case, the notice under Section 143(2) of the Income Tax Act, 1961 was issued beyond the prescribed period of limitation and as a ITA No.884/09 Page No.2 of 27 consequence thereof the block assessment order under 158 BC(c) of the said Act was bad in law ? 2. Whether, if the notice under Section 143(2) of the Income Tax Act, 1961 is held to have been issued within time, the block assessment order dated 30.07.2004 was barred by limitation?‖ 2. To appreciate the pleas taken by the parties, it would be necessary to set down the factual position. A search was conducted on 18.01.2001 and it was said to have been completed in March 2001. The notice under Section 158BC of the said Act was served on the assessee on 03.12.2001 and the assessee filed the return on 31.12.2002. According to the learned counsel for the assessee / appellant, the notice under Section 143(2) of the said Act read with the provisions of Section 158BC(b) could have been issued by 31.12.2003, i.e., within the period of twelve months from the end of the month in which the return was filed. The return having been filed on 31.12.2002, according to the learned counsel for the appellant, the notice under Section 143(2) ought to have been issued by 31.12.2003. The learned counsel further submitted that the notice under Section 143(2) was, in fact, issued much later, i.e., on 05.07.2004. The block assessment order under Section 158BC (c) was also passed later, on 30.07.2004, when, in fact, according to the provisions of Section 158BE, the order should have been passed by 31.01.2003. 3. The learned counsel for the appellant / assessee referred to a decision of this court in the case of Commissioner of Income-tax v. Pawan Gupta: 318 ITR 322 and submitted that the issuance of a notice under ITA No.884/09 Page No.3 of 27 Section 143(2) was mandatory even in respect of the proceedings under Section 158BC. He also referred to the recent decision of the Supreme Court in the case of Assistant Commissioner of Income-tax and Anr. v. Hotel Blue Moon: 321 ITR 362 (SC) which held that the notice under Section 143(2) of the said Act was a mandatory requirement in case the Assessing Officer disagreed with the return filed by the assessee pursuant to the notice under Section 158BC. The Supreme Court also held that it was not merely a procedural requirement, but it was mandatory that the notice under Section 143(2) ought to be issued within the period of limitation. In case it is not so done, then the assessment following such notice would be bad in law. The learned counsel for the appellant / assessee, therefore, contended that since the notice under Section 143(2) had been issued beyond the time prescribed under the said Act, the block assessment order dated 30.07.2004 was bad in law. He also submitted that, in any event, the block assessment order was beyond time in itself inasmuch as the last date for framing the assessment under Section 158BC(c) was 31.03.2003 in view of the provisions of Section 158BE. 4. Ms Bansal, appearing on behalf of the revenue, contended that an important circumstance has been left out by the learned counsel for the appellant / assessee and that is the filing of an application by the assessee before the Settlement Commission under Section 245C of the said Act. Such an application had been filed by the appellant / assessee on 10.01.2003 and the same had been rejected by the Settlement Commission by passing an order under Section 245 D(1) of the said Act on 25.05.2004 which was ITA No.884/09 Page No.4 of 27 received by the Commissioner of Income-tax on 03.06.2004. Consequently, she placed reliance on clause (iv) of Explanation 1 to Section 158BE to submit that the period between 10.01.2003 and 03.06.2004 has to be excluded in computing the period of limitation for completion of the assessment proceedings. She submitted that if this exclusion is granted, then the revenue would, in the minimum, have at least 60 days time to complete the same after the order under Section 245D(1) is received by the Commissioner. The assessment proceedings were completed on 30.07.2004 and, therefore, in view of the said provisions with regard to exclusion of time, the block assessment had been completed within time. She also submitted with reference to the decision of the Supreme Court in the case of Auto & Metal Engineers and Ors. v. Union of India (UOI) and Ors.: 229 ITR 399 (SC) that the notice under Section 143(2) was an integral part of the assessment itself and once there is exclusion of time for making an assessment order and completing the assessment, the exclusion of time would also be applicable to the issuance of a notice under Section 143(2). 5. That learned counsel for the appellant / assessee, in rejoinder, drew our attention to the Supreme Court decision in the case of CIT v. Hindustan Bulk Carriers: 259 ITR 449 (SC), wherein the Supreme Court held that the mere filing of an application by the assessee before the Settlement Commission would have no adverse effect on the proceedings of assessment or recovery pending or initiated against the assessee under the regular procedure for assessment and recovery of dues under the said Act. Relying upon these observations of the Supreme Court, the learned counsel ITA No.884/09 Page No.5 of 27 for the appellant / assessee submitted that the filing of the settlement application on 10.01.2003 did not mean that there was any bar imposed on the Assessing Officer to proceed with the assessment proceedings. It was not a case akin to the grant of a stay by a court of law which was the case before the Supreme Court in Auto & Metal Engineers (supra). He further submitted that the decision of the Supreme Court in Auto & Metal Engineers (supra) was distinguishable also for the reason that it related to the assessment years 1967-68, 1968-69 and 1969-70 when the proviso to Section 143(2) was not in the statute book. It is only in the proviso to the said sub-section (2) that the period of limitation for issuance of notice under Section 143(2) has been prescribed. The amendment to Section 143(2) would make a world of a difference, according to the learned counsel for the appellant / assessee, inasmuch as the specific time period for the stage of Section 143(2) does not get subsumed in the time period for the completion of the assessment proceedings. The learned counsel for the appellant / assessee also placed reliance on a decision of this court in the case of Deen Dayal Didwania v. Union of India and others: 160 ITR 12(Del) to submit that the filing of an application before the Settlement Commission does not amount to an automatic stay of the assessment proceedings during the period when the Settlement Commission is deciding whether or not to proceed with the settlement application. He also placed reliance on a decision of the Supreme Court in the case of CIT v. Damani Brothers: 259 ITR 475, wherein a similar view has been expressed that the income-tax ITA No.884/09 Page No.6 of 27 authorities are free to proceed in the prescribed manner till the Settlement Commission decides to proceed with the settlement application. 6. Relying on the aforesaid decision, the learned counsel appearing on behalf of the appellant / assessee, submitted that, first of all, the decision in Auto & Metal Engineers (supra), which was cited by the learned counsel for the revenue is distinguishable and would not be applicable to the facts and circumstances of the present case. Secondly, he submitted that since there was no bar to the Assessing Officer proceeding with the assessment proceedings and which meant that he could have issued the notice under Section 143(2), the fact that he did not issue the notice under Section 143(2) within the time prescribed would be fatal to the assessment proceedings. He also submitted that the exclusion of time, which is referred to in Section 158 BE [Explanation 1, clause (iv)] applies only to the passing of an order under Section 158 BC and does not extend to the issuance of a notice under Section 143(2). 7. Let us examine the statutory provisions. Section 143(2), as applicable in the present case, to the extent relevant, is as under:- ―143. Assessment.–(1) xxxx xxxx xxxx xxxx (2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall,– (i) xxxx xxxx xxxx xxxx (ii) notwithstanding anything contained in clause (i), if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid ITA No.884/09 Page No.7 of 27 the 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, any evidence on which the assessee may rely in support of the return: Provided that no notice under clause (ii) shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished.‖ (emphasis supplied) 8. Section 153 of the said Act prescribes the time limit for completion of assessments and re-assessments. Explanation 1 at the end of the said provision is relevant for our purposes and, to the extent relevant for this case, reads as under:- “153. Time limit for completion of assessments and reassessments–. xxxx xxxx xxxx xxxx xxxx Explanation 1.—In computing the period of limitation for the purposes of this section— (i) the time taken in reopening the whole or any part of the proceeding or in giving an opportunity to the assessee to be re-heard under the proviso to section 129, or (ii) the period during which the assessment proceeding is stayed by an order or injunction of any court, or xxxxx xxxxx xxxxx xxxxx (v) in a case where an application made before the Income-tax Settlement Commission under section 245C is rejected by it or is not allowed to be proceeded with by it, the period commencing from the date on which such application is made and ending with the date on which the order under sub-section (1) of section 245D is received by the Commissioner under sub-section (2) of that section, xxxxx xxxxx xxxxx xxxxx shall be excluded: Provided that where immediately after the exclusion of the aforesaid time or period, the period of ITA No.884/09 Page No.8 of 27 limitation referred to in sub-sections (1), [(1A), (1B),] [(2), (2A) and (4)] available to the Assessing Officer for making an order of assessment, reassessment or recomputation, as the case may be, is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.‖ The above provisions fall in Chapter XIV which deals with the procedure for assessment in the regular course. Chapter XIV-B provides the special procedure for assessment in search cases. Section 158-BC, which falls within this Chapter, lays down the procedure for block assessment. Section 158BC(b) requires that the Assessing Officer shall proceed to:- ―… determine the undisclosed income of the block period in the manner laid down in Section 158BB 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;‖ 9. Section 158BC(c) stipulates as under:- “158BC. Procedure for block assessment.– xxxxxx xxxxxx xxxxxx xxxxxx (c) the Assessing Officer, on determination of the undisclosed income of the block period in accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment; xxxxxx xxxxxx xxxxxx xxxxxx‖ The time limit for completion of block assessment is prescribed in Section 158BE. Sub-section (1) of the said Section 158BE and Explanation 1 thereto is relevant for our purposes. They are set out hereinbelow:- “158BE. Time limit for completion of block assessment.– (1) The order under section 158BC shall be passed— (a) within one year from the end of the month in which the last of the authorisations for search under section 132 or for requisition under section 132A, as the case may be, was executed in cases where a ITA No.884/09 Page No.9 of 27 search is initiated or books of account or other documents or any assets are requisitioned after the 30th day of June, 1995, but before the 1st day of January, 1997; (b) within two years from the end of the month in which the last of the authorisations for search under section 132 or for requisition under section 132A, as the case may be, was executed in cases where a search is initiated or books of account or other documents or any assets are requisitioned on or after the 1st day of January, 1997. xxxx xxxx xxxx xxxx Explanation 1. — In computing the period of limitation for the purposes of this section,— (i) the period during which the assessment proceeding is stayed by an order or injunction of any court; or (ii) the period commencing from the day on which the Assessing Officer directs the assessee to get his accounts audited under sub-section (2A) of section 142 and ending on the day on which the assessee is required to furnish a report of such audit under that sub-section; or (iii) the time taken in reopening the whole or any part of the proceeding or giving an opportunity to the assessee to be re-heard under the proviso to section 129; or (iv) in a case where an application made before the Settlement Commission under section 245C is rejected by it or is not allowed to be proceeded with by it, the period commencing on the date on which such application is made and ending with the date on which the order under sub-section (1) of section 245D is received by the Commissioner under sub-section (2) of that section, shall be excluded: xxxx xxxx xxxx xxxx‖ 10. Now we come to the provisions of Chapter XIX-A, which deals with the settlement of cases and comprises of Sections 245A to 245L. Section 245A, as applicable to the period of this appeal, gives the ITA No.884/09 Page No.10 of 27 definitions of various words and expressions used in Chapter XIX-A. Section 245A(b) defines ―case‖ as under:- ―245A. Definitions. – In this Chapter, unless the context otherwise requires,— (a) xxxxx xxxxx xxxxx xxxxx (b) ―case‖ means any proceeding under this Act for the assessment or reassessment of any person in respect of any year or years, or by way of appeal or revision in connection with such assessment or reassessment, which may be pending before an income-tax authority on the date on which an application under sub-section (1) of section 245C is made. xxxxx xxxxx xxxxx xxxxx‖ 11. Section 245C provides that an assessee may, at any stage of a ―case‖ relating to him, make an application in such form and in such manner as may be prescribed, and containing a full and true disclosure of his income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the additional amount of income-tax payable on such income and such other particulars, as may be prescribed, to the Settlement Commission to have the case settled and any such application shall be disposed of in the manner provided in the said Act. The procedure to be followed on receipt of an application under Section 245C is given in Section 245D, which, to the extent relevant and as applicable in the present case, is set out hereinbelow:- ―245D. Procedure on receipt of an application under section 245C. – (1) On receipt of an application under section 245C, the Settlement Commission shall call for a report from the Commissioner and on the basis of the materials contained in such report and having regard to the nature and circumstances of the case or the complexity of the investigation involved therein, the Settlement Commission, shall, where it is possible, by order, reject the application or allow the application to be proceeded with ITA No.884/09 Page No.11 of 27 within a period of one year from the end of the month in which such application was made under section 245C: Provided that an application shall not be rejected under this sub-section unless an opportunity has been given to the applicant of being heard: Provided further that the Commissioner shall furnish the report within a period of forty-five days of the receipt of communication from the Settlement Commission in case of all applications made under section 245C on or after the 1st day of July, 1995 and if the Commissioner fails to furnish the report within the said period, the Settlement Commission may make the order without such report. xxxxx xxxxx xxxxx xxxxx (2) A copy of every order under sub-section (1) shall be sent to the applicant and to the Commissioner.‖ 12. Section 245F makes provision for the powers and procedure of the Settlement Commission. Sub-sections (1) and (2) are relevant and they read as under:- ―245F. Powers and procedure of Settlement Commission.–(1) In addition to the powers conferred on the Settlement Commission under this Chapter, it shall have all the powers which are vested in an income-tax authority under this Act. (2) Where an application made under section 245C has been allowed to be proceeded with under section 245D, the Settlement Commission shall, until an order is passed under sub-section (4) of section 245D, have, subject to the provisions of sub-section (3) of that section, exclusive jurisdiction to exercise the powers and perform the functions of an income-tax authority under this Act in relation to the case: xxxxx xxxxx xxxxx xxxxx xxxxx‖ 13. We may also point out that in case of applications made under Section 245C on or after 01.06.2007, two provisos have been made ITA No.884/09 Page No.12 of 27 applicable by virtue of the Finance Act, 2007 with effect from 01.06.2007. The two provisos to sub-section (2) read as under:- “Provided that where an application has been made under section 245C on or after the 1st day of June, 2007, the Settlement Commission shall have such exclusive jurisdiction from the date on which the application was made: Provided further that where— (i) an application made on or after the 1st day of June, 2007, is rejected under sub-section (1) of section 245D; or (ii) an application is not allowed to be proceeded with under sub-section (2A) of section 245D, or, as the case may be, is declared invalid under sub-section (2C) of that section; or (iii) an application is not allowed to be further proceeded with under sub-section (2D) of section 245D, the Settlement Commission, in respect of such application shall have such exclusive jurisdiction upto the date on which the application is rejected, or, not allowed to be proceeded with, or, declared invalid, or, not allowed to be further proceeded with, as the case may be.‖ 14. An analysis of the above provisions indicates that in the course of regular assessments under Chapter XIV of the said Act, if the Assessing Officer considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed the assessee‘s loss or has not underpaid the tax in any manner, serve on the assessee a notice under Section 143(2) of the said Act requiring the assessee, on a date to be specified therein, either to attend his office or to produce or cause to be produced any evidence on which the assessee may rely in support of the return. Importantly, the proviso to Section 143(2) stipulates that no such notice could be served on the assessee after the expiry of twelve months ITA No.884/09 Page No.13 of 27 from the end of the month in which the return is furnished. Thus, a specific time period has been prescribed under the proviso to Section 143(2) for serving a notice under the said provision on the assessee. If such a notice is not served within the period of limitation prescribed, any assessment order passed in pursuance thereof, would be bad in law and would be liable to be set aside. This is a well-settled position in law. Apart from there being a specific limitation period prescribed for the issuance of a notice under Section 143(2), there is also a time limit for completion of assessments in general. And, that has been prescribed, as aforesaid, by Section 153 of the said Act. We have already referred to Explanation 1 to Section 153 which deals with certain periods of time, which are to be excluded while computing the period of limitation, inter alia, for making of an assessment order under Section 143. Clause (ii) of Explanation 1 to Section 153 stipulates that the period during which the ―assessment proceeding‖ is stayed by an order or injunction of any court, shall be excluded in computing the period of limitation for the making of, inter alia, an assessment order under Section 143. Similarly, clause (v) of Explanation 1 to Section 153 provides that the period commencing from the date on which an application is made under Section 245C and ending with the date on which an order under sub-section (1) of Section 245D is received by the Commissioner under sub-section (2) of that section, shall be excluded in computing the period of limitation for, inter alia, making an order of assessment under Section 143 of the said Act. This clause, will obviously apply in a case where an application is made before the Income-tax ITA No.884/09 Page No.14 of 27 Settlement Commission under Section 245C and in the event such an application is rejected by the said Settlement Commission or is not allowed to be proceeded with by it. It is pertinent to note herein that the exclusion of time consumed before the Settlement Commission is in respect of computing the period of limitation, for making an order of assessment under Section 143. It does not pertain to exclusion of time for the purposes of serving a notice on the assessee under Section 143(2) of the said Act. It is also important to keep in mind the expression ―assessment proceeding‖ in clause (2) to Explanation 1 of Section 153. We shall deal with this aspect while discussing the case law cited by the parties. 15. It is also clear from a plain reading of the provisions pertaining to the procedure for assessment in search cases to the extent set out above that the provisions of Section 143(2) are to apply to block assessment proceedings under Section 158 BC by virtue of Section 158 BC(b). At this juncture itself, it would