The Hindu Business Line : Taxpayers' nightmare

When a return of income or loss is filed, the same has to be processed under Section 143(1)(a) of the Income-Tax Act, 1961. If the assessing officer considers that the case requires scrutiny, he has to issue notice under Section 143(2) within 12 months. If such notice is not issued, the return becomes final and nothing can be done about escapement of income.

The Punjab and Haryana High Court held in Vipan Khanna vs CIT (255 ITR 220) that where no notice under Section 143(2) is served on the assessee within the stipulated period and the return as such has become final, the assessing officer could not assess or reassess the escaped income and he cannot also assess any other income chargeable to tax which has escaped assessment and which comes to his knowledge subsequently.

This view of the court has been followed by the Madras High Court in CIT vs M. Chellappan and another (281 ITR 444). The court ruled that when no notice under Section 143(2) was served within the stipulated period of 12 months, the proceedings under Section 143 came to an end and the matter attained finality. This was also the view of the Special Bench of the Tribunal in the Raj Kumar Chawla vs ITO (94 ITD 1, Delhi) case. The proviso to Section 143(2) mandated service of notice within 12 months from the end of the month in which return is filed. This applies even to returns filed pursuant to a notice under Section 148.

Going back in time

The Government cannot ignore the legal situation created by the rulings of the judicial authorities cited above. The Finance Act, 2006 amends Section 148 of the I-T Act and revalidated notices issued beyond the period of 12 months under Section 143(2). The issue of a valid notice is fundamental to the reopening proceedings.

A proviso is inserted in Section 148(1) for this purpose. It revalidates notices issued under Section 143(2) and such revalidation is made retrospective during the period October 1, 1991, to September 30, 2005, wherever return has been filed in this period after the expiry of 12 months specified in Section 143(2) but before the expiry of the time limit for making the assessment or reassessment. The amendment takes effect retrospectively from 1st October 1991.

It was the Direct Tax Laws Amendment Act, 1987 that recast both Sections 147 and 148 of the I-T Act and the new Sections took effect from April 1, 1989. Section 143(2) was recast by the Finance (No.2) Act, 1991 with effect from October 1, 1991. By revalidating time barred notices, the Finance Act legitimises the action of the Department which has been rendered illegal by judicial authorities.

Finality, when?

Rights were conferred on taxpayers to ensure that there is a finality to income tax proceedings and no harm can be caused by arbitrary action of the assessing officer through recourse to action beyond reasonable time limits. The assessments for the periods from April 1, 1990, for various assessment years had already got time barred by limitation under Section 153. Is it fair to revalidate time-barred action by retrospective amendment?

A similar action is also contemplated in respect of time limit for issue of notice under Section 142. This section provides that a notice calling for the filing of the return can be issued at any time after the due date for filing the return of income. In the Motorola Inc vs DCIT (95 ITD 269 Delhi) case, a Special Bench of the Tribunal has observed that a notice under Section 142 has to be issued after the end of the period under Section 139(1), that is, the due date of filing of the return but before the end of the relevant assessment year.

To get over this ruling of the special Bench, Clause 35 of the Finance Act, 2006 amends Section 142 and permits the assessing officer to serve a notice under Section 142(1) even after the end of the assessment year calling upon the assessee to furnish his return of income. Here again, the amendment is made with retrospective effect from 1-4-1990.

The sanctity of proceedings under Section 142, 143, 147 & 148 is thus violated and vitiated. No reasons have been given for the retrospective amendments in these Sections. It is not known why even Special Bench orders of the Tribunal are taken up for purposes of amendment of the Income Tax Act.

The normal custom hitherto has been to await the final ruling of the SC. Revalidation of proceedings for 15 years can be thought of only by the IT department.Truly, it has been said that retrospective amendment is the bureaucrats' dream and the taxpayer's nightmare.

(The author is a former Chief Commissioner of Income-Tax.)

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