Failure to Issue Income Tax Notice u/s 143(2) Fatal and not Curable u/s 292B: ITAT [Read Order]

The Bangalore bench of Income Tax Appellate Tribunal ( ITAT ) ruled in favour of the assessee, observing that the assessment order is invalid due to AO’s failure to issue a mandatory Income tax notice under Section 143(2), therefore, this is a procedural lapse which is not rectifiable under Section 292B of the Act.

Syeda Mariam, the appellant-assessee, filed her return of income on July 28, 2014. Following this, a survey under Section 133A was conducted at M/s. Intact Developers P. Ltd., where the assessee is a Director. The survey revealed that the assessee had lent unsecured loans to the company, and she provided confirmation letters from the company to support these loans. The assessee claimed that the source of these loans was capital gains earned in the assessment years 2013-14 and 2014-15.

The Assessing Officer ( AO ) reviewed the details provided and suspected income escapement, leading to the issuance of a notice under Section 148 on February 6, 2019, asking the assessee to file her return of income. The assessee did not respond initially, prompting a reminder notice on March 13, 2019, and a show cause notice under Section 144 read with Section 147 on May 3, 2019. The assessee responded on May 20, 2019, requesting that the return filed under Section 139(1) be considered as the return in response to the Section 148 notice. She also addressed other issues in her reply.

The AO did not accept this request, citing the Supreme Court's ruling in GKN Driveshaft v. ITO [2022] 259 ITR 19 (SC), which supports treating the return filed in response to a Section 148 notice separately. Additionally, the AO did not accept the assessee's explanations on other issues and included interest income in the assessment.

Consequently, the AO completed the assessment under Section 144 read with Section 147, disallowing the claim for capital gains under Section 54B of the act, and adding the interest credited to the capital gain account to the income declared in the return filed on June 28, 2014.

Dissatisfied with the Income Tax AO’s order, the assessee filed an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the AO conducted the assessment arbitrarily. The CIT(A) after considering all the aspects concluded that the assessment was conducted on solid legal and factual grounds and dismissed the appeal of the assessee. The assessee filed an appeal before the tribunal against the order passed by the CIT(A).

The tribunal on considering the rival contentions and material on record stated that the primary contention raised by the counsel of the assessee was that the assessment was invalid due to the lack of a notice under Section 143(2) issued by the AO prior to concluding the assessment.

The tribunal observed that the assessee's return was filed on June 28, 2014, and the AO did not issue a notice under Section 143(2) before the assessment. The AO issued a notice under Section 148 to disallow the capital gains claim under Section 54B but did not accept the assessee's request to treat the original return as a response to this notice.

The tribunal noted that the AO then disallowed the Section 54B deduction without issuing a Section 143(2) notice. The tribunal concluded that a Section 143(2) income tax notice was mandatory before making any disallowance, whether under Section 143 or Section 144.

The tribunal also stated that the reliance on the Supreme Court case GKN Driveshaft was deemed inappropriate as it involved different facts and could not justify rejecting the assessee's request.

The tribunal noted that the AO considered the assessee's return when computing income and tax but failed to issue a notice under Section 143(2) before making the assessment under Section 144 read with Section 147.

The tribunal contended that the omission is a serious procedural lapse and is not rectifiable under Section 292B of the income tax law, therefore, the legal issue raised by the assessee regarding the lack of a Section 143(2) notice is valid and well-founded.

The tribunal supported its conclusion by referencing the Supreme Court judgment in CIT (Asst) vs. Hotel Blue Moon (2010) 321 ITR 362 (SC), it reads as:

  “ We conclude even for the purpose of Chapter XIV-B of the Act, for the determination of the undisclosed income for block period under the provisions of section 158BC, the provision of section 142 and sub sections (2) and (3) of section 143 are applicable and no assessment could be made without issuing notice under section 143(2) of the Act ”

The two-member bench of Soundararajan K ( Judicial Member ) and Waseem Ahmed ( Accountant Member ) concluded that the assessment order is illegal and must be set aside due to the lack of a Section 143(2) notice after considering the assessee's return.

The income tax appellate tribunal accepted the legal issue and determined that the assessment order dated August 30, 2019, and the CIT(A) order dated December 28, 2023, were not sustainable. Consequently, the tribunal allowed the assessee’s appeal.

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