Tax Scrutiny Notice | Kerala High Court Validates Procedure

The Kerala High Court has held that since the issuance of scrutiny notice under Section 143(2)(ii) of the Income Tax Act is only a procedural matter, the law that came into force on 1.4.2008 would apply to the petitioner’s case, especially since the time for issuance of notice even under the unamended provision had not expired on 1.4.2008.

The bench of Justice Gopinath P. has observed that assessment order proceeds on the basis that after filing the original return of income on 18.5.2007, the petitioner filed a revised return of income on 11.8.2008. Therefore, the time limit for issuance of notice under the unamended provision of the proviso to Section 143(2)(ii) would be 12 months from 31.8.2008 and admittedly, notice was issued on 8.8.2008. The order indicates that there were some disputes as to whether the return filed on 11.8.2008 was in respect of assessment year 2007-08 or the assessment year 2008-09 there is no material produced to suggest that the return filed on 11.8.2008 pertains to the year 2008-09 and not to the year 2007-08.

The petitioner is an assessee under the Income Tax Act, 1961. For the assessment year 2007-08, the petitioner filed his return of income on 18.5.2007. The petitioner was served with notice under Section 143(2)(ii) on 22.8.2008. The assessing authority proceeded to issue Ext.P3 order of assessment under sub-section (3) of Section 143, on 30.12.2009, assessing the total income of the petitioner to be Rs.15,28,500and proceeded to demand an amount of Rs.6,09,632 with surcharge, education cess and interest under Section 234 up to the date of the order.

The petitioner approached the Commissioner by filing revision petition taking up a contention that the notice issued to the petitioner under Section 143(2)(ii) was beyond the time prescribed in the first proviso to Section 143(2)(ii) which provided that no notice as contemplated by that provision shall be served on the assessee after the expiry of 12 months from the end of the month in which the return is furnished. However, by order, the revision petition filed by the petitioner was dismissed by the Commissioner.

The petitioner contended that notice under Section 143(2)(ii) was beyond the time prescribed to the first proviso of that provision was rejected by the Commissioner on the basis of the amendment to the proviso by the Finance Act, 2008 with effect from 1.4.2008. The proceedings culminating in order of the assessing authority and order of the revisional authority for the assessment year 2007-08 are illegal and unsustainable in law on the ground that notice under Section 143(2)(ii) was issued beyond the time prescribed in the first proviso to Section 143(2)(ii) of the 1961 Act as it stood prior to its amendment with effect from 1.4.2008 by the Finance Act, 2008.

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The petitioner contended that the assessment for a particular assessment year has to be completed with reference to the law as it stood on the 1st of April of the relevant assessment year. The proviso to Section 143(2)(ii) as it stood on 1.4.2007 contemplated that no notice under Section 143(2)(ii) could be issued after the expiry of 12 months from the end of the month in which the return is furnished. The return for the assessment year 2007-08 was furnished by the petitioner on 18.5.2007 and the last date for issuing a notice under Section 143(2)(ii) would therefore be 17.5.2008. The notice was issued only on 8.8.2008 and therefore, the entire proceedings following notice are clearly without jurisdiction.

The department contended that the proviso to Section 143(2)(ii) would clearly apply as admittedly on the date of coming into force of the amended proviso, the time for issuance of notice under the unamended proviso had not yet expired.

The proviso to Section 143(2)(ii) prior to its amendment with effect from 1.4.2008 reads as “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.”

If the time limit applicable in this case is as per the provisions of the unamended proviso to Section 143(2)(ii) referred to above, the time limit for issuance of notice would have expired by 31.5.2008 (12 months from the end of the month in which the return was filed) taking into consideration the date of filing of the original return.

By the Finance Act, 2008 with effect from 1.4.2008, the proviso to Section 143(2)(ii) was amended. The amended provision reads as “Provided that no notice under clause (ii) shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.”

The court while dismissing the petition held that there is no material produced to suggest that the return filed on 11.8.2008 pertains to the year 2008-09 and not to the year 2007-08.