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CHAPTER Five

An Evaluation of Assessment
Procedure under the
Income-tax Act, 1961
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Chapter Five
An Evaluation of Assessment Procedure
UNDER THE INCOME-TAX ACT, 1961

5.1 Introduction

Assessment of income is the core administrative

activity under the Income-tax Act, 1961 (hereinafter

‘the Act’). The present Chapter, being the core

Chapter of this analytical exercise, evaluates the

procedure of assessment of income under the Act.

5.2 Return of Income

Section 139 reads:


139. Return of income. -
(1) Every person, -
(a) being a company; or
(b) being a person other than a company, ifhis
total income or the total income ofany other person in
respect ofwhich is assessable under this Act during the
previous year exceeded the maximum amount which is
not chargeable to income tax;
shall, on or before the due date, furnish a return
ofhis income or the income ofsuch otherperson during
the previous year, in the prescribed form and verified
in the prescribed manner and settingforth such other
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particulars as may be prescribed;


Provided that a person referred to in clause (b), who is not required to
furnish a return under this sub-section and residing in such area as may be
specified by the Board in this behalfby notification in the Official Gazette, and
who at any time during the previous year fulfills any one of the following
conditions, namely,:-
(i) is in occupation of an immovable property exceeding a specified floor
area, whether by way of ownership, tenancy or otherwise, as may be
specified by the Board in this behalf; or
(ii) is the owner or the lessee of a motor vehicle other than a two-wheeled
motor vehicle, whether having any detachable side car having extra wheel
attached to such two-wheeled motor vehicle or not; or
(in) is a subscriber to a telephone; or
(iv) has incurred expenditure for himselfor any other person on travel to any
foreign country; or
(v) is the holder of a credit card, not being cm ‘add-on card, issued by any

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bank or institution; or
i

(vi) is a member ofa club where entrance fee charged is twentyfive thousand
rupees of more,
shall furnish a return of his income during the previous year, on or before the
due date in the prescribedform and verified in the prescribed manner and setting
forth such other particulars as may be prescribed;
Providedfurther that the Central Government may, by notification in the
Official Gazette, specify the class or classes ofpersons to whom the provisions
of the first proviso shall not apply;
Provided also that every company shallfurnish on or before the due date
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the return in respect of its income or loss in every previous year.


Explanation-1. - For the purposes of this sub-section, the expression "motor
vehicle shall have the meaning assigned to it in clause (28) ofSection 2 ofthe
"

Motor Vehicles Act, 1988.


Explanation-2, - In this sub-section, "due date” means, -
(a) where the assessee is -
ISO

(i) company; or
(ii) a person (other than a company) whose accounts are required to be
audited under this Act or under any other lawfor the time being in
force; or
(iii) a workingpartner ofafirm whose accounts are required to be audited
wider this Act or under any other law for the time being in fame,
the 31st day of October ofthe assessment year;
(b) in the case ofa person other than a company, referred to in thefirstproviso
to this sub-section, the 31st day of October of the assessment year;
(c) in the case of any other assessee, the 31st day ofJuly of the assessment
year;
Explanation-3. - For the purposes ofthis sub-section, the expression “travel to
anyforeign country " does not include travel to the neighbouring countries or to
such place ofpilgrimages the Board may specify in this behalfby notification in
the Official Gazette.
(2) (Omitted).
(3) If any person, who has sustained a loss in any previous year under the head
“Profits and gains ofbusiness ofprofession ” or under the head “Capital gains ”
and claims that the loss or any part thereof should be carried forward under
sub-section (1) ofSection 72, or sub-section (2) ofSection 73, or sub-section (1)
or sub-section (3) ofSection 74 or sub-section (3) ofSection-74, he mayfurnish,
within the time allowed under sub-section (1) a return of loss in the prescribed
form and verified in the prescribed manner and containing such otherparticulars
as may be prescribed, and all the provisions of this Act shall apply as if it were
; a return under sub-section (1).
(4)' Any person who has notfurnished a return within the time allowed to him under
1
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sub-section (1), or within the time allowed under a notice issued under sub-
/ section' (1) ofSection 142, mayfurnish the return for any previous year at any
time before the expiry of one yearfrom the end of the relevant assessment year
or before the completion ofthe assessment, whichever is earlier;
Provided that where the return relates to a previous year relevant to the
assessment year commencing on the 1st Day of April, 1988, or any earlier
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assessment year, the reference to one year aforesaid shall be construed as a


reference to two years from the end of the relevant assessment year.
(4-A) Every person in receipt of income derived from property held under trust or
other legal obligation wholly for charitable or religious purposes or in part
onlyfor such purposes, or of income being voluntary contributions referred to
in sub-clause (ii-a) of clause (24) of Section 2, shall, if the total income in
respect ofwhich he is assessable as a representative assessee (the total income
for this purpose being computed under this Act without giving effect to the
provisions of Sections 11 and 12) exceeds the maximum amount which is not
chargeable to income tax, furnish a return ofsuch income of the previous year
in the prescribed form and verified in the prescribed manner and settingforth
such other particulars as may be prescribed and all the provisions of this Act
shall, so far as may be, apply as it if were a return required to be furnished
under sub-section (1).
(4-B) The chief executive officer (whether such chief executive officer is known as
Secretary or by any other designation) ofevery political party shall, ifthe total
income in respect ofwhich the political party is assessable (the total income for
this purpose being computed under this Act without giving effect to the provisions
ofSections 11 and 12) exceeds the maximum amount which is not chargeable to
income tax, furnish a return ofsuch income ofthe previous year in the prescribed
form and verified in the prescribed manner and settingforth such otherparticulars
as maybe prescribed and all the provisions of this Act shall, so far as may be,
apply as if it were a return required to be furnished under sub-section (1).
(5) Ifany person, having furnished a return under sub-section (1) or in pursuance
ofa notice issued under sub-section (1) ofSection 142, discovers any omission
1 ■ " or. any wrong statement therein, he may furnish a revised return at any time
' before die expiry of one year from die end of the relevant assessment year or
before the completion ofthe assessment, whichever is earlier;
Provided that where die return relates to the previous year relevant to the
assessment year commencing one the 1st day of April, 1988, or any earlier
assessment year, the reference to one year aforesaid shall be construed as a
reference to two years from the end of the relevant assessment year.
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(6) The prescribedform ofthe returns referred to in sub-sections (1) and (3) of this
Section and in clause (1) ofsub-section (1) ofSection 142 shall, in such cases as
may be prescribed, require the assessee to furnish the particulars of income
exempt from tax, assets of the prescribed nature, value belonging to him, Ins
bank account and credit card held by him, expenditure exceeding the prescribed
limits incurred by him under prescribed heads and such other outgoings as may
be prescribed.
(7) (Omitted).
(8) (a) Where the return under sub-section (1) or sub-section (2) or sub-section
(4)for an assessmentyear isfurnished after the specified date, or is notfurnished,
then (whether or not the Assessing Officer has extended the (kite forfurnishing
the return under sub-section (1) or sub-section (2)), the assessee shall be liable
to pay single interest at fifteen per cent per annum, reckoned from the day
immediately following the specified date to the date of the furnishing of the
return or, where no return has been furnished, the date of completion of the
assessment under Section 144, on the amount of the tax payable on the total
income as determined on regular assessment, as reduced by the advance tax, if
any, paid, and any tax deducted at source.
Provided that the Assessing Officer may, in such cases and under such
circumstances as may be prescribed, reduce or waive the interestpayable by any
assessee under this sub-seetion.
Explanation-1. - For the purpose ofthis subsection, “specified date ”, in relation
to a return for an assessment year, means, -
■ (a) in the case of every assessee whose total income, or the total income of
any person in respect ofwhich he assessable under this Act, includes any
income from business or profession, the date ofthe expiry offour months
from the end ofthe previous year or where there is more than one previous
year, from the end of the previous year which expired last before the
commencement of the assessment year or the 30th day of June of the
assessment, whichever is later;
(b) in the case ofevery other assessee, the 30th day ofJune ofthe assessment
year.
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Explanation-2. - Where, in relation to an assessment year, an assessment is made


for the first time under Section 147, the assessment so made shall be regarded
as a regular assessmentfor the purposes of this sub-section.
(b) Where as a result ofan order under Section 147 or Section 154 or Section
155 or Section 250 or Section 254 or Section 260 or Section 262 or Section 263
or Section 264 or an order of the Settlement Commissioner under sub-section
(4) ofSection 245-D, the amount oftax on which interestwas payable under this
sub-section has been increased or reduced, as the case may be, the interest shall
be increased or reduced accordingly, and -
(i) m a case where the interest is increased, the Assessing Officer shall serve
on the assessee, a notice ofdemand in the prescribedform specifying the
sum payable, and such notice ofdemand shall be deemed to a notice under
Section 156 and the provisions of tlus Act shall apply accordingly;
(ii) in a case where the interest is reduced, the excess interest paid, if any,
shall be refunded.
I
(c) The provisions ofthis sub-section shall apply in respect ofthe assessment
for the assessmentyear commencing on the 1st day ofApril, 1988, or any earlier
assessment year, and references therein to the other provisions of this Act shall
be construed as references to the said provisions as they were applicable to the
relevant assessment year.
(9) . Where the Assessing Officer considers that the return ofincomefurnished by the
assessee is defective, he may intimate the defect to the assessee and give him an
opportunity to rectify the defect within a period offifteen days from the date of
such intimation or within such further period which, on an application made in
'/* this behalf, the Assessing Officer may, in his discretion, allow, and ifthe defect
is not rectified within the saidperiod offifteen days or, as the case may be, the
furtherperiod so allowed, then, notwithstanding anything contained in any other
provision of tins Act, the return shall be treated as an invalid return and the
provisions of this Act shall apply as if the assessee had failed to Jurnish the
return.
Provided that where the assessee rectifies the defect after the expiry ofthe
saidperiod affifteen days or thefurtherperiod allowed, but before the assessment
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is made, the Assessing Officer may condone the delay and treat the return as a
valid return.
Explanation.- For the purposes of this sub-section, a return of income shall be
regarded as defective unless all the following conditions arefulfilled, namely,-
(a) the annexures, statements and columns in the return ofincome relating to
computation ofincome chargeable under each head ofincome, computation
ofgross total income and total income have been dulyfilled in;
(b) the return is accompanied by a statement showing the computation ofthe
tax payable on the basis of the return;
(bb) the return is accompanied by the report ofthe audit referred to in Section
44-AB, or, where the report has been furnished prior to the furnishing of
the return, by a copy ofsuch report together with proofoffurnishing the
report;
(c) the return is accompanied by proof of -
(i) the tax, if any, claimed to have been deducted at source and the
advance tax and tax on self-assessment, ifany, claimed to have been
paid;
f" (ii) the amount ofcompulsory deposit, ifany, claimed to have been made
under the Compulsory Deposit Scheme (Income Tax Payers) Act,
1974 (38 of1974);
(d) where regular boohs ofaccount are maintained by the assessee, the return
is accompanied by copies of-
*(i) manufacturing account, trading account, profit and loss account,
or, as the case may be, income and expenditure account or any other
similar account and balance sheet;
(ii) in the case of a proprietary business or profession, the personal
account ofthe proprietor, in the case ofafirm, association ofpersons
or body of individuals, personal accounts of the partners or
members; and in the case of a partner or member of a firm,
association ofpersons or body of individuals, also his personal
account in the firm, association ofpersons or body ofindividuals;
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(e) where the accounts of the assessee have been audited, the return is
accompanied by copies ofdie auditedprofit and loss account and balance
sheet and the auditor Is report and, where an audit ofcost accounts of the
assessee has been conducted under Section 233-B of the Companies Act,
1956 (1 of1956), also the report under that section;
(f) where regular books of account are not maintained by the assessee, the
return is accompanied by a statement indicating the amounts of turnover
or, as the case may be, gross receipts, gross profit, expenses and netprofit
of the business or profession and the basis on which such amounts have
been computed, and also disclosing the amounts of total sundry debtors,
sundry creditors, stock-in-trade and cash balance as at the end of the
previous year.

(10) (Omitted).

An interpretation on the above provisions of Section 139 is being offered

as under:

(1) Voluntary Return of Income (Sec. 139(1),(4A),(4B)

The following persons are under statutory obligation to file return of income by

virtue of Section 139(1),(4A) and (4B).

Sr. Minimum Income for


No. Taxpayer filing return of income
1. Company (Sec. 139(1) Any income or loss
2. Person, other than a Company Income in excess of the amount not
chargeable to tax (i.e. the amount
of exempted slab).
3. A person receiving income from If the income (without giving
property held under a trust for exemption under Secs.ll&12)
charitable/religious purposes exceeds the maximum amount
not chargeable to tax.
4. Chief Executive Officer of Income (without giving exemption
a Political Party under Sec. 13 A) exceeds the
maximum amount not chargeable
to tax.
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> Resident or non-resident: Section 139(1) applies to all persons whether

they are resident or non-resident.1

> Political Parties : Political parties are under a statutory obligation to file

return of income in respect of each assessment year in accordance with the

provisions of the Income-tax At and the total income for this purpose has to be

computed without giving effect to provisions of Section 13A.2

> Liquidator : Under the Companies Act, a liquidator is not exempt from

making an income-tax return on business managed by him for the beneficial

winding up of the company.3

> Charitable Trust: Submission of return by a charitable trust is essential if

its income is exempt.4 If the total income of a charitable trust (without claiming

exemption under Sections 11, 12 and 13 A) exceeds the maximum amount not

chargeable to tax, then submission of return by the trust is essential.

> Obligatory filing of return when income is lower than exemption limit

(Proviso to Sec. 139(1)) : A person (other than a company, political party or

charitable trust) shall submit his return of income in Form 2C if he fulfills my one

of the following conditions at any time during the previous year:

(a) ownership/lease of a motor vehicle; or

(b) occupation of any category/ies of immovable property as may be specified


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rm ’

by the CBDT by notification, whether by way of ownership or tenancy or

otherwise;
1. Pannalal Nandlal Bhandari v. CIT (1961) 41ITR 76 (SC).
2. Common Cause (A Registered Society) v. Union of India (1996), 85 Taxman
600/222 ITR 260 (SC)
3. CIT v. Official Liquidator of the Agra, Spinning and Weaving Mills Co.Ltd.
(1934) 2 HR 79 (All.).
4. Lala Gopi Mai Kuthiala Trust v. ITO (1962) 46 ITR 436 (Punj.)
157

(c) incurred expenditure on himself or any other person on travel to a foreign

country (excluding Bangladesh, Bhutan, Maldives, Nepal, Pakistan or Sri

Lanka and to Saudi Arabia for Haj or to China on pilgrimage to Kailash

Mansarover);

(d) subscription of a telephone;

(e) holder of a credit card (excluding ‘add-on’ card and Kisan Credit Card);

(f) member of a club where entrance fee is Rs.25,000 or more.

The above provisions shall not apply to persons as are notified by die Government,

to the non-residents; as also an individual who is atleast 65 years of age and not

engaged in any business/profession is not subject to condition (b) or (d).

> Return of Income : Return of income is required to be furnished in the

forms prescribed by Rule-12 and should be verified in the manner indicated therein.

Rule-12 prescribes the following forms for different categories of the assessees.

Categories of Assessees Form No.


1. For companies other than those claiming exemption
under Section 11. 1
2. For assessees (other than companies and those claimitig
exemption under Section 11) whose total income includes
income or loss under the head ‘Profits and gains of 2 or
business or profession’ 2D (Saral)
3. For a resident individual or Hindu undivided family, if his
or its total income (a) does not exceed Rs.2.0 lakh;
(b) does not include income chaigeable under the head
‘Profits and gains of business or profession’; and
(c) does not include any brought forward or carried
forward loss or allowance except under the head 2A or 3 or
‘Income from house property’. 2D (Saral)
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4. For a person who is required to file a return under


provision to Sec. 139(1) 2C
5. For assessees (other than companies and those deriving
income from property held for charitable or religious
purposes claiming exemption under Sec. 11) whose
total income does not include income or loss under the 3 or
head ‘Profits and gains of business or profession’. 2D (Saral)
6. For assessees including companies claiming exemption
underSec.il 3A

> Timeforfiling of return : The due dates for filing the returns by different

categories of the assessees are given below:


Different Situations Due Dates
1. Where the assessee is a company October 31
2. Where the assessee is a person other than company
(a) where accounts of the assessee are required to
be audited under any law October 31
(b) where the assessee is a ‘working partner’ in a
firm whose accounts are required to be audited
under any law October 31
;:' (c) where the assessee is covered by the first
proviso to sec. 139(1) October 31
(d) Inanyother case July 31.

' •*

> Return ofLoss: A return of loss can also be filed on the above dates. The

following losses cannot be carried forward ifthe return ofloss is not submitted in

time: '

(a) business loss (speculative or otherwise),

(b) capital loss; and

(c) loss from the activity of owning and maintaining race horses.
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> Extension of time: Undear the amended provisions applicable from 1 st April

1989, the Assessing Officers do not have any power to extend the date of filing

the return and dates mentioned above.

> Belated returns : If the return of income is not furnished within the time

allowed under Sec. 139(1) or within the time allowed under notice issued under

Sec. 142(1), the person may, before the assessment is made, furnish the return of

any previous year at any time before the end of one year from the end of relevant

assessment year.

> Revised return : If the following conditions are satisfied, a person may

furnish a revised return of income under Sec. 139(5).

(a) A return can be revised only if it is furnished under Sec. 139(1) or in

pursuance of a notice under Sec. 142(1). But the return filed under

Sec. 139(4) cannot be revised.

(b) A revised return can be filed under Sec. 139(5) only ifthe assessee discovers

any omission or wrong statement in return originally filed. While ‘omission’

denotes an unintentional act or neglect to perform what the law requires,

‘wrong statement’ should include within its scope of statement which is


F ' S.

not false ip the knowledge of the person making it. The word ‘discovers’

takes within its ambit that which was hidden, concealed or unknown.

Therefore, the benefit of filing a revised return cannot be claimed by a

person who has initially filed a return, knowing it to be false.5 In other

words, Sec: 139(5) is not applicable in cases of concealment or false

5. CIT v. Radhey Shyam (1980) 123 ITR 125 (All.);


CIT v. Badridas Ramraj Shop (1939) ITR 613 (Nag.)
160

statements.6 Omission or wrong statement in the original return must be

due to a bona fide inadvertence or mistake on the part ofthe assessee.7 But

the omission or wrong statement, referred to above must have a bearing on

the assessment of the assessee itself and it is not that every incorrect

statement made would enable the assessee to file a revised return.8

(c) Also, a revised return under Sec. 139(5) can be filed at. any time before the

expiry of one year from the end of the relevant assessment year or before

the completion of the assessment, whichever is earlier.

Also, the following broad propositions should be kept in view while

understanding the implications of Sec. 139(5).

> Auditor’s report: Where the assessee-trust which was required to file the

auditor’s report with its return did not file the same with the original return, the

assessee was entitled to file the same with the revised return.9

> Substitution of original return : There is a distinction between a revised

return and a correction of the return. If the assessee files some application for

correcting a return already filed or making amendments therein, it would not

mean that he has filed a revised return. It will still retain the character of an

original return, but once a revised return is filed, the original return must be

taken to have been withdrawn and to have been substituted by a fresh return for
{ (J
the purpose of assessment.10 If the assessee files a revised return, assessment

based on such revised return would be valid.*11


........... ■ .... .......
.

6. CU v. J.K.A.Subramanna Chettiar (1977) 110 ITR 602 (Mad.).


7. Sunanda Ram Deka v. CIT (1994) 210 ITR 988 (Gauhatti).
8. Halima Fancy Stores v. CIT (1994) 104 ITR 190 (Mad.).
9. CIT v. Sri Baldeoji Maharaj Trust (1983) 142 ITR 584 (All.).
10. Dhampur Sugar Mills Ltd. v. CIT (1973) 90 ITR 236 (All.)).
11. Zulekha Begum (Khatoon) v. CIT (1981) 129 ITR 560 (Cal.).
161

y Application by the assessee: Where, after filing his return and after receiving

notice for production of accounts, the assessee sent an application to the Income-

tax Officer stating that a further income was required to be added to the declared

income, it was held that it would not amount to filing of a revised return.12

> Period oflimitation: A second revised return can be filed under Sec. 139(5)

correcting omissions or wrong statements made in the first revised return, for,

the first revised return filed under Sec. 139(5) would, in law, be a return under

Sec. 139(1) also. The period of limitation prescribed under Sec. 153(1) will run

from the date of filing of second revised return, if the assessee has filed two

revised returns.13

> Permission not required: There is no provision in the Income-tax Act to

seek permission to revise a return. It is the right of the assessee to submit such

return. However, an application purporting to be under Sec. 139(5), seeking

permission to revise the return as originally filed cannot be treated as a revised

return.14

Defective or incomplete return (Sec.l39(9))

Where the Assessing Officer considers that the return of income furnished by the

assessee is defective, he is given the discretion to intimate the defect to the assessee

and give him an opportunity to rectify the defect within a period of fifteen days

from the date of intimation or within such further extended time, as the Assessing

Officer may allow.

If the defect is not rectified within the period specified, then the Assessing

12. Gopaldas Parshottamdas v. CIT (1941) 9ITR 130 (All.).


13. Niranjan Lai Ram Chandra v. CIT (1982) 134 ITR 352 (All.).
14. Waman Padmanabh Dande v. CIT (1952) 22 ITR 339 (Nag.).
162

Officer can treat the return as an invalid return and other provisions ofthe Income-

tax Act would apply as if the assessee had failed to furnish the return. Where the

assessee rectifies the defect within the period specified, but before the assessment

is made, the Assessing Officer has been empowered to condone the delay and

treat the return as being valid.

Defects in the return

For the purposes of this sub-section, a return of income is regarded as

defective unless all the following conditions have been fulfilled:

> The return is accompanied by the following:

(a) a statement showing the computation oftax payable on the basis of return;

(b) audit report referred to in Sec.44AB, or where the report has been furnished

prior to tiie furnishing of return, by a copy of such report together with

proof of furnishing report;

(c) proof of the tax, if any, claimed to have been deducted at source and the

advance tax and tax on self-assessment, if any, claimed to have been paid;

(d) proof of the amount of compulsory deposit, if any, claimed to have been

made under the Compulsory Deposit Scheme (Income-tax Payers) Act,

1974:

(e) where regular books of account are maintained by the assessee:

(i) copies of manufecturing account, trading account, profit and loss

account or income and expenditure account, or any other similar

account and balance sheet;

(ii) in the case of a proprietary business or profession, the personal account

ofthe proprietor; in the case of a firm, association of persons or body


163

of individuals, personal account of the partners or members; and in

the case of partner or member of a firm, association of persons or

body of individuals, his personal account in the firm, association of

persons or body of individuals;

(f) where the accounts ofthe assessee have been audited, copies ofthe audited

profit and loss account and the balance sheet and a copy of the auditors’

report;

(g) where an audit of cost accounts of the assessee has been conducted under

Sec.233B of the Companies’ Act, the auditor’s report under that Section;

(h) where regular books of account are maintained by the assessee, a statement

indicating the amount of turnover or gross receipts, gross profit, expenses

and net profit of the business or profession and the basis on which such

amounts have been computed, as also ofthe amount oftotal sundry debtors,

sundry creditors, stock-in-trade and cash balance as at the end of the

previous year.

- The CBDT, vide its Circular No.281 dated 22.9.1980, has given the

following clarifications with regard to the provisions of Sec. 139(9):

> Defects other than the specified defects: A return ofincome is to be regarded

as defective only if it contains any of the defects referred to in the Explanation to

Sec. 139(9). In other words, the provision in Section 139(9) is not applicable in

the case of returns which do not contain any defects specified above. However,

the Calcutta High Court held that the defects specified in Sec. 139(9) are only

illustrative and not exhaustive.15 The Assessing Officer cannot ignore the specified

IS. CIT v. Raj Bahadur Bissesswarlal Motilal Malwasi Trust (1992) 19S ITR 82S)
164

defects and must get them rectified but to contend that only the defects specified

can be got rectified and no other defects would be Rutting unnecessary restrictions

op the power pf the Assessing Officer, leading to inconvenient consequences and

absurd results not intended by the Legislature. The Assessing Officer has the

power to ask the assessee to remoye all defects ip the return pther than the defects

making the return invalid.

> Invalid return: The provision makes a distinction between a defective return

and an invalid return. A defective return is not ipso fqgtp tP be regarded as an

invalid return. It is only when a return contains any of the specified defects and

thp Assessing Officer, in his discretion, intimates the defect to the assessee and

the assessee fails to rectify the same within the specified period that the return
!

would be treated as an invalid rettjrq, In this corniection, a reference may be

made, to Sec.292B, which, inter alia, provides! that no return of income will be.

invalid merely by reason pf mistake, defect or omission in such return of income.

The provision ip Sec. 139(9), however, overrides other provisions of the Income-
• i

tax Act (including.Sec.292B) in this regard and in a case where any ofthe specified

defects is not removed within the time allowed, the Return will be treated as

invalid return and the provisions of the Income-tax Act wifi apply as ifthp assessee

had failed to furnish the return.

> Time limit of 15 days : The defect intimated by the Assessing Officer is

ordinarily required to be rectified by the assessee within a period of 15 days from

the date ofintimation. Where the Assessing Officer send a written communication

tp the assesspc by post or through Notice Server, the period of 15 days will have

to be reckoned from thf date on which the communication is served on the


165

assessee. Where there is a default in rectifying the defect intimated by the Assessing

Officer, the return of income has to be treated as an invalid return and further

proceedings will have to be taken on the footing that the asseesee had failed to

furnish the return. Thus, in a case where the return is furnished voluntarily under

Sec. 139(1), the Assessing Officer cannot proceed to make an ex-pqrte assessment

under Sec. 144 without serving a notice under Sec. 148. Where, however, the

defective return was filed ha response to a notice under Sec. 148, the Assessing

Officer may straightaway proceed to complete the assessment ex-parte under

Sec. 144 or issue a notice under Sec. 142(1).

The position stated above, however, is subject to the condition that in a

case where the assessee rectifies the defect alter the expiry of the prescribed

period of 15 days or the further period allowed by the Assessing Officer, but

before the assessment is made, the Assessing Officer may condone the delay and

treat the return as a valid return. Thus, in a case where the defect is not rectified

within the tipie allowed, but the assessee rectifies the same before the Assessing
, * \

Officer has completed the assessment, it will not be open to the assessee to question

the validity pf the assessment made by the Assessing Officer on the ground that
- ' V1'*

the defect had not been rectified within the time allowed and accordingly, the

return filed, by him was invalid.

It mu&t also he noted that a return which is not verified by the assessee is

not valid in the eye of law,16 as also an unsigned return is not a valid return at

all.17 Furthermore, the statutory time of 15 days for removing the defects in

return of income is available not only tp the proceedings before the first assessment
16. C1T v. br.kxishan Lai Gqyal (1?84) 148 1TR 283 (Punj.& Har.)
17. Befaari Lai Oiattexji v. GIT (1934) 2 ITR 377 (All.).
166

is made but also to fresh assessment proceedings taken up on remand by the

appellate authorities.18

5.3 Permanent Account Number

Section 139A reads:

139-A. Permanent Account Number. -


(1) Every person,
(i) if his total income or the total income of any other person in respect of
which he is assessable under this Act during any previous year exceeded
the maximum amount which is not chargeable to income tax; or
(ii) carrying on any business orprofession whose total sales, turnover or gross
receipts are or is likely to exceedfive lakh rupees in any previous year; or
(Hi) who is required to furnish a return of income under sub-section (4-A) of
Section 139,
and who has not been allotted a Permanent Account Number shall, within such
time, as may be prescribed, apply to the Assessing Officerfor the allotment ofa
Permanent Account Number.
(1-A) Notwithstanding anything contained in subsection (1), the Central Government
may, by notification in the Official Gazette, specify, any class or classes ofpersons
;• by whom tax is payable under this Act or any tax or duty is payable under any
other law for the,time being in fore including importers and exporters whether
any tax is payable by them or not and such persons shall, within such time as
mentioned in that notification, apply to the Assessing Officerfor the allotment
ofa Permanent Account Number.
(2) The Assessing Officer may also allot to any otherperson by whom tax is payable,
a Permanent Account Number.
(3) Any person, not falling under sub-section (1) or sub-section (2), may apply to
the Assessing Officer for the allotment of a Permanent Account Number and,
thereupon, the Assessing Officer shall allot a Permanent Account Number to
such person forthwith.
(4) For the purpose ofallotment ofpermanent account numbers under the new series,

18. Seeyan Plywood v. ITO (2000) 109 Taxman 318 (Ker.).


167

the Board may, by notification in the Official Gazette, specify the date from
which the persons referred to in sub-section (1) and (2) and other persons who
have been allotted Permanent Account Numbers and residing in a place to
specified in such notification, shall, within such time as may be specified, apply
to the Assessing Officerfor the allotment ofsuch Permanent Account Number to
a person, the Permanent Account Number, if any, allotted to him earlier shall
cease to have effect.
Provided that the persons to whom Permanent Account Number under the
new series has already been allotted shall not applyfor such number again.
(5) Every person shall -

(a) quote such number in all his returns to, or correspondence with, any income
tax authority;
(b) quote such number in all challans for the payment ofany sum due under
this Act;
(c) quote such number in all documents pertaining to such transactions as
may be prescribed by the Board in the interests ofthe revenue, and entered
into by him;
Provided that the Board may prescribe different dates for different
- * transactions or class of transactions orfor different class ofpersons;
' Providedfurther that a person shall quote General Index Register
Number till such time Permanent Account Number is not allotted to such
• person.
(d) intimate the Assessing Officer any change in his address or in the name
and nature ofhis business on the basis of which the Permanent Account
- Number was allotted to him.
' *x
(5-A) Evety personreceiving any sum or income or amountfrom which tax Juts been
deducted under the provisions ofChapter XVJI-B, shall intimate his permanent
account number to the person responsible for deducting such tax under that
Chapter;
Provided that nothing contained in this sub-section shall apply to a non­
resident referred to in subsection (4) of Section 115-AC or subsection (2) of
Section 115-BBA, or to a non-resident Indian referred to in Section 115-G;
168

Providedfurther that a person referred to in this subsection shall intimate


the General Index Register Number till such time permanent account number is
allotted to such person;
(5-B) Where any sum or income or amount has been paid after deducting tax under
Chapter XVI1-B, every person deducting tax under that Chapter shall quote the
permanent account number ofthe person to whom such sum or income or amount
has been paid by him -
(i) in the statementfurnished in accordance with the provisions ofsubsection
(2-C) ofSection 192;
(ii) in all certificates furnished in accordance with the provisions of Section
203;
(iii) in all returns prepared and delivered or caused to be delivered in
accordance with the provisions ofSection 206 to, any income tax authority;
Provided that the Central Government may, by notification in the Official
Gazette, specify different dates from which the provisions of this subsection
shall apply in respect ofany class or classes ofpersons;
Provided further that nothing contained in subsections (5-A) and (5-B)
shall apply in case ofa person whose total income is not chargeable to income
tax or who is not required to obtain permanent account number under any
provisions of this Act if such person furnishes to the person responsible for
deducting tax, a declaration referred to in Section 197-A in thefarm and manner
prescribed thereunder to the effect that the tax on his estimated total income of
the previous year in which such income is to be included in computing his total
income .will be nil.
Yy-~y
(5-C) Every.buyer referred to in Section 206-C shall intimate his permanent account
number to dm seller referred to in that Section.
(5-D) Every seller collecting tax in accordance with the provisions ofSection 206-C
shall quote the permanent account number of every buyer referred to in that
section -
(i) in all certificatesfurnished in accordance with the provisions ofsub-section
(5) ofSection 206-C;
(ii) in all returns prepared and delivered or caused to be delivered in
169

accordance with the provisions ofsub-section (5-A) or subsection (5-B)


of Section 206-C to an income tax authority.
(6) Everyperson receiving any document relating to a transaction prescribed under
clause (c) ofsubsection (5) shall ensure that the Permanent Account Number
or the General Index Register Number has been duly quoted in the document.
(7) No person who has already been allotted a Permanent Account Number under
the new series shall apply, obtain orpossess another Permanent Account Number.
(8) The Board may make rules providing for:
(a) the form and the manner in which an application may be made for the
allotment ofa Permanent Account Number and the particulars which such
application shall contain;
(b) the categories of transactions in relation to which Permanent Account
Number or the General Index Register Number shall be quoted by every
person in the documents pertaining to such transactions;
(c) the categories ofdocuments pertaining to business or profession in which
such number's shall be quoted by every person;
(d) class or clashes ofpersons to whom the provisions ofthis section shall not
apply;
(e) the form and the manner in which the person who has not been allotted a
Permanent Account Number or who does not have General Index Register
** * \ • **

■}, - Number shall make his declaration;


" “’I it*

(f) the manner in which the Permanent Account Number or the General Index
/> 7 /
Register Number shall be tptoted in respect ofthe categories oftransactions
„ ; V referred to clause (b);
. (g) the time and the manner in which the transactions referred to in clause (c)
shall be intimated to the prescribed authority.
Explanation. -For the purposes ofthis Section, -

(a) “Assessing Officer ” includes an income tax authority who is assigned the
duty ofallotting permanent account number;
(b) “permanent account number” means a number which the Assessing Officer
may allot to any person for the purpose of identification and includes a
Permanent Account Number allotted under the new series;
170

(c) “permanent account number under the new series” means a Permanent
Account Number having ten alphanumeric characters and issued in the
form ofa laminated card;
(d) “General Index Register Number ” means a number given by an Assessing
Officer to an assessee in the General Index Register maintained by him
and containing the designation and particulars of the ward or circle or

range of the Assessing Officer.

The procedure regarding the allotment of the Permanent Account Number

(PAN) is as under:

Allotment of a PAN

> The following persons should apply for the allotment of the PAN:

(a) Every person, if his total income assessable during the previous year exceeds ,

the maximum amount which is not chargeable to tax or any person carrying
i

on business or profession whose total sales, turnover or gross receipts are

or are likely to exceed Rs.5.0 lakh in any previous year and who has not

been allotted any permanent account number, is obliged to obtain permanent

account number. Application should be submitted before May 31 of the

assessment year for which the income exceeds the maximum amount not

chargeable to tax or before the end of the accounting year for which gross

receipt/turnover exceeds Rs.5.0 lakh.

(b) A person who is required to furnish return of income under sub-sec. (4A) of

Sec. 139 (i.e. a charitable trust) is also required to obtain permanent account

number fore the end of the accounting year.

(c) The Central Government has power to specify any class or classes of persons

by whom tax is payable under the Income-tax Act or any tax or duty is
171

payable under any other law for the time being in force, including importers

and exporters (whether any tax is payable by them or not) to apply to the

Assessing Officer for the allotment of a permanent account number.

Besides the above cases, the Assessing Officer may also allot a PAN to any other

person by whom a tax is payable. Any other person may also apply for a PAN.

Intimation of PAN to the person deducting or collecting tax at source

Following provisions of Sec.l39A(5A),(5C) have come into effect from

1st June, 2001.

(a) Every person receiving any sum or income from which tax has been deducted

shall intimate his PAN (or GIR number if PAN is not allotted) to the person

responsible for deducting tax. This requirement shall not apply to a non-resident

referred to in Sec. 115AC or Sec.ll5BBA and to a non-resident Indian referred

to in Sec. 115G, for whom it is not necessary to furnish a return under Sec. 139(1).

The provision also shall not apply in case of a person whose total income is

not chargeable to income-tax or who is not required to obtain PAN if such person

furnishes, to the person responsible for deducting tax at source a declaration

referred to in Sec. 197A to the effect that the tax on his estimated total income of

the previous year to which such income relates will be nil.

(b) Every ‘buyer’ under Sec.206C shall intimate his PAN to the ‘seller’.

Where the PAN should be quoted

Every person shall quote his PAN or GIR number in all documents pertaining

to the transactions specified below:

(a) sale or purchase of any immovable property valued at Rs.5.0 lakh or more;

(b) sale or purchase of a motor vehicle or vehicle, which requires registration


172

by a registering authority;

(c) a Time Deposit exceeding Rs.50,000 with a banking company to which the

Banking Regulation Act, 1949, applies;

(d) a deposit, exceeding Rs.50,000 in any account with Post Office Saving

Bank;

(e) a contract ofa value exceeding Rs. 10.0 lakh for sale or purchase of securities

as defined in Sec.2(h) of the Securities Contracts (Regulation) Ant, 1956;

(f) opening an account with a banking company to which the Banking

Regulation Act, 1949, applies (but other than time deposit account);

(g) making an application for installation of a telephone connection (including

a cellular telephone connection);

(h) payment to hotels and restaurants against their bills for an amount exceeding

Rs.25,000 at any one time.

A person shall quote GIR number in the documents pertaining to transactions

specified in above till such time the PAN is allotted to him. Where a person,

making an application for opening a bank account is a minor and who does not

have any income chargeable to income-tax, he shall quote the PAN or GIR number

of his father or mother or guardian, as the case may be. Any person who has not

been allotted a PAN or who does not have a GIR and who makes payment in cash

or otherwise than by a crossed cheque drawn on a banker by a crossed bank draft

in respect of any transaction specified above, shall make a declaration in Form

No.60 giving therein the particulars of such transaction. Form No. 60 is, however,

not required if payment is made by crossed cheque, crossed draft or through

credit card issued by a Bank.


173

Also, the following provisions have been made with effect from 1st June,

2001, regarding the quoting of PAN of recipient/purchaser in tax deduction/

collection at source:

(1) Tax deduction at source (Sec.l39A(5B)) : Where any sum or income has

been paid after deducting tax, every person deducting tax shall quote the PAN of

the recipient, in a statement furnished in accordance with the provisions of

Sec.l92(2C), in all, certificates furnished in accordance with the provision of

Sec.203 (Form No. 16,16A) and in all returns under Sec.206 (Form No.24, 26,

etc.). The Central Government may, however, have the power to notify separately

the dates from which these provisions shall apply in respect of any class or classes

of persons.

The above provisions shall not apply in case of a person whose total income

is not chargeable to income-tax or who is not required to obtain PAN if such

person furnishes to the person responsible for deducting tax, a declaration referred

to in Sec.l97A to the effect that the tax on his estimated total income of the

previous year to which such income relations will be nil.


, if

(2) -Tax collection at source (Sec. 139A(5)) : Every seller collecting tax under

Sec.206C shall quote the permanent account number of every buyer, in all

certificates furnished in accordance with the provisions of Sec.206C(5) and in all

returns under 206C(5A),(5B) to an income-tax authority.

Persons to whom Sec. 139A shall not apply

The provisions of Sec.l39A shall not apply to the following persons:

(a) a person who has agricultural income and is not in receipt of any other

income chargeable to income-tax;


174

(b) non-residents;

(c) the Central Government, State Government and Consular Officers in

transactions where they are the payers.

It is also necessary to bear in the mind the following points:

(1) Every person, receiving any document relating to the prescribed transactions

shall ensure that the PAN (or GIR number) has been duly quoted in the

document;

(2) Every person shall intimate the Assessing Officer any change in his address

or in the name and nature ofhis business on the basis of which the PAN was

allotted to him;

(3) No person who has already been allotted a PAN under the new series shall

apply to obtain or possess another PAN;

(4) The PAN under the new series has been defined to mean a number which

will have ten alphanumeric characters to be issued on a laminated card.

..
M*
. The expression ‘Assessing Officer’ has been defined to include an Income-
*

tax authority to whom the job of allotting PANs has been assigned.

5.4 Signatory to the Return of Income

Section 140 reads:


140. Return by whom to be signed.-
The return under Section 139 shall be signed and verified -
/■vyLV
(a) in the base ofan individual, -

(i) by the individual himself,


(ii) where he is absentfrom India, by the individual himselfor by some person
duly authorized by him in this behalf;
(Hi) where he is mentally incapacitated from attending to his affairs, by his
guardian or any other person competent to act on his behalf; and
175

(iv) where, for any other reason, it is not possiblefor the individual to sign the
return, by any person duly authorized by him in this behalf;
Provided that in a case referred to in sub-clause (ii) or sub-clause
(iv), the person signing the return holds a valid power of attorney from
the individual to do so which shall be attached to the return.
(b) in the case of a Hindu undividedfamily, by the Karta, and, where the Karta is
absentfrom India or is mentally incapacitatedfrom attending to his affairs, by
any other adult member ofsuch family;
(c) in the case of a company, the managing director thereof, or where for any
unavoidable reason such managing director is not able to sign and verify the
return, or where there is not managing direct, by any director thereof;
Provided that where the company is not resident in India, the return may
be signed and verified by a person who holds a valid power of attorney from
such company to do so, which shall be attached to the return;
Providedfurther that, -
(a) where the company is being wound up, whether under the orders ofa court
or otherwise, or where any person has been appointed as the receiver of
any assets of the company, the return shall be signed and verified by the
' ■ liquidator referred to in sub-section (1) ofSection 178: * "
' ~ (b) where the management ofthe company has been taken oyer by the Central
Government or any State Government under any law, the return of the
' i ' i i

v V .. company shall be signed and verified by the principal officer thereof;


(cc) in the case bf a firm, by the managing partner thereof, or 'where for any
unavoidable reason such managing partner is not able to sign, and verify the
1 j 1
return, or where there is no managing partner as such, by; any,partner thereof
'i

not being a minor;


(d) in the case ofa local authority, by the principal officer thereof;,
(dd) in the case ofa political party referred to in sub-section (4-B) ofSection 139 by
the chiefexecutive officer ofsuch party (whether such chiefexecutive officer is
known as Secretary or by any other designation);
(e) in the case of any other association, by any member of the association or the
principal officer thereof; and
176

(f) in the case ofany other person, by that person or by some person competent to

act on his behalf

The return of income under Sec. 139 is required to be signed and verified:

(a) in the case of an individual, by the individual himself or if he is absent from

India, by a person duly authorized in this behalf, or where the individual is

mentally incapacitated from attending to his affairs, by his guardian or a

person competent to act on his behalf; and where for any other reason, it is

not possible for the individual to sign return, by a duly authorized person

(such person should hold a valid power of attorney, a copy ofwhich should

be attached to the return);

(b) in the case of a Hindu undividedfamily (HUF), by its Karta, or where he is

absent from India or is mentally incapacitated from attending to his affairs,

by any other adult (not necessarily major) member of the family;

(c) in the case of a company, by its managing director, or where for any

unavoidable reason, he is not able to sign, or where there is no managing

director, by any .director of the company;

(d) in the case of afirm, by its managing partner or where, for any unavoidable

reason, he is not able to sign or where there is no managing partner, by any

partner of the firm, not being a minor;

(e) in the case of a local authority, by its principal officer;

(f) in the case of a political peaty, by its chief executive officer (by whatever

title or designation he is known);

(g) in the case of any other association, by its principal officer or any member;

(h) in the case of any other person, by that person or by any other person
277

competent to act on his behalf.

(i) in the case of a non-resident company, the return of income can be signed

by a person holding a valid power or attorney which has to be attached

with the return. It has also been provided that:

(a) where the company is wound up, the liquidator of the company shall

sign and verify the return, or

(b) where the management of the company has been taken over by the

Central or the State Government, the principal officer shall sign and

verify the return.

The following details must also be paid attention while signing and verifying

a return of income:

> Signature must be personal: When signature by an agent is permissible,

the: writing of the name of the principal by the agent is regarded as the signature

ofthe principal himself But this result only follows when it is permissible for the
i ’i

agent to sign tfie name of the principal. Where in the return of income of an

illiterate assessee, the physical act of putting the mark was found to have been

made by his son who was not authorized in this behalf, the return must be treated

as not properly signed and consequently, invalid.19

> Return of an HUF : Since a junior member could act as Karta with the

consent of other members, the return of income an HUF can be signed by such a

junior member.20

> Deity/Idol: The concept of a Hindu deity is such that it must be taken that

the signature of the Shebait is the signature of the deity itself.21


19! CATT v. Shri Keshav Chandra Mandal (1950) 18 ITR 569 (SC).
20. Narendra Kumar J.Modi v. CIT (1976) 105 ITR 109 (SC).
21. Sri Sri Sridhar Jiew v. ITO (1967) 63 ITR 192 (Cal.)
178

5.5 Self-assessment
Section 140-A reads:
140-A. Self-assessment-
(1) Where any tax is payable on the basis of any return required to be furnished
under Section 139 or Section 142 or Section 148 or, as the case may be, Section
158-BC, after taking into account the amount oftax, ifany, already paid under
any provision of this Act, the assessee shall be liable to pay such tax together
with interest payable under any provision ofthis Actfor any delay infurnishing
the return or any default or delay in payment ofadvance tax, before furnishing
the return and the return shall be accompanied by proofofpayment ofsuch tax
and interest.
Explanation. - Where the amountpaid by the assessee under this sub-section
fall short of the aggregate of the tax and interest as aforesaid, the amount so
paid shall first be adjusted towards the interest payable as aforesaid and the
balance, ifany, shall be adjusted towards the tax payable.
(1-A) For the purposes ofsub-section (1), interest payable under Section 234-A shall
be computed on the amount of the tax on the total income as declared in the
return as reduced by the advance tax, if any, paid and any tax deducted or
collected at source.
(1-B) For the purposes ofsub-section (1), interest payable under Section 234-B shall
* •¥ •

be computed on an among equal to the assessed tax or, as the case may be, on
the amount by which the advance tax paidfalls short ofthe assessed tax.
Explanation.-For the purposes ofthis sub-section, “assessed tax” means
the tax, on the total income as declared in the return as reduced by the amount of
tax deducted or collected at source, in accordance with the provisions ofChapter
XVIII, on any income which is subject to such deduction or collection and which
is taken into account in computing such total income.
(2) After a regular assessment tinder Section 143 or Section 144 (or cm assessment
under Section 158-BC has been mack, any amount paid under subsection (1)
shall be deemed to have been paid towards such regular assessment or assessment,
as the case may be.
(3) Ifany assessee fails to pay the whole or any part ofsuch tax or interest or both
179

in accordance with the provisions ofsub-section 91), he shall, withoutprejudice


to any other consequences which he may incur, be deemed to be an assessee in
default in respect of the tax or interest or both remaining unpaid, and all the
provisions of this Act shall apply accordingly.
(4) The provisions ofthis Section as they stood immediately before their amendment
by the Direct Tax Laws (Amendment) Act, 1987 (4 of1988), shall apply to and in
relation to any assessmentfor the assessment year commencing on the 1st day of
April, 1988, or any earlier assessment year and references in this section to the
other provisions ofthis Act shall be construed as references to those provisions
as for the time being in force and applicable to the relevant assessment year.

Where any tax is payable on the basis of any return furnished under Sec. 139

or,Sec. 142 or Sec. 148 or (with effect from June 1, 1998) Sec.l58BC (after

deducting advance payment oftax or tax deducted or collected at source, if any),

the assessee is required to pay the tax before the filing ofthe return. It is mandatory

for a person also to pay interest payable up to the date of filing the return along

with the self-assessment tax. The interest is to be paid for non-payment or short

payment of advance tax under Sec.234B, deferment of payment of advance tax

under Sec.234C and late filing ofreturn under Sec.234A. For this purpose, interest

under Secs.234A and 234B shallbe computed on the basis ofthe income declared

in the returmo;ftincome.
•;/
The return of income is to be accompanied by proof of payment of both tax

and interne/Where the amount paid by the assessee falls short of the aggregate

of tax and interest, the amount so paid shall first be adjusted towards interest

payable and the balance, if any, shall be adjusted towards tax payable.

After a regular assessment under Sec. 143 or 144 has been made, any amount

paid under Sec.l40A shall be deemed to have been paid towards such regular

assessment.
180

If any assessee fells to pay wholejcir^ny part of such tax Qginterest or both

in accordance with the provisions of Sec.l40A, he shall (without prejudice to

any other consequences which he may incur) be deemed to be an assessee in

default in respect of the tax or interest or both remaining unpaid and all the

provisions of the Act shall apply accordingly.

S.6 Inquiry before Assessment

Section 142 reads:

142. Enquiry before assessment.-


(1) For the purpose ofmaking an assessment under this Act, the Assessing Officer
may serve on any person who has made a return under Section 139 or in whose
case the time allowed under subsection (1) of that section for furnishing the
return has expired, a notice requiring him, on a date to be therein specified,-
(i) where such person has not made a return within the time allowed under
subsection (1) of Section 139, for furnish a return of his income or the
income ofany other person in respect ofwhich he is assessable under this
Act, in the prescribed form and verified in the prescribed manner and
setting forth such other particulars as may be prescribed, or
(ii) . to produce, or cause to be produced, such accounts or documents as the
Assessing Officer may require, or
(iii) tofurnish in writing and verified in the prescribed manner information in
sudh jorm and on such points or matters (including a statement of all
assets arid liabilities ofthe assessee, whether included in the accounts or
• i

,; not) as the Assessing Officer may require:


Provided that -
(a) the previous approval of the Joint Commissioner shall be obtained fore
requiring the assessee to furnish a statement of all assets and liabilities
not included in the accounts;
(b) the Assessing Officer shall not require the production of any accounts
relating to a period more than three years prior to the previous year.
181

(2) For the purpose ofobtainingfull information in respect ofthe income or loss of
any person, the Assessing Officer may make such enquiry as he considers
necessary.
(2-A) If, at any stage of the proceedings before him, the Assessing Officer, having
regard to the nature and complexity of the accounts of the assessee and the
interests of the revenue, is of the opinion that it is necessary so to do, he may,
with the previous approval of the Chief Commissioner or Commissioner, direct
the assessee to get the accounts audited by an accountant, as defined in the
Explanation below sub-section (2) of Section 288, nominated by the Chief
Commissioner or Commissioner in this behalf and to furnish a report of such
audit in the prescribedform duly signed and verified by such accountant and
setting forth such particulars as may be prescribed and such other particulars
as the Assessing Officer may require.
(2-B) The provisions of sub-section (2-A) shall have effect notwithstanding that the
accounts of the assessee hive been audited under any other law for the time
being in force or otherwise.
(2-C) Every report under sub-section (2-A) shall be furnished by the assessee to the
Assessing Officer within such period as may be specified by the Assessing Officer;^
■ Provided that the Assessing Officer may, on an application made in this
behalf by the assessee andfor any good and sufficient reason, extend the said
period by such further period or periods as he thinks fit; so, however, that the
- aggregate of the period originally fixed and the period or periods so extended
■ shall not, in any case, exceed one hundred and eighty days from the date on
which the direction under sub-section (2-A) is received by the assessee.
(2-0). The expenses of, and incidental to, any audit under sub-section (2-A) (including
the remuneration of the accountant) shall be determined by the Chief
Commissioner or Commissioner (which determination shall be final) and paid
by the assessee and in default of such payment, shall be recoverable from the
assessee in the manner provided in Chapter XVII-D for the recovery ofarrears
of tax.
(3) The assessee shall, except where the assessment is made under section 144, be
given an opportunity ofbeing heard in respect ofany material gathered on the
182

basis ofany enquiry under sub-section (2) or any audit under subsection (2-A)
and proposed to be utilizedfor the purposes ofthe assessment.
(4) The provisions ofthis section as they stood immediately before their amendment
by the Direct Tax Laws (Amendment) Act, 1987 (4 of1988), shall apply to and in
relation to any assessmentfor the assessment year commencing on the 1st day of
April, 1988, or any earlier assessmentyear and references in this section to the
other provisions ofthis Act shall be construed as references to those provisions

as for the time being in force and applicable to the relevant assessment year.

Inquiry before assessment deals with the following:

(1) Giving notice to the assessee to submit return (if not submitted earlier),

produce accounts, documents, etc. (Sec. 142(1));

(2) Making inquiry mid giving opportunity to the assessee (Sec. 142(2),(3));

(3) Giving direction to get books of account audited (Sec. 142(2A) to (2D)).

Giving Notice to the Assessee

The Assessing Officer may serve on any person a notice under Sec. 142(1) for the

following purposes:

(1) Ifthe assessee has not submitted a return of income within the time allowed

under Sec. 139(1), the Assessing Officer may require him to submit the

return of income in the prescribed form on or before a date specified in the

notice;'

(2) Hie Assessing Officer may ask the assessee to produce (or cause to be

produced), such documents/accounts as he may require. However, the

Assessing Officer shall not require the production of any accounts pertaining

to a period more than 3 years prior to the previous year. Where the Assessing

Officer issues a notice calling for production of accounts relating to earlier

years and one of those years falls beyond the prescribed three-year limit,
183

the whole notice cannot be treated as bad, inasmuch as the illegal portion

ofthe notice as regards one ofthe years is clearly severable from the rest of

the terms of the notice which are legal.22

(3) The Assessing Officer may require the assessee to furnish in writing (and

verified in the prescribed manner) information in such form and on such

points or matters (including a statement of all assets and liabilities of the

assessee, whether included in the accounts or not, as he m§y, require.

However, the previous approval ofthe Joint Commissioner shall be obtained

before requiring the assessee to furnish a statement ofall assets and liabilities

not included in the accounts;

(4) A combined notice calling upon the assessee to attend in person as well as

to produce account books is legal.23

Making Inquiry

For the purpose of obtaining full information in respect ofthe income (or loss) of

any person, the Assessing Officer may make such inquiry as he considers necessary.

However, the assessee shall (accept where the assessment is made under SecJ44)

be given an opportunity of being heard in respect of any material gathered on the

basis of any inquiry or any audit under Sec. 142(2A) and proposed, to be utilized

for the purpose of the assessment.

Giving Directions for Audit

If the following conditions are satisfied, the Assessing Officer may direct the

assessee to get his accounts audited by an accountant nominated by the Chief

22. Murlidhar Madanlal v. CIT (1954) 20ITR 231 (Pat.).


23. Rm.Pl.S.Sivaswami Chettiar v. CIT 4ITC 207 (Mad.); Chandra Sen Jaini v. GT
3 ITC 17 (All.); Harmukhrai Dulichand v. CIT 3 ITC 198 (Cal.).
184

Commissioner/Commissioner. Such directions can be issued under Sec.l42(2A)

even if accounts of the assessee have been audited under any other provision:

(a) directions for audit can be issued at any stage of proceedings before the

Assessing Officer; in other words, no such direction can be issued after the

completion of proceedings before the Assessing Officer;

(b) such directions can be issued only if having regard, to the nature and

complexity of the accounts of the assessee and interest of the revenue, the

Assessing Officer is of opinion that it is necessary to do so; and

(c) such direction can be issued only with the prior approval of the Chief

Commissioner/Commissioner.
i

A few more aspects are relevant to the inquiry before assessment under

Sec. 142 of the Income-tax Act.

> A mechanical and perfunctory order directing special, audit would be liable
t

to be quashed.24

> A direction to the assessee to get the accounts audited without hearing the

assessee would be unjustified.25

> The audit report shall be furnished by the assessee within the period specified

by the Assessing Officer, who shall have the power to extend such period

on an application made by the assessee (even in the absence of application

by assessee, the Assessing Officer can extend the period for submission of

. report of special audit under Sec. 142(2A)).26 However, the aggregate period

(fixed originally and extended) shall not exceed 180 days.

24. U.P.State Handloom Corporation v. CIT (2000) 245 ITR 192 (All.).
25. Muthoottu Mini Kuries v. Dy.CIT (2001) 115 Taxman 216 (Ker.).
26. Jagatjit Sugar Mills Co. Ltd. v. CIT (1994) 210 ITR 468 (Punj. & Har.)
185

> The audit fees and audit expenses shall be determined by the Chief

Commissioner/Commissioner (determination shall be final) and paid by the

assessee (in default such payment shall be recoverable as arrears of tax);

> Failure to comply with the direction under Sec. 142(2A) to get books of

account audited entails a best judgement assessment under Sec. 144. Besides,

it attracts penalty under Sec.271 and prosecution under Sec.276D. These

provisions are attracted only if there is a default by the assessee. If the

accountant nominated by the Commissioner refuses to audit the accounts,

the assessee cannot be held responsible.27

> There is no merit in the submission that Sec.44AB has replaced and rendered

redundant Sec. 142(2A) to the extent of the cases covered by the former

provision.28 There is no merit in the contention that special auditor can be

appointed under Sec. 142(2A) only if the turnover in the case of business-is

less than Rs.40 lakh and the professional receipts are less than Rs. 10 lakh.29

The Assessing Officer can direct under Sec. 142(2A) an assessee to haye a

special audit even when accounts of assessee have already been audited by

reason of provisions of Sec.44AB.30

5.7 Summary Assessment

Section 143 reads:


143. Assessment -
(1) Where a return has been made under Section 139, or in response to a notice
Under sub-section (1) ofSection 142,-
(i) if any tax or interest is found due on the basis of such return, after
27. Swadeshi Polytex Ltd. v. CIT (1983) 144ITR 171 (SC).
28. Super Cassettes Industries Ltd. v. CIT (1999) 102 Taxman 202 (Delhi).
29. Joint CIT v. LT.C.Ltd. (1999) 106 Taxman 373, 239 ITR 921 (Cal.).
30. SB Civil Writ Petition Nos.2449 & 2774 of 1995 (1999) 105 Taxman 1 (Raj ).
186

adjustment ofany tax deducted at source, any advance tax paid, any tax
paid on self-assessment and any amount paid otherwise by way of tax or
interest, then without prejudice to the provisions of sub-section (2), an
intimation shall be sent to the assessee specifying the sum so payable, and
such intimation shall be deemed to be a notice of demand issued under
Section 156 and all the provisions ofthis Act shall apply accordingly; and
(ii) ifany refund is due on the basis ofsuch return, it shall be granted to the
assessee and an intimation to this effect shall be sent to the assessee;
Provided that except as otherwise provided in this sub-section, the
acknowledgment of the return shall be deemed to be an intimation under this
sub-section where either no sum is payable by the assessee or no refund is due to
him;
Providedfurther that no intimation under this sub-section shall be sent
after the expiry ofone yearfrom the end ofthefinancial year in which the return
is made;
Provided also that where the return made is in respect ofthe income first
assessable in the assessment year commencing on the 1st day ofApril, 1999,
such intimation may be sent at any time upto the 31st day ofMarch, 2002.
(2) Where a return has been made under Section 139, or in response to a notice
under sub-section (1) ofSection 142, the Assessing Officer shall, ifhe considers
it necessary or expedient to ensure that the assessee has not understated the
income or has not computed excessive loss or has not underpaid 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 there,
any evidence on which the assessee may rely in support of the return;
Provided that no notice under this sub-section shall be served on the
assessee after the expiry oftwelve monthsfrom the end ofthe month in which the
return is furnished.
(3) On the■ date specified in the notice issued under sub-section (2), or as soon
afterwards as may be, after hearing such evidence as the assessee may produce
and such other evidence as the Assessing Officer may require on specifiedpoints,
and after taking into account all relevant material which he has gathered, the
187

Assessing Officer shall, by an order in writing, make an assessment ofthe total


income or loss ofthe assessee, and determine the sum payable by him or refund
ofany amount due to him on the basis ofsuch assessment.
(4) Where a regular assessment under subsection (3) ofthis section ofSection 144
is made,-
(a) any tax or interest paid by the assessee under subsection (1) shall be
deemed to have been paid towards such regular assessment;
(b) if no refund is due on regular assessment or'the amount refunded under
stibsection 91) exceeds the amount refundable on regular assessment, the whole
or the excess amount so refunded shall be deemed to be tax payable by the

assessee and the provisions of this Act shall apply accordingly.

Under See. 143(1), the Assessing Officer can complete the assessment

without passing a regular assessment order. The provisions are as under:

> Intimation : If any tax or interest is found due on the basis of the return

filed under Sec. 139 or in response to a notice under Sec. 142(1), after

adjustment of any tax deducted at source, any advance tax paid, any tax

paid on self-assessment and any amount paid otherwise by way of tax or

interest, then, an intimation shall be sent to the assessee specifying the sum

so payable and such intimation shall be deemed to be a notice of demand

issued under Sec. 156 and all the provisions of the Act shall apply

., i '
accordingly. If any refund is due on the basis of such return, it shall be

granted to the assessee. Also, the acknowledgment of the return shall be

deemed to be the intimation under Sec. 143(1) where either no sum is payable

or no refund is due. In other words, except for issuing intimations where

any sum is payable by the assessee or refund is due to him, the

acknowledgment shall be deemed to be an intimation.


188

> Time limit for intimation : An intimation for tax or interest due under

Sec. 143(1) should not be sent after the expiry of one year from the end of

the financial year in which return is made.

Assessment in response to Notice under Sec.l43(2) (Sec.l43(3».

A notice can be issued under Sec. 143(2), ifthe following conditions are satisfied:

(1) A return of income (or loss) has been made under Sec. 139 or in response to

notice under Sec. 142(1). If such return has not been furnished, notice under

Sec. 143(2) cannot be issued;

(2) Such notice can be issued ifthe Assessing Officer considers it necessary or

expedient to ensure that the assessee has not understated the income or has

not computed excessive loss or has not underpaid the tax in any manner;
.i
(3) Such notice shall be served on the assessee before the expiry of 12 months

from the end of the month in which return is furnished. After hearing such

evidence as the assessee may produce in response to the notice under

Sec. 143(2) and such other evidence as the Assessing Officer may require

on specified points and after taking into account all relevant materials which

the Assessing Officer has gathered, he shall pass an assessment order in

writing determining the total income or loss of the assessee and the sum

payable by tlie assessee (or which effect from October 1,1998) refund of

any amount due to him) on the basis of such assessment order.

5.8 Best Judgment Assessment

Section 144 reads:


144. Best judgment assessment-
(1) Ifany person -
(a) fails to make the return required under subsection (1) ofSection 139 and
189

has not made a return or a revised return under sub-section (4) or sub­
section (5) of that section, or
(b) fails to comply with all the terms ofa notice issued under sub-section (1)
ofSection 142 orfails to comply with a direction issued under sub-section
(2-A) of that section, or
(c) having made a return, fails to comply with all the terms ofa notice issued
under sub-section (2) ofSection 143,
The Assessing Officer, after taking into account all relevant material which the
Assessing Officer has gathered, shall, after giving the assessee an opportunity
ofbeing heard, make the assessment ofthe total income or loss to the best ofhis
Judgement and determine the sum payable by the assessee on the basis ofsuch
assessment.
Provided that such opportunity shall be given by the Assessing Officer by
serving a notice calling upon the assessee to show cause, on a date and time to
be specified in the notice, why the assessment should not be completed to the
best ofhis judgement;
Providedfurther that it shall not be necessary to give such opportunity in
a case where a notice under sub-section (1) ofSection 142 has been issuedprior
to the making ofan assessment under this Section.
(2) The provisions ofthis section as they stood immediately before their amendment
by the Direct Tax Laws (Amendment) Act, 1987 (4 of1988), shall apply to and in
relation to any assessmentfor the assessment year commencing on the 1st day of
April]‘1-988, or any earlier assessment year and references in this section to the
other, provisions ofthis Act shall be construed as references to those provisions
1 -V
as for the timeZjbeing in force and applicable to the relevant assessment year.

The assessing Officer, after considering all relevant material which he has

gathered,, is under an obligation to make an assessment of the total income or

loss to the best of his judgment in the following cases:

(a) If the person Mis to make the return as required under Sec. 139(1) and has

not made a return or a revised return under sub-secs,(4^or (5) ;


190

(b) If any person fails to comply with all the terms of a notice under Sec. 142(1)

or fails to comply with the directions requiring him to get his accounts

audited in terms of Sec. 142(2A);

(c) If any person, after having filed a return, fails to comply with the terms of

notice under Sec. 143(2) requiring his presence or production of evidence

and documents; or

(d) If the Assessing Officer is not satisfied about the correctness or the

completeness of the accounts of the assessee or ifno method of accounting

has been regularly employed by the assessee.

Following points also have a bearing on the best judgment assessment.

(1) The assessee has a right to file an appeal under Seci248 or to make an

application for revision under Sec.264 to the Commissioner;

(2) The best judgment assessment can only be made after giving the assessee

an opportunity of being heard. Such opportunity shall be given by issuing a

notice to him to show cause why the assessment should not be completed

to the best ofjudgment and opportunity for hearing will not be necessary
v

where notice under Sec. 142(1) has already been issued;

(3) i$L- refund cannot be granted under Sec. 144.

Judicial Killings on the scope of Best Judgment Assessment

1. An assessment made under Sec. 144 can, by no means, be equated with ex-
/wa^p^oceedings in a civil court.31

2. Best judgment assessment is mandatory for any one of the defaults under

Sec.144.'32 '
31. Dhanalakshmi Pictures v. CIT (1983) 144 ITR 452 (Mad.).
32. CIT v. Segu Buchiah Setty (1970) 77 ITR 539 (SC).
191

3. Where the assessee had furnished only approximate figure in his return of

income without any further details, it was held that the best judgment

assessment made by ignoring such a return was invalid.33

4. A best judgment assessment can be made when the return is not signed and

verified.34

5. Where, in response to a combined notice for personal appearance and

production of account books, the assessee appeared in person but did not

produce any account books, it was held that the Income-tax Officer would

be justified in making a best judgement assessment.35

6. A best judgment assessment made pursuant to the assessee’s failure to

produce account books over which the assessee has neither possession nor

control, is invalid.36

7. In orde^o commit the default under Sec. 143(2), it is necessary that there

assessee relied in support of his return. Therefore, where the assessee had

not relied on any such books, documents or evidence, there could not be a

consequent failure to produce them, so as to justify a best judgment

assessment in his case.37

8. If a chartered accountant refuses to audit company’s account for frivolous

reasons, Sec. 144 is not attracted.38

33. A.R.A.N.Chettiar Firm v. CIT 2ITC 477 (Rangoon).


34. Behari Lai Chatterji v. CIT (1934) 2 ITR 377 (All.).
35. Rm.PI.S.Sivaswami Chettiar v. CIT 4 ITC 207 (Mad.).
36. CIT v. Bombay Trust Corporation (1938) 6 ITR 445 (Bom.).
37. ITO v. Luxmi Prasad Goanka (1977) 110 ITR 674 (Cal.).
38. Swadeshi Polytex Ltd. v. ITO (1983) 144 ITR 171 (SC).
9. Estimate must be honest and fair.39 Best judgment assessment must have

reasonable nexus to the available material.40 However, in best judgement

assessment guesswork is necessary and it is not required for that figures

have to be proved of the exact amount determined by taxing authorities41

and the basis of computation must be disclosed by the Assessing Officer42

10. While making a best judgment assessment under Sec. 144, the determination

of tax in the assessment order is as much mandatory as the determination

of income.43

11. Before the Assessing Officer can assume jurisdiction under Sec. 144, he

must first record the finding that there has been a non-compliance with any

of the various notices mentioned in that Section. If in a particular case, the

Assessing Officer makes a best judgment assessment on a wrong finding as

to jurisdictional fact, namely, noncompliance with any of the notices

mentioned in Sec. 144, the High Court, in exercise of its jurisdiction under

Article 226 ofthe Constitution is competent to enquire into the correctness

of such finding on a jurisdictional fact.44

5.9 Method of Accounting

' Sections 145 and 145-A read:


145. Method of accounting.-
(1) Income chargeable under the head “Profits and gains ofbusiness orprofession ”
. or “income from other sources” shall, subject to the provisions ofsub-section
'(2), be computed in accordance with either cash or mercantile system of
39. Brij Bhushan Lai Parduman Kumar v. CIT (1978) 115 ITR 524 (SC)
40. State of Kerala v. C.Velnkutty (1966) 60 ITR 239 (SC)
41. Lake Palace Hotels & Motels P.Ltd. v. CIT (1995) 213 ITR 735 (Raj.)
42. Ganga Prasad Sharma v. CIT (1981) 132 ITR 87 (MP)
43. S.Mubarik Shah Naqshabandi v. CIT (1977) 110 ITR 217 (J&K)
44. Mohini Devi Malpani v. ITO (1977) 77 ITR 674 (Cal.)
193

accounting regularly employed by the assessee.


(2) The Central Government may notified in the Official Gazette from time to time
accounting standards to be followed by any class of assessees or in respect of
any class ofincome.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness
of the accounts of the assessee, or where the method ofaccounting provided in
sub-section (I) or accounting standards as notified under sub-section (2), have
not been regularlyfollowed by the assessee, the Assessing Officer may make an
assessment in the manner provided in Section 144.
145-A. Method of accounting in certain cases.-
Notwithstanding anything to the contrary contained in Section 145, the valuation of
purchase and sale ofgoods and inventoryfor the purposes ofdetermining the income
chargeable under the head “Profits and gains ofbusiness or profession” shall be -
(a) in accordance with the method ofaccounting regularly employed by the assessee;
and
(b) further adjusted to include the amount ofany tax, duty, cess orfee (by whatever
name called) actually paid or incurred by the assessee to bring the goods to the
place ofits location and condition as on the date of valuation.
Explanation.- For the purposes of this Section, any tax, duty, cess or fee (by
whatever name called) under any lawfor the time being inforce, shall include all such

payment notwithstanding any right arising as a consequence to such payment.

Section 145 provides that in cases where (a) the assessee’s accounts are

incorrect or incomplete or (b) no method of accounting has been regularly

employed by the assessee, the ITO has the discretion to make a best judgement

assessment in the manner provided in Section 144 instead of nuking an ordinary

assessment under Section 143(3).

The Section enacts that for the purposes of Section 28 (profits of business,

profession or vocation) and Section 56 (income from other sources), income,

profits and gainst must be computed in accordance with the method of accounting
194

regularly employed by the assessee. The choice of the method of accounting lies

with the assessee,45 but the assessee must show that he has followed his chosen

method regularly.46 Even for the very first accounting year, the method of

accounting would be deemed to have been regularly employed ifthe same method

is shown to have been employed for the subsequent years 47 The Section is

mandatory48 The Department is bound by the assessee’s choice of a method

regularly employed unless by that method the true income, profits and gains cannot

be arrived at49 The assessee’s regular method cannot be rejected as being improper

merely because it gives him benefit in certain years.50 Secondly, the section

clearly makes such a method of accounting a compulsory basis of computation

unless in the opinion of the ITO, the income, profits and gains cannot properly be

deducted therefrom. If the true income, profits and gains cannot be ascertain on

the basis of the asessee’s method, it would be the duty of the ITO to discard the

method, wholly or in part, and to adopt a method ofhis own. Where no method

of account has been regularly employed, the income must be;computed upon

such basis as the ITO may determine. These principles have been reafiiremed by

the Supreme Court.51 The word ‘method’ in this Section must be given a broad

and reasonable interpretation.52


45. r.BCGA (Punjab) Ltd. v. CIT 5 ITR 279,299 (FB); Subramaniam Chettiar v. CIT
2 iTC 365, 371 (SB).
46. BCGA (Punjab) Ltd. v. CIT 5 ITR 279, (FB); CIT v. Achrulal 6 ITR 255, 261-
2; Gobardhan Das v. CIT 5 ITC 378; Govindarajulu Chetty v. CIT 87 ITR 22,31.
47. Sundaram & Co.Ltd. v. CIT 36 ITR 162.
48. Re Kamdar & Co.Ltd. v. CIT 14 ITR 10, 21 (FB)
49. CIT v. Singari Bai 13 ITR 224 (FB); CIT v. Chari & Ram 17 ITR 1, 8;
Juggilal Kamalpat v. CIT 101 ITR 40.
50. CIT v. Dodabasappa 54 ITR 221.
51. CIT v. Macmillan & Co. 33 ITR 182, 188; CIT v. Krishnaswami Mudaliar,
53 ITR 122, 128.
52. CIT v. Khemchand Ramdas 8 ITR 159, 176; Gurumukh Singh v. CIT 12 ITR
393, (FB).
195

The method of accounting can affect the computation of income only under

the heads of business or profession (Sec.28) and income from other sources

(Sec.56). The provisions of this Section do not apply to salaries (Sec. 15), interest

on securities (Sec. 18),, income from house property (Sec.22) and capital gains

(Sec.45). Although dividend income is taxable as income from other sources

(Sec.56(2)(i), by reason of the provisions of Sec.8, it is taxable as the income of

the year in which it is declared, irrespective of the method of accounting employed

by shareholder.

Under this Section, the assessee’s regular method of accounting determines

the mode of computing the taxable income, but it does not determine or even

affect the range of taxable income or the ambit of taxation.55 The provision of

computation of income contained in this Section cannot derogage from the

provisions ofthe charging Section. In other words, the charge on income accruing

or received in India, imposed by Section 5, cannot be avoided by any method of

accounting. This proposition is of particular significant in the case of non residents


, * ,/
• V"* '

who might be assessable in respect of stray items of income accruing or received

in India: .The chaigeabilityjof income received in India cannot be escaped by a

non-resident on the ground that his regular method of accounting is mercantile.54

nor can the cargeability of income accruing in India be escaped on the ground

that he maintains his accounts on the cash system.

Impropriety ofmethod ofaccounting distinguishedfrom falsity ofaccount

books - Sub-section (1) deals merely with the method of accounting. Ifthe assesse’s

method of accounting is improper, i.e. such that the real profits cannot properly
53. C1T v. Krishnaswami Mudaliar 53 ITR122, 128 (SC).
54. Kesbav Mills Ltd. v. CIT 23 ITR 230 (SC).
196

be deduced therefrom, the ITO must reject the method under the provision, but

he cannot merely on that ground reject the account books.55 He must compute

the income, having regard to the entries in the books, by applying a method of his

own,56 e.g. by revalutine undervalued stocks.57 Even where the accounts are
’ J-
complicated, the ITO must exercise his judgement and if by a reasonable amount

of labour, he can deduct the true profit from the accojuj^, he should do so and

not reject the account books.58

If, however, the account books are unreliable, false or incorrect, or are

incomplete, e.g. where etftri^in respect of certain transactions are altogether

omitted with a view to suppressing profits, the ITO has the power to reject such
S'

account-books, but that power i^ ppt to be sought under the proviso to sub-
I *1
section (1). If the accounts are fcppd tp be incorrect or incomplete, the case
111 ;;i''
I* !*
would fall, not under the.provison, but under sub-section (2). For instance, the

method of accounting regularly employed may be the cash system which is a

proper method, but the entries in the books of account may be false or fabricated.
»•

To such a case, sub-section (2) applies and the ITO should: reject such account
* , “* •<
• |i
books and estimate the real income under Section 143(3) or in idle manner provided
S’1.

in Section 144 \yithout calling this proviso in aid.59 Conversely, the accounts

may be rejected as to their method but accepted as to their fa^ts, in which event,
. I ^ ^

this proviso would operate. 60 j

55. Nathuram Mnnnalal v. CIT 25ITR 216,220;Pandit Bros' v' CIT 26LTR159.
56. Muthukaruppan Chettiar v. CIT-7 ITR 76,' 89 (FB). 11
57. Chhaoni Lai Pragdas v. CIT 31 ITR 597; CIT v Achralal 6 ITR 255; CIT v.
Ahmedabad New Cotton Mills Co.Ltd. 4ITC 245 (PC).
58. Gunimukh Singh v. CIT 12 ITR 393, 423 (FB); Dhuni Chand Dhani Ram v.
CIT 2 ITC 188, 193.
59. Guramukh Singh v. CIT 12 ITR 393,427.
60. CIT v. Khemchand Ramdas 8 ITR 159, 177.
197

The questions as to what method of accounting was adopted by the

assessee61 and whether the method adopted had been regularly employed62 are

questions of feet. The question whether the income, profits and gains can be

properly deducted from the method employed has been loosely held to be a

question of fact in some cases.63 Impropriety of the method of accounting, as

distinguished from falsity of account books, is, correctly speaking, a miexed 1

question offact and law. Where the finding ofthe Department is that the assessee’s

system of accounting, by whatever name called, required the inclusion in his

accounts of a certain amount of income, the question question open to judicial ^

determination is whether there was any evidence before the Department upon

which it could so find.64

5.10 Reassessment (Sections 147 to 151)


-Sections 147 to 151 read:

147. Income escaping assessment.-


Ifthe Assessing Officer has reason to believe that any income chargeable to tax has
‘ i i ,

escaped assessmentfor any/assessmentyear, he may, subject to the provisions ofSections


l

148 to 153., assess or reassess such income and also any other income chargeable to
tax yffnch has escaped assessment and which comes to fus notice subsequently in the
course ofthe proceedings, under this Section, or recompute tlx joss or the depreciation
allowance or any other allowance, as the case may be, for the assessmentyear concerned
(hereafter in this Section and in Sections 148 and 153 referred to as ‘the relevant
assessment year j.
61. Fatehchand Chakodilal v. CIT 13 ITR 198. But in Pandurang v. CIT 2ITC 69,
proper method of construing accounts entries was held to be a question of law.
62. Sarupchand v. CIT 4 ITR 420, 422-3.
63. Chhabildas Shah v. CIT 59 ITR 733 (SC) (a case of falsity of account books);
Neki Devi v. CIT 2 ITR 365; Diwan Chand v. CIT 2 ITR 382; Rulia Mai
Raunak Ram v. CIT 2 ITR 329; Narayan Atmaram Patkar v. CIT 2 ITR 486;
Jewan Shah Maya Shah v. CIT 2 ITR 343, etc., etc.
64. Feroz Shah v. CIT1 ITR 219 (PC); Dhakeshiyar Prasad v. CIT 4 ITR, 79
(FB); BCGA (Punjab) Ltd. v. CIT 5 ITR 279 (FB).
198

Provided that where an assessment under sub-section (3) ofSection 143 or this
Section has been made for the relevant assessment year, no action shall be taken under
this Section after the expiry offour yearsfrom the end ofthe relevant assessment year,
unless any income chargeable to tax has escaped assessment year by reason of the
failure on the part ofthe assessee to make a return under Section 139 or in response to
a notice issued under sub-Secfion (1) ofSection 142 or Section 148 or to disclose fully
and truly all materialfacts necessaryfor his assessment, for that assessment year.
Explanation-1. - Production before the Assessing Officer of accounts books or
other evidence from which material evidence could with due diligence have been
discovered by the Assessing Officer will not necessarily amount to disclose within the
meaning ofthe foregoing proviso.
Explanation-2. - For the purposes of this Section, the following shall also be
deemed to be cases where income chargeable to tax has escaped assessment, namely
(a) where no return ofincome has been furnished by the assessee although his total
income or the total income ofany otherperson in respect ofwhich he is assessable
I

under this Act during the previous year exceeded the maximum amount which is
not chargeable to income tax;
(b) where a return ofincome has been furnished by the assessee but no assessment
has been made and it is noticed by the Assessing Officer that the assessee has
understated the income or has claimed excessive loss, deduction, allowance or
relief in the return;
(c) when an assessment has been made, but-
(i) income chargeable to tax has been under-assessed; or
(ii) such income has been assessed at too low a rate; or
(iii) such income has been made the subject ofexcessive relief under this Act;
or
(iv) excessive loss or depreciation allowance or any other allowance under
this Act has been computed.
148. Issue of notice where income has escaped assessment -
(1) Before making the assessment, reassessment or recomputation under Section
147, the Assessing Officer shall serve on the assessee a notice requiring him to
furnish within such period, as may be specified in the notice, a return of his
199

income or the income of any other person in respect of■which he is assessable


under this Act during the previous year corresponding to the relevant assessment
year, in the prescribedform and verified in the prescribed manner and setting
forth such other particulars as may be prescribed; and the provisions of this Act
shall, sofar as may be, apply accordingly as ifsuch return were a return required
to be furnished under Section 139;
(2) The Assessing Officer, shall before issuing any notice under this Section, record
his reasons for doing so.
149. Time limit for notice. -
(1) No notice under Section 148 shall be issuedfor the relevant assessment year:
(a) iffour years have elapsed from the end of the relevant assessment year,
unless the case falls under clause (b);
(b) iffour years, but more than six years, have elapsed from the end of the
relevant assessment year unless the income chargeable to tax which has
escaped assessment amounts to or is likely to amount to one lakh rupees
or more for that year.
Explanation.- In determining income chargeable to tax which has escaped
assessmentfor die purposes ofthis sub-seetion, the provisions ofExplanation 2
ofSection 147 shall apply as they apply for the purposes of that Section.
(2) The provisions ofsubsection (1) as to the issue ofnotice shall be subject to the
provisions ofSection 151.
(3) If the person on whom a notice under Section 148 is to be served is a person

treated as the agent of a non-resident under Section 163 and the assessment,
reassessment or recomputation to be made in pursuance of the notice is to be
made on him as the agent of such non-resident, the notice shall not be issued
dfter the expiry ofa period oftwo years from the end of the relevant qij^^nent
'* 'ill ,

year.
150. Provision for cases where assessment is in pursuance of an order on appeal,
etc.
(1) Notwithstanding anything contained in Section 149, the notice under Section
148 may be issued at any time for the purpose of making an assessment or
reassessment or recomputation in consequence ofor to give effect to anyfinding
200

or direction contained in an order passed by any authority in any proceeding


under this Act by way of appeal, reference or revision or by a Court in any
proceeding wider any other law.
(2) The provisions of sub-section (1) shall not apply in any case where any such
assessment, reassessment or recomputation as is referred to in that sub-section
relates to an assessment year in respect of which an assessment, reassessment
or recomputation could not have been made at the time the order which was the
subject matter of the appeal, reference or revision, as the case may be, was
made by reason ofany other provision limiting the time within which any action
for assessment, reassessment or recomputation may be taken.
151. Sanction for issue of notice.-
(1) In a case where an assessment under sub-section (3) of Section 143 or Section
147 has been made for the relevant assessment year, no notice shall be issued
under Section 148 by an Assessing Officer, who is below the rank ofAssistant
Commissioner or Deputy Commissioner, unless the Joint Commissioner is
satisfied on the reasons recorded by such Assessing Officer that it is a fit case
for the issue ofsuch notice;
Provided that, after the expiry offour years from the erul of the relevant
assessment year, no such notice shall be issued unless the Chief Commissioner
or Commissioner is satisfied, on the reasons recorded by the Assessing Officer
aforesaid, that it is a fit case for the issue ofsuch notice.
(2) In a case other than a case falling under sub-section (1) , no notice shall be
issued under Section 148 by an Assessing Officer, who is below the rank ofJoint
Commissioner, after the expiry offour years from the end of the relevant
assessment year, unless., the Joint Commissioner is satisfied on the reasons
recorded by such Assessing Officer, that it is as fit case for the issue of such

notice.

If the Assessing Officer has reason to believe that any income chargeable to

tax has escaped assessment for any year, he may assess or reassess such income.

Once an assessment is Ireopened, any other income which has escaped assessment

and which comes to the notice ofthe Assessing Officer subsequently in the course
201

of the proceeding under See. 147 can also be included in the assessment.

For this purpose, there are two conditions; firstly, the Assessing Officer

must have reason to believe that income, profits or gains chargeable to income-

tax had escaped assessment, and secondly, he must also have reason to believe

that such escapement had occurred by reason of either omission or failure on the

part of the assessee to disclose fully or truly all material facts necessary for his

assessment of that year or failure on the part of the assessee to make a return

under Sec. 139 or in response to notice issued under Sec. 142(1) or 148.

Both these conditions should be satisfied if the original assessment is made

under Sec. 143(3) or 147 and the Assessing Officer desires to take action after

the expiry of 4 years from the end of the assessment year.

However, in the following cases, only the first condition should be satisfied

(a) If the Assessing Officer wants to take action within 4 years (from the end

. ; of the assessment year) and the original assessment was completed under

Sec. 143(1), 143(3), 144 or 147; or

(b) If the Assessing Officer wants to take action after the expiry of 4 years and

the origmal assessment was completed under Sec. 143(1) or 144.

Income escaping Assessment (Section 147)

Explanation 2 to Sec. 147 clarifies that the following shall also be deemed

to be cases of income escaping assessment:

(a) where no return of income has been furnished by an assessee, although

total income is above the taxable limit;

(b) where a return of income has been furnished, but not assessment has been

made, and the assessee is found to have understated his income or claimed
202

excessive loss, deduction, etc., in the return;

(c) where an assessment has been made, but the income chargeable to tax has

been under-assessed or has been assessed at too low a rate or any excessive

loss or relief or depreciation allowance or any other allowance under the

Act has been allowed.

Issue of Notice for Reassessment (Sec.148)

Before making the assessment, reassessment or recomputation under Sec. 147,

the Assessing Officer should serve on the assessee a notice requiring him to furnish

a return of income within such period as may be specified in the notice. Before

issuing a notice, the Assessing Officer is required to record reasons for doing so.

Time Limit and Sanction for Issue of Notice (Sec.149 to 151)

Time limit and other conditions for the issue notice under Sec.148 are as

under:
-

Provisions as applicable upto May 31,2001

Upto 4 years from Beyond 4 years Beyond 7 years but


• s the end of the but upto 7 years upto 10 years from
' * <•
relevant assess­ from the end of the end of the
V"7' ment years the relevant relevant assess­
assessment year ment year

In cases subject to Assessment can be If the escaped If the escaped


scrutiny by way of reopened what­ income is Rs. income is Rs.
assessment under ever is the amount 50,000 or more 1,00,000 or more
Sec. 143(3) ior of escaped income for that year for that year.
Sec. 147

In other cases -do- If the escaped If the escaped


income is Rs. income is Rs.
25,000 or more 50,000 or more
for that year for that year
203

Provisions as applicable from June 1, 2001

Upto 4 years from the Beyond 4 years but


end of the relevant upto 6 years from the
assessment year end of the relevant
assessment year

In cases subject to Assessment can be re­ If the escaped income


scrutiny way of assess­ opened whatever is the is Rs. 1.0 lakh or more
ment under Sec. 143(3) amount of income for that year.
or 147. escaped

In other cases Assessment can be re­ If the escaped income


opened whatever is the is Rs. 1.0 lakh or more
amount of income for that year
escaped
Notes:
1. Only an Assessing Officer, not below the rank of Assistant Commissioner or
Deputy Commissioner can issue a notice. An Assessing Officer who is below the
rank ofAssistant Commissioner or Deputy Commissioner can issue the notice
only if the joint Commissioner is satisfied on the reasons recordedfor the issue
ofnotice.
2. Notice can be issued only if the Chief Commissioner/Commissioner is satisfied
on the reasons recordedfor the issue ofnotice.
3. Notice can be issued by the Assessing Officer.
4. No notice can be issued by an Assessing Officer who is below the rank ofJoint
' i

Commissioner unless the Joint Commissioner is satisfied that on the reasons


recorded by the Assessing Officer that it is a fit case of the issue of notice.

However, there are certain exceptions for the issue notice for the re-opening
-Vi"'

of the cases. .

1. According to Sec. 150(1), notice under Sec. 148 may be issued at any time

for the purpose of making an assessment, reassessment or recomputation

in consequence of (or giving effect to) any finding or direction contained in

an order passed by any authority in any proceeding by way of appeal,


204

reference or revision or by a Court.

2. If the person on whom the notice under Sec. 148 is to be served is a person

treated as an agent of non-resident (under Sec. 163), then notice shall not

be issued after the expiry of 2 years from the end ofthe relevant assessment

year.

3. If an assessment has been made for the relevant assessment year under

Sec. 143(3) or under Sec. 147, no action shall be taken under Sec. 147 after

the expiry offour years from the mid ofthe relevant assessment year, unless

he income has escaped assessment due to the failure on the part of the

assessee to file a return under Sec. 139 or in response to a notice under

Sec. 142(1) or 148 or to disclose fully and truly all material frets necessary

for this assessment. For this purpose, production before the Assessing

Officer of accounts books or other evidence from which material evidence

would, with due diligence, have been discovered by the Assessing Officer

will not necessarily amount to disclosure.

Where the initiation of the proceedings is beyond the period of 4 years


rt*

from the end ofthe assessment year, the Assessing Officer must necessarily record

not only his reasonable belief that income has escaped assessment, but also the

default or failure committed by the assessee.65

Reopening of assessment on the basis of law declared by the Court will not

be a case of failure to disclose material facts and in such a case, reassessment

proceeding initiated beyond the expiry of four years from the end of the relevant

assessment year would be barred by time.66


65. Fanner (India) Limited v. CIT (1999) 107 Taxman 53 (Mad.).
66. CIT v. Bipin Vadilal (1999) 238ITR 1022 (Guj.).
205

As regards the issue ofnotice for reassessment, the followingjudicial rulings

are worth mentioning:

(1) If a notice is invalid, entire proceedings are vitiated,67 even if the assessee

has responded to such a notice.68

(2) Where notice, though originally invalid, but is subsequently validated by

statute, reassessment is valid.69

(3) If validity of notice is not challenged before the Commissioner (Appeals)

or Tribunal, it cannot be challenged in reference.70

(4) Where return is filed within the time allowed in response to invalid notice

for reassessment, second notice of reassessment by treating such return as

invalid, will not be valid.71

(5) Recording of reasons is mandatory.72 But it is not necessary that the

Assessing Officer should elaborately set out all relevant facts. It is essential

that he must indicate broadly the facts which constitute nondisclosure and

which, in turn, have led to assessable income escaping assessment.73

(6) If in original proposal for reopening assessment, reasons are recorded and

fresh proposal is sent merely to correct status ofthe assessee wrongly shown

in original notice, reasons need not be recorded afresh in the fresh proposal.74

(7) Only requirement in law for initiating proceedings under Sec. 148 is that

67. CIT v. Kurban Hussain Ibrahimji Mithibomala (1971) 82ITR 821 (SC)
68. Sewlal Daga v. CIT (1965) 55 ITR 406 (Cal.).
69. Dayaldas Khushiram v. CIT (1943) 11 ITR 67 (Bom.).
70. CIT v. Nemidas Vishaniji & Co. (1984) 145 ITGR 423 (AP).
71. CIT v. S.Raman Chettiar (1965) 55 ITR 630 (SC).
72. CIT v. Thakurlal (1981) 132 ITR 398;
East West Commercial Co.Ltd., v. ITO (1981) 128 ITR 326 (Cal.)
73. K.C.P.Ltd. v. ITO (1984) 146 ITR 284 (MP).
74. Sheo Narain Jaiswal v. ITO (1989) 176 ITR 352 (Pat.).
206

there must be reasons to justify belief that there is escapement and

suppression of income and there is no need to disclose reasons.75

(8) Where petitioner makes an application for getting a copy of the reasons

recorded by the assessing authority to proceed under Sec. 148, then the

assessing authority shall communicate reasons, subject to the necessity of

protecting his source/information ifhe thinks such protection is necessary.76

(9) Where assessee 1ms furnished return in pursuance of notice under Sec. 148,

on assessee’s request, the Assessing Officer must furnish assessee with

reasons recorded by him or a certified copy thereof.77

(10) Once the assessee has filed his return in response to the notice under

Sec. 148(1) and has contended that very initiation of reassessment

proceedings is not valid in law for the reasons that reasons are not recorded

or that even if recorded, they are not relevant and germane, he becomes

entitled to be communicated the reasons recorded under Sec.l48(2).78

(11) The assessing officer has to disclose reasons for reopening assessment to

Court though he does not have to disclose them in notice.79 It is trite law

that when an assessee challenges a notice to reopen assessment under


* '<f 4 ' ‘

Sec. 147 on ground that no reasons under Sec. 148 have been recorded or

disclosed, the Court must call for and examine the reasons.80

(12) Wherever a contention is raised that the Assessing Officer did not apply Us

mind before issuing notice under Sec. 148, the burden is on the assessee to
75. Dr.V.Mohan Das v. Dy.CIT (1991) 188ITR 727 (Ker.)
76. Jindal Products v. ITO (1993) 70 Taxman 111 (All.).
77. Jawahar Lai Gupta v. ITO (1992) 196 ITR 147 (All.).
78. Sohan Lai Singhania v. ITO (1992) 194 ITR 519 (AIL).
79. Dalai Consultants P.Ltd. v. D.V.Bapat, ITO (1982) 138 ITR 334 (Bom.)
80. Commnnidado of Chicalim v. ITO (2000) 113 Taxman 331 (SC).
207

show that the Assessing Officer did not act according to law.81 It is very

clear that when a notice has been issued on the ground that the income has

escaped assessment, then it becomes the duty ofthe concerned respondent-

income tax authority to file an affidavit and to place the necessary material

before the court.82

On the basis of these judicial rulings, the following, conclusions may be

drayvn:

1. The reasons for reopening of the case may not be supplied to the assessee;

and simply because these are not supplied to him, the reopening does not

become bad;

2. The reasons must, however, recorded and should have link with the reopened

assessment;

3. Though sufficient of reasons for forming belief is not justifiable, it is open

to the assessee to establish that there, in fact, existed no belief and that the

belief was not at all bona fide one or was based on vague, irrelevant and

non-specific information and to that limited extent, the court may look to

the conclusion arrived at by the Assessing Officer and whether the material

had any rational connection or a live link with the formation of the belief.

4. Where reasons said to have been recorded and said to be available fore the

issue ofnotice under Sec. 147, are not available even to the court or tribunal,

reopening of the case is bad in law.

A few more judicial rulings are also available on the issue of notice for

reassessment:
8L S.K.Gupta & Co. v. ITO (2000) 246ITR 560 (All.)
82. Hiralal Bhagwati v. CIT (2000) 246 ITR 188 (Guj.)
208

(1) Notice must be in writing.83

(2) Before the issue of notice, it is not necessary to prove that a particular

income has escaped assessment.84

(3) Specification of amount of escapement is not necessary.85

(4) Wrong description of assessee in notice under Sec. 148, which is corrected

subsequently, will not invalidate notice.86

(5) Where there are two entities having same name and address and it is not

clear from the notice as to which entity it was addressed, the notice would

not be a valid one.87

(6) If a notice sent by registered post comes back with an endorsement of refusal

to accept, it is a presumptive proof of the service of notice.88

(7) the proceedings which are initiated under Sec. 154 or 155 cannot be made a

ground of defence for invalidating the notice issued under Sec. 147 or 148,
-s

as both the proceedings are independent of each other and cannot

successfully be argued to point out that overlap.89

(8) Notice must be issued within the limitation period, service within the

limitation period is not a perquisite for conferment of jurisdiction on the

Assessing Officer.90 Therefore, the word ‘issue’ used in Sec. 149 does not

mean ‘serve’.91

83. B.K.Gooyee v. CIT (1966) 62ITR 169 (Cal.).


84. B.P.Halder & Sons, In re (1942) 10 ITR 79 (AIL).
85. East Coast Commercial Co.Ltd. v. ITO (1981) 128 ITR 326 (Cal.).
86. Mahabir Prasad Poddar v. ITO (1971) 119 ITR 340 (Cal.).
87. ITO v. Chandi Prasad Modi (1979) 119 ITR 340 (Cal.).
88. Cn v. Har Prasad (1989) 178 ITR 591 (Punj.& Har.).
89. Dev Son P.Ltd. v. Union of India (1991) 56 Taxman 122 (J&K).
90. R.K.Upadhyaya v. Shanabhai P.Patel (1987) 166 ITR 163 (SC).
91. Cn v. Sheo Kumari Debi (1986) 157 ITR 13 (Pat.).
209

5.11 Other Provisions


Section 152 reads:
152. Other provisions. -
(1) In an assessment, rassessment or recomputation made under Section 147, the
tax shall be chargeable at ther ate or rates at which it would have been charged
had the income not escaped assessment.
(2) Where an asessment is reopened under Section 147, the assessee may, ifhe has
not impugned any part of the original assessment order for that year either
under Sections 246 to 248 or under Section 264, claim that the proceedings
under Section 147 shall be dropped on his showing that he had been assessed on
an amount or to a sum not lower than what he would be rightly liable forevenif
the income alleged to have escapped assessment had been taken into account, or
the assessment or computation had been properly made.
Provided that m so doing he shall not be entitled to reopen matters
concluded by an order under Sections 154,155, 260, 262 or 263.

In an assessment/reassessment/recomputation made under Sec. 147, the tax

shall be chargeable at the rate or rates at which it would have been charged had

the income not escaped assessment. Moreover, when an assessment is reopened

under Sec. 147, the assessee may (if he has not impugned any part of the original

assessment order for that year, either under Secs.246 to 248 or 264) claim that

the proceedings under Sec. 147 shall be dropped on his showing that he had been

assessed on an amount not lower than what he would be rightly liable for, even if

the income said to have escaped assessment had been taken into account, or the

assessment or computation had been properly made. However, in doing so, he

shall not reopen matters concluded under Secs. 154 (Rectification of mistake),

155 (Other amendments), 260 (Decision of High Court/Supreme Court), 262

(Hearing before Supreme Court), 263 (Revision of orders prejudicial to revenue).


210

5.12 Time Limits for Completion of Assessments

Section 153 reads:

153. Time limit for completion of assessments and reassessments. -


(1) No order ofassessment shall be made under Section 143 or Section 144 at any
time after the expiry of-
(a) two years from the end of the assessment year in which the income was
first assessable; or
(b) one year from the end of the financial year in which a return or a revised
return relating to the assessmentyear commencing on the 1st day ofApril,
1988, or any earlier assessment year, is filed under sub-section (4) or
sub-section (5) ofSection 139,
whichever is later.
(2) No order of assessment, reassessment or recomputation shall be made under
Section 147 after the expiry of one year from the end. of the financial year in
which the notice under Section 148 was served:
Provided that where the notice under Section 148 was served on or after
the 1st day ofApril, 1999, but before the 1st day ofApril, 2000, such assessment,
reassessment or recomputation may be made at any time upto the 31st day of
March, 2002.
(2-A) Notwithstanding anything contained in sub-sections (1) and (2), in relation to
the assessmentyear commencing on the 1st day ofApril, 1971, and any subsequent
assessment year, cm order offresh assessment in pursuance of an order under
Section 250 or Section 254 or Section 263 or Section 264, setting aside or
cancelling an assessment, may be made at any time before the expiry ofone year
from the end of the financial year in which the order under Section 250 or /
Section 254 is received by the Chief Commissioner or Commissioner or, as the
case may be, the order under Section 263 or Section 264 is passed by the Chief
Commissioner or Commissioner.
Provided that where the order under Section 250or Section 254 is received
by the Chief Commissioner or Commissioner or, as the case may be, the order
under Section 263 or Section 264 is passed by the Chief Commissioner or
211

Commissioner, on or after the 1st day ofApril, 1999, but before the 1st day of
April, 2000, such an order offresh assessment may be made at any time upto the
31st day ofMarch, 20002.
(3) The provisions ofsub-sections (1) and ((2) shall not apply to thefollowing classes
of assessments, reassessments and recomputations which may, subject to the
provisions ofsub-section (2-A) be completed at any time.
(i) (Omitted)
(ii) where the assessment, reassessment or recomputation is made on the
assesses or any person in consequence of or to give effect to anyfinding
or direction contained in an order under Sections 250, 254, 260, 262,
263, or 264 or in an order ofany court in a proceeding otherwise than by
way ofappeal or reference under this Act;
(in) where, in the case of a firm, an assessment is made on a partner of the
firm in consequence of cm assessment made on the firm under Section
147.
Explanation-1. -In computing the period oflimitationfor 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 reheard under the proviso to
Section 129, or
(ii) the period ihiring which the assessment proceeding is stayed by an order
or injunction ofany court, or
i! C'-

(Hi) the period commencingfrom the date on which the Assessing Officer directs
, the assessee to get his accounts audited under sub-section (2-A) ofSection
142 and ending with the last date on which the assessee is required to
, furnish a report ofsuch audit under that sub-section, or
(iv) (Omitted)
(iv-a) the period not exceeding sixty days commencingfro the date on which the
Assessing Officer received die declaration under subsection (1) ofSection
158-A arid ending with the date on which the order under subsection (3)
of that section is made by him, or
(v) in a case where an application made before the Income Tax Settlement
212

Commission under Section 245-C 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 245-D is received by the Commissioner under
sub-section (2) of that section,
shall be excluded.
Provided that where immediately after the exclusion ofthe aforesaid time
or period, the period of limitation referred to in subsection (1),(2) and (2-A)
available to the Assessing Officerfor making an order ofassessment, 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.
Explanation-2. - Where, by an order referred to in clause (ii) ofsub-section
(3), any income is occludedfrom the total income to the assesseefor an assessment
year, then, an assessment ofsuch income for another assessment year shall, for
the purposes of Section 150 and this Section, be deemed to be one made in
consequence ofor to give effect to anyfinding or direction contained in the said
order.
Explanation-3. - Where, by an order referred to in clause (ii) ofsubsection
(3), any income is excludedfrom the total income of one person and held to be
the income ofanother person, then, an assessment ofsuch income on such other
person shall, for the purposes ofSection 150 and this Section, be deemed to be
one made in consequence ofor to give effect to anyfinding or direction contained
in the said order, provided such other person was given an opportunity ofbeing

heard before the said order was passed.

Sec. 153 prescribes time limits for completion of assessment/reassessment

under Secs. 143,144 or 147 as follows:

(1) Assessment under Sec. 143 or 144 (Sec.l53(l))

An assessment under Secs. 143 or 144 must be completed within 2 years from the

end of the relevant assessment year, regardless of the fact whether it is a case of
213

concealment. For example, assessment under Sec. 143 or 144 for the assessment

year 2001-02 should be completed upto March 31, 2004.

(2) Assessment or Reassessment under Sec. 147 (Sec. 153(2))

An assessment or reassessment under Sec. 147 must be completed within 2 years

(one year with effect from June 1,2002) from the end of financial year in which

notice under Sec. 148 was served. For instance, for the assessment year 1990-91,

assessment was completed under Sec. 143(3) on 30.1.1991. Notice under Sec. 148

was issued on 26.3.2001 to include an unassessed income of Rs. 1.20 lakh. The

notice is served on the assessee on April 4,2001. In this case, the reassessment

under Sec. 147 must be completed by 31.3.2003, that is, within 1 year from the

end of the financial year 2001-02 in which the notice is served.

It must also be noted that from June 1, 2001, no order of assessment or

reassessment or recomputation shall be made under Sec. 147, after the expiry of

one year from the end ofthe financial year in which the notice under Sec. 148 was

served. However, where the notice under Sec. 148 has been served during the

financial year 1999-2000, such assessment, reassessment or recomputation may

be made at any time upto March 31,2002.

(3) Fresh Assessment (Sec.l53(2A))

Sec.l53(2A) is applicable if fresh assessment is made in pursuance of an order

under Sec.250, 254, 263 or 264, setting aside or cancelling an assessment

(Sec. 153(2A) is not applicable if an order is not set aside or cancelled). In such

cases, fresh assessment can be made within the time limits given below:
214

Situations lime-limit
If assessment is set aside or Fresh assessment shall be completed
cancelled virtue of an order within 2 years from the end of the
under Sees.250 or 254. financial year in which order under
Secs.250 or 254 is received by the
Chief Commissioner or Commissioner.

If assessment is set aside or cancelled Fresh assessment shall be made within


by virtue of an order under Secs.263 2 years from the end of the financial
or 264. year in which order under Secs.263
or 264 is passed by the Chief

>■ ■■ .... - -...... -■■■ ..........


Commissioner or Commissioner -

(4) Assessment/reassessment to give effect to a direction (Sec. 153(3))

The Table below highlights the scope of sub-Secs.(2A) and (3) of Sec. 153.

Section of Nature of Order lime limit given No time-limit


order by Sec.l53(2A) under Sec. 153(3)
for fresh for reassessment
assessment

250, 254, Setting aside or 2 years time-limit


263,264. cancelling an for fresh
assessment assessment

250,254,260,262, Giving a direction No time-limit for


263 or 264 or an for assessment, assessment/
order of any reassessment or reassessment or
Court, otherwise recomputation. recomputation in
than by way of the case of an
appeal/reference assessee or any
other person.

147 Reassessing firm


which requires
revision of •

partner’s
assessment

..
The provisions of sub-sees.(f) and (2) ofSec.153 shall not applyttrthe

following classes of assessment, reassessment and recomputations which maybe

completed at anytime, subject to the provisions ofSec/153(2A):

(a) where a fresh assessment is made under Sec.146;

(b) where the assessment, reassessment or recomputation is made on the'

assessee or any person, in consequence of or to give effect to any finding

or direction contained'in an order under Secs.250, 254, 260, 262, 263 of

264or in an order of any Court in a proceeding otherwise than by way of

appeal or reference under the Act;

'(c) where, in the case of a firm, an assessment is made on a partner of a firm in

consequence of an assessment made on the firm under Sec. 147.

fir the aforesaid cases, no lime limitation applies. The only exception is

where an assessment is set aside or cancelled in appeal/revisioiq in which case,

fresh assessment can be made only within the time prescribed by Sec.153(2A).

Various judicial ridings have interpreted the meanings of the terms used in

the Sections relutingto the assessment/reassessment andrecomputation of

income; the significant among them are being cited "below.

(1) Any person’: The words ‘any person’ are necessarily circumscribed by

the scope of the subject matter of file appeal or revision; that'is, the'‘person’

signified by the' term must be the one who would be liable to be assessed for the

whole or a part of the income fiat went into the assessment of the year under-

appeal or revision. Modification or setting aside of an assessment made on a

firm, joint Hindu family, association of persons, for a particular yearinay affect

"the assessment for the said year on a partner or partners ofthe firm, member or
members of theHUF or the individual, in such cases, though the latter are eo

'nomine parties to the appeal, their assessment depend upon the assessment ofthe

former. These instances are only illustrative. Therefore, the expression ‘any person’

in the setting in which it appears must be confined to a person intimately connected

in-the above sense with the assessments ofthe year under appeal.'92

The intimate connection muStfie such thatThe assessment of one must

depend on the assessment ofthe other as inthe case of a partner and partnership

'firm and mi individual and members of the joint Hindu family. In other words,

though a person is not eo nomine party to an appeal, it is apparent that the finding

must be so recorded that there is a consideration of the liability of that person to

assessment which is so intimately connected with the assessment which is the

'subject matter of the appeal that the controversy as to whose income it is got

decided by the same order. Merely because in the course of assessment a finding

is recorded that income belongs to somebody else, the intimate connection is not

automatically established by the fact that the same income isthought to be assessed

inthe hands of another.93 Where an order is passed by-an appellate authority in

the case of abigger HUF accepting or not accepting disruption, smaller HUFs

would be persons intimately connected with the assessment of fhebiggerHUF.94

The- person who filed return as well as appeal cannot claim that he was

stranger-to proceedings beeau se assessment was made in different-status.95

Where there was a partial partition in a HUF and the separated members

thereoffiledtheir returns as individuals and one ofthemhad appealed againstthe


92. ITO v. Muriidhar Bhagwan Das (1964) 52 ITR 335 (SC).
93. CETLv.-Homi Mehta & Sons (1982) 137 ITR 213 (Bom.).
94. Bhagwan Das Sita Ram (HUF) v. CIT (1984) 146 ITR 563 (SC).
95. CIT v. Anibala Flour Mills (1970) 78 ITR 256 (SC).
assessment order as he was assessed asHUF, it washeld that the direction ofthe

appellate authority in that appeal could not be said to apply to the other members

for the purposes of determining question of limitation for reopening their

assessments.96

Based on the above judicial rulings, it may be concluded that a direction or

finding given against 'any other person’ will be operative (that is, an assessment

or reassessment can be made on ‘any other person’ on the basis of such a finding

or direction without any time limit) only if:

(a) such person is intimately connected with the assessment; and

(b) a finding/direction is necessary for disposal of appeal/reference, etc.

In the case of a person other than the assessee who is not intimately connected

-with the assessment, a valid finding or direction cannot he given against them.97

(2) ‘Finding or Direction ’: The expressions ‘finding’ or ‘direction’ are limited

sMq-their meaning. A finding given in an appeal; revision or reference arising out of

an assessment must be afinding necessary for the disposal of the particular case,

assessment year. To be a necessary finding, it must be directly involved in the

disposalrofthe case. It is possible in certain cases that in order to render a finding

in respect"of one person, a‘finding in respect of another person may be railed for.

For example, where the feet shows that the income can belong either to ‘A’ or

‘B’ and to no one else, a finding that it belongs or does not belong to ‘B” would

be determinative of the issue whether it can be taxed as A’s income. A finding

96. CIT v. Onkarmal Meghraj (HUF) (1974) 93 ITR 233 (SC).


97. err v. Saghubir Singh Trust (1980) 123 ITR 438 (S€);
N.K.Patni v. ITO (1983) 139 ITR 972 (AH.).
218

respecting TB’ is intimately involved as a step in the process of reaching the

Cdtim&tefinding respecting ‘A’. If, however, the finding as to' A’s liability can be

directly arrived at without necessitating a finding in respect of ‘B’, then a finding

made in respect of is an incidental finding only. It is not a finding necessary

for the disposal of the case pertaining to *A\ The same principles apply when the

question is whether the income under enquiry is taxable in the assessment- year

under consideration or any other assessment year.98

The expression ‘direction’ in Sec. 153(3)(99) must be an express direction

necessary for the disposal of the case before the authority or court. It must also

be a direction which the authority or Court is empowered to give while deciding

the case before it. The expressions ‘finding’ and ‘direction’ in See.l\53(3)(ii)

must be accordingly confined. A direction by a statutory authority is in the nature

of ah order requiring positive compliance. When it is left to the option and

discretion of the Assessing Officer whether or not to take action, it cannot be


•7 ' *r *•

described as a direction. A mere observation by the Commissioner (Appeals)

that the Assessing Officer “is free to take action” to assess the excess in the

hands tifthe co-owners cannot be described as a ‘direction’.99

Tlie word ‘finding’ will only cover material questions which arise in a

particular case for decision by the authority hearing the case or the appeal which

(being necessary for passing the final order or giving the final decision in the

appeal) has been the subject of controversy between the interested parties or on

which the parties concerned have been given a hearing. A ‘finding’ therefore, can

9SL Rajjnder-Nath v. CIT (1979) 120 JTR 14 (SC); C.M.Rajgharia v. TTO (1975)
98 ITR 486 (Pat); K.Simrathnmll v. CIT (1967) 64 ITR 166 (Mad.).
99. RajinderNath v. CIT (1979) 120FTR 14 (SC).
219

be only that which is necessary for the disposal of an appeal in respect of an

assessment of a particular year. For example, the Commissioner (Appeals) may

hold, on the evidence, that the income shown by the assessee is not the income

for the relevant year and thereby exclude that income from the assessment of the

year under appeal. The finding in that context is that income does not belong to

the relevant year. He may incidentally find that the income belongs to another

year, but that is not a finding necessary for the disposal of an appeal in respect of

the years of assessment in question. The expression ‘direction’ cannot be construed

in vacuum, but must be collated to the directions which the Commissioner

(Appeals) can give under the Section. It can only refer to the directions which

the Commissioner (Appeals) or other Tribunals can issue under the powers

conferred under the respective sections. Accordingly, the expression ‘finding’ as

well as the expression ‘direction’ can be given full meaning, namely, that the

findingis a finding necessary for giving relief in respect ofthe assessment of the

year in question and the direction is a direction which the appellate or revisional

authority is empowered to give under the Section mentioned therein.100

The word ‘finding’ in law has a definite meaning and that is indicated by

the provisions of the Code of Civil Procedure where it is indicated that a finding

is a decision of a Court on material questions in issue. The word ‘finding’ cannot

be interpreted so as to include within it any statement of fact contained in a

decision, irrespective of whether that fact was or was not material to the decision

and whether the Court or the Tribunal, when recording the decision, had any

occasion to hear parties on that question of fact and to record a decision on it


100. ITO v. Murlidhar Bhagwan Das (1964) 52 ITR 335 (SC); N.K.T.Sivalingam
Chettiar v. CIT (1967) 66 ITR 586 (SC).
220

instead of merely reciting it as a statement of fact. The word ‘finding’ will only

cover a material question which arises in a particular case for decision by the

authority hearing the case or the appeal which, being necessary for passing final

order or giving the final decision ip the appeal, has been the subject of controversy

between the interested parties or on which the parties concerned have been given

a hearing.101

Explanations 2 and 3 to Section 153

Explanations 2 and 3 to Sec. 153 are applicable in the following situations:


'.... .... ■ ... ■ ......... ..... ............ .. .... ..... .. 1,1,1 ... ..... ..
Explanation 2 Explanation 3
A finding of direction is given in an A finding or direction is given in an
order under Sees.250,254,260,262, order under Secs.250, 254,260, 262,
263 or order of any Court. 263, 264 or order of any Court.

Under such order, an income is exclu­ Under such order, any income is exclu­
ded from the total income of the ded from total, income of one person
assessee for an assessment year. and held to be income of another
person.

An assessment of such income for An assessment of such income on such


another assessment year may be made other person may be made at any time
at any time (even notice under Sec. even notice under Sec. 148 may be
148 can be issued at any time) to give issued at any time) to give effect to
effect to any finding/direction such finding/direction.
contained in such order.

Such other person should be given an


opportunity of being heard before
passing an order on such other person.

101. Pt.Hazari Lai v. ITO (1960) 39ITR 265 (All.).


221

Explanation-2 to Sec. 153 partially supersedes the Supreme Court decision

in ITO v. Murlidhar Bhagwan Das (1964) 52 TTR 335 and N.K.T.Shivalingam

Chettiar v. CIT (1967) 66ITGR 586 by providing that in any case where income

is excluded in appeal, reference or revision on any other legal proceeding, from

the assessment for any year, an assessment of such income for another assessment

year shall be deemed to be one made in consequence of, of to give effect to, any

finding or direction by the authority hearing the case. This fiction of law removes

the bar of limitation, irrespective of the question whether the authority has, in

fact, given or can, in law, give a finding or direction that the income should be

taxed in specified assessment year other than the year for which the authority

hears the case. The effect of Secs. 150 and 153(3) read with Explanation-2 is

that, if any income is detected from assessment in a higher proceeding, on the

ground that it is not the income of that year, steps may be taken under Sec. 147 to

assess it as the income of another year; without any limitation applying to the

issue of the notice under Sec. 148 or to the completion of the assessment or

reassessment.

Explanation-2 operates to pout all the assessees on the same footing

inasmuph as, once an income is excluded from assessment for a particular year
i

on the ground that it is not the income of that year, the bar of limitation is

necessarily removed for assessment of another year, regardless of the question

whether there is any express finding by the higher authority that the amount

represents the income another specified year.

Thus, on a careful reading ofExpUmatian-2, it is evident that mere exclusion

of an income from an assessment year by a higher authority in a proceeding before


222

it, gives jurisdiction to the Assessing Officer to assess or reassess that excluded

income in a different assessment year, and, in such a case, under Explanation-2,

to Sec.l53(3),it will be deemed to have been made in consequence of or to give

effect to a finding or direction contained in the said order. Tfthere is no finding or

direction in the order of a higher authority, then Explanation-2 to Sec. 153(3)

shall apply. On the other hand,- if there is a finding or direction, the case would

fall under Sec. 153(3)(ii).102

Explanation-3 to Sec. 153 embraces with its scope ‘persons other than the

assessee’ as well but lays down the condition that the third party should be given

an opportunity of hearing before the order depriving him of the right ofpleading

limitation is passed103 Moreover, Explanation-3 has no application unless the

order under Sec. l 53(3((ii) incorporates a finding that the income excluded from

the total income of one person was the income of another person.104 Mere

examination of a director of the company cannot be equated with an opportunity

being given to the company of being heard.105

Explanation-1 to See. 153 relates to the period of limitation.- The Proviso


+ s *

in Explanation-1 provides that where immediately after the exclusion of the time

or period mentioned, the period of limitation referred to in sub-Secs.(l),(2) and


‘ - i

(2A) of Sec. 153 available to the Assessing Officer for making orders under those

sub-sections is less than 60 days, the remaining period shall be extended to 60

days and the period of limitation shall be deemed to be extended accordingly.

A few of the judicial rulings in this behalf are worth mentioning;


102. B.A.R.AMul Rafiriiaii SaheB v. ITO (1975) ldO ITR 541 (AP).
103. Gupta Traders v. GIT (1982) 135 ITR 504 (All.)
104. CIT v K.R.Patel (1969) 73 ITR 509 (Mys.)
105. C.A.Gulamkar, ITO v. Ramnarain Sons P.Ltd: (1979) 119 ITR 83 (Bom.).
223

(1) Time limit is only for making assessment order* it may be communicated

later.106

(2) Assessment to be completed also includes determination of tax before

limitation period.107

(3) Whether assessment is time-barred is a question of law.108

(4) There is no merit in the contention that since sub-Section (2A) of Section

153 uses the word ‘may’, it is not mandatory on the part of the Assessing

Officer to complete the assessment proceedings within the time prescribed

under sub-Sec.(2A) of Sec. 153.109

(5) ‘An order of any Court’ means an order of any and every Court in the

country. If there is an order of a Court, whatever be its status* then the bar

of limitation is automatically lifted.110

(6) The words ‘in consequence of or to give effect to’ have to be collated with

* and cannot enlarge the scope of the findings or direction.*111*

(7) ‘Finding’ which Gan lift bar oflimitation is limited to matters which appellate

authority is called upon to decide.112 ‘Finding’ must be necessary for the

disposal of appeal.113 For instance, an order dropping proceedings under

Sec.263 is not an order containing ‘direction’ or ‘finding within the meaning

of.Sec. ISO.114 ________________________________________


106. Esthuri Aswathiah v. CIT (1963) 50ITR 764 (Mys.).
107. Mohendra J .Thacker & Co. v. CIT (1983) 139 ITR 793 (Cal);
CIT v. Purushottamdas T. Patel (1994) 209 ITR 52 (Guj.).
108; Sudesh Kumar v. CIT (1975) 101 ITR 865 (J&K).
109. CIT v. Smt.Kamla Devi (1995) 83 Taxman 575 (All.).
110. T.M.Kousali v. Sixth ITO (1985) 155 ITR 739 (Kar.).
111. ITO v: Murlidhar Bhagwan Das (1964) 52 ITR 335 (SC);
112. Pt.Hazar Lai v. ITO (1960) 39 ITR 265 (All.)
113. Rajinder nath v. CIT (1979) 120 ITR 14 (SC).
114. Raj Kishore Prasad v» ITO (1992) 195 ITR 438 (All.).
224

(8) Explanation-3 embraces within its scope persons other than assessee as

well but it lays down conditions that such third party should be given an

opportunity of being heard before order depriving him of right of pleading

his limitation is passed.115

(9) An assessment or reassessment will not be time-barred if the assessment

order is made before the expiry of the limitation period even though the

order and demand notice are served on the assessee after the expiry of that

period.116

Where, however, the order of assessment was passed before the expiry

of limitation period, but the notice of demand was prepared after the expiry

of that period, the assessment order would be barred by limitation, as the

assessment order includes not only computation of total income but also

the .determination of tax.117

5.13 Rectification of Mistakes


Section 154 reads:
134, Rectification of mistake. -
(1) With a view to rectifying any mistake apparent from the record an income tax
authority referred to in Section 116 may, -
(a) amendany order passed by it under the provisions of this Act;
(b) amend any intimation or deemed intimation under sub-section (1) ofSection
143:
(1-A) Where any matter has been considered and decided in any proceeding by way of
appeal or revision relating to an order referred to in sub-section (1) the authority
_____passing such order may, notwithstanding anything contained in any law for the
115. Gupta Traders v. CIT (1982) 135 ITR 504 (All.).
116. Kodidasu Appalaswamy and Suryanarayana v. CIT (1962) 46 ITR 735 (AP);
Laxmidas & Co. v. CIT (1969) 72 ITR 88 (Bom.);
Ramananand Agarwalla v. ClT (1985) 151 ITR 216 (Gauhatti).
117. (Mohendra J.Thacker & Co. v. CIT (1983) 139 ITR 793 (Cal):
225
p.50
time being in force, amend the order, under that sub-section in relation to any
matter than the matter which has been so considered and decided.
(2) Subject to the other provisions of this section, the authority concerned, -

(a) may make an amendment under sub-section (1) of its own motion, and
(b) shall make such amendment for rectifying any such mistake which has
been brought to its notice by the assessee, and where the authority
concerned is the Commissioner (Appeals), by the Assessing Officer also.
(3) An amendment, which has the effect of enhancing an assessment or reducing a
refund or otherwise increasing the liability of the assessee, shall not be made
under this Section unless the authority concerned has given notice to die assessee
of its intention so to do and has allowed the assessee a reasonable opportunity
ofbeing heard;
(4) Where an amendment is made under this section, an order shall be passed in
writing by the income tax authority concerned,
(5) Subject to the provisions of Section 241, where any such amendment has the
effect of reducing the assessment, the Assessing Officer shall make any refund
which, nitty be due to such assessee.
(5) Where any such amendment has the effect ofenhancing the assessment or reducing
a refund already made, the Assessing Officer shall serve on the assessee a notice
ofdemand in the prescribedfor specifying the sum payable, and such notice of
demand shall be deemed to be issued under Section 156 and the provisions of
this Act shall apply accordingly;
(7) Save as otherwise provided in Section 155 or sub-section (4) ofSection 186, no
amendment under this Section shall be made after the expiry offour years from
the end ofthefinancial year in which the order sought to be amended was passed.
(8) Without prejudice to the provisions ofsub-section (7); where an application for
amendment under this Section is made by the assessee on or after the 1st day of
June, 2001, to an income tax authority referred to in sub-section (1), the authority
shall pass an order, within a period ofsix months from the end of the month in
which the application is received by it, -
(a) making the amendment; or

(b) refusing to allow the claim.


226

With a view to rectifying any mistake apparent from the record an income-

tax authority may amend any order passed by it. An income-tax authority can

also amend any intimation or deemed intimation under Sec. 143(1).

Following are some of the examples of the mistakes which can be rectified

under this Section: an error of law or fact, a clerical or arithmetical mistake,

error in determining written down value, overlooking the obligatory provisions

of the legislature mid mistake arising as a result of subsequent interpretation of

law by the Supreme Court or subsequent retrospective amendment of law.

Furthermore, rectification under Sec. 154 shall also be made:

(a) by the income-tax authority on its own motion;

(b) by the income-tax authority if mistake is brought to its notice by the assessee;

(c) by the Deputy Commissioner (Appeals) or Commissioner (Appeals),

if mistake is brought to its notice by the Assessing Officer.

Even if an appeal has been preferred against an order, a mistake in that part

ofthe order which was not subject matter of appeal and which was left untouched

by the appellate authority can be rectified under Sec. 154(1).

Where rectification has the effect of enhancing tax liability or reducing a

refund, the concerned authority is required to issue a notice of its intention to do

so to theassessee and to give to him a reasonable opportunity of being heard.


1
Rectification can be made within the time-limit given below:

(a) within 4 years for the end ofthe financial year in which the original order is

passed; or

(b) within 6 months from the end of the month in which application is received

(if application is made after May 31, 2001), whichever is earlier.


227

Where the rectification has the effect of reducing the assessment, the

Assessing Officer shall make any refund which may be due to the assessee.

Where the sums referred to in the first proviso under Sec.43B had in fact

been paid on or belbre the due dates mentioned therein, but the evidence therefor

had been omitted to be furnished along with the return, the Assessing Officers

can entertain applications under Sec. 154 for rectification ofthe intimations under

Sec. 143(l)(a) or orders under Sec. 143(3) and decide the same on merits (CBDT

Circular No.669 of25.10.1993).

The following judicial rulings on the scope of Sec. 154 merit consideration:

(1) Rectification proceedings are part of the proceedings for assessment.118

(2) Ifin a case, requirements ofboth Sec. 147 and 157 are satisfied, the Assessing

Officer can have recourse to either.119

(3) Proceedings which are initiated under Sec. 154 or 155 cannot be made a

ground of defence for invalidating notice issued under Sec. 147 or 148.120

(4) Where the first rectification application has been dismissed by the

Commissioner (Appeals), the successor Commissioner (Appeals) cannot

admits second application and allow the same in respect ofthe same alleged

mistake.121
'\n\
**v

(5) A mistake apparent from record must be an obvious and patent mistake, it

must not involve a debatable point of law.122 For instance, where a

controversy can be resolved only by way of a complicated process of


118. Rambhai Jethabhai Patel v. CIT (1977) 108ITR 771 (Guj.)).
119. Bihar State Road Transport Corpn. v. CIT (1976) 103 ITR 736 (Pat.);
Salem Provident Fund Society Ltd. v. CIT (1961) 42 ITR 547 (Mad.)).
120. Dev Son.P.Ltd. v. Union of India (1991) 56 Taxman 122 (J&K)).
121. CIT v. J.K.Bankers (2000) 245 ITR 844 (All.)).
122. T.S.Balram, ITO v. Volkart Bros. (1971) 82 (ITR) 50 (SC)).
228

investigation, recourse cannot be taken to Sec. 154.123

(6) If, on a question of construction on a point of law, two views are possible,

then the view which is in favour ofthe assessee has to be taken and, therefore,

no rectification can be done by involving Sec. 154.124

(7) Under the provisions of Sec. 154, there has to be a mistake apparent from

the record. In other words, a look at the record must show that there has

been an error and that error may be rectified. Reference to documents outside

the record and the law is impermissible when applying the provisions of

Sec. 154.125

(8) If assessment order is plainly and obviously inconsistent with the specific

and clear provision amended retrospectively, indisputably there is a mistake

apparent from record126 A subsequent decision of the Supreme Court can

validly form basis for rectifying an order of assessment under Sec. 154,

provided the decision is given by the Apex Court within four years from

the date of order.127

The CBDT has also issued its Circular No.68 of 17.11.1971 in support

of the aforesaid view. However, a contrary opinion was expressed by the

Punjab and Haryana High Court, where it was held that it is not possible

for the department to carry out rectification on the solitary ground,128 that

in a later decision, the Supreme Court has impliedly overruled that decision.

123. CIT v. Delhi Cement Stockists (1971) 81ITR 515 Delhi!).


124. CIT v. Indian Steel & Wire Products Ltd. (1991) 192 ITR 252 (Cal.)).
125. CIT v. Keshri Metal P.Jtd. (1991) 237 ITR 165 (SC)).
126. CIT v. E.Sefton & Co.P.Ltd. (1989) 179 ITR 435 (Cal.))
127. B.V.K.Seshavataram v. CIT (1994) 210 ITR 633 (AP); Kil Kotagiri Tea &
Coffee Estates Co.Ltd. v. ITAT (1988) 174 ITR 579 (Ker.)).
128. CIT v. Haryana Slate Cooperative Supply and Marketing Federation Ltd.
(1995) 80 Taxman 330)
229

Similar views were expressed in Jiyajeerao v. ITO (J98J)129

(9) Rectification is not confined to clerical or arithmetical error only.130

(10) Tribunal’s finding is a part of the record of appeal so as to empower the

Deputy Commissioner to rectify his earlier order.131

(11) Record of assessment of other assessment years can also be looked into.132

(12) Assessment records of firm and partners are part of the same record.133

But Mistake apparent from record of firm is not a mistake apparent from

record of its partners.134

(13) An authority cannot proceed to rectify a mistake in an order of any higher

authority. An Assessing Officer cannot rectify a mistake in order of the

Deputy Commissioner.135

(14) The object of issuing a notice to the assessee before passing a rectification

order is that no order for rectification should be passed to the detriment of

the assessee without affording him a reasonable opportunity of hearing,

but thfe rule is not so rigid that if, as a matter of fact, the assessee has

knowledge of the proceedings and the matter has been discussed with him,

eyenthen an advance order would be invalid merely because no notice was

given. The notice to the assessee may be express or constructive. It is not

always necessary to serve the assessee with a notice if he is aware of the

rectification proceedings.136
129. 130 ITR 710 (Cal.)
130. N.V.N. Nagappa Chettiar v. ITO (1958) 34 ITR 583 (Mad.)
131. Mahendra Mills Ltd. v. P.B.Desai, AAC (1975) 99 ITR 135 (SC)
132. Indra singh & Sens P.Ltd. v. Union of India (1967) 64 ITR 501 (Cal.)
133. Devendra Prakash v. ITO (1963) 47 ITR 501 (All.)
134. Swaran Yash v. CIT (1982) 138 ITR 734 (Delhi)
135. Babulal & Bros. v. CIT (1989) 177 ITR 451 (MP)
136. Mulchand v. CIT (1977) 107 ITR 932 (MP)
230

(15) The action under Sec. 154 may be taken in favour of the taxpayer without

any notice to him, but ifthe action has the effect ofenhancing an assessment

or reducing the refund, the Assessing Officer must send a notice to the

assessee and give him a reasonable opportunity of being heard.137

(16) The word ‘order’ in the expression ‘from the date ofthe order sought to be

amended’ in Sec. 154 includes amended or rectified order and, therefore,

where original assessment is subsequently rectified, a second application

for rectification made within four years from the date ofthe first rectificatory

order is valid.138

(17) Where mistake in original assessment is left untouched in subsequent

reassessment, period oflimitation should be counted from the date of original

assessment and not from the date of reassessment.139

(18) Where the Assessing Officer’s order was only partially revised under Sec.264

and the assessee sought rectification of an item which was not the subject

matter of revision, period oflimitation for rectification would be counted

fromthe dafiTJf Assessing Officer’s original order and not from the date of

revision.1,411 Therefore, so long as the original order remains unaffected and

does not merge with the appellate order, the limitation will run from the

date of the original order and not from the date when the Assessing Officer

has given effect to the order ofthe appellate authority.141

137. M.Chockalingam & M.Meyyappan v. CIT-(1963) 48 ITR 34 (SC)


138. Hind Wire Industries Ltd. v. CIT (1995) 212JTR.639 (SC)
139. Mettur Chemical & Industrial Corpn. Ltd. v. CIT (1977) 110 ITR 822 (Mad.)
140. Saran Engg. Co.Ltd. v. CIT (1983) 199 ITR 105 (Cal.)
141. CIT v. Shaw Wallace & Co.Ltd. (1993) 199 ITR 105 (Cal.)
231

(19) Umitation period is applicable only to making of order and not to the issue

of the demand notice.142

(20) Question whether there was sufficient cause for condonation of delay in

rectification application or not, is a matter within the discretion of the CBDT

and no oral hearing such a case is necessary.143

(21) Remedies available under Income-tax against issuance of notice under Sec.

154 are effective remedies and writ petition filed by the petitioner to quash

aforesaid notice under Sec. 154 without exhausting such remedies is not

maintainable.144

5.14 ‘Amendments’ in Special Cases

Section 155 reads:

155. Other amendments. -


(1) Where, in respect of any completed assessment of a partner in a firm for the
assessment year commencing on the 1st day of April, 1992, or any earlier
assessment year, it is found -
(a) on the assessment or reassessment ofthe firm, or
(b) on any reduction or enhancement made in the income of the firm under
this Section, Section 154, Section 250, Section 254, Section 260, Section
262, Section 262 or Section 264, or
(c) on any . order passed under sub-section (4) of Section 245-D on the
application made by the firm,
that the ,share of the partner in the income of the firm has not been included in
the assessment ofthe partner or, ifincluded, is not correct, the Assessing Officer
may amend the order ofassessment ofthe partner with a view to the inclusion of
the share in the assessment or the correction thereof, as the case may be; and
the provisions ofSection 154 shall, sofar as may be, apply thereto, the period of

142. S.T.Veln v. CIT (1958) 33 ITR 463 (Mad.)


143. A.P.Sivaraman v. ITO (1994) 209 ITR 36 (Ker.)
144. V.K.Construction Works Ltd. v. CIT (1995) 215 ITR 26 (Punj. & Har.)
232

four years specified in subsection (7) of that Section being reckonedfrom the
end of the financial year in which the final order was passed in the case of the
firm.
(1-A) Where in respect ofany completed assessment ofa firm, it is found
(a) on the assessment or reassessment ofthe firm, or
(b) on any reduction or enhancement made in the income of the firm under
this Section, Section 154, Section 250, Section 254, Section 260, Section
262, Section 262 or Section 264, or
(c) on (my order passed under sub-section (4) of Section 245-D on the
application made by the firm,
that any remuneration to anypartner is not deductible under clause (b) ofSection
40, the Assessing Officer may amend the order ofassessment ofthe partner with
a view to adjusting the income ofthe partner to the extent ofthe amount not so
deductible; and the provisions of Section 154 shall, so far as may be, apply
thereto, the period offour years specified in sub-section (7) ofthat section being
reckonedfrom the end of the financial year in which the final order was passed
in the case of the firm.
(2) Where in respect ofany completed assessment ofa member ofcm association of
persons or ofa body ofindividuals, it is found -
(a) on the assessment or reassessment of the association or body, or
(b) on any ^reduction or enhancement made in the income ofthe association,
or body under this Section, Section 154, Section 250, Section 254, Section
260, Section 262, Section 262 or Section 264, or
(c) -• ^
on-any order, 'passed under sub-section (4) of Section 245-D on the
‘-t

application made by the association or body,


that the share of the member in the income of the association or body, as the
case may be, has not been included in the assessment ofthe member or, ifincluded,
is not correct, the Assessing Officer may amend the order ofassessment of the
* , ‘ /

member with a view to the inclusion of the share in die assessment or the
correction thereof, as the case may be; and the provisions ofSection 154 shall,
soJar as may be, apply thereto, the period offour years specified in sub-section
(7) ofthat section being reckonedfrom the end ofthefinancial year in which the
233

final order was passed in the case ofthe association or body as the case may be.
(3) (Omitted).
(4) Where as a result of proceedings initiated under Section 147, a loss or
depreciation has been recomputed and in consequence thereof, it is necessary to
recompute the total income of the assessee for the succeeding year or years to
which the loss or depreciation allowance has been carriedforward and set off
under the provisions ofsub-section (1) ofSection 72, or sub-section (2) ofSection
73, or sub-section (1) or sub-section (3) of Section 74, or sub-section (3) of
Section 74-A, the Assessing Officer may proceed to recompute the total income
in respect of such year or years and make the necessary amendments; and the
provisions of Section 154 shall, so far as may be, apply thereto, the period of
four years specified in sub-section (7) of that section being reckoned from the
end of the financial year in which the order was passed under Section 147.
(4-A) Where an allowance by way of investment allowance has been made wholly or
partly to an assessee in respect of a ship or an aircraft or any machinery of
plant in any assessment year under Section 32-A and subsequently -
(a) at any time before the expiry of eight years from the end of the previous
year in which the ship or aircraft was acquired or the machinery or plant
was installed, the ship, aircraft, machinery or plant is sold or otherwise
transferred by the assessee to any person other than the Government, a
local authority, a corporation established by a Central, State or Provincial
Act or a Government company as defined in Section 617 ofthe Companies
Act, 1956 (1 of 1956), or in connection with any amalgamation or
succession referred to in sub-section (6) or sub-section (7) ofSection 32-
. A; or
(b) at any time before the expiry often yearsfrom the end ofthe previous year
in which the ship or aircraft was acquired or the machinery or plant was
installed, the assessee does not utilize the amount credited to the reserve
account under sub-section (4) ofSection 32-A for the purposes ofacquiring
' a new ship or a new aircraft or new machinery or plant (other than
machinery or plant of the nature referred to in clauses (a), (b) and (d) of
* s ij

the second proviso to sub-section (1) or Section 32-A for the purposes of
234

the business of the undertaking; or


(c) at any time before the expiry of the ten years referred to in clause (b), the
assesses utilizes the amount credited to the reserve account under sub­
section (4) ofSection 32-A -
(i) for distribution by way ofdividends or profits; or
(ii) for remittance outside India as profits or for the creation of any
asset outside India; or
(iii) for any other purpose which is not a purpose of the business ofthe
undertaking;
the investment allowance originally allowed shall be deemed to have been
wrongly allowed and the Assessing Officer may, notwithstanding anything
contained in this Act, recompute the total income of the assessee for the
relevant previous year and make the necessary amendment; and the
provisions ofSection 154 shall, sofar as may be, apply thereto, the period
offour yeas specified in sub-section (7) of that section being reckoned, -
(i) in a case referred to in clause (a), from the end ofthe previous year
in which the sale or other transfer tookplace;
(ii) in a case referred to in clause (b), from the end of the ten years
referred to in that clause;
(iii) in a case referred to in clause (c), from the end ofthe previous year
in which the amount was utilized.
Explanation. - For the purposes ofclause (b), “new ship ” or “new aircraft ”
or “new machinery or plant” shall have the same meaning? as in the
v '-Explanation below sub-section (2) ofSection 32-A.
' * . v

(5) Wtiere an allowance by way of development rebate has been made wholly or
•S, '«*■’

partly to art assessee iri respect ofa ship, machinery or plant installed after the
31st day ofDecember, 1957, in any assessment year under Section 33 or under
the, corresponding provisions of the Indian Income Tax Act, 1922 (11 of1922),
and subsequently,
(i) at any time before the expiry of eight years from the end of the previous
year in which the ship was acquired or the machinery or plant was installed,
the ship, machinery orplant is sold or otherwise transferred by die assessee
235

to any person other than the Government a local authority, a corporation


established by a Central, State or Provincial Act, or a Government
company, as defined in Section 617 of the Companies Act, 1956 (1 of
1956), or in connection with any amalgamation or succession referred to
in sub-section (3) or sub-section (4) ofSection 33; or
(ii) at any time before the expiry of the eight years referred to in sub-section
(3) ofSection 34, the assessee utilizes the amount credited to the reserve
account under clause (a) of that subsection, -
(a) for distribution by way of dividends or profits; or
(b) for remittance outside India as profits or for the creation of any
asset outside India; or
(c) for any other purpose which is not a purpose of the business of the
undertaking,
the development rebate originally allowed shall be deemed to have been wrongly
allowed, and the Assessing Officer may, notwithstanding anything contained in
this Act, recompute the total income of the assessee for the relevant previous
year-and make;the necessary amendment; and the provisions of Section 154
shall, so fara&may be, apply thereto, the period offour years specified in sub­
section (7) of that Section being reckonedfrom the end of the previous year in
which the sale or transfer took place or the money was so utilized.
(5-A) Where an allowance by way ofdevelopment allowance has been made wholly or
partly to ', an assessee in respect of the cost of planting in any area in any
assessment year under Section 33-A and subsequently -
(i) at any time fore the expiry ofeightyears from the end ofthe previous year
in winch such allowance was made, the land is sold or otherwise transferred
t • -/ *r

by the assessee to anyperson other than the Government, a local authority,


a corporation established by a Central, State or Provincial Act or a
Government company as defined in Section 617 of the Companies Act,
1956 (1 of1956), or in connection with any amalgamation or succession
referred to in sub-section (5) or sub-section (6) ofSection 33-A; or
(ii) at any time before the expiry of the eight years referred to in sub-section
(3) ofSection 33-A, the assessee utilizes the amount credited to the reserve
236

account under clause (ii) of that subsection -

(a) for distribution by way ofdividends or profits; or


(b) for remittance outside India as profits or far the creation of any
asset outside India; or
(c) for any other purpose which is not a purpose ofthe business ofthe
undertaking;
the development allowance originally allowed shall be deemed to have been
wrongly allowed, and the Assessing Officer may, notwithstanding anything
contained in this Act, recompute the total income ofthe assessee for the relevant
previous year and make the necessary amendment; and the provisions ofSection
154 shall, so far as may be, apply thereto, the period offour yeas specified in
subsection (7) ofthat Section being reckonedfrom the end of the previous year
in which the sale or transfer took place or the money was so utilized;
Explanation. - For the purposes of this sub-section, where an assessee
having any leasehold or other right of occupancy in any land transfers such
right, he shall be deemed to have sold or otherwise transferred such land.
(5-B) Where any deduction in respect of any expenditure on scientific research has
been made in any assessment year under sub-section (2-B) ofSection 35 and the
assessee fails to furnish a certificate ofcompletion of the programme obtained
from the prescribed authority within one year of the period allowed for its
completion by such authority, the deduction originally made in excess of the
expenditure actually incurred shall be deemed to have been wrongly made, and
the Assessing Officer may, notwithstanding anything contained in this Act,

recompute the total income of the assessee for the relevant previous year and
make the necessary amendment; and the provisions ofSection 154 shall, so far
as maybe, apply thereto, the period offour years specified in sub-section (7) of
that Section being reckonedfrom the end ofthe previous year in which the period
allowedfor the completion ofthe programme by the prescribed authority expired
(6) (Omitted).
(7) Where as d result of any proceeding under this Act, in the assessment for any
year ofa company in whose case an order under Section 104 has been mackfor
/•it
that year, it is necessary to recompute the distributable income ofthat company,
237

the Assessing Officer may proceed to recompute the distributable income and
determine the tax payable on the basis of such recomputation and make the
necessary amendment; and the provisions ofSection 154 shall, sofar as may be,
apply thereto, the period offour years specified in sub-section (7) ofthat section
being reckonedfrom the end of the financial year in which the final order was
passed in the case of the company in respect of that proceeding.
(7-A) (Omitted).
(7-B) Where in the assessment for any year, the capital gain arising from the transfer
ofa capital asset is not charged under Section 45 by virtue ofthe provisions of
clause (iv) or, as the case may be, clause (v) ofSection 47, but is deemed under
Section 47-A to be income chargeable under the head "Capital gains ” of the
previous year in which the transfer took place by reason of-
(i) such capital asset being converted by the transferee company into. or being
treated by it, as stock-in-trade ofits business; or
(ii) the parent company or its nominees or, as the case may be, the holding
company ceasing to hold the whole of the share capital of the subsidiary
company,
at any time before the expiry of the period of eight years from the date of such
transfer, the Assessing Officer may, notwithstanding anything contained in this
Act, recompute the total income of the transferror company for the relevant
previous year and make the necessary amendment; and the provisions ofSection
• ■'*' 154 shall, so far as may be, apply thereto, the period offour years specified in
subjection (7) of that Section being reckonedfrom the end ofthe previous year
in which the capital asset was converted or treated or in which the parent company
or its nominees or, as the case may be, the holding company ceased to hold the
whole of the share capital of the subsidiary company.
(8) (Omitted),
(8-A) (Omitted),
(9) (Omitted),
(9-A) (Omitted),
(10) (Omitted).
(10-A) Where in the assessmentfor any year, a capital gain arising from the transfer
238

ofa long-term capital asset, is charged to tax and within a period ofsix months
after the date ofsuch transfer the assesses has made any investment or deposit
in any specified asset within the meaning ofExplanation-1 to sub-section (1) of
Section 54-E, the Assessing Officer shall amend the order ofassessment so as to
exclude the amount ofthe capital gain nor chargeable to tax under the provisions
of sub-section (1) of Section 54-E; and the provisions of Section 154 shall, so
far as may be, apply thereto, the period offour years specified in sub-Section
(7) ofthat section being reckonedfrom the end ofthefinancial year in which the
assessment was made.
(10-B)(Omitted),
(10-C) (Omitted),
(11) Where in the assessmentfor any year, a capital gain arisingfrom transfer ofany
original asset as is referred to in Section 54-H is charged to tax and within the
period so extended under that Section, the assessee acquires the new asset referred
to in that Section or, as the case may be, deposits or invests the amount ofsuch
capital gain within the period extended, the Assessing Officer shall amend the
order ofassessment so as to exclude tlx amount ofthe capital gain not chargeable
to tax under any of the sections referred to in Section 54-H; and the provisions
of Section 154 shall, so far as may be, apply thereto, the period offour years
specified in subsection (7) of Section 154 being reckoned from the end of the
previous year in which the compensation was received by the assessee.
(12) Where in the assessment for any year commencing before the 1st day ofApril,
1998, the deduction under Section 80-0 in respect of any income, being the
whole ok any part ofincome by way ofroyalty, commission, fees or any similar
payment as is referred to in that Section, has not been allowed on the ground
that such income has not been received in convertibleforeign exchange in India,
or having been received in convertibleforeign exchange outside India, or having
been converted into convertible foreign exchange outside India, has not been
brought into India, by or on behalf of the assessee in accordance with any law
for die time being in force for regulating payments and dealings in foreign
exchange and subsequently such income or part thereofhas been or is received
in, or brought into, India in the manner aforesaid, the Assessing Officer shall
239

amend the order of assessment so as to allow deduction under Section 80-0 in


respect of such income or part thereof as is so received in, or brought into,
India; and the provisions ofSection 154 shall, so far as map be, apply thereto,
the period offouryears specified in subsection (7) ofthat section being reckoned
from the end of the previous year in which such income is so received, in or
brought into, India; so, however, that the periodfrom the 1st day ofApril, 1988
to the 30th day ofSeptember 1991 shall be excluded in computing the period of
four years.
(13) Where in the assessment for any year, the deduction under Section 80-HHB or
Section 80-HHC or Section 80-HHD or Section 80-HUE or Section 80-0 or
Section 80-R or Section 80-RR or Section 80-RRA has not been allowed on the
ground that such income has not been received in convertible foreign exchange
in India, or having been received in convertibleforeign exchange outside India,
or having been converted into convertible foreign exchange outside India, has
not been brought in India, by or on behalf of the assessee with the approval of
the Reserve Bank ofIndia or such other authority as is authorized under any law
for the time being in force for regulating payments and dealings in foreign
, \

exchange and subsequently such income or part thereofhas been or is received


in, or brought into, India in the maimer aforesaid, the Assessing Officer shall
amend the order ofassessment so as to allow deduction under 'Section 80-HHB
or Section 80-HHC or Section 80-HHD or Section 80-HHD or Section 80-0 or
1 !
Section 80-R or Section 80-RR or Section 80-RRA, as the case may be, in respect
ofsuch income or part thereofas is so received in, or brought into, India; and
the provisions of Section 154 shall, so far as may be, apply thereto, and the
period offour years shall be reckonedfrom the end ofthe previous year in which
' such income is so received in, or brought into India.
Explanation. For the purposes ofthis section, -
(a) “additional compensation ” shall have the meaning assigned to it in clause
(1) or the Explanation to sub-section (2) ofSection 54;
(b) “additional consideration ”, in relation to the transfer ofany capital asset
the consideration for which was determined or approved by the Central
Government or the Reserve Bank ofIndia, means the difference between
240

the amount ofconsideration for such transfer as enhanced by any court,


tribunal or other authority and the amount ofconsideration which would

have been payable ifsuch enhancement has not been made.

This section confers the power of amending an asessment or reassessment

in certain special cases. Sub-Secs.(l) to (13) deal with the amendment of a

completed assessment,145 as a result of assessment,146 reassessment,147 or further

proceedings by way of appeal,148 reference, rectification149or revision. Such

amendment may be done within four years from the date of the final order.150

An amendment order passed under this Section is appealable under Section

246 of the Act.

5.15 Notice of Demand


Section 156 reads:

156. Notice of demand. -


When any tax, interest, penalty, fine or any other sum is payable in consequence ofany
order passed under this Act, the Assessing Officer shall serve upon the assesses a
notice ofdemand in the prescribedform specifying the sum so payable.

A notice ofdemand is issued under this Section in respect ofany tax, interest,

penalty, fine or any other sum payable under this Act. Proceedings for the recovery
*

of such sums cannot be initiated unless and until a notice of demand is served.151

145. cf. Hansraj Dhingra v. Union of Lidia 98ITR 397 (provisional assessment
completed under Sec. 141 of 1922 Act).
146. Naraindas v. ITO 49 ITR 768; CIT v. Thimmaiah 67 ITR j
180; CIT v.
Balkishan Bhatia 86 ITR 452 (a partner’s share, treated as earned income in
the original assessment, cannot be treated as unearned income under this Sec.)
147. Ameeruddin v. ITO 92 ITR 366 (reassessment may be made after retirement of
a partner whose assessment is sought to be rectified).
148. Sankappa v. ITO 68 ITR 760 (SC)
149. Aithanari v. ITO 83 ITR 828 (The position was the same under Sec.35(5) of
the 1922 Act, although it did not expressly refer to rectified assessment).
150. Kishanlal Haricharan v. ITO 86 ITR 141 (SC); Ekambarappa v. ITO 49 ITR
692; Arthanari v. ITO 83 ITR 828; Karsandas Patel v. Shah 98 ITR 255.
151. Misri Bai v. ITO 51 ITR 487.
241

A notice of demand for tax determined cannot be issued unless an assessment

order is passed.152 Similarly, if there is no valid order under which tax, interest,

penalty or fine is payable by the asessee, no valid notice of demand can be issued

under this Section. Thus, where an order passed by the Assessing Officer under

Sec.221(l) did not specify the amount of penalty, the order was bad, and the

notice of demand was was issued pursuant to that order and which mentioned the

amount of penalty was held to be equally bad.1S3

Tax and interest are distinct and different concepts,154 and so are tax and

penalty.155 Interest is payable under the provisions of Sections 215,216 and 217.

Though the tax is calculated and assessed by reference to the income of the

assessee for a given year, the tax when demanded by a notice under this section

does not become a debt due only for a particular period.156

If pursuant to a notice of demand, the assessee has paid part of the sum

demanded, it is not necessary to issue a fresh notice of demand for the unpaid

balance before taking recovery proceedings.157

After the death of an assessee on whom a notice of demand was served, it

is not necessary to serve a fresh notice ofthe heir.158 But if no notice of demand
i

was served on the deceased, all the heirs who are sought to be held liable must be

served with a notice.159


152..Rasiklal Doshi v. Nundy 42ITR 35.
1533 Rotakv. CIT 21 ITR 18.
154. Subramanian v. Simplex Mills Ltd. 48 ITR (SC); CIT v. Nonshi Devsi
Kattawala Ltd. 45 ITR 47.
155. "Penalty is not an additional tax ” per N.A.Palkhivala & B.A.Palkhivala,
commenting on the contrary view of the Supreme Court in: Abraham v. ITO 41
ITR 425 and CIT v. Bhikaji Dadabhai 42 ITR 123.
156. Dootga Prasad v. Sec.of State 13 ITR 285 (PC).
157. Sushil Chandra Ghosev. ITO 35 ITR 379.
158. Koteswara Rao v. CIT 46 ITR 882.
159. Shah Mahmood v. Asstt.Commr. 47 ITR 55.
242

Where a final assessment has been made and a notice of demand issued, any

fresh computation of income, otherwise than in accordance with the provisions

of the Act, and a fresh notice of demand, would be illegal.160

If the notice of demand is defective and bad in law, the assesee who does

not comply with it cannot be regarded as a defaulter and recovery proceedings

under this Act cannot be commenced against him.161 A notice of demand which

does not lake into account the advance tax already paid, is invalid, and the assessee

cannot be penalized for not complying with it.162 Ifthe notice ofdemand contains

a mistake or an inaccuracy, the notice may be called and the issue of a fresh

notice to the assessee would be valid.163 The notice of demand also shall not be

invalid merely because the status of the addressee is incorrectly mentioned,

particularly if he is not thereby misled, or because the words in the printed form

inviting attention to the statutory right of appeal are deleted.164 Section 292-B

provides that no notice shall be deemed to be invalid merely by reason of any

mistake, defect or omission therein, if the notice ‘is in substance and effect in

conformity with or according to the intent and purpose of this Act”.

The Act nowhere imposes any time limit within which the service ofthe the

notice of demand has to be effected,165 however, it should be issued within a

reasonable time.166

160. rfGIT v. Khemchand Ramdas 6 ITR 414 (PC).


161. ' Murlidhar Jalan v. ITO 41 ITR 80.
162. idlT v. Venilal Mehta 93 ITR 140.
163. Protap Chandra Ganguly v. CIT 4 ITR 418.
164. Motilal v. ITO 44 ITR 454.
165. CIT v. Khemchand Ramdas 6 ITR 414 (PC).
166. Rajendra Narayan Bhanja Deo v. CIT 2ITC 82 (notice of demand issued
fourteen months after the expiry of the assessment year held to be issued within
a reasonable time).
243

5.16 Intimation of Loss


Section 157 reads:

157. Intonation of loss. -


When, in the course ofthe assessment ofthe total income ofany assessee, it is established
that a loss has taken place which the assessee is entitled to have carriedforward and
set offunder the provisions ofsub-section (1) ofSection 72, sub-section (2) ofSection
73, sub-section (1) or sub-section (3) ofSection 74 or sub-section (3) ofSection 74-A,
the Assessing Officer shall notify to the assessee by an order in writing the amount of
the loss as computed by him for the purposes of sub-section (1) of Section 72, sub­
section (2) of Section 73, subsection (1) or subsection (3) of Section 74 or sub­
section (3) ofSection 74-A.

When after setting of a loss under one head against profits under another

head, the computation of the total income of the assesseee discloses a loss which

the assessee is entitled to carry forward, it is the duty of the Assessing Officer,

under this Section, to notify to the assessee by an order in writing the amount of

such loss. This is to obviate any dispute in future regarding the quantum of the

loss. The assessee may appeal against the amount of loss determined by the

Assessing Officer (Sec.246), but he cannot dispute the correctness ofthe amount

in theassessment proceedings of a subsequent year against the profits of which

the canied|o|ward loss is sought to be set off, except in a case where the Assessing
^ • *. ,"*k *5' ■ ,

‘-SSiV-'i .
Officer hasTBiled to notify to the assessee by an order in writing the amount of

the loss competed by him.167 But ifthe Assessing Officer, having determined the

amount of loss, holds that it cannot be carried forward, on the ground that it is

not a business loss, that would not debar the assessee’s claim in a subsequent

year to have such loss carried forward and set off against that year’s profits.168

167. CIT v. KhushaJ Chand Daga 42ITGR 177 (SC).


168. CIT v. Manmohan Das 59ITR 699 (SC).
244

The loss contemplated by this Section can be determined only “in the course

of the assessment of the total income of an assessee”, i.e. in the course of

assessment proceedings under Sections 143 or 147. Further, in view of Section

80, an assessee would not be entitled to carry forward a loss unless the loss has

been determined in pursuance of a return filed under Section 139.169

In the proceeding initiated under Section 147 for assessing the income which

is suspected to have escaped assessment, the assessee is not entitled to claim that

the loss sustained by him in the relevant accounting year or in an earlier year

should be determined and an order notifying the amount of such loss should be

passed under this Section.170

5.17 Intimation of Assessment of Firm


Section 158 reads:
158. Intimation of assessment offirm. -
Whenever, in respect ofthe assessmentyear commencing on the 1st day ofApril, 1992,
or any' earlier assessment year, a registeredfirm is assessed, or an unregisteredfirm is
assessed, undej, the provisions ofclause-(hfofSection 183, the Assessing Officer shall
notify to.thefi/m by an order in writing the amount ofits total income assessed and the
apportionment thereofbetween the several partners.

- &(U StoKfe riwwwj that whenever the Assessing Officer 'makes an


• i * *
assessment on a registered firm or an unregistered firm assessed as a registered
i
f Iffy *

firm under Section 183, he shall, by an order in writing, intimate to the firm, the

amount at whieh^the total income of the firm has been computed and the

apportionment thereofbetween the several partnrs. Any such partner may appeal

against the order determining the amount of the firm’s total income or the

appointment thereofbetween the several partners.


245

Thus concludes an evaluation of the statutory provisions in respect of the

procedure for assessment of income under the Income-tax Act, 1961.

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