JUDGMENT
B.N. Mahapatra, J.
1. This appeal is directed against the Order dated 25.11.2002 passed by the Income Tax Appellate Tribunal, Cuttack (hereinafter referred to as ‘ITAT)) in ITA No. 401(CTK)/98 and CO. No. 109 (CTK)/1998. This Court has admitted the appeal on the following substantial questions of law:
(i) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal is right in holding that the cross objection filed by the Appellant had become academic and infructuous?
(ii) Whether after issuance of notice under Section 143(2) of the Act, it is not open to the assessing officer to make adjustments or pass an order under Section 143(1) of the Act, and he has to make the assessment under Section 143(3) of the Act ?
2. The relevant facts, in nutshell, which give rise to the present appeal are as follows:
The appellant is a Public Limited Company engaged in business of manufacture and sale of sponge iron. It was incorporated under the Companies Act, 1956 on 31.07.2005 and assessed to income tax since the assessment year 1984-85. The appellant filed return under Section 139 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the assessment year 1997-98 on 26.09.1997 and subsequently revised it by return dated 30.12.1997. The return was accompanied by audited profit and loss account and balance sheet as well as tax audit report. On receipt of the return the assessing officer has initiated proceedings of assessment by issuing notice under Section 143(2) of the Act on 19.2.1998 and 18.3.1998 posting the case for hearing. The assessing officer thereafter processed the return under Section 143 (1) of the Act on 31.3.1998. While processing the return under Section 143(1) of the Act, the learned Assessing Officer made various adjustments in respect of loss of capital investment, interest due, depreciation of guest house and salary of guest house staff and has enclosed an explanatory note to the intimation in respect of said adjustments. The Assessing Officer made addition of Rs. 95,73,489/- to the return of income while processing the return. He also levied additional income tax amounting to Rs. 8,23,318/- @ 20% of the income tax and surcharge due on the addition of Rs. 95,73,489/- made to the return of income as provided under Sub-section (1A) of Section 143 of the Act. Being dissatisfied with the intimation issued under Section 143(1)(a) of the Act, the appellant preferred an appeal before the Commissioner of Income Tax (Appeals), Orissa (hereinafter referred to as ‘CIT (A)’) basically on the two grounds, i.e., (i) the prima facie adjustment made under different heads was outside the purview of Section 143(1)(a), and (ii) issuance of intimation under Section 143(1)(a) of the Act subsequent to initiation of proceeding for completion of assessment under Section 143(3) of the Act by issue of notice under Section 143(2) of the Act was bad in law.
The learned CIT(A) after relying on some judicial pronouncements allowed the first contention by holding that the adjustment effected by the Assessing Officer in respect of various items did not come within the purview of Section 143(1)(a) of the Act. However, interpreting provisions contained in Section 143(1)(a)(i) held that the said provisions clearly authorized the Assessing Officer to make prima facie adjustments even after initiation of proceedings under Section 143(2) of the Act. Against the order of CIT (A), the Department went in appeal before the learned ITAT. The present appellant also filed cross objection inter alia on the ground that once the proceeding under Section 143(2) was initiated, resort to Section 143(1) thereafter is bad in law. The learned ITAT vide its order dated 25.11.2002 allowed the appeal filed by the Department holding that CIT(A) was not justified in granting relief claimed on account of depreciation of guest house and salary and wages paid for the maintenance of guest house. The learned ITAT did not adjudicate the issue raised in the cross objection holding that cross objection filed by the present appellant only supported the action of CIT(A) and in view of its finding in the Department appeal, the cross objection became infructuous and has become an academic one.
3. Learned Counsel appearing on behalf of the appellant strenuously argued that the learned ITAT is not justified in holding that the cross objection filed by the appellant supported the action of the CIT (A) and therefore it had become academic and infructuous. He further contended that once notice under Section 143(2) of the Act is issued for making a scrutiny assessment under Section 143(3) of the Act the Assessing Officer cannot exercise jurisdiction under Section 143(1) for making any prima facie adjustment. In support of his contention, he relied on the decision of the Gujarat High Court in the case of Gujarat Poly-Avx Electronics Ltd. v. Dy. Commissioner of Income Tax (Assessment) and Calcutta High Court in Modern Fibotex India Ltd. and Anr. v. Dy. Commissioner of Income-Tax and Ors. .
4. The learned Counsel appearing for the Income Tax Department vehemently argued that there was no infirmity in the order passed by the learned ITAT. He further contended that merely because notice under Section 143(2) of the Act had been issued to make an assessment under Section 143(3) that did not take away the power of the Assessing Officer in making prima facie adjustments to the return of income filed as provided under Section 143(1)(a) subsequent to issue of notice under Section 143(2).
5. In the above back-drop, the two questions set out above fall for consideration by this Court. In order to decide the first question, it is necessary to know whether in the cross objection, the appellant only supported the order of the learned CIT (A), as has been observed by the learned ITAT for which it held that the cross objection filed by the present appellant became infructuous and has become academic. The grounds taken in the cross objection, copy of which is annexed to the appeal memo are set out herein below:
Grounds of Objections
1. On the facts and in the circumstances of the case, the Commissioner of Income Tax (Appeals) correctly held the disallowance of depreciation of guest house and salary wages paid to the employees are debatable issues which are outside the purview of prima facie adjustments within the meaning of 143(1)(a) read with the circular 689 dt. 24.08.94.
2. The learned Assessing Officer passed 143(1)(a) order on 31.03.98 based on the return filed on 26.09.97 ignoring the revised return filed on 30.12.97.
3. The learned Commissioner of Income Tax (Appeal) erred in not accepting the claim that, once proceedings Under Section 143(2) are initiated (as in this case) resort to Section 143(1) is bad in law.
4. That the learned Commissioner of Income Tax (Appeal) should have annulled the intimation and the computation Under Section 143(1) on that ground alone.
5. That other grounds may be kindly permitted to be raised before or at the time of hearing of this appeal….
6. Perusal of grounds of cross objection clearly reveals that the appellant in its ground Nos. 3 & 4 challenged the decision of the learned CIT(A) in upholding the action of the Assessing Officer in issuing intimation under Section 143(1) subsequent to issue of notice under Section 143(2) of the Act instead of annulling the said intimation. Thus the observation of the learned ITAT that in the cross-objection the present appellant only supported the action of learned CIT (A) is contrary to the materials available on record. As required under Section 253(4) of the Act, the learned ITAT should have disposed of the memorandum of cross objection as if it were an appeal presented before it Section 253(4) of the Act is reproduced herein below:
The [Assessing] Officer or the assessee, as the case may be, on receipt of notice that an appeal against the order of the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals) has been preferred under Sub-section (1) or Sub-section (2) by the other part, may, notwithstanding that he may not have appealed against such order or any part thereof; within thirty days of the receipt of the notice, file a memorandum of cross-objections, verified in the prescribed manner, against any part of the order of the [Deputy Commissioner (Appeals) [or, as the case may be, the Commissioner (Appeals), and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time specified in Sub-section (3).
In view of the clear provisions of Section 253(4) of the Act, learned ITAT should have disposed of the cross-objection as if it were an appeal presented by this appellant before it. Therefore, we are of the considered view that the learned ITAT is not correct in holding that the cross-objection filed before it by this appellant supported the action of the CIT (A) and the same being academic had become infructuous on the facts and circumstances of the case.
7. To deal with the 2nd questions, it is necessary to know what was contemplated in Sections 143(1), 143(2) and 143(3) of the Act during the relevant time. The relevant portions of Sub-sections (1), (2) & (3) of Section 143 of the Act are quoted herein below:
Assessment:
143(1)(a) Where a return has been made under Section 139, or in response to a notice under Sub-section (1) of Section 142,–
(i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid 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 of this Act shall apply accordingly; and
(ii) if any refund is due on the basis of such return, it shall be granted to the assessee;
Provided that in computing the tax or interest payable by, or refundable to, the assessee, the following adjustments shall be made in the income or loss declared in the return, namely:
(i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified;
(ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed;
(iii) any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed:
Provided further that where adjustments are made under the first proviso, an intimation shall be sent to the assessee, not with standing that no tax or interest is found due from him after making the said adjustments:
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(2) Where a return has been made under Section 139, or in response to a notice under Sub-section (1) of Section 142, the Assessing Officer shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not 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 of twelve months from the end of the month in which the return is furnished.
(3) On the day 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 specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him on the basis of such assessment.
8. A plain reading of the provisions of Section 143(1)(a) makes it clear that the Assessing Officer is authorized to make prima facie adjustments to the return of income which is without prejudice to the provisions of Sub-section (2) of Section 143 of the Act. The role of the Assessing Officer to proceed under Section 143(2) is preserved despite intimation to the assessee under Section 143(1) of the Act. The Assessing Officer is under no obligation to accept the return filed by the assessee in case of any doubt. Assessing Officer has option to call upon the assessee to produce materials and evidence In support of his return. Notice under Section 143(2) is issued with a view to ensure that the assessee has not under-staled income or has not computed the excessive loss or has not paid any tax in any manner. Once notice under Section 143(2) of the Act is issued to make, regular assessment under Section 143(3) of the Act, the Assessing Officer is bound to make assessment under Section 143 of the act. Thus, issuance of notice under Section 143(2) of the Act suggests that the Assessing Officer is determined to make assessment under Section 143(3) of the Act. Processing return under Section 143(1) does not act as a bar to make assessment under Section 143(3) which is regular assessment. Further, while processing the return filed by the assessee under Section 143(1)(a), if any prima facie adjustment is made resulting in increase of income or the reduction of loss declared in the return further tax @ 20% on the income so increased or further tax of 20% on the loss so reduced as if it is income of the assessee it shall be charged as per Sub-section (1A) of Section 143 of the Act. Such a provision is made with a view to create awareness among the tax payers to take necessary care so that no incorrect return of income is submitted with a view to save additional tax which may be imposed on them. This additional tax is not leviable when an assessment order is passed under Section 143(3) of the Act. Thus, what is not permissible under Section 143(3) of the Act cannot be made permissible by allowing the Assessing Officer to resort to Section 143(1) of the act. What cannot be done directly cannot be done in directlty. Therefore, after calling upon the assessee to produce evidence by issuing notice under Section 143(2), the Assessing Officer cannot issue intimation under Section 143(1)(a).
9. The Central Board of Direct Taxes also in its Circular No. 549 dated October, 31, 1989 [see (1990) 182 ITR St. 1] has advised the Assessing Officers to issue intimation under Section 143(1) before issuance of notice under Section 143(2) of the Act. Therefore, it is not open to the Assessing Officer to make prima facie adjustment as provided under Section 143(1) of the Act, after issuance of notice under Section 143(2) of the Act.
10. In Modern Fibotex India Ltd (supra), the Calcutta High Court held that once notice under Section 143(2) has been issued there is no scope for the Assessing Officer either to make prima facie adjustment on the basis of return as filed or to issue an intimation under Section 143(1)(a) of the Act. In Gujarat Poly-Avx Electronics Ltd. (supra), the Gujarat High Court took a view that after issuance of notice under Section 143(2) of the Act, it is not open to the Assessing Officer to make adjustment or to pass order under Section 143(1) of the Act but he has to make assessment in accordance with law, i.e., under Section 143(3) of the Act.
11. In this regard, the position of law has been settled by Hon’ble Supreme Court in the case of Commissioner of Income Tax v. Gujarat Electricity Board . In that case, the question before the Hon’ble Supreme Court was whether it is open to the Revenue to issue intimation under Section 143(1)(a) of the Act after notice for regular assessment has been issued under Section 143(2) of the Act. The Hon’ble Supreme Court held as follows:
…There is no dispute that Section 143(1)(a) of the Act enacts a summary procedure for quick collection of tax and quick refunds. Under the scheme if there is a serious objection to any of the orders made by the Assessing Officer determining the income, it is open to the assessee to ask for rectification under Section 154. Apart therefrom, the provisions of Section 143(1)(a)(i) indicate that the intimation sent under Section 143(1)(a) shall be without prejudice to the provisions of Sub-section (2). The Legislature, therefore, intended that, where the summary procedure under Sub-section (1) has been adopted, there should be scope available for the Revenue, either suo motu or at the instance of the assesses to make a regular assessment under Sub-section (2) of Section 143. The converse is not available; a regular assessment proceeding having been commenced under Section 143(2), there is no need for a summary proceeding underSection 143(1)(a)….
12. In view of the well settled legal position as has been decided by the Hon’ble Supreme Court, we are of the opinion that after issuance of notice under Section 143(2) of the Act, it is not open to the Assessing Officer to make adjustments as provided under Section 143(1) of the Act and to issue intimation under the said Section. In the result; the appeal Is allowed and the Order dated 25.11.2002 passed by the learned ITAT in ITA No. 401 (CTK)/1998 and cross objection No. 109 (CTK)/1998 are set aside. There will be no order as to costs.
A.K. Ganguly, C.J.
13. I agree.
