Issuance of notice U/s 143(2) prior to supply of recorded reasons U/s 147 is fatal & may vitiate entire reassessment

Issuance of Notice U/s 143(2) Prior to Supply of Recorded Reasons U/s 147 is Fatal & May Vitiate Entire Reassessment

Understanding the Legal Framework of Sections 143(2) and 147

Section 147 of the Income Tax Act, 1961, empowers the Assessing Officer (AO) to reassess income that has escaped assessment, provided there is ‘reason to believe’ that such income exists. This belief must be recorded in writing before issuing a notice under Section 148. However, the recent ITAT Delhi Bench ruling highlights a critical procedural requirement: the notice under Section 143(2) for scrutiny must follow the supply of these recorded reasons to the assessee.

Under Section 143(2), the AO issues a notice calling for evidence and details if the return is selected for scrutiny. This is mandatory for completing a scrutiny assessment under Section 143(3) read with Section 147. The law mandates that the assessee receives the recorded reasons under Section 147 before any further proceedings, ensuring natural justice and transparency[1][3].

Failure to adhere to this sequence constitutes a fatal procedural lapse, as it deprives the assessee of the opportunity to challenge the validity of the reopening at the outset[2][6].

ITAT Delhi Bench Ruling: A Landmark Decision

In a significant judgment, the Income Tax Appellate Tribunal (ITAT) Delhi Bench held that issuing a notice under Section 143(2) prior to supplying the recorded reasons under Section 147 vitiates the entire reassessment proceedings. The bench emphasized that this premature issuance undermines the foundational principles of fairness in tax administration.

Key Facts of the Case

• The AO issued notice u/s 143(2) without first providing the assessee with the recorded reasons for reopening under Section 147.
• The assessee argued that this violated procedural mandates, rendering the assessment jurisdictionally defective.
• ITAT quashed the assessment, citing precedents like Ashok Chaddha [2011] 337 ITR 399 (Delhi) and Alpine Electronics Asia Pte. Ltd. [2012] 341 ITR 247 (Delhi), which affirm the mandatory nature of Section 143(2) notice[2][4].

Judicial Precedents Reinforcing the Ruling

Courts have consistently ruled that non-issuance or improper issuance of Section 143(2) notice invalidates reassessment. For instance, in Uma Polymers (P.) Ltd. v. Asstt. CIT [2002] 123 Taxman 226 (Mag.), the Mumbai Tribunal deemed non-issuance fatal. Similarly, the Delhi High Court in CIT v. Lunar Diamonds Ltd. [2006] 281 ITR 1 clarified that Section 143(2) is not discretionary but mandatory post-return filing under Section 148[3][6].

The first and second provisos to Section 148 prescribe timelines for Section 143(2) notices based on the return filing date, underscoring its compulsory nature. Amendments via Finance Act, 2006, addressed time limits but did not dilute the requirement for issuance[3].

Implications for Taxpayers and Assessing Officers

This ruling serves as a wake-up call for AOs to strictly follow procedural timelines and sequences. Taxpayers receiving premature Section 143(2) notices can now challenge reassessments on jurisdictional grounds, potentially leading to their annulment.

Practical Steps for Taxpayers

• Demand Recorded Reasons: Insist on receiving reasons recorded under Section 147 before responding to any scrutiny notice.
• Verify Timelines: Ensure Section 143(2) notice complies with the 3-6 month limit from the end of the financial year in which the return under Section 148 is filed[5][15].
• File Objections Promptly: Object to procedural lapses in writing, citing ITAT precedents, to build a strong defense.
• Seek Professional Advice: Engage a Chartered Accountant to analyze notices and represent before authorities.

Compliance Tips for Assessing Officers

• Record reasons under Section 147 prima facie before Section 148 notice, and supply them to the assessee immediately[1].
• Issue Section 143(2) only after return filing under Section 148 and within prescribed timelines.
• Document all procedural steps meticulously to withstand judicial scrutiny[11].

The decision reinforces that reassessment is not a tool for fishing expeditions but a structured process safeguarding taxpayer rights. While some benches previously viewed Section 143(2) as non-jurisdictional, the weight of authority now favors its mandatory compliance, especially post-2006 amendments[6].

Broader Impact on Tax Litigation

This ITAT verdict aligns with judicial trends quashing reassessments for procedural defects, such as unrelated additions or unaddressed objections[8][14]. It promotes accountability, reducing arbitrary reopenings beyond the 4-16 year limits under Section 147[1].

Taxpayers should monitor updates, as evolving jurisprudence may influence future CBDT circulars. For assessments post-April 1, 2021, new facets like Section 148A introduce preliminary inquiries, but core procedural mandates remain intact[7].

In conclusion, procedural adherence is the bedrock of valid reassessments. This ruling empowers taxpayers to defend against hasty actions, ensuring only meritorious cases proceed.