Direct Tax Alert - SC holds reassessment proceeding invalid when the rectification proceeding is ongoing

BACKGROUND

As per section 154 of the Income-tax Act, 1961 (IT Act), any mistake apparent from the record can be rectified within 4 years from the end of the year in which the concerned order is received. The tax officer, either suo-moto or on an application made by the taxpayer, carries out the rectification of the mistake. Where the Tax Officer suo-moto decides to make rectification, he shall grant the taxpayer an opportunity of being heard before making the rectification.

Further, the Tax Officer has the power to reopen a proceeding if the income has escaped assessment. However, there are certain conditions/restrictions for the reopening of proceedings and one such being that other proceedings should not be ongoing. Hence, a question may arise as to whether reassessment can be done when rectification proceedings are ongoing. In this regard, recently, the Supreme Court¹ had an occasion to examine the validity of reassessment proceedings when rectification proceedings are not concluded. We, at BDO in India, have summarized the ruling of the Supreme Court and provided our comments on the impact of this decision hereunder.

FACTS OF THE CASE

Taxpayer, a company engaged in the export of welding electrodes, raw material spares and machines used in the manufacture of electrodes, filed a tax return for Fiscal Year (FY) 1994-95 claiming deduction under section 80HHC² of the IT Act. The said return was processed under section 143(1) of the IT Act. In subsequent FY, the taxpayer claimed bad debts which included unrealised export sales pertaining to FY 1994-95. The tax officer opined that the claim under section 80HHC of the IT Act for FY 1994-95 was not permissible and accordingly initiated rectification proceedings on 23 January 2002. The Tax Officer also initiated reassessment proceedings vide notice dated 22 March 2002. The taxpayer challenged the reassessment proceedings on the ground that as notice under section 154 of the IT Act was issued on 23 January 2002, the assessment proceedings were pending and hence reassessment was not permissible. The Tax Officer and the First-Appellate Authority rejected the taxpayer’s appeal but the Delhi Tax Tribunal granted relief. However, Delhi High Court upheld the validity of reassessment proceedings on the basis that the rectification proceedings were time-barred and therefore the reassessment proceedings would be maintainable. Aggrieved, the taxpayer preferred an appeal before the Supreme Court.    

SUPREME COURT RULING

While treating the reassessment notice as invalid as rectification proceedings were ongoing, the Supreme Court made the following observations:

• The rectification proceedings were not the subject matter before the High Court.
• Nothing was on record that the notice under section 154 of the IT Act was withdrawn on the ground that the same was beyond the period of limitation prescribed under section 154(7) of the IT Act. In absence of any specific order of withdrawal of the rectification proceedings, such proceedings can be said to have been pending.   
• Accordingly, during the pendency of rectification proceedings, it was not permissible on the part of the tax authorities to initiate reassessment proceedings.
• The High Court has erred in presuming and observing that the rectification proceedings were invalid because the same was beyond the period of limitation.

BDO COMMENTS

As per Section 154(7) of the IT Act, an order can be amended/rectified within 4 years from the end of the FY in which the order sought to be rectified was passed. In the instant case, it appears that the Supreme Court has not examined the aspect of the validity of rectification proceedings and consequently whether the initiation of reassessment proceedings is valid or not. Having said this, this ruling will help all those instances where the tax officer has initiated reassessment proceedings while rectification proceedings are yet to be disposed of. The taxpayer should also evaluate the applicability of this ruling where the rectification application is made by the taxpayer (i.e. it is not initiated on suo-moto basis by the tax officer).

 

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