The Supreme Court on Wednesday held that income tax reassessment proceedings are invalid if the tax department fails to issue a mandatory notice under Section 143(2) of the Income Tax Act, even if the taxpayer participates in the proceedings.

Section 143(2) of the Income Tax Act, 1961 is a scrutiny notice issued by the Income Tax Department to verify that a taxpayer has not understated their income, claimed excessive losses, or underpaid tax.

A Bench of Justices Sanjay Kumar and Sanjeev Sachdeva dismissed the tax department’s appeal against an Orissa High Court judgment that had set aside reassessment proceedings against taxpayers because the required notice had not been issued.

The court said a notice under Section 143(2) is mandatory as it gives taxpayers an opportunity to submit evidence and other details in support of their income tax returns.

Without such a notice, the department cannot proceed with reassessment under Section 147 of the Act.

The Bench also clarified that a taxpayer’s participation in reassessment proceedings does not make up for the department’s failure to issue the mandatory notice.

The tax department had argued that Section 292BB of the Act protected the reassessment proceedings because the taxpayers had participated in them.

The provision deals with the deemed service of notices when a taxpayer appears in proceedings or cooperates with an inquiry.

Rejecting this argument, the court said Section 292BB applies when a notice has been issued but the taxpayer disputes whether it was served, whether it was served on time, or whether it was properly served. It cannot apply when the department has not issued a notice at all.

“Where the Revenue itself contends that no notice was sent, as required under the Act, the provision of Section 292BB will have no applicability,” the court said in a judgment authored by Justice Sachdeva.

The court laid down three key clarifications.

First, taxpayers can challenge reassessment proceedings on the ground that a notice under Section 143(2) was never issued, even if they participated in the proceedings without raising the objection at the time.

Second, the department must issue the notice even when a taxpayer requests that the original income tax return filed under Section 139 be treated as the return filed in response to a reassessment notice under Section 148.

Third, a letter issued by the assessing officer under Section 142(1), asking a taxpayer to explain why reassessment is proposed, does not satisfy the requirement of issuing a notice under Section 143(2).