CIT vs. M/s India Sea Foods (Kerala High Court)

AO entitled to issue s. 154 notice, drop it, & issue s. 148 notice

The assessee claimed deduction u/s 80HHC without reducing 90% of the items of income referred to in Explanation (baa) to s. 80HHC which the AO allowed vide s. 143(1) Intimation. To rectify the mistake, the AO issued a notice u/s 154 to which the assessee objected. After the expiry of the period for rectification, the AO issued a notice u/s 148 & made a reassessment reducing the s. 80HHC deduction. The CIT (A) & Tribunal struck down the reassessment on the ground, relying on EID Parry 216 ITR 489 (Mad), that after initiation of rectification proceedings u/s 154, the AO does not have jurisdiction to drop the same and pass an assessment order u/s 147. On appeal by the department, HELD allowing the appeal:

If an assessment happens to be an under-assessment or a mistaken order, the course open to the AO is either to rectify the mistake u/s 154 or to make a reassessment u/s 147. While, it is correct, as held in EID Parry 216 ITR 489 (Mad), that the AO has to choose between the two and cannot initiate both proceedings at the same time, the principle of constructive res judicata made applicable by the Madras High Court that the AO having initiated rectification proceedings u/s 154 should stick to the same only and cannot drop that and proceed u/s 147 is not acceptable. The fact that the AO invoked s. 154 and dropped it does not affect the validity of re-assessment u/s 147.