Scope of Explanation 2 to Section 147 is such that Assessing Officer is free to re-examine correctness of a regular assessment

Scope of Explanation 2 to Section 147 is such that Assessing Officer is free to re-examine correctness of a regular assessment and decide whether tax assessed, rate applied, relief and allowances granted, etc., are in terms of provisions of Act and if not, to revise assessment in terms of Section 147. Section 147, after amendment, is large enough to cover situations whereby deductions have been wrongly or excessively granted, the Tribunal has no authority to restrict the powers of the Assessing Officer by holding that change of opinion is not a ground to reopen the assessment under Section 147.

CASE LAWS DETAILS

DECIDED BY: HIGH COURT OF KERALA, IN THE CASE OF: CIT v. Popular Vehicles & Services Ltd., APPEAL NO: ITA No. 1628 of 2009, DECIDED ON January 7, 2010

FACTS

The respondent-assessee’s returns filed for the assessment year 2001- 02 was first processed under Section 143(l)(a) and thereafter a regular assessment was completed under Section 143(3) of the Act. However, the assessing officer on further scrutiny of the accounts noticed that the assessee from out of borrowed funds invested Rs. 84,12,500/- in various sister concerns as interest free loans. The total deduction towards interest paid was Rs. 308.36 lakhs and the entire claim was allowed as a deduction under Section 36(l)(iii) of the Act. The assessing officer noticed that in view of the diversion of interest bearing loan to sister concerns, as interest free loans, there is excess deduction of interest granted under Section 36(l)(iii) and in order to disallow proportionate interest attributable to interest free loans given to sister concerns and to assess such escaped income, the assessment was reopened and completed under Section 147 of the Act. When the assessee challenged the assessment in appeal before the CIT (Appeals), he allowed the same both on merits and on the ground that the revised assessment under Section 147 is invalid. The second appeal filed by the revenue before the Tribunal was rejected by the Tribunal without going into merits of the case but by holding that the CIT (Appeals) is justified in cancelling reassessment completed under Section 147 as the same is only on account of change of opinion of the assessing officer on the entitlement of deduction of interest claimed and allowed in the original assessment.

HELD

we have to clarify that the Tribunal has wrongly assumed that reassessment was completed beyond four years from the end of the relevant assessment year and there is no failure on the part of the assessee to make full and true disclosure of material facts necessary for assessment as referred to in the first proviso to the Section. Standing counsel pointed out that reassessment proceedings under Section 147 was initiated within the four year period from the end of the relevant assessment year and therefore the first proviso to Section 147 has no application and the Tribunal’s finding to the contrary is factually incorrect. Amended provisions of section 147 effective from 1.4.1989 authorise income escaping assessment if the assessing officer has reason to believe that income chargeable to tax has escaped assessment for any assessment year. Therefore only two conditions are required to be satisfied for reopening an assessment, that is escapement of income chargeable to tax in the assessment and reason available with the assessing officer to believe that chargeable income has escaped assessment. In this case the assessing officer on reexamination of the accounts noticed that assessee which has paid Rs.3 crores towards interest on borrowings in the accounting year relevant for the assessment year advanced above Rs. 84 lakhs as interest free loans to sister concerns and so much so the entire borrowings was not for business purposes and hence deduction of interest allowed under Section 36(l)(iii) is excessive relief granted in assessment. In this context Explanation 2 to Section 147 has to be referred to which exhaustively slates certain cases where income chargeable to tax has escaped assessment. Under sub-clause (iii) of clause (c) of Explanation 2, if income has been made the subject of excessive relief under the Act, then the same is one of the circumstances of income escaping assessment. Therefore if excessive deduction of interest is allowed under Section 36(l)(iii) then certainly it is a case of income escaping squarely covered by Explanation 2 to Section 147 of the Act. Even though counsel for the assessee submitted that when the claim was allowed in the original assessment any proposal for subsequent disallowance of relief granted originally in the assessment either fully or partially should be taken as on account of change of opinion, we are unable to accept the same because in the first place the assessing officer has not discussed the matter in the regular assessment but allowed deduction in terms of the claim made in the returns. There is no embargo in Section 147 against the assessing officer reexamining the assessment file and appreciating like evidence, and accounts in support of the claim and arriving at a conclusion which may attract Section 147. There is no presumption anywhere in the provisions of the Act to the effect that every regular assessment completed is after due consideration of every claim under the provisions of the Act. On the other hand, the scope of Explanation 2 to Section 147 is such that the Assessing Officer is free to reexamine correctness of a regular assessment and decide whether the tax assessed, rate applied, relief and allowances granted, etc., are in terms of the provisions of the Act and if not to revise thee assessment in terms of Section 147 of the Act. When the scope of the Section after amendment is large enough to cover situations whereby deductions have been wrongly or excessively granted, the Tribunal has no authority to restrict the powers of the Assessing Officer by holding that change of opinion is not a ground to reopen the assessment under Section 147 1 of the Act. Even though assessec’s counsel submitted that the decision of the Supreme Court referred to does not apply to this case, in as much as assessment involved in this case is under Section 143(1), whereas the assessment involved in the Supreme Court case is regular assessment, we do not think there is any difference between the proceedings completed under Section 143(1) and the regular assessment under Section 143(3) of the Act, if income chargeable to tax has escaped assessment within the meaning of Explanation 2 to Section 147 of the Act.

RELEVANT PARAGRAPHS

4. Before proceeding to consider the applicability of the Section to the facts of this case, we have to observe that the finding of the Full Bench of the Delhi High Court in the above referred decision on the scope of Section 147 after the amendment by Finance Act 1987 with effect from 1.4.1989 is exactly contrary to the finding of the Supreme Court in the later judgment above referred in as much as the Supreme Court has held that the amcndmcnt-introduced with effect from 1.4.1989 has brought out substantial difference in the meaning and content of the Section, whereas according to the Delhi High Court, the amendment is inconsequential. The Supreme Court has held that if ingredients of Section 147 are fulfilled, then the assessing officer is free to initiate proceedings under Section 147. We have to therefore examine whether the Section applies to the facts of this case.

5. Here again, we have to clarify that the Tribunal has wrongly assumed that reassessment was completed beyond four years from the end of the relevant assessment year and there is no failure on the part of the assessee to make full and true disclosure of material facts necessary for assessment as referred to in the first proviso to the Section. Standing counsel pointed out that reassessment proceedings under Section 147 was initiated within the four year period from the end of the relevant assessment year and therefore the first proviso to Section 147 has no application and the Tribunal’s finding to the contrary is factually incorrect. Amended provisions of section 147 effective from 1.4.1989 authorise income escaping assessment if the assessing officer has reason to believe that income chargeable to tax has escaped assessment for any assessment year. Therefore only two conditions are required to be satisfied for reopening an assessment, that is escapement of income chargeable to tax in the assessment and reason available with the assessing officer to believe that chargeable income has escaped assessment. In this case the assessing officer on reexamination of the accounts noticed that assessee which has paid Rs.3 crores towards interest on borrowings in the accounting year relevant for the assessment year advanced above Rs. 84 lakhs as interest free loans to sister concerns and so much so the entire borrowings was not for business purposes and hence deduction of interest allowed under Section 36(l)(iii) is excessive relief granted in assessment. In this context Explanation 2 to Section 147 has to be referred to which exhaustively slates certain cases where income chargeable to tax has escaped assessment. Under sub-clause (iii) of clause (c) of Explanation 2, if income has been made the subject of excessive relief under the Act, then the same is one of the circumstances of income escaping assessment. Therefore if excessive deduction of interest is allowed under Section 36(l)(iii) then certainly it is a case of income escaping squarely covered by Explanation 2 to Section 147 of the Act. Even though counsel for the assessee submitted that when the claim was allowed in the original assessment any proposal for subsequent disallowance of relief granted originally in the assessment either fully or partially should be taken as on account of change of opinion, we are unable to accept the same because in the first place the assessing officer has not discussed the matter in the regular assessment but allowed deduction in terms of the claim made in the returns. There is no embargo in Section 147 against the assessing officer reexamining the assessment file and appreciating like evidence, and accounts in support of the claim and arriving at a conclusion which may attract Section 147. There is no presumption anywhere in the provisions of the Act to the effect that every regular assessment completed is after due consideration of every claim under the provisions of the Act. On the other hand, the scope of Explanation 2 to Section 147 is such that the Assessing Officer is free to reexamine correctness of a regular assessment and decide whether the tax assessed, rate applied, relief and allowances granted, etc., are in terms of the provisions of the Act and if not to revise thee assessment in terms of Section 147 of the Act. When the scope of the Section after amendment is large enough to cover situations whereby deductions have been wrongly or excessively granted, the Tribunal has no authority to restrict the powers of the Assessing Officer by holding that change of opinion is not a ground to reopen the assessment under Section 147 1 of the Act. Even though assessec’s counsel submitted that the decision of the Supreme Court referred to does not apply to this case, in as much as assessment involved in this case is under Section 143(1), whereas the assessment involved in the Supreme Court case is regular assessment, we do not think there is any difference between the proceedings completed under Section 143(1) and the regular assessment under Section 143(3) of the Act, if income chargeable to tax has escaped assessment within the meaning of Explanation 2 to Section 147 of the Act.

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