Summary: The Bombay High Court ruling in Sesa Sterlite Ltd. Vs ACIT underscores the balance between the Income Tax Department’s authority to reopen assessments and the procedural safeguards to prevent arbitrary actions. The case involved Section 10B deductions for AY 2009-10, which were disallowed in normal assessment but later allowed by the ITAT. A subsequent attempt by the department to reassess based on new survey findings was deemed impermissible under the third proviso to Section 147 (prior to its 2021 amendment). This proviso prohibits reassessment of matters already under appeal or review to avoid conflicting outcomes. The High Court reaffirmed the ITAT’s allowance of the deduction and emphasized the importance of credible evidence and adherence to legal safeguards in reassessment proceedings, ensuring fairness and consistency while preventing legal anomalies.
The concept of income tax assessment or scrutiny of Income Tax Returns is discussed with a sense of caution and anxiety by taxpayers. To make matters worse, any instance or attempt by the Income Tax Department to reopen or reassess an earlier closed assessment, or to assess a return that was not assessed during the normal time for doing so, after a considerable gap but within the period specified under the Income Tax Act (i.e., under Sections 147 to 151), is viewed with a sense of retaliation and discomfort. Consequently, every possible reason and opportunity is sought to be explored to thwart such initiation, aiming to avoid the exercise of reassessment or the assessment of income that, in the department’s opinion, has escaped taxation.
From a legal perspective, the issuance of notice and initiation of reassessment proceedings are analyzed and dealt with primarily from the jurisdictional angle, whether the issuance of such notice was within the prescribed time limits and whether it satisfied all necessary conditions as laid down in the scheme of the law.
Over the years, the statute has been made increasingly lucid to incorporate various checks and balances, ensuring that such reassessment proceedings are not initiated based on the whims and fancies of an officer. Such an exercise is to be initiated only on reliable and strong evidence coming to the officer’s knowledge, leading to a strong prima facie belief that some income has escaped assessment.
One such check and balance in the Act is the third proviso added to Section 147 (before its amendment and substitution wef 01.04.2021), which states that the Assessing Officer may assess or reassess such income, other than the income involving matters that are the subject of any appeal, reference, or revision, that is chargeable to tax and has escaped assessment. The effect of this proviso is that, if there is an income matter already under dispute in an existing appeal proceeding before an authority, no reassessment proceeding can be initiated for that matter. The logic seems simple, if there is an income on which there is a dispute in an existing proceeding, then a simultaneous new proceeding would lead to undue chaos and conflict.
In one such case adjudicated by the Bombay High Court, it was held that in relation to the deduction under Section 10B for A.Y. 2009 -10, where such deduction was already disallowed under normal assessment under Section 143(3) and confirmed in the appeal by CIT(A), and thereafter allowed in the appellate proceeding before the ITAT, any attempt to reinitiate reassessment proceedings for the same issue, albeit based on a further survey conducted after the conclusion of proceedings before the ITAT, was impermissible given the third proviso to section 147 as it stood at relevant time and till 31.03.2021.
Moreover, in this case, the Tribunal declined to review its own decision when an application was made to it by the department basis such survey conducted post issuance of the order of the Tribunal. The High Court also confirmed the allowance of the deduction under the appeal filed by the department, even after noting the conduct and results of the survey conducted by the Income Tax Department subsequent to the ITAT’s order. The court held that such reassessment was not permissible due to the third proviso to Section 147. The court held that allowing it would lead to the possibility of two different outcomes for the same matter, which is not the intention of the legislature. The court thus observed “ Assuming that the reassessment proceeding is allowed to continue on the basis of the new materials during the pendency of the proceedings before the tribunal and thereafter in this court, a situation may arise that this court finds the petitioner is entitled to claim deduction Under Section 10B; whereas in the reassessment proceedings, the Assessing Officer on the basis of the new materials may come to a conclusion that the petitioner is not entitled to claim deduction U/s 10B. in our opinion, it is obviously to get over such an anomalous situation that the third proviso to section 147 is meant to cover it.”
In conclusion, the legal framework for reassessment under the Income Tax Act is designed to ensure fairness and consistency while safeguarding taxpayers from arbitrary actions on one hand and avoiding any legal conflict and inconsistency on the other. By embedding procedural safeguards, such as the third proviso to Section 147, the law emphasizes that reassessment must be based on credible evidence and adhere to established norms. This balance between departmental authority and taxpayer rights upholds the integrity of the tax administration system and promotes trust among stakeholders.
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