Reopening of an assessment is one of the weapons in the armoury of the Income tax Department, it empowers assessing officer to reassess or recompute the income of an assessee which has escaped assessment. Section 147 to 153 of the Income tax Act, 1961 [ Act] deals with the provisions of reassessment proceedings. The said sections of the Act and various court rulings have laid down the preconditions that needs to be satisfied by an assessing officer before initiating the reassessment proceedings. If any of the preconditions is breached then it may be sufficient to challenge the reassessment proceedings by filing a writ petition before the High Court or challenging the reassessment in the course appellate proceedings. In this article we are going to understand the law of reopening, procedure to deal with the reassessment proceedings and various propositions under which the reassessment proceedings can be challenged along with the citation of the relevant case laws.
1. The basic requirement to initiate the reassessment proceedings is to have a ‘reason to believe’ that the income of an assessee has escaped assessment. The assessing officer has to form “reason to believe” by himself and it cannot be at the behest of some superior authority. Even if the information is received from external source the assessing officer has to apply his independent mind and verify the records of an assessee to form his own reason to believe before issuing notice under section 148. The expression “reason to believe” is very well explained by the Apex Court in case of Calcutta Discount Co. Ltd. v. ITO – [(1961) 41 ITR 191 (SC)], relevant para of the decision is reproduced as follows:
“……………. The expression “reason to believe” postulates belief and the existence of reasons for that belief. The belief must be held in good faith : it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer: the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-tax Officer. If it be asserted that the Income-tax Officer had reason to believe that income had been under-assessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief; in other words, the Income-tax Officer must on information at his disposal believe that income has been under-assessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion : it must be founded upon information.”
2. Before going to various grounds under which we can challenge the reassessment proceedings, let us first understand the procedure to deal with the reassessment proceedings. The Apex Court in case of GKN Driveshaft (India) Ltd. v. ITO – [(2002) 259 ITR 19 (SC)] has laid down the proper course of action to deal with the reassessment proceedings. It is as follows:
i) The noticee shall file the return of income in response to notice u/s 148.
ii) After filing the said return, the noticee shall seek reasons for issuing of notice.
iii) The assessing officer is bound to furnish reasons within a reasonable time.
iv) On receipt of reasons, the noticee is entitled to file objections to issuance of notice.
v) On receipt of objections, the assessing officer is bound to dispose of the same by passing a speaking order.
3. It is important to note that the reassessment cannot be initiated when an assessment or reassessment proceedings of the relevant assessment year has commenced and not concluded or time limit for issuance of notice for scrutiny assessment u/s 143(3) is not over.
a) Ghanshyamdas v. Reg. Asst. Comr. of Sales Tax – [(1964) 51 ITR 557 (SC)]
b) Ador Technopack Ltd. v. DCIT – [(2004) 271 ITR 50 (Bom)]
c) CIT v. TCP Ltd. – [(2010) 323 ITR 346 (Madras)]
4. As explained earlier that the basic requirement is to have reason to believe, once the assessing officer forms his reason to believe that the income of an assessee has escaped assessment then the assessing officer shall record the reasons in writing for reopening the assessment and it must be recorded prior to issue of notice under section 148. How the reasons are to be recorded and interpreted is explained in the decision of Hindustan Lever Ltd. v. ACIT – [(2004) 268 ITR 332 (Bom)], relevant extract of the decision is as follows:
i) The reasons are required to be read as they were recorded by the assessing officer. No substitution or deletion is permissible. No additions can be made to those reasons.
ii)No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons.
iii) It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence.
iv) The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment.
v) The reasons recorded by the Assessing Officer cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.
5. After the reasons are recorded, the assessing officer needs to obtain the sanction from PCCIT / CCIT / PCIT / CIT / JC as per the provisions of section 151. The sanction is must for issue of notice under section 148. The sanctioning authority should not accord sanction mechanically and they should apply their mind to the reasons recorded by the assessing officer and if they are satisfied with the reasons recorded then only sanction should be accorded.
i) Notice issued without obtaining sanction of the concerned authority is bad in law.
a) CIT v. Suman Waman Chaudhary – [(2010) 321 ITR 495 (Bom)]
b) Ghanshyam K. Khabrani v. ACIT – [(2012) 346 ITR 443 (Bom)]
ii) Sanction accorded without application of mind by the sanctioning authority that is merely affixing a ‘yes’ stamp and signing underneath by the concerning authority is not valid sanction under the Act, consequently notice under section 148 is bad in law.
a) Chhugamal Rajpal v/s. S. P. Chaliha – [(1971) 79 ITR 603 (SC)]
b) ITO v/s. Lakhmani Mewal Das – [(1976) 103 ITR 437 (SC)]
iii) Authorities as specified in section 151 of the Act are eligible to give sanction. If the reopening is within four years, sanction shall be obtained from the Joint Commissioner of Income Tax and if it is beyond four years then sanction shall be obtained from PCCIT / CCIT / PCIT / CIT. If the assessing officer obtains sanction of any authority even of the superior authority but if it is not as per the provisions of section 151 then such sanction is void and reassessment will be quashed.
6. After recording the reasons in writing and obtaining the required sanction the assessing officer shall issue notice under section 148. There are various grounds under which the notice can be challenged, those are as follows:
i) The period of limitation is provided under section 149 for the issuance of notice. The notice under section 148 shall not be issued after the expiry of 4 / 6 / 16 years from the end of the relevant assessment year. The notice may be served to the assessee after expiry of the period of limitation but the notice must be issued within given time period. The date of issue of notice will be the date on which notice was sent for booking to speed post centre. If the notice is issued after the period of limitation then the reassessment proceedings is bad in law.
b) ITO v. On Exim (P.) Ltd. – [(2013) 26 ITR(T) 697 (Delhi)]
ii) The notice must be issued in the name of existent person or entity. In case of dead person, the notice must be issued in the name of his legal heir/s and in case of the amalgamation the notice must be issued in the name of amalgamated company (new entity). Issue of notice in the name of non – existing person or entity such as dead person / amalgamating company (old entity) is bad in law.
b) Sumit Balkrishna Gupta v. ACIT – [(2019) 414 ITR 292 (Bom)]
iii) If the notice is served at wrong address then reassessment is bad in law. It is important to note, address of the assessee should be updated in PAN database. If the notice is served on the address available in PAN database then it is valid service of notice.
7. On receipt of the notice, the assessee is required to file return of income in response to notice u/s 148. On filing of return, the assessee can request the assessing officer to provide the copy of reasons recorded. The assessing officer is bound to provide the reasons recorded. There are various propositions under which an assessee can challenge the reassessment proceedings, those are as follows:
i) Requested assessing Officer to provide the reasons for reopening but the reasons were not provided.
a) PCIT v. V. Ramaiah – [(2019) 103 taxmann.com 202 (SC)]
b) CIT v. Videsh Sanchar Nigam Ltd. – [(2012) 340 ITR 66 (Bom)]
ii) The assessing officer is supposed to provide complete reasons recorded and not merely gist of reasons recorded.
iii) Where an assessment u/s 143(3) or 147 has been made for the relevant assessment year then there cannot be reassessment after the expiry of four years unless the assessee has failed to file return under section 139 for the relevant assessment year or there was failure on the part of the assessee to fully and truly disclose all material facts at the time of assessment. [First proviso to section 147]
iv) Further, in the above situation (mentioned in (iii)), if the reasons recorded does not contain the statement “there was failure on the part of the assessee to fully and truly disclose all material facts at the time of assessment” then also such reassessment is bad in law.
a) Akshar Anshul Construction LLP v. ACIT – [(2019) 104 taxmann.com 94 (Bom)]
b) Calcutta Club Ltd v. ITO – [(2020) 114 taxmann.com 560 (Calcutta – HC)]
v) Once the copy of reasons recorded is given to the assessee, subsequently, such reasons cannot be supplemented by filing an affidavit or making oral submission.
b) Aroni Commercial Ltd v/s DCIT – [(2014) 367 ITR 405 (Bom)]
vi) Reasons recorded on the basis of wrong facts
a) Sagar Enterprises vs. ACIT – [(2002) 257 ITR 335 (Guj)]
vii) Initiation of reassessment merely on the basis of information received from third party (i.e. investigation wing, audit unit etc.) is bad in law. The jurisdictional assessing officer on receipt of information should verify it with the records of the assessee and apply his independent mind to form reason to believe. The result of independent application of mind can be seen from the reasons recorded, the reasons should demonstrate link between the tangible material and formation of reason to believe that income has escaped assessment.
b) Nu Power Renewables (P.) Ltd. v. DCIT – [(2018) 94 taxmann.com 29 (Bom – HC)]
viii) If an assessing officer does not make addition on income for which reasons are recorded then the assessing officer is not permitted to make additions on other issues which are not part of the reasons recorded. If he intends to do so he needs to issue fresh notice under section 148. [Explanation 3 to section 147]
b) Martech Peripherals (P.) Ltd. v. DCIT – [(2017) 394 ITR 733 (Madras)]
ix) The reasons recorded by an assessing officer shall contain the amount of income escaped assessment, if the amount is not mentioned then the reassessment is bad in law. It is in the context, if the reassessment is initiated after the expiry of four years from the end of the relevant assessment year then the reasons shall specifically state that the amount of income escaped assessment is likely to be Rs. 1 lakh or more. [Section 149(1)(b)]
a) Mahesh Kumar Gupta v. CIT – [(2013) 363 ITR 300 (Allahabad)]
b) Novo Nordisk India (P.) Ltd. v. DCIT – [(2018) 95 taxmann.com 225 (Karnataka – HC)]
x) Assessing officer recording reasons for reopening and assessing officer issuing notice under section 148 must be the same person. In other words, successor assessing officer cannot issue notice under section 148 on the basis of reasons recorded by predecessor as it amounts to borrowed satisfaction.
a) Hynoup Food & Oil Industries Ltd. v. ACIT – [(2008) 307 ITR 115 (Guj)]
8. Upon receipt of the reasons recorded an assessee is entitled to file objections against the initiation of reassessment proceedings. Such objections should be filed within reasonable time (generally, within four weeks from the date of receipt of reasons recorded). On filing the objections, the assessing officer is obliged to dispose of those objections by passing a speaking order. Unless the objections are disposed of, the assessing officer cannot proceed with the reassessment proceedings. On the following grounds the reassessment can be challenged:
i) No disposal of the objections by the assessing officer
a) Bayer Material Science (P.) Ltd. v. DCIT – [(2016) 382 ITR 333 (Bom)]
ii) All the objections are not disposed of or the objections raised were not disposed of by the reasoned or speaking order. In other words, if the objections are not found worthy of acceptance or has no merits, then, the order must speak as to why the said conclusion has been reached. Merely rejecting the objections by one line observation and finding is not tenable in law.
9. Once the order disposing of the objections is passed by the assessing officer, he shall not proceed with the assessment for four weeks from the date of serving of such order to the assessee. This ruling is made by the Courts, so that, the assessee gets time to file the writ petition with the High Court challenging the jurisdiction of reassessment proceedings.
a) Asian Paints Ltd. v. DCIT – [(2008) 296 ITR 90 (Bom)]
b) Bharat Jayantilal Patel v. UOI – [(2015) 378 ITR 596 (Bom)]
10. Other propositions on the basis of which reassessment proceedings can be challenged
i) Initiation of reassessment merely on the basis of AIR information of cash deposit is not valid. Mere cash deposit cannot be treated as income escaped assessment. The assessing officer must verify whether such cash deposit represents assessee’s own income and if such cash deposit is income then whether such income is offered to tax or not by the assessee. In other words, AIR information of cash deposit has no link or nexus with the income escaped assessment. The reasons recorded must provide the nexus between the AIR information and formation of reason to believe that the income has escaped assessment.
a) ITO v. Mohanlal Champalal Jain – [(2019) 111 taxmann.com 67 (SC)]
ii) Subsequent decision of the Supreme Court or retrospective amendment in law reversing the legal position prevailing at the time of assessment is not valid reason for reopening of the assessment unless, there was omission or failure on the part of the assessee to disclose fully or truly material facts at the time of assessment. However, the assessing officer may reopen the assessment, if reopening is within four years.
a) DCIT v. Simplex Concrete Piles (India) Ltd. – [(2012) 358 ITR 129 (SC)]
b) Calcutta Club Ltd. v. ITO – [(2020) 114 taxmann.com 560 (Calcutta – HC)]
iii) No reassessment can be made without issuing notice under section 143(2) of the Act.
iv) If an assessment has been completed under section 143(3) or 147 after raising a query regarding a particular issue and the assessing officer has accepted the assessee’s reply to the query. Subsequently, assessing officer has no jurisdiction to reopen the assessment with respect to that issue as it amounts to mere change of opinion. Whereas, if assessing officers after completion of original assessment comes in possession of a new tangible material which depicts that the assessee has escaped income with respect to the earlier issue then the assessing officer may reopen assessment with respect to that issue.
a) DCIT v. Sun Pharmaceutical Industries Ltd. – [(2020) 117 taxmann.com 116 (SC)]
b) ACIT v. Marico Ltd. – [(2020) 117 taxmann.com 244 (SC)]
v) Initiation of reassessment solely on the basis of Audit Objection is not valid.
a) ACIT v. FIS Global Business Solutions India (P.) Ltd. – [(2019) 104 taxmann.com 169 (SC)]
b) Torrent Power of S.E.C. Ltd. v. ACIT – [(2017) 392 ITR 330 (Guj)]
vi) Reassessment in case of intimation u/s 143(1) is allowed only when the prerequisite condition is fulfilled of having “reason to believe” that income chargeable to tax has escaped assessment.
vii) If the notice under section 148 is issued after 01.04.2019, the order under section 147 is to be passed within twelve months from the end of the financial year in which notice was served. Prior to 01.04.2019, the time limit was nine months. Order passed after the given time period is time barred.
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation.