In a recent ruling Supreme Court (SC) [2010-TIOL-06- SC-IT-L13] in the case of Kelvinator of India Ltd. (Taxpayer) held that income cannot be reassessed on a mere change of opinion, as that would imply conferring arbitrary powers on the Tax Authority. It is only when there is a ‘tangible material’ to believe that income has escaped assessment that the power of reassessment can be exercised and the reasons for reassessment must have a live link with the formation of the belief.
The pre-amended provision of the ITL empowered the Tax Authority to reassess the income if it has ‘reason to believe’ that income has escaped assessment either because (a) the taxpayer has not disclosed fully and truly all material facts necessary for assessment or (b) as a consequence of information in Tax Authority’s possession.
- Subsequently, by an amendment, the aforesaid conditions (a) and (b) were dropped and the concept of reason to believe was substituted by the concept of ‘opinion of the tax authority’. This implied that the Tax Authority could reassess the income, if, in its opinion, the income has escaped assessment.
- However, upon resistance from the taxpayer community, the ITL was again amended to restore the concept of reason to believe in place of the concept of opinion of the tax authority.
Facts of the case
- The Taxpayer had filed the return of income along with annual report, tax audit report etc. Subsequently, it filed a revised return to claim certain expenses which were not claimed in the original return. In the assessment, the deduction for the expenditure was granted without discussing this particular aspect in the assessment order. However, subsequently, the Tax Authority reassessed the income on the ground that it had reason to believe that income has escaped assessment because (a) The expenditure claimed in the revised return was not deductible as the claim was inconsistent with the tax audit report. (b) The deduction for interest expenditure that had accrued in the previous year, being a prior period expense, was not allowable.
- The Taxpayer challenged the reassessment before the first appellate authority which ruled in favour of the Taxpayer. Aggrieved by this order, the Tax Authority appealed to the Income Tax Appellate Tribunal which ruled in favour of the Taxpayer, inter-alia, for the reason that the reassessment, pursuant to change of opinion, is not permissible. Thereafter, the Tax Authority preferred an appeal before the High Court (HC).
Contentions of the Tax Authority before the High Court
- As there was no discussion in the original assessment order in respect of the items that have been reassessed, it must be construed that the order was passed without the application of mind.
- The tax audit report filed with the return of income was the ‘information’, pursuant to which, it had reason to believe that the income has escaped assessment.
- The change of opinion is a valid reason for the Tax Authority to reassess the income.
Contentions of the Taxpayer before the High Court
- The information (tax audit report) was already available at the time of assessment. It was not information received post-assessment, that could enable the Tax Authority to exercise its power of reassessment.
- The reassessment on a mere change of opinion is not permissible under the Income Tax Act, 1961.
Ruling of the High Court
- The reassessment is not permissible on the basis of information that was available to the Tax Authority at the time of assessment.
- If it is held that the Tax Authority has the power to reassess the income when the assessment is carried out without application of mind, the Tax Authority would benefit from its own error.
- The absence of discussion on a particular aspect in the assessment order does not mean lack of application of mind.
- The change of opinion by the Tax Authority cannot be the basis for reassessment of the income, as that would imply conferring arbitrary powers on the Tax Authority.
- The legislative history of the amendment to the relevant provisions of the ITL, read with the CBDT Circular No. 549 dated 31 October 1989 issued by the Central Board of Direct Taxes (CBDT) explaining the amendment, clearly indicates that a change of opinion cannot be a reason to believe for the Tax Authority to conclude that any income has escaped assessment.
Aggrieved by the HC ruling, the Tax Authority appealed to the SC.
Ruling of the SC
- Post the amendment, the condition to be fulfilled under the relevant provisions of the ITL is that the Tax Authority has reason to believe that the income has escaped assessment. Therefore, the scope of the power to reassess is much wider. However, the phrase ‘reason to believe’ needs schematic interpretation, failing which, arbitrary powers would be vested with the Tax Authority to reassess the income on the basis of mere change of opinion which cannot, per se, be the reason to reassess.
- Conceptual difference between power to ‘review’ and power to ‘reassess’ needs to be observed. The Tax Authority has the power to reassess and not the power to review.
- The concept that the change of opinion cannot be the basis of reassessment is an inbuilt test to be construed to prevent abuse of power by the Tax Authority.
- The reassessment needs to be based on tangible material.
- The reason for reassessment must have a live link with the formation of the belief.
- The legislative history of the amendments to the relevant provisions of the ITL and the CBDT circular explaining the amendment support the conclusion that mere change of opinion, per se, cannot be the basis for reassessment of income.
Post amendment to the relevant provisions of the ITL, judicial views were divided as to whether a mere ‘change of opinion’, per se, would empower the Tax Authority to reassess the income. This SC ruling clarifies that there has to be some ‘tangible material’ in possession of the Tax Authority to reassess the income and that mere change of opinion by the Tax Authority would not enable it to reassess the income.
The taxpayers, that have made adequate disclosures in the return of income or in the course of assessment proceedings, would be on a stronger footing to counter any attempt by the Tax Authority to reassess the income, whether or not the concerned subject matter has been discussed in the assessment order.