Issues in Respect of Reopening of Assessment

Mr. Jay Kishor Mishra, IRS
(IT: 1993)
CIT (DR)(ITAT)-4, Delhi

jkmishrairs@gmail.com

Mr. Jay Kishor Mishra is an officer of the 1993 batch of the Indian Revenue Service. He is a Graduate in Economics and Post Graduate in Sanskrit. He is an LLB and also holds Post Graduate Diploma in Management.

Ms Sushama Singh, IRS
(IT: 1990)
CIT (DR)(ITAT)-6, Delhi

sushmasinghirs@yahoo.com

He has long experience of working in the fields of non-corporate and corporate assessment, intelligence, search and seizure operations, search assessments, TDS, tax-administration and representation before Tribunal. He has also worked as Additional Director General, Competition Commission of India and also officiated as Director General, Competition Commission of India, dealing with investigation of infringement of antitrust laws. He is currently posted as Commissioner of Income Tax (DR), ITAT, New Delhi.

Sushma Singh is an IRS batch of 1990. My Qualification is M.Sc (Economic) and LLB. Have varied experience both inside the department as well as outside department. Have worked in the department in different positions in Kolkata, Varanasi, Patna, Muzaffarpur and Delhi. On deputation worked as CVO, CSIR and CVO, NIFT. Presently working as CIT(DR) ITAT, Delhi.

Executive Summary

Reopening of assessment is an issue that has been constantly under litigation. The reopened assessments are quashed by the appellate authorities, High Courts and Supreme Court on technical grounds. Apart from proper recording of satisfaction, there are various dimensions to reopening of assessment. This Article attempts to cover the procedural and substantive aspects on one hand and entire gamut of relevant and up-to-date case laws on this vast subject on the other. After dealing with particular aspects, Action Points are provided for assessing officers and their supervisory officers. At the end, Key Takeaways are again summarized.

Reopening of a completed assessment vitiates against the ‘principle of finality’. This principle of finality is the concept that certain disputes must achieve a resolution from which no further appeal may be taken, and from which no collateral proceedings may be permitted to disturb that resolution, otherwise there would be no certainty as to the meaning of the law, or the outcome of any legal process. Hence, the courts have held that reopening of assessment after lapse of many years is a serious matter and therefore, it is essential that before such action is taken, the requirements of the law should be satisfied [ITO vs. Lakhmani Mewal Das [1976] 103 ITR 437(SC)]. Provisions in respect of assessment/ reassessment of income chargeable to tax which has escaped assessment are given in Sections 147 to 153 of the Income-tax Act1961. ‘Reason to believe’ under Section 147 is a jurisdictional requirement while provisions contained in Sections 148 to 153 are procedural requirements. It has to be understood that these provisions are not to revise, review or rectify the mistakes committed in the original assessment. Assessment orders passed under Section 147 read with Section 143(3)/144 are quashed by the ITAT on technical grounds. In this Technical Note, various issues pertaining to reopening have been discussed along with relevant case laws so that the officers may appreciate the judicial precedent and minimize the mistakes in reopening of assessment under Section 147/148 of the Act.

BACKGROUND

Major changes were brought in the existing provisions of Section 147 by the Direct Tax Laws (Amendment) Act 1987 w.e.f. 01.04.1989. Post-amendment, cases in which income chargeable to tax has escaped assessment can be broadly
classified in two categories. In the first category, the following cases can be listed:

a. Where no return of income is filed by the assessee.

b. Where return was processed under Section 143(1) and no regular assessment was made under Section 143(3)/ 147 of the Act.

c. Where regular assessment was made under Section 143(3)/147 and a period of 4 years from the end of the relevant assessment year has not expired.

As per the amended provisions, in respect of the above mentioned cases, only requirement is that the AO has reason to believe that any income chargeable to tax has escaped assessment. It is a jurisdictional requirement.

Second category of cases are those cases in which regular assessment was made under Section 143(3)/147 and a period of 4 years has expired from the end of the relevant assessment year in which income chargeable to tax has escaped assessment (first proviso to Section 147). For such cases, there are two conditions provided in the Act:

a. Reason to believe that any income chargeable to tax has escaped assessment.

b. There is failure on the part of the assesse to disclose fully and truly all material facts necessary for his assessment.

These are also jurisdictional requirements.

STANDARD PROCEDURE FOR RECORDING SATISFACTION UNDER SECTION 147 ISSUED BY THE CBDT

In view of the plethora of litigation in respect of reopening of assessment and problems being faced by the Assessing Officers in recording the satisfaction, the CBDT has issued an exhaustive ‘Standard Procedure for Recording Satisfaction under Section 147’ dated 10.01.2018 along with four separate ‘Sample Templates’ for the guidance of the assessing officers. A copy of the aforesaid ‘Standard Procedure’ and the ‘Sample Templates’ is enclosed herewith for ready reference. There are separate ‘Sample Templates’ given for recording reasons for reopening of the assessment for the guidance of the AO in respect of following four category of cases:

• Where no return of income is filed by the assessee;
• Where no regular assessment was made under Section 143(3)/147 of the Act.
• Where regular assessment was made under Section 143(3)/147and a period of 4 years from the end of the relevant assessment year has not expired.
• Where regular assessment was made under Section 143(3)/147and a period of 4 years has expired from the end of the relevant assessment year.

Each of the said templates contains the following 8 paragraphs:

a. Brief details of the assessee.

b. Brief details of information collected/received by the AO.

c. Analysis of information collected/ received.

d. Enquiries made by the AO as sequel to the information collected/ received.

e. Findings of the AO.

f. Basis of forming reason to believe and details of escapement of income.

g. Escapement of income chargeable to tax in relation to any asset.

h. Applicability of the provisions of Section 147/ 151 to the facts of the case.

The Assessing Officers must go through the aforesaid ‘Standard Procedure’ and the ‘Template’. If the same is followed diligently, mistakes in recording satisfaction for reopening of assessment can be completely avoided.

The above mentioned ‘Standard Procedure’ and ‘templates’ are based on provisions of the Act as well as on judicial pronouncements.

Further, there are other important issues relating to reopening also which need to be analyzed. Therefore, there is a need to properly understand the relevant provisions of the Act along with judicial pronouncements. Hence, various issues pertaining to reopening of assessment have been discussed along with important case laws in the following paragraphs.

REASON TO BELIEVE

For making assessment/ reassessment of all the cases in which income chargeable to tax has escaped assessment, valid ‘reason to believe’ is sine qua non for assuming jurisdiction under Section 147. Hence, if the ‘reason to believe’ is not valid, or is mere pretense, or there is lack of due application of mind by the Assessing Officer, the re-assessment proceedings initiated under Section 147 of the Act would not be valid. The expression ‘reason to believe’ does not mean subjective satisfaction of the AO. The belief must be held in good faith and should not be merely reason to suspect. The reason to believe is more than ‘satisfaction’ of the AO. It should not be extraneous or irrelevant to the purpose of the Section. The AO must have tangible material on the basis of which he can record his reasons to believe. The courts have held that at the time of reopening, the AO should have prima facie some material to form reason to believe and at that stage the sufficiency or correctness of the material is not required to be proven. [Central Provinces Manganese Ore Co. Ltd. vs. CIT [1991] 191 ITR 662(SC); Sri Krishna (P) Ltd. vs. CIT [1996] 221 ITR 538(SC)]. In the landmark decision of Raymond Woolen Mills Ltd. vs. ITO [1999]236 ITR 34, the Supreme Court held that:

‘We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage.’

Further, in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500 (SC), it was observed by the Hon’ble Supreme court that:

‘…at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage.’

It is now settled that reason to believe has to be recorded prior to issue of notice under Section 148. It has also been held by the courts that material/ information which may come to the possession of the AO subsequent to the reopening cannot be held to be a valid basis for reopening. The said reason to believe cannot be supplemented or added by further reasons or by filing an affidavit and/ or making oral submission, once it is recorded and notice under 148 is issued. [Hindustan Lever Ltd. vs. R.B. Wadkar [2004]268 ITR 322 (Bombay); Aroni Chemicals Ltd. vs. DCIT [2014] 362 ITR 403(Bombay]. However, in the case of Aayojan Developers vs. ITO [2011] 335 ITR 234 (Guj.) and Purnima Komalkant Sharma vs. DCIT [2020] 114 taxmann.com 718(Guj.), it has been held by the Gujarat High Court that the Assessing Officer in his affidavit filed in the court can explain or elaborate or clarify the reasons recorded by him, but cannot thereby introduce new grounds, or new reasons, or new materials, which were not to be found in the recorded reasons either expressly or by implication.

LIVE LINK

Courts have held that reason to believe must have a ‘live link’ or a ‘direct nexus’ with the information or material available with the AO. The ‘reason to believe’ should be self-speaking and self-contained reflecting his independent
application of mind. In the case of ITO vs. Lakhmani Mewal Das [1976] 103 ITR 437, it was held by the Hon’ble Supreme Court that: Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income Tax Officer and the formation of his belief that there has been escapement of the income of the assessee. Further, in the landmark case of CIT vs. Kelvinator of India Ltd. [2010] 320 ITR 561(SC), the Hon’ble Supreme Court held that: ‘Hence, after 01.04.1989, an Assessing Officer has the power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.’

TANGIBLE MATERIAL

Courts have held that the AO must have ‘tangible material’ on the basis of which AO can form reason to believe that income has escaped assessment. The Income-tax Act does not impose any restriction on the sources from which ‘tangible material’ could emanate, forming the basis for reopening of assessment. What could be the ‘tangible material’ has been explained in various decisions.

In Kalyani Mawji & Co. vs. CIT, West Bengal (1976) 1 SCC 985, the Supreme Court held that the word ‘information’ was to be construed in its widest amplitude. It was also held that information could emanate from external sources as well as material already on record.

Information Coming into Possession during Proceedings of Subsequent Year

When during the course of the assessment proceedings of a subsequent assessment year, certain information comes into the possession of the AO from which he can form reason to believe that income has escaped assessment in a prior assessment year, he would be entitled to invoke Section 147 [Mahabir Prasad Munna Lal vs. CIT 15 ITR 393(All.); Clagget Brachi Co. Ltd. vs. CIT, Andhra Pradesh 1989 Supp (2) SCC 182; Ess Kay Engineering Co. P. Ltd vs. CIT (2001) 10 SCC 189; Siemens Information Systems Ltd vs. ACIT (2012) 343 ITR 188 (Bom.). Further, in the recent decision of Hon’ble Supreme Court in the case of New Delhi Television Ltd. vs. DCIT [2020] 116 taxmann.com 151(SC), it was held that: ‘Information which comes to the notice of the assessing officer during proceedings for subsequent assessments years can definitely form tangible material to invoke powers vested with the Assessing Officer under Section 147 of the Act.’

Report from Investigation

Wing and TEP

In various decisions including the case of AGR Investments vs. Addl. CIT 333 ITR 146 (Delhi), it was held that on the basis of information received from the Investigation Wing assessment can be reopened. Further, reopening on the basis of Tax Evasion Petition (TEP) where the AO has applied his mind to the TEP has been held to be valid. It was held that substance of the contents of the TEP has to be examined to ascertain prima facie reason to believe [Sumana Sen vs. CIT [2013] 356 ITR 29(Delhi)]. In the case of Sonia Gandhi vs. ACIT [2018] 407 ITR 594 (Delhi), it has been held that the TEP and investigation reports constituted tangible material.

Audit Objection

The intimation which the AO received from the audit department would constitute ‘information’ [R.K. Malhotra ITO vs. Kasturbhai Lalbhai [1977] 109 ITR 537 (SC). Findings of the audit department pertaining to facts may be the basis for reopening of assessment [CIT vs. PVS Beedis P. Ltd. [1999] 237 ITR 13(SC)]. However, comments of the audit department pertaining to point of law could not be considered as ‘information’. [India & Eastern Newspapers Society vs. CIT [1979]199 ITR 996(SC).

Valuation Report

In various judicial pronouncements, it has been held that valuation report as such is not enough to reopen assessment. For a valuation report to be considered as ‘tangible material’ and form the basis for reopening, there must be an independent application of mind by the AO and a belief must be formed thereon.

In the case of Smt. Amala Das vs. CIT [1984] 146 ITR 216(P&H), it was held that valuation report was a mere opinion and a change in opinion could not be a ground for reopening assessment. In Smt. Tarawati Devi Agarwal vs. ACIT [1986] 162 ITR 606 (Calcutta), it was held that variation is always a question of opinion and unless there is a clear finding on the basis of materials that the assesse invested in the construction of house property more than what has been shown by her in the course of the assessment proceedings, the ITO cannot proceed merely on the basis of the valuation report of the Departmental Valuer. On the basis of the difference in estimate, it cannot be said that the assesse actually invested more than what has been shown by her.

The Hon’ble Supreme Court in ACIT vs. Dhariya Construction Company [2010] 15 SCC 251 held that opinion of a Departmental Valuation Officer per se is not an ‘information’ for reopening of assessment. AO has to apply his mind to the information collected, if any, and must form a belief thereon. Delhi High Court in ACC Ltd. Vs. DVO & Ors. [2013] 357 ITR 160 reiterated the ratio of Dhariya Construction (supra).

CHANGE OF OPINION

Post-amendment w.e.f. 01.04.1989, for the first category of cases, as mentioned in para 2.1 above, only requirement for reopening of the case is ‘reason to believe’. However, in the landmark decision of CIT vs. Kelvinator of India Ltd. [2010] 320 ITR 561(SC), the Hon’ble Supreme Court held that: ‘One must treat the concept of ‘change of opinion’ as an in-built test to check abuse of power by the Assessing Officer.’ Therefore, one more condition was added by the Supreme Court to the effect that assessment cannot be reopened merely on change of opinion.

Cases in which Return is Processed under Section 143(1)

Where return of income has been processed under Section 143(1), there cannot be change of opinion as there was no occasion for the AO to form any opinion being no assessment/reassessment made under Section 143(3)/147. In the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007], 291 ITR 500 (SC), notice under Section 148 was issued in a case where intimation under Section 143(1)(a) was issued and the Hon’ble SC observed that: ‘Therefore, there being no assessment under Section 143(1)(a), the question of change of opinion, as contended, does not arise.’ Further, the Hon’ble Supreme Court held that: ‘So long as the ingredients of Section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under Section 147 even when intimation under Section 143(1) had been issued.’ The same was reiterated in Dy. CIT vs. Zuari Estate Development & Investment Co. Ltd. [2015] 373 ITR 661 (SC) (Mag.).

However, reopening of cases where return is processed under Section 143(1) has to meet the ingredients of Section 147 and the AO does not have unbridled powers to reopen such cases without having tangible material [Inductotherm (India) P. Ltd. vs. DCIT [2013]356 ITR 481(Gujarat).

In the case of CIT vs. Orient Craft Ltd. [2013] 354 ITR 536 (Del), Delhi High Court held that: ‘it is open to the assessee to contend that notwithstanding that the argument of “change of opinion” is not available to him, it would still be open to him to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment.’

In the case of Indu Lata Rangwala vs. DCIT [2017] 384 ITR 337 (Del), Hon’ble Delhi High Court extensively analyzed the decisions of Rajesh Jhaveri (supra), Zuari Estate (supra) and Orient Craft (supra) and held that: ‘where reopening is sought of an assessment in a situation where the initial return is processed under Section 143(1) of the Act, the AO can form reasons to believe that income has escaped assessment by examining the very return and/or the documents accompanying the return. It is not necessary in such a case for the AO to come across some fresh tangible material to form “reasons to believe” that income has escaped assessment.’

Cases in which no Return is Filed

In the case of Ingram Micro [2017] 78 taxmann. com 140 (Bombay), it was held that income which has escaped assessment does not arise simpliciter on non-filing of return. For Explanation 2(a) to Section 147 to apply, there must be (i) non-filing of return, and (ii) satisfaction of AO that income chargeable to tax has escaped assessment.

ACTION-POINT

It has been noticed that in those cases where return was processed under Section 143(1), or where return was not filed, satisfaction note is recorded casually without bringing facts and material on record. In such cases also, the AO has to record his reasons carefully based on the tangible material available with him so that the requirements of ‘reason to believe’ are met.

Cases where assessment has earlier been made under Section 143(3)/147 within 4 years from the end of the relevant assessment year

In the cases in which assessment was made earlier and 4 years have not yet expired from the end of the relevant assessment year, the AO has to meet the basic requirement of recording of reasons to believe on the basis of tangible material. Further, in the light of decision of Kelvinator of India Ltd. (supra), assessment cannot be reopened on the
basis of ‘mere change of opinion’.

The term ‘change of opinion’ has been examined and explained by different courts. In the case of ITO vs. Tech Span India (P.) Ltd. [2018] 404 ITR 10 (SC), the Supreme Court held that change of opinion implies formulation of opinion and then a change thereof. It means formulation of belief by an Assessing Officer resulting from what he thinks on a particular question. It was further held that:

‘12. .The Court ought to verify whether the assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which is the basis of the alleged escapement of income that was taxable. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the assessing officer any opinion on the questions that are raised in the proposed re-assessment proceedings. Every attempt to bring to tax, income that has escaped assessment, cannot be absorbed by judicial intervention on an assumed change of opinion even in cases where the order of assessment does not address itself to a given aspect sought to be examined in the re-assessment proceedings.’

In the case of Dalmia (P.) Ltd. vs. CIT [2011]348 ITR 469 (Del), the Hon’ble Delhi High Court held that: ‘Question of change of opinion arises when an Assessing Officer forms an opinion and decides not to make an addition and holds that the assessee is correct.’

In the case of CIT vs. Usha International Ltd. [2012] 348 ITR 485 (Delhi), Delhi High Court held that: ‘Thus if a subject matter, entry or claim/ deduction is not examined by an Assessing Officer, it cannot be presumed that he must have examined the claim/ deduction or the entry, and therefore, it is the case of ‘change of opinion’. When at the first instance, in the original assessment proceedings, no opinion is formed, principle of ‘change of opinion’ cannot and does not apply. There is a difference between change of opinion and failure, or, omission of the Assessing Officer to form an opinion on a subject-matter, entry, claim, and deduction. When the Assessing Officer fails to examine a subject-matter, entry, claim or deduction, he forms no opinion. It is a case of no opinion.’

In Consolidated Photo & Finvest Ltd. vs. Asstt. CIT [2006] 281 ITR 394 (Delhi), Delhi High Court held that: ‘there can be no presumption that even when the order of assessment is silent, all possible angles and aspects of a controversy had been examined and determined by the Assessing Officer….’

In Gruh Finance Ltd. vs. Jt. CIT [2000] 243 ITR 482 (Guj.), Gujarat High Court held that: ‘though the material was available on record, at the time of first assessment, when no conscious consideration of the material is made and a mistake has been committed, it would not, in any case, create an embargo or a ban on the competent officer to exercise powers under the amended Section 147, as prima facie, there could not be “change of opinion” in that factual scenario.’

Further, in the case of Chetan Sabharwal 11 taxmann.com (Delhi), it was held that: ‘in view of the fact that the original assessment orders are totally silent on this aspect of the matter, it cannot be said that the ‘reason to believe’ constitutes a “change of opinion”.’

Courts have often held that the reopening would be bad on account of change of opinion where questionnaires have been issued and the subject-matter, which is later the subject-matter of reassessment, was in fact examined by the AO in the original assessment proceedings. [Best Cybercity (India) Pvt. Ltd vs. ITO [2019] 414 ITR 385 (Delhi); Bharati Infratel Ltd. vs. DCIT [2019] 411 ITR 403 (Delhi)].

However, in the case of Honda Siel Power Products Ltd. vs. DCIT & Ors. [2012] 340 ITR 53( Delhi), the AO issued notice under Section 148 on the ground that the assessee had earned tax-free dividend income exempt under Section 10(33) but various administrative expenses for earning said dividend income were claimed and allowed as expenditures and, thus, income had escaped assessment. The assessee had admitted that it had not given details with regard to proportionate expenses relatable to tax-free or exempt income, which were claimed as a deduction under the cumulative head ‘Expenditure’. It was contended that the assessee was not required to disclose the said fat, as when it had filed the return Section 14A was not in the statute book and consequently, there was no omission and failure on the part of the assessee to make full and true disclosure. The court held that the term ‘failure’ on the part of the assessee is not restricted only to the income-tax return and the columns of the income-tax return or the tax audit report. This is the first stage. The said expression ‘failure to fully and truly disclose material facts’ also relates to the stage of the assessment proceedings, the second stage. There can be omission and failure on the part of the assessee to disclose fully and truly material facts during the course of the assessment proceedings. This can happen when the assessee does not disclose or furnish to the Assessing Officer complete and correct information and details which it is required to disclose under an obligation. Burden is on the assessee to make full and true disclosure. The court further held that merely because material lies embedded in material or evidence, which the AO could have uncovered but did not uncover, is not a good ground to deny or strike down a notice for reassessment. Whether the Assessing Officer could have found the truth but he did not, does not preclude the Assessing Officer from exercising the power of reassessment to bring to tax the escaped income.

Action-Point

The AO cannot reopen an assessment merely on the ground that a wrong view was taken in the facts of the case in the original assessment order. Recourse to correct that mistake is revision under Section 263 and not the reopening under Section 148 of the Act. Particularly in the case of audit objections, a very careful view has to be taken as regards remedial action to be taken under Section 148 or Section 263. On the same set of facts, once a view has been taken by the AO not to make an addition, the AO cannot reopen the said assessment to add the same income holding
that an erroneous view was taken earlier. Hence, questionnaire should be issued carefully. The AO is required to demonstrate in his satisfaction note that the material on the basis of which he is going to reopen the case was not considered in the original assessment order and also that no opinion was formed by the AO in respect of the said material. The judicial precedents cited above may be referred to by the AO to appreciate the law in this regard.

CASES WHERE ASSESSMENT HAS EARLIER BEEN MADE UNDER SECTION 143(3)/148 AND 4 YEARS HAVE EXPIRED FROM THE END OF THE RELEVANT ASSESSMENT YEAR

First Proviso to Section 147 provides that where an assessment under Section 143(3) or 148 has previously been made for the relevant assessment year, no action shall be taken under Section 147 after the expiry of four years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. In the cases where assessment has earlier been made under Section 143(3)/ 148 and 4 years have expired from the end of the relevant assessment year, following three conditions are required to be met:

• ‘Reason to believe’ is based on the tangible material.
• Reopening is not based on ‘mere change of opinion’.
• There is failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.

On perusal of the assessment records, AO may come across some material which was not disclosed fully and truly by the assesse and on the basis of that material/ information, the AO may have prima facie reason to believe that income chargeable to tax has escaped assessment. The assessee can always raise the issue that all the facts and material were available before the AO at the time of original assessment. In that case, AO may refer to Explanation 1 to Section 147 of the Act. However, the AO has to record his reasons in such a manner that failure on the part of the assessee to disclose fully and truly all material facts is prima facie established.

The AO may also receive information from other sources including information/ material from the DIT (Investigation), which was not available with him at the time of making original assessment. In such cases, AO has to establish live link or close nexus with such information/ material with the return of income and/ or details filed by the assessee during original assessment and on independent application of mind, he should arrive at the finding that the assessee failed to disclose fully and truly all material facts necessary for his assessment. The AO has to examine that not only all material facts were disclosed before the AO during the original assessment, but the same were disclosed fully and truly also. Disclosure of all material facts fully does not mean per se that it was disclosed truly also.

Material Facts

A ‘material fact’ is a fact that a reasonable person would recognize as germane to a decision to be made, as distinguished from an insignificant, trivial, or unimportant detail. In other words, it is a fact, the suppression of which would reasonably result in a different decision. In the case of CIT vs. Usha International Ltd. [2012] 348 ITR 485 (Delhi), Hon’ble Delhi High Court has explained the expression ‘material facts’ as, ‘The expression ‘material facts’ means those facts which if taken into account would have an adverse effect on the assessee by a higher assessment of income than the one actually made. They should be proximate and not have remote bearing on the assessment. The omission to disclose may be deliberate or inadvertent.’

FAILURE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR ASSESSMENT

The expression ‘failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment’ has been examined and considered by different courts. In the landmark decision of Phool Chand Bajrang Lal vs. ITO [1993] 203 ITR 456 (SC), the Supreme Court held that: ‘He may start reassessment proceedings either because some fresh facts come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts.’ The Court further held that: It would be immaterial whether the ITO at the time of making the original assessment could, or could not, have found by further enquiry or investigation, whether the transaction was genuine or not.

In the landmark decision of Calcutta Discount Co. Ltd. vs. ITO [1961] 41 ITR 191 (SC), the Hon’ble Supreme Court noted:

‘There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet a possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example,I have produced the account books and the documents: You, the assessing officer examine them, and find out the facts necessary for your purpose: My duty is done with disclosing these account-books and the documents.’ His omission to bring to the assessing authority’s attention these particular items in the account books, or the particular portions of the documents, which are relevant, amounts to ‘omission to disclose fully and truly all material facts necessary for his assessment.’ Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section, gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is the assessee’s duty to disclose all of them, including particular entries in account books, particular portions of documents and documents, and other evidence, which could have been discovered by the assessing authority, from the documents and other evidence disclosed.’’

In the case of Consolidated Photo & Finvest Ltd vs. ACIT [2006] 281 ITR 394, Delhi High Court referred to Explanation 1 of Section 147 and held that: ‘The argument that production of the account books and other documentary evidence relevant for assessment must imply a full and true disclosure of all material facts must be rejected out of hand in the light of the provisions of Explanation, according to which mere production of the books of account or other evidence from which the Assessing Officer could have, with due diligence, discovered the material evidence does not necessarily amount to a disclosure within the meaning of the proviso.’

In the case of Dalmia (P.) Ltd. vs. CIT [2011] 348 ITR 469 (Delhi), the assessee submitted only the part details of sundry creditors. Assessment was reopened in respect of those creditors details of which were not filed in the original assessment proceedings. The Hon’ble Delhi High Court held the reopening valid and observed that: ‘The assessee was called upon and asked to furnish names and addresses of the sundry creditors and since when the amount was outstanding. The assessee was also asked to explain details of each creditor. There is nothing on record and it is not even the stand of the assessee that those details in respect of all parties were furnished. If there is no disclosure and details were not furnished, there cannot be full and true disclosure. In such circumstances, it cannot be held that there was full and true disclosure by the assessee.’

In the case of Shri Krishna (P.) Ltd. vs. CIT [1996] 221 ITR 538 (SC), it was held by the Supreme Court that: ‘Every disclosure is not and cannot be treated to be a true and full disclosure.

The disclosure must not only be true but must be full—’fully and truly’. A fake assertion, or statement, of material fact, therefore, attracts the jurisdiction of the ITO under Section 147.’

In SC Johnson Products Ltd vs. ACIT 400 ITR 426 (Delhi), it was held by the Delhi High Court that; ‘the material can also include subsequent years’ assessments, which receive scrutiny during the course of whose proceedings the AO has occasion to see if the same, or same pattern of returns or claims were made. If so, the notice of reassessment would be justified… where it is felt that returns were “dressed up” or improper claims were made, that escaped
inquiry, reassessment is warranted.’

In Money Growth Investment & Consultants (P.) Ltd. vs. ITO [2012] 21 taxmann.com 438 (Delhi), Delhi High Court held that failure of assessee to disclose at time of assessment that it had received share capital from bogus companies providing accommodation entries, was sufficient to initiate reassessment.

Different benches of the ITAT have annulled the reopening of assessment in many cases on the ground that while recording reason to believe the AO has not specifically mentioned in so many words that there was failure on the part of the assesse to disclose fully and truly all material facts necessary for his assessment. Therefore, the AO needs to specifically mention in the satisfaction note that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.

However, in the case of CIT vs. India Terminal Connector System Ltd. [2012] 21 taxmann. com 69 (Delhi), the AO had described the facts from which it could be drawn conclusion that the assesse had not made full and true disclosure of all material facts. However, in the satisfaction note, it was not recorded in so many words that there was failure on the part of the assessee to make full and true disclosure of all the material facts necessary for his assessment. Hon’ble Delhi High Court reversed the order of the ITAT, Delhi holding that: ‘Reasons recorded by the Assessing Officer have to be read as a whole in entirety and in a holistic manner. Mere reproduction of the language of the Section is not sufficient. We have to read and understand the reasons recorded and whether on the basis of said reasons the Assessing Officer had come to the conclusion or drawn an inference that the assessee had not made full and true disclosure of material facts.’

Action Point

In those cases, where assessment is reopened after expiry of four years from the end of the relevant assessment year, on the basis of information received from the Investigation Wing regarding accommodation entry etc., the AO must record in the satisfaction note that the information/ material received from the Investigation Wing was not available at the time of original assessment. It should also be brought on record that even though information regarding such transactions was submitted during the original assessment proceedings, the same was not true in light of the material or information subsequently available with the AO particularly with respect to specific transactions which were not disclosed fully and truly. Further, considering various decisions of the ITAT and to avoid unnecessary litigation, after describing the facts of the case, the AO must specifically mention in the satisfaction note that: ‘there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.’

REOPENING OF ASSESSMENT ON THE BASIS OF INFORMATION RECEIVED FROM INVESTIGATION WING- BORROWED SATISFACTION

Information/ material received from the Investigation Wing or other sources, should be linked and correlated with the return of income/ assessment records and particularly with specific transactions. In many cases, the AO mechanically copies and pastes the findings of the DDIT (Inv.) in the satisfaction note without demonstrating his independent application of mind on the information received, which is patently wrong. While recording his satisfaction, the AO is required to show his application of mind after receiving the information/ material in order to form his reason to believe that income liable to tax has escaped assessment.

In the case of Signature Hotels Ltd vs. ITO (2011) 338 ITR 51 (Delhi), information regarding accommodation entry was received by the AO from the Investigation Wing. The AO recorded the satisfaction as under:

‘Information received from the office of the DIT (Inv.)-VI, New Delhi, revealed that M/s. Signature Hotels (P) Ltd. has introduced unaccounted money in its books of account during the financial year 2002-03 through accommodation entry from M/s. Swetu Stone PV for Rs. 5 lakhs. In view of the above, I have reasons to believe that the taxable income to the tune of Rs. 5 lakhs has escaped assessment within the meaning of Section 147 of the Income-tax Act 1961.’

The AO, in a separate annexure, mentioned the details of transactions as intimated by the Investigation Wing. Further, the reasons recorded by the Assessing Officer for approval of the Commissioner of Income-tax in paragraph 11 of the said form/ proforma read as under:

‘11. Reasons for the belief that income has escaped assessment.—Information is received from the DIT (Inv.-I), New Delhi, that the assessee has introduced money amounting to Rs. 5 lakhs during the financial year 2002-03 relating to the assessment year 2003-04. Details are contained in annexure. As per the information amount received is nothing but accommodation entry and the assessee is a beneficiary.’

The Hon’ble Delhi High Court observed that the last sentence records that as per the information, the amount received was nothing but an accommodation entry and the assessee was the beneficiary. The reasons and the information referred to was held as extremely scanty and vague. There is no reference to any document or statement, except the annexure. The annexure cannot be regarded as a material or evidence that prima facie shows or establishes nexus or link which discloses escapement of income. Further, it is apparent that the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. The Assessing Officer accepted the plea on the basis of vague information in a mechanical manner. The reasons recorded reflect that the Assessing Officer did not independently apply his mind to the information received from the Director of Income-tax (Investigation) and arrive at a belief whether or not any income had escaped assessment.

In recent cases, reopening of assessment has been challenged by the assessees on the ground that the reopening was not on the basis of the satisfaction recorded by the AO on his independent application of mind, but was based merely on a ‘borrowed satisfaction’. In the case of PCIT vs. Meenakshi Overseas (P.) Ltd. [2017] 395 ITR 677 (Del), the AO received certain information from the DIT (Investigation) in respect of accommodation entry taken by the assessee from an entry operator. The return in this case was processed under Section 143(1). The AO reproduced the findings of the DIT (Investigation) in the satisfaction note apparently without independent application of his mind. It was argued by the assessee that ‘reason to believe’ recorded by the AO was mere reproduction of the finding of the DIT (Investigation) and there was no independent application of mind by the AO to arrive at the finding that income has escaped assessment. It was claimed by the assesse that since the satisfaction was not of the AO but was merely a reproduction of the findings of the DDIT (Investigation), it was a borrowed satisfaction. Hon’ble Delhi High Court Court observed that:

‘There is no independent application of mind by the AO to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the AO are at best a reproduction of the conclusion in the investigation report. Indeed it is a “borrowed satisfaction”. The reasons fail to demonstrate the link between the tangible material and the formation of the reason to believe that income has escaped assessment.’

In Pr. CIT vs. RMG Polyvinyl (I) Ltd. [2017] 83 taxmann.com 348 (Delhi), information was received from Investigation Wing. While recording satisfaction, the AO wrongly mentioned that no return was filed by the assesse and also the incorrect amount of accommodation entry taken was mentioned. Hon’ble Delhi High Court pointed out the said glaring mistakes to show non-application of mind by the AO and further observed that there was no link between the tangible material and the formation of the reasons to believe that income had escaped assessment. Relying upon the decision of Meenakshi Overseas Ltd. (supra), the court quashed the reopening.

In respect of information received from Investigation Wing regarding accommodation entry taken by the assesse in the case of which order was passed under Section 143(3), Delhi High Court in the case of Haryana Acrylic Manufacturing Co. v. CIT [2008] 175 Taxman 262 [2009] 208 ITR 38 (Delhi) held that since all the information regarding share/ share application money/ unsecured loan taken was submitted before the AO during the original assessment proceedings, it cannot be held that there was failure on the part of the assesse to disclose the material fully and truly. In that case, the High Court noticed that the AO has not mentioned in his satisfaction note that there was failure on the part of the assesse to disclose fully and truly all material facts necessary for his assessment and the reopening of assessment was quashed. The aforesaid decision has been followed by high courts and different benches of the ITAT.

In recent decisions, different high courts have considered and distinguished the above mentioned decisions of Meenakshi Overseas (supra) and Haryana Acrylic Manufacturing Co (supra). The courts have held reopening to be valid in the cases where the AO has properly brought out the facts on record including specific information received from the Investigation Wing and has shown independent application of mind by way of analyzing the said information and linking the specific transactions contained therein with the return of income/assessment records.
In a recent decision of RDS Projects Ltd. vs. ACIT [2020] 113 taxmann.com 534 (Delhi), the assessment was completed under Section 143(3) which was reopened on the basis of information received from the Investigation
Wing in respect of share capital received by the assesse from accommodation entry providers. In the above decision, the court also considered and distinguished the decision of Haryana Acrylic Manufacturing Co. (supra). The Hon’ble Delhi High Court has referred to the recent decision of the Supreme Court in Pr. CIT vs. NRA Iron & Steel (P.) Ltd. [2019] 412 ITR 161 in respect of addition made under Section 68 on account of bogus share capital. The Hon’ble Court also referred to Explanation 1 to Section 147. The court observed that in the original assessment order, there is absolutely no examination or discussion with regard to the genuineness of the transactions undertaken by the assesse with entry provider companies. The court referred to the decision of CIT vs. Burlop Dealers Ltd. [1971] 79 ITR 609 (SC), wherein the Supreme Court had observed that: ‘having created and recorded bogus entries of loans, the assessee could not say that it had truly and fully disclosed all material fact necessary’. The Court also relied on the decision of AGR Investment Ltd. vs. Addl. CIT [2011] 333 ITR 146 (Delhi), where similarly specific information regarding accommodation entries was received from the office of the Directorate of Investigation. The Court further held that:

‘It is neither a change of opinion nor does it convey a particular interpretation of a specific provision which was done in a particular manner in the original assessment and sought to be done in a different manner in the proceeding under Section 147 of the Act. The reason to believe has been appropriately understood by the assessing officer and there is material on the basis of which the notice was issued.’

In the case of Aravali Infrapower Ltd. vs. DCIT [2017] 390 ITR 456 (Delhi) and PCIT vs. Paramount Communication (P.) Ltd. [2017] 79 taxmann.com 409 (Delhi), the decision of Haryana Acrylic Manufacturing Co. (supra) has been considered and distinguished. In a very recent decision dated 20.12.2019 in the case of Vedanta Ltd. vs. ACIT in WP(c) No. 13036 of 2019, assessment was reopened on the basis of information received from the Investigation Wing regarding accommodation entry. Hon’ble Delhi High Court considered and distinguished the decision of Meenakshi Overseas Ltd. (Supra) holding that there was proper application of mind and analysis of facts by the AO pursuant to information received from the Investigation Wing. Further, the court followed the decision of RDS Projects Ltd. (supra). In the said case, the AO has followed the format of the Sample Template of the CBDT while recording satisfaction for reopening. Detailed analysis of the transactions of the assesse with the entry providing entities was made by the AO to arrive at his conclusion regarding escapement of income. The AO could establish live link between the tangible material and reason to believe.

In Rakesh Gupta vs. CIT [2018] 93 taxmann. com 271(P&H), decision of Meenakshi Overseas Ltd. (Supra) was distinguished and reopening was treated as valid by Punjab & Haryana High Court observing that the AO has shown independent application of mind in respect of information received from Investigation Wing and live link between the tangible material and reason to believe was shown.

Also, reopening of assessment on the basis of information received from the Investigation Wing regarding accommodation entry has been upheld by Delhi High Court in JMD Global (P) Ltd. vs. PCIT [2019] 112 taxmann.com 204 (Delhi).

Inquiries under Section 133(6) before Recording Reason for Reopening

In the case of Aishwarya Dyeing Mills (P) Ltd. vs. DCIT 94 taxmann.com 430 (Guj), AO received information from Investigation Wing regarding accommodation entry taken by the assesse. The court considered and rejected the argument of ‘borrowed satisfaction’. Further, the court held that there are no fetters on the AO on making certain inquiries under Section 133(6) before recording reasons for reopening of assessment. It was held by the Gujarat High Court as under: ‘…there are no fetters on Assessing Officer carrying out preliminary inquiries even before issuance of notice of reopening in order to collect information on basis of which, he may either form a belief that income chargeable to tax had escaped assessment or abandon any further inquiry, upon being satisfied that no such belief could be formed.’

Action Point

Information/ material received from the Investigation Wing or other sources, should be linked and correlated with the return of income/assessment records and particularly specific transactions. It has been noticed that in many cases the AO mechanically copies and pastes the reason recorded in another case mentioning the name of the concerned parties/ transactions wrong and in few cases even the name of the assessee is also wrongly mentioned. Such mistakes are fatal and reopening is quashed at first instance. Further, the reasons to believe should not be mere reproduction of findings of the DDIT (Inv.) etc. but should demonstrate independent application of mind of the AO in respect of material/ information available with him. There are no fetters on the AO to make inquiry under Section 133(6) before recording satisfaction for reopening of assessment. In fact, Para 4 of the ‘sample template’ issued by the CBDT covers the aspect of inquiries made by the AO as sequel to the information collected/received. It should also be brought on record that in the light of fresh material available with the AO, there was failure on the part of the assesse in disclosing fully and truly all materials necessary for his assessment.

SERVICE OF NOTICE

Issue and service of statutory notices forms an important part of all the proceedings under the Income-tax Act. The proceedings are initiated by issue of proper notice and valid service of that notice and end with proper service of the order. In case of any deficiencies in the issue or service of the notice, the assessment order is quashed on technical grounds by the appellate authority without going into the merits of the case. Valid issue and service of notice under Section 148 is also mandatory for reopening of assessment. In a number of cases, reopening of assessment is quashed on the ground of invalid service of notice. Hence, relevant provisions in respect of service of notice have briefly been touched upon in this note. Provisions in respect of service of notice are given in Section 282(1) of the Act which are to be read with Rule 127 of the Income-tax Rules 1962. The said Rule 127 has been amended w.e.f. 02.12.2015, which may be referred to by the AO.

Service by Post

Rule 127(2) (a) contains provisions regarding correct address for service of notice by post. Further, the procedure for service by post is given in Section 27 of the General Clauses Act 1897. The service of notice is effected when the letter is delivered in the ordinary course by post (with registered AD or through Speed Post). The presumption is that the delivery on the assessee has been effected. This is so, even if a third person receives the post. The onus of proving otherwise is on the assessee. If the notice comes back with the postal remark ‘refused’, it will still have the effect of a valid service. However, if the assessee denies such refusal on oath, the postman must be examined. But if the notice is returned with the postal remarks ‘Left’, ‘Not found’ or ‘Not known’, then valid service cannot be presumed. Further, if more than one notices are sent in one envelope, then the envelope should bear the details of all the notices inside it and the dispatch register should be marked with value of stamp covering all dispatches as one. This is necessary because in case of any dispute, the same may be used as an evidence. However, to avoid any future litigation on this matter, and where so possible, every notice may be sent in separate envelope and that separate receipts are pasted in file.

Service by Affixture

Rule 17 of Order V of the Code of Civil Procedure contains the provisions regarding service by affixture. It provides that service by affixture is resorted to when the addressee or his agent refuses to sign the acknowledgement for service or when the serving official, after using all due and reasonable diligence, cannot find the addressee at his residential or business premises within a reasonable time and there is no likelihood of the addressee being found at the residence or business premise within a reasonable time and when there is no agent/authorized person empowered to accept the notice on behalf of the addressee.

After affixture of the notice, on the outer door or some other conspicuous part of the he building, the serving officer shall return the notice with a report stating that he has affixed the copy and the circumstances under which he did so and the name and address of the person by whom the house was identified (if any) and in whose presence the copy of the notice was affixed.

In respect of requirement of independent witness, it is better to get the signature of a witness as provided in Rule 17 of Order V of CPC. However, in the case of CIT vs. Samir Kumar Aditya [2012]17 taxmann.com 128(Delhi), Hon’ble Delhi Court relied on the decision of Sahara Deposits & Investments (I) Ltd. vs. Karan Singh [1996] 63 DLT 377 and held that it is not mandatory to get the signature of independent witness at the time of affixture. In the aforesaid case of Sahara Deposits (supra), it was held that if the court is not satisfied with the service by affixture, the court may issue necessary directions to serve the notice afresh.

However, in the case of CIT vs. Avi-Oil India (P.) Ltd. [2010] 323 ITR 242 (P&H), it was held that:

‘Before affixture, the serving officer of the summons, must use his due and reasonable diligence to find out the defendant/ respondent and if the circumstances as mentioned in Rule 17 exist, then and only then, the notice may be served by affixture and that too in the presence of witnesses by whom the house was identified and in whose presence the copy was affixed. Merely because the noticee in this case had not been found at the given address is not sufficient to establish that he could not be found, when there is nothing to show that reasonable efforts to find the person on whom the service was to be effected had been made.’

Service of Notice Electronically

As per Rule 127(2)(b), communication can be delivered or transmitted electronically at the email address available in the income-tax return or in the last income-tax return or email address of the company as available on the website of Ministry of Corporate Affairs; or any email address made available by the addressee to the income-tax authority. Further, as per Section 13 of the Information Technology Act 2000, dispatch of an electronic record occurs when it enters a computer resource outside the control of the originator.

Action Point

In the case of service by post, correct address of the assesse must be obtained in terms of Rule 127(2)(a). Service by affixture is ‘substituted service’ as provided in Rule 20 of Order V of CPC. It should be remembered that service by affixture is not a regular mode of service and can be effected only as a last resort. Courts have held that it is the duty of the Department to discharge the onus by showing that the authority concerned is satisfied that the assessee was keeping out of the way for the purpose of avoiding service or that there were other good reasons to come to the conclusion that the notice could not be served in the ordinary way. The AO should take recourse to service by affixture only when the assessee is intentionally avoiding service and/ or that for any reason, the notice cannot be served in the ordinary way. The court may not treat the issue as well as service of notice by affixture on the time-barring date of service of notice as valid. There must be reasonable effort by the AO to serve the notice on the assessee in ordinary way. Further, it is better to get the signature of a witness as provided in Rule 17 of Order V of CPC to avoid litigation. In case of electronic service of notice, it must be ensured that the notice is dispatched from the official email address of the AO at the correct email address of the assesse in terms of Rule 127(2)(b) well before the time-barring date.

ISSUE OF NOTICE UNDER SECTION 148 ON THE ASSESSEE IS MANDATORY BEFORE THE DUE DATE

As per the provisions of Section 148(1), notice to the assessee requiring him to furnish return shall be served on him before making the assessment/reassessment. However, Section 149(1) speaks of issue of notice. The issue is whether service of notice under Section 148 on the assessee is mandatory before the due date or whether notice under Section 148 is only to be issued before the due date.

The Hon’ble Supreme Court has analyzed the relevant provisions of the Act in the landmark decision of R.K. Upadhyaya vs. Shanabhai P. Patel [1987] 166 ITR 163 (SC) and held that-‘once a notice is issued within the period of
limitations, jurisdiction becomes vested in the ITO to proceed to reassess and service under the 1961 Act is not a condition precedent to conferment of jurisdiction in the ITO.’ The relevant portion of the order is further extracted as under:

‘A clear distinction has been made out between “issue of notice’ and “service of notice” under the 1961 Act. Section 149 prescribes the period of limitation. It categorically prescribes that no notice under Section 148 shall be issued after the prescribed limitation has lapsed. Section 148(1) provides for service of notice as a condition precedent to making the order of assessment. Once a notice is issued within the period of limitations, jurisdiction becomes vested in the ITO to proceed to reassess. The mandate of Section 148(1) is that reassessment shall not be made until there has been service. The requirement of issue of notice is satisfied when a notice is actually issued. Service under the 1961 Act is not a condition precedent to conferment of jurisdiction in the ITO to deal with the matter but it is a condition precedent to making of the order of assessment.’

In this regard, decision of Hon’ble Delhi High Court in the case of Mayawati vs. CIT [2010] 321 ITR 349(Del) has reiterated the aforesaid decision in R.K. Upadhyaya (supra) after discussing all the important decisions on the issue. In the case of Abab Offshore Ltd. vs. DCIT [2017] 78 taxmann.com 37(Mad), it was held by Madras High Court that reassessment notice collected from Revenue by postal department on last date of expiry of six years from the end of relevant assessment year, though served on assessee later, was not barred by limitation. In the case of Kanubhai Patel HUF vs. Hiren Bhatt or His Successors to Office [2011] 334 ITR 25 (Gujarat), it was held that for purposes of Section 149, the expression ‘notice shall be issued’ means that the notice should go out of the hands of the AO. Merely signing the notice on 31.03.2010 cannot be equated with ‘issuance of notice’ as contemplated under Section 149. In the case of CIT (Central-1) vs. Chetan Gupta [2015] 382 ITR 613(Del), it has been held by Delhi High Court that:

i. Under Section 148 of the Act, the issue and service of such notice upon the assessee are jurisdictional requirements that must be mandatorily complied with. They are not mere procedural requirements.

ii. For the AO to exercise jurisdiction to reopen an assessment, notice under Section 148 (1) has to be mandatorily issued to the assessee.

iii. Further, the AO cannot complete the reassessment without service of the notice so issued upon the assessee in accordance with Section 282 (1) of the Act read with Order V Rule 12 CPC and Order III Rule 6 CPC.

In the case of CIT vs. Three Dee Exim P. Ltd. [2012] 20 taxmann.com 146 (Del), notice under Section 148 was issued to the assessee at the address given by it in the return of income for the relevant assessment year. The counsel for the assessee had also appeared before the AO in response to notice under Section 142(1) and was given copy of the notice under Section 148. The assessee had also written letter within a few days thereafter, stating that the return as
originally filed under Section 143 be treated as return in pursuance to notice under Section 148. Not only this, various queries were also raised to which detailed replies were filed by the assessee. It was only thereafter that the assessment was framed. The court held that: ‘The participation by the assessee in the assessment proceedings on receipt of the copy of the notice can be deemed to be service of notice within the ambit of Section 148(1). That is what is the legislative intent of “service of notice” on assessee under this section that no assessment under Section 147 can be finalized before the assessee has sufficient notice thereof.’”

In the case of Sonia Gandhi vs. ACIT [2018] 407 ITR 594 (Delhi), notice under Section 148 was issued electronically through email just before the end of limitation period. Hon’ble Delhi High Court held as under:

‘52. The object of imposing time limits is to ensure that both the assessees and the tax administrators have the same standard on which the extended period available under the law are to be judged. Therefore, if it is shown that the AO issued and the assessee received notice, which was within the period of limitation, the form of the notice or the fact that it was through a channel not deemed ‘regular’ is not relevant. The violation of the circulars relied on at best can bespeak of irregularity.’

In the recent judgement of the Supreme Court in the case of PCIT vs. M/s. I-Ven Interactive Ltd. [2019] 418 ITR 66 (SC), it has been held that scrutiny notice issued to assessee under Section 143(2) at address available as per PAN database was justified as change in address had not been intimated to the Assessing Officer. However, when the change in address is notified by the assessee, the AO should get the notice served at the new address given.

ISSUE OF NOTICE UNDER SECTION 143(2) AFTER A RETURN IS FILED IN RESPONSE TO NOTICE UNDER SECTION 148 IS MANDATORY

It is now settled that issue of notice under Section 143(2) is mandatory after a return is filed in response to notice under Section 148. Taking clue from the decision in the case of ACIT vs. Hotel Blue Moon [2010] 321 ITR 362 (SC), Delhi High Court has held in the case of PCIT vs. Shri Jai Shiv Shankar Traders P. Ltd. [2016] 383 ITR 448 (Del) that failure to issue notice under Section 143(2) is fatal to the reassessment order. In the aforesaid order, the court also considered the decision of CIT vs. Madhya Bharat Energy Corporation Ltd. [2011] 20 taxmann.com 557(Del) and distinguished.

Further, in the case of PCIT vs. Silver Line [2016] 383 ITR 455 (Delhi), Delhi High Court held that notice under Section 143(2) is mandatory and even if assesse participated in reassessment proceedings, it would not obviate the mandatory requirement of service of notice under Section 143(2). In the case of PCIT vs. Paramount Biotech Ind Ltd. 398 ITR 701 (Delhi) also, it was reiterated that service of notice under Section 143(2) is mandatory.

In the case of Alpine Electronics Asia Pte Ltd. vs. DGIT [2012] 18 taxmann.com 246/ 341 ITR 247(Delhi), Delhi High Court reiterated that service of notice under Section 143(2) is mandatory within the stipulated time limit. It was also held that principle of estoppel incorporated in Section 292BB would not apply, if assessee has raised objection in reply to notice before completion of assessment or reassessment. The court further held that where only a draft assessment order had been passed, principle of estoppel under Section 292BB would not apply.

Issue of Notice under Section 143(2) on the Same Date of Filing of Return of Income

Recently, another dispute has arisen in respect of issue of notice under Section 143(2) on the same date on which return of income is filed in response to notice under Section 148. The origin of the dispute goes to the decision in DIT vs. Society for Worldwide Interbank Financial Communications [2010] 323 ITR 249 (Delhi). In the said case, the AO issued notice under Section 143(2) on 23.03.2000 while return of income was filed on 27.03.2000 which was treated as invalid by the CIT (A) and the ITAT. Before the High Court, Revenue took the stand that date of issue was mistakenly mentioned as 23.03.2000 and actually notice under Section 143(2) was issued and handed over to the assessee on 27.03.2000 only. High Court observed that service of notice under Section 143(2) was invalid holding that,

‘The provisions of Section 143(2) make it clear that the notice can only be served after the Assessing Officer has examined the return filed by the assessee. Whereas what paragraph 3.4 indicates is that when the assessee came to file the return, the notice under Section 143(2) was served upon the authorized representative by hand. Thus, even if we take the statement of the Assessing Officer at face value, it would amount to gross violation of the scheme of Section 143(2) of the said Act.’

Taking clue from the above mentioned observation of the High Court, the ITAT has quashed the reopening under Section 148 in a number of cases in which notice under Section 143(2) was issued on the same date on which return in response to notice under Section 148 was filed. In fact, in those cases, the assessee submitted a letter to the effect that return filed under Section 139(1) may be treated as compliance to notice under Section 148 and the AO issued notice under Section 143(2) on the same date. The ITAT, Delhi Bench has quashed the assessment proceedings holding issue of notice under Section 143(2) invalid inter alia in the following cases:

• Harsh Bhatia vs. ITO (ITA No. 1262-1263/Del/2017; Order dated 17.10.2017)
• Micron Enterprises P. Ltd vs. ITO (ITA No. 801/Del/2016; Order dated 14.05.2018)
• Ajay Sharma vs. DCIT (ITA no 3555/Del/2015; Order dated 05.03.2019)
• Satish Kumar vs. ITO (ITA No. 3586/Del/2018 ‘ Order dated 14.01.2019)

No notice under Section 143(2) where no return is filed in response to notice under Section 148

In the case of PCIT vs. Broadway Shoe Co. [2018] 99 taxmann.com 83 (J&K), Hon’ble J&K High Court held that: ‘The Notice under Section 143(2) is required to be given only when return is furnished. Furnishing of the return is a sine qua non for issuance of notice under Section 143(2) of the Act. If no return is furnished by the assessee, there can be no reason for issuance of notice under Section 143(2) of the Act.’

Action Point for Service of Notice under Section 148 and 143(2)

The following points emerge from the above discussion:

i. Service of notice under Section 143(2) is mandatory after return is filed in response to notice under Section 148. This is jurisdictional requirement and mistake is not curable under Section 292 BB.

ii. Issue of notice, not service of notice, under Section 148 is mandatory before the limitation period. Notice under Section 148 must be handed over to postal authorities for dispatch before the limitation period.

iii. Valid service of notice under Section 148 is mandatory before the reassessment proceedings. During the assessment proceedings, it must be ascertained that notice under Section 148 has been received by the assessee. In case it is claimed by the assessee that notice under Section 148 has not been received by him, a photocopy of the original notice under Section 148 should be given. In such case, the AO should not issue a fresh notice under Section 148.

iv. To avoid litigation, notice under Section 143(2) should be issued after a few days of filing return of income in response to notice under Section 148 is filed.

ISSUE OF NOTICE UNDER SECTION 148 WHILE RECTIFICATION PROCEEDING UNDER SECTION 154 IS PENDING

Sometimes, notice under Section 154 is issued and before completion of the rectification proceedings, notice under Section 148 is issued on the same issue. It may so happen that once assessee objects to the proposed rectification on the ground that mistake is not apparent from record, the AO initiates reassessment proceedings without dropping/ closing proceedings under Section 154. Various benches of the ITAT have held that if rectification proceedings are pending, issue of notice under Section 148 is invalid. On the aforesaid ground, notice under Section 148 has been quashed in the following cases:

• Mahinder Freight Carriers vs. DCIT 129 ITD 278 ( ITAT- Mumbai)
• Rajasthan State Industrial Development & Investment Corporation Ltd. vs. ACIT ( ITA No. 92/JP/2015; order dated 20.02.2018 of ITAT, Jaipur)
• Ram Kishore Rathore vs. ACIT (ITA No. 308/ Del/ 2019; order dated 03.04.2020 of SMC Bench, ITAT Delhi
• Ananda Paul vs. ACIT 9 ITA No 165/Kol/2015; order dated 20.04.2018 of ITAT, Kolkata

However, different high courts have held in various decisions that proceedings under Section 154 and 148 are separate proceedings and once rectification proceedings are dropped by the AO, he is not precluded from reopening the assessment provided the conditions under Section 147 are met. In the case of Honda Siel Power Products Ltd. vs. DCIT [2012] 340 ITR 53 (Del) Delhi High Court has held as under:

‘It was submitted that as a legal proposition; that once a notice under Section 154 of the Act is issued, proceedings under Section 147 of the Act on the same ground or reasons cannot be taken. It is not possible to accept the said proposition in broad terms as propounded or as one having universal application. Scope and ambit of Sections 154 and 147/148 of the Act are different. Under Section 154 of the Act, the Assessing Officer can only rectify mistakes and errors. Section 154 is not a substitute for Section 147/148. In a given case, resort to provisions of Section 154 of the Act may be an appropriate remedy but in other cases resort to Section 147/148 may be required.’

However, in the case of Berger Paints India Ltd vs. ACIT [2010] 322 ITR 369(Cal), it was held by the Calcutta High Court that: ‘If the Assessing Officer is of the view that income has escaped assessment by reason of a mistake apparent from records, and takes recourse to Section 154, but finds later, that there is no apparent mistake, then he cannot, in the absence of any other ground on the basis of which he still has reason to believe that the income has escaped assessment, start reassessment proceedings under Section 147. In other words, the Assessing Officer cannot again start reassessment proceedings on the basis of the same reasons.’

13.4 In the case of Mahinder Freight Carrier vs. DCIT 129 ITD 278, it was held by ITAT, Mumbai Bench that: ‘Admittedly, in this case, the mandate of Section 147 is not fulfilled for the reasons that the Assessing Officer himself was not sure whether the issue in controversy could be the subject-matter of Section 154 or the same can be the subject-matter of proceedings under Section 147.’

Action Point

Scope and ambit of Sections 154 and 147/148 of the Act are different. Under Section 154 of the Act, the Assessing Officer can only rectify mistakes and errors. Section 154 is not a substitute for Section 147/148. Therefore, notice under Section 154 should not be issued in such cases where mistake is not apparent from record as it may weaken the Revenue’s case when the assessment is subsequently reopened on the same point. Further, if any pending rectification is there on the issue concerned, the same should necessarily be first closed/ dropped and after that only notice under Section 148 should be issued.

APPROVAL FOR ISSUE OF NOTICE UNDER SECTION 148

The provisions regarding authority for according sanction for issue of notice under Section 148 are contained in Section 151. Courts have held that sanction has to be given by the specific authority only as specified in Section 151 and any mistake in this regard has been held to be fatal. In CIT vs. Soyuz Industrial Resources Ltd. [2015] 58 taxmann.com 336 (Delhi) and CIT vs. SPL’S Siddhartha Ltd. [2012] 345 ITR 223 (Delhi), sanction from the Commissioner was taken instead of Joint Commissioner as required under Section 151(2) and on that ground the reopening under Section 148 was held to be invalid.

In the case of CIT vs. Aquatic Remedies (P.) Ltd. [2018] 406 ITR 545 (Bombay), sanction for issue of notice was taken from Commissioner, instead of Additional Commissioner and the reopening was held to be invalid. SLP filed by Revenue was dismissed by the Supreme Court in CIT vs. Aquatic Remedies (P.) Ltd. [2020] 113 taxmann.com 451(SC). The same view was reiterated in Miranda Tools P. Ltd. vs. ITO [2020] 114 taxmann.com 584 (Bombay) also. Where Joint Commissioner had, in clear terms, expressed his satisfaction that on basis of reasons recorded by Assessing Officer, it was a fit case for issuance of notice for reopening assessment under Section 148, merely because for some erroneous reason, papers were also placed before Commissioner who also recorded similar satisfaction, reassessment proceedings would not be vitiated [Mayurbhai Mangaldas Patel vs. ITO [2018] 93 taxmann.com 220 (Gujarat)].

APPLICATION OF MIND WHILE GRANTING SANCTION FOR ISSUE OF NOTICE UNDER SECTION 148

In respect of sanction, another dispute is whether there was application of mind of the sanctioning authority while according sanction. In few of the decisions, it has been held that even writing ‘yes’ or ‘I am satisfied’ meets the conditions of Section 151, while in other decisions the courts have held that satisfaction of the approving authority cannot be in a routine or mechanical manner.

Decisions in Favour of Revenue

Where Joint Commissioner nodded in favour of Assessing Officer by writing ‘yes’ to the reasons recorded and accorded permission for reopening of assessment, notice of reopening on that count alone cannot fail holding that assumption of jurisdiction under Section 147 was valid, if application of mind is otherwise demonstrable from material on record [Lalita Ashwin Jain vs. ITO [2014] 45 taxmann.com 404/363 ITR 343 (Guj.)]

In the case of Prem Chand Shaw (Jaiswal) vs. ACIT [2016] 67 taxmann.com 339(Cal.), Hon’ble Calcutta High Court held as under:

‘The mere fact that the Additional Commissioner did not record his satisfaction in so many words would not render invalid the sanction granted under Section 151(2) when the reasons on the basis of which sanction was sought for could not be assailed. Even an appellate authority is not required to give reasons when it agrees with the finding unless statute or rules so requires.’

In the above order, the Court relied on (Central) v. T.O. Abraham & Co. [2011] 333 ITR 182 (Ker.) Further, the Court relied on R.P. Bhatt vs. Union of India AIR 1986 SC 1040 in which reliance was made on Som Datt Datta vs. Union of India AIR 1969 SC 414 wherein it was held as follows:

‘Apart from any requirement imposed by the statute or statutory rule either expressly or by necessary implication, there is no legal obligation that the statutory tribunal should give reasons for its decision. There is also no general principle or any rule of natural justice that a statutory tribunal should always and in every case give reasons in support of its decision.” ‘15.4 In the case of Virbhadra Singh vs. DCIT [2017] 88 taxmann.com 888 (HP), it was held that: ‘I am satisfied that it is a fit case for issue of notice under Section 148 is a valid approval.’

The abovementioned decisions of Prem Chand Shaw (supra) and Virbhadra Singh (supra) have been followed by the Delhi High Court in a very recent decision in the case of Experion Developers P Ltd vs. ACIT [2020] 115 taxmann.com 338 (Delhi) wherein it was held that: ‘there is no requirement to provide elaborate reasoning to arrive at a finding of approval when the Principal Commissioner is satisfied with the reasons recorded by the AO.’

In the case of Baldevbhai Bhikhabhai Patel vs. DCIT [2018] 94 taxmann.com 428 (Gujarat), the Addl. Commissioner, in his own hands, put the remarks: ‘I am satisfied that it is a fit case to issue Notice under Section 148 of the Incometax Act 1961.’ Further, the Addl. Commissioner forwarded such approval to the Dy. Commissioner with the remarks; ‘The reasons recorded by you for initiating proceedings under Section 147 of the I-T Act 1961 are perused. After perusal, I am satisfied on the basis of above reasons and considered opinion that this is a fit case for issue of the notice under Section 148 of the I-T Act.’ The court held the said approval as valid.

In the case of Sonia Gandhi vs. ACIT [2018] 407 ITR 594/ 97 taxmann.com 150(Delhi), Delhi High Court in para 49 of the order relied on the decision of Delhi High Court in the case of Meenakshi Overseas (P.) Ltd. The relevant portion of the order is extracted as under:

‘49. As far as the question of satisfaction recorded by the Principal Commissioner, under Section 151(1) is concerned, the legal requirements were spelt out by the Division bench ruling in (supra), in the following terms:

“For the purpose of Section 151(1) of the Act, what the Court should be satisfied about is that the Additional CIT has recorded his satisfaction ‘on the reasons recorded by the Assessing Officer that it is a fit case for the issue of such notice. In the present case, the court is satisfied that by recording in his own writing the words: “Yes, I am satisfied”, the mandate of Section 151(1) of the Act as far as the approval of the Additional CIT was concerned, stood fulfilled.”

Mere non-mentioning of sanction accorded by authority in notice issued under Section 148 would not, in any way, be fatal to process of reopening [Sword Global India P. Ltd. vs. ACIT [2015]60 taxmann.com 73(Madras).

DECISIONS IN FAVOUR OF THE ASSESSEE

In the case of PCIT vs. N.C. Cables Ltd. [2017] 391 ITR 11 (Delhi), the CIT mentioned –“Approved” while recording his sanction under Section 151. The Hon’ble Delhi High Court observed that:

‘The mere appending of the expression “approved” says nothing. It is not as if the Commissioner of Income-tax (Appeals) has to record elaborate reasons for agreeing with the noting put up. At the same time, satisfaction has to be recorded of the given case which can be reflected in the briefest possible manner.’

In the case of CIT vs. S. Goyanka Lime & Chemicals Ltd. [2015] 56 taxmann.com 390 (MP), while according sanction, the Joint Commissioner only recorded ‘Yes, I am satisfied.’ The MP High Court held the said sanction as mechanical. Hon’ble Supreme Court dismissed the Writ Petition of the Revenue in CIT vs. S Goyanka Lime & Chemicals Ltd. [2015] 64 taxmann.com 313 (SC).

ACTION POINT

The following points emerge out of the above discussion on Section 151:

i. Sanction for issue of notice under Section 148 has necessarily to be granted by the authority as mentioned in Section 151. Approval by the authority other than as specified under Section 151, is fatal and will make the reopening invalid.

ii. To avoid litigation, the sanction granted for issue of notice under Section 148 should be self-speaking reflecting due application of mind and satisfaction of the sanctioning authority. It would be better if the satisfaction is recorded in own hand by the sanctioning authority.

SUPPLY OF REASONS OF REOPENING AND DISPOSAL OF OBJECTIONS

As held by the Hon’ble Supreme Court in the landmark decision of GKN Driveshafts Ltd vs. ITO [2002] 259 ITR 19 (SC), the AO has to provide reasons recorded for reopening within a reasonable time. Further, when the assessee files objections against the reopening in a reasonable time, the AO is required to dispose of the said objection by way of a speaking order in a reasonable time.

In the case of CIT vs. Safetag International India P. Ltd. [2011] 332 ITR 622 (Del), it has been held by Delhi High Court that if assessee does not ask for the reasons recorded or raised objections thereto before AO, Tribunal could not have restored matter back to file of Assessing Officer and give another opportunity to assessee to raise objections to ‘reasons to believe’ recorded by AO.

In the case of AG Holdings P. Ltd vs. ITO [2012] 21 taxmann.com 34 (Delhi), it has been held by the Delhi High Court that there is no requirement of law that reasons recorded for initiating reassessment procedure should also accompany the notice issued under Section 148. Further, it was reiterated in Sun Direct TV P. Ltd. [2018] 409 ITR 49 (Mad) and South Asia FM Ltd. vs. ACIT [2018] 413 ITR 205 (Mad) that it is not required to supply reasons recorded for reopening of assessment along with notice under Section 148.

There is no time-frame indicated for supply of reasons and disposal of objections in GKN Driveshafts (supra). However, in the case of Sahakari Khand Udyog Mandal Ltd. vs. ACIT [2014] 370 ITR 107(Gujarat), Gujarat High Court issued the following directions in respect of time-frame to be followed for compliance of GKN Driveshafts for the state of Gujarat:

1. AO shall supply the reasons within 30 days of the filing of the return without waiting for the assessee to demand such reasons.

2. Assessee would be expected to raise his objections, if he so desires, within 60 days of receipt of such reasons.

3. AO would dispose off the objections, as far as possible, within four months of date of receipt of the objections filed by the assessee.

4. However, in those cases where the assesse does not adhere to the time limit, the above time-frame would not apply. This would not mean that the procedure provided in the case of GKN Driveshafts would not apply.

The SLP filed by the Revenue vide SLP(C) No. 008189/ 2016 registered on 21.01.2016 was dismissed by the Supreme Court on 18.03.2016. Though the said guidelines were for the State of Gujarat, the same may be taken note of by the Assessing Officers to avoid litigation.

NON-SUPPLY OF REASONS TO THE ASSESSEE

In respect of non-supply of reasons recorded for reopening to the assessee, the courts have unequivocally held the reopening of assessment as invalid. In the case of Haryana Acrylic Manufacturing Co. vs. CIT [2009] 308 ITR 38 (Delhi), reasons recorded were not supplied to the assessee inspite of being asked and Delhi High Court held the reopening as invalid. Again in the case of PCIT vs. Jagat Talkies Distributors [2017] 85 taxmann.com 189 (Delhi), assessee was not given a copy of reasons recorded for reopening and order passed under Section 148 was quashed. The same view was taken by the Bombay High Court in CIT vs. Videsh Sanchar Nigam Ltd. 340 ITR 66 and CIT vs. Trend Electronics Ltd. [2015] 61 taxmann.com 308 (Bom). In a recent decision of Karnataka High Court in the case of PCIT vs. V. Ramaiah [2019] 103 taxmann.com 201 (Karnataka), it has been held that recording of reasons before issue of notice under Section 148 and communication of the same to the assesse is sine qua non. The Supreme Court has dismissed the SLP against the said order in PCIT vs. V. Ramaiah [2019] 103 taxmann.com 202 (SC). There are plethora of decisions holding the same view.

NON-DISPOSAL OF OBJECTIONS FILLED BY THE ASSESSEE

There are contrary decisions of the high courts and different benches of the ITAT in respect of non-disposal of objections filed by the assessee against reopening of assessment. Most of the high courts have held that non-compliance of GKN Driveshafts in respect of non-disposal of objections filed by the assessee against the reopening is only procedural/ administrative mistake and the matter was set aside to the AO for disposal of objections by a speaking order in a reasonable time.

WHERE MATTER WAS SET ASIDE TO AO FOR DISPOSAL OF OBJECTION

In Scan Holdings P. Ltd. vs. ACIT [2018] 402 ITR 290 (Delhi), it was held that where AO rejected objections filed by the assesse without elucidating and dealing with contentions and issues raised in objection letter, order was set aside and matter was remanded back for disposal afresh.

In Kamlesh Sharma vs. ITO [2009] 287 ITR 337 (Delhi) also, where AO passed assessment order under Section 147 without first passing a speaking order on objections raised by assessee to notice under Section 148, assessment was set aside. The said decision was followed in Keshav Shares & Stocks Ltd. [2008] 326 ITR 553 (Delhi). In the case of Areva T&D Ltd. 294 ITR 233 (Madras) also, it was held that non-disposal of objection is procedural irregularity and matter was set aside to AO.

In PCIT vs. Sagar Developers [2016] 72 taxmann.com 321 (Guj), it was held by Gujarat High Court that requirement of supplying the reasons recorded by the AO and permitting the assessee to raise objections and to decide the same by the AO by a speaking order are not part of the statutory provisions, but are created under the judgement of Supreme Court in the case of GKN Driveshafts. Any default on the part of the AO is administrative in nature suffering from breach of principle of natural justice. In such cases, the decision-making process should be placed at a stage where the defect is detected rather than to permanently annul the action of the authority. In the above decision, order of Delhi High Court in the case of Ferrous Infrastructure (P) Ltd. vs. DCIT [2015] 63 taxmann.com 201 was also considered in which a contrary view was taken.

In a recent decision of Home Finders Housing Ltd. vs. ITO [2018] 93 taxmann.com 371 (Mad), it has been held by Madras High Court that: ‘The disposal of objections is in the value of a procedural requirement to appraise the assessee of the actual grounds which made the Assessing Officer to arrive at a prima facie satisfaction that there was escape of assessment warranting reopening the assessment proceedings. The disposal of such objection must be before the date of hearing and passing a fresh order of assessment.’ The court, further held that: ‘Such a violation in the matter of procedure is only an irregularity which could be cured by remitting the matter to the authority.’

SLP against the said order has been dismissed by Supreme Court in Home Finders Housing Ltd. vs. ITO [2018]94 taxmann.com 84(SC).

WHERE ASSESSMENT ORDER WAS QUASHED DUE TO NON-DISPOSAL OF OBJECTIONS

In the case of Ferrous Infrastructure (P) Ltd. vs. DCIT [2015] 63 taxmann.com 201(Delhi) and CIT vs. Tupperware India P. Ltd. [2016] 284 CTR 68 (Delhi), the assessment order was quashed on the ground of non-disposal of objections of the assessee. In the recent decision of Nimitaya Hotel & Resorts Ltd. [2019] 109 taxmann.com 185 (Delhi-Trib.) also, the ratio of the abovementioned two decisions was followed.

NO ASSESSMENT ORDER WITHIN 4 WEEKS OF DISPOSAL OF OBJECTIONS

In the case of Asian Paints Ltd. vs. DCIT [2008] 296 ITR 90 (Bombay), a writ petition was filed with the plea that assessment order is passed within a very short time whereby the assessee is left without any remedy to challenge such an order of rejection. It was held by the Bombay High Court that: ‘Hence we make it clear that if the Assessing Officer does not accept the objections so filed, he shall not proceed further in the matter within a period of four weeks from the date of receipt of service of the said order on objections, on the assessee.’ The said decision was relied upon by the ITAT, Mumbai Bench in the case of Hirachand Kanuga vs. DCIT [2015] 56 taxmann.com 199 (Mumbai) and assessment order was quashed on the ground that assessment order was passed in less than 4 weeks after order disposing of the objections was passed.

ACTION POINT

The AO should mandatorily provide a copy of the reasons recorded to the assesse immediately after issue of notice under Section 148. While sending the copy of the reasons recorded, it may be mentioned that objections to reopening may be filed by the assesse giving the reasonable time, as specified in the said letter, if the assessee so desires. The objections filed by the assessee should necessarily be disposed off immediately by a speaking order covering the issues raised by the assessee, in brief. The assessment order should be passed after a reasonable time of disposal of the objections so that the assessee gets adequate time for legal recourse against the rejection of objections filed by him against reopening of assessment.

JURISDICTIONAL ISSUES

SATISFACTION OF JURISDICTIONAL AO AND ISSUE OF NOTICE UNDER SECTION 148 BY THE SAME AO

Since the notice under Section 148 of the Act is a jurisdictional notice, any inherent defect therein cannot be cured under Section 292B of the Act. A notice under Section 148(1) would be a valid notice if the jurisdictional AO records the reasons for reopening the assessment as contemplated under Section 148(2) and thereafter the same officer namely the jurisdictional Assessing Officer issues the notice under Section 148(1) of the Act. [Pankajbhai Jaysukhlal Shah vs. ACIT [2019] 110 taxmann.com 51(Gujarat).

AO recording reasons and the AO issuing notice under Section 148 must be the same. Successor AO cannot issue notice under Section 148 on the basis of reasons recorded by the predecessor AO. [Hyoup Food Oil Ind. Ltd. vs. ACIT (2008) 307 ITR 115 (Gujarat), CIT & Anr. vs. Aslam Ullakhan [2010] 321 ITR 150 (Kar.)]

Reason to believe for reopening of assessment can be formed only by Jurisdictional Assessing Officer and not any other Assessing Officer. The basic requirement of Section 147 is that the assessing officer must have a reason to believe that any income chargeable to tax has escaped assessment and such belief must be the belief of jurisdictional Assessing Officer and not of any other assessing officer or authority and in absence of the same entire proceedings taken by him would become void for want of jurisdiction [ACIT vs. Resham Petrotech Ltd. (2012) 136 ITD 185 (Ahm. Tribunal)].

TERRITORIAL JURISDICTION-APPLICABILITY OF SECTION 124(3)

In respect of territorial jurisdiction, there is a decision in favour of Revenue in the case of Abhishek Jain vs. ITO [2018] 94 taxmann.com 355/405 ITR1 (Delhi). In the said case, Delhi High Court held that in terms of Section 124(3) (b) jurisdiction of an Assessing Officer cannot be called in question by an assessee after expiry of one month from date on which he was served with a notice for reopening assessment under Section 148. This decision refers to Harshad Chiman Lal Modi vs. DLF Universal Ltd. & Anr. (2005) 7 SCC 791, which classifies and draws jurisprudential difference amongst territorial or local jurisdiction; pecuniary jurisdiction; and jurisdiction over the subject matter. As far as territorial or pecuniary jurisdictions are concerned, objection should be taken at the earliest possible opportunity and/ or before the settlement of issues and not at the subsequent stage. Jurisdiction as to the subject-matter is distinct and stands on a different footing.

In CIT vs. Shri Shyam Sunder Infrastructure (P.) Ltd. [IT Appeal No. 236 of 2014] Delhi High Court in the order dated 04.02.2015 referred to Section 124(3) and held that:

‘Facially, Section 124(3) stipulates a bar to any contention about lack of jurisdiction of an AO. It is not as if the provisions of the Act disable an assessee from contending that in the given circumstances the AO lacks jurisdiction; rather Section 124(3) limits the availability of those options at the threshold. The assessee upon receipt of notice of the kind mentioned in Clause (a) and (b) of Subsection 3 has the option to urge the question of jurisdiction; the expressed tenor and terms of the provisions clarify that such objections are to be articulated at the threshold or at the earlier points of time.’

Where Assessing Officer conducted survey upon assessee and thereafter issued a notice under Section 148 dated 27.03.2015 and assessee by letter dated 29.04.2015 raised objection to territorial jurisdiction of Assessing Officer, since objection was not raised within 30 days even from date of issuance of notice under Section 148, assessee had lost right to raise objection by efflux of time. [Elite Pharmaceuticals vs. ITO [2016] 73 taxmann.com 69 (Calcutta)

ACTION POINT

The jurisdictional AO who has recorded the reason can only issue notice under Section 148. Successor AO cannot issue notice under Section 148 on the basis of reasons recorded by his predecessor. In case of change of incumbent, reasons should be recorded afresh. Jurisdictional mistake in issuing notice under Section 148 is not curable under Section 292B of the Act. Hence, the AO has to be very careful as regards jurisdiction while recording and issuing notice under Section 148.

ORDER UNDER SECTION 144 WHERE RETURN IS NOT FILED IN RESPONSE TO NOTICE UNDER SECTION 148

Whenever a return is not filed in response to notice under Section 148, then the best judgement assessment has to be completed under Section 144. In R.B. Seth Shreeram Durgaprasad and Fatechand Nursingdas (Export Firm) vs. CIT [1987] 170 ITR 23 (Bombay), it was held by Bombay High Court that where an assessee does not file return in response to notice under Section 148, the AO is obliged to frame best judgement assessment under Section 144 on the basis of material available with him. The Court held that:

‘Section 147 predicates the existence of some material. Where an assessee does not respond to a notice under Section 148, the taxing authority is obliged to determine the assessee’s income as best as he can based on that material. There is no real difference between the manner in which the taxing authority reaches its conclusions under the provisions of Section 144 and of Section 147. Both are assessments made to its best judgment. It is as open to the assessee to argue that the material does not support the assessment made under Section 147 as under Section 144. There is, therefore, no merit in the submission that the words “so far as may be” in Section 148 exclude the applicability of the provisions of Section 144 to an assessment made under Section 147.’

In the case of Ms. Meenakshi Agarwal vs. ITO [ITA no 417/Del/2015] in order dated 16.10.2015, ITAT, SMC Bench, Delhi has analyzed the provisions in respect of assessment under Section 144 where return is not filed in response to notice under Section 148 as under:

‘Notice under Section 148 of the Act, issued to the assessee required it to file a return within 30 days from the date of service of such notice. There is no provision in the Act, which would allow on AO to treat the return which was already subject to a processing under Section 143(1) of the IT Act, as a return filed pursuant to a notice subsequently issued under Section 148 of the Act. However, once an assessee itself declares before the AO that his earlier return could be treated as filed pursuant to notice under Section 148 of the IT Act, three results can follow. Assessing Officer can either say no, this will not be accepted, you have to file a fresh return or he can say that 30 days’ time period being over I will not take cognizance of your request or he has to accept the request of the assessee and treat the earlier returns as one filed pursuant to the notice under Section 148 of the IT Act. In the former two scenarios, AO has to follow the procedure set out for a best of judgment assessment and cannot make an assessment under Section 143(3). On the other hand, if the AO chose to accept assessee’s request, he can indeed, make an assessment under Section 143(3).’

The above order of Meenakshi Agarwal (supra) has been followed by the ITAT, Kolkata Bench in the case of Pinnacle Commodities Pvt. Ltd. [ITA No. 1901/Kol/2018] in order dated 09.08.2019 and in Pankaj Dutta vs. ITO [ITA No 2206/Kol/2016] in order dated 17.11.2017.

NO NEW CLAIM IN RETURN FILED IN RESPONSE TO NOTICE UNDER SECTION 148

In the landmark decision of CIT vs. Sun Engineering Works P. Ltd. [1992] 198 ITR 297(SC), the Hon’ble Supreme Court observed that the words ‘such income’ in Section 147 clearly refer to the income which is chargeable to tax but has escaped assessment and the ITO’s jurisdiction under the Section is confined only to such income which has escaped assessment. Since the proceedings under Section 147 are for the benefit of the revenue and not an assessee and are aimed at gathering the “escaped income” of an assessee, the same cannot be allowed to be converted as “revisional” or “review” proceedings at the instance of the assessee, thereby making the machinery unworkable. The Hon’ble Supreme Court further held that:

‘Keeping in view the object and purpose of the proceedings under Section 147 which are for the benefit of the revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings on his appeal or revision, in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to ‘escaped income’, and re-agitate the concluded matters. Even in cases where the claims of the assessee during the course of reassessment proceedings relating to the escaped assessment are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income for purposes of ‘reassessment’ cannot be reduced beyond the income originally assessed.’

In the case of Videocon Leasing & Finance Ltd vs. JCIT [2006] 103 ITD 309 (Ahmedabad), ITAT, Ahmedabad Bench held that:

‘Income for the purpose of assessment under Section 147 cannot be a negative figure. In a case, even if at any stage of these proceedings, the Assessing Officer finds that income chargeable to tax has not escaped assessment, he is free not to take further action and drop the proceedings. He is not bound to conclude the proceedings and make the assessment to the detriment of the revenue. If pursuant to notice under Section 148, the assessee submits a loss return and the Assessing Officer is satisfied with the return of income or it is really negative as claimed by the assessee in his return, he is entitled to close the proceedings.’

In the case of CIT vs. State Agro Development Corporation [2001] 248 ITR 484(J&K), J&K High Court held that:

‘The assessee cannot claim that assessment should be completed and loss should be determined to enable him to claim the benefit of carry-forward and set-off against the income of subsequent years. In such a case, the proper course for the ITO would be to drop the proceedings under Section 147. In the instant case, by refusing to allow the assessee the benefit of carry-forward of loss, the ITO had, in effect, dropped the proceedings under Section 148 and he was right in doing so.’

Where income assessed in reassessment proceedings after giving effect to order of Tribunal became less than income originally assessed, said order passed by Tribunal was not sustainable being contrary to decision of Apex Court in CIT v. Sun Engg. Works (P.) Ltd. [CIT vs. Jai Hind Coop. Housing Society Ltd. [2013] 349 ITR 537 (Bombay)]

ACTION POINT

The AO is not to allow any fresh claim of the assesse in the return filed in response to notice under Section 148. The income for purposes of “reassessment” cannot be reduced beyond the income originally assessed. Income for the purpose of assessment under Section 147 cannot be a negative figure. If at any stage of reassessment proceedings, the AO finds that income chargeable to tax has not escaped assessment, he is free to drop the proceedings.

ISSUES REGARDING EXPLANATION 3 TO SECTION 147 OF THE ACT

Section 147 of the Act itself provides that the Assessing Officer may assess or reassess– ‘also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the assessment proceedings under this section.’ Revenue has consistently been of the view that once assessment is validly reopened, all income chargeable to tax which escaped assessment can be brought to tax in the reassessment order. In the reassessment proceedings, Revenue has been making addition in respect of other escaped income also which came to the notice of the AO during the assessment proceedings under Section 147 even though there was no mention of the aforesaid escaped income in the reasons to believe. However, certain courts held that the AO cannot make addition of such escaped income in respect of which there was no discussion in the satisfaction note. To deal with the said dispute, a clarificatory provision by way of Explanation 3 to Section 147 of the Act was inserted by the Finance Act 2009 with retrospective effect from 01.04.1989 which is extracted as under:

‘For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under Sub-section (2) of Section 148.’

After insertion of the said Explanation, it was assumed that there will be no dispute in respect of addition made of such escaped income which was not included in the satisfaction note, once the reopening of assessment was valid per se. However, a dispute arose shortly after the said insertion of the said Explanation by the decision of Hon’ble Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd. [2010] 195 Taxman 117 (Bombay). In the said decision, it was held that where no addition is made in respect of that income on the basis of which reason to believe to reopen the assessment was recorded, it is not open to the AO, even after invocation of Explanation 3 to Section 147, to bring to tax any other income. Subsequently, in the case of Ranbaxy Laboratories Ltd vs. CIT [2011] 336 ITR 136 (Delhi), the Hon’ble Delhi High Court followed the decision of Jet Airways Ltd. (supra).

However, in Pratibha Finvest (P.) Ltd. [2013] 29 taxmann.com 420 (Delhi); [2013] 215 Taxman 470 (Delhi)/[2013] 263 CTR 206 (Delhi), Delhi High Court held that: ‘ In the opinion of this court, the law as it existed always was that if a valid notice under Section 147 was issued by the AO, the scope of scrutiny and final assessment made in the reopening proceedings was not conditioned upon the material which impelled him to issue notice. To hold such a view would be to impinge on the concededly wide power conferred upon the Revenue in Section 147/148 and undermine its objective.’

In the aforesaid decision, the court relied on V. Jaganmohan Rao vs. CIT Excess Profits Tax [1970] 75 ITR 373 (SC) in which it was held that: ‘It is, therefore, manifest that once assessment is reopened by issuing a notice under Sub-section (2) of Section 22 the previous under-assessment is set aside and the whole assessment proceedings start afresh.’

Further, in Majinder Singh Kang vs. CIT [2012] 344 ITR 358/25 taxmann.com 124 (Punj. & Har.), it was held that: ‘The provision nowhere postulates or contemplates that it is only when there is some addition on the ground on which reassessment had been initiated, that the Assessing Officer can make additions on any other ground on the basis of which income may have escaped assessment.’ SLP of the assessee against the said judgment was also dismissed by the Apex Court bearing Special Leave Petition (Civil) No. 13028 of 2011 on August 19, 2011. The said decision was followed in the case of CIT vs. Mehak Finvest P. Ltd. [2014] 52 taxmann. com 51(P&H).

Subsequently, in the case of N. Govindraju vs. ITO [2015] 377 ITR 243 (Karnataka), Karnataka High Court held that; ‘There is no conflict between the main Section 147 and its Explanation 3. This Explanation has been inserted only to clarify the main section and not curtail its scope. Insertion of Explanation 3 is thus clarificatory and is for the benefit of the revenue and not the assessee.’ The Court further held that:

‘If notice under Section 148(2) is found to be valid, then addition can be made on all grounds or issues which may come to notice of Assessing Officer subsequently during course of proceedings under Section 147, even though reason for notice for ‘such income’ which may have escaped assessment, may not survive.’

The decisions in the case of Jet Airways Ltd. (supra) and Ranbaxy Laboratories Ltd. (supra) were considered and distinguished in the above mentioned decision.

However, in the subsequent decision of CIT vs. Monarch Education Society [2017] 387 ITR 416 (Delhi), decisions in the case of Jet Airways Ltd (supra) and Ranbaxy Laboratories Ltd. (supra) were followed by Delhi High Court.

Identical issue came before the Hon’ble Delhi High Court in the case of PCIT vs. Jakhotia Plastics (P.) Ltd. [2018] 94 taxmann.com 89 (Delhi). The Hon’ble Delhi High Court held that:

‘This Court specifically is of the opinion that the Karnataka High Court’s view in the case of N. Govindaraju (supra) is a more accurate one. In this court’s view the emphasis placed in Jet Airways’ case (supra) on “and also” undermines the essential objective of Section 147 of the Act and unduly restricts and narrows it. The circumstance clarifies existence of an additional power to bring to tax other sums. This per se would not mean that the sums or amounts sought to be brought to tax in a reassessment notice (which are ultimately not the subject of the final reassessment orders), act as a limitation.’

However, the court held that since there is some doubt as to the accuracy of the interpretation in the case of Ranbaxy Laboratories (supra) and Monarch Educational Society (supra), the issue was referred to the Full Bench. SLP filed
by the assessee against the said order has been dismissed by the Supreme Court in Jakhotia Plastics (P.) Ltd vs. PCIT [2018] 94 taxmann. com 96(SC).

ACTION POINT

As there is no decision of Supreme Court on the above issue, once assessment is reopened, the AO should make addition of such escaped income which comes to the notice of the AO during reassessment proceedings even though it was not included in the reason to believe, irrespective of the fact that no addition is made in respect of that income on the basis of which assessment was reopened.

WHETHER AO COULD BE COMPELLED TO PURSUE REMEDY NECESSARILY UNDER SECTION 153C IN EXCLUSION TO REMEDY AVAILABLE UNDER SECTION 147

In the case of an assessee, where certain material belonging to or pertaining to him is found from the search at the premise of other person, provisions of Section 153C can be invoked. There can be a dispute as to whether the said material belongs to/ pertains to that person or not. The dispute can also be as to whether material seized is incriminating material or not. To obviate such disputes, the AO has the option to resort to reopening of assessment under Section 148, instead of invoking Section 153C, on the basis of the material received from the Investigation Wing, once he has reason to believe that income chargeable to tax has escaped assessment. The issue is whether the AO is compelled to invoke Section 153C in exclusion to reopening of assessment under Section 148 in such cases. In this context, it is pertinent to mention that Section 153C starts with the non-obstante clause: ‘Notwithstanding anything contained in Sections 139, 147, 148, 149, 151 and Section 153.’ As against this, Section 158BD did not have such non-obstante clause. There are conflicting decisions on this issue, mostly in favour of the assessee.

After the decision of CIT vs. Kabul Chawla [2015] 380 ITR 573(Delhi) and CIT vs. Sinhgad Technical Education Society [2017]397 ITR 344(SC), addition can be made under Section 153A only on the basis of incriminating material unearthed during the course of search in respect of non-abated assessments. There is dispute regarding relevant assessment years also after the decision of CIT vs. RRJ Securities Ltd. [2016] 380 ITR 612 (Delhi). In view of the above, continuing with Section 153C may need thoughtful consideration and deliberation.

In the case of Shailesh S. Patel vs. ITO [2018] 97 taxmann.com 570 (Ahmedabad-Trib.), ITAT, Ahmedabad Bench has analyzed the above issue in detail in paras 14 to 14.4 of the order. The ITAT has held as under:

‘Hence, S. 147 will be rendered inoperative and will give way to Section 153C once power under S. 153C are exercised validly. This, however, is not the same thing to say that there is any statutory compulsion to resort only to mode prescribed under Section 153A/ Section 153C in the event of search. The scheme of Act does not suggest that mere search action revealing incriminating material against the person other than searched person would automatically oust the power of the AO over the assessee concerned under Section 147 of the Act. The overriding provisions of Setion 153C merely enables the AO to set aside the pending reassessment proceedings and grants primacy to Section 153C of the Act. As noted earlier, exercise of power under Section 153C is governed without any stringent fetters of holding ‘reason to believe’ contemplated under Section 147. Therefore, while exercise of overriding power under Section 153C will render Section 147 otiose, the converse case of clipping the powers available under Section 147 in search cases per se is not found to be reconcilable to the scheme of the Act. In the light of scheme of the Act narrated above, we are of the view that the AO of the assessee (person other than searched person) cannot be compelled to pursue remedy necessarily under Section153C of the Act in exclusion to remedy available to the AO under Section.147 of the Act.’

In the case of Sushil Kumar S Nadkarni vs. ITO [ITA No. 826/PN/2010, Order dated 29.11.2013], the ITAT, Pune Bench the issue was raised by the assessee that the AO was not competent to issue notice under Section 148 on the basis of the material before him because the material found in the course of search at Mumbai was passed on to the AO of the assessee and therefore, on that basis the Assessing Officer ought to have initiated proceedings of assessment by issuing notice under Section 153C and not under Section 148 of the Act. The ITAT held as under:

‘The aforesaid plea is based on an argument to the effect that the correct jurisdiction for the Assessing Officer to make the reassessment was under Section 153C of the Act and therefore, the issuance of notice under Section 148 of the Act to effectuate the reassessment in the present case is not valid. In our considered opinion, the argument of the assessee is quite misplaced because in order to test the validity of initiation of proceedings by issuance of notice under Section 148 of the Act in the present case what is required to be examined is as to whether or not the necessary ingredients prescribed in Section 148 of the Act are satisfied.’

DECISIONS IN FAVOUR OF ASSESSE

There appears to be no decision of any high court in respect of the above issue of applicability of Section 148 instead of Section 153C. In the decisions which are in favour of the assessee, different benches of the ITAT have held that Section 153C begins with non-obstante clause and has an overriding effect on Section 147/148. It has been held that as per the scheme of Section 153C, AO has no discretion or choice to invoke the provisions of Section 148. In the case of Arun Kumar Kapur [2011] 140 TTJ 249(Amritsar Trib.), the above view was taken and reopening under Section 148 was quashed. Subsequently, the said decision has been followed by different benches of ITAT inter alia in the following cases:

• G. Koteshwar Rao vs. DCIT [2015] 64 taxmann.com 159 (Vishakhapatnam Trib.)
• Rajat Shubhra Chatterjee vs. ACIT [ITA 2403/Del/2015; order dated 20.05.2016], ITAT Delhi
• Navrattan Kothari vs. ACIT [ITA No. 425/JP/2017, order dated 13.12.2017], ITAT, Jaipur
• Adarsh Agarwal vs. ITO [ITA No 777/Del/2019; order dated 14.01.2020], ITAT, Delhi

ACTION POINT

AO may first examine as to whether the necessary conditions to proceed for assessment under Section 153C are met or not. He may record that the necessary ingredients of Section 153C are not satisfied. If yes, then the AO is out of the clutches of provisions of Section 153C and then he can record the reason to believe as to how the case satisfies the necessary conditions for reopening of assessment under Section 147. To avoid litigation, the AO may complete the assessment under Section 153C immediately, particularly of those assessment years, reopening of which under Section 147 may get time-barred. In respect of such assessment years, where there is tangible material, which was not found during the course of search, AO may reopen the assessment under Section 147.

REOPENING OF ASSESSMENT ON THE BASIS OF TANGIBLE MATERIAL IN THE CASE OF SEARCH ASSESSMENTS

After the decision of CIT(C)-III vs. Kabul Chawla [2015] 380 ITR 573 (Delhi) and PCIT vs. Meeta Gutgutia [2017] 395 ITR 526 (Delhi), Sinhgad Technical Education Society [2017] 397 ITR 344 (SC) and plethora of decisions in which ratio of Kabul Chawla (supra) has been reiterated, addition made on the basis of incriminating material found from the search premise only is being sustained by ITAT and high courts in respect of non-abated assessments. Even the addition made on the basis of incriminating material found and impounded from the premise covered under simultaneous survey action under Section 133A pertaining to nonabated assessment years, addition is not being sustained by different Benches of the ITAT relying on the above mentioned decisions. In respect of abated pending assessments only, addition can be made on the basis of nonsearch material also. Therefore, in such cases where the AO is in the possession of tangible material, which is not found/ seized from the search premise and is pertaining to the nonabated assessment years, only recourse left with the AO is to reopen assessment on the basis of that tangible material immediately after completion of assessment under Section 153A or Section 153C. Such tangible material may be in the nature of information received from the Investigation Wing regarding accommodation entry taken by the assesse from entry operators, documents found/impounded during the course of survey under Section 133A or any other material received by the AO during the course of assessment proceedings under Section 153A or Section 153C, or any pre-search material. However, such reopening would be possible only if time for reopening the non-abated assessment under Section 147 is available till completion of assessment under Section 153A. In this connection, it is pertinent to note that as per Section 153A, assessment order has to be passed for each of the six assessment years separately and therefore, the AO need not wait for completion of assessment for all six assessment years in the case of an assessee. Where there is no incriminating material found/ seized from the search premise in respect of a non-abated assessment year, such assessment may also be completed immediately so that reopening can be made within the time limit provided under Section 147 on the basis of tangible material available in the possession of the AO Also, the AO may complete the assessment of those assessment years on priority, reopening of which under Section 147 may get time-barred. Similar approach may be adopted in respect of proceedings under Section 153C also.

KEY TAKEAWAYS

As recording of reason to believe is the cornerstone of reassessment, CBDT has issued an exhaustive ‘Standard Procedure for Recording Satisfaction under Section 147’ dated 10.01.2018 along with four separate ‘Sample Templates’ for the guidance of the assessing officers. If the same is followed diligently, mistakes in recording satisfaction for reopening of assessment can be avoided (Refer Para 3).

The reason to believe must have live link or close nexus with the tangible material on the basis of which AO seeks to reopen the assessment. This is equally important even in those cases, where return was processed under Section 143(1) or where return was not filed. (Refer para 5, 6, 7.7)

Supreme Court in Kelvinator India Ltd. (supra) has added a further condition that reopening cannot be made merely on change of opinion. Question of change of opinion arises when an AO forms an opinion on a set of facts and decides not to make an addition and holds that the assessee is correct. When the original assessment order is totally silent on any aspect of the matter, it cannot be said that the reason to believe constitutes a ‘change of opinion’. (Refer paras 7.1 to 7.5)

The AO cannot reopen an assessment merely on the ground that a wrong view was taken in the original assessment order. Recourse to correct that mistake is revision under Section 263 and not the reopening under Section 148 of the Act. Particularly in the case of audit objections, a very careful view has to be taken as regards remedial action to be taken under Section 148 or Section 263 (Refer para 7.17).

The AO is required to demonstrate in his satisfaction note that the material on the basis of which he is going to reopen the case was not considered in the original assessment order and also that no opinion was formed by the AO in respect of the said material (Refer para 7.17).

Where assessment has earlier been made under Section 143(3)/148 and 4 years have expired from the end of the relevant assessment year, three conditions are required to be met for reopening: (i) ‘reason to believe’ is based on the tangible material, (ii) reopening is not based on ‘mere change of opinion’ and (iii) there is failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. In this regard, the AO has to examine that not only all material facts were disclosed before the AO during the original assessment, but the same were disclosed ‘fully’ and ‘truly’ and reason to believe should be recorded in such a manner that failure on the part of the assessee to disclose fully and truly all material facts is prima facie established. Further, where assessment is reopened on the basis of information received from the investigation wing regarding accommodation entry etc. the AO must record this fact in the satisfaction note that the said information/ material received from the Investigation Wing was not available at the time of original assessment (Refer para 8).

Information/ material received from the Investigation Wing should be linked and correlated with the return of income/ assessment records and particularly specific transactions. Further, the reasons to believe should not be mere reproduction of findings of the DDIT (Inv.) i.e. it should not be ‘borrowed satisfaction’ but should demonstrate independent application of mind of the AO in respect of material/ information available with him. There are no fetters on the AO to make inquiry under Section 133(6), after taking necessary approval, before recording satisfaction for reopening of assessment (Refer para 9).

Valid issue and service of notice under Section 148 is mandatory for reopening of assessment. Service of notice under Section 143(2) is mandatory after return is filed in response to notice under Section 148. This is jurisdictional requirement and mistake is not curable under Section 292 BB. Issue of notice, not service of notice, under Section 148 is mandatory before the limitation period. Further, notice under Section 148 must be handed over to postal authorities for dispatch before the limitation period. Valid service of notice under Section 148 is mandatory before the reassessment proceedings. During the assessment proceedings, it must be ascertained that notice under Section 148 has been received by the assessee. To avoid litigation, notice under Section 143(2) should be issued after few days of filing return of income in response to notice under Section 148. No notice under Section 143(2) is required to be issued where no return is filed in response to notice under Section 148. (Refer paras 10, 11 and 12).

Section 154 is not a substitute for Section 147/Section 148. Therefore, notice under Section 154 may weaken the Revenue’s case when the assessment is subsequently reopened on the same point. Further, if any pending rectification is there on the issue concerned, the same should necessarily be first closed/ dropped before issuing notice under Section 148 (refer para 13).

Approval by the authority other than as specified under Section 151 is fatal and will make the reopening invalid. The sanction granted for issue of notice under Section 148 should be self speaking reflecting due application of mind and satisfaction of the sanctioning authority. (Refer para 14 and 15).

The AO should mandatorily provide a copy of the reasons recorded to the assessee immediately after issue of notice under Section 148. The objections filed by the assessee should necessarily be disposed of immediately by a speaking order covering the issues raised by the assessee in brief. It would be better if the assessment order is passed after a reasonable time of disposal of the objections, so that the assesse gets time for legal recourse against rejection of objections raised (Refer para 16).

The jurisdictional AO who has recorded the reason can only issue notice under Section 148. In case of change of incumbent, reasons should be recorded afresh. Jurisdictional mistake in issuing notice under Section 148 is not curable under Section 292B of the Act (Refer para 17).

Whenever a return is not filed in response to notice under Section 148, then the best judgement assessment has to be completed under Section 144 (refer para 18).

In the landmark decision of CIT vs. Sun Engineering Works P. Ltd. (supra), the Hon’ble Supreme Court observed that the proceedings under Section 147 are for the benefit of the revenue and not an assessee .The AO shall not allow any fresh claim in the return filed in response to notice under Section 148 (refer para 19).

On the issue where no addition is made on the issue(s) involved in reason to believe, the addition can be made on grounds or issues which may come to the notice of AO subsequently during course of proceedings under Section 147, even though reason for notice for ‘such income’ which may have escaped assessment, may not survive. There are two different views on this issue based on judicial precedents. However, the AO should make addition of all such escaped income which comes to the notice of the AO during reassessment proceedings even though it was not included in the reason to believe (Refer para 20).

Where certain material belonging to or pertaining to an assessee is found from the search in the case of another person, the AO may examine as to whether the necessary conditions to proceed for assessment under Section 153C are met or not. If not, the AO is out of the clutches of provisions of Section 153C and then he can record the reason to believe as to how the case is best fit for reopening of assessment under Section 147 as against assessment under Section 153C of the Act (Refer para 21).

Where there is no incriminating material found/seized from the search premises in respect of a non-abated assessment year, the assessment under Section 153A/ 153C may be completed immediately so that reopening can be made within the time limit provided under Section 147 on the basis of tangible material, if any, available in the possession of the AO (refer para 22).

Source- Taxalogue 3- April to June 2020