Original assessment date relevant for Sec. 263 revision on issues outside re-assessment

CIT Vs. ICICI Bank Ltd. (Bombay High Court)

An order of assessment in case of ICICI bank Ltd (ICICI) was passed in March 1999 u/s 143(3) wherein deduction claimed u/s Section 36(1)(vii) and 36(1)(viia) and in respect of foreign exchange rate difference was allowed.  The first reassessment was carried out in February 2000 for reworking a deduction under Sec 80M. Thereafter, a second reassessment was carried out in March 2001 for reworking of the deduction under Section 36(1)(viii). In March 2003, the Commissioner u/s 263 sought to revise assessment to disallow deduction u/s 36(1 )(vii) and 36(1 )(viia) and in respect of foreign exchange rate difference.

ICICI challenged revision on the ground that it was time barred. ICICI claimed that the revision order was passed after a period of two years from the date of original assessment. On the other hand, Revenue argued that when the Assessing Officer (AO) reopened the assessment for second time in March 2001, the explanation to Clause (vii) of Section 36(1) had been introduced on the statute book. Thus, he was duty bound to apply the law as amended and disallow the deduction claimed, which he failed to do. To support this contention Revenue also argued that in the view of Explanation 3 to Section 147, AO could have reassessed the income in respect of any issue, which has escaped assessment, and if such issue came to his notice, subsequently in the course of the proceedings.

A division bench of Bombay HC ruling in favor of assessee, held that the revision u/s 263 was time barred. HC observed that where the revision u/s 263 was sought to be exercised with reference to an issue which was covered by the original order of assessment and which was not subject matter of the reassessment, limitation should be reckoned from the date of original assessment order under Section 143(3). Reliance was placed on SC decision in Alagendran Finance Ltd (2007) 293 ITR 1 (SC).

HC observed, Explanation 3 only enables the Assessing Officer, once an assessment is reopened, to assess or reassess the income in respect of any issue, even an issue in respect of which no reasons were indicated in the notice under Section 148(2). This, however, will not obviate the bar of limitation under Section 263(2). HC placed reliance on co-ordinate bench decision in Ashoka Build con Ltd [2010] 325 ITR 574 (Bombay). Accordingly HC held that revision order passed after period of two years from the date of original assessment order was barred by limitation u/s 263(2).

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HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

INCOME TAX APPEAL NO. 6375 OF 2010

The Commissioner of Income Tax

Versus

ICICI Bank Ltd.

Dated- 8 February 2012.

ORAL JUDGMENT

(PER DR.D.Y.CHANDRACHUD,J.):

This appeal arises out of an order of the ITAT dated 24 September 2008 for Assessment Year 1996­97. The Tribunal has held that the invocation of the revisional jurisdiction under Section 263 of the Income Tax Act, 1961 by the Commissioner on 28 March 2003 was barred by limitation. The appeal by the Revenue raises the following   substantial question of law:

Whether on the facts and in the circumstances of the case and in law the Tribunal was right in holding that the Order of the CIT dated 28.03.2003 passed under Section 263 of the Income Tax Act setting aside the Assessment Order dated 26.03.2002 passed under Section 143 read with Section 147 of the Income Tax Act by the Assessing Officer is barred by limitation under Section 263(2) of the Income Tax Act?

2. The appeal is admitted and is taken up for final disposal with the consent of the counsel. In the present case the facts fall within a narrow compass. On 24 November 1997 an intimation was issued under Section 143(1)(a). An order was passed under Section 154 on 30 March 1998 to give credit for advance tax. An order of assessment was passed on 10 March 1999 under Section 143(3). The deduction claimed under clauses (vii) and (viia) of Section 36(1) and the foreign exchange rate difference was allowed. A notice was issued under Section 148 on 21 October 1999 following which the first  Reassessment was carried out on 22 February 2000 for reworking a deduction under Section 80M. An appeal against the order under Section 143(3) was decided by the Commissioner (Appeals) on 28 March 2001. Thereafter a second notice was issued under Section 148 on 28 March 2001. Following that on 26 March 2002 a second order of reassessment was passed for reworking of the deduction under Section 36(1)(viii). This order was set aside by the Tribunal on 27 August 2010 and an Appeal (IT Appeal No.1237 of 2011) is pending. On 28 March 2003 an order was passed by the Commissioner under Section 263 for dis allowance under Section 36(1)(vii), (viia) and in respect of foreign exchange rate difference. The narration of facts would indicate the following admitted position:

(i) In the order of assessment under Section 143(3) dated 10 March 1999 the deductions which were claimed under Clauses (vii) and (viia) of Section 36(1) and the foreign exchange rate difference were allowed;

(ii) neither in the first reassessment which took place on 22 February 2000 nor in the second reassessment which took place on 26 Mach 2002 was there any issue raised  or decided in respect of the deductions under Section 36(1)(vii), Section 36(1)(viia) and the foreign exchange rate difference;

(iii) the order of the Commissioner under Section 263 has not been passed with reference to any issue which has been decided either in the order of the first reassessment or in the order of second reassessment dated 22 February 2000 or 26 March 2002;

(iv) the order under Section 263 seeks to revise the issues decided in the first order of assessment passed under Section 143(3) on 10 March 1999.

3. Sub­section (2) of Section 263 provides that no order shall be made under sub­section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

4. The submission which has been urged on behalf of the Revenue is that Section 36(1)(vii) was amended by the insertion of an explanation by the Finance Act of 2001 with retrospective effect from 1 April 1989. The Explanation states that for the purposes of the clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. The submission is that when the Assessing Officer reopened the assessment and passed his order dated 26 March 2002 the explanation to Clause (vii) of Section 36(1) had been introduced on the statute book. The Assessing Officer, it is urged, was duty bound to apply the law as amended, which he failed to do. Moreover, it has been urged that Explanation 3 to Section 147 of the Act provides that for the purpose of assessment or reassessment under the 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 the section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub­section (2) of section 148.

5. The issue as to when the period of limitation would commence for an order under Section 263 was considered by the Supreme Court in Commissioner of Income Tax Vs. Alagendran  Finance Ltd. (2007) 293 ITR 1 (SC) In that case, orders of assessment for Assessment Years 1994­- 95, 1995­- 96 and 1996­- 97 were passed on 27 February 1997, 12 May 1997 and 30 March 1998. In the said orders of assessment the assessee’s return under the head “ lease equalization fund” was  accepted. Proceedings for reassessment were initiated and were completed on 28 March 2002. The proceedings for reassessment, however, were in respect of three items and the assessee’s return in respect of lease equalization fund was not the subject matter of the reassessment proceedings. The Commissioner invoked his jurisdiction under Section 263 on 29 March 2004 in respect of the return under the head of “lease equalization fund”. On these facts the Supreme Court held that only that part of the order of assessment which related to the lease equalization fund was found to be prejudicial to the interest of the revenue. The proceedings for reassessment had nothing to do with that head of income and hence the doctrine of merger would not apply in a case of that nature. The Supreme Court further held that once an order of assessment is reopened the previous assessment will be held to be set aside and the whole proceeding would start afresh but that would not mean that even when the subject matter of reassessment is distinct and different, the  entire proceeding of assessment would be deemed to have been reopened. Since the Commissioner in exercise of his revisional jurisdiction reopened the order of assessment in relation to the lease equalization fund which was not the subject matter of the reassessment proceedings, the period of limitation provided under sub­section (2) of Section 263 would, it was held, begin to run from the date of the order of assessment and not from the order of re-assessment.

6. But the submission which has been urged by the counsel for the revenue is that the decision of the Supreme Court in Alagendran Finance was rendered on 27 July 2007 which was prior to the amendment of Section 147 by the insertion of Explanation 3. The counsel submits that as a result of the insertion of Explanation 3, once an assessment is reopened, the Assessing Officer is entitled to assess or reassess the income in respect of any issue which has escaped assessment though the reasons in respect of such issue have not been included in the reasons recorded under Section 148(2). On this basis it is urged that when the Assessing Officer reopened the assessment on 26 March 2002 the entire assessment was at large and hence he ought to have applied the amended provisions of Section  36(1)(vii), particularly the explanation thereto.

7. This aspect of the matter has been considered in a judgment of a Division Bench of this Court in Ashoka Build con Ltd. Vs. Assistant Commissioner of Income Tax [2010] 325 ITR 574 (Bombay). The Division Bench considered a similar submission based on Explanation 3 which was inserted in Section 147 by the Finance Act of 2009 with retrospective effect from 1/4/1989. Negativing the submission, the Division Bench held as follows:

“Where a reassessment has been made pursuant to  a notice under Section 148, the order of reassessment prevails in respect of those items which form part of reassessment. On items which do not form part of the reassessment, the original assessment continues to hold the field. When the Assessing Officer reopens an assessment on a particular issue, it is open to him to make a reassessment on that issue as well as in respect of other issues which subsequently come to his notice during the course of the proceedings under Section 147. The submission of the revenue is that by not passing an order of reassessment in respect of other independent issues, the order of the Assessing  Officer can be construed to be erroneous and to be prejudicial to the interests of the Revenue within the meaning of Section 263. The submission cannot be accepted in the facts of the present case. The substantive part of Section 147 as well as Explanation 3 enables the Assessing Officer to assess or reassess income chargeable to tax which he has reason to believe had escaped assessment and other income which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. There is nothing on the record of the present case to indicate that there was any other income which had come to the notice of the Assessing Officer as having escaped assessment in the course of the proceedings under Section 147 and when he passed the order of reassessment. The Commissioner, when he exercised his jurisdiction under Section 263, in the facts of the present case, was under a bar of limitation since limitation would begin to run from the date on which the original order of assessment was passed. We must however clarify that the bar of limitation in this case arises because the revisional jurisdiction under Section 263 is sought to be exercised in respect of issues which did not form the subject matter of the reassessment proceedings under Section 143(3) read with 147. In respect of those issues, limitation would commence with reference to  the original order of assessment. If the exercise of the revisional jurisdiction under Section 263 was to be in respect of issues which formed the subject matter of the reassessment, after the original assessment was reopened, the commencement of limitation would be with reference to the order of reassessment. The present case does not fall in that category. “

Sub­section (2) of Section 263 stipulates a period of limitation of two years within which an order under sub­section (1) has to be passed. Under sub­section (2) no order under Section 263(1) can be made after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. The order of assessment under Section 143(3) in the present case allowed the deduction which was claimed under Section 36(1)(vii), Section 36(1)(viia) and in respect of foreign exchange rate difference. Neither in the first order of reassessment dated 22 February 2000 nor in the second order of reassessment dated 26 March 2002 were these aspects determined. In other words on the aforesaid three issues, the original order of assessment dated 10 March 1999 passed under Section 143(3) continued to hold the field. Once that is the position, then clearly the doctrine of merger would not apply. The order under Section 143(3) passed on 10 March 1999 cannot stand merged with the orders of reassessment in respect of those issues which did not form the subject matter of the reassessment. Consequently Explanation 3 to Section 147 will not alter that position. Explanation 3 only enables the Assessing Officer, once an assessment is reopened, to assess or reassess the income in respect of any issue, even an issue in respect of which no reasons were indicated in the notice under Section 148(2). This, however, will not obviate the bar of limitation under Section 263(2). Where the jurisdiction under Section 263(1) is sought to be exercised with reference to an issue which is covered by the original order of assessment under Section 143(3) and which does not form the subject matter of the reassessment, as in the present case, limitation must necessarily begin to run from the order under Section 143(3). Before concluding we may also take notice of the fact that the second order of reassessment dated 26 March 2002 has been set aside by the Tribunal on 27 August 2010. An appeal against the order of the Tribunal is pending before this Court for admission. However, we have considered this appeal independently and have come to the conclusion that the invocation of the jurisdiction under Section 263 was barred by limitation. Accordingly we answer the question of law in the affirmative.

8. The Appeal is accordingly disposed of. There shall be no order as to costs.

NF