CA Vijay Bansal

CA Vijay BansalBrief Overview of Section 147 of Act

The provisions of section 147 empower the Assessing Officer, to reopen an assessment if he has “reason to believe” that income has escaped assessment. The important words under section 147 are ‘has reason to believe’ and these words are stronger than the words ‘is satisfied’. The belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material.

(Section 149) Time Limit for issue & service of notice under said section is – Four years from the end of relevant assessment year


1. Six years from end of relevant assessment year if escaped amounts is one lakh rupees or more

2. Sixteen years if escapement is in relation to any asset (including financial interest in any entity) located outside India.

Note: Section 148 : The Assessing officer shall before issuing any notice under this section record his reasons for issuing the notice. In other words it is necessary on part of AO to record his reasons why he/she believe that certain income has escaped assessment.

What to do when notice u/s 148 is received:

When a notice u/s 148 is received the assesse is asked to file a return of the relevant assessment year. After filling the return the assesse should ask for the copy of reasons recorded for issue of notice u/s 148 and can file objection to the issuance of notice. The assesse should ask specifically assessing officer to pass a speaking order by disposing off the objections giving reference of the Judgment of Honourable Supreme Court in GKN Driveshaft’s (India) Ltd vs ITO (2003) 259 ITR 19 (SC). The objections should be filled giving reasons for challenging the legality of the notice u/s 148. All this procedure has been laid down by the Honourable Supreme court in GKN Driveshaft’s (India) Ltd case. This procedure has been provided by the Honourable Supreme court to enable the assesse to file writ petition before the respective High court challenging the legality of the notice u/s 148 before the assessment is completed.

From the above literature, it is very clear and settled position that AO must have valid reason to believe that certain income which would have chargeable to tax has escaped assessment for any assessment year. But it does not mean that AO has the power to review the cases for which assessment has already been completed. Review here includes change in Opinion too with regard to any particular transactions or matter.

In support of above statement, reference is drawn to some landmark judicial pronouncements including decision given by our apex court:

1. CIT v. Kelvinator of India (SC) : The Supreme Court has held as under :

Though the power to reopen under the amended s. 147 is much wider, one needs to give a schematic interpretation to the words “reason to believe” failing which s. 147 would give arbitrary powers to the AO to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. One must also keep in mind the conceptual difference between power to review and power to re-assess. The AO has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfilment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the AO. Hence, after 1.4.1989, the AO has power to re-open, 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. This is supported by Circular No.549 dated 31.10.1989 which clarified that the words “reason to believe” did not mean a change of opinion.

2. Calcutta Discount Co. Ltd. v. ITO(SC) :

The expression “reason to believe” postulates belief and the existence of reasons for that belief. The belief must be held in good faith, it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief. In other words, the Income-tax Officer must on information at his disposal believe that income has been under-assessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief may not be based on mere suspicion. It must be founded upon information

3. Chugamal Rajpal v. S.P. Chaliha (SC):

In the instant case, the Assessing Officer sought to reopen the assessment on the basis of some communications received from the Commissioner of Bihar and Orissa. He did not mention the facts contained in those communications. All that he said was that from those communications ‘it appeared that the persons (alleged creditors) were name-lenders and the transactions were bogus’. He had not even come to a prima facie conclusion that the transactions to which he referred were not genuine transactions. The Court held that the Assessing Officer only appeared to have a vague feeling that the transactions might be bogus. This does not satisfy the basic requirements of reassessment which requires that the Assessing Officer must have a prima facie ground before taking action under section 148 of the Act.

4. Direct Information (P) Ltd v. ITO (Bombay High Court) :

The power to reopen an assessment is not a power to review an assessment already made, but a power to reopen where there is reason to believe that income has escaped assessment. Consequently, unless the Assessing Officer has tangible material before him on the basis of which he comes to that conclusion, the reopening of an assessment cannot be permitted merely on the ground that there is a change in the view of the Assessing Officer and he subsequently believes that the earlier view was incorrect. If that were to be permitted, the Assessing Officer would exercise the power to reopen assessments arbitrarily.

5. SGS India (P) Ltd v. ACIT (Bombay High Court) :

In the aforesaid decision the Bombay High Court has held that reassessment merely for the purpose for reviewing the original assessment is not valid.

6. K Menon V. ITO (Bombay High Court):

Though the power to reopen is much wider, but the interpretation that the words “reason to believe” must receive an interpretation which is in consonance with the scheme of the law. There cannot be arbitrary powers to the Assessing Officer to reopen assessment on the basis of mere change of opinion. The Assessing Officer has no power to review. He has only a power to reassess. In the garb of reopening the assessment review cannot take place. If the recorded reasons show contradiction and inconsistency it means necessary satisfaction in terms of the statutory provision has not been recorded at all. The Court cannot be called upon to indulge in guess work or speculate as to which reason has enabled the AO to act in terms of s. 147.

So it is very clear now that the intention of legislature is to give power to AO to re-open only those cases where he has recorded reason to believe that income has escaped assessment and that too can be opened within the time frame as provided under section 149. So to conclude, AO has never ever given power to Re-view what has been already decided or assessed provided assesse has made full and true disclosure at time of initial assessment.

Any contrary view is welcomed.

Author may be reached at [email protected] or +91 9820149229.

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October 2021