Legal Foundation of Provisions

The fundamental legal and common-sense principle which help understanding and appreciating the requirements of valid actions and procedures for re-opening the assessments is, that in general, the law disfavours the unsettling of settled and concluded status/ proceedings. It is easy to understand why it should be so. First, law believes that apparent is legal and valid and higher degree of basis and need is generally required to attempt to allege otherwise, particularly for concluded proceedings. Second, everyone is entitled to a satisfaction, after the lapse of normal limitation, that some proceedings likely against her are “finally concluded, or not taken”. Third, and more important, as the time passes, the evidences which support the claims become difficult to gather and produce and therefore, stringent procedural requirements must be prescribed to reagitate older matters. Fourth, when State is a party, enough procedural safeguards must be prescribed to prevent whimsical or arbitrary misuse of power. Fifth, and topmost, enough inhouse verification by senior functionaries must be inbuilt in the procedure governing the exercise of power to reopen/reagitate to ensure that undue and unjustified inconvenience and harassment is not caused to the subject. The law, on the other hand, must also ensure the levy of rightful taxes when on account of oversight/negligence some tax has been missed to be collected. Thus, the reassessment code prescribed in Sections 147 to 153 is a fine balance between the “due taxation” and “citizen’s rights/State’s duty to be fair and reasonable”. If viewed in this perspective, the actions/procedural requirements of Sections 147 to 153 are easily and effortlessly integrated into our governing psyche.

The notice for reassessment and the consequential proceedings result primarily in unsettling a settled position or concluded proceedings after a lapse of time. Invariably, as is easy to visualize, such an attempt would entail some inconvenience and perceived harassment to the person who is visited with these reassessment proceedings. Such person justifiably would have a notion of undue, discriminatory and unjust treatment even after the closure of the original proceedings. Moreover, an arbitrary exercise of such power, in the absence of effective machinery to safeguard the interest of the assessee, can lead to excesses and rampant misuse. This is the reason why powers to reassess are not blanket but is substantially restricted and must be exercised strictly within the statutory parameters laid down so as to balance the interest of the revenue vis-à-vis the interest of the assessee. Because the restrictions/conditionalities contained in the provisions are meant to ensure disciplined and judicious exercise of powers by the Assessing Officers and to protect the assesses against the misuse or malafides, the same are always construed strictly by the Judicial Authorities, and even a minor infraction would be enough to vitiate the jurisdiction and the proceedings.

The reassessment can be initiated within the time frame and on satisfaction of the Assessing Officer as detailed in Sections 147 to 153 subject to procedure prescribed in these sections. These are briefly mentioned below, and are meant only to get the “basic content” of the provisions meant to remain in our consciousness though; referring to the relevant provisions themselves every time we deal with them can never be over-emphasized.

1) Section 147: Income escaping assessment.

a)      When

i)                   Assessing Officer has “reason to believe”

ii)                That income chargeable to tax has escaped assessment (explanation below proviso important) for any Assessment Year.

b) She may assess, reassess, recompute loss etc. subject to Sections 148 to 153 for that Assessment Year, including any other income that she may discover during the course of 147 proceedings under Section 147.

i) However, Assessing Officer cannot assess or reassess the income involving subject matters of appeal, revision etc (principle of merger of order / proceedings).

c)        If however, earlier assessment is under Section 143(3) or 147, then, after four years from end of Assessment Year, the action by Assessing Officer is possible only if the escapement is on account of failure of the assessee to file Return of Income as required, or in response to notice, or to disclose all “material facts fully and truly etc” (Expln. 1: mere production of books of account may NOT necessarily be ‘disclosure’ so as to disable Assessing Officer’s action).

d)            The income from “foreign assets” can be, however, reassessed till 16 years from end of Assessment Year (recent amendment).

e)     Explanations below proviso are important for definitions and scope of few phrases/for special cases.

2) Sections 148, 149, 151: Issue of notice where income has escaped assessment: sanction , time limit

a)             The Assessing Officer shall issue requisite notice before action under Section 147 for relevant Assessment Year

b)            Notice under Section 143(2) should be issued/served within prescribed statutory period for undertaking reassessment after filing or deemed filing of return in response to 148 notice under Section 148.

c)        Requisite approvals before issuance of notice:

i)                If earlier assessment is framed under Section 143(3) or under Section 147, and, if the present Assessing Officer is an ITO, the approval of JCIT, if the reopening is within four years and CIT/CCIT if it is beyond four years from the end of the relevant Assessment Year. In other words, the JC’sIT/Addl. C’sIT or the satisfaction on the fitness of proposed action as required; and,

ii)              If earlier assessment is not under Section 143(3) or under Section 147 then no approval is necessary till four years from the end of the Assessment Year for any Assessing Officer, but beyond four years, approval of JCIT/Addl. CIT would be necessary for both the ITO and ACIT/DCIT herself would need no approval.

d) The notice under Section 148 can be issued after four years from the end of the Assessment Year only if:

i)        The income having escaped assessment is not less than Rs. 1 lac for that Assessment Year.

In any case, no notice can be issued after six years from the end of the Assessment Year normally.

ii) The only exception is income from “foreign assets” which, when forms the basis of re­opening, notice in that case the notice can be issued till end of 16 years from the end of relevant Assessment Year without any monetary limit subject only to approvals as above.

3) Important Concepts/ key words a)     ‘Reason to believe’:

The reassessment can be initiated only when the Assessing Officer has “reason to believe” that “income chargeable to tax has escaped assessment” for relevant assessment year. The basis of the belief should be discernible from the material on record, which was available with the Assessing Officer, when he recorded reason. There should be a link between the reasons and the evidence/material available with the Assessing Officer. The ‘reason to believe’ would plainly mean basic cause or justification for the Assessing Officer to initiate proceedings.

The “reason to believe” is different from “reason to suspect” or from “to have an opinion”. It has been held that reason to believe can be said to exist only when the Assessing Officer comes into possession or “discovers” “some material”, or “gets a new insight” subsequent to the conclusion of the original proceedings. Some “information”/event after the original assessment would normally be required to form a belief that the income chargeable to tax has escaped assessment.

Such material or insight must be bona-fide and must be capable of leading to the “formation of bona-fide belief”

The belief should be that income chargeable to tax has escaped assessment. Such escapement may be escapement simpliciter or also as defined in Explanation 2 below Section 147.

The reasons leading to satisfaction under Section 147 must be duly recorded by the Assessing Officer bringing out clearly the “material” or the “insight”, the link of reasoning connecting the material with the belief of escapement and also indicating the prima-facie estimate of escapement. The recording of reasons is the most important and fundamental jurisdictional necessity, in the absence of which the assessment itself will not survive. As such recorded reasons are the only basis for higher judicial authorities to ascertain the link between the material, the ‘reason to believe’ and the underlying reasoning, utmost care should be exercised to ensure:

(1)       That the reasons are fully self-contained and bring out a clear existence of the fulfillment of requisite conditions and jurisdictional facts. Wherever necessary, after the end of four years from the Assessment Year, how there is requisite “failure” of the assessee must also be clearly brought out;

(2)         That the existence of such reasons recorded in the file and on the order-sheet

(3)         That proper approvals are taken whenever necessary;

(4)         That mentioning of such reasons is duly made in the Assessment Order; and,

(5) That the reasons recorded must be on the basis of Evidence/ ‘material’.

In Hindustan Lever Limited Vs. R.B. Wadkar, Asst. Commissioner of Income Tax, (2004) 268 ITR 332 (Bom), a Division Bench has opined the followings with respect to recording of reasons which should form the unimpeachable code for the Assessing Officers:

  • The reasons are required to be read as they were recorded by the Assessing Officer;
  • No substitution or deletion is permissible;
  • No additions can be made to those reasons;
  • No inference can be allowed to be drawn on reasons not recorded;
  • It is for the Assessing Officer to disclose and open his mind through reasons recorded by him;
  • It is for the Assessing Officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year;
  • The reasons recorded should be clear and unambiguous and should not suffer from any vagueness;
  • The reasons recorded should be self explanatory and should not keep the assessee guessing for the reasons;
  • Reasons provide the link between conclusion and evidence;
  • The reasons must be based on evidence;
  • The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record;
  • He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence;
  • That vital link is the safeguard against arbitraryreopening of the concluded assessment;
  •   The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission;
  •   If the reasons were lacking in the material particulars, the same would get supplemented by the time the matter reaches to the court, on the strength of affidavit or oral submission advanced.

b) Information :

The Assessing officer may, on the basis of ‘information’ received from external sources, including that from the Audit, form the belief of escapement. The Assessing Officer, based on the information which comes to his notice subsequent to the earlier assessment, may issue notice for reassessment. “Information” means communication or reception of knowledge or intelligence. It includes knowledge obtained from investigation, study or instruction. To inform means to impart knowledge. A detail available in file before ITO does not by its mere presence or availability become an item of information. It is transmuted into an item of information only, if and when its existence is realized and its implications are recognized. Whether a particular fact or material constitutes information has to be decided w.r.t the facts of that case and there cannot be a definite rule of universal application. (Shiva Exports 28 SOT 512(Chd))

It may not be out of place to mention, that in the modern era of user-friendly and searchable data of ALL relevant decisions available on softwares subscribed by the department, locating the decision is not a challenge (as it earlier used to be), but reading those which have gone against the Department, and integrating the import of the same as a guiding factor in our actions is the key challenge. The following case laws envisage what amounts to ‘information’ and may be used as a guide or relied upon by the Assessing Officer:

(a)       In Assistant Commissioner of Income Tax Vs. Dhariya Construction Co. (2010) 328 ITR 515, the Supreme Court held that the Department sought reopening of the assessment based on the opinion given by the District Valuation Officer. The opinion of the DVO per se is not information for the purposes of reopening assessment under Section 147 of the Act. The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon.

(b)       In Income Tax Officer Vs. Saradbhai M. Lakshmi, (2000) 243 ITR 1, the Supreme Court held that the decision of the High Court would constitute information and the initiation of reassessment proceeding on the basis of the decision of the High Court has been justified.

(c)       In Ess Ess Kay Engineering Co. P. Limited Vs. Commissioner of Income Tax, (2001) 247 ITR 818, the Supreme Court held that the Income Tax Officer is not precluded from reopening of the assessment of an earlier year on the basis of his finding of fact, made on the basis of the fresh materials in the course of assessment of the next assessment year.

(d)       In Dr. Lata Chouhan Vs. Income Tax Officer and another, (2010) 329 ITR 400 (MP), the petitioner filed her return for the Assessment Year 1997 – 98. On 25- 12-1999, a survey under Section 133A of the Act was conducted by the Department in the business premises of the petitioner. During the course of the survey, it was noticed that the petitioner had made substantial investment in construction of her hospital building. It was estimated by the ITO at Rs 27,70,000/- whereas the petitioner had disclosed only Rs. 3,65,310/-. A notice for reassessment was issued under Section 147. In the writ petition filed by the assessee, the High Court held that when survey was conducted in the premises, the department came into possession of material for proceeding to reopen the assessment. This fact was thus rightly made the basis for making reassessment. Once there existed a basis for forming a prima facie opinion for escaped income then it is sufficient ground to issue notice under Section 147. The Court cannot examine the adequacy or sufficiency of reasons on facts like an appellate court for deciding as to whether on such facts, notice would be issued or not unless the reasons are found to be totally perverse or absurd or against any provision of law. Such was not the case here.

The return was filed and hence notice under Section 147 could be issued on satisfying the requirement of Section147. The notice was thus valid.

(e)       In case of A Raman & Co 67 ITR 11(SC), it is held that the word information means instruction or knowledge derived from external source or as to law relating to a matter bearing on the assessment. Similarly in the case of Kalyanji Mavji 102 ITR 287(SC) it has been held that information can come from external sources or even from material already on record and the word information would include the true and correct state of law. [ Also see 287 ITR 282(Bom) Clagget Brachi & Co 100 ITR 46 (AP)].

(f)           Audit note is information P. V.S beedies P Ltd- 237 ITR 1 3(SC):

(g) A subsequent decision of Jurisdictional court will constitute information: Novapan India 236 ITR 746(AP), Madras Fertilisers 122 ITR 139(Mad), Ma ha rak Kumar kamal Singh 35 ITR 1(SC), A L A Firms 189 ITR 285(SC)

If, somehow, the Assessing Officer feels that she has no “real material” on which a “reason to believe” can exist, the Assessing Officer may be well advised to gather further material by collecting information under Section 133(6) after seeking approval from the Appropriate Authority. This may be particularly required while dealing with remedial actions in cases of Audit Objections which are not accepted. Such information can strengthen either the reassessment proceedings (by ensuring proper existence and recording of “reason to believe”), or the reply to the Audit, as the facts may turn out to be. When there is “escapement” but there is also challenge in forming a belief under Section 147, the Assessing Officer should endeavour to gather proper material as statutorily permissible before recording the reasons and issuance of notice. The Range Heads can and should ensure proper and legal basis for issuance of notice under Section 148 rather than hurriedly recording “some reasons”.

c) Failure to disclose fully and truly material facts necessary for assessment

In case the earlier assessment is under Section 143(3)/147, the reopening beyond four years from the end of the Assessment Year is possible only if the escapement is on account of “failure of the assessee to disclose fully and truly all material facts necessary for his assessment”. The following case laws are important in this regard:

(i)           In Deputy Commissioner of Income Tax Vs. Purolator India Limited, (2011) 11 ITR (Trib) 434 (Delhi), it was held that where the assessee had claimed relief under Section 80HHC on the basis of audited accounts with accompanied return and such relief was allowed in regular assessment after considering the materials on record, there could be no justification for issuing notice under Section 148 after the four year time limit.

(ii)         In Ka lyan Ala Ba rot Vs. M. H. Ra thod, (2010) 328 ITR 521 (Guj), the High Court dismissed the writ petition holding that in consequence of and with a view to give effect to the finding contained in the order made by the Commissioner (Appeals) in appeal for assessment year 1984-85, the Assessing Officer has issued notice under Section 148 for assessing the income which was excluded from the total income of the petitioner for the Assessment Year 1984-85, to assess such income for the Assessment Year 1983-84. Thus, the case fell within the ambit of provisions of Section 150 as well as Section 153(3)(ii) read with Explanation 2 to Section 153 of the Act and as such, there was no infirmity in the action of the Assessing Officer in initiating reassessment proceedings, the same being in consonance with the provisions of law and within the prescribed time limit.

iii)         In Hindustan Petroleum Corporation Limited Vs. Deputy Commissioner of Income Tax, (2010) 328 ITR 534 (Bom), the High Court held that where the assessee had claimed relief under Section 80-IA on the income attributable to a generator used as a captive power plant, with all the particulars of such claim, reopening of assessment to withdraw the claim after four year time in such cases, where there was full and true disclosure, was not justified.

iv)          In Smt. Raj Rani Gulati Vs. Union of India and another, (2010) 329 ITR 370 (All), the High Court held that under proviso to Section 147 of the Act, notice under Section 148 of the Act can be issued beyond the period of four years only in a situation where there is failure on the part of the assessee to disclose all material facts necessary for the assessment. Unless such case is made out, no notice beyond the period of four years can be issued. The Court has gone through the findings recorded by the assessing authority in the assessment order. The findings recorded by the assessing authority in the assessment order revealed that the assessee had furnished complete details relating to the sale of 16,000 equity shares of M/s Viraj Credit Capital Limited through M/s J.R.D. Stock Brokers (P) Limited, Dariyaganj, New Delhi and on the basis of the material furnished, the assessing authority had also made necessary enquiry and therefore, the Court was of the view that there was no failure on the part of the assessee to disclose fully and truly the material in respect of equity shares of M/s Viraj Credit Capital Limited through M/s JRD Stock Brokers (P) Limited, Dariyaganj, New Delhi and therefore, the limitation available for initiation of proceeding was only four years. In the present case, the notice issued under Section 148 was beyond four years, and thus, barred by limitation.

d) Validity of Notice

The following case laws clearly bring out the issues in this regard:

i)              In Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers (P) Limited, (2007) 291 ITR 500, the Supreme Court held that failure of the officer to make regular assessment under Section 143 will not render the Assessing Officer powerless to initiate reassessment proceedings.

ii)            In Commissioner of Income Tax Vs. Chandrasekar Balagopal, (2010) 328 ITR 619 (Kar) the assessee during the previous year, relevant for the assessment year 2000-01, received an income of Rs. 3.9 crore under restrictive covenant from a Japanese company which took over the business of an Indian company of which the assessee was the Managing Director. The assessee initially treated the receipt from the foreign company as his income and paid advance tax of Rs 63,94,000/-. Later, the assessee paid a further amount of Rs. 5 lakhs towards self assessed tax. The taxes so paid were in addition to the tax deducted at source in the assessee’s account amounting to Rs. 63,347/- Even though such huge amount was paid by the assessee towards advance tax and self assessed tax, while filing the return for the assessment year 2000-01 on 31-08-2000, the assessee returned an income of only Rs 17,79,850/- and claimed refund of the taxes paid on the receipt of the aforesaid money from the foreign company. The Assessing Officer re-opened the assessment and completed the reassessment under Section 147 including the amount received from the foreign company as income. According to the Tribunal, there was no processing of return under Section 143(1)(a) the Assessing Officer was barred from making a reassessment of income escaping assessment under Section 147. On appeal, the High Court held that the reassessment proceedings were valid. By virtue of Explanation 2 to Section 147, if the Assessing Officer in the course of scrutiny of the return finds that the assessee has “understated the income or has claimed excessive loss, deduction, allowance or other relief, in the return” the Assessing Officer is free to initiate income escaping assessment under Section 147, no matter the assessment based on original return is not completed either through proceedings under Section 143(1)(a) or through regular assessment under Section 143(3) of the Act. Thus, income escaping assessment can, possibly, be made based on the return filed by the assessee, pending for assessment also.

e) Objection to Reassessment

An assessee may raise objection on the issue of notice for reassessment. The Assessing Officer is to take note of objections and to dispose of his objection before reassessment. In GKN Driveshafts (India) Limited Vs. ITO, (2003) 259 ITR19 (SC), the Supreme Court held that the Court saw no justifiable reason to interfere with the order under challenge.

However, the Court clarified that – when a notice under Section 148 of the Act is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notices;

The following points may be noted with respect to supply of copy of reasons

(1)         The Assessing Officer is bound to furnish reasons within a reasonable time;

(2)            On receipt of reasons, the noticee is entitled to file objections to issuance of notice; and,

(3) The Assessing Officer is bound to dispose of the same by passing a speaking order.

In IOT Infrastructure and Energy Services Limited Vs. Assistant Commissioner of Income Tax and another, (2010) 329 ITR 547 (Bom), the notice for reopening the assessment was issued on 16-03-2009 and the reasons in support of the notice were dated 18-06-2009. On 18-12- 2009, the assessee lodged its objections to the reopening of the assessment, stating that a copy of the letter dated 18-06-2009 had been handed over only on 16-12-2009. The order of assessment was passed on 23-12-2009. In the writ petition filed by the assessee, the High Court held that there was absolutely no reason or justification for the Assessing Officer not to deal with the objections filed by the assessee to the reopening of the assessment, particularly in view of the binding principle of law laid down by the Supreme Court in that regard. The order of reassessment was therefore set aside. The High Court directed the Assessing Officer to pass a fresh order on the objections raised by the assessee to the proposed reassessment in accordance with the law.

f) Change of opinion:

One important controversy is the doctrine of “change of opinion” which should always remain paramount in the mind of the Assessing Officer while proceeding to reopen an assessment. This is so because, by the time, if at all, the assessment based on ‘mere change of opinion’ is held to be so, the time to gather further information might expire, and the revenue may be lost forever. In simple words, the doctrine, as propounded in various Decisions, is that the same or the successor Assessing Officer cannot, in the absence of any new material or “insight”, suddenly and baselessly change his position vis-à-vis an allowance/relief granted in previous assessment, unless it is patently so, in which case also the re-opening may have a doubtful life. Such a changed opinion, in the absence of any material newly discovered or brought, would not be construed as “reason to believe”, and thus, would fail the judicial test. The key points to be noted and to be accordingly highlighted while recording the reasons are:

i)            An earlier “stand/opinion” based on mistake of law or a mistake of fact is no “valid opinion”, and hence a new “opinion” based on correct facts/law can still be a good basis for formation of a valid belief of escapement. But such facts must be clearly stated and brought out in the reasons recorded;

ii)         Even if the earlier stand is one of the permissible legal stands, but the same was taken without weighing pros and cons of possible stands or without demonstrable application of mind, and in a subsequent opportunity (say, in the subsequent Assessment Year) the contrary view is taken by the Assessing Officer after weighing pros and cons and after due application of mind, the “new opinion” can, possibly, lead to formation of a “reason to believe”;

iii)       An allowance, wholly uncalled for and not at all allowable, if granted, would be a valid ground for re-opening;

iv)       The “newly acquired knowledge” of a binding decision or discovery of patently (factually or legally) non-admissible claim granted in original assessment can also, thus form a valid basis;

v) While recording the reasons or in preparation to formation of the belief, the Assessing Officer should always remain conscious to so marshal the facts (if need be, by resorting to Section 133(6)) and to so adopt the reasoning as to avoid the conclusion or even allegation of having “a mere change of opinion”

The following case laws discussed would demonstrate what would amount to ‘change of opinion’ which bars reassessment.

(1)           In Deputy Commissioner of Income Tax Vs. Manak Shoes Co. P. Limited, (2011) 11 ITR (Trib) 673 (Del), the Tribunal held that where regular assessment had been made under Section 143(3) allowing depreciation of factory building, plant and machinery, and reassessment proceedings were initiated on the ground that depreciation was not admissible since the assessee had no manufacturing activity during the year, the Tribunal found that the matter had been examined during the assessment stage and that there was no fresh information to justify a different inference and notice under Section 148. Though action was initiated within the four year time limit, it was found that it was based on mere change of opinion and reassessment proceedings was, therefore, not justified.

(2)           In Consolidated and Fin vest Limited Vs. Asst.
Commissioner of Income Tax,
(2006) 281 ITR 394 (Delhi), the High Court held that the doctrine of change of opinion could not be a basis for reopening completed assessments and would be applicable only to situations where the Assessing Officer had applied his mind (in earlier assessment) and taken conscious decision on a particular matter in issue, and it would have no application, where the order of assessment did not address itself to the aspect which was the basis for re-opening of the assessment. The High Court further held that mere production of 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 to Section 147 of the Act.

(3)       In Jai Hotels Co. Limited Vs. Asst. DIT, (2009) 24 DTR 37 (Del), the Delhi High Court has held that there being no new material in the hands of the Revenue leading to view that there was reason to believe that income had escaped assessment, the case is a classic instance of a change of opinion. The High Court further observed that when copies of statement of income, trading account, profit and loss account, audit report etc., were appended to the return filed by the assessee, taking resort to Section 147/148 was unwarranted as it constituted a change of opinion, since the material acted upon had been made available along with return of income.

(4)       In Satnam Overseas vs. Addl. Commissioner of Income Tax, (2010) 329 ITR 237 (Delhi), the High Court held that the only reason which has been given seeking reopening of the assessment for the years 1997-98 and 1998-99 is that suppression of sales has taken place on account of the fact that when average price of the closing stock is multiplied with the quantity of the sales in the year then the value of the sales would be at a higher figure, than declared by the assessee. Clearly, there is no new material which is alleged to have come to the notice of the Assessing Officer which has caused him to seek reopening of the assessment. Admittedly, the reasons given for seeking reopening of the assessment contains the expression ‘perusal of the case record reveals’ clearly showing that it is on the basis of the same assessment record as was filed by the assessee, during the relevant assessment years and also scrutinised by the Assessing Officer before passing the orders under Section 143(3). Further, the new logic, rationale and opinion which has been formed by the Assessing Officer for seeking reopening of the assessment is nothing but a change of opinion and a new approach to the existing facts and material which the Assessing Officer could well have done during the regular assessment proceedings of the relevant assessment years.

(5) In Commissioner of Income Tax Vs. Eicher Limited, (2007) 294 ITR 310 (Del), the High Court has taken a view that since the facts and materials were before the Assessing Officer at the time of framing of the original assessment, and later a different view was taken by him or his successor on the same facts, it clearly amounted to a change of opinion, which would not form the basis for permitting the Assessing Officer or his successor to re­open the assessment of the assessee. The Honorable High Court further observed that if the entire material had been placed by the assessee before the Assessing Officer at the time when the original assessment was made and the Assessing Officer applied his mind to that material and accepted the view canvassed by the assessee, then merely because he did not express this in the assessment order, that by itself would not give him a ground to conclude that income had escaped assessment and, therefore, the assessment needed to be reopened. The assessee had no control over the way an assessment order is drafted.

(6) In Commissioner of Income Tax Vs. Kelvinator of India Limited, (2010) 320 ITR 561, the Supreme Court observed that post 01-04- 1989, the power to reopen is much wider. However, one needs to give a schematic interpretation to the words ‘reason to believe’ failing which, Section 147 would give arbitrary powers to the Assessing Officer to reopen the assessments on the basis of ‘mere change of opinion’ which cannot be per se reason to reopen. The conceptual difference between the power to review and power to reassess is to be kept in mind. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on the fulfillment of certain pre conditions and if the concept of ‘change of opinion’ is removed, 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 Assessing officer. Hence, after 01-08-1989, the Assessing Officer has 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 link with the formation of the belief.

4) Other Important Decisions:

a)            The fact that ITO could have found out true position by further probing did not exonerate assessee from making disclosure truly. Indo Aden salt Mfg & trading Co 159 ITR 624(SC), Electro steel casting 264 ITR 410(cal), Shri Krishna P Ltd 211 ITR 538 (SC).

b)            It is duty of assessee to make true and full disclosure of material facts. It is for the Assessing Officer to decide what inference of fact or law can be drawn there from and the law does not require assessee to state that the conclusion could reasonably be drawn from primary facts. If there were some reasonable grounds for thinking that there had been any no disclosure as regards any primary facts which could have material bearing on question of under assessment, that would be sufficient to give jurisdiction. Calcutta Discount Co 41 ITR 191(SC). Material disclosed should be by itself complete enough and part/vague disclosure would not amount to full & true disclosure 221 ITR 538(SC).

c)      The fact that only an Intimation was passed under Section 143(1)(a) is irrelevant because what is material is whether the Assessing Officer had proper “reasons to believe” that income had escaped assessment. Prashant S Joshi (Bom), Pirojsha Godrej Foundation ITAT(Mum).

d)        Block Assessment can be reopened under Section 148 as held in Peerchand Ratanlal Baid 322 ITR 544(Gau) which has been passed after considering Cargo clearing agency 307 ITR 1(Guj) which is against revenue. Also see Western India Brakes 87 ITD 607(Mum) and Mangal Singh (HUF) ) 42 DTR 58 (Del.)(Trib.) which are also against revenue.

e) Reassessment order passed without considering the objections lodged by the assessee is not sustainable. But Assessing Officer was directed to consider the objections filed by the assessee and pass fresh orders after hearing the assessee. IOT Infrastructure & Energy Services Ltd 233 CTR 175 (Bom.)

5) Recent Decisions

Though there are decisions pouring in practically daily for and against the revenue on the issue of reopening and validity thereof, and guidance would need to be always sought before proceeding to reopen, the following  recent decisions are worth noting:

(i) 211 Taxmann 447 (Guj.) – Gala Gymkhana (P) Ltd. Vs. ACIT: Where Assessing Officer seeks details from assessee-club as to number of its members and assessee in addition informs about total membership fees it has received and Assessing Officer without expressing any opinion on membership fees passed its order not imposing any tax thereupon, it cannot be said that Assessing Officer had expressed its opinion on membership fees; and, therefore, membership fees can be taxed subsequently by re­opening assessment.

(iii) The important full bench decision of Delhi HC on the issue of “change of opinion” in CIT vs. Usha International Limited [2012] 25 taxmann. com 200 (Delhi) (FB): Reassessment proceedings will be invalid in case an issue or query is raised and answered by assessee in original assessment proceedings and Assessing Officer does not make any addition in assessment order.

6) Reopening of Assessment as a consequence of Audit Objections:

This has become a very potent issue for discussion since with advent of RTI Act an assessee can now collect information from the Auditor as well as the Assessing Officer to find out:

(i)       That the reopening is on the basis of an Audit Objection.

(ii)     That the Assessing Officer has actually accepted or not accepted the objection.

Moreover, in many instances it has been seen that the Assessing Officer himself mentions that his “reason to believe” is based on Audit Objections raised in a particular case.

The issues that arise in this regard are as under:

(1)       Where an objection has not been accepted by the Assessing Officer but notice under Section 148 has been issued as a remedial measure in view of the Board’s Instruction No. 9/2006 date 07.11.2006. In this regard, the High Court of Gujarat in the case of Adani Exports Vs. DCIT [240 ITR 224 ] and Cadila Healthcare Pvt Ltd in SCA No. 15566 of 2011 has held that when the Assessing Officer did not accept the objection, he could not have a reason to believe. The aforesaid decisions have been accepted by the Department since no further SLP has been preferred. Thus, clearly, reopening is not a remedial action available when the Audit Objection is not acceptable.

(2)       Where an objection has been accepted it has been held in many instances that re-opening under Section 147 is not on the basis of a reason to believe formed by the Assessing Officer. Thus, following measures should be taken by the Assessing Officer, if, at all, remedial measure under Section 147 is required to be taken in response to an Audit Objection:-

(a)       He should clearly mention in the reason recorded that the belief is owing to facts, information or evidence in his possession. Mention of Audit Objection should be obviously avoided.

(b)       He may gather further information to verify the Audit Objection under Section 133(6) and form the reasons to believe on the basis of such new information gathered.

7) Conclusion:

The Assessing Officer and Range Head should seek guidance from recent decision before embarking on reassessment proceedings. If proper care is taken, and if proper actions available to the Department are taken to gather/collect/collate information and evidences, and are properly marshalled into the proper recording of reasons, and due care is taken to strictly follow all procedural aspects/time-frames, there is no reason why the re-opened assessments, in genuine cases, would not be upheld. Further, a reason to believe that income has escaped assessment need not necessarily lead to the same conclusion after the assessee has been allowed opportunity to represent the facts and law and the same has been found contrary to the reasons recorded.


Author – B.K.S. Pandya, CIT VII, Ahmedabad

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  1. S G Dsouza says:

    Sir after supply of Reasons How much Time should be granted to the assessed to file objections against Notice for reopening

  2. M. HARI KRISHNAN says:

    What is the time limit for reopenign of assessment when revised return filed only for TDS certificates received after filing the original Return.

  3. S G SAVADI says:

    Well said Sir. In my experience as a former officer in the Department, majority of proceedings are initiated on account of Audit Objections which are not accepted. In such cases, the approach of the A.O. from the beginning is half hearted because he himself is not convinced about the action he is going to initiate.There are instances where the A.O. in the recording of reasons merely mentions the audit objection or intimation received from the investigation wing as the reason for initiating the proceedings. Application of his mind and coming to his own conclusion for holding the belief that income has escaped assessment is largely absent in such cases. Therefore even in cases where the objections raised by the Audit are genuine, correct, because of the lackadaisical approach of the A.O. in recording the reasons, the cases are lost in appeal. On of the remedy to tackle such situation can be the monitoring by the senior Officers in the drafting of the reasons by the A.O.for initiating proceeding u/s 147 of the Act. It may help the cause of the revenue if in all high tax effect cases say above Rs. One crore, the CIT concerned is involved in the drafting of the reasons and in other cases of tax effect exceeding Rs. ten lacs but bellow Rs. one crore, the Range head is involved for the proper monitoring of assessment of reopened cases.
    S G Savadi.( Formerly Addl. CIT Mumbai.)

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November 2020