1. Recently, Karnataka High Court on 1-Jul-2015 in the case of Sri N Govindaraju v ITO in ITA/504/2013 held that, an AO has the AO has unfettered power of re-to assessment u/s 147 i.e. not limited to issue mentioned in notice u/s 148.
2. Till that date, the views of the high courts were divided on the issue in ratio of 3:2. Refer the table below.
3. In very simple language, the process of re-opening of an assessment is as follows.
4. An AO has a power to re-open an assessment u/s 147 if he has reason to believe that some income has escaped assessment.
5. The AO has to issue a notice u/s 148 pointing out the basis for reason to believe.
6. The assessee has to file a return of income and then he can ask for the basis on which the assessment is sought to be re-opened.
7. Irrespective of the outcome i.e. whether actual addition to income happens or not, if the material [including a news item in newspaper] based on which the AO has reason to believe is valid, he can proceed with the assessment.
8. Till this point, there is no difference of opinion among various high courts.
9. The moot question is, once the window is opened based on reason to believe, whether the AO will get unfettered rights to do the roaming inquiries on issues not mentioned in the notice u/s 148?
10. There are two views at this juncture.
11. The said section 147 of the Act, as it now stands after 1.4.1989, may be read in a simple manner, in parts, as follows:
If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment, he may assess or reassess ‘such income’ “and also” ‘any other income’ chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings………
12. The two views revolve around the words [ ‘such income’ “and also” ‘any other income’]
|FIRST SCHOOL OF HIGH COURTS||SECOND SCHOOL OF HIGH COURTS|
|Bombay, Gujarat and Delhi||Punjab & Haryana, Rajasthan & Karnataka|
|Annexure A below||Annexure B below|
|If there is a successful addition for the issue mentioned at the time of issuing notice u/s 148 then and then only, addition can sustain in relation to issues not mentioned in notice u/s 148.||Once the re-opening is valid, the AO can make addition on any of the issue i.e. his power to assessment is unfettered i.e. not limited to issue mentioned in notice u/s 148.|
Reason for this article-:
13. Understanding the reasoning of two schools of high courts.
Take-away for a practicing Chartered Accountant / tax consultant / advocate
14. As of today, there are 24 high courts in India. Out of 24, the above mentioned 6 high courts have already taken a view on the issue. The volume of the assessees covered by jurisdictions of above 6 high courts might as well cover 50% of the tax assessments.
15. Needless to say, the view of jurisdictional high court is binding on all courts below that high court.
Points to ponder-:
16. It may be relevant to look into the law of precedence.
17. A High Court is not bound by decision of another High court but it definitely has a persuasive value.
18. One such principle says that, in the case of conflicting decisions, a view favourable to the assessee should be adopted. Following cases are relevant in this regard.
|1||CIT v. Vegetable Products  88 ITR 192 (SC)|
|2||Suryalatha Spinning Mills Ltd. v. Union of India [IT Appeal No. 624/Hyd./2009]|
|3||ITO v. Chandanmal Champalal  11 Taxman 32 (Pune).|
19. Precedent is a judicial decision which contains in itself a principle. A decision is available as precedent only if it decides a question of law State of PunjabSurinder Kumar  194 ITR 434 (SC). One of the essential features of the doctrine of precedent in the common law is that rules of law are developed in the very process of application to the facts and circumstances of a case. They are created by judges when they decide issues raised and argued by the parties. In the process of application, they interpret or construct law. Decisions of Courts not merely constitute an adjudication of the rights of the parties and resolve disputes between them, but also in doing so, embody a declaration of law operating as a binding principle in future cases.
MY Personal View-:
20. As it appears from the order, there is no mention of any of these decisions. But even in that case, it would not have made any difference.
21. In my Personal view, it is more probable than not, the view of second school of High Courts will be upheld. The Karnataka High Court is right in interpreting the section 147
22. At this point, the Supreme Court should give a final verdict and settle the issue once for all.
23. Though unrelated to this topic, , it will be helpful to read one of the observations of the Bombay High Court in the case of 3i Infotech Limited vs. ACIT & ors [(2010)(329 ITR 257)] where the High Court was dealing with the issue of change in opinion.
“producing voluminous records before the AO did not absolve the assessee and when a subject matter / claim remained hidden or unexamined by the AO for any reason, it could not be a case of change of opinion”.
Understanding the issue-:
It will be interesting to note following paragraphs of CIT v Sun Engineering Works (P.) Ltd.  64 TAXMAN 442 (SC)
39. ….. …….. A matter not agitated in the concluded original assessment proceedings also cannot be permitted to be agitated in the reassessment proceedings unless relatable to the item sought to be taxed as ‘escaped income’. Indeed, in the reassessment proceedings for bringing to tax items which had escaped assessment, it would be open to an assessee to put forward claims for deduction of any expenditure in respect of that income or the non-taxability of the items at all. Keeping in view the object and purpose of the proceedings under Section 147 of the Act which are for the benefit of the Revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings as 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 reagitate 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.
40. It would be seen that whereas in the case of Anglo French Textile Company Limited’s case (supra) the question as to the rights of an assessee to claim ‘redoing’, ‘revising’ or ‘recomputing’ entire income during the reassessment proceedings was left open, that question did not come up for consideration in the case of N.H. shri Ramulu (supra) or H.M. Esufali (supra) or even in Jaganmohan Rao’s case (supra). Some of the High Courts, therefore, fell in error in reading those judgments, divorced from the context in which the precise questions came up for consideration in those cases, and to hold that the assessee could ‘reagitate’ the concluded issues and claim relief in respect of items, finally concluded in the original assessment proceedings, during the reassessment proceedings, unconnected with the escapement of income. We cannot, therefore, approve the broad propositions laid in that regard in 46 STC 264; 110 ITR 527; 133 ITR 204; 142 ITR 877; 149 ITR 487; 171 ITR 232 and 181 ITR 22 (supra).
24. Annexure A-: A paragraph on Page 22 of the Judgement reads as follows
In the case of CIT Vs Jet Airways (I) Ltd. (2011) 331 ITR 236 the Bombay High Court has held that –
“Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance or core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income (“such income”) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.”
Thus, what has been held is that ‘such income’ in the first part of section 147 is joined with ‘any other income’ of the second part of the section by the phrase “and also” which is used in a “cumulative and conjunctive sense”. Following the said judgment of the Bombay High Court, same view has been taken by the Delhi High Court in the cases of Ranbaxy Laboratories Ltd. Vs CIT (2011) CIT 336 ITR 136 and CIT Vs Adhunik Niryat Ispat Ltd. (2011) 63 DTR 212 and also the Gujarat High Court in the case of CIT Vs Mohmed Juned Dadani (2013) 214 Taxman 38.
With due respect to the view taken in the aforesaid cases, we are unable to persuade ourselves to follow the same.
25. Annexure B-: A paragraph on Page 19 of the Judgement reads as follows
The Punjab & Haryana High Court, in the case of Majinder Singh Kang Vs CIT (2012) CIT 344 ITR 358 has, after noticing that the earlier judgments [of the Punjab & Haryana and Rajasthan High Courts in the cases of CIT Vs Atlas Cycle Industries (1989) 180 ITR 319 and CIT Vs Shri Ram Singh (2008) 306 ITR 343 respectively] were rendered prior to the insertion of Explanation 3 to section 147 of the Act, held that “a plain reading of Explanation 3 to S.147 clearly depicts that the Assessing Officer has power to make additions even on the ground that reassessment notice might not have been issued in the case during the reassessment proceedings, if he arrives at a conclusion that some other income has escaped assessment which comes to his notice during the course of proceedings for reassessment under S.148 of the Act. The provision no where 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 grounds on which the income has escaped assessment”. The same view was reiterated by the Punjab & Haryana High Court in the case of CIT Vs Mehak Finvest Pvt. Ltd. (2014) 367 ITR 769. In the said judgment, it was also noticed that the Special Leave Petition filed against the judgment in the case of Majinder Singh (supra) had been dismissed by the Supreme Court.
Circular No.5 of 2010 issued by the Central Board of Direct Taxes (CBDT) after the amendment of 2009, provided for the “Explanatory Notes to the Provisions of Finance (No.2) Act, 2009” by which Explanation 3 to section 147 of the Act had been inserted with effect from 1.4.1989. The relevant paragraph 47 of this Circular is reproduced below:
“47: Clarificatory amendment in respect of reassessment proceeding under S.147.
47.1: The existing provisions of S.147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of S.148 to 153, assess or reassess such income and also any other income chargeable to tax, which has escaped assessment. Further Assessing Officer may also assess or reassess such other income which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section. Assessing Officer is required to record the reasons for reopening the assessment before issuing notice under S.148 with a view to reassess the income of assessee.
47.2: Some courts have held that the Assessing Officer has to restrict the reassessment proceedings only to the reasons recorded for reopening of the assessment and he is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent.
47.3: Therefore, to articulate the legislative intention clearly Explanation 3 has been inserted in S.147 to provide that the Assessing Officer may examine, assess or reassess any issue relevant to income which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub-section (2) of S.148.
47.4: Applicability – This amendment has been made applicable with retrospective effect from 1st April, 1989 and will apply accordingly in relation to assessment year 1989-90 and subsequent years.”
Insertion of ‘Explanation’ in a section of an Act is for a different purpose than insertion of a ‘Proviso’. ‘Explanation’ gives a reason or justification and explains the contents of the main section, whereas ‘Proviso’ puts a condition on the contents of the main section or qualifies the same. ‘Proviso’ is generally intended to restrain the enacting clause, whereas ‘Explanation’ explains or clarifies the main section. Meaning thereby, ‘Proviso’ limits the scope of the enactment as it puts a condition, whereas ‘Explanation’ clarifies the enactment as it explains and is useful for settling a matter or controversy.
Orthodox function of an ‘Explanation’ is to explain the meaning and effect of the main provision. It is different in nature from a ‘Proviso’, as the latter excepts, excludes or restricts, while the former explains or clarifies and does not restrict the operation of the main provision. It is true that an ‘Explanation’ may not enlarge the scope of the section but it also does not restrict the operation of the main provision. Its purpose is to clear the cob-webs which may make the meaning of the main provision blurred. Ordinarily, the purpose of insertion of an ‘Explanation’ to a section is not to limit the scope of the main provision but to explain or clarify and to clear the doubt or ambiguity in it.
Explanation is also different from Rules framed under an Act. Rules are for effective implementation of the Act whereas Explanation only explains the provision of the Section. Rules cannot go beyond or against the provision of the Act as it is framed under the Act and if there is any contradiction, the Act will prevail over the Rules. Same is not the position vis-à-vis the Section and its Explanation. The latter, by its very name, is intended to explain the provision of the Section, hence there can be no contradiction. Section has to be understood and read hand-in hand with the Explanation, which is only to support the main provision, like an example does to explain any situation.
In the present case, insertion of Explanation 3 to section 147 does not in any manner override the main section and has been added with no other purpose than to explain or clarify the main section so as to also bring in ‘any other income’ (of the second part of section 147) within the ambit of tax, which may have escaped assessment, and comes to the notice of the Assessing Officer subsequently during the course of the proceedings. Circular 5 of 2010 issued by the CBDT (already reproduced above) also makes this position clear. In our view, 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. If there is ambiguity in the main provision of the enactment, it can be clarified by insertion of an Explanation to the said section of the Act. Same has been done in the present case. Section 147 of the Act was interpreted differently by different High Courts, i.e., whether the second part of the section was independent of the first part, or not. To clarify the same, Explanation 3 was inserted by which it has been clarified that the Assessing Officer can assess the income in respect of any issue which has escaped assessment and also ‘any other income’ (of the second part of section 147) which comes to his notice subsequently during the course of the proceedings under the section. After the insertion of Explanation 3 to section 147 it is clear that the use of the phrase “and also” between the first and the second parts of the section is not conjunctive and assessment of ‘any other income’ (of the second part) can be made independent of the first part (relating to ‘such income’ for which reasons are given in notice under section 148), notwithstanding that the reasons for such issue (‘any other income’) have not been given in the reasons recorded under section 148(2) of the Act. We are thus in agreement with the view taken by the Punjab & Haryana High Court in the cases of Majinder Singh Kang and Mehak Finvest (supra). Considering the provision of section 147 as well as its Explanation 3, and also keeping in view that section 147 is for the benefit of the Revenue and not the assessee and is aimed at garnering the escaped income of the assessee [viz. Sun Engineering (supra)] and also keeping in view that it is the constitutional obligation of every assessee to disclose his total income on which it is to pay tax, we are of the clear opinion that the two parts of section 147 (one relating to ‘such income’ and the other to ‘any other income’) are to be read independently. The phrase ‘such income’ used in the first part of section 147 is with regard to which reasons have been recorded under section 148(2) of the Act, and the phrase ‘any other income’ used in the second part of the section is with regard to where no reasons have been recorded before issuing notice and has come to the notice of the Assessing Officer subsequently during the course of the proceedings, which can be assessed independent of the first part, even when no addition can be made with regard to ‘such income’, but the notice on the basis of which proceedings have commenced, is found to be valid.
( Author CA. Yogesh S. Limaye can be reached at firstname.lastname@example.org)