The views expressed herein are personal to the writer and do not necessarily represent the views of the Bar Association.

CA Vidhan Surana & CA Sunil Maloo

S. 147: A Treatise On The Law Of Reopening Of Assessments

CA Vidhan Surana & CA Sunil Maloo

S. 147 confers wide powers on the AO to reopen completed assessments and bring to tax income which has escaped assessment. However, there are several technical rules that have to complied with by the AO. The authors have carefully studied the entire law on the subject and presented it in a clear and succinct manner so that it can be ensured that the reopening is as per the law

 

 

The assessing officer is empowered under section 147 of the Income Tax Act, 1961 to assess or reassess the income escaping assessment. This is popularly known as ‘reopening of the assessment’.

 

In following cases, it would be deemed that income chargeable to tax has escaped assessment:

 

- Where no return is furnished for the relevant A.Y.

- Where return has been furnished but assessment is not done and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

- where the Assessee has failed to furnish a report in respect of any international transaction which he was so required under  section 92E

- where an assessment has been made, but—

- income chargeable to tax has been underassessed ; or

- such income has been assessed at too low a rate ; or

- such income has been made subject of excessive relief under this Act ; or

- excessive loss or depreciation allowance or any other allowance under this Act has been computed.

 


 

1. Reason to believe vs. Reason to suspect:

 

For making reassessment under section 147 of the Act, AO must have REASONS TO BELIEVE that any income chargeable to tax has escaped assessment. The expression used in this section is ‘reason to believe’, which are quite different from the phrase ‘reason to suspect’.

 

‘Reason to believe’ has been the matter of judicial scrutiny by the Apex Court in several cases. In the case of Calcutta Discount Co. Ltd. v. ITO 41 ITR 191 (SC), it was observed that it is the duty of the assessee to disclose all the primary facts which have a bearing on the liability of the income earned by the assessee being subjected to tax. It is for the Assessing Officer to draw inferences from the facts and apply the law determining the liability of the assessee. The assessee cannot draw the conclusions drawn by the Assessing Officer and once the conclusion is drawn and the assessment order framed, the Assessing Officer cannot at a later point of time form a different opinion by giving a second thought to the facts disclosed by the assessee, holding that he committed an error in computing taxable income and reopen the assessment under section 147.

 

Discovery of new and important matters or knowledge of fresh facts which were not present at the time of original assessment would constitute a ‘reason to believe that income had escaped assessment’ within the meaning of section 147. Similar view has been taken by the apex court in the following cases :—

 

(iPhool Chand Bajrang Lal v. ITO 203 ITR 456, 477;

 

(iiALA Firm v. CIT 189 ITR 285, 298;

 

(iiiIndian and Eastern Newspaper Society v. CIT 119 ITR 996, 1004; and

 

(ivITO v. Lakhmani Mewal Das 103 ITR 437, 445.

 

2. Reopening based on change of opinion:

 

However, merely change of opinion in the mind of AO on interpretation of law cannot be basis for forming ‘reason to believe’. Section 147 does not empower the Assessing Officer to review on the same set of facts the assessment order which had already been framed merely by fresh application of mind to its own decision or to the decision of predecessor.

 

Fresh application of mind by the Assessing Officer on similar facts would tantamount to review of own decision. Amended section 147 does not authorize the Assessing Officer to reopen assessment under the garb of ‘reason to believe’ to review its own decision. If Assessing Officer does not bring any fresh/new material on record and neither receives any fresh information, then this would be a case of absence of jurisdiction on the part of the Assessing Officer to militate proceedings under section 147/148 and in the absence of jurisdiction, reassessment framed would be illegal and void.

 

Reopening of an assessment completed under section 143(3) of the Act is not permissible merely on the basis of new opinion formed on the same material which happened to be the material of Sec 143(3) assessment. Similar view is taken in the case of DCIT V. SMITHKLINE BEECHAM CONSUMER BRANDS LTD., ITAT CHD. [2003] 126 TAXMAN 104 (CHD.)(MAG).

 

If on perusal of the reasons recorded by the AO for initiating reassessment proceedings clearly shows that on the very same material which was available while completing the assessment under section 143(3) of the Act he had on a mere change of opinion issued notice for reassessment. It is not permissible for the AO to resort to proceedings under section 147 merely on change of opinion.

 

The Apex court, in the case of CIT vs. KELVINATOR OF INDIA LTD., reported in 320 ITR 561, on judicial scrutiny of the term “change of opinion” held as under

 

Reassessment—Reason to believe—Change of opinion—After 1st April, 1989, power to reopen is much wider—However, mere "change of opinion" cannot per se be reason to reopen—AO has power to reassess but no power to review—If the concept of "change of opinion" is removed, as contended on behalf of the Department, review would take place in the grab of reopening of assessment—Concept of "change of opinion" is an in-built test to check abuse of power by the AO—Hence, after 1st April, 1989 AO has power to reopen the assessment under s. 147 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

 

Thus, the AO must have some sort of tangible material to establish that he has ‘reason to believe’ that the income chargeable to tax has escaped assessment.

 

However, at this juncture it is important to note that in the case of Asst. CIT Vs. Rajesh Jhaveri Stock Brokers (P.) Ltd, reported in 291 ITR 500 (SC) the Supreme Court held that the passing of an Intimation u/s 143 (1) does not amount to an “assessment” and in the absence of an assessment, there may not be question of “change of opinion”, the Court also held that there must be “reason to believe” i.e. “cause or justification” that income had escaped assessment. The court further held that so long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued.

 

3. Formation of belief has to be of AO’s own

 

The power to reopen the assessment is confined only to the Assessing Officer under the Act, so he is the Supreme Authority for deciding and forming belief as to escapement of income. While forming such belief, Assessing Officer has no authority to surrender or abdicate his function to his superiors, nor superiors can arrogate to themselves such authority. Therefore, if in the independent opinion of AO, there is no escapement but the notice u/s 148 is issued by him as instructed by any superior authority, then the impugned notice has to be quashed. This position of law was cleared by Honorable Gujarat High Court in the case of Adani Exports Vs. DCIT, reported in 240 ITR 224.

 

In another case, the Delhi High Court held that the AO cannot reopen the assessment merely on the basis of information received without applying his mind to the information and forming an opinion. The reasons must show due application of mind to the information. He also cannot reopen merely because he has been directed to do so by a superior officer. (CIT Vs. Sfil Stock Broking Ltd. reported in 325 ITR 285.

 

4. No reassessment can be made on the basis of Tax Audit Report:-

 

In was held in High Court judgment the case of COMMISSIONER OF INCOME TAX Vs MODIPON LTD, reported in 2011-TIOL-355-HC-DEL-IT, that reassessment can not be made on the basis of information contained in the tax audit report furnished by the assessee at the time of assessment, because no new tangible material comes into possession of AO. It was held to be just change of opinion in the mind of the AO and reopening proceedings initiated by the AO was quashed.

 

5. Report of Internal Auditor of Department

 

Reopening on the basis of an opinion formed by the internal auditor of the department, cannot be treated valid because it amounts to change of opinion, as held by Delhi High Court in the case of COMMISSIONER OF INCOME TAX Vs THE SIMBHAOLI SUGAR MILLS LTD, 2011-TIOL-293-HC-DEL-IT.

 

6. Time limitation for reopening:

 

First proviso to section 147 of the Act lays down an exception whereby the AO is not permitted to exercise his jurisdiction in reopening the assessment beyond a period of four years from the end of the relevant assessment year.

 

Once the exception carved out by proviso to s. 147 comes into play, the case would fall outside the ambit of s. 147. As per proviso to s. 147, no action under this section can be taken after expiry of four years from the end of the relevant assessment year, unless inter alia, income chargeable to tax had escaped assessment by reason of failure of the assessee to make full and true disclosure of all material facts necessary for assessment.

 

In case, there being no whisper in the reasons supplied to assessee that income escaped assessment by reason of assessee’s failure to make a full and true disclosure of all material facts necessary for assessment, notice under s. 148 issued beyond four years from the end of relevant assessment year was barred by limitation under proviso to s. 147, hence without jurisdiction.

 

If either of these conditions is not fulfilled the notice is without jurisdiction. If the notice issued u/s 148 fails to satisfy either of the conditions, it deserves to be quashed.

 

However, the officers have many time issued notices for reopening the assessments even beyond four years from the end of the assessment year without fulfillment of any of the legal conditions as stipulated in the first proviso to this section. Such an action of the revenue authorities is strictly challenged by the taxpayers at large in the court of law.  

 

This has been a subject matter of scrutiny by various courts including ITAT’s, High Courts and Apex court as well. We are considering here only the law laid down by the High Courts and the Supreme Court. Many High Courts have held the issue in favour of the assessee’s. Some of the citations are as under:

 

Sr. No.

 

Citation

 

Sr. No.

 

Citation

 

1

 

[2010] 192 TAXMAN 137 (BOM.)

 

12

 

9 taxmann.com 290 (Delhi)

 

2

 

(2008) 12 DTR (Guj) 270

 

13

 

[2011] 9 taxmann.com 237 (Bom.)

 

3

 

(2008) 307 ITR 271 Gujarat

 

14

 

[2010] 192 TAXMAN 178 (BOM.)

 

4

 

(2009) 309 ITR 45 Gujarat

 

15

 

[2010] 327 ITR 272 (BOM.)

 

5

 

[2003] 129 TAXMAN 971 (CAL.)

 

16

 

[2010] 233 CTR 573(GUJ.)

 

6

 

[2010] 229 CTR 160 (BOM.)

 

17

 

[2010] 190 TAXMAN 279 (BOM.)

 

7

 

2010-TIOL-17-HC-AHM-IT

 

18

 

[2010] 323 ITR 564 (BOM.)

 

8

 

(2010) 186 TAXMAN 360 Delhi HC

 

19

 

[2010] 229 CTR 167 (DELHI)

 

9

 

2010-TIOL-253-HC-AHM-IT

 

20

 

251 ITR 416 (BOM.)

 

10

 

(2009) 308 ITR 38, Delhi HC

 

21

 

2010-TIOL-590-HC-DEL-IT

 

11

 

(2009) 182 TAXMAN 216, Bombay HC

 

22

 

2007-TIOL-383-HC-MAD-IT

 

The department in some of the case, has filed the SLP in the Supreme Court challenging the High Court rulings in the matter. On which, the finding of the Apex Court is summarized as under:

 

Sr. No.

 

Name of the case

 

Citation / date

 

Remarks

 

1

 

CIT v. Foramer France

 

[2003] 129 TAXMAN 72 (SC)

 

No reopening beyond four years unless conditions laid down in first proviso are fulfilled

 

2

 

THE UNION OF INDIA & ANR. VS. MULTISCREEN MEDIA PVT.LTD.

 

16/12/2010

 

SLP filed by department dismissed

 

3

 

DCIT(OSD)CIRCLE-8 & ANR VS. SADBHAV ENG.LTD.

 

2/5/2011

 

SLP filed by department dismissed

 

Thus the conditions which are prescribed by the statute for the

 

exercise of such an exceptional power must be strictly fulfilled and in their absence, the exercise of power would not be sustainable in law.

 

7. Reopening of assessment beyond four years based on Supreme Court Decision:-

 

Reopening of assessment on basis of Apex Court decision after expiry of four years from relevant assessment year was not justified merely because Apex Court pronounced law to be otherwise than on date of filing of return of income when assessee made a claim for deduction. Such claim of the assessee could be termed to be neither lacking in material particulars nor could be termed to be untrue so as to justify reopening of assessment on basis of Apex Court decision after expiry of four years from relevant assessment year.

 

The judgment rendered by the Supreme Court is an expression of opinion on the interpretation of statute. The power under section 147 will have to be invoked by the Assessing Officer in accordance with the said provision. Merely because a judgment has been rendered, the same cannot be a ground for reopening the assessment under section 147. Where the material facts were fully disclosed and the assessment was completed allowing deduction under section 80HHC on export incentive, such an assessment cannot be reopened based upon a subsequent decision of the Supreme Court.

 

Therefore for reopening of the assessment, the precontions laid down in the first proviso to section 147 has to be fulfilled. This issued was decided by the courts in following cases:-

- Austin Engineering Co. Ltd. Vs, JCIT [2009] 312 ITR 70 (GUJ.)

- CIT Vs. Baer Shoes (India) (P) Ltd. [2010] 235 CTR 194(MAD.)

 

8. PRINCIPLE OF PARTIAL MERGER:

 

The principle of partial merger is applicable to the reassessment proceedings under section 147 of the Act. The second proviso to the said section provides that the Assessing Officer may NOT assess or reassess income, involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Such matters are left for decisions by above mentioned higher authorities only.

 

9. ONCE REOPENED, THEN REOPENED FOR ALL COUNTS:

 

Some of the Courts have held that the Assessing Officer has to restrict the reassessment proceedings only to issues in respect of which reasons have been recorded for reopening the assessment, and that it is not open to him to touch upon any other issue for which no reasons have been recorded.

 

This interpretation was regarded by the Parliament as being contrary to the legislative intent. Hence, the Explanation 3 came to be inserted to provide that the Assessing Officer may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under section 147, though the reasons for such issue have not been included in the reasons recorded in the notice under section 148(2).

 

Recently the Bombay High Court, in the case of Commissioner of Income-tax-5, Mumbai v. Jet Airways (I) Ltd., reported in (2011) 331 ITR 236 (Bom), have made an in depth interpretation of the language used in the main provision of section 147(1) of the Act and newly inserted Explanation-3 to this section w.r.e.f. 01/04/1989 with a view to make the same in line with the legislative intent.

 

The Bombay High Court held that, if after issuing a notice under section 148, the Assessing Officer accepts contention of assessee and holds that income, for which he had initially formed a reason to believe that it had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to independently assess some other income.

 

Similar view is taken by the Delhi High Court in the case of RANBAXY LABORATORIES LIMITED Vs COMMISSIONER OF INCOME TAX, reported in 2011-TIOL-356-HC-DEL-IT holding that there must be some nexus between ‘reasons to believe’ recorded and the assessment framed. In this case also, the AO had not made any addition on the basis of reasons recorded and tried to reduce other valid claim of the assessee allowed during assessment u/s 143(3) of the Act.

 

10. Notice to be served or issued?

 

Section 148(1) of the Income Tax Act, 1961 provides that before making any assessment or reassessment under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to file a return of his income under this Act for the relevant assessment year.

 

Further, section 149(1) of the Act, requires that no notice under section 148 shall be issued for the relevant assessment year after elapsing of four / or six years as the case may be. Now the legal question arises that whether the notice u/s 148 has to be issued or served to the assessee within the time limit specified in section 149(1)?

 

Above question of law has been a matter of scrutiny by the Gujarat High Court in the case of KANUBHAI M PATEL HUF, reported in 2010-TIOL-531-HC-AHM-IT. The Hon’ble High Court held as under:

 

16. Thus, the expression to issue in the context of issuance of notices, writs and process, has been attributed the meaning, to send out; to place in the hands of the proper officer for service. The expression "shall be issued" as used in section 149 would therefore have to be read in the aforesaid context. In the present case, the impugned notices have been signed on 31.03.2010, whereas the same were sent to the speed post centre for booking only on 07.04.2010. Considering the definition of the word issue, it is apparent that merely signing the notices on 31.03.2010, cannot be equated with issuance of notice as contemplated under section 149 of the Act. The date of issue would be the date on which the same were handed over for service to the proper officer, which in the facts of the present case would be the date on which the said notices were actually handed over to the post office for the purpose of booking for the purpose of effecting service on the petitioners. Till the point of time the envelopes are properly stamped with adequate value of postal stamps, it cannot be stated that the process of issue is complete. In the facts of the present case, the impugned notices having been sent for booking to the Speed Post Centre only on 07.04.2010, the date of issue of the said notices would be 07.04.2010 and not 31.03.2010, as contended on behalf of the revenue. In the circumstances, impugned the notices under section 148 in relation to assessment year 2003-04, having been issued on 07.04.2010 which is clearly beyond the period of six years from the end of the relevant assessment year, are clearly barred by limitation and as such, cannot be sustained.

 

Thus the term issue in not confined to mean merely signing of the notice, rather the process of ‘issue’ is said to be completed when the said notice is handed over for service to the proper officer.

 

11. Assessee’s reaction to the notice u/s 148: G K N DRIVESHAFTS (INDIA) LTD

 

The Supreme Court had clarified in the case of GKN DRIVESHAFTS (INDIA) LTD Vs INCOME-TAX OFFICER AND OTHER, that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the notice is to file a return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order, before proceeding with the assessment u/s 147 of the Act.

 

12. Furnishing reasons to Assessee: what is reasonable time?

 

The Supreme Court in the case of GKN DRIVESHAFTS (INDIA) LTD (Supra) had clarified that the Assessing Officer is bound to furnish reasons within a reasonable time. The term ‘reasonable time’ is interpreted by the HIGH COURT OF DELHI, in the case of Haryana Acrylic Manufacturing Co.  v. Commissioner of Income-tax, in following manner:

 

A notice under section 148 without the communication of the reasons therefore is meaningless inasmuch as the Assessing Officer is bound to furnish the reasons within a reasonable time. In a case where the notice has been issued within the said period of six years but the reasons have not been furnished within that period, any proceedings pursuant thereto would be hit by the bar of limitation inasmuch as the issuance of the notice and the communication and furnishing of reasons go HAND-IN-HAND. The expression ‘within a reasonable period of time’ as used by the Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra) cannot be stretched to such an extent that it extends even beyond the six years stipulated in section 149. Then, the validity of the notice under section 148 and any proceedings pursuant thereto could not be upheld.

 

The above decision of Delhi High Court is further followed by ITAT Delhi bench in the case of Shri Balwant Rai Wadhwa Vs. ITO Ward 18 (2), in ITA No. I.T.A No. 4806/Del/10. The ITAT bench held that if reasons are not supplied to the assessee within the period of 6 years then it would be construed that assessment has not been validly reopened.

 

13. Reopening when mistake is tax neutral

 

No reopening is permissible in, by way of taking shelter of any reason recorded by the Assessing officer is the tax effect of that particular reason is NIL. This issue was decided by the ITAT Mumbai bench in the case of  “GIVAUDAN FLAVOURS INDIA PVT LTD Vs. DEPUTY COMMISSIONER OF INCOME TAX, reported in 2011-TIOL-195-ITAT-MUM.” The ITAT Bench held as under:-

 

Where there is a mistake which is tax neutral while computing the income, no reassessment can be initiated as the basic condition of income escaping assessment is not satisfied.

 

The AO recorded reason on the base that unutilised CENVAT/MODVAT on raw material is a part of the profit/ income of the assessee which was directly taken to balance sheet under the head loans and advances and therefore should be considered while computing the taxable income.

 

The ITAT held that reasons recorded regarding CENVAT credit is tax neutral and, unless the condition of satisfaction about income having escaped assessment is satisfied, there cannot be any reopening of assessment. The finding of income having escaped assessment is a precondition for reopening the assessment. Hence, reassessment proceedings deserves to be quashed.

 

14. Reopening: Law Applicable on the date of issue of notice

 

There has been a lot of controversy, regarding the applicable law, according to which the conclusion can be drawn by the AO and reasons to be recorded as to escapement of income for reopening the assessment u/s 147. Following questions has been a matter of discussion by the courts of law:- “escapement on the basis of law prevailing on the date of”-

 

- filing of return of Income;

- issuance of notice of 148 by the AO;

- passing of the order of reassessment u/s 147 of the Act.

The court ruling in the matter is summarized as under:-

 

In was held in the case of RALLIS INDIA LTD, reported in 2010-TIOL-173-HC-MUM-IT, Bombay High Court held that the validity of the notice issued by the Assessing Officer in seeking to reopen the assessment must be determined with reference to the reasons which are found in support of the reopening of the assessment. These reasons cannot be allowed to be supplemented on a basis which was not present to the mind of the Officer and could not have been so present on the date on which the power to reopen the assessment was exercised

 

15. No Reopening WITHIN four years on the basis of any amendment in the law with RETROSPECTIVE EFFECT.

 

Going a step further, many assesses have challenged the jurisdiction of the AO in initiated reopening proceedings on the basis of retrospective amendment in the law. The courts in the following case have held that:-

 

that if an Explanation is added to a section of a statute for the removal of doubts, the implication is that the law was the same from the very beginning and the same is further explained by way of addition of the Explanation . The assessee had disclosed all the materials regarding its activities and there was no suppression of materials. In spite of such disclosure, the Assessing Officer gave benefit of the provision by considering the then Explanation which was substantially the same and, thus, it could not be said that any income escaped assessment in accordance with the then law. The Assessing Officer has now given a second thought over the same materials and according to him, as the assessee is a contractor or supplier of irrigation products, it cannot be called a developer of any new infrastructural facility. From the materials placed before him by the assessee, the Assessing Officer earlier did not arrive at such conclusion and, thus, the amended Explanation subsequently added cannot be of any help to him in arriving at the second opinion based on the alleged new law

 

- Parixit Industries (P.) Ltd. Vs ACIT Gujarat High Court, [2012] 20 taxmann.com 750 (Guj.)

 

- ACIT Vs Parixit Industries (P.) Ltd. SUPREME COURT OF INDIA, SLP Dismissed CC. NO. 15455 OF 2012

 

16. No Reopening BEYOND four years on the basis of any amendment in the law with RETROSPECTIVE EFFECT.

However, the courts have ruled that no reopening can be done beyond a period of four years on the basis of any amendment in the law with RETROSPECTIVE EFFECT.

 

1

 

DENISH INDUSTRIES LTD. vs. INCOME TAX OFFICER

 

(2004) 271 ITR 340 (Guj)

 

2

 

SIL INVESTMENTS LTD

 

[2011] 9 taxmann.com 143 (DELHI)

 

3

 

CIT Vs AASHINI LEASING & FINANCE LIMITED

 

2010-TIOL-661-HC-AHM-IT

 

 

17. Reopening to cover escapement of income u/s 14A:-

 

Proviso to section 14A clearly states that the AO is not empowered to enhance the income of the assessee resorting to reopening u/s 147 or rectification u/s 154 of the Act for any assessment year beginning on or before 01/04/2001.

 

This has been a matter of dispute in many cases, where the AO’s have reopened the assessments for earlier years, recording reasons for escapement of income on account of section 14A. However, this issue has recently got finality on the basis of Supreme Court Judgment in the case of Honda Siel Power Products Ltd vs. DCIT in the judgment dated 29/07/2011. The Apex court have held that the reopening for A.Y. before 2001-02 is justified, upholding the ruling of Delhi High Court.

 

The Delhi High Court has held that the Proviso to section 14A bars reassessment but not original assessment on the basis of the retrospective amendment. Though the ROI was filed before s. 14A was enacted, the assessment order was passed subsequently. The AO ought to have applied s. 14A and his failure has resulted in escapement of income. It is the duty of the assessee to bring to the notice of the AO particular items in the books of account or portions of documents which are relevant. Material facts are those facts which if taken into accounts they would have an adverse affect on assessee by the higher assessment of income than the one actually made.

 

The object and purpose of the Proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases which have attained finality. Thus if the assessment u/s 143(3) has been made before the enactment of provisions of section 14A, then those cases could not be reopened.

 

18. Reopening on the basis of finding of others:-

 

Reopening Based on Opinion of DVO:- Generally the Income Tax Department refers cases of valuation of properties to valuation cell, who many times send a report based on which A.O initiates proceeding u/s 147 of the Income Tax Act. Many of those actions were subjected to judicial scrutiny and the result is that most courts, including Hon’ble Supreme Court have held that reopening of assessment merely on the basis of opinion of District Valuation Officer’s report is bad is law. The A.O has to apply his mind and only on the basis of some fact, the reopening can be done. The opinion of DVO alone is not suffice for reopening. This was the finding of the Honorable Apex court in the case of Asstt. CIT vs. Dhariya Construction Company reported in 328 ITR 515.

 

19. Whether reason recorded by AO can be supplemented by additional affidavit / orally?

 

Honorable Bombay High Court in the case of Hindustan Lever Ltd. Reported in [2004] 137 TAXMAN 479 (BOM.) has considered this issue in detail and following were the conclusions:-

 

It is needless to mention that 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 based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. 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. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded 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 vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.

 

Conclusion:-

 

The powers of the AO, in this connection are wide but not at all plenary in nature. Therefore, the reasons of the AO for reopening should be based on direct and circumstantial evidence, such reasons could not be based on simply suspicion, rumour or gossip. One side the law empowers the authorities to levy taxes on the income escaping the Assessment, on the other hand, the law as well as the judiciary takes due care of the interest of law abiding taxpayers by restricting the validity of exercise of reopening of cases only if same is within the provisions of the Act.

 

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11 Responses to “S. 147: A Treatise On The Law Of Reopening Of Assessments”

  1. abhishek says:

    good

  2. manoj garg says:

    Very good article. I have a query with regard to 154/155 of I. T Act . Assesse assessed u/s 115WE(3) on 26.5 .2008 for AY 2006-07.AO record shows on the basis of audit objection issued notice u/s 154\155 on 21/2/2012 and assessed FBT on higher value on 9/3/2012. My question is whether AO is authorised. To issue notice on the basis of internal audit object ion for case already assessed under scrutiny.? Kindly throw some light.

  3. INDEED GOOD PIECE OF ARTICLE. TRUE A O HAS POWERS BUT HE NEEDS TO BE VERY CAREFULLY PLAYING WITH LAWS. HE CANNOT WORK ON EVERY SUSPICION HE MAY HARBOR ON, HE HAS TO CAREFULLY HANDLE LAWS AS THE LAWS ARE DOUBLE EDGED. ASSESSEES CANNOT BE LOOKED AT AS THIEVES BUT ACTUALLY THEIR TAX PAYMENTS ONLY HELP RUN THE GOVERNMENT, AS ASSESSEES ARE THE FUND PROVIDERS, SO SRI. TIRUVALLUVAR, A GREAT TAMIL SEER SAYS TAX HAS TO BE LEVIED WITH THE CONSENT OF THE PEOPLE AND NOT ARBITRARILY BY GOVERNING GOVERNMENT. SO JUDICIARY CORRECTLY ACTS VERY WELL THAT IS THE BOON OF INDIA!

  4. Suryam Gumma says:

    Very good Treatise on the subject. Very helpful, Kudos to the writers.

  5. Sunil Maloo says:

    The validity of issuance of notice u/s 154 has nothing to do with the source of such information. However, for issuance of notice u/s 154 there must be some “mistake apparent from the records”. Kindly check – whether there is any mistake apparent from the records in your case?

  6. Harakamal Chakravorty says:

    Good article but discussion on the meaning and scope of the term “escaped” does not appear to heve been touched upon.

  7. Gour chandra Das says:

    A good compilation and the same would serve as a ready reckoner for the tax payers and tax practitioners. However no elaborate comment has been offered in the context of Supreme Court decision in the GKN Drive shaft India. It is the practice of the Assessing officers not to dispose off the objection as directed and go ahead with assessments. This runs contrary to the direction of Supreme Court which is in form of categorical step by step direction. One of direction is that the AO is bound to dispose of the objection by a speaking order before going ahead with assessment. This direction goes to the root of the matter and is of mandatory in nature. Non communication of the order causes prejudice to the assessee as closes door for seeking alternate remedy. In such circumstance will the assessment become bad in law ? It is not a case of mere violation of the principles of natural justice as it appears.Please reply.

  8. Mr. Das, your point is correct but we have not covered this due to GKN Drive Shaft of Supreme Court Judgment applicable once you filed objection for re-opening. merely being the procedural matter. Thanks for advice and comment.

  9. G C Das says:

    Dear sir,
    Thanks for your response. My querry is not answered. What I wanted to know relates to fate of assessment if the objection is not disposed off. Can the AO ignore the objection and go ahead with assessment ? The direction of the Apex court is specific on various steps to be taken. In fact the effective exercise of jurisdiction starts after disposal of objection. Non disposal causes prejudice as it prevents a tax payer to seek alternate remedy. What is the effect of article 141 of the Constitution ? Courts remit back the case to the AO to redo the assessment. Does it amount to following a direction of SC.? Is there any case law of any court rendering such assessments void ? Kindly inform.
    G C Das

  10. CA Sunil Bhatia says:

    In a recent judgement
    Supreme Polypropylene (Pvt. ) Ltd., The Delhi High Court has has observed that
    Reasons recorded for validity of notice of reopening assessment should have live nexus with material on record.
    The material relied upon by the AO for issuing a notice u/s 148 is a part of the assessment record and the non availability of the material on record is a sufficient ground to quash the proceedings.

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