These would be cases where the return is accepted without scrutiny and no formal assessment is made.9 A perusal of the provisions clearly shows that two conditions must be satisfied before its application namely: (1) The return of income must have been furnished by the assessee; and (2) It is shown that in the return so furnished, the assessee has either understated the income or has claimed excessive loss, deduction, allowance or relief.
Reassessment u/s 147 After Issuance of Intimation u/s 143(1) тАУ An Analysis of Conflicting Decisions – Taxmann
 Sanjay BansalSenior Advocate, High Court of Punjab & Haryana, Chandigarh Amit ParsadAdvocate, High Court of Punjab & Haryana, Chandigarh |
| Exordium:There is a sharp cleavage of opinion amongst various High Court’s on the question as to whether action can be taken under Section 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’) in a case where return has been processed under Section 143(1) of the Act on basis of material which is available in return or along with return with the Assessing Officer, and interestingly the Hon’ble Supreme Court by non-speaking Order has dismissed the special leave petition under Article 136 of the Constitution of India of the Department as well as that of the assessee against the respective judgments of the High Court’s passed against them, in the background of which the aforesaid question being open for debate assumes significance and importance.Relevant statutory provisions:The relevant provisions of Section 147 of the Act which come into play for considering the aforesaid issue in question may be noticed. The same reads as under:”147. 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 sections 148 to 153, assess or reassesssuch 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 under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) . . .Explanation 2.тАФFor the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:тАФ (a). ******(b) where a return of income has been furnished by the assessee but no assessment has been made 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;”Scope of “reason to believe”:The power of reassessment conferred on the Assessing Officer by the provisions of Section 147 of the Act is subject to the condition of recording of reasons which must fulfill the parameters of the undefined expression ‘reason to believe’ occurring in Section 147 of the Act interpreted by various Hon’ble High Courts as well as the Hon’ble’ Supreme Court of India in numerous cases. Prior to the introduction of the provisions of Section 147 of the Act w.e.f. 01.04.1989, to confer jurisdiction on the Assessing Officer two conditions were required to be satisfied: firstly, the Assessing Officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment and, secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for assessment of that year. Reopening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in Section 147 of the Act [with effect from 01.04.1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post 01.04.1989, power to reopen is much wider. The Assessing Officer has no power to review; he has the power to reassess. After 01.04.1989, Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment and the reasons must have a live link with the formation of the belief as pointed out by the Supreme Court in CIT v. Kelvinator of India Ltd.1 However, what deserves to be kept in mind on a bare perusal of the judgment of the Supreme Court that no where it stands mentioned therein that the tangible material on the basis of which reasons are recorded must come in possession of the Assessing Officer either at the stage of pre-assessment or post-assessment and therefore, the only inevitable conclusion would be that power to reopen can be exercised only on basis of tangible material coming into possession at the post-assessment stage otherwise reopening on the basis of tangible material available at the time of assessment stage if made the basis for reopening the assessment would tantamount to review not permitted in terms of the aforesaid judgment of the Supreme Court. The eco of the said principle stood highlighted in the case of ITO v. Lakhmani Mewal Das2 wherein it has been observed:”. . .the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words “definite information” which were there in section 34 of the Act of 1922, at one time before its amendment in 1948, are not there in section 147 of the Act of 1961, would not lead to the conclusion that action can now be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. The powers of the Income-tax Officer to reopen assessment, though wide, are not plenary. The words of the statute are “reason to believe” and not “reason to suspect”. The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings.” (Emphasis Supplied)The finality of an “assessment” cannot be disturbed by dispensing the requirement of “reason to believe”. An assessment proceeding is a quasi-judicial proceeding. Assessment precedes reassessment proceedings and reassessment proceedings can be initiated only on the formation of belief having a direct nexus or live link between the material subsequently coming to the notice of the Assessing Officer and the formation of belief regarding escapement of income after the assessment had been framed. Hitherto3, the judgments laying down the aforesaid principle with regard to reopening of the assessment on the basis of material coming in possession of the Assessing Officer having a direct nexus with the formation of belief and the judgments surfacing thereafter including the judgment in the case of Kelvinator of India Ltd. (supra) were with regard to the concluded assessment proceedings under Section 143(3) of the Act which were subsequently sought to be reopened on the ground of escapement of income. Reopening prior to Direct Tax Laws (Amendment) Act, 1987 could be done under Section 147 upon fulfillment of two conditions stipulated there under namely, by clause (a) and clause (b), but in Section 147 of the Act w.e.f. 01.04.1989 they were given a go-by and only one condition remained viz., that where the Assessing Officer has reason to believe that income has escaped assessment, the Assessing Officer would be well within its power to reopen the assessment. In Kalyanji Mavji & Co. v. CIT4, which was a case where the Assessing Officer had reopened the assessment under the provisions of Section 147 of the Act existing prior to 01.04.1989, the Supreme Court had emphasized that in following category of cases the Assessing Officer would have complete jurisdiction to reopen the original assessment тАУ (1) Where the information is as to the true and correct state of the law derived from relevant judicial decisions; (2) Where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income Tax Officer, This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; (3) Where the information derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; and (4) Where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law. A three Judges Bench in the case of Indian & Eastern Newspaper Society v. CIT5, while reversing the preposition (2) laid down in Kalyanji Mavji & Co’s case (supra) held:”Now, in the case before us, the ITO had, when he made the original assessment, considered the provisions of sections 9 and 10. Any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. The revenue contends that it is open to him to do so, and on that basis to reopen the assessment under section 147(b). Reliance is placed on Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC) where a Bench of two learned Judges of this Court, observed that a case where income had escaped assessment due to the ‘oversight, inadvertence or mistake’ of the ITO must fall within section 34(1)(b) of the Indian Income-tax Act, 1922. It appears to us, with respect, that the proposition is stated too widely and travels further than the statute warrants insofar as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power…’.” (p. 1004)Thus, noticeably proposition no. (2) has been held to be too wide by the Supreme Court in Indian & Eastern Newspaper Society’s case (supra). However, there is nothing in that judgment by way of disapproval of other propositions more particularly proposition no. (4), therefore, the same continues to hold the field, as pointed out by the Hon’ble Supreme Court subsequently in the case of A.L.A. Firm v. CIT6. Thus, even after the amending Act of 1987, the Assessing Officer would have complete jurisdiction to reopen the assessment on the basis of information much less any relevant material derived from any external or internal source coming in possession of the Assessing Officer either in law or on facts thereby constituting reason to believe.Scope of Explanation 2(b) to Section 147:An Intimation issued under Section 143(1) of the Act cannot be equated to an “assessment”7, in view of the scheme for acceptance of the claim of the assessee by an Intimation under Section 143(1) of the Act and/or framing of assessment by an assessment Order under Section 143(3) of the Act. The Legislature keeping in mind the distinction between an ‘assessment’ and an ‘intimation’ for the purposes of Section 147 of the Act, by the amending Act of 19878 introduced Explanation 2 consisting of various sub-clauses providing there under category of deemed cases where income chargeable to tax has escaped assessment. One of the important clause of Explanation 2 is clause (b) deals with cases where no assessment is made and the Assessing Officer notices that the income is understated or excessive loss, deduction, allowance or relief is claimed in the return. These would be cases where the return is accepted without scrutiny and no formal assessment is made.9 A perusal of the provisions clearly shows that two conditions must be satisfied before its application namely: (1) The return of income must have been furnished by the assessee; and (2) It is shown that in the return so furnished, the assessee has either understated the income or has claimed excessive loss, deduction, allowance or relief. The Legislature has used the word “and” in between the two conditions. That means that none of the conditions can be ignored so in order to demonstrate that both the conditions are satisfied, the Assessing Officer must state in the reasons recorded that both these conditions are fulfilled. The reason is obvious. Explanation 2 is only an aid to the interpretation of the words “escaped assessment” in the main provisions of Section 147 of the Act which says that Assessing Officer must have ‘reasons to believe’ that the income has escaped assessment. Section 148(2) of the Act says that such reason should be recorded prior to the issue of notice. So, it is incumbent upon the Assessing Officer to record such reasons to demonstrate that the conditions provided by the legislature in clause (b) of Explanation 2 were satisfied before issuing the notice.10 There are many reasons and effects of an Explanation. Firstly, in view of the settled rules of interpretation when the Explanation is added towards the end of the Section and the Explanation opens with the words “for the purposes of this Section” it will prima facie indicate that Explanation applies to all the clauses in the Section.11 Secondly, an Explanation, normally, should be so read as to harmonise with and clear up any ambiguity in the main Section and should not be so construed as to widen the ambit of this Section.12 Thirdly, an Explanation is at times appended to a Section to explain the meaning of words contained in the Section.13 Fourthly, an Explanation may be added to include something within or to exclude something from the ambit of the main enactment or the connotation of some words occurring in it.14At this stage it would be useful to make a reference to the judgments rendered by the Supreme Court in cases deciding the question of validity of the reopening of assessment after an Intimation has been issued under Section 143(1) of the Act though without there being any reference to the Explanation 2(b) to Section 147 of the Act. One of such cases being the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) where while upholding the action for initiation of reassessment proceedings on the basis of audit objection pursuant to the Intimation having been issued under Section 143(1) of the Act, the Supreme Court held that:”Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusionтАж The scope and effect of section 147 as substituted with effect from 01.04.1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147тАж 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. (Emphasis supplied)Thus, according to the judgment of the Supreme Court the necessary ingredient of Section 147 of the Act that there should be reason to believe i.e., cause or justification for reopening pursuant to the Intimation issued under Section 143(1) of the Act. The Supreme Court did not curtail the action of the Assessing Officer to reopen the assessment pursuant to Intimation issued under Section 143(1) of the Act only to cases where tangible material had come in possession of the Assessing Officer after the issuance of Intimation. Thus, the formation of belief that income chargeable to tax has escaped assessment constituting reason to believe could be based on tangible material available by way of the information from the record i.e, original return of income and/or material available from an investigation of the materials already on the record, or the facts disclosed thereby or from other enquiry or research into facts or law. In other words the finality to the Intimation issued under Section 143(1) of the Act could be disturbed by the Assessing Officer by invoking the provisions of Section 147 of the Act on the basis of tangible material coming into the possession of the Assessing Officer subsequent to the issue of Intimation and/or material already on record at the time of issuance of Intimation provided such material constituted reason to believe. For reassessment proceedings under Section 147 of the Act, the statute does not require that the information/material must necessarily be extraneous to the record. The Supreme Court pursuant to its judgment in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) reiterated its view in Dy. CIT v. Zuari Estate Development & Investment Co. Ltd.15 by observing that there being no assessment under Section 143(1) of the Act, question of change of opinion, does not arise and, reassessment can be made.Divergent views expressed by various High Courts:The ball of controversy was set rolling by the Hon’ble High Court of Delhi in the case of CIT v. Orient Craft Ltd.16 where pursuant to Intimation having been issued under Section 143(1) of the Act assessment was reopened by the Assessing Officer on the basis of the information available with the return showing that deduction had wrongly be allowed, the Hon’ble High Court took the view that the reopening of assessment was a review of the earlier proceedings in the absence of any whisper in the reasons recorded of any tangible material which came to the possession of the Assessing Officer subsequent to the issue of the Intimation, thereby reflecting an arbitrary exercise of power conferred under Section 147 of the Act and therefore, the initiation of the assessment proceedings was bad in law. The Hon’ble High Court did not consider the effect of the Explanation 2(b) to Section 147 of the Act including the principle of law17 that for reassessment proceedings under Section 147 of the Act, the statute does not require that the information/material must necessarily be extraneous to the record; and Intimation not being a assessment, therefore, there being no application of mind much less any opinion having been formed at the stage of issuance of Intimation, the material on record would be good tangible material for formation of belief constituting reason to believe thereby conferring power on the Assessing Officer to exercise the power of reassessment both in law as well as on facts under Section 147 of the Act. Interestingly, special leave petition preferred by the Department/Revenue under Article 136 of the Constitution against the judgment of the High Court of Delhi in Orient Craft Ltd.’s case (supra) stands dismissed18 by a non-speaking Order. The doctrine of merger as a result of dismissal of the appeal of the Department/Revenue would not be attracted of course in view of the Judgment of the Supreme Court in the case of Kunhayammed v. State of Kerala19. The same Division Bench deciding the case of Orient Craft Ltd. (supra) reiterated its view in Mohan Gupta (HUF) v. CIT20, despite the fact that earlier to the decision rendered in the case of Orient Craft Ltd. (supra), a Full Bench of the same High Court in CIT v. Usha International Ltd.21 had held that reassessment proceedings can be validly initiated in case return of income is processed under Section 143(1) of the Act and no scrutiny assessment having been undertaken therefore, in such cases there is no change of opinion, although special leave petition preferred by the assessee against the decision of the Full Bench, under Article 136 of the Constitution of India is pending adjudication, after leave having been granted by the Hon’ble Supreme Court.22 Justice R. V. Eashwar (as his lordships then was) was a party to the Full Bench and despite that took a contrary view in the case of Orient Craft Ltd. (supra). Surprisingly, the view of the Full Bench is not noticed in the case of Orient Craft Ltd. (supra). Thereafter, another Division Bench of the High Court of Delhi in the case of Pr. CIT v. Tupperware India (P.) Ltd.23 took the same view taken in the case of Orient Craft Ltd. (supra) by following the same. No special leave petition was preferred by the Department/Revenue against the judgment in the case of Tupperware India (P.) Ltd. (supra) also before the Hon’ble Supreme Court under Article 136 of the Constitution of India. However, a Division Bench of the Hon’ble High Court of Delhi in the case of Indu Lata Rangwala v. Dy. CIT24 took a u-turn by taking a view contrary to the view taken earlier in the case of Orient Craft Ltd. (supra) and other cases instead of referring the matter to a larger Bench in view of the various decisions of the Supreme Court holding that the pronouncement/decision by Division Bench is binding on another Division Bench25 in view of the principle of judicial discipline. Be that as it may, consequent to the decision rendered in Indu Lata Rangwala case (supra) by the Hon’ble High Court of Delhi, the High Court of Madras26 had concurred with the view expressed in Orient Craft Ltd. (supra) whereas the High Court of Bombay27 and Gujarat28 have expressed a contrary view to that taken in Orient Craft Ltd. (supra) thereby siding with the decision of the coordinate Bench in Indu Lata Rangwala case (supra). Against the view expressed by one of the Benches of the Hon’ble High Court of Gujarat in the case of Krishna Developers & Co. v. Dy. CIT [2017] 84 taxmann.com 166/[2018] 400 ITR 260 concurring with the judgment of the Hon’ble High Court of Delhi in the case of Indu Lata Rangwala (supra), special leave petition preferred by the assessee under Article136 of Constitution stands dismissed by the Supreme Court by a non-speaking Order.29 Thus, there is a conflict of opinion betwixt various benches of the Hon’ble High Court of Delhi, Bombay, Madras and Gujarat in the absence of any judgment of the Supreme Court on the issue more so when the appeal is pending adjudication before the Hon’ble Supreme Court in Usha International Ltd.’s case (supra). With the dismissal of the special leave petition against the judgment of High Court of Delhi and Gujarat by a non-speaking Order under Article 136 of the Constitution of India by the Supreme Court, the issue continues to be an open and debatable one, more so when the judgment of the Supreme Court in Rajesh Jhaveri Stock Brokers (P.) Ltd.’s case (supra) is not an authority for the proposition that it is necessary after the issuance of Intimation under Section 143(1) of the Act fresh tangible material must come into possession of the Assessing Officer for reopening the assessment and/or in the absence thereof, the reopening would be bad in law reflecting an arbitrary exercise of power under Section 147 of the Act.Epilogue:Thus, in case of mere processing of return under Section 143(1) of the Act action for reopening under Section 147 of the Act can be initiated even on basis of material available with the Assessing Officer in the return filed by the assessee; and the requirement of new material or fresh information or tangible material coming in possession of the Assessing Officer as a pre-condition for reassessment is applicable only where Assessing Officer has made an assessment under Section 143(3) of the Act, absence of which fresh tangible material would result in change of opinion. The principle of change of opinion is not applicable in case where a return have only been processed under Section 143(1) of the Act and proceedings under Section 147 of the Act have been initiated after the issuance of Intimation. Section 147 of the Act has used both the words ‘assess’ or ‘reassess’. Under Section 143(1) of the Act no assessment takes place as only an Intimation is issued after the return is processed by the computer and not by the Assessing Officer. This means that in view of the provisions of Section 147 of the Act which uses the two aforesaid words i.e., assess or reassess, the Assessing Officer has the power to make an assessment when earlier no assessment under Section 143(1) of the Act is made and it subsequently transpires after the issuance of Intimation that there is escapement of income. The provision of Section 147 of the Act cannot be read in a manner that they can be applied only in cases where assessment stands framed and, therefore, on the basis of the material available in the return or along with the return already on record, the Assessing Officer has the power to initiate reassessment proceedings in case where income has escaped assessment at the time of the issuance of Intimation under Section 143(1) of the Act in view of Explanation 2(b) which was inserted by Direct Tax Laws (Amendment) Act, 1987 to cover the cases where no assessment had been framed and/or in other words deemed to be cases where income chargeable to tax has escaped assessment. Moreover, the provisions of Section 147 of the Act only provides for fulfillment of one condition namely, ‘reason to believe’ that income chargeable to tax has escaped assessment. It does not contemplate that ‘reason to believe’ must be in consequence of information coming into the possession of the Assessing Officer after the finalization of proceeding under Section 143(1) of the Act and therefore, for initiating action under Section 147 of the Act pursuant to the Intimation issued under Section 143(1) of the Act, the ‘reason to believe’ i.e., cause or justification could be based on tangible material available with the Assessing Officer on the basis of return filed by the assessee or from any other external source. The view expressed by the High Court of Delhi in the case of Orient Craft Ltd. (supra) and view of the other High Courts on the same line is not a correct one. It is on account of tensile strength of the judgments taking a view contrary to the view expressed in Orient Craft Ltd. (supra), in view of the provisions of Section 147 of the Act read with Explanation 2(b) including the settled principles underlying the judgments of the Supreme Court rendered prior to Amending Act of 1987 and thereafter, may ultimately be sustained but till then the controversy on the question still remains especially when leave stands granted by the Supreme Court under Article 136 of the Constitution against the judgment rendered by the Full Bench of the High Court of Delhi in the case of Usha International Ltd. (supra). With utmost respect in fact the Hon’ble Division Bench deciding the case of Orient Craft Ltd. (supra) should have refrained from taking a contrary view which stood expressed by the Full Bench prior thereto on the question in view of the firm principle of law governing the judicial decorum30 no less than legal propriety forming the basis of judicial procedure cum practice and as also laid down by the Hon’ble High Court’s in various cases holding that Income Tax Act being an All India Statute, uniformity in the construction of its statutory provisions by the various High Courts is eminently desirable.31тЦатЦа |
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