Powers of the AO to re-open assessment u/s 148 are not un-abundant or luxuriant
Section 147 and 148 of Income Tax Act is a well designed weapon for the Income Tax Department empowering it to assess, re-assess or re-compute income, turnover etc. which has escaped assessment. Sec. 147 and Section 148 of the Act contain the pre-requisite conditions to be fulfilled for invoking the jurisdiction to reopen the assessment. Powers of the Assessing Officer to re-open a completed assessment are not un-abundant or luxuriant.
Assessing Officer must have reason
The AO must have reasons to open/ re-open the case u/s 148. The existence of reasons is mandatory. On the basis of such reasons, the AO must form a belief that there is a situation of actual or deemed escapement of Income and therefore action is required u/s 147. The Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment and the circumstances are forming a belief for issuance of the notice u/s 148. AO must record such reasons in writing. No reassessment notice can be served just to make an enquiry or verification. Does it mean that AO is bound to provide the reason for reopening to the assessee? Answer is affirmative. Assessing officer is duty bound to provide the copy of reason recorded within reasonable time as per guidelines of Hon’ble Supreme Court in case of GKN Driveshafts (India) Ltd. v/s D.C.I.T. (2003) 259 ITR 19 (SC).
Reopening of case under for assessment u/s 147 after expiry of 4 years can not be justified unless the income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose all true & material facts necessary for his assessment.
For passing an order under section 147 recording of reasons u/s. 148 and communication thereof to party concern is mandatory. Gujarat Fluorochemicals Ltd Vs. DCIT (2008) 15 DTR (Guj), Nandlal Tejmal Kothari Vs. ACIT (1998) 230 ITR 943 (SC)
Where assessee ask for reasons for reassessment and the same was not furnished to the assessee before completion of assessment, such reassessment is held invalid and it could not be upheld. Moreover, Special Leave Petition filed by revenue against the decision of Bombay High Court in the case of CIY Vs. Fomento Resorts and Hotels Ltd, has been dismissed by Apex Court, vide order dated July 16, 2007. The court dismissed the appeal of the revenue and assessment order was held as not valid. CIT v. Videsh Sanchar Nigam Ltd. (2012) 340 ITR 66 (Bom.)
The Mumbai ITAT followed above decision and quashed the reassessment proceedings in the case of Tata International Ltd. Vs. DCIT
If assessee does not ask for reasons for reassessment/ reopening u/s 148 & object to reopening of the case th ITAT cannot remand to AO & give assessee another opportunity. CIT vs. Safetag International India Pvt Ltd (Delhi High Court)
Notice u/s. 143(2) is Mandatory.
ITAT Mumbai held that the issue of notice u/s. 143 (2) of Income Tax Act 1961, within the time limit is mandatory for assessment proceedings. If notice u/s 143 (2) is issued beyond the time limit, the order passed u/s 158BC or 147 is not valid. Judgment was upheld by the Mumbai High Court. (CIT vs. Mundra Nanvati (2009) 227 CTR 387 Bom.)
Similar citation: CIT Vs. Scindia HUF (Bombay HC), Smt. Bandana Gogoi vs CIT (Gau. HC).
Notice under section 148 cannot be issued for making reassessment, when time limit is available for issue of notice under section 143(2) for making an assessment under section 143(3). CIT vs. TCP Ltd. (2010) 323 ITR 346 / 235 CTR 414 (Mad.)
Time limit for issuance of Notice
AO must issue notice u/s 148 within prescribed time limit. A formal notice must be served upon the assessee. Normally time limit for issue of Notice period is 4 years if the escaped Income less than Rs. 1,00,000/- and the time limit shall be 6 years if the escaped income is Rs. 1,00,000/- or above. But this time limit shall be 16 years if it is related to asset located outside India. But, if there is any specific direction contained in an order passed by the authority in any proceeding under this act by way of appeal/ revision or by a court, in that situation there shall not be any time limit i.e. the time limit shall be indefinite period.
It means reassessment proceeding can be initiated only for maximum last 6 re-assessment year. If the year involved is beyond the 6 years, re-assessment proceeding cannot be initiate. However, the time limit will be 4 years only if assessment has already been made and where assessee has not failed to file a return of income u/s 139 or 142(1) or has not failed to disclose fully and truly all material facts necessary for the assessment for that assessment year.
When issue is subject matter of an appeal which is pending:
When appeal on original assessment order is pending, reassessment cannot be done as the original order is merged with order of higher authorities.
In Chika Overseas (P) Ltd, it was held that when appeal was pending before ITAT and the matter was subject matter of appeal before CIT(A), no reassessment proceedings can be initiated. Once an issue is subject matter of appeal before Tribunal, issuance of notice of reassessment on said ground has to be considered bad in law. Chika Overseas (P) Ltd v ITO (2011) 131 ITD 471 (Mum) (Tribunal)
Similarly, in case of Metro Auto Corporation, Bombay HC relied upon a decision given in case of Ador Technopack Ltd. Vs. DCIT, to the effect that during the pendency of any appeal proceedings the assessment could not be treated as final. Hence, notice can not be issued u/s 148 as the proceedings are yet pending and it results in non completion of earlier proceedings / assessment in toto. Metro Auto Corporation vs. ITO (2006) 286 ITR 618, Bombay HC
Similar citation: Vodafone Essar Gujarat Ltd. Vs. ACIT (2010) 37 DTR 259 (Guj. HC)
Previous disclosure was full and true: - Reassessment held to be invalid.
Where subject matter is a matter which is fully disclosed and partly allowed previously by the AO and on subsequent appeal party allowed by the CIT(A) therefore reopening of assessment on ground of escapement of income/ tax is not valid. ICICI Bank Ltd. v. Dy. CIT (2012) 65 DTR 249 /246 CTR 292/ 204 Taxman 65 (Bom. HC)
If Permission is not obtained from appropriate authority
Section 151 mandates the Assessing officer to take prior approval from appropriate authority. If the AO obtain the approval from any other authority, even from higher authority, the proceeding u/s 148 is invalid. There is no statutory provision under which a power to be exercised by an officer can be exercised by a superior officer. When the statute mandates the satisfaction of a particular functionary for the exercise of a power, the satisfaction must be of that authority. Where a statute requires something to be done in a particular manner, it has to be done in that manner (SPL’s Siddhartha Ltd followed) Ghanshyam K. Khabrani v. ACIT (2012) 249 CTR 370 (Bom. HC)
Reassessment proceedings based on an approval granted by Commissioner of Income Tax instead of Additional Commissioner / Joint Commissioner of Income Tax are required to be held invalid. Since section 151(2) mandates that sanction to be taken for issuance of notice under section 148 in certain cases has to be of Joint Commissioner, reopening of assessment with approval of Commissioner is unsustainable.
Proceeding u/s 148 based on audit objection or review of earlier opinion
As discussed earlier the AO must have reasons to open the case u/s 148. On the basis of such reasons, the AO must form a belief that there is a situation of actual or deemed escapement of Income and therefore action is required u/s 147. Reassessment can not be ordered based on objections raised by the Audit. Such reassessment shall not be valid as the AO held no belief on his own at any point of time, that income of assessee has escaped assessment on account of erroneous computation. In case of Adani Exports vs. DCIT (1999) 240 ITR 224 (Guj) the department was constrained to issue notice only on the basis of audit objection.
Similar Citation: IL & FS Investment Managers Ltd. Vs. ITO (2008) 298 ITR 32 (Bom)
The power to reopen an assessment is conditional on the formation of a reason to believe that income chargeable to tax has escaped assessment. The power is not akin to a review. The existence of tangible material is necessary to ensure against an arbitrary exercise of power. The assessing officer has been given power to reassess u/s147 upon certain conditions being satisfied and the AO does not have power to re-view. Reopening of assessment on the very same issue due to change of opinion in the absence of any fresh material is held to be invalid and bad at law. Aventis Pharma Ltd. vs. ACIT (2010) 323 ITR 570 (Bom)
Similar citations:
Raymond Woolen Mills Ltd. Vs. ITO (1999) 236 ITR 34 (S.C.)
CIT Vs. Kelvinator of India Ltd (2010) 320 ITR 561 (SC)
M.J. Pharmaceuticals Ltd Vs. CIT (2008) 297 ITR 119 (Bom)
D. T. & T. D. C. Ltd. vs. CIT (2010) 324 ITR 234 (Del.)
ICICI Prudential Life Insurance Co Ltd. Vs. DCIT (2010) 325 ITR 471 (Bom)
General Insurance Corporation of India Vs. DCIT (2012) Vol.114 (1) Bom High Court
Reassessment just to make an enquiry or verification
As discussed above, some fresh material findings are required to reopen the case u/s 147. It should make the AO to reach the belief that income has escaped from assessment. Reassessment can not be ordered mere to make an enquiry of verification. Bhor Industries Ltd. V/s ACIT – [(2004) 267 ITR 161 (Bom)]
Similar citation:
Hindutan Lever Ltd. V/s ACIT [(2004) 268 ITR 332 (Bom)]
Ajanta Pharma Ltd. V/s ACIT – [(2004) 267 ITR 200 (Bom)]
Also be noted that reopening of assessment on the basis of wrong interpretation of high court decision was also held invalid in case of Assam Co. Ltd vs. UOI & Ors (2005) 275 ITR 609 (Gau)
Reopening on the basis of finding of others:-
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 AO 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 sufficient for reopening. This was the finding of the Honorable Supreme court in the case of ACIT Vs. Dhariya Construction Company (328 ITR 515).
Can reason recorded by AO be supplemented by additional affidavit?
Hn. Bombay High Court in case of Hindustan Lever Ltd. [2004] 137 TAXMAN 479 (BOM.) has considered this issue and it was held that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion in the recorded reasons 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 AO to disclose and open his mind through reasons recorded by him. 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 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 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.
Reopening beyond four years on the basis of any amendment in the law with retro effect.
The rulings by various courts held that no reopening can be done beyond a period of four years on the basis of any amendment in the law with retrospective effect. The citations are listed below.
Denish Industries Ltd. Vs. ITO 2004 (271) ITR 340 (Guj HC)
SIL Investments Ltd Vs. DCIT 2011, 9 Taxmann 143 (Delhi HC)
CIT Vs. Aashni Leasing & Finance Limited 2010 TIOL 661 (Guj HC)
Powers of the Assessing Officer to re-open a completed assessment are not un-abundant or luxuriant. The powers of the AO 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. 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. Law should be read and exercised as it is expressed and intended. At same time interpretation plays a vital role.
Disclaimer: This article is compiled based on various case studies and material which is available online on various cases. This is mere an effort of the author to facilitate a compilation at one place. This article does not intend to be treated as legal advice. Consult your tax advisor / advocate for legal advice. The author reserves the right to produce / reproduce the article and anyone copying the same and publishing it should obtain prior permission of the author or of the publisher of this article.
Pawan Maloo
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