The culminating point of the return filing exercise under the Income-tax Act, 1961 is its assessment. It may so happen that the income returned is accepted per se or subjected to some increase by virtue of the provisions of law. Section 2(8) very briefly defines the term ‘assessment’ as “assessment includes reassessment”. However, there is no definition of the term ‘reassessment’ under the Act.
When a return of income is filed by the taxpayer , it could be accepted. Later on, it could also be selected for detailed verification technically known as “scrutiny assessment”. However, there is a time limit for selecting a return for scrutiny assessment viz. six months from the end of the financial year in which the return was filed. Once this time limit expires, whether the tax authorities can invoke reassessment provisions which provide longer time limit has been litigated..
Recently, the Gujarat High Court in Olwin Tiles India P Ltd v. Dy. CIT (2016) 130 DTR (Guj) 209 analysed whether the Assessing Officer without having any extra material / information could reopen the case. This article discusses this decision which dissented from the decision in the case of CIT v. Orient Craft Ltd (2013) 87 DTR (Del) 313 / 354 ITR 536 (Del) as well asthe recent statutory amendments which require further fine tuning for having hassle free tax compliance in respect of the majority of taxpayers whose returns are accepted as it is by the tax authorities.
Olwin Tiles India (P) Ltd ’s case
The assessee filed its return of income declaring “nil” income. It was processed u/s. 143(1) and later on, a notice u/s. 148 was issued for reopening the assessment.
The reason given by the Assessing Officer for reopening the assessment was that the assessee had issued 60,000 equity shares of Rs.10 each at a premium of Rs.990 per share. The Assessing Officer based on the assets and liabilities furnished in the return of income computed the ‘net worth’ of the company and found book value of equity share to be Rs.33 per share. Hence, the Assessing Officer concluded that the shares were issued to the shareholders at a premium which was far above their book value or intrinsic worth.
Readers may note that the facts of the case relate to assessment year 2011-12 and hence clause (viib) of section 56(2) could not be applied as the said provision became operational by virtue of the Finance Act, 2012 w.e.f. the assessment year 2013-14.
The assessee submitted that the return having been accepted by the Assessing Officer cannot be subjected to reassessment on the basis of materials which are already available on record. It was contended that the Assessing Officer must have some tangible material which did not form part of the original record to enable him to reopen the case or else, it would amount to mere review of the earlier assessment, which is impermissible in law.
The reason recorded by the Assessing Officer was that the investors invested in the shares of the company at a value far above the net asset value which implied that the additional amounts represent unexplained cash credits chargeable to tax under section 68 of the Act.
The assessee relied on the decision in the case of CIT vs. Orient Craft Ltd (2013) 354 ITR 536 (Del).
Orient Craft’s case
The assessee in this case for the assessment year 2002- 03 filed its return of income declaring total income of Rs.445.35 lakh. The income returned included inter alia (i) claim of deduction u/s. 80HHC; and (ii) deduction u/s. 10B. The return was processed u/s. 143(1).
Later, a notice u/s. 148 was issued on the ground that the income chargeable to tax had escaped assessment by virtue of the items such as (i) duty drawback; (ii) DEPB; (iii) premium on DEPB; and (iv) sale of quota all of which were included in the ‘export turnover’ and thus excess deduction was allowed u/s. 80HHC. The assessee filed a return in response to the notice issued under section 148 declaring the same total income as was admitted in the original return.
The assessee questioned the reopening of assessment which the Assessing Officer rejected by citing clause (c) of the Explanation to section 147. The Assessing Officer claimed that the assessee had claimed excess deduction under section 80HHC by including ineligible items. The reassessment was completed by scaling down the deduction u/s. 80HHC to Rs.683.95 lakh from the original claim of Rs.874.21 lakh.
The assessee challenged the reassessment order both on the grounds of jurisdiction and merit. The CIT (Appeals) rejected the objection to jurisdiction , but on merit decided the issue in favour of the assessee. Before the tribunal, both the assessee and the Revenue filed cross appeals. The assessee challenged the jurisdiction assumed for reopening the assessment u/s. 147 as also certain other issues on merit which were decided against it by the CIT (Appeals).
The tribunal examined the assessee’s claim and found that the issue was decided in favour of the assessee for the earlier assessment years and accordingly decided the case by citing decision in the case of CIT vs. Kelvinator of India Ltd (2010) 320 ITR 561 (SC) in which it was observed “since there was no tangible material available with the Assessing Officer to form the requisite belief of escapement of income, the reopening of the completed assessment is unsustainable in the eyes of law. The same is, therefore cancelled”.
The matter went to the Delhi High Court where the court held that even an assessment u/s. 143(1) can be reopened u/s. 147 subject to fulfillment of the conditions precedent, which includes that the Assessing Officer must have “reason to believe” that income chargeable to tax has escaped assessment.
Though no assessment order was passed and intimation u/s. 143(1) is sent, the apex court in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd (2007) 291 ITR 500 (SC) has held that for initiating the proceedings u/s. 147 the ingredients of section 147 are to be fulfilled. The ingredient is the presence of “reason to believe” that income chargeable to tax has escaped assessment. The court held that this judgment does not give carte blanche to disturb the finality of the intimation issued u/s. 143(1).
The Delhi High Court finally held that the reasons recorded by the Assessing Officer were not based on any tangible material which came to his possession subsequent to the issue of intimation u/s. 143(1). It held that reopening of assessment after issue of intimation without any fresh material reflects an arbitrary exercise of the powers conferred u/s. 147. The decision hence was in favour of the assessee.
Reasoning in Olwin Tiles case
The Gujarat High Court referred to its precedent in Inductotherm India (P) Ltd vs. M.Gopalan, Dy. CIT (2012) 356 ITR 481 (Guj) where it was held that no assessment had taken place when an intimation under section 143(1) was issued accepting the return filed by the assessee. It held that the Assessing Officer would not have formed any opinion with respect to any of the aspect arising in such return. The power to reopen assessment is available when a return has been accepted u/s. 143(1) or a scrutiny assessment has been framed u/s. 143(3) of the Act. The common requirement in both the situations is that the Assessing Officer should have reason to believe that any income chargeable to tax has escaped assessment.
The Gujarat High Court in Olwin Tiles case (Supra) hence held that it cannot accept the contention of the assessee that the Assessing Officer must have some material outside or extraneous to the records to enable him to form an opinion or entertain a belief that income chargeable to tax has escaped assessment. The only requirement to be fulfilled for issuing a notice for reopening the assessment is the ‘reason to believe’ that income chargeable to tax had escaped assessment.
It adverted to the decision of the Supreme Court in the case of Rajesh Jhaveri’s case (Supra) where it has been highlighted that ‘reason to believe’ does not have to be a final opinion that the additions would certainly be made to the income originally admitted / assessed. The reason recorded in Olwin Tiles case (Supra) by the Assessing Officer was that the share valuation of the company on the basis of balance sheet furnished in the return of income was only Rs.33 as against the issued price of Rs.1000 per share.
The court observed that the assessee-company had not commenced manufacturing activity and whether or not it has earned income cannot be gone into at this stage viz. at the time of deciding the validity of reassessment notice. The court accordingly held that it was not inclined to terminate the reassessment proceedings at this stage on the grounds put forth by the appellant.
Olwin Tiles vS. Orient Crafts – a comparative study
Prima facie the decision of the Gujarat High Court in Olwin Tiles case (Supra) was in favour of the Revenue and it dissented from the Delhi High Court decision in the case of Orient Crafts Ltd (Supra).
The decision rendered in Orient Craft’s case related to assessment year 2002-03 being an era preceding the electronic filing / processing of returns. Hence, at that time the assessee would have furnished the necessary details along with the return of income. Whereas in Olwin Tiles case (Supra) which pertained to assessment year 2011-12, the return of income would have been filed electronically and is an annexure-less return. No further details except the return form duly filled in were available with the tax authorities. This would show that a return processed u/s. 143(1) is prima facie an acknowledgement of the return, subject to a cursory verification of the claims contained therein.
Further tax returns are presently processed by Centralized Processing Centres (CPC). Though CPC is managed by the officials of the Department, it is not possible to analyse or validate the contents of the return filed by the taxpayers in the absence of supporting documents / evidences as the returns filed nowadays are annexure-less.
In this backdrop, it is debatable whether the return processed by CPC can be called as an appraisal of the return of income filed by the taxpayers. It appears that the e processing of the return is adequate only for detection of apparent errors or inconsistencies detected by the software based on the schedules forming part of the return, Thus processing of return and issue of intimation u/s. 143(1) in all fairness cannot taken as approval of the return filed by the taxpayers.
If the Delhi High Court (dealt with Orient Craft’s case) had dealt with the assessment year where the return is processed by CPC and not by the jurisdictional Assessing Officer, perhaps the decision may have been different. The decision of the Gujarat High Court (in Olwin Tiles case) is to be read in the context of the situation on the ground. Therefore a subsequent appraisal of the information contained in the return may also lead to formation of a reason to believe, and a consequent reopening.
Amendments in Finance Act, 2016
The Finance Act, 2016 probably taking note of the limitations in processing of returns by CPC enlarged the scope for adjustments on processing of returns which hitherto was limited to adjusting (i) arithmetical errors; and (ii) incorrect claims which are apparent from any information in the return.
Now w.e.f. 01.04.2017, four more sub-clauses to section 143(1) are inserted which validate adjustments to the returned income while processing the returns either by the Department (in the case of paper returns) or CPC which processes e-returns. These adjustments are popularly known as prima facie adjustments and they covers the following:
(i) Incorrect claim of brought forward loss when the return of the assessment year in which the loss was incurred, is filed beyond the ‘due date’ specified in section 139(1);
(ii) Disallowance of expenditure which could be deciphered from the audit report filed with the return but was not to be taken into account while computing the total income;
(iii) Disallowance of deduction under sections 10AA, 80- IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE when the return is furnished beyond the ‘due date’ specified in section 139(1); and
(iv) Addition of income due to mismatch of figures between Form 26AS or Form 16A or Form 16 vis a vis the income disclosed in the return.
Though the first three adjustments are are fully justified while processing the return u/s. 143(1), the fourth one could create substantial hardship, particularly when the mismatch arises on account of difference in method of accounting followed by the deductor and deductee. Consequently , if for any reason an adjustment falling within these categories is not made in processing u/s. 143(1), the provisions of section 148 cannot be resorted to subsequently. The tax authorities may invoke section 154 if such omitted adjustments would fall in the category of error apparent on record. Other debatable claim of expenditure or income, which do not require any disclosure in the return or in the audit report continue to remain beyond the scope of the said adjustments, and therefore possibly attract the provisions of section 148..An explicit amendment in sections 147 /148 would put an end to this kind of controversy.
Yet another subsisting controversy resolved by the Finance Act, 2016 relates to substitution of sub-section (1D) to section 143 by mandating processing of returns u/s. 143(1) before issue of notice u/s. 143(2). This is applicable w.e.f. 01.04.2017. However, processing of returns u/s. 143(1) is not permitted after issuance of an order u/s. 143(3). This amendment would provide the taxpayers the benefit of cash flow viz. refund of tax if any, on processing of return under section 143(1) which was hitherto kept in abeyance till the completion of assessment u/s. 143(3). Further as a corollary to insertion of sub-clauses (iii) to (vi) to section 143(1), the concept of limited scrutiny has been done away with by amending section 143(2) w.e.f. 01.06.2016.
Revision under section 263
Section 263 empowers the Commissioner to assume jurisdiction where any order passed by the Assessing Officer is erroneous or prejudicial to the interests of the revenue. Whether intimation u/s. 143(1) is an ‘order’ to permit the CIT to assume the revisionary jurisdiction u/s. 263 has also been litigated at various points of time.
The legislature by amending the law and the courts by interpreting the law have provided safeguards when Commissioner exercises revisionary powers u/s. 263 such as (i) revision not permissible in respect of debatable claims; (ii) mandating recording of reasons for revision; (iii) revision of matters limited to issues not pending in appeal; and (iv) wider meaning of ‘record’ for the purpose of permitting revision.
The catch phrase in section 263 is “any order passed therein by the Assessing Officer” which is erroneous or prejudicial to the interests of revenue. Prima facie, when the return is processed u/s. 143(1), there is no examination of the claims made in the return except prima facie items listed in section 143(1). Thus the intimation issued u/s. 143(1) may not qualify as an ‘order’ for the purpose of revision u/s. 263.
However, the Bombay High Court in CIT vs. Anderson Marine & Sons (P) Ltd (2004) 266 ITR 694 has held that the intimation u/s. 143(1) will have to be understood as having the force of an ‘order’ on self-assessment. By legal fiction, intimation u/s. 143(1) shall be deemed to be a notice of demand issued u/s.156 and all the provisions of the Act are applicable.
Thus the court held in the affirmative that intimation u/s. 143(1) is eligible for interference u/s. 263.
Conclusion
Based on the two legal decisions given at different points of time in the light of the fact that the returns were processed manually vis a vis electronically and the provisions of law as it stands now, one may summarize the position as follows:
(i) A return processed u/s. 143(1) in spite of the expanded scope of adjustments may be subjected to reassessment proceedings provided the Assessing Officer has reason to believe escapement of income or on the basis of some credible information from which he entertains the belief of escapement of income chargeable to tax.
(ii) Processing of a return u/s. 143(1), in the current scenario does not indicate appraisal of the return. Thus it appears that formation of the belief on the basis of a scrutiny of the return subsequent to the processing might result in a notice u/s. 148 and possession of information or knowledge by the tax authorities beyond the return may not be mandatory for issue of notice u/s. 148.
