Reassessment beyond Reasons

In many a case, no additions are made for the issues that formed part of the reasons for reopening, while passing an order of reassessment, and instead, additions are made on altogether new issues that are not part of the reasons recorded.

There has been an ongoing conflict concerning the scope of reassessment. Should the scope extend to cover issues not recorded in the reasons and, if yes, should such extension be denied, at least in cases where the reasons for which the reopening was made, have been found to be invalid on final reassessment. An additional issue that arises is whether a fresh notice u/s. 148 is required to be issued for covering the new issue in reassessment.

The issue about including new issues where additions are also made in respect of the recorded reasons is settled in favour of sustenance of addition on account of a new or additional issues. What appears however, to be open is the issue where addition is made on account of an issue that has not been found in the reasons recorded and where no addition is made for the reasons recorded. Conflicting decisions are delivered on the subject by High Courts with some upholding the right of the Assessing Officer, and some dismissing it.

N. Govindaraju’s case
The issue recently came up for consideration of the Karnataka High court in the case of N. Govindaraju vs. ITO, 60 taxmann.com 333 (Karnataka).In that case, the assessee, an individual, had income from house property, transport business, capital gains and other sources, and had filed the return of income, which was processed u/s. 143(1) and accepted. A notice u/s. 148 was issued for reopening the assessment for the purpose of assessing the income from the sale of property u/s. 45(2) and also for denying the benefit of indexation. The reassessment was completed on total income of Rs.29.91 lakh. No addition was made u/s. 45(2), nor was indexation denied to him in reassessment. Additions were however made for reasons other than the one recorded in the notice.

On appeal, the Commissioner (Appeals) confirmed the reassessment and the Tribunal held that the reopening of assessment was justified in law.

On appeal to the High Court, the assessee raised the following questions for consideration of the court; “Whether the Tribunal was correct in upholding reassessment proceedings, when the reason recorded for re-opening of assessment u/s.147 of Act itself does not survive. Whether the Tribunal was correct in upholding levy of tax on a different issue, which was not a subject matter for re-opening the assessment and moreover the reason recorded for the re-opening of the assessment itself does not survive.”

On behalf of the assessee, it was submitted that the order u/s. 147 of the Act had to be in consonance with the reasons given for which notice u/s. 148 had been issued, and once it was found that no tax could be levied for the reasons given in the notice for reopening the assessment, independent assessment or reassessment on other issues would not be permissible, even if subsequently, in the course of such proceedings some other income chargeable to tax was found to have escaped assessment; the reason for which notice was given had to survive, and it was only thereafter that ‘any other income’ which was found to have escaped assessment could be assessed or reassessed in such proceedings; the reopening of assessment should first be valid (which could be only when reason for reopening survived) and once the reopening was valid, then u/s. 147 of the Act, the entire case could be reassessed on all grounds or issues; if reopening was valid and reassessment could be made for such reason, then only the AO could proceed further and not doing so, without even the reason for reopening surviving, it could lead to fishing and roving enquiry and would give unfettered powers to the AO.

The Revenue submitted that under the old section 147 (as it stood prior to 1989), grounds or items for which no reasons had been recorded could not be opened, and because of conflicting decisions of the High Courts, the provisions of the said section had now been clarified to include or cover any other income chargeable to tax which might have escaped assessment and for which reasons might not have been recorded before giving the notice; that the said section 147 was in two parts, which had to be read independently, and the phrase “such income”, in the first part, was with regard to which reasons had been recorded and the phrase “any other income” in the second part was with regard to where no reasons were recorded in the notice and had come to notice of the AO during the course of the proceedings. Both being independent, once the satisfaction in the notice was found sufficient, addition could be made on all grounds, i.e., for which reason had been recorded and also for which no reason had been recorded. All that was necessary was that during the course of the proceedings u/s. 147, income chargeable to tax must be found to have escaped assessment. Strong reliance was placed by the Revenue on the insertion of Explanation 3 in support of its contentions.

The court, on hearing the contentions of the parties, held that once the notice for reopening of a previously closed assessment was held to be valid, the assessment proceedings as well as the assessment order already passed would be deemed to have been set aside and the AO would then have the power to pass fresh assessment order with regard to the entire income which escaped assessment and to levy tax thereon. and doing so was his duty .

The court observed that the issue was whether the latter part of the section relating to ‘any other income’ was to be read in conjunction with the first part (relating to ‘such income’) or not; if it was to be read in conjunction, then without there being any addition made with regard to ‘such income’ (for which reason had been given in the notice for reopening the assessment), the second part could not be invoked; however, if it was not to be so read in conjunction, the second part could be invoked independently even without the reason for the first part surviving.

In the opinion of the court, from a plain reading of section 147, it was clear that its latter part provided that ‘any other income’ chargeable to tax which had escaped assessment and which had come to the notice of the AO subsequently in the course of the proceedings, could also be taxed. It further noted that the sole purpose of Chapter XIV of the Act was to bring to tax the entire taxable income of the assessee and, in doing so, where the AO had reason to believe that some income chargeable to tax had escaped assessment, he might assess or reassess such income. In doing so, it would be open to him to also independently assess or reassess any other income which did not form the subject matter of notice.

The court took note of the conflicting decisions of the high courts on the subject, noting that some had held that the second part of section 147 was to be read in conjunction with the first part, and some had held that the second part was to be read independently.

It held that the insertion of Explanation 3 could not be but for the benefit of the revenue, and not the assessee. In that view of the matter, on reading section 147, it was clear that the phrase ‘and also’ joined the first and second parts of the section; the phrase ‘and’ was conjunctive which was to join the first part with the second part, but ‘also’ was for the second part and was disjunctive; it segregated the first part from the second. Upon reading the full section, the phrase ‘and also’ could not be said to be conjunctive. It was thus clear to the court that once satisfaction of reasons for the notice was found sufficient, i.e., if the notice u/s. 148(2) was found to be valid, then addition could be made on all grounds or issues (with regard to ‘any other income’ also) which might come to the notice of the AO subsequently during the course of proceedings u/s. 147, even though reason for notice for ‘such income’ which might have escaped assessment, did not survive.

Importantly, the court held that Explanation 3 was inserted to address the ambiguity in the main provision of the enactment that had arisen because of the different interpretation of different High Courts about the issue whether the second part of the section was independent of the first part, or not. To clarify the same, Explanation 3 was inserted, by which it had been clarified that the AO could assess the income in respect of any issue which had escaped assessment and also ‘any other income’ (of the second part of section 147) which came to his notice subsequently during the course of the proceedings under the section. After the insertion of Explanation 3 to section 147, it was clear that the use of the phrase ‘and also’ between the first and the second parts of the section was not conjunctive and assessment of ‘any other income’ (of the second part) can be made independent of the first part (relating to ‘such income’ for which reasons were given in notice u/s. 148), notwithstanding that the reasons for such issue (‘any other income’) had not been given in the reasons recorded u/s. 148(2).

Considering the provision of section 147 as well as its Explanation 3, and also keeping in view that section 147 was for the benefit of the revenue and not the assessee, and was aimed at garnering the escaped income of the assessee, and also keeping in view that it was the constitutional obligation of every assessee to disclose his total income on which it was to pay tax, it was held by the court that the two parts of section 147 (one relating to ‘such income’and the other to ‘any other income’) were to be read independently. In doing so, it observed that the phrase ‘such income’ used in the first part of section 147 was with regard to which reasons had been recorded u/s. 148(2), and the phrase ‘any other income’ used in the second part of the section was with regard to a case where no reasons had been recorded before issuing notice and a reason had come to the notice of the AO subsequently during the course of the proceedings, which could be assessed independent of the first part, even when no addition could be made with regard to ‘such income’, once the notice on the basis of which proceedings had commenced, was found to be valid.

The Karnataka High Court took note of the decisions in the cases of CIT vs. Jet Airways (I) Ltd. 331 ITR 236( Bom.) Ranbaxy Laboratories Ltd. vs. CIT, 336 ITR 136(Dl.) and CIT vs. Adhunik Niryat Ispat Ltd.(Del.) and CIT vs. Mohmed Juned Dadani, 355 ITR 172 (Del.). and noted that, with due respect to the view taken in the aforesaid cases, it was unable to persuade itself to follow the same.

The court concurred with the decision of the Punjab & Haryana High Court in the case of Majinder Singh Kang vs. CIT, 344 ITR 358 which was delivered after noticing that the earlier judgments in the cases of CIT vs. Atlas Cycle Industries 180 ITR 319 and CIT vs. Shri Ram Singh 306 ITR 343 were rendered prior to the insertion of Explanation 3 to section 147 of the Act, wherein it was held that “a plain reading of Explanation 3 to section147 clearly depicts that the Assessing Officer has power to make additions even on the ground that reassessment notice might not have been issued in the case during the reassessment proceedings, if he arrives at a conclusion that some other income has escaped assessment which comes to his notice during the course of proceedings for reassessment u/s.148 of the Act. The provision nowhere postulates or contemplates that it is only when there is some addition on the ground on which reassessment had been initiated, that the Assessing Officer can make additions on any other grounds on which the income has escaped assessment”.

The court further noted that the same view was reiterated by the Punjab & Haryana High Court in the case of CIT vs. Mehak Finvest (P.) Ltd,.367 ITR 769 wherein it was also noticed that the Special Leave Petition filed against the judgment in the case of Majinder Singh (supra ) had been dismissed by the Supreme Court.

Mohmed Juned Dadani’s case
The issue had arisen in the case of CIT-II vs. Mohmed Juned Dadani, 30 taxmann.com 1 (Gujarat). In this case, the assessment was completed allowing assessee’s claim for deduction u/s. 80HHC. Subsequently, the Assessing Officer initiated reassessment proceedings taking a view that if two export incentives, i.e., DEPB licence income and excise duty refund were excluded from the income of the assessee, there would be a loss from export business and, consequently, assessee would not be entitled to deduction u/s. 80HHC. In the reassessment, the AO made additions of cash credit u/s. 68 and on account of some unverifiable purchases. However, the AO did not disturb the deduction u/s. 80HHC, previously claimed by the assessee.

The assessee carried such order in appeal before the Commissioner (Appeals) where he contended that the AO had no jurisdiction to travel beyond the reasons for reopening the assessment, which appeal however, was rejected by the Commissioner (Appeals). The Tribunal, finding that in the reassessment proceedings, no disallowance had been made towards assessee’s claim for deduction u/s. 80HHC, which was the reason on the basis of which notice for reopening of the assessment was issued, held that the order of reassessment was without jurisdiction and bad in law.

On revenue’s appeal to the Gujarat High Court, the court addressed the following substantial question of law. “Whether the Income-tax Appellate Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment is based, no additions are made by the Assessing Officer in the order of assessment, he cannot make additions on some other grounds which did not form part of the reasons recorded by him.” .

On behalf of the revenue, it was submitted that the Tribunal committed a grave error in interpreting the provisions contained in section 147 of the Act ; the section as amended w.e.f. 01.04.1989, gave ample authority to an AO to assess or reassess any income chargeable to tax which had escaped assessment, as long as the requirements of a valid reopening of the assessment were satisfied; once an assessment was reopened, by virtue of valid exercise of powers u/s. 147 of the Act, thereafter, there would be no further limitation on the AO framing assessment on all or any of the grounds mentioned in the reasons recorded or even on the grounds not so mentioned; that the position was clear even before Explanation 3 to section 147 of the Act was added with retrospective effect from 01.04.1989; in any case, by virtue of such Explanation being introduced in section 147, the issue had been put beyond any pale of controversy. The decision of the Punjab and Haryana High Court in case of Majinder Singh Kang vs. CIT 344 ITR 358 was relied upon by the revenue.

On the other hand, the assessee drew attention to the statutory provisions contained in section 147 of the Act, as amended w.e.f. 01.04.1989, and the explanatory memorandum clarifying the background in which Explanation 3 to section 147 of the Act was enacted. It was submitted that section 147 of the Act, prior to introduction of Explanation 3, permitted the AO to assess or reassess any income chargeable to tax which had escaped assessment and also any other income which had escaped assessment and which came to the notice of the AO subsequently in the course of the proceedings for reassessment; that the words “and also any other income” must be understood as to be referring to such income which had escaped assessment but the ground for which had not been mentioned in the reasons recorded, in addition to income which had escaped assessment and for which mention had been made in the reasons recorded; that Explanation 3 to section 147 of the Act did not change the basic proposition, nor it was meant to do so, as would be clear from the explanatory memorandum explaining the reasons for introduction of the said explanation; that power to reopen the assessment which had been previously closed was peculiar in nature and was available to the AO under the Income-tax Act which was not normally available to an officer exercising judicial or quasi judicial powers; such powers, therefore, must be strictly construed, authorising an AO to assess income under any head even if the same was not part of the reasons recorded for reopening of the assessment, would give wide powers which were possible of arbitrary exercise; that for an AO to assess income on any ground not mentioned in the reasons recorded, it was essential that there was a valid reopening of assessment; if the grounds, on which the reopening of the assessment failed, there would thereafter be no longer a valid reopening of an assessment in which the AO could make any additions on some other grounds.

The Gujarat High Court held that the Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment was based, no additions were made by the AO in the order of assessment, he could not make additions on some other grounds which did not form part of reasons recorded by him. It was not in dispute that once an assessment was reopened by a valid exercise of jurisdiction u/s. 147, it was open for the AO to assess or reassess any income which had escaped assessment which came to his light during the course of his assessment proceedings which was not mentioned in the reason for issuing notice u/s. 148, provided the ground on which the notice was issued for reopening survived.

Significantly, the court supplied an interesting dimension by noting that in a notice for reassessment which had been issued beyond a period of four years from the end of relevant assessment year, the condition that income chargeable to tax had escaped assessment for the reason of the failure on the part of the assessee to disclose truly and fully all material facts for the purpose of assessment must also be established. If in such a situation, the stand of the revenue was accepted, a very incongruent situation would come about, if ultimately the AO were to drop the ground on which notice for reopening had been issued, but to chase some other grounds not so mentioned for issuance of the notice. In such a situation, even if a case where notice for reopening had been issued beyond a period of four years, the assessment would continue even though on all the grounds on which the additions were being made, there was no failure on the part of the assessee to disclose true and full material facts. In such a situation, an important requirement of failure on part of the assessee to disclose truly and fully all material facts would be totally circumvented. Thus, it was apparent that Explanation 3 to section 147 does not change the situation insofar as the present controversy was concerned.

In deciding the case, the High court approved the decision relied upon by the assessee in the case of CIT vs. Jet Airways (I) Ltd. 331 ITR 236 in which the Bombay High Court considering an identical situation, interpreting the provisions contained in section 147 of the Act, held that the situation would not be different by virtue of introduction of Explanation 3 to the said section. The High Court, placing heavy reliance on the explanatory memorandum, held that if upon issuance of a notice u/s. 148 of the Act, the AO did not assess the income which he had reason to believe had escaped assessment and which formed the basis of a notice u/s.148, it was not open to him to assess independently any other income which did not form the subject matter of the notice.

In addition, the Gujarat High Court approved the decisions in the case of Ranbaxy Laboratories Ltd. vs. CIT , 336 ITR 136 (Delhi) wherein the court besides approving the ratio of the decision of the Bombay High Court in the case of Jet Airways, held that sub-section (2) of section 148 mandated reasons for issuance of notice by the AO and s/s. (1) thereof mandated service of notice to the assessee before the AO proceeded to assess, reassess or recompute the escaped income and those conditions were required to be fulfilled to assess or reassess the escaped income chargeable to tax. The Gujarat High court also approved the observations of the Delhi High Court to the effect that the Legislature could not be presumed to have intended to give blanket powers to the AO such that on assuming jurisdiction u/s. 147 regarding assessment or reassessment of the escaped income, he could keep on making roving inquiry, and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction, and also the finding of the Delhi High Court, that for every new issue coming before the AO during the course of proceedings of assessment or reassessment of escaped income, and which he intended to take into account, he would be required to issue a fresh notice u/s. 148. The ratio of the decision in the case of Asstt. CIT vs. Major Deepak Mehta, 344 ITR 641 (Chhattisgarh) was also approved by the court.

The Gujarat High Court, relying on the Memorandum explaining the provisions of Explanation 3, held that it was meant to be clarificatory in nature and to put the issue beyond any legal controversy; when the Legislature found that in face of the provisions contained in section 147 of the Act post 01.04.1989, some of the courts had taken a view that the AO was restricted to the reassessment proceedings only on issues in respect of which the reasons were recorded for reopening the assessment, such explanation was introduced in the statute; thus, the explanation was meant to be merely clarificatory in nature and was introduced with the purpose of putting at rest the legal controversy regarding the true interpretation of section 147 of the Act which had arisen on account of certain judicial pronouncements especially in the cases of CIT vs. Atlas Cycle Industries, 180 ITR 319 (P&H), Travancore Cements Ltd. vs. Asstt. CIT 305 ITR 170 (Kerala).

The Gujarat High Court did not agree with the decision of the Punjab and Haryana High Court in case of Majinder Singh Kang (supra) by noting that all other courts had uniformly taken a view that Explanation 3 to section 147 of the Act did not change the situation insofar as the present controversy was concerned, and for the reason that the explanatory memorandum to Explanation 3 to section of the Act was not brought to the notice of the High Court in the said case.

Observations
On a bare reading of the main provision, it is gathered that section 147, as is substituted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 01.04.1989, enables inclusion of any other income that has escaped assessment and which comes to the notice subsequently in the course of proceedings. Accordingly, it should be possible for an AO to also include any new item while making reassessment, though such item was not included in recorded reasons. This main provision was found to be deficient, in the past by the courts, on the following two counts;

The substituted provision while permitting the AO to rope in a new issue in the scope of reassessment, did not override the specific provisions of section148(2), which required an AO to record reasons before issue of a notice u/s. 148 for doing so.

The substituted provision permitted the AO to rope in a new issue in the scope of reassessment only where the original issue on which the reassessment was reopened has been found to be valid.

One of the above referred deficiencies has been expressly cured by insertion of Explanation 3 w.e.f 01.04.1989 by the Finance (No.2) Act, 2009, whereunder the requirement of the new issue being recorded in reasons for reopening as per section 148(2), before a notice is issued, has been dispensed with. As regards the other deficiency concerning the need for survival of the recorded issue, some courts recently have found that the AO is empowered to expand the scope of reassessment either by virtue of Explanation 3 or independent of it, while a few other courts have found that the deficiency continued in spite of Explanation 3.

The issue that has attracted conflicting views therefore is narrowed down to whether the word ‘and also’ used in the main proviso are conjunctive and cumulative or they are disjunctive and detach the latter part of the provision from the earlier part. In the alternative, whether, with insertion of Explanation 3, the AO is authorised to rope in a new issue, even where no addition is made in respect of the issue recorded in reasons for reopening.

The question is that when the reason recorded for reopening the assessment u/s. 147 itself does not survive, can tax be levied for a totally different reason or issue, which was not the subject matter of reopening the assessment. In other words, if reasons for reopening are (a) and (b) and during reassessment proceedings , income is found to have escaped from assessment for some other reason say, (c) and (d), then, if reasons (a) and (b) do not survive, and no addition can be made for such reasons, can additions be made on the basis of reasons or grounds (c) and (d) that did not find place in the reasons recorded. The related questions are whether the main provision permits such an assessment and whether the insertion of the Explanation 3 has made such an assessment possible.

Section 147 of the Act, even without the aid of Explanation 3, enabled the AO while framing an assessment section 147 of the Act, to assess or reassess such income for which he had recorded his reasons to believe had escaped assessment and also any other income which escaped assessment which came to his notice subsequently in the course of the assessment proceedings.

Insertion of Explanation in a section of an Act is for a different purpose than insertion of a ‘Proviso’. Explanation gives a reason or justification and explains the contents of the main section, whereas ‘Proviso’ puts a condition on the contents of the main section or qualifies the same. ‘Proviso’ is generally intended to restrain the enacting clause, whereas Explanation explains or clarifies the main section. ‘Proviso’ limits the scope of the enactment as it puts a condition, whereas Explanation clarifies the enactment as it explains and is useful for settling a matter or controversy. In the instant case, insertion of Explanation 3 to section 147 does not in any manner override the main section and has been added with no other purpose than to explain or clarify the main section so as to also bring in ‘any other income’ (of the second part of section 147) within the ambit of tax, which may have escaped assessment, and comes to the notice of the AO subsequently during the course of the proceedings.

Circular 5 of 2010 issued by the CBDT also makes this position clear. There is no conflict between the main section 147 and its Explanation 3. This Explanation has been inserted only to clarify the main section and not to curtail its scope, even though it is for the benefit of the revenue and not the assessee.

Explanation 3 thus does not, in any manner, even purport to expand the powers of the AO u/s. 147 of the Act. In any case, an explanation cannot expand the scope and sweep of the main body of the statutory provision. In case of S. Sundaram Pillai vs. V. R. Pattabiraman AIR 1985 (SC) 582 the Supreme Court observed that, an explanation added to a statutory provision is not a substantive provision, but as the plain meaning of the word itself shows, it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision.

An explanation cannot override the scope of the main provision nor can it extend the scope. An explanation can only explain the scope of the main provision by eliminating the ambiguity.

The Rajasthan High Court in Shri Ram Singh 306 ITR 343 and the Punjab & Haryana High Court in CIT vs. Atlas Cycle Industries, 180 ITR 319 had interpreted the words ‘and also’, used in the main section itself, in a cumulative and conjunctive sense and held that to read these words as being in the alternative, would be to rewrite the language used by the Parliament. The said decision was delivered before insertion of Explanation 3.

Parliament must be regarded as being aware of the interpretation that was placed on the words “and also”. Parliament however has not taken away the basis of that decision while it was open to the Parliament, having regard to the plenitude of its legislative powers, to do so. It could have clearly provided in Explanation 3 that power to deal with a new issue would be irrespective of survival of the old issues for which reasons were recorded. It was not so done, and in view of that, the provisions of section 147 as they stood after the amendment of 1st April, 1989, continue to hold the field.

The fluid state of law on the issue prevailing up to 31.03.1988, was sought to be addressed by insertion of substituted provision w.e.f. 01.04.1989. This insertion was found inadequate by the courts for addressing the issue under consideration and to meet the concerns of the courts, Explanation 3 is claimed to have been inserted witnesses cannot be procured for various other reasons, like death of both attesting witness, out of jurisdiction, physical incapacity, insanity etc. Section 69 should apply and can be extended to such cases. Hence, the word “not found” occurring in section 69 of Evidence Act should receive a wider purposive interpretation than its literal meaning and should take in situation where the presence of the attesting witness cannot be procured. This view gets its support from Venkataramayya vs. Kamisetti Gattayya (AIR 1927 Madras 662) and Ponnuswami Goundan vs. Kalyanasundara Ayyar (AIR 1930 Madras 770).

It is settled that mode of proving a Will does not ordinarily differ from that of proving any other document except as to the special requirement of attestation prescribed by section 63 of Indian Succession Act. Section 69 imposes a twin fold duty on the propounder. It provides that if no such attesting witness can be found, it must be proved that attestation of one attesting witness at least is in his handwriting and also that the signature of the person executing the document is in the handwriting of that person. Hence, to rely on a Will propounded in a case covered by section 69 the propounder should prove i) that the attestation is in the handwriting of the attesting witness and ii) that the document was signed by the executant. Both the limbs will have to be cumulatively proved by the propounder. Evidently, the section demands proof of execution in addition to attestation and does not permit execution to be inferred from proof of attestation. However, section 69 presumes that once the handwriting of attesting witness is proved he has witnessed the execution of the document. The twin requirement of proving the signature and handwriting has to be in accordance with section 67 of the Indian Evidence Act.