Reassessment: Section 147 and section 148 of Income-tax Act, 1961: Reopening of assessment on reason to believe that certain items of income have escaped assessment: Finding in reassessment proceedings that such items of income have not escaped assessment: Reassessment proceedings not valid: AO cannot assess any other income.

The assessee-company was engaged in the business of manufacturing and trading of pharmaceutical products. For the relevant year, the assessee filed the return of income on 31-10-1994, which was processed u/s.143(1)(a) of the Income-tax Act, 1961. Subsequently, a notice u/s.148 was issued on 23-1- 1998 for the reason that the items viz., club fees, gifts and presents and provision for leave encashment have escaped assessment. In reassessment proceedings the assessee explained that there is no escapement of income on account of these items and the explanation was accepted by the Assessing Officer. Accordingly, no addition was made on that count. However, the Assessing Officer reduced the claim for deduction u/s.80HHC and u/s.80I of the Act. The assessee challenged the validity of the assessment order and the additions. The Tribunal upheld the reassessment and the additions.

On appeal by the assessee, the Delhi High Court followed the decision of the Bombay High Court in the case of Jet Airways; 331 ITR 236 (Bom.), allowed the appeal and held as under:

“(i) Though Explanation 3 to section 147 inserted by the Finance Act, 2009 w.e.f. 1-4-1989 permits the Assessing Officer to assess or reassess income which has escaped assessment even if the recorded reasons have not been recorded with regard to such items, it is essential that the items in respect of which the reasons had been recorded are assessed.

(ii) If the Assessing Officer accepts that the items for which reasons are recorded have not escaped assessment, it means he had no “reason to believe that income has escaped assessment” and the issue of the notice becomes invalid. If so, he has no jurisdiction to assess any other income.”