ISSUE FOR CONSIDERATION
Section 147 of the Income Tax Act, 1961 provides for reassessment of income which has escaped assessment for any assessment year. The section reads as under:
“Income Escaping Assessment
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 reassess such 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) :
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:”
The issue of applicability of the above referred proviso to section 147 has come up before the courts in cases where no assessment has been made u/s. 143(3), but merely an intimation has been issued u/s. 143(1). In other words, in cases where more than 4 years have expired from the end of the relevant assessment year, is the A.O. required to satisfy and establish that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for a valid reopening of the case? While the Madras High Court has taken the view that the proviso applies even in cases of intimation u/s. 143(1) and the A.O is required to establish that there was a failure to disclose material facts before reopening a case, the Gujarat High Court has taken a contrary view that the proviso applies only in the case of assessments u/s. 143(3).
EL FORGE’S CASE
The issue came up before the Madras High Court in the case of EL Forge Ltd vs. Dy CIT 45 taxmann.com 402.
In this case, an intimation was issued u/s. 143(1) on 31st December, 1991 for assessment year 1989-90. The assessing officer thereafter noticed that the assessee had claimed deduction u/s. 80HH and 80-I on the total income before set off of unabsorbed losses of earlier years. Therefore, as the assessing officer was of the view that the assessee was not entitled to deduction under chapter VI-A, reassessment proceedings were initiated u/s. 147 and a notice was issued u/s. 148 on 15th December, 1997.
The assessee objected to the reopening of the assessment, contending that as the reopening was made after a lapse of 4 years from the end of the assessment year, and as there was no failure on the part of the assessee to disclose all material facts necessary for making the assessment, the reopening was not valid.
The Commissioner (Appeals) rejected the assessee’s claim and dismissed the appeal, holding that the reopening of the assessment by the assessing officer was perfectly in order. The Tribunal held that the assessee did not disclose fully and truly all material facts, and therefore agreed with the finding of the assessing officer as well as the Commissioner (Appeals). It held that the reopening of the assessment was justified, as it was well within the period provided for under the proviso to section 147.
Before the Madras High Court, besides pointing out on behalf of the assessee that the notice u/s. 147 did not give any independent reasons for reopening of assessment u/s. 147, it was argued that the details of the income computation were very much before the assessing officer. The assessee therefore claimed that the assessing officer had not shown that there was a failure to disclose material facts necessary for assessment.
The Madras High Court observed that the facts of the case showed that there was no denial of the fact that the assessee had disclosed details of carry forward of the losses as well as the computation of income, and that these details were very much before the assessing officer. It observed that there was no denial of the fact that there was no failure on the part of the assessee in disclosing the facts necessary for assessment, and there was no allegation that the escapement of income was on account of failure of the assessee to disclose fully and truly all material facts for assessment.
Applying the decision of the Supreme Court in Kelvinator’s case, the Madras High Court accepted the argument of the assessee that the assumption of jurisdiction beyond four years was hit by the limitation provided under the proviso to section 147. The Madras High Court therefore allowed the appeal of the assessee.
LAXMIRAJ DISTRIBUTORS’ CASE
The issue again came up before the Gujarat High Court in the case of Pr CIT vs. Laxmiraj Distributors (P) Ltd 250 Taxman 455.
In this case, the assessee, a company, had filed its return of income for assessment year 2009-10 on 13th September, 2009. The return was accepted and an intimation was issued u/s. 143(1). Subsequently, a survey was carried out on the premises of the company. During the course of such survey, several documents were seized and a statement of a director of the company was recorded on 30th August, 2012.
The assessee also wrote a letter on 4th September, 2012 to the assessing officer, in which it stated that the company had verified its records for various years, that it might not be possible to substantiate certain issues and transactions recorded in the regular books of account as required by law, as it would take a lot of time and effort, and that it would like to avoid protracted litigation. To avoid litigation and penalty and to buy peace, the company stated that it would voluntarily disclose an amount of Rs. 9 crore as it’s undisclosed income, comprising of Rs. 7.52 crore for assessment year 2009-10 towards share capital reserves and Rs. 1.48 crore for assessment year 2013-14 towards estimated profit for the year of survey. In such letter, details of the companies to which 7.52 lakh shares were allotted with premium of Rs. 6.77 crore were given.
In spite of such letter, the company did not offer such income to tax. The assessing officer therefore issued notice on 13th February, 2013 u/s. 148, to reopen the assessment for assessment year 2009-10. The reason recorded for such reassessment was that the income disclosed as a result of survey at Rs. 7.52 crore was over and above the income of Rs. 78.47 lakh returned in the original return of income.
In reassessment proceedings, an addition of Rs. 7.52 crore as bogus share capital was made. The Commissioner (Appeals) rejected the assessee’s appeal.
The ground of validity of the notice of reopening was raised before the Tribunal for the first time. The Tribunal permitted raising of such ground, since it touched upon the very jurisdiction of the assessing officer to reassess the income.
The Tribunal held that reopening of assessment was bad in law, and therefore it did not enter into the question of correctness of the additions. The Tribunal referred to the Supreme Court decisions in the case of ITO vs. Lakhmani Mewal Das 103 ITR 437, and Asst CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd 291 ITR 500, and the decision of the Gujarat High Court in the case of Inductotherm (India) (P) Ltd vs. M Gopalan, Dy CIT 356 ITR 481, and proceeded to annul the reassessment on the ground that the formation of belief by the assessing officer that income chargeable to tax had escaped assessment was erroneous on account of the fact that there was no corroborative evidence casting doubts on the assessee’s share capital received up to the date of issue of the notice of reopening. According to the Tribunal, the basic tenet of cause effect relationship between the reasons for reopening and the taxable income having escaped assessment was not made out by the assessing officer.
The Gujarat High Court observed that, in the case of Rajesh Jhaveri Stock Brokers (P) Ltd (supra), the Supreme Court highlighted a clear distinction between assessment under section 143(1) and assessment made by the assessing officer after scrutiny u/s. 143(3). Such distinction was noticed in the background of the notice of reassessment where the return of the assessee was accepted u/s. 143(1). The Supreme Court had observed that, in the scheme of things, the intimation u/s. 143 (1) could not be treated to be an order of assessment, and that being the position, the question of change of opinion did not arise. The Gujarat High Court further observed that the ratio of the decision was reiterated in a later judgement of the Supreme Court in the case of Dy CIT vs. Zuari Estate Development & Investment Co Ltd 373 ITR 661.
The Gujarat High Court also referred to its decision in the case of Inductotherm (supra), where the court observed that even in case of reopening of an assessment where the return was accepted without scrutiny, the requirement that the assessing officer had reason to believe that income chargeable to tax had escaped assessment, would apply.
The Gujarat High Court further referred to the Supreme Court decision in the case of Lakhmani Mewal Das (supra), where it had been held that the reasons for the formation of the belief contemplated by section 147 for the reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulated that there must be a direct nexus or live link between the material coming to the notice of the assessing officer and the formation of his belief that there had been escapement of the income of the assessee from assessment.
Culling out the ratio of those decisions, the Gujarat High Court stated that what broadly emerged was that there was a vital distinction between the reopening of an assessment where the return of an assessee had been accepted u/s. 143 (1) without scrutiny, and where the scrutiny assessment had been framed. According to the Gujarat High Court, in the former case, the assessing officer could not be stated to have formed any opinion, and therefore, unlike in the latter case, the concept of change of opinion would have no applicability. The common thread that would run through both sets of exercises of reopening of assessment was that the assessing officer must have reason to believe that income chargeable to tax had escaped assessment.
Looking at the facts of the case and the observations of the Tribunal, the Gujarat High Court observed that the Tribunal had evaluated the evidence on record in minutest detail, as if each limb of the assessing officer’s reasons recorded for issuing notice of reassessment was in the nature of an addition made in assessment order, which had either to be upheld or reversed, which, according to the High Court, was simply impermissible.
The Gujarat High Court referred to the decision of the Delhi High Court in the case of Indu Lata Rangwala vs. Dy CIT 384 ITR 337, where the Delhi High Court had taken the view that where the return initially filed was processed u/s. 143(1), there was no occasion for the assessing officer to form an opinion after examining the documents enclosed with the return. In other words, the requirement in the first proviso to section 147 of there having to be a failure on the part of the assessee “to disclose fully and truly all material facts” did not at all apply whether the initial return had been processed u/s. 143(1). In that case, the Delhi High Court had taken the view that it was not necessary in such a case for the assessing officer to come across some fresh tangible material to form reasons to believe that income had escaped assessment.
The Gujarat High Court thereafter considered the decision of the Madras High Court in the case of EL Forge (supra) and expressed its inability to concur with the view of the Madras High Court in the said case where it held that the condition that there was a failure to disclose the material facts for the purposes of assessment was required to be satisfied even in cases of intimation issued u/s. 143(1). According to the Gujarat High Court, the proviso to section 147 would apply only in a case where an assessment had been framed after scrutiny. In a case where the return was accepted u/s. 143(1), the additional requirement that income chargeable to tax had escaped assessment on account of the failure on the part of the assessee to disclose truly and fully all material facts, would simply not apply. According to the Gujarat High Court, the decision of the Supreme Court in Kelvinator’s case did not apply, to the facts of the case before the court, as that was a case in which the original assessment was framed after scrutiny.
The Gujarat High Court therefore allowed the appeal of the revenue, quashing the conclusion of the Tribunal that the notice of reopening of assessment was invalid.
OBSERVATIONS
Reading the proviso in the manner, as is read by the Gujarat High Court, would mean that in all cases of the intimation u/s. 143(1) where other things are equal, the time limit for reopening gets automatically extended to six years from the end of the assessment year and that the requirement to satisfy the disclosure test has to be met with only in cases of assessment u/s. 143(3) and is otherwise dispensed with in cases of intimation u/s. 143(1). On a reading of the Proviso this does not appear to be the case and even on the touchstone of common sense there appears to be a case that the requirement to satisfy the disclosure test should not be restricted to section 143(3) cases only. A failure by the AO to initiate the proceedings u/s. 143(2) and again under the main provisions of section 147, within the time prescribed under the respective provisions can not be remedied by resorting to the reading of the proviso in a convenient manner that gives a license to the AO to reopen a case even after a lapse of a long time and deny the finality to the proceedings in cases where there otherwise is not a failure to disclose the material on the part of the assessee. Such an understanding is strongly supported by the overall scheme of the Income tax Act.
In cases where the assesssee has disclosed the material facts and the AO has failed to have a prima facie look into the facts, in time, and fails to pursue the matter appropriately, within the prescribed time, it is reasonable to hold that his power to reopen a case comes to an end irrespective of the fact that the assessment was not made u/s. 143(3).
Even otherwise, it is not unreasonable to hold that in cases where the assessee has made an adequate disclosure of facts, then the same are deemed to have been considered by the AO and therefore his inaction, within the prescribed time, should be construed to be a case of a change of opinion.
It is difficult to appreciate that the standards that are applicable to the cases covered by section 143(3) are not applied to cases covered by section 143(1) for no fault of the assessee more so when the assessee has no control over the action or inaction of the AO. It is not the assessee who prevented the AO from scrutinising the return of income. In fact, permitting the AO to have a longer time than it is prescribed is giving him a premium for his inefficiency of not having acted within the time when he should have.
The decision of the Gujarat High Court in Laxmiraj’s case, is the one delivered on very peculiar facts involving an admission by the assessee firm at the time of survey and not following it us with the offer for tax in spite of admitted facts that were not denied by the assessee later on at the time of even reassessment. The SLP file by the assessee against the decision has been rejected by the Supreme Court 95 taxxmann.com 109(SC).
The Madras High Court in case of TANMAC India vs. Dy.CIT 78 taxmann.com 155 (Mad.) held that if after issuing intimation u/s. 143(1) of the Act, the Assessing Officer did not issue notice of scrutiny assessment u/s. 143(2) of the Act, it would not be open for the Assessing Officer thereafter to resort to reopening of the assessment. The High Court in deciding the case placed heavy reliance on the decision of Delhi High Court in case of CIT vs. Orient Craft Ltd. 354 ITR 536 in which the distinction between scrutiny assessment and a situation where return has been accepted u/s. 143(1) was narrowed down. The Court had applied the concept of true and full disclosure even in case of reopening assessment where return was accepted u/s. 143(1) of the Act.
It seems that the excessive reliance on the ratio of the Supreme Court cases in Rajesh Jhaveri Stock Brokers’ case (supra) and Zuari Estate & Investment Co.‘s case (supra) requires a fresh consideration and perhaps was uncalled for. The issue in those cases has been about whether there could be a change of opinion in a case where an intimation u/s. 143(1) was issued and whether there was a need to have the reason to believe that income has escaped income in such cases of intimation and whether an intimation was different form an order. The issue under consideration, namely, the application of the first proviso to section 147 was not an issue before the court in both the cases. It is respectfully submitted that in the below quoted part of the decision, the Supreme Court inter alia held that the condition of the First Proviso to section 147 were required to be satisfied for a valid reopening of a case involving even an intimation issued u/s. 143(1) of the Act.
“The scope and effect of section 147 as substituted with effect from 1-4-1989, 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 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 147.” The disclosure of the material facts is a factor that can not be ignored even in the case of intimation simply because the first proviso expressly refers only to the order of assessment u/s. 143(3). It appears that the last word on the subject has yet to be said and sooner the same is said by the Supreme Court, is better.