Reopening of a completed assessment

    1.2 Very often substantial details are collected and inquiries are made by the AO but assessment orders are passed without reference to such details and inquiries, allowing a deduction or exemption. The factual question that arises in such cases is whether there has been an application of mind by the Assessing Officer during the assessment proceedings to the issue involved, and whether the deduction, exemption or non-taxation was after due deliberation, in which case reassessment proceedings cannot be initiated. The issue gets added dimensions where the assessee is able to show that he has filed details in response to the AO’s inquiry but the AO claims that he had not noticed the same in the myriad of details furnished with him.

    1.3 The issues that have arisen before the courts in such cases are whether, in a case where a regular order of assessment is passed u/s.143(3) without much discussion on a particular issue, there was an application of mind by the Assessing Officer; whether there was disclosure of material facts by the assessee and whether permitting reopening in such cases would amount to giving premium to an authority exercising quasi-judicial function to take benefit of its own wrong. While the full bench of the Delhi High Court has taken the view that no reassessment proceedings are permissible in such cases, the division bench of the Allahabad High Court, recently, has taken a contrary view.

2. Kelvinator’s case :

    2.1 The issue came up before the Full Bench of the Delhi High Court in the case of CIT v. Kelvinator of India Ltd., 256 ITR 1.

    2.2 In this case, the assessment of the assessee was completed u/s.143(3). Subsequently, it was noticed by the Assessing Officer that as indicated in the accounts and tax audit report, certain prior period expenditure and certain disallowable expenditure had been wrongly allowed as deductions. He therefore issued a notice for reassessment u/s.147.

    2.3 The assessee challenged the reassessment proceedings in appeal. The Commissioner (Appeals) allowed the assessee’s appeal holding that the assessee had disclosed all the facts, that no new fact or material was available with the Assessing Officer, and that it was a mere change of opinion on the part of the Assessing Officer. The Tribunal upheld the order of the Commissioner (Appeals).

    2.4 Before the Delhi High Court, on behalf of the department, it was argued that the change of opinion was relevant only for the purposes of clause (b) of S. 147, and that initiation of reassessment proceedings was permissible when it was found that the Assessing Officer had passed an order of assessment without any application of mind. According to the department, such application of mind could be found out from the order of assessment itself inasmuch as, if the order of assessment did not contain any discussion on the particular issue, the same may be held to have been rendered without any application of mind.

    2.5 On behalf of the assessee, it was argued before the Delhi High Court that the expression ‘reason to believe’ contained in S. 147 denoted that the reassessment must be based on a change of fact or subsequent information or new law. According to the assessee, income escaping assessment must be founded upon or in consequence of any information which must come into the possession of the Assessing Officer after completion of the original assessment.

    2.6 The Delhi High Court, after considering the various decisions cited before it, observed that it was not in dispute that the Assessing Officer did not have the jurisdiction to review his own order. His jurisdiction was confined only to rectification of mistakes as contained in S. 154. The power of rectification of mistakes could be exercised only when the mistake was apparent, and a mistake could not be rectified where it was a mere possible view or where the issues were debatable. Thus, where the Assessing Officer had considered the matter in detail and the view taken was a possible view, the order could not be changed by way of exercising the jurisdiction of rectification of mistake.

    2.7 The Delhi High Court further noted that it was a well settled principle of law that what could not be done directly could not be done indirectly. If the Assessing Officer did not have the power of review, he could not be permitted to achieve the object by taking recourse to initiating a proceeding of reassessment.

    2.8 According to the Delhi High Court, when a regular order of assessment is passed in terms of S. 143(3), a presumption can be raised that such an order has been passed on application of mind. In terms of S. 114(e) of the Indian Evidence Act, judicial and official acts are presumed to have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, this would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.

    2.9 The Delhi High Court therefore held that since the material was before the Assessing Officer at the time of assessment, the reassessment proceedings were invalid.

3. EMA India’s case :

    3.1 The issue again recently came up before the full bench of the Allahabad High Court in the case of EMA India Ltd. v. ACIT, (unreported — copy of order available on www.itatonline.org).

    3.2 In this case also, the assessment proceedings were completed u/s.143(3), and reassessment proceedings were initiated u/s.147 to disallow prior period expenditure and to tax certain interest which were disclosed in the balance sheet, profit and loss account, tax audit report, and other documents submitted before the Assessing Officer in the earlier proceedings.

3.3 The assessee challenged the reassessment proceedings in a writ petition before the High Court. Before the Allahabad High Court, it was submitted on behalf of the assessee that the initiation of proceedings and issue of notice were based on mere change of opinion and were totally without jurisdiction. It was submitted that the action of the Assessing Officer amounted to review of the earlier assessment order, and that even though the Assessing Officer had noticed such items, he did not assess these items nor add the same to the income during the assessment proceedings. Reliance was placed by the assessee on the full bench decision of the Delhi High Court in Kelvinator’s case (supra).

3.4 On behalf of the department, it was submitted that the initiation of reassessment proceedings was permissible when it was found that certain items of income, though chargeable to tax, had escaped the notice of the Assessing Officer, and no discussion of chargeability to tax of such items of income was made in the assessment order.

3.5 According to the Allahabad High Court, where the assessment order had been passed and certain items of income are not at all discussed and it escaped the notice of the assessing Officer as a result of which the reassessment proceedings were initiated in respect of those items of income, in the circumstances it could not be said that it would amount to review. Since the Assessing Officer did not form any view or any opinion with regard to the items of income which escaped its notice in the original assessment order, it would not amount to review of the order or change of opinion. According to the Allahabad High Court, there could be no change of opinion when no opinion was formed by the Assessing Officer.

3.6 The Allahabad High Court was of review that initiation of reassessment proceedings was permissible where it was found that the Assessing Officer had passed an order of assessment without any application of mind and such application of mind could be found out from the order of assessment itself, inasmuch as, in the event the order of assessment did not contain any discussion on a particular issue, the same may be held to have been rendered without any application of mind. According to the Allahabad High Court, in view of Explanation 1 to S. 147, mere production of account books or other evidence from which material evidence could, with due diligence have been discovered by the assessing authority would not necessarily amount to disclosure. This aspect, according to the Allahabad High Court, had not been considered by the Delhi High Court in Kelvinator’s case.

3.7 The Allahabad High Court therefore held that the reassessment proceedings were valid.

Observations:

4.1 Some controversies do not lead to ‘closements’ soon. The issue being discussed here is an example of one such controversy. Even the attempt in the proposed Direct Tax Code for resolving the controversy in favour of smooth reopening will surely raise new controversies. The issue is fiercely con-tested by the tax payers, in spite of amendments, as they perceive the whole exercise of reassessment as unjust weilding of power by those in the power. One finds a lot of merit in this when one notices the ease with which completed cases are sought to be reopened in large numbers.

4.2 The sting is acutely painful in cases where the reopening is made after expiry of four years, in spite of the fact that there is no failure on the part of the assessee to disclose fully and truly the material facts necessary for assessment. Even in such cases the reopening is sought to be justified on the pretext that the AO had not applied his mind to the material disclosed, though it was produced. The action is sought to be explained by resorting to Explanation 1 to S. 147 and in many cases by relying on Explanation 2 to the said section.

4.3 Fortunately for the tax payers the courts have, by and large, frustrated such attempts of the Revenue in cases where disclosure is found to be evident and also in cases where the material has been furnished in response to an inquiry by the AO. The courts have not given great credence to the Revenue’s contention, often made, that the assessment order is silent on the relevant aspect under contest. The courts have advanced the cause of the tax payers even in cases involving reopening within four years on being convinced that material facts necessary for assessment were disclosed. The courts have also taken a unanimous view that the amendments of 1989 have not materially altered the available law on the subject and that a change of opinion can not lead to a valid reopening even post 1989.

4.4 The Courts have been consistent in holding that the law does not permit a review of an order, not even in the name of reassessment. A thing which can not be done directly can certainly not be done indirectly by resorting to the provisions of re-assessment. It is this principle that has been reiterated by the Full Bench of the Delhi High Court by stating that permitting an AO to reopen a completed case in given circumstances amounted to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.

4.5 Whether this position stated in paragraph 4.4 has been changed by insertion of Explanation 1 and 2. The Courts do not think so. Even after the said insertion the courts are more or less consistent, in holding that a change of opinion can not lead to reopening of a completed assessment and further that in cases where the assessee has not failed in disclosing truly and fully the material facts necessary for assessment, reopening is not possible irrespective of the time of reopening.

4.6 The Punjab & Haryana High Court, in the case of Hari Iron Trading Co. v. CIT, 263 ITR 437, observed that the taxpayer had no control over the actions of an AO and that he was not in a position to direct the framing of an order in a manner that would record fully and truly all that had actually transpired during the course of assessment and in such circumstances it was appropriate to assume that the order had been passed with due diligence unless it was otherwise proved by the AO. It is normally seen that an assessment order rarely records the findings of the inquiry by AO where he is satisfied with the assessee’s explanation furnished in response to his inquiry.

4.7 The Bombay High Court, consistently follow-ing the full bench decision of the Delhi High Court, has held that once an assessment order is passed u/s.143(3) and the assessee has not been found to have failed in disclosing material facts, no reopening was sustainable. Asian Paints Ltd. v. DCIT & Ors., 308 ITR 195, Idea Cellular Ltd. v. DCIT, 301 ITR 407 and GT v. Eicher Ltd., 294 ITR 310. The same is the ratio of the decisions of several High Courts and Tribunals including the latest one by the Tribunal in the case of Vardhman Industries, ITA No. 501/ Jd/2008 dated 14-9-2009 wherein the jodhpur Bench held that even within four years it was not possible to reopen an assessment where the material facts were found to have been disclosed by the assessee. It appears that in all cases of assessments completed after scrutiny, a reopening can follow only on the basis of an information received subsequent to assessment.

4.8 Even the Allahabad High Court in the case of Foramer v. CIT & Ors., 247 ITR 436 had held that no reopening was possible on a mere change of opinion in cases where there was no failure to disclose material facts by an assessee, a decision which was later on approved by the Supreme Court. Had this decision been noted by the court in EVA’s case, the outcome could have been different. It is interesting to note that the full bench of the Delhi High Court in coming to the conclusion in assessee’s favour had concurred with the abovementioned decision of the Allahabad High Court in Foramer’s case.

4.9 The twin decisions of the Gujarat High Court in the cases of Praful Chunilal Patel, 236 ITR 732 and Garden Silk Mills, 237 ITR 668, heavily relied upon by the Allahabad High Court in EVA’s case, were not even followed by the same Gujarat high court and importantly the full bench in Kelvinator’s case had specifically dissented from these decisions of the Gujarat High Court. Like Delhi, the Bombay High Court has refused to follow the said decisions of the Gujarat High Court.

4.10 CBDT Circular No. 549 dated 31-10-1989, while explaining the implication of the scheme of reassessment, specifically clarified vide para 7.2, that the new scheme does not bring about a material change in the existing law providing that no reopening would sustain in cases of change of opinion not involving any failure on the part of the assessee to disclose material facts. It is this circular which has helped information of a definitive judicial consen-sus in the era after amendment of 1989. It is need-less to note that the circulars of the Board are binding on its officers in administering the provisions of the Income-tax Act.

4.11 S. 114 of the Indian  Evidence  Act vide clause provides that due care has been taken by a public officer in performing his duty. Therefore on completion of assessment, it can be presumed that the AO has examined the material produced before him. Frankly, Explanation 1 is an unintended but serious reflection on the state of affairs in the Revenue department, indicating that orders as a rule are passed without due diligence, unless otherwise proved.

4.12 Article 14 has been favourably relied upon by the courts to support the contention that permitting an AO to review his order results in violation of the Constitution which guarantees protection against such administrative actions of the executive.

4.13 A point which emerges from the controversy is that the issue is debatable, and the language adopted by the law is capable of two interpretations. If that is so, a view that is favourable to the assessee should be accepted.

4.14 The decision of the Supreme Court, in the case of Indian Newspaper, relied upon by the Allahabad high court in EVA’s case, clearly supported the view that the reopening of an assessment was not possible for reviewing an order.

4.15 The decision in Kelvinator’s case was delivered by the full bench of the high court. The law of precedent required that the division bench of the high court, of two judges, in EVA’s case should have followed the decision of a larger bench instead of following decisions which were specifically dissented by the full bench. The decision in the case of Shyam Bansal, 296 ITR 95 (All.), again relied upon in EVA’s case did not consider the decision of the full bench and in any case the Revenue in that case was in possession of some information obtained post assessment. The binding force of the decision of the full bench in Kelvinator’s case was specifically considered in the case of KLM Royal Dutch Airlines 292 ITR 49 (Delhi) wherein the Court, in the context of the very same issue, had considered the validity of a decision delivered by the division bench in the case of Consolidated Photo and Finvest Ltd. 281 ITR 394 (Del.) wherein the division bench had failed to follow the decision of the full bench in Kelvinator’s case. The Court in KLM Royal Dutch Airlines’ case held that the decision of the full bench in Kelvinator’s case had to be followed by the division bench of the Court. This position in law of precedent has been reiterated by the Bombay High Court in the case of Eicher Ltd., 294 ITR 310.