REASSESSMENT TO CORRECT ERRORS IN ASSESSMENT IS NOT VALID.

[Mr. M. GOVINDARAJAN]

                        Section 147 of the Income Tax Act, 1961 (‘Act’ for short) provides that 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 of the Act, 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 recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned.

                        Where an assessment under Section 143(3) of the Act or Section 147 has been made for the relevant assessment year, no action shall be taken under Section 147 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 failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Section 142(1) or Section 148 to disclose fully and truly all material facts necessary for his assessment, for that assessment year. 

                        In ‘Titanor Companies Limited V. Assistant Commissioner of Income Tax and others’ – 2011 (6) TMI 138 (HC) the petitioner filed a return of income for the assessment year 1997-98 along with the duly audited accounts, tax audit report etc., in respect of its income from the manufacturing fabrication and servicing of components.  The same was assessed under Section 143(3) of the Act on 29.12.1999.  The petitioner preferred an appeal against the assessment before the Commissioner of Income Tax (Appeals) on 31.3.2000. 

                        On 18.03.2004 the Department issued a notice to the petitioner under Section 147 of the Act.  The petitioner objected to the notice and asked for the reasons for reassessment.  The Department sought to justify the demand vide their letter dated 27.01.2005.   The petitioner challenged the validity and propriety of the notice and the reasons for the issue of such notice to the petitioner before the High Court.  The petitioner also contended that the notice is barred by limitation since it has been issued after the expiry of the four years from the end of relevant assessment year. 

                        The petitioner submitted the following before the Court:

• The Revenue is entitled to issue notice if the Assessing Officer has reasons to believe that the income chargeable to tax has escaped assessment by reason of failure on the part of the assessee-

-          To make a return under Section 139; or

-          In response to the notice issued under Section 142(1) or Section 148; or

-          To disclose fully and truly all material facts necessary for that assessment year;

• Since the first two conditions are not satisfied the notice issued by the Department is unwarranted;
• Since there is no allegation that the petitioner has failed to disclose all material facts necessary for that assessment the notice issued is invalid;

The Department contended that the Assessing Officer has reasons to believe that income has escaped assessment because the petitioner has claimed wrongly deduction under Section 80-IA in respect of income which was not derived from the income of the petitioners unit of Kundaim;  Further the long term capital gains have been wrongly claimed by the assessee which have been wrongly considered for the set off of the unit of Kundaim which has resulted in escapement of income.

                        The High Court found that nowhere the Assessing Officer stated that there is any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.   The High Court is of the view that the power conferred by Section 147 does not provide a fresh opportunity to the Assessing Officer to correct an incorrect assessment made earlier unless the mistake in the assessment so made is the result of a failure of the assessee to fully and truly disclose all material facts necessary for assessment.  The High Court further held that where the assessee has fully disclosed all the material facts, it is not open to the Department to reopen the assessment on the ground that there is a mistake in assessment.   It is necessary for the Assessing Officer to first observe whether there is a failure to disclose fully and truly all material facts necessary for assessment and having observed that there is such a failure to proceed under Section147.   The Assessing Officer has not recorded the failure on the part of the petitioner to fully and truly disclose all material facts necessary for assessment year 1997-98.  Where the Assessing Officer does not record such a failure, he would not be entitled to proceed under Section 147.   The Assessing Officer recorded that the petitioner has wrongly claimed certain deductions which he was not entitled to.  There is a well known difference between a wrong claim made by an assessee after disclosing all the true and material facts and a wrong claim made by the assessee by withholding the material facts fully and truly.  It is only in the latter case the Assessing Officer would be entitled to proceed under Sec. 147.  The High Court permanently restrained the department from reassessing the income of the petitioner for the assessment year 1997-98.