Summary Reassessment is not allowed on mere change of opinion. Some new tangible information is required before initiation of reassessment proceedings and such new tangible material should be basis to form opinion that income has escaped assessment due to lack of such new information at the time of original assessment and that the assessee had not disclosed income fully and truly because of suppression of information which come to knowledge of the AO subsequently..

Reassessment of income:

As per provisions of S. 147 of the Income-tax Act, 1961, the AO Can reasses income of assessee which was earlier assessed by him in terms of sub-section (1) as well as (s) of section 143. He can also asses income which was not assessed at all if the assessee had not filed the return of income. Conditions for initiating proceedings, limitations, and scope are provided in the provisions. There have been amendment in these provisions from time to time, therefore, one should be careful about ascertaining the applicable provision to a particular year with which one is concerned at particular time. For example, in case you are concerned with a case before High Court, for AY say 1987.88, you need to have a look at the relevant provision at relevant time.

In a major relief to the income tax payers, the Supreme Court has ruled that the Income-Tax Department cannot re-open the completed assessment arbitrarily to review the assessment made earlier. Reassessment is possible on the basis of some 'tangible material' and not based on mere change of opinion. Unrestricted power to re-open the cases against assessees, will amount to review of the assessment by the assessing authority, said the apex court.

As contended on behalf of the department, if we ignore the concept of 'change of opinion' then, in the garb of re-opening the assessment, review would take place and there will be unrestricted powers.

This is a judgment of larger bench of the Supreme Court of three-judge headed by justice SH Kapadia. Court held that "Re-assessment can be on fulfillment of certain pre-conditions. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the assessing officer", According to section 147 of the Income-Tax Act amended by virtue of the Direct Tax Laws (Amendment) Act of 1989 which came into effect from April 1, 1989, cases could be re-opened if the assessing officer has reason to believe that the income has escaped assessment.

One needs to give a schematic interpretation to the words 'reason to believe' failing which, section 147 would give arbitrary powers to the assessing officer to re-open assessments on the basis of 'mere change of opinion', which cannot be per se reason to re-open.

We must also keep in mind the conceptual difference between power to review and power to re-assess.

The assessing officer has no power to review; he has the power to re-assess.

The court noted that after April 1, 1989, the assessing officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment.

Reasons must have a live link with the formation of the belief.

The court dismissed a bunch of appeals of the Income-Tax Department against the assesses. The issue before the court was whether by virtue of the Direct Tax Laws (Amendment) Act of 1989, the condition of 'change of opinion' stood obliterated for re-opening of assessment cases.

The court observed that under Direct Tax Laws (Amendment) Act, 1987, the words 'reason to believe' was deleted and the word 'opinion' was inserted in section 147 of the Act. However, on receipt of representations from the companies against omission of the words 'reason to believe', Parliament re-introduced it and deleted the word 'opinion' on the ground that it would vest arbitrary powers in the hands of assessing officer.

To gather the legislative intention, the apex court also perused a circular issued by the government on October 31, 1989 reiterating the same thing. Prior to Direct Tax Laws (Amendment) Act, 1987, the assessing officer was empowered to make back assessment on fulfilment of two conditions. But section 147 of the Act was amended which came into effect from April 1, 1989, these two conditions were given a go-by. The only condition remained was that where the assessing officer has reason to believe that income has escaped assessment, it confers jurisdiction to re-open the assessment. Therefore, after April 1, 1989, the revenue's power to re-open the cases was widened. According to the unamended section 147 of the Act, on fulfilment of two conditions, the assessing officer was empowered to re-open the cases. First, if the assessing officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return under section 139 of the Act for any assessment year to the income-tax officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year. Second, notwithstanding that there has been no omission or failure on the part of the assessee, the income- tax officer has in consequence of information in his possession has reason to believe that income chargeable to tax has escaped assessment for any assessment year.

Comparative provisions:

The Supreme Court has compared provisions at three different times as follows:

Prior to Direct Tax Laws(Amendment) Act, 1987, Section 147 reads as under:

After enactment of Direct Tax Laws (Amendment) Act, 1987, i.e., prior to 1st April, 1989, Section 147 of the Act, reads as under:

After the Amending Act, 1989, Section 147 reads as under:

"Income escaping assessment.147.

If-- [a] the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

[b] notwithstanding that there has been no omission or failure as mentioned in clause(a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that 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 or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year)."

147. Income escaping assessment.—

If the Assessing Officer, for reasons to be recorded by him in writing, is of the opinion 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)."

"Income escaping assessment.147.

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)."

Before discussing judgment of the Supreme Court it is worth to analyze the judgment of Delhi High Court

Facts:

The assessee filed its return of income along with computation of income, annual report, tax audit report, etc.

In original return the assessee did not claim certain expenses relating to rent, depreciation, etc therefore assessee filed a revised return with a claim of rent and depreciation to be allowed under sections 30 and 32.

The Assessing Officer determined the taxable income making additions and disallowances.

Later on, the Assessing Officer issued a notice under section 148 and reopened the assessment under section 147 on the allegation of basis of under assessment.

The assessee objected to the reopening of assessment.

The assessment was however reopened on the alleged ground of various disallowable claims, but except for the disallowance of a sum claimed in the revised return neither any claim was disallowed nor any addition was made in reassessment order.

On appeal, the Commissioner (Appeals) held that it was mere change of opinion on the part of the Assessing Officer and as such, the reassessment proceedings could not have been validly initiated, thus he quashed the reassessment proceedings holding that the assessee had disclosed all the facts and no new fact was available to the Assessing Officer to assume jurisdiction for reassessment. Therefore, On revenues appeal the Tribunal also upheld the decision of the Commissioner (Appeals). Therefore revenue appealed by way of reference application under section 256(2) before Delhi High Court.

The judgment of Delhi High Court is reported as CIT Vs Kelvinator Of India Limited. 2008 -TMI - 12568 / [2002] 256 ITR 1, 174 CTR 617,123 TAXMANN 433. The high Court held as follows:

To confer jurisdiction under section 147(a) two conditions were required to be satisfied, viz.,

(1) the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment; and

(2) he must also have a reason to believe that such escapement occurred by reason of either (a) omission or failure on the part of the assessee to make a return of his income under section 139; or (b) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year.

The aforementioned requirements of law must be held to be conditions precedent for invoking jurisdiction of the Assessing Officer to reopen the assessment under section 147.

Both the conditions aforementioned are cumulative.

It is also a well-settled principle of law that, in the event, it is found that any of the said two conditions is not fulfilled, the notice issued by the Assessing Officer would be wholly without jurisdiction.

The expression 'reason to believe' mandates that before jurisdiction under section 147 is invoked by the Assessing Officer, he is to record his reasons for doing so or before issuing any notice under section 147.

The formation of reason to believe and recording of reasons are imperative before the Assessing Officer can reopen a completed assessment.

Assessment having been reopened on 20-4-1990, section 147 as amended with effect from 1-4-1989 would apply.

Reading of law: It is well-settled principle of interpretation of statute that entire statute should be read as a whole and the same has to be considered thereafter chapter by chapter and then section by section and ultimately word by word.

There is no dispute that the Assessing Officer does not have any jurisdiction to review its own order. His jurisdiction is confined only to rectification of mistake as contained in section 154. The power of rectification of mistake conferred upon the ITO is circumscribed by the provisions of section 154. The said power can be exercised when mistake is apparent. Even mistake cannot be rectified where it may be a mere possible view or where the issues are debatable. Even the Tribunal has limited jurisdiction under section 254(2). Thus, when the Assessing Officer or the Tribunal has considered the matter in detail and the view taken is a possible view, the order cannot be changed by way of exercising the jurisdiction of rectification of mistake.

It is a well-settled principle of law that what cannot be done directly cannot be done indirectly. If the ITO does not possess the power of review, he cannot be permitted to achieve the said object by taking recourse to reassessment proceedings.

Analysis From CIT Versus M/s. Kelvinator of India Limited 2010 -TMI - 35201 (SC) judgment dated: 18 January 2010.

The Supreme Court affirmed the judgment of Delhi High Court and dismissed appeal of the revenue.

Re-assessment can be on omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer.

Reassessment can also be made when assessee has file d a return of income but fails to disclose fully and truly all material facts and in consequence of information in possession of AO he has, reason to believe that income chargeable to tax has escaped assessment.

Post-1st April, 1989 after amendments the, power to re-open is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open.

The Assessing Officer has no power to review; he has the power to re-assess.

Re-assessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then,in the garb of re-opening the assessment, review would take place which is not permissible.

To reopen an assessment tangible material should be there with the A.O. (and such material should be new one and not part of return of income or assessment records).

We may also refer to ITO v. Master Keshav Suri 228 ITR (ST.) 156.

In this case in original assessment certain exemption for foreign exchange remittances was allowed. Subsequently notice for reassessment was issued. On Writ Petition the High Court permitted proceedings to continue but stayed recovery. On 3-10-1997: Their Lordships S.C. Agrawal and S. Rajendra Babu, JJ. Dismissed the special leave petition filed by the Department against the judgment dated 24-2-1997, of the Delhi High Court in C.M. No.1162 of 1997, in Civil Writ No.664 of 1997 on the question whether action permissible under section 143(2) on the basis of the information available in the return but not taken and in respect of which limitation expired, cannot legally be taken under section 147/148 of the Income-tax Act, 1961, if the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment.

Thus what cannot originally be done by the A.O. based on material available at that time cannot be done by the A.O. on the basis of same material and information by resorting to reassessment proceedings. For reassessment the A.O. must have some new and tangible material to take view that income has escaped assessment.

Request from readers:

Readers are requested to send their view to further strengthen the study on the subject and also to point out if the author has missed some vital and important issues in the context of the article.

By: C.A. DEV KUMAR KOTHARI - January 29, 2010