Validity of Reassessment proceedings u/s 147 of Income Tax Act, 1961 when original reasons for which proceedings were initiated ceases to survive!

[Navdeep Gupta]

By Navdeep Gupta

CA, LL.B., Valluer(ICAI)

There is a prolong litigation in the matter of reopening of assessment between Assessee and Revenue regarding scope of powers of assessing officer to reopen assessments. Provisions of reassessment are very special in nature which provides remedy to Revenue to tax income which has escaped assessment. Various courts including apex court have held that Taxation laws are penal in nature and should be construed strictly. Further, courts have repeatedly held that reopening of a concluded assessment is a very serious matter and should not be allowed in a casual manner. Only upon fulfillment of conditions as enunciated under section 147, reopening is allowed.

After Direct Tax (Amendment) Act 1987 w.e.f. 01^st April 1989, scope of powers of assessing officer to reopen assessment has been expanded substantially. The word “opinion” has been substituted with the word “reason to believe” which expand power of assessing officer to reopen assessment. Section 147 is reproduced below:

“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” (Emphasis supplied)

Various courts have taken a view that reassessment proceedings should be confined to the point for which reasons were recorded u/s 148(2) before issuance of notice and assessing officer has no power to go beyond the issue(s) for which reassessment proceedings were initiated.

With a view to clarify the intent of the legislature, parliament through Finance Act, 2009 has inserted  Explanation 3 to section 147 retrospectively from AY 1989-90 and is reproduced below:

“Explanation 3.-For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.” (Emphasis supplied)

After insertion of above explanation, old judgments taking contrary views are no longer hold field and assessing officer has power to assess such income for which reasons were recorded u/s 148 and also such other income which has come to his notice during the course of proceeding.

An interesting issue came before Rajasthan High Court in case of Shri Ram Singh [2008 (5) TMI 200 - RAJASTHAN HIGH COURT] in which no addition was made by assessing officer on issue/matter for which proceedings u/s 147 were initiated but assessing officer has made addition on other grounds which came to his notice during further course of proceeding. Hon’ble Rajasthan High Court while dismissing appeal of revenue and relying on the judgment of High Court of Punjab & Haryana in case of Atlas Cycle Industries 1989 (4) TMI 48 - PUNJAB AND HARYANA High Court has held as follows:

“28. If considered on that principle, leaving apart for the moment, the aspect of interpretation of the word "and" as "or", the existence of the word "also" is of a great significance, being of conjunctive nature, and leaves no manner of doubt in our opinion, that it is only when, in proceedings under section 147 the AO, assesses or reassesses any income chargeable to tax, which has escaped assessment for any assessment year, with respect to which he had "reason to believe" to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment. and which has come to his notice subsequently, in the course of proceedings under section 147.

29. To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings under section 147, the AO were to come to conclusion, that any income chargeable to tax, Which, according to his "reason to believe", had escaped assessment for any assessment year, did not escape assessment, then, the mere fact, that the AO entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the AO may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under section 147.”

It is to be noted that the judgment of Rajasthan High Court is delivered before insertion of Explanation 3 to section 147 by Finance Act 2009.

Thereafter, following the above judgment of Rajasthan High Court in case of Shri Ram Singh (supra), Bombay High Court in a similar issue after insertion of explanation 3 to section 147 by Finance Act 2009 in case of Jet Airways 2010 (4) TMI 431 - HIGH COURT OF BOMBAY has held as follows:

“17. We have approached the issue of interpretation that has arisen for decision in these appeals, both as a matter of first principle, based on the language used in section 147(1) and on the basis of the precedent on the subject. We agree with the submission which has been urged on behalf of the assessee that section 147(1) as it stands postulates that upon the formation of a reason to believe that income chargeable to tax has escaped assessment for any assessment year, the Assessing Officer may assess or reassess such income "and also" any other income chargeable to tax which comes to his notice subsequently during the proceedings as having escaped assessment. The words "and also" are used in a cumulative and conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by Parliament. Our view has been supported by the background which led to the insertion of Explanation 3 to section 147. Parliament must be regarded as being aware of the interpretation that was placed on the words "and also" by the Rajasthan High Court in Shri Ram Singh's case (supra). Parliament has not taken away the basis of that decision. While it is open to Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of section 147(1) as they stood after the amendment of 1-4-1989 continue to hold the field.”

Judgment of Bombay High Court in case of Jet Airways (supra) is followed by Delhi High Court in case of Ranbaxy Laboratories Ltd. 2011 (6) TMI 4 - DELHI HIGH COURT and similar view was expressed. Judgment of Ranbaxy Laboratories Ltd. (supra) is then followed by Delhi High Court in following cases Narayan Secrities Pvt. Ltd. 2011 (6) TMI 228, Adhunik Niryat Ispat Ltd. 2012 (11) TMI 895, Software Consultants 2012 (2) TMI 18 - DELHI HIGH COURT , Cheil Communications India Pvt. Ltd. 2013 (5) TMI 417 - DELHI HIGH COURT , Living Media India Ltd. 2013 (6) TMI 128 - DELHI HIGH COURT , Oriental Bank of Commerce [2014 (9) TMI 7 - DELHI HIGH COURT], Monarch Educational Society 2016 (2) TMI 971. Following the reasoning of Bombay High Court in Jet Airways (supra) and Delhi High Court in Ranbaxy Laboratories Ltd. (supra), High Court of Chattisgarh in case of Major Deepak Mehta – 2011 (11) TMI 462 - CHATTISGARH HIGH COURT , High Court of Gujarat in case of Ganesh Housing Corporation Ltd. 2012 (3) TMI 211 - GUJARAT HIGH COURT and High Court of Andhra Pradesh in case of Swarna Andhra IJMII Integrated Township Development Private Limited, Hyderabad - 2014 (4) TMI 852 has also taken similar view.

However, High Court of Punjab & Haryana in case of Majinder Singh Kang 2012 (6) TMI 616 - Punjab and Haryana High Court [SLP dismissed by Supreme Court] has taken a contrary view and held that proceedings u/s 147 are not vitiated if no addition is made on the ground on which reasons were recorded before initiation of proceedings. Court has held as follows:

“12. A plain reading of Explanation 3 to section 147 clearly depicts that the Assessing Officer has power to make additions even on the ground on which reassessment notice might not have been issued in case during the reassessment proceedings, he arrives at a conclusion that some other income has escaped assessment which comes to his notice during the course of proceedings for reassessment under section 148 of the Act. The provision no where postulates or contemplates that it is only when there is some addition on the ground on which reassessment had been initiated, that the Assessing Officer can make additions on any other ground on the basis of which income may have escaped assessment. The reassessment proceedings, thus, in the present case cannot be held to be vitiated.

13. Referring to the judgment of this court in Atlas Cycle Industries' case (supra) and the Rajasthan High Court in Shri Ram Singh's case (supra), it may be noticed that these were the judgments rendered by the courts prior to the insertion of Explanation 3 to section 147 of the Act. In view of the insertion of Explanation 3 to section 147 by the Finance (No. 2) Act, 2009, with effect from April 1, 1989, the aforesaid judgments do not advance the case of the assessee any longer.” (Emphasis Supplied)

Judgment of Majinder Singh Kang(Supra) is then followed by Punjab & Haryana High Court in case of Mehak Finvest Pvt. Limited 2014 (11) TMI 56 - PUNJAB & HARYANA HIGH COURT and contrary view was upheld.

Further, High Court of Karnataka in case of Sri N. Govindaraju 2015 (8) TMI 271 has taken a view that If notice under section 148(2) is found to be valid, then addition can be made on all grounds or issues which may come to notice of Assessing Officer subsequently during course of proceeding under section 147, even though reasons for which proceeding were initiated may not survive. Relevant observation of high court is as follows:

“41. ……. Section 147 of the Act was interpreted differently by different High Courts, i.e., whether the second part of the section was independent of the first part, or not. To clarify the same, Explanation 3 was inserted by which it has been clarified that the Assessing Officer can assess the income in respect of any issue which has escaped assessment and also 'any other income' (of the second part of section 147) which comes to his notice subsequently during the course of the proceedings under the section. After the insertion of Explanation 3 to section 147 it is clear that the use of the phrase "and also" between the first and the second parts of the section is not conjunctive and assessment of 'any other income' (of the second part) can be made independent of the first part (relating to 'such income' for which reasons are given in notice under section 148), notwithstanding that the reasons for such issue ('any other income') have not been given in the reasons recorded under section 148(2) of the Act. We are thus in agreement with the view taken by the Punjab & Haryana High Court in the cases of Majinder Singh Kang and Mehak Finvest (supra ).

42. Considering the provision of section 147 as well as its Explanation 3, and also keeping in view that section 147 is for the benefit of the Revenue and not the assessee and is aimed at garnering the escaped income of the assessee [viz. Sun Engg. (supra )] and also keeping in view that it is the constitutional obligation of every assessee to disclose his total income on which it is to pay tax, we are of the clear opinion that the two parts of section 147 (one relating to 'such income' and the other to 'any other income') are to be read independently. The phrase 'such income' used in the first part of section 147 is with regard to which reasons have been recorded under section 148(2) of the Act, and the phrase 'any other income' used in the second part of the section is with regard to where no reasons have been recorded before issuing notice and has come to the notice of the Assessing Officer subsequently during the course of the proceedings, which can be assessed independent of the first part, even when no addition can be made with regard to 'such income', but the notice on the basis of which proceedings have commenced, is found to be valid.

43. In the end it was vehemently argued by the learned counsel for the appellant that the reason to be given under sub-section (2) of section 148 would be the very foundation of the issuance of notice and if it is false or baseless, then everything goes and the structure erected on such foundation would crumble.

44. It is true that if the foundation goes, then the structure cannot remain. Meaning thereby, if notice has no sufficient reason or is invalid, no proceedings can be initiated. But the same can be checked at the initial stage by challenging the notice. If the notice is challenged and found to be valid, or where the notice, is not at all challenged, then in either case it cannot be said that notice is invalid. As such, if the notice is valid, then the foundation remains and the proceedings on the basis of such notice can go on. We may only reiterate here that once the proceedings have been initiated on a valid notice, it becomes the duty of the Assessing Officer to levy tax on the entire income (including 'any other income') which may have escaped assessment and comes to his notice during the course of the proceedings initiated under section 147 of the Act.” (Emphasis supplied)

Judgment of Sri N. Govindaraju (supra) is followed by Karnataka high Court in case of Mookambika Developers 2015 (8) TMI 614 and contrary view was upheld.

Thus, hon’ble High Courts of Rajasthan, Bombay, Delhi Chattisgarh, Gujarat and Andhra Pradesh have held that proceedings u/s 147 comes to end when reasons for which proceedings were initiated ceases to survive. This opinion is based on the observation that the words "and also" are used in a cumulative and conjunctive sense.

However, hon’ble High Court of Punjab & Haryana and Karnataka have taken a contrary view and held that If notice under section 148(2) is found to be valid, then addition can be made on all grounds or issues which may come to notice of Assessing Officer subsequently during course of proceedings under section 147, even though reason for which proceedings were initiated may not survive.

This opinion is based on observation that two parts of section 147 are to be read independently. The phrase 'such income' used in the first part of section 147 and the phrase 'any other income' used in the second part of the section can be assessed independent of the first part, even when no addition can be made with regard to 'such income', but the notice on the basis of which proceedings have commenced, is found to be valid.

This controversy now can only be settled through judgment of Hon’ble Supreme Court of India on the issue or clarification by parliament. Till then the Judgment of Hon’ble Supreme Court of India in case of Vegetable Product Ltd. 1973 (1) TMI 1 - SUPREME Court is relevant in which following is observed:

“There is no doubt that the acceptance of one or the other interpretation sought to be placed on section 271(1)(a)(i) by the parties would lead to some inconvenient result, but the duty of the court is to read the section, understand its language and give effect to the same. If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted. This is a well-accepted rule of construction recognised by this court in several of its decisions. Hence, all that we have to see is, what is the true effect of the language employed in section 271(1)(a)(i). If we find that language to be ambiguous or capable of more meanings than one, then we have to adopt that interpretation which favours the assessee, more particularly so because the provision relates to imposition of penalty.” (Emphasis supplied)

Therefore, following the judgment of Supreme Court in case of Vegetable Product Ltd. (supra), view favorable to assessee should be adopted.

In authors personal view, since taxation laws are penal in nature, they should be construed strictly and any liberal interpretation of Explanation 3 to section 147 will lead to enable assessing officer to make roving & fishing enquiries and ‘review’ will take place in grab of reassessment proceedings which is not permissible in law. Thus, in the opinion of author, view canvassing by Rajasthan High Court & Bombay High Court appears to be more correct.

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Discussions to this article

[Ganeshan Kalyani]

Excellent article. Nicely compiled. The best part is that the law to be interpreted in favour of assessee when there is ambiguous or having more than one meaning in interpretation of a law. However, revenue always to be fair in dealing with the assessee. Thanks.