Reopening of assessment u/s. 147 to rectify 154 mistakes

[Chunauti Dholakia]

Introduction:

The general principle is that once the assessment is completed, it becomes final. However, in case of mistake in the order of the Assessing Officer, three remedies are possible under the Act namely (1) Rectification u/s. 154 (2) Revision u/s. 263 and (3) Reassessment u/s. 147. It is exercisable by different authorities within different period of limitation.

 section 147 empowers the assessing officer to reopen the assessment subject to following conditions:

         (1)   The assessing officer has to record reason for taking action under section 147;

(2)   Recorded reason must have a live link with the formation of belief. Meaning thereby, the assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year and those reasons cannot be supplemented or improved upon subsequently;

(3)    Reason must be based on relevant material on record at the time of recording reason. It is not open for AO to relook at the same material only because he was subsequently of the view that conclusion arrived at earlier was erroneous; and

(4)    No action can be initiated under section 147 after expiry of 4 years from the end of relevant assessment year unless the income chargeable to tax has escaped assessment by reason for the failure on the part of the taxpayer to disclose fully and truly all material facts for the assessment.

Section 154 empowers the income tax authorities including AO to amend any order passed by them to rectify any mistake apparent from the record within four years from the end of the financial year in which the order sought to be amended was passed. Hence when mistakes are apparent from the record, AO should invoke section 154 and when mistakes are not apparent from the record, AO can reopen the assessment u/s.147 subject to satisfaction of preconditions. Hence where the powers to rectify order of assessment under section 154 are adequate to meet a mistake or error in the order of assessment, AO must take recourse to that power as opposed to wider power to reopen the assessment. Moreover, the AO cannot initiate both proceedings at the same time. Hence when proceedings under section 154 are pending on the same issue and not concluded, parallel proceedings under section 147 initiated by the AO are invalid ab inito, especially when except the return and its enclosures, no other material or information are in the possession of the assessing Officer. There are some judicial rulings supporting this view.

Judicial decisions:

In case of Bhawana Adwani vs. ITO Jaipur, AO received information that the stamp authority has enhanced the value of sale of land. Accordingly AO issued order to reopen the assessment u/s. 147. Assessee submitted that section 155(15) of the Act specifically provides that where the value adopted by stamp duty authority is subsequently revised in an appeal or revision or reference, the AO is empowered to take such value by amending order u/s. 154. Thus when there is specific provision to deal with a particular situation, then the action taken by the AO to reopen the assessment is bad in law. ITAT Jaipur held that computational error cannot be attributed to any act or omission on the part of the assessee when assessee has clearly disclosed it in statement of income. The provisions of statute lay down overlapping remedies which are available to the revenue but the exercise of these remedies must be commensurate with the purpose that sought to be achieved with the legislature. When a statute confers an idea of discretion, the exercise of discretion is structured by the requirement that the discretionary powers must be exercised reasonably. When one or more remedies are available with the taxing authority, the authority must adopt the remedy which is a matter of least prejudice to the assessee,Hence when the revenue has efficacious remedy open to it in the form of rectification under section 154 for correcting the computational error, the consequent recourse to the provisions of section 147 are not warranted and it is set asiide.

In the case of Hndustan Unilever Limited vs. DCIT, Bombay High Court held that in the event that the AO was to exercise the power of rectification u/s. 154, the order would have to be corrected to the extent of computational error. Exercising the power of reopening the assessment on that ground of a simple computational error is a matter of serious prejudice to the assessee since in such an event, entire assessment would be liable to be reopened including all other issues which come to the notice of AO in the course of proceedings u/s. 147.The assessee cannot be penalized for the fault of AO. A simple computational error can be resolved by rectifying an order of assessment u/s. 154. It would be entirely arbitrary for the AO to reopen the entire assessment u/s. 147.