2013 (2) TMI 292 - HC - Income Tax

Reopening of Assessment - The assessee contended that the Assessing Officer had no jurisdiction to travel beyond the reasons for reopening the assessment. - Held that - Explanation (3), Section 147 of the Act, however, by no stretch of imagination, can be construed as to provide that if the reason on which the assessment is reopened fails, the AO still can proceed to assess some other income which according to him had escaped assessment and which came to his light during the course of the assessment. For assuming jurisdiction to frame an assessment under Section 147 what is essential is a valid reopening of a previously closed assessment. If the very foundation of the reopening is knocked out, any further proceeding in respect to such assessment naturally would not survive. If the stand of the revenue is accepted, a very incongruent situation would come about if ultimately the AO were to drop the ground on which notice for reopening had been issued but to chase some other grounds not so mentioned for issuance of the notice. In such a situation, even if a case where notice for reopening has been issued beyond a period of four years, the assessment would continue even though on all the grounds on which the additions are being made, there was no failure on the part of the assessee to disclose true and full material facts. In such a situation an important requirement of failure on part of the assessee to disclose truly and fully all material facts would be totally circumvented. As already noted, except for the Punjab and Haryana High Court in case of Majinder Singh Kang v. Commissioner of Income-Tax and anr (2012 (6) TMI 616 - PUNJAB AND HARYANA HIGH COURT) all courts have uniformly taken a view that Explanation 3 to Section 147 of the Act does not change the situation insofar as the present controversy is concerned. Leading decision of Bombay High Court in case of CIT. v. Jet Airways (I) Ltd. 2010 (4) TMI 431 - HIGH COURT OF BOMBAY has been followed by different High Courts wherin the High Court, in its elaborate decision considering the statutory provisions, different judicial pronouncements and the explanatory memorandum for introduction of Explanation 3 to Section 147 ruled in favour of the assessee. Punjab and Haryana High Court in case of Majinder Singh Kang v. Commissioner of Income-Tax and anr (supra) ofcourse has sounded a different note, however, the explanatory memorandum to Explanation 3 to Section 147 of the Act was not brought to the notice of the High Court in the said decision. The High Court gave considerable importance on such Explanation 3 to Section 147 and the language used therein. In the result, we answer the question in the affirmative i.e. in favour of the assessee and against the revenue.

Issues Involved:
1. Jurisdiction of the Assessing Officer in reassessment proceedings.
2. Validity of additions made on grounds not mentioned in the reasons recorded for reopening the assessment.
3. Interpretation and application of Explanation 3 to Section 147 of the Income Tax Act, 1961.

Detailed Analysis:

1. Jurisdiction of the Assessing Officer in Reassessment Proceedings
The core issue was whether the Assessing Officer (AO) had jurisdiction to make additions on grounds not mentioned in the reasons recorded for reopening the assessment. The Tribunal held that the AO's order was without jurisdiction and bad in law because no additions were made on the grounds that formed the basis for reopening the assessment. The Tribunal relied on the decision of the Bombay High Court in CIT v. Jet Airways (I) Ltd., which stated that if the AO does not assess or reassess the income which was the basis of the notice, it is not open to him to assess income on some other issue independently.

2. Validity of Additions Made on Grounds Not Mentioned in the Reasons Recorded for Reopening the Assessment
The High Court examined whether the AO could make additions on grounds not mentioned in the reasons recorded for reopening the assessment once the original grounds for reopening failed. The Tribunal had observed that the AO did not disturb the deduction under Section 80HHC, which was the reason for reopening the assessment. Therefore, the reassessment was deemed without jurisdiction. The High Court upheld this view, agreeing with the Tribunal that the AO cannot make additions on other grounds if the primary reason for reopening the assessment fails.

3. Interpretation and Application of Explanation 3 to Section 147 of the Income Tax Act, 1961
The High Court discussed the scope and implications of Explanation 3 to Section 147, which allows the AO to assess or reassess income in respect of any issue that comes to his notice subsequently during the reassessment proceedings, even if the reasons for such issue were not included in the reasons recorded under Section 148(2). The High Court noted that Explanation 3 was meant to clarify the legislative intent and put to rest the legal controversy regarding the AO's powers during reassessment. However, the Court emphasized that Explanation 3 does not expand the AO's jurisdiction to make additions on grounds not mentioned in the reasons for reopening if the original grounds fail.

The Court referred to various judgments, including:
- CIT v. Jet Airways (I) Ltd.: Held that if the AO does not assess the income which was the basis of the notice, he cannot assess any other income independently.
- Ranbaxy Laboratories Ltd. v. CIT: Agreed with the Bombay High Court's reasoning and emphasized that the AO cannot make a roving inquiry into different items of income not connected with the reasons for reopening.
- ACIT v. Major Deepak Mehta: Supported the view that the AO's jurisdiction is limited to the reasons recorded for reopening.

The Court concluded that Explanation 3 to Section 147 does not change the basic proposition that a valid reopening of assessment is essential for the AO to assess any other income that comes to his notice during reassessment proceedings.

Conclusion
The High Court affirmed the Tribunal's decision, holding that the AO cannot make additions on grounds not mentioned in the reasons recorded for reopening the assessment if the original grounds fail. The Court dismissed all tax appeals, ruling in favor of the assessee and against the revenue.

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