Tuesday 26 February 2013

Whether when very foundation of reopening is knocked out, any further proceeding in respect to such assessment can still survive - NO: HC

THE issues before the Bench are - Whether if the reason for which the assessment is reopened u/s 147 fails, the AO can still proceed to assess other income, which had escaped assessment; Whether when the very foundation of the reopening is knocked out, any further proceeding in respect to such assessment can still survive and Whether 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 part of the assessee to disclose true and full material facts. And the verdict goes against the Revenue.
Facts of the case
The assessee had filed return of income and assessment was framed originally after scrutiny. Thereafter, the AO issued a notice u/s 148 for reopening such assessment. The AO had recorded reasons that the return was filed after claiming the deduction of Rs. 1,82,746 u/s. 80HHC, but on verification it was found that the assessee had considered DEPB License income and excise
duty refund. the AO further recorded that if these two export incentives were excluded from the income of the assessee, there would be a loss from the export business and consequently the assessee would not be entitled to get deduction u/s. 80HHC. The AO made several additions on account of unexplained cash credit and unverifiable purchases, however, did not disturb the deduction previously claimed by the assessee u/s 80HHC, and granted in the original assessment order. On appeal, the CIT(A) granted substantial relief and reduced the deduction.
Aggrieved, both the assessee and the Revenue field appeals before the Tribunal. The Tribunal dismissed the Revenue's appeals, and relied on the Bombay High Court in the case of CIT. vs. Jet Airways (I) Ltd., where it was held that if upon the issuance of a notice u/s 148(2), the AO accepts the objections of the assessee and does not assess or reassess the income which was the basis of the notice, it would not be open to him to assess income under some other issue independently.
Thereafter, the Revenue has filed this appeal before the High Court.
The DR submitted that Section 147 of the Act, as amended w.e.f. 01.04.1989, gives ample authority to an AO to assess or reassess any income chargeable to tax which has escaped assessment, of course, as long as the requirements of a valid reopening of the assessment are satisfied. He further submitted that, once an assessment was reopened, by virtue of valid exercise of powers u/s 147 of the Act, thereafter, there would be no further limitation on the AO framing assessment on all or any of the grounds mentioned in the reasons recorded or even on the grounds not so mentioned. To substantiate his contention, the DR relied on the decision of Punjab and Haryana High Court in case of Majinder Singh Kang Vs. Commissioner of Income-Tax and anr.
On the other hand, the Counsel for the assessee submitted that Explanation 3 to Section 147 of the Act did not change this basic proposition, nor it was meant to do so as would be clear from the explanatory memorandum explaining the reasons for introduction of the said explanation. The Counsel further submitted that power to reopen the assessment which has been previously closed is peculiar in nature and is available to the AO under the Income Tax Act which is not normally available to an officer exercising judicial or quasi judicial powers. He submitted that however, such powers, must be strictly construed, because authorizing an AO to assess income under any head even if the same was not part of the reasons recorded for reopening of the assessment, would give wide powers which are possible of arbitrary exercise. The Counsel relied on Commissioner of Income Tax Vs. Jet Airways (I) Ltd. in which the Bombay High Court considering an identical situation interpreting the provisions contained in Section 147 of the Act held that the situation would not be different by virtue of introduction of Explanation 3 to the said section. He referred to the part of the judgment, where the High Court held that if upon issuance of a notice u/s 148 the AO does not assess the income which he has reason to believe had escaped assessment and which forms the basis of a notice u/s 148, it is not open to the AO to assess independently any other income which does not form the subject matter of the notice.
Having heard the parties, the High Court held that,
++ section 147 of the Act gives power to the Assessing Officer for reopening an assessment. Such powers, however, are hedged with several conditions. First the Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment. Further if the reopening is resorted beyond the period of four years from the end of the relevant assessment year, additional requirement that income chargeable to tax has escaped assessment by the reason of failure on the part of the assessee to make a return under Section 139 or in response to a notice under Section 142(1) or 148 of the Act or to disclose fully and truly all material facts necessary for the assessment must also be satisfied. If the requirements of giving jurisdiction to the Assessing Officer to reopen assessment are satisfied, he may 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 the said section;
++ section 147 of the Act, even without the aid of Explanation 3 thus enabled the Assessing Officer while framing an assessment under Section 147 of the Act, to assess or reassess such income for which he had recorded his reasons to believe had escaped assessment and also any other income which escaped assessment which came to his notice subsequently in the course of the assessment proceedings;
++ sans 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 Assessing Officer 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 of the Act 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;
++ a question may therefore, arise whether introduction of Explanation (3) would change this position and for that purpose we need to ascertain what is true purport of Explanation 3 and the purpose for which the same was introduced. Let us have a closer look to such Explanation which provides that for the purpose of assessment or reassessment under the said section, the Assessing Officer may assess or reassess the income in respect of any issue which escaped assessment and which comes to his notice subsequently in the course of reassessment proceedings. The explanation further provides that this would be so notwithstanding that the reasons for such issue have not been included in the reasons recorded under Section 148(2);
++ if the contention of the assessee that even after introduction of Explanation 3 to Section 147 of the Act, the situation has not undergone any material change is accepted, the question that immediately would come to ones mind is, what then was the purpose of introducing such an explanation. An argument may arise that if before and after introduction of Explanation 3, the nature of jurisdiction exercised by the Assessing Officer was not to undergo any change, would Explanation 3 not be rendered redundant. Would such a situation not run counter to a well known legal principle that the Legislature cannot be seen to have enacted a redundant legislation and that every effort should be made to give such interpretation which ensures that a provision in a statute is not rendering otiose. Such question may have led to some interesting discussion. However, the entire issue has been put beyond any pale of controversy by virtue of the explanatory memorandum for introducing such explanation. Such explanatory memorandum reads as under:
Clarificatory amendment in respect of reassessment
Proceeding under section 147
1.
The existing provisions of section 147 provides, inter alia, that if the Assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may assess or reassess such income after recording reasons for re-opening the assessment. Further, he may also assess or reassess such other income which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section.
Some courts have held that the Assessing Officer has to restrict the reassessment proceedings only to issues in respect of which the reasons have been recorded for reopening the assessment. He is not emplowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent.
With a view to further clarifying the legislative intent, it is proposed to insert an Explanation in section 147 to provide that the Assessing Officer may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub-section (2) of section 148.
This amendment will take effect retrospectively from 1st April, 1989 and will, accordingly, apply in relation to assessment year 1989-1990 and subsequent years.
++ from the above, it can be seen that the explanation was meant to be clarificatory in nature and to put the issue beyond any legal controversy. When the Legislature found that in face of the provisions contained in Section 147 of the Act post 01.04.1989 some of the courts had taken a view that the Assessing Officer is restricted to the reassessment proceedings only on issues in respect of which the reasons were recorded for reopening the assessment, such explanation was introduced in the statute. Thus, the explanation was meant to be merely clarificatory in nature and was introduced with the purpose of putting at rest the legal controversy regarding the true interpretation of Section 147 of the Act which had arisen on account of certain judicial pronouncements. We have noticed that prior to enactment of Explanation 3 to Section 147, Punjab and Haryana High Court in case of Commissioner of Income Tax Vs. Atlas Cycle Industries had taken a restricted view of the power of the Assessing Officer to make any addition on the grounds not mentioned in the reasons recorded for reopening the assessment. We may also notice that Kerela High Court in case of Travencore Cements Ltd. Vs. Assistant Commissioner of Income-Tax and anr had taken somewhat similar stand;
++ explanation 3 to Section 147 of the Act thus does not in any manner, even purport to expand the powers of the Assessing Officer under Section 147 of the Act. In any case, an explanation cannot expand the scope and sweep of the main body of the statutory provision. In case of S.Sundaram Pillai Vs. V.R.Pattabiraman the Supreme Court observed that, an explanation added to a statutory provision is not a substantive provision but as the plain meaning of the word itself shows it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision;
++ we may also approach the question from a slightly different angle. It is not in dispute that once an assessment is reopened by a valid exercise of jurisdiction under Section 147 of the Act, it is open for the Assessing Officer to assess or reassess any income which had escaped assessment which comes to his light during the course of his assessment proceedings which was not mentioned in the reason for issuing notice under Section 148 of the Act. In a notice for reassessment which has been issued beyond a period of four years from the end of relevant assessment year, the condition that income chargeable to tax has escaped assessment for the reason of the failure on the part of the assessee to disclose truly and fully all material facts for the purpose of assessment must also be established unless ofcourse some other ground viz. non-filing of the return at all etc. is available to the Assessing Officer. If such non-disclosure of material facts is established with respect to the reason recorded for issuing notice for reopening the assessment, it would be open for the Assessing Officer to thereafter even assess other income which might have escaped assessment but which may not necessarily satisfy the requirement of non-disclosure of true and full material facts. If in such a situation, the stand of the revenue is accepted, a very incongruent situation would come about if ultimately the Assessing Officer 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 Vs. Commissioner of Income-Tax and anr 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. vs. Jet Airways (I) Ltd. has been followed by different High Courts. In case of CIT. vs. Jet Airways (I) Ltd.,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 of the Act, ruled in favour of the assessee;
++ Punjab and Haryana High Court in case of Majinder Singh Kang Vs. Commissioner of Income-Tax and anr ofcourse has sounded a different note. We may, however, notice that 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 of the Act and the language used therein.

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