Section 147 of the Income Tax Act, 1961 allows reopening of assessment of income, in case the Assessing Officer believes that any income which is chargeable to tax has not been assessed for any assessment year. However no reassessment is allowed in cases where the AO discovers no new fact necessary for the assessment of his income.
When reopening of assessment is allowed:
No reopening is allowed unless the reopening is based on any information gathered subsequent to an assessment. It is often observed that details of income are collected by the AO but assessment orders have already been passed without reference to such details allowing an exemption. The question that arises in such cases is whether the Assessing Officer has rightly applied his mind during the assessment proceedings in the issue concerned, and whether the exemption was granted after due diligence, where reassessment proceedings cannot be initiated.
The issue gets more complicated where the assessee proves that he has filed details of his income as per the AO’s inquiry but the AO contends that he did not notice the same.
Notice for reopening of assessment:
Section 148(1) of the Income Tax Act, 1961 provides that before making any reassessment, the Assessing Officer is required to serve a notice on the assessee requiring him to file a return of his income for the relevant assessment year. Section 149(1) of the Act requires that no notice shall be issued after end of four years from the order of the original assessment.
Judicial decisions in connection with reopening of assessment:
The issues came up before the courts that where a regular order of assessment is passed, whether reopening in such a case would be permitted. The issue appeared before the Full Bench of the Delhi High Court in CIT v. Kelvinator of India Ltd., 256 ITR 1. In this case, the assessment was completed as per section 143(3) of the Act. Later on it was noticed by the Assessing Officer that as stated in the accounts and tax audit report many expenses had been wrongly allowed as deductions. Accordingly a notice for reassessment under section 147 was issued.
The assessee challenged the reassessment in appeal. The Commissioner (Appeals) allowed the appeal holding that the assessee had disclosed all material facts and no new fact was available with the Assessing Officer. It was further held that it was nothing but a mere change of opinion of the Assessing Officer. The Tribunal confirmed the order of the Commissioner (Appeals).
The matter came up before the Delhi High Court in appeal. Before the Delhi High Court the Learned Counsel for the department argued that a mere change of opinion was relevant for the purposes of section 147(b) and that initiation of reassessment could be allowed if it was found that the Assessing Officer had passed the order of assessment without applying his mind.
The department argued that the application of mind could be discovered from the order of assessment as if the order did not contain any discussion regarding the particular subject, it could be presumed that it had been rendered without applying mind.
The Learned Counsel for the assessee argued before the Delhi High Court that reassessment should be based on a subsequent information. According to the assessee, there should be some new information appearing before the Assessing Officer after completion of the assessment.
The Delhi High Court after taking into account many decisions observed that where the Assessing Officer had considered the total matter, the order could not be changed by exercising the jurisdiction of rectification of error.
The Delhi High Court further noted that where assessment order has been passed under section 143(3), it can be presumed that such an order has been passed on application of mind by the AO. Finally The Delhi High Court held that since the material was before the Assessing Officer during assessment, the reassessment proceedings were not valid and should be set aside.
The Bombay High Court has followed the decision of the Delhi High Court and has held that if an assessment order is passed under section 143(3) and the assessee has not failed to disclose material facts, no reopening could be allowed.
However, the division bench of the Allahabad High Court recently expressed a contrary view. In the case of EMA India Ltd. v. ACIT, it was observed that the assessment proceedings were completed as per section 143(3). Reassessment proceedings were initiated as per section 147 to disallow some expenditure and other documents filed before the Assessing Officer in the proceedings.
The assessee challenged the reassessment proceedings before the High Court. It was submitted on behalf of the assessee that the initiation of proceedings was based on mere change of opinion and was without jurisdiction. It was submitted that the Assessing Officer did not assess some items during the assessment proceedings. The department submitted that the initiation of reassessment proceedings should be allowed if it was found that some items of income which were chargeable to tax had escaped assessment and no discussion of such items of income was present in the assessment order.
According to the Allahabad High Court, where the assessment order had been passed and certain items of income were not discussed and it escaped assessment and proceedings were initiated for those items of income, in the circumstances there was no change of opinion as no opinion was formed by the Assessing Officer on the subject.
The Allahabad High Court did not consider the decision of by the Delhi High Court in Kelvinator’s case and therefore held that the reassessment proceedings were valid.
The Gujarat High Court in the case of Praful Chunilal Patel, 236 ITR 732 has followed the decision of the Allahabad High Court in EVA’s case.
However the Apex Court has held that reopening of assessment on the basis of a subsequent decision after expiry of four years from the assessment year was not justified.