The Hindu Business Line : Damocles sword of reassessment proceedings

The law for reopening an assessment was amended from Assessment Year 1989-90. The Assessing Officer must have `reason to believe' that income has escaped assessment; a mere change of opinion does not justify a reassessment.

Courts have given a strict interpretation of the law that imposes specific conditions that need to be satisfied before reassessment proceedings can be initiated. While this may comfort tax-payers, the legal remedy is costly and protracted.

Assessment proceedings have to be completed within two years from the end of the assessment year. However, this does not mean that a tax-payer can take it easy on the ground that the proceedings have reached finality. Powers have been given to the tax authorities to reopen assessments subject to fulfilment of the conditions laid down in Section 147 of the Income-Tax Act, 1961.

The law for reopening an assessment was amended with effect from the Assessment Year 1989-90. Circular No. 549, dated October 31, 1989, explained the change by stating that the amended Section 147 permitted the reopening of an assessment only if there was reason to believe that income had escaped the assessment, as was the position right from the inception of the law but which was sought to be disturbed.

A Full Bench of the Delhi High Court in C.I.T. vs Kelvinator of India Ltd (256 I.T.R. 1) examined the legal impact of this circular and the case law.

It was held that even after the amendment, the Assessing Officer must have `reason to believe' that income has escaped assessment; a mere change of opinion does not justify a reassessment and the Assessing Officer does not have the power of review on the same set of facts and law. The Bombay, Allahabad and Gujarat High Courts have also taken the view that a mere change of opinion does not justify the initiation of reassessment proceedings under the amended law.

Terms under amended Section

The proviso to the amended Section provides that no action can be taken after the expiry of four years from the end of the relevant assessment year unless the escapement is by reason of the failure on the part of the assessee to disclose fully or truly all material facts necessary for the assessment. Thus, even under the amended law, in all cases, there must be reasons to believe that income has escaped assessment. Protection is available to those who disclose material facts truly and fully.

In Rajesh Jhaveri Stock Brokers P. Ltd. v. C.I.T. (284 I.T.R.593), the assessee, a private limited company, filed its return for the assessment year 2001-02 declaring a loss of Rs 2,70,85,105. This was accepted and the assessment was made. A senior audit officer raised an objection on the ground that bad debts were not properly computed. The Assessing Officer did not accept the objection and his view was upheld by the Additional Commissioner. Subsequently, the former issued a notice under Section 148 of the Income-tax Act, 1961, on the ground that bad debts were wrongly computed.

A colourable exercise

On a writ petition challenging the notice, the Gujarat High Court held that the respondent had sustained his objection to the proposal made by the audit department and the objection raised by the respondent had been endorsed by the Additional Commissioner. Therefore, it was clear that the respondent did not hold the belief at any point of time, either before or after recording reasons, that the income of the assessee had escaped assessment on account of erroneous computation of loss. Recording reasons on the file was a mere pretence to give validity to the exercise of power for assuming jurisdiction. Thus, it was a colourable exercise of jurisdiction which could not be sustained in law.

`Reason to believe'

In Sunil Kumar Jain v. I.T.O. (284 I.T.R. 626 ), the Allahabad High Court held that the words "has reason to believe" in Section 147 are stronger than the words "is satisfied". The belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable; it must be based on reasons which are relevant and material. The expression "reason to believe" does not mean purely subjective satisfaction on the part of the Assessing Officer.

The belief must be held in good faith; it cannot be merely a pretence. It is open to a court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the Section.

The Madras High Court has dealt with this issue exhaustively in C.I.T. v. Elgi Finance Ltd (2006; 155 Taxman 124). In this case, the company was in the business of finance and leasing. For the assessment years 1992-93 and 1993-94, the assessments were completed under Section 143(3). After four years from the end of relevant assessment years, that is, on July 17, 1998, the Assessing Officer issued notice under Section 148 proposing to reopen the assessments on the ground that there was escapement of income as depreciation at a higher rate was allowed in favour of the assessee-company at the time of original assessments in respect of plant and machinery let out by assessee to other lessees. Accordingly, the Assessing Officer reassessed the income restricting the depreciation to the normal rate.

The High Court held that the company had filed the full set of accounts before the Assessing Officer, comprising of profit and loss account, balance-sheet and schedules thereto.

The company had furnished the details on the acquisition of various machineries and assets and the details on leasing them out to other parties. The assessee had also provided the details of lease rent received out of those lease agreements and the detailed computation of depreciation mentioning therein the written down value of machineries and assets before and after claiming the depreciation allowance for the impugned assessment years.

When the factual finding was that the assessee-company had fully and truly disclosed all material facts necessary for computing the depreciation allowance in the course of the original assessments completed under Section 143(3), the period of limitation applicable to the reopening for those years would be four years prescribed in the proviso to Section 147. Hence, the assessments were barred by limitation and liable to be set aside.

While the sword of reassessment proceedings is always hanging over the head of tax-payers, courts have given a strict interpretation of the law which imposes specific conditions that need to be satisfied before reassessment proceedings can be initiated.

While this may bring comfort to tax-payers, the legal remedy is costly and protracted.

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in)

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