[Amrit Singh is a fourth-year B.A., LL.B. (Hons.) student at Institute of Law, Nirma University]
According to section 2(9) of the Income Tax Act 1961, the term “assessment year” means the period of twelve months commencing on the 1st day of April every year. Reassessment means reopening the already completed assessment on fulfilment of certain conditions to reassess the total income of the assessee by including the income which has escaped earlier assessment.
Section 147 of the Act talks about a situation wherein an income, which is chargeable to tax, has escaped assessment for any assessment year. If an Assessing Officer (AO) has a reason to believe this, then he may reassess such income, which comes to his notice subsequently in the course of the proceedings under this section. However, no action could be taken after the expiry of four years from the end of that relevant assessment year.
The expression “reason to believe” has been interpreted by courts in several judgments. This expression is usually subject to considerable debate as to its precise meaning. In IL & FS Investment Managers Ltd. v. Income Tax Officer, IL&FS was initially allowed a deduction or depreciation of Rs. 3,05,77,001/- for the assessment year 2003-04. However, later, the income tax authorities communicated to IL&FS that there was an audit objection to a deduction amounting to a sum of Rs. 2,82,74,878/-, which was claimed on the intangible assets.
IL&FS stated that the expression “intangible assets” is covered under explanation 3 to section 32(1) of the Act and that deduction should be allowed. Despite this explanation, IL&FS received a notice under section 148 wherein the AO claimed that he had “reason to believe” that some income chargeable to tax had escaped assessment. The counsel for IL&FS relied on the judgments laid down in Sheo Narain Jaiswal v. ITO and CIT v. T.R. Rajakumari wherein it was held that reassessment based on the directions of superiors is bad in law. In addition, it was held that if the income-tax officer does not form his own belief but merely acts at the behest of any superior authority then the conditions for re-assessment are not met.
In the present case, the Bombay High Court observed that initially the AO had allowed deduction and then, when there was an audit objection, he disagreed with those objections. However, even after recording his disagreement, he reopened the assessment which made it difficult to conclude that he had formed his own opinion. The Court also noted that he had not provided any reasons for such reassessment and that reopening was without any basis and merely a change of opinion is not permissible as far as sections 147 and 148 are concerned.
Further, in Raajratna Metal Industries Ltd. v. Assistant Commissioner of Income Tax, an issue arose whether reassessment proceedings initiated solely at the instance of the audit party are permissible. The Gujarat High Court noticed that reassessment was sought only because of the audit party and not because the AO believed so. Further, the AO had also asked the audit party to drop its objections; however, this did not happen and was forced to follow the orders and reopen the assessment proceedings. Hence, the Court quashed the reassessment proceedings as they were not initiated at the instance of the AO.
Moreover, in The Commissioner of Income Tax, Mumbai v. Shri Rajan Aswani, the Bombay High Court was once again called upon to decide an issue whether an AO can reopen an assessment on the same ground on which he had initially opposed or objected to in reply to the query from the audit report. In this case, the revenue had an interesting argument to show that the AO had applied his own mind in reopening the assessment. It argued that since there was a time gap between AO’s objections to audit report and issuance of reopening notice, this implied that the AO had applied his own mind to arrive at the conclusion.
The Court did not accept this contention because there was no evidence to prove the same thing. Moreover, it stated that the AO should have recorded reasons to prove a change of opinion and this is necessary when the AO has previously objected to the audit report. Therefore, in order to show that the AO had applied his own mind for reopening the assessment, passage of time is not a cogent reason.
Further, in Adani Infrastructure & Developers (P) Ltd. v. Assistant Commissioner of Income Tax,[1] Adani had approached the High Court under article 226 of the Constitution of India and challenged the notice issued under section 148 of the Act. In this case, Adani, which was a private limited company engaged in the business of development and real estate, had filed its return for the assessment year 2012-13. After scrutiny of the details furnished by Adani, the AO made an assessment to determine the total income and sum payable by the assessee on the basis of such assessment.
The order dated 16 March 2015 was issued and the Adani was allowed some disallowances according to section 14A of the Act read with rule 8D of the Income Tax Rules, 1962. However, the revenue wanted to reassess the income but the same was opposed by Adani on the basis of the details that it had already furnished. On 20 August 2018, the tax department rejected the claims of the assessee.
Before the Gujarat High Court, Adani claimed the reassessment was not valid as it was not based upon the satisfaction of the AO, but at that of the audit department. It also placed reliance on the judgment in Jagat Jayantilal Parikh v. Dy. CIT, wherein the Gujarat High Court held:
It is a well laid down principle that the Assessing Officer requires to form his own belief at the time of reopening the assessment and while issuing notice of reopening. However, on having noticed certain aspects from the report of the audit party if the Assessing Officer chooses to form his opinion to reopen validity of reopening of such assessment cannot be challenged on the ground of such reopening of assessment being at the instance of audit party.
The High Court applied the aforementioned ratio in the case and observed that the AO had opposed the objections raised by the audit party by communicating internally. It also noted that AO, acting under the command of the audit party, had reopened the assessment, which clearly showed the lack of independent belief that is required as per section 147 of the Act to reopen assessment for any income that has escaped assessment. The High Court held that since reopening of assessment was solely based upon the findings of the audit party and not because the AO had “reason to believe” that any income chargeable to tax has escaped assessment, therefore, it set aside the notice issued under section 148 of the Act and ruled in favour of the assessee.
Hence, it can be safely concluded that for reopening of assessment, the AO has to apply his own mind to the facts of every case and, if such reassessment is initiated solely at the instance of the audit report, then the order for reassessment issued under section 148 is liable to be quashed and set aside.
– Amrit Singh
[1] R/Special Civil Application No. 14461 of 2018.