S.147 of the Income Tax Act 1961

Reopening of a completed assessment under S. 147 of the Income Tax Act is a widely debated legal issue. From being challenged on grounds of its constitutional validity under Art. 14 of the Constitution to being upheld as a necessary check against escapement of disallowable income, this legal provision has been emphatically criticised and contested. Every time, the issue has been settled by terming this provision as a necessary evil. Also, the Courts have displayed a predilection for deciding in favour of the assesse for myriad reasons. The intricacies and the nuances involved in judicial reasoning are discussed herein with the help of relevant case laws- both landmark rulings and recent judgments- to ascertain the legal position on the important questions raised by this provision.

The new provision after the 1989 Direct Taxation Amendment reads that the ambiguous and vague phrase, ‘Reason to believe’ that certain income has escaped assessment on part of the A.O shall be the sole criteria to determine the legality of the reopening of a completed assessment. This change gives a wider berth to the A. O since he no longer has to rely upon a non-disclosure on part of the assessee to warrant his belief. But, this phrase has been subject to multiple judicial interpretations.

The Court has adopted the standard of an honest and reasonable man to analyse the A.O’s behaviour against that of a constructed rational being who would consider all material reasons before arriving at a rational conclusion. Hence the predominantly subjective standard of satisfaction on part of the A.O has been replaced by a stronger and an objective criteria based on ‘reason to believe’. But in Ram Swarup Cold Storage & Allied Industries v. ACIT and Britannia Industries Ltd. v. Dy. CIT it was held that the word ‘reason to believe’, does not signify the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether such material would conclusively prove escapement of income is not the concern at that stage. But such a view would provide a large room for subjectivity and it’d hence be problematic.

This was clarified by the Supreme Court in Shamsuddin Ansari v. Union of India wherein it was held that the formation of the belief may be within the subjective realm of satisfaction of the assessing officer insofar as it is not necessary for the belief to be a conclusive fact.
Further, it can be added that the belief must be held in good faith and also that it cannot be merely a pretence. It is open to the Court to examine whether the reasons for the belief have a rational nexus or a relevant bearing to the information of the belief and are not extraneous or irrelevant for the purpose of the Section. To that limited extent, the action of the Assessing Officer in initiating proceedings u/s. 147 can be challenged in a Court of law. This brings us to the question of the success rate in such challenges.

Recent trends in the precedents would persuade one to conclude that the Courts have been reluctant to allow a reopening u/s. 147/ 148 unless there has been an incomplete or untrue disclosure on part of the assesse. Thus the essence of the requirement for a reassessment has been reduced to mere wrong conduct or fault of the assessee. So reopening has been allowed when the assesse had not given cogent reasons as to why the notice under S. 148 should be declared illegal and merely claimed that the A.O had no jurisdiction; also when he had outright refused to declare the sufficient information to satisfy the inquiry by the A.O. The rationale being that he cannot claim a remedy in law when he himself had not acted in accordance with the law.
In April 2015, the Allahabad High Court found that the assessee had failed to disclose fully and truly the complete facts in respect of L.G. Electronics, Korea having a P.E. in India to which payments have been made. So a rational nexus was found between the reasons recorded and the belief that income had escaped assessment because of fully and truly information having not been furnished by the assessee. These grounds were found to be valid reasons to believe that income had escaped assessment. Hence the Court found no illegality in the notice issued under Section 148 and decided the matter against the assessee.

Also, when the assesse had already disclosed all relevant records the fact that a subsequent business loss has occurred shall be no ground to reopen the completed assessment.
The Allahabad High Court has also held in the case of Foramer v. CIT & Ors that in cases where there was no failure to disclose material facts by an assessee, a reopening may not be sustainable. So the position of the judiciary in this regard is arguably settled. But the Courts have even ventured so far as to finding the legislative intent in seeking to justify their stand.

The Delhi High Court has held that the legislative intent could not have been to allow a power of review to the A.O since such a legal position would grant excessive and arbitrary power to the A.O to revise the final speaking order as per his changing moods.
Therefore, AO does not have any jurisdiction to review his own order. His jurisdiction is confined to only rectification of apparent mistakes u/s.154 and the said powers cannot be exercised where the issues are debatable. According to the Court, what cannot be done directly, cannot be done indirectly by taking recourse to provisions relating to reassessment or by way of rectification of mistake.

But the interpretation of statutory language is not settled and it is another moot point. Whether the rule of strict interpretation or construction or contra preferentum should be adopted is debatable. But the Court has said that a legal provision should be adopted in favour of the assessee.
Furthermore, a question arises whether the A.O has a power of review. The landmark ruling in CIT v Kelvinator of India has settled this and it has reaffirmed that the A.O hath not a power of review. Article 14 has been favourably relied upon by the court to support the contention that permitting an AO to review his order results in violation of the Constitution which guarantees protection against such administrative actions of the executive.

When it comes to question whether a mere change of opinion could be a valid ground to reopen an assessment, Gujarat High Court in the case of Praful Chunilal Patel has answered in the positive. It was held that the word ‘assessment’ would mean the ascertainment of the amount of taxable income and the tax payable thereon. In other words, where there is no ascertainment of amount of taxable income and the tax payable thereon, it can never be said that such income was assessed. It was further held that merely because during the assessment proceedings the relevant material was on record, it cannot be inferred that the AO must necessarily have deliberated over it and taken in to account while ascertaining the taxable income or that he had formed an opinion in respect thereof. If looking back, it appears to the AO (albeit, within four years from the end of the relevant assessment year) that particular item even though reflected on the record was not subjected to assessment and was left out while working out the taxable income earlier, that would enable him to initiate the proceedings for reassessment. Such a view was also upheld in EMA India v ACIT wherein according to the Allahabad High Court, there could be no change of opinion when no opinion was formed by the Assessing Officer.
But the debate was settled by CIT v Kelvinator of India wherein the Court opined that it would be irrational and arbitrary to allow for reopening on account of change in A.O’s opinion. There has to be a reason to believe which predicates that the Assessing Officer must hold a belief by the existence of reasons for holding such a belief. In other words, it contemplates existence of reasons on which the belief is founded and not merely a belief in the existence of reasons inducing the belief. Such a belief may not be based merely on reasons but it must be founded on material information which have a rational nexus to the belief .

The next question is whether non application of mind by the A.O would be sufficient reason to reopen the case. S. 114 of the Indian Evidence Act vide clause (e) provides for the presumption that due care has been taken by a public officer in performing his duty. Therefore on completion of assessment, it can be presumed that the AO has examined the material produced before him. So, the requirement that the discussions as to the inquiry should be made available in the A.O’ s report to infer an application of his mind has an unintended but serious reflection on the state of affairs in the Revenue department, indicating that orders as a rule are passed without due diligence, unless otherwise sufficiently established.
But new information chanced upon by the A.O after the completion of the assessment is a valid ground on which a reason to believe can be founded provided that the information received subsequent to the assessment is material and definite. But the Court has also declined to allow reassessment on the ground that the addition sought to be made by the A.O is not approved by the Court.

Time barred cases are also those in which the Court has declined to allow a reopening. Hence, after 4 years the A.O’s power to reassess elapses.
Finally, a reopening on mere opinion of District Valuation Officer is illegal though the A.O is bound to follow his opinion during the assessment. In Assistant Commissioner of Income-tax v. Dhariya Construction Co. it was held that the mere opinion of DVO is not sufficient to reopen a completed assessment. The assessing officer should apply his mind and form a belief thereon on reopening the assessment. The rationale behind this may be that the DVO’s report may be based only on his opinion or on some tangible material. In the former case it would be only estimation or guesswork. If A.O. has relied mainly on the report of the DVO without pointing out any defect or discrepancy much less any material defect in the books of account of the assessee, and the expenditure incurred by the assessee in construction and shown in the books of account are duly supported by bills and vouchers it would be unfair to reopen the completed assessment.
To conclude the discussion on the situations which would amount to an illegal reopening, it can be held forth that the judicial decisions have favoured the assessee in a move to encourage business and support the commercial interests.


When reopening is illegal Case Law
There is no reason to believe that certain disallowable income has not escaped assessment Ram Swarup Cold Storage & Allied Industries v. ACIT 1991. View approved in SC case (Kelvinator case).
On the mere opinion of the DVO Assistant Commissioner of Income-tax v. Dhariya Construction Co. [2010] 328 ITR 515.
Time barred (4years period from the date when the assessment is concluded) Statutory provision
If the Court doesn’t approve of the additional material sought to be included by the A.O Deputy Commissioner of Income-tax v. Gujarat Narmada Valley Fertilizers Co. Ltd. Case reference against High court SCA NO. 25090/2006
If subsequent information discovered isn’t material ITO v. Lakhmani Dewal Dass [1976] 103 ITR (SC) 437.
Mere change of opinion CIT v. Kelvinator of India 256 ITR 1. Del HC judgment upheld in SC.
To review earlier decision CIT v Kelvinator of India
Complete and true disclosure on part of the assessee of all relevant info Foramer v. CIT & Ors
On account of non-application of mind CIT v Kelvinator of India




Lakshana Radhakrishnan is presently an undergraduate student at National Academy of Legal Studies and Research (NALSAR) University of Law, Hyderabad. She will be graduating in 2019. She can be contacted at lakshana@outlook.in.

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