Re-opening of Assessments U/s.147 – The concept of “Mere Change of Opinion”

The words and phrases ‘Mere Change of Opinion’ do not appear in the section. However, this phrase is often referred. On study it is found that it is the result of Judge made law. Interestingly, the phrase was first coined by K.N. Rajagopala Sastri appearing on behalf of the Revenue in the case of Maharaj Kumar Kamal Singh vs. CIT [1959] 35 ITR 1 (SC) while relying on the observations of Mr. Justice Rowlatt in Anderton and Halstead Ltd. vs. Birrell [1932] 1 K.B. 271 which was referred in CIT vs. Sir Mahomed Yusuf Ismail [1944] 12 ITR 8 (Bom.). The argument was not dealt with, however this paved the way for development of Judge made law on this point.

Recently in CIT vs. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC) [affirming CIT vs. Kelvinator of India Ltd. [2002] 256 ITR 1 (Delhi) (FB)] J. Kapadia held that the concept of ‘change of opinion’ must be treated as an in-built test to check abuse of power by Assessing Officer and that the reasons must have a live link with formation of belief. Important excerpt of the decision is reproduced hereunder:

“However, one needs to give a schematic interpretation to the words ‘reason to believe’, failing which section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of ‘mere change of opinion’, which cannot be per se reason to reopen. One must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess, but the reassessment has to be based on fulfilment of certain pre-conditions and if the concept of ‘change of opinion’ is removed as contended on behalf of the department, then in the garb of reopening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989 , the Assessing Officer has power to reopen, provided there is ‘tangible material’ to come to conclusion that there is escapement of income from assessment. Under the Direct Tax Laws (Amendment) Act, 1987, the Parliament not only deleted the words ‘reason to believe’ but also inserted the word ‘opinion’ in section 147. However, on receipt of representations from the companies against omission of the words ‘reason to believe’, the Parliament reintroduced the said expression and deleted the word ‘opinion’ on the ground that it would vest arbitrary powers in the Assessing Officer.”

In the Kelvinator’s judgment the true meaning of the phrase ‘Reason to Believe’ was also explained. ‘Change of Opinion’ rebuts the formation of ‘Reason to Believe’ which is the crux. If there is “Change of opinion” it is essentially a Review which cannot be done as it is a separate statutory process.

  1. Some important decisions on initiation of reassessment proceedings on mere change of opinion
  • In Chandrashekhar Karundia (HUF) vs. ITO 14(3)(3) [2011] 14 taxmann.com 37 (Mum. ITAT), the A.O. completed assessment u/s 143(3) determining total income at nil (as per Return filed by the assessee). Subsequently, A.O. initiated reassessment proceedings taking a view that assessee had wrongly adjusted speculation loss on account of Futures & Options transactions against short-term capital gain. Hon’ble Mr. R.V. Easwar, President ITAT held that notice u/s 148 had been issued on a mere change of opinion and, therefore, reassessment proceedings initiated in pursuance of said notice were to be quashed since the A.O. himself had accepted F&O transactions to be non-speculative in nature being hedging transaction within meaning of clause (b) of proviso to section 43(5) while completing original assessment.
  • In B.J. Services Company Middle East Ltd. vs. Deputy Director of Income-tax (International Taxation), Dehradun [2011] 12 taxmann.com 493 (Uttarakhand) it was held that reassessment cannot be initiated on a mere change of opinion to merely re-examine an issue on basis of information or material which was already available to A.O. at time of completion of original assessment. Further held that subsequent pronouncement by a Court or a Superior Court do not entitle the A.O. to reopen assessment proceedings on ground that A.O. has reasons to believe that income has escaped assessment or that assessee has not fully and truly disclosed all material facts.
  • In CIT vs. Manak Shoes Co. (P.) Ltd. [2011] 200 Taxman 133 (Del.): [2011] 11 taxmann.com 217 (Delhi), the A.O. reopened assessee’s assessment for relevant assessment year on ground that though there was no manufacturing activity during previous year, still assessee had claimed depreciation on plant, machinery, etc. and had also claimed expenses on power and fuel charges, job charges and raw material; and the A.O. accordingly passed assessment order u/s 143/147 disallowing depreciation and said expenses. It was held that when at time of original assessment proceedings, assessee had brought all relevant facts to notice of A.O. and original assessment order unequivocally manifested that A.O. specifically went into issue as to whether there was a manufacturing activity or not, reopening of assessment constituted a change of opinion.

Similarly view was taken in CIT vs. Feather Foam Enterprises (P) Ltd. [2008] 296 ITR 342 (Del.) where it was held that where the explanation of assessee has been accepted in original assessment, subsequent rejection of explanation for the purpose of reassessment amounts to change of opinion.

The Delhi High Court in CIT vs. Kelvinator of India Limited [2002] 256 ITR 1 (Del.) [decision affirmed by the Supreme Court in [2010] 320 ITR 561 (SC)] held that if two interpretations are possible, the interpretation which upholds constitutionality, it is trite, should be favoured. In the event it is held that by reason of section 147 if the ITO exercises his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional. We are therefore of the opinion that section 147 of the Act does not postulate conferment of power upon the A.O. to initiate reassessment proceeding upon his mere change of opinion. If “reason to believe” of the A.O. is founded on an information which might have been received by the A.O. after the completion of assessment, it may be a sound foundation for exercising the power under section 147 read with section 148 of the Act. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.

  • It has been held in CIT vs. Bhanji Lavji [1971] 79 ITR 582 (SC) that when the primary facts necessary for assessment are fully and truly disclosed, the ITO will not be entitled on change of opinion to commence proceedings for reassessment. Similarly, if he has raised a wrong legal inference from the facts disclosed, he will not, on that account, be competent to commence reassessment proceedings. Similar view was taken in ITO vs. Nawab Mir Barkat Ali Khan Bahadur [1974] 97 ITR 239 (SC) where the Hon’ble Apex Court held that having second thoughts on the same material, and omission to draw the correct legal presumption during original assessment do not warrant the initiation of a proceeding u/s 147.
  • In determining whether commencement of reassessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. – Raymond Woollen Mills Ltd. vs. ITO and Others (1999) 236 ITR 34 (SC).
  • It was held in CIT vs. Former Finance (2003) 264 ITR 566 (SC) that reopening of assessment on mere change of opinion, is bad in law.
  • The Bombay High Court in the case of M.J. Pharmaceuticals Ltd. vs. DCIT [2008] 297 ITR 119 (Bom.) held that reassessment proceedings based on change of opinion is not valid. Issue regarding addition of amount of deferred taxation for computing book profits u/s. 115JB having been raised by the AO at the time of original assessment u/s. 143(3) and no addition having been made by AO on the account on being satisfied with the explanation of the assessee reopening of assessment on the very same issue suffered from change of opinion in the absence of any fresh material, hence invalid.
  • Where A.O. had allowed a deduction after making queries and considering the reply of the assessee, but the assessment was reopened as the Revenue audit was of the view that the deduction was not admissible. It was held that such opinion is mere change of opinion. Notice u/s 148 is not valid – Carlton Overseas P. Ltd. vs. ITO [2009] 318 ITR 295 (Del.).
  • Where a deduction has been considered and allowed, subsequent withdrawal of same u/s 148 amounts to change of opinion. Notice u/s 148 is not valid – CIT vs. Chakiat Agencies Pvt. Ltd. [2009] 314 ITR 200 (Mad.); Caetini India Ltd. vs. Addl. CIT [2009] 314 ITR 275 (Bom.); Pan Drugs Ltd. vs. DCIT [2009] 316 ITR (AT) 72 (Ahm.).
  • Some other important decisions with respect to “Change of Opinion” which may be referred to are Nawabganj Sugar Mills Co. Ltd. vs. CIT [1980] 123 ITR 287 (Del.); Bharat V. Patel vs. Union of India [2004] 268 ITR 116 (Guj.); Girdhar Gopal Gulati vs. UOI (2004) 269 ITR 45 (All.); Sirpur Paper Mills Ltd. vs. ITO [1978] 114 ITR 404 (AP).

 

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