The power of the A.O. to re-open the assessment is quite large in its realm. One of the most important aspects u/s. 147 is that Reopening of Assessment u/s. 147 cannot be made on “Reason to Believe”, In order to understand this phrase “Reasons to believe” various decisions to explain the meaning and scope of the phrases are specified as under and discussed.
The term “reason to believe” has been dealt by various courts in their decisions
- The A.O. can reopen an assessment provided there is ‘tangible material’ to come to the conclusion that there is escapement of income. Reasons must have a live link with the formation of the belief – CIT vs. Kelvinator of India Ltd.  320 ITR 561 (SC), IOT Infrastrature & Energy Services Ltd. vs. Asst. CIT  332 ITR 587 (Bom.). Also refer CIT vs. Daulat Ram Rawatmull  87 ITR 349 (SC).
- The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the ITO. The belief must be held in good faith; it cannot merely be a pretence – Narayanappa vs. CIT  63 ITR 219 (SC); Peerless General Finance and Investment Co. Ltd. vs. DCIT  273 ITR 16 (Cal.).
- In ITO & Others vs. Lakhmani Mewal Das 103 ITR 437 (SC)it was held that the powers of the ITO to reopen assessment, though wide, are not plenary. The words of the statute are ‘reason to believe’ and not ‘reason to suspect’. The reopening of an assessment after a lapse of many years is a serious matter.
- The important words u/s 147 are “has reason to believe” and these words are stronger than the words “is satisfied”. The belief entertained by the ITO must not be arbitrary. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court cannot of course investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice u/s 147 – Ganga Saran & Sons (P.) Ltd. vs. ITO  130 ITR 1 (SC).Similar views have been expressed by the Supreme Court in ITO vs. Nawab Mir Barkat Ali Khan Bahadur  97 ITR 239 (SC).
- The words “reason to believe” suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds, and that the ITO may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The ITO would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section – Sheo Nath Singh vs. AAC  82 ITR 147 (SC).Also refer CIT vs. Jamnadas Dwarkadas & Co.  209 ITR 1 (Bom.) and Raymond Woollen Mills Ltd. vs. ITO  236 ITR 34 (SC).
- 147: Reassessment – Valuation of closing stock (Sec. 145A):Assessee had not included CST and excise duty paid on closing stock, while making its valuation thereby claimed excess loss. The Court held that the Assessing Officer had sufficient reason to form belief that income of assessee had escaped assessment, hence reassessment was held to be valid. (Asst. Yr. 2000-01, 2001-02). – Ginni Filaments Ltd vs. CIT ( 2011) Tax .L.R. 538 (All).
- Reason to believe – Satisfaction: Reopening is not permissible on borrowed satisfaction of another Assessing Officer – CIT vs. Shree Rajasthan Syntex Ltd. (2009) 212 Taxation 275 (Raj.).
Recording of reasons – mandatory:
- Recently the Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd.  331 ITR 236 (Bom.)held that if A.O. does not assess income for which reasons were recorded u/s 147, he cannot assess other income u/s 147. The decision of presents an interesting authority on the subject of the scope of jurisdiction of an A.O. to re-assess income believed to have escaped assessment. HELD that:
- S. 147 provides that the A.O. may assess the income which has escaped assessment “and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section”. Explanation 3 to s. 147 inserted by Finance (No. 2) Act, 2009 w.r.e.f. 1-4-1989 provides that the AO “may assess or reassess the income in respect of any issue … notwithstanding the reasons for such issue have not been included in the reasons recorded …”
- The words “and also” indicate that reassessment must be with respect to the income for which the A.O. has formed an opinion and also in respect of any other income which comes to his notice subsequently. However, if the A.O. accepts the objection of the assessee and does not assess the income which was the basis of the notice, it is not open to him to assessee income under some other issue independently;
- Explanation 3 to s. 147 was inserted to supersede the judgments in Vipin Khanna 255 ITR 220 (P&H) & Travancore Cements 305 ITR 170 (Ker)where it was held that the AO could not assess income in respect of issues unconnected with the issue for which the notice was issued. However, Explanation 3 does not affect the judgements in Shri Ram Singh 306 ITR 343 (Raj) & Atlas Cycle Industries 180 ITR 319 (P&H) where it was held that if the A.O. accepted that the reasons for which the notice was issued were not correct, he would cease to have jurisdiction to proceed with the reassessment;
- Explanation 3 lifts the embargo inserted by judicial interpretation on the making of a s. 147 assessment in respect of items not referred to in the recorded reasons. However, it does not and cannot override the substantive part of s. 147 that the income for which the notice was issued must be assessable.
Please also refer the recent decision in ITO vs. Bidbhanjan Investment & Trading Co. (P) Ltd ( 2011) 59 DTR 345 (Mum) (Trib.) wherein it has been similarly held that if no addition is made on the basis of recording of reasons, the reassessment is bad in law.
- On receipt of notice, assessee should file the return. Thereafter he is entitled to seek reasons for issuance of such notice and the A.O. is bound to furnish reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file objections to issuance of notice and the A.O. is bound to dispose of the same by passing a speaking order. – GKN Driveshafts (India) Ltd. vs. ITO & Others  259 ITR 19 (SC) ; Berger Paints India Ltd. vs. ACIT 266 ITR 462 (Cal); K.S. Suresh vs. DCIT  279 ITR 61 (Mad.), Keshav Shares and Stocks Ltd. vs. ITO  326 ITR 553 (Del.); Allana Cold Storage vs. ITO (2006) 287 ITR 1 (Bom.).
- The A.O. must record reasons for reopening before issuing notice u/s 148, failing which the notice will be invalid – East West Commercial Co. Ltd vs. ITO  128 ITR 326 (Cal.); CIT vs. Thakurlal  132 ITR 398 (MP).Recording of reasons is a condition precedent to invoke jurisdiction u/s 147/148 – CIT vs. Rajindra Rosin & Turpentine Industries (2008) 305 ITR 161 (Punj. & Har.)
- Language of section 148(2) does not permit recording of reasons between date of issuance of notice and service of notice, words used by provisions in no uncertain terms require recording of reasons before issuing any notice. – Rajoo Engineers vs. Dy. CIT (2008) 218 CTR (Guj.) 53.
- It was held in Berger Paints India Ltd vs. ACIT & Ors. (2004) 266 ITR 462 (Cal.)that assessee is entitled to be supplied with the reasons in the event he challenges the notice for reassessment; assessee is not estopped from challenging the impugned notice after having submitted to the jurisdiction of the officer by filing returns.
Some decisions on valuation related cases
Tarawati Debi Agarwal vs. ITO 162 ITR 606 (Cal): In this case assessee constructed a house property. Necessary facts required for assessment were disclosed to ITO and all the details required by him were furnished. A.O. referred the matter to departmental valuer and meanwhile completed the assessment on the basis of valuation by the assessee. It was held that a valuation report of the Government valuer estimating the cost of construction of, or of repair to, a property at a higher figure than that shown by the assessee does not, without other evidence, entitle the A.O. to take action u/s 147. Court observed, “in any event, valuation is a question of opinion and unless there is a clear finding on the basis of the materials that the assessee invested in the construction of the House Property more than what had been shown by her in the course of the assessment proceedings, the ITO cannot proceed merely on the basis of the valuation report of the Departmental valuer. Before taking action u/s 147 the A.O. has to reject the assessee’s valuation assigning reason therefor. On the basis of the difference in estimate, it cannot be said that the assessee actually invested more than what has been shown by her.”
In this context reference may also be made to the decisions in ITO vs. Santosh Kumar Dalmia  208 ITR 337 (Cal.); CIT vs. Darshan Singh  272 ITR 650 (P&H) andCIT vs. Phool Chand  272 ITR 239 (All.); Hotel Mount View vs. CIT & Others  280 ITR 51 (Cal.); Durga Sharan Udho Prasad vs. CIT  103 ITR 270 (Pat.); Jawaharlal Daryavbuxmal vs. CIT  137 ITR 54 (M.P.); Smt. Amala Das vs. CIT & Anr.  146 ITR 216 (P. & H.); Abdul Gaffar vs. ITO  154 ITR 1; Abdul Majid vs. ITO & Ors.  178 ITR 616 (M.P.); New Excelsior Theatre (P) Ltd. vs. M.B. Naik, ITO  185 ITR 158; Sardal Kehar Singh vs. CIT & Ors.  195 ITR 769 (Raj.); Hotel Regal International & Anr. vs. ITO & Anr.  320 ITR 573 (Cal.); ACIT vs. Dhariya Construction Co.  328 ITR 515 (SC).
By no stretch of imagination can the assessee’s omission or failure to disclose any fact be inferred from a revised departmental valuation report which came into being only subsequently and not any time earlier – Kamala Properties vs. IAC  Tax LR 468 (Cal.).
It was held in the case of CIT vs. Smt. Meena Devi Mansinghka (2008) 303 ITR 351 (Raj.) that mere DVO’s report cannot constitute reason to believe that income has escaped assessment for the purpose of initiating reassessment and therefore Tribunal was justified on holding that the reassessment proceedings initiated on the basis of DVO’s report were invalid ab initio, more so when it has found that the DVO’s report suffers from various defects and mistakes.
However, contrary view has been expressed in the following cases – Shanmugham Chetty vs. CIT  154 ITR 331 (Mad.); Ram Swarup Cold Storage & Allied Industries vs. ACIT  192 ITR 537 (All.).
Judicial view on disclosure of primary facts
Calcutta Discount Co. Ltd. vs. ITO & Another  41 ITR 191 (SC) – The words “omission or failure to disclose fully and truly all material facts necessary for his assessment for that year” postulate a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. After the insertion of Explanation to section 147 the position remains that so far as primary facts are concerned, it is assessee’s duty to disclose all of them, including particular entries in account books, particular portions of documents, documents and other evidences which could have been discovered by the assessing authority from the documents and other evidences disclosed. The duty however did not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the assessing authority, it is for him to decide what inferences of fact can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else – far less the assessee – to tell the assessing authority what inferences, whether of fact or of law, should be drawn. Also refer: Oriental Carpet Mfrs. (India) Ltd. vs. ITO  168 ITR 296 (P&H) : 31 Taxman 80 (P&H)
CIT vs. Gujarat Ginning and Mfg. Co. Ltd.  205 ITR 40 (Guj.) – The assessee stopped its business of spinning and confined itself to activity of letting out some portions of its property. In respect of some godowns which were kept vacant without being let out, it did not declare any property income but had claimed deduction of municipal taxes. The ITO accepted the computation as per assessee’s return and completed the assessment. Subsequently the ITO reopened the assessment in view of the decision in Liquidator, Mahmudabad Properties Ltd. vs. CIT  83 ITR 470 (Cal.), so as to include the notional income from the vacant godowns and to withdraw the deduction granted in respect of municipal taxes. It was held that the assessee had disclosed all the material facts. It had disclosed the fact that it was in possession of the godowns and therefore, the annual letting value in respect of the same was not computed. It was for the ITO to draw the necessary inference therefrom. The ITO did draw an inference in favour of the assessee and it was only because of the subsequent decision of the High Court that the ITO changed his opinion. Thus, this clearly amounted to a mere change of opinion and it cannot be said that income had escaped assessment as a result of any failure or omission on the part of the assessee to disclose truly and correctly all the facts pertaining to its assessment. Therefore, the reassessment proceedings were not valid.
Indo-Aden Salt Mfg. & Trading Co. (P.) Ltd. vs. CIT  159 ITR 624 (SC): 25 Taxman 356 (SC): Mere production of evidence before the ITO is not enough. There may be omission or failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the assessee could have uncovered but did not, then it is the duty of the assessee to bring it to the notice of the assessing authority. The assessee knows all the material and relevant facts, the assessing authority may not. In respect of the failure to disclose, the omission to disclose may be deliberate or inadvertent. That is immaterial. But if there is omission to disclose the material facts, then subject to the other conditions, jurisdiction to reopen is attracted.
To conclude, it is noticed is that the revenue department is empowered with the statutory power to reopen an assessment or make a reassessment within the stipulated period by the issuance of a statutory notice under the Act. This stringent power for reopening/reassessing, however, requires that the A.O. must have ‘reason to believe’ that any income chargeable to tax has escaped assessment. However, such ‘reason to believe’ should not be based on ‘mere change of opinion’. In reassessments proceedings, one has to be very careful and some important points which the assessees as well as their Advocates/ CAs/ representatives should follow are summarised hereunder:
- Whether notice is issued in time and duly served;
- Whether reasons are recorded before issue of notice;
- To timely file the return u/s 148;
- Seek copy of reasons recorded and examine its relevance;
- Raising objections in writing if reasons are not valid and ask the A.O. to dispose of the Objections first;
- Requesting the A.O. to drop the proceedings u/s 147/148 by demonstrating that no income has really been escaped;
- Make proper representation if you feel reasons are not valid; and
Carefully represent if the proceedings are to continue