Fresh tangible material not required to reopen an assessment where the initially the return of income is processed u/s 143(1) and an intimation is sent to the assessee, the reopening of such assessment requires the AO to form reasons to believe that income has escaped assessment, but such reasons do not require any fresh tangible material-Delhi High Court.
Case Law Details:
W.P.(C) 1393/2002
Indu Lata Rangwala (Appellant) vs. Deputy Commissioner of Income Tax (Respondent)
Date of Judgment: 18/05/2016
Coram: Justice S. Muralidhar and Justice Vibhu Bakhru
Important Case Laws cited:
Assistant Commissioner of Income-tax v. Rajesh Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500 (SC)
Commissioner of Income Tax v. Orient Craft Limited (2013)354 ITR 536 (Del)
Brief Facts of the Case:
In the instant case, the Petitioner‟s return was processed under Section 143(1) of the Income Tax Act, 1961 by an order/intimation dated 29th May 2001. In the said intimation, the loss declared by the Petitioner in the return along with its statement of accounts, computation sheet, audit report etc. was accepted and the amount as claimed by the Petitioner was refunded to the Petitioner. In 2001, the centralized processing center (CPC) was not in operative and thee AO had the discretion whether to pick up a return for scrutiny.
On 26th June 2001, a notice u/s 148 was issued to the Petitioner stating that AO had reasons to believe that the Petitioner‟s income chargeable to tax for the AY in question had escaped assessment and that he proposed to reassess the income. The Petitioner challenged the initiation of the reassessment proceeding as being without jurisdiction and bad in law. The AO was also requested to supply a copy of the reasons under Section 148 (2) of the Act for reopening the assessment. However the AO rejected the objections raised by the Petitioner.
The Petitioner moved the present Writ Petition under Article 226 of the Constitution challenging the notices issued u/s 148.
Contentions of the Petitioner:
According to the Petitioner, the intimation under Section 143 (1) was akin to a regular assessment of a return picked up for scrutiny under Section 143 (3). It was further submitted that there was no tangible material that the AO came across to justify forming ‘reasons to believe’ that income had escaped assessment. The only material referred to were the statement of accounts, balance sheet, audited report etc. which in any way were available with the AO in respect of both the Petitioner and the firm for the AY in question at the time of issuance of the order/ intimation under Section 143 (1) of the Act. The reasons recorded were therefore at best a change of opinion based on suspicion and surmises.
Important Excerpts from High Court Judgment:
The ratio of the decision in Rajesh Jhaveri Stock Brokers P. Ltd. (supra) is that the sending of an intimation by the AO to an Assessee in terms of Section 143 (1) of the Act is not treated to be an „assessment‟ made by the AO. After 1st April 1989 there was no need for AO to pass an assessment order if he had decided to accept the return and this was in line with the legislative intent of minimizing the departmental work of scrutinizing each and every return and instead concentrate on selective scrutiny of returns. Importantly it was pointed out that “there being no assessment under Section 143 (1) (a), the question of change of opinion, as contended, does not arise.”
It appears that the above distinction drawn between the object of provision of Section 143 (1) and Section 143 (3) of the Act was overlooked in some of the decisions of the High Courts, including this Court.
In Commissioner of Income Tax v. Orient Craft Limited (supra), the question that arose for consideration was whether the reopening of the assessment made by the AO under Section 147 of the Act of an assessment for the AY 2002-03 was valid and whether the intimation under Section 143 (1) sent to the Assessee by the AO in respect of such return was an ‘assessment’?
The Court in Orient Craft Ltd. (supra) then proceeded to also explain Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) and point out that the difference between an „assessment‟ and an „intimation‟ did not mean that the strict requirements of Section 147 could be compromised. It was pointed out in Orient Craft Ltd. (supra) that in Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) the Court reiterated that “so long as the ingredients of Section 147 are fulfilled an intimation issued under Section 143 (1) can be subjected to proceedings for reopening.” The Court in Orient Craft Ltd. (supra) then reiterated that
“It is nobody‟s case that an „intimation‟ cannot be subjected to Section 147 proceedings; all that is contended by the Assessee, and quite rightly, is that if the Revenue ants to invoke Section 147 it should play by the rules of that Section and cannot bog down. In other words, the expression „reason to believe‟ cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made under Section 143 (3) and another applicable where an intimation was earlier issued under Section 143 (1). It follows that it is open to the Assessee to contend that notwithstanding that the argument of „change of opinion” is not available to him, it would still be open to him to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment. In doing so, it is further open to the Assessee to challenge the reasons recorded under Section 148 (2) on the ground that they do not meet the standards set in the various judicial pronouncements.”
Summary of the legal position
The upshot of the above discussion is that where the return initially filed is processed under Section 143 (1) of the Act, and an intimation is sent to an Assessee, it is not an ‘assessment’ in the strict sense of the term for the purposes of Section 147 of the Act. In other words, in such event, there is no occasion for the AO to form an opinion after examining the documents enclosed with the return whether in the form of balance sheet, audited accounts, tax audit report etc.
The first proviso to Section 147 of the Act applies only (i) where the initial assessment is under Section 143 (3) of the Act and (ii) where such reopening is sought to be done after the expiry of four years from the end of the relevant assessment year. In other words, the requirement in the first proviso to Section 147 of there having to be a failure on the part of the Assessee “to disclose fully and truly all material facts” does not at all apply where the initial return has been processed under Section 143 (1) of the Act.
As explained in Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) “an intimation issued under Section 143 (1) can be subjected to proceedings for reopening”, “so long as the ingredients of Section 147 are fulfilled”
Explanation 2 (b) below Section 147 states that for the purposes of Section 147, where a return of income has been furnished by the Assessee but no assessment has been made and it is noticed by the AO that the Assessee has understated the income and claimed excessive loss, deduction, allowance and relief in the return then that “shall also be deemed to be a case where the income chargeable to tax has escaped assessment”.
As explained by the Supreme Court in Rajesh Jhaveri Stock Brokers P. Ltd. (supra) and reiterated by it in Zuari Estate Development and Investment Co. Ltd. (supra) an intimation under Section 143 (1) (a) cannot be treated to be an order of assessment. There being no assessment under Section 143 (1) (a), the question of change of opinion does not arise.
Whereas in a case where the initial assessment order is under Section 143 (3), and it is sought to be reopened within four years from the expiry of the relevant assessment year, the AO has to base his ‘reasons to believe’ that income has escaped assessment on some fresh tangible material that provides the nexus or link to the formation of such belief. In a case where the initial return is processed under Section 143 (1) of the Act and an intimation is sent to the Assessee, the reopening of such assessment no doubt requires the AO to form reasons to believe that income has escaped assessment, but such reasons do not require any fresh tangible material.
In other words, where reopening is sought of an assessment in a situation where the initial return is processed under Section 143 (1) of the Act, the AO can form reasons to believe that income has escaped assessment by examining the very return and/or the documents accompanying the return. It is not necessary in such a case for the AO to come across some fresh tangible material to form ‘reasons to believe’ that income has escaped assessment.
In the assessment proceedings pursuant to such reopening, it will be open to the Assessee to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment.
The decisions of this Court and other Courts to the extent inconsistent with the above decisions of the Supreme Court cannot be said to reflect the correct legal position.
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