AMIT BAJAJ ADVOCATE

In this case: For AY 2002-03, the AO issued an Intimation u/s 143(1) accepting the return. Subsequently, based on objections raised by the audit, he issued a s. 148 notice to reopen the assessment. The AO set out four issues in the recorded reasons and for two he stated that the reopening was to “verify” the expenditure. The assessee filed a Writ Petition to challenge the reopening inter alia on the ground that there was no reason to believe that income had escaped assessment. 

HELD by the High Court: Even in a case where only a s. 143(1) Intimation is passed, the power to reopen can be exercised only where there is “reason to believe that income has escaped assessment” and not merely to “scrutinize” the return or “verify” the expenditure. Further, even in case of reopening of an assessment which was previously accepted u/s 143(1) without scrutiny, the AO would have power to reopen the assessment, provided he had some tangible material on the basis of which he could form a reason to believe that income chargeable to tax had escaped assessment. Such reason to believe need not necessarily be a firm final decision of the AO. This safeguard is necessary to prevent arbitrary exercise of powers u/s 147 to circumvent the scrutiny proceedings which could not be framed in view of notice u/s 143(2) having become time barred. On facts, in respect of two issues, the AO reopened the assessment to verify the claims. For mere verification of the claim, power of reopening of assessment cannot be exercised. The AO in the guise of power to reopen an assessment cannot seek to undertake a fishing or roving inquiry and seek to verify the claims as if it were a scrutiny assessment.  

Although  the Petition was ultimately dismissed because for the other two issues, there was material to justify the reopening.  

MR RK PATEL for Petitioner

MR MANISH BHATT for Respondent

1. The petitioner has challenged a notice dated 20.12.2004 issued by the respondent –

Deputy Commissioner of Income Tax under section 148 of the Income Tax Act, 1961

(“the Act” for short). The petitioner has also challenged the subsequent notices issued by

the respondent under section 143(2) of the Act. However, the principal challenge of the

petitioner is to the notice dated 20.12.2004 issued by the Assessing Officer seeking to

reopen the assessment of the petitioner for the assessment year 2002-03.

2. The petition arises in following factual background.

2.1 The petitioner is a Company registered under the Companies Act, 1956 and is

regularly assessed to tax under the Act. For the assessment year 2002-03, the petitioner

filed its return of income on 28.10.2002. On such return, the Assessing Officer sent

intimation under section 143(1) of the Act on 16.1.2003.

2.2 It is not in dispute that during the statutory period envisaged under section 143 of the

Act, the Assessing Officer issued no notice under section 143(2) of the Act. Such period

expired on 1.11.2003. The return of income, thus, remained at the stage of intimation

under section 143(1) of the Act and was never taken in scrutiny.

2.3 The Assessing Officer, however, issued the impugned notice on 28.12.2004 seeking to reopen the assessment for the assessment year 2002-03. In response to such notice, the petitioner issued a communication dated 30.12.2004 and besides objecting to the reopening of the assessment, also demanded that the reasons recorded by the Assessing Officer may be supplied. The respondent – Assessing Officer did not supply the reasons. Instead, he issued a notice dated 21.10.2005 under section 143(2) of the Act, stating that there were certain points with respect to return of income for the assessment year 2002-03 on which he would like to have further information.

2.4 The petitioner thereupon wrote a letter dated 8.11.2005 and reiterated the request for

supply of the reasons recorded by the Assessing Officer for reopening the assessment. He

referred to the decision of the Apex Court in case of GKN Driveshafts (India) Ltd.

reported in 259 ITR 19 (SC). He also relied on the decision of this Court in case of

Arvind Mills Ltd. reported in 270 ITR 470 (Guj.) in support of such a prayer.

2.5 In response to such letter, the Assessing Officer supplied the reasons recorded under

his communication dated 8.11.2005. Such reasons read as under :

“In this case, the assessee company has filed its return of income for A.Y. 2002-03

2.6 Upon receipt of such reasons, the petitioner raised detailed objections to the notice of

reopening under communication dated 16.11.2005. It was contended that in absence of

any material to tax the income, even in proceedings under section 147 of the Act, it

would not be open for the Assessing Officer to proceed. The petitioner placed

considerable reliance on the expression “reason to believe” used in section 147 of the

Act. Such objections were disposed of by an order dated 12.1.2006. At that stage, the

petitioner filed the present petition and challenged the impugned notice issued by the

respondent – Assessing Officer.

3. Appearing for the petitioner, Shri R. K. Patel contended that the notice is invalid. The

Assessing Officer has assumed jurisdiction not vested in him. He, therefore, submitted

that the notice be quashed. This contention the counsel sought to support on the following

four arguments :

[1] That the reasons were not recorded by the Assessing Officer before issuing notice. In

this respect, counsel pointed out that though immediately upon receipt of notice under

section 148 of the Act, the petitioner demanded a copy of the reasons recorded by the

Assessing Officer, such reasons were not supplied for a long time. In the meantime,

notices were issued under section 143(2) of the Act.

[2] The counsel contended that the assessment proceedings cannot be reopened to

circumvent time limit for issuing the notice under section 143(2) of the Act. He submitted

that time-limit provided in the proviso to section 143(2) of the Act, must be given its due

weightage. If the Assessing Officer for any reason failed to issue such a notice within the

time-limit, he cannot proceed under section 147 for taking such a return in scrutiny.

In support of this contention, counsel relied on the following decisions :

[a] In case of Deputy Commissioner of Income Tax v. Maxima Systems Ltd., reported in

(2012) 344 ITR 204, wherein a Division Bench of this Court observed that assessment

which was framed under section 143(3) of the Act pursuant to a notice under section

143(2) which was served beyond the period of limitation prescribed under the proviso,

was not a valid assessment.

[b] In case of Assistant Commissioner of Income Tax and another v. Hotel Blue Moon,

reported in (2010) 321 ITR 363 wherein the Apex Court held that notice under section

143(2) of the Act was mandatory even in the block assessment proceedings if the

Assessing Officer desired to complete such assessment under section 143(3) of the Act.

[c] In case of Kanubhai M. Patel (HUF) v. Hiren Bhatt or His Successors to Office and

others, reported in (2011) 334 ITR 25 (Guj.), wherein a Division Bench of this Court had

the occasion to interpret the term “to issue” the notice in context of the provisions

contained under sections 147, 148 and 149 of the Act.

[3] The third contention of the counsel was that the reasons recorded by the Assessing

Officer were not germane. Such reasons only recorded that the Assessing Officer wanted

to verify certain claims made by the assessee. Counsel submitted that for a fishing inquiry

or for mere verification of the claims made, reopening cannot be permitted even in the

assessment which was accepted under section 143(1) of the Act.

In support of this contention, counsel relied on following decisions :

[a] In case of Bakulbhai Ramanlal Patel v. Income Tax Officer, reported in (2011) 56

DTR (Guj) 212, wherein a Division Bench of this Court finding that all reasons recorded

by the Assessing Officer for reopening of assessment, only provided that the Assessing

Officer desired to carry out a detailed investigation/verification to bring the assessee in

the tax net, held that the notice for reopening the assessment was not valid. We may

record that this was also a case where the return filed was accepted under section 143(1)

of the Act without any scrutiny.

[b] In case of BalKrishna Hiralal Wani v. Income Tax Officer and others, reported in

(2010) 321 ITR 519 (Bom), wherein a Division Bench of the Bombay High Court, also in

relation to reopening of assessment which was previously accepted without scrutiny,

quashed the notice on the premise that the Assessing Officer could not have any reason to

believe that the income chargeable to tax has escaped assessment.

4. On the other hand, learned counsel Shri Manish Bhatt for the Department, opposing

the petition, contended as under :

[1] In the present case, the Assessing Officer had recorded reasons for reopening of

assessment. Such reasons were recorded before issuance of notice. He took us through

the documents on record in the original file to contend that though the reasons recorded

did not carry a specific date, from the record, it can be ascertained that such reasons were

recorded before issuance of notice.

[2] In the present case, notice for reopening has been issued after recording proper

reasons. The return of the assessee was previously not taken in scrutiny. In that view of

the matter, in view of the decision of the Apex Court in case of Assistant Commissioner

of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd., reported in (2007) 291 ITR 500

(SC), the revenue would have much greater latitude for reopening the assessment.

[3] He further submitted that the reasons recorded by the Assessing Officer would

demonstrate that he had valid reasons to believe that the income chargeable to tax had

escaped assessment.

5. Having, thus, heard the learned counsel for the parties and having perused the

documents on record, we may first deal with the question of recording of the reasons

before issuance of notice. It is undoubtedly true that to re-open an assessment, the

Assessing Officer must record his reasons before issuing notice for re-opening. In that

view of the matter, the question of such reasons having been recorded before issuance of

notice assume significance. As noted, counsel for the petitioner contended that such

reasons were not recorded before issuance of notice. For this purpose, he highlighted that

such reasons were not supplied immediately though the petitioner demanded the same.

Such reasons when produced before the Court showed that they do not carry any date.

6. We have perused the original file in context of this controversy. The file reveals that

the reasons recorded by the Assessing Officer and signed by himself are found at page

324 which is immediately after page 323 which is the notice for reopening of the

assessment. Immediately after the reasons recorded at page 325, is the acknowledgment

receipt of service of the notice dated 20.12.2004 issued under section 148 of the Act.

Further we find that the Assessing Officer had drawn a note-sheet in which on

20.12.2004, he recorded that, “Notice u/s 148 issued after recording reasons for

reopening.” Such note-sheet also contains reference to subsequent notice under section

143(2) issued on 8.11.2005 and other details.

7. We also notice that the audit party had brought certain discrepancies to the notice of

the Assessing Officer. The Assessing Officer thereupon examined such issues and wrote

to the Commissioner of Income Tax on 17.10.2003 that in view of such issues, remedial

action is required to be taken. He noted that the assessment was accepted under section

143(1) of the Act and therefore, remedial actions available would be proceedings under

section 263 of the Act, under section 147 of the Act or under section 154 of the Act. In

the concluding portion of his letter, he stated thus, “Sections 263 and 254 do not appear

147. Approval may kindly be accorded.”.

7.1 Such approval was granted by the Commissioner under communication dated

16.2.2004. Thereupon, the impugned notice came to be issued.

8. In addition to above materials emerging from the original files, we also have an

affidavit in-reply filed on one Shri James Kurian, Assistant Commissioner of Income

Tax, Circle-4, Ahmedabad on behalf of the respondent in which he has stated that the

reasons were recorded before issuance of notice for reopening. He pointed out that a

proposal of reopening of the assessment was sent for approval of the Commissioner and

the Commissioner had accorded such approval and thereafter, the notice was issued.

9. From such materials, we are of the opinion that it cannot be stated that the Assessing

Officer had not recorded reasons before issuance of the notice. Firstly, the reasons

recorded are found on the file immediately after the original notice under section 148 of

the Act. Though such reasons are not dated, the note-sheet maintained by the Assessing

Officer concerned recorded that the notice is issued after recording reasons. Further, as

noted, the issue arose when the audit party brought certain discrepancies to the notice of

the Assessing Officer. He mulled over various options available to the revenue and

suggested to the Commissioner that the best option would be to exercise powers under

section 147 of the Act. These factors coupled with the affidavit in-reply filed by the

respondent would convince us that in exercise of writ jurisdiction, it would not be open

for us to hold that reasons were not recorded by the Assessing Officer before issuance of

notice.

10. This brings us to the second limb of the petitioner's challenge namely, that the power

under section 147 of the Act cannot be exercised to circumvent the proceedings under

section 143(3) of the Act because the notice under section 143(2) of the Act has become

time barred and further that in any case, reasons recorded would not permit the Assessing

Officer to reopen the assessment.

11. It is undoubtedly true that proviso to section 143(2) of the Act prescribes a time limit

within which such notice could be issued. It is equally well settled that such notice is

mandatory and in absence of notice under section 143(2) of the Act within the time

permitted, scrutiny assessment under section 143(3) cannot be framed. However, merely

because no such notice was issued, to contend that the assessment cannot be reopened, is

not backed by any statutory provisions. Counsel for the petitioner did not even stretch his

contention to that extent. The case of the petitioner as we understand is that in guise of

reopening of an assessment, the Assessing Officer cannot try to scrutinize the return. This

aspect substantially overlaps with the later contention of the petitioner that the reasons

recorded by the Assessing Officer were not germane and were not sufficient to permit

reopening.

12. We must recall that the return filed by the petitioner was not taken in scrutiny. No

assessment, thus, took place. The Assessing Officer without any assessment, merely

issued an intimation under section 143(1) of the Act accepting such return. In that view of

the matter, it cannot be stated that the Assessing Officer formed any opinion with respect

to any of the aspects arising in such return. In such a case, scope for reopening such

assessment under section 147 of the Act as compared to an assessment which was

previously framed under section 143(3) of the Act, whether beyond or within four years

from the end of the relevant assessment year, is substantially wider. The Apex Court in

case of Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd.,

(supra) noticed such distinction and noted that the scheme of sections 143(1) and 143(3)

of the Act is entirely different. It was noticed that after 1.4.1989, the provisions contained

in section 143 underwent substantial changes. It was noticed that the intimation under

section 143(1) of the Act is given without prejudice to the provisions of section 143(3) of

the Act and though technically the intimation would be deemed to be demand notice

under section 156, that did not per se preclude the right of the Assessing Officer to

proceed under section 143(2)(a) of the Act. The Apex Court observed that the word

“intimation” as substituted for assessment carried different concepts. It was observed that

while making an assessment, the Assessing Officer is free to make any addition after

granting an opportunity to the assessee. The Apex Court observed that, “It may be noted

13. Despite such difference in the scheme between a return which is accepted under

section 143(1) of the Act as compared to a return of which scrutiny assessment under

section 143(3) of the Act is framed, the basic requirement of section 147 of the Act that

the Assessing Officer has reason to believe that income chargeable to tax has escaped

assessment is not done away with. Section 147 of the Act permits the Assessing Officer

to assess, re-assess the income or re-compute the loss or depreciation if he has reason to

believe that any income chargeable to tax has escaped assessment for any assessment

year. This power to reopen assessment is available in either case, namely, while a return

has been either accepted under section 143(1) of the Act or a scrutiny assessment has

been framed under section 143(3) of the Act. A common requirement in both of cases is

that the Assessing Officer should have reason to believe that any income chargeable to

tax has escaped assessment.

14. The term “reason to believe” has come up for consideration in various decisions

before this Court as well as the Apex Court. It is not necessary to trace long line of

decisions on the point. We may, however, refer to two of the recent decisions. In case of

Commissioner of Income Tax v. (1) Kelvinator of India Ltd. & (2) Eicher Ltd., reported

in (2010) 320 ITR 561 (SC), in the context of amended provision of section 147 with

effect from 1.4.1989, the Court stressed on the expression “reason to believe”, observing

that the Court has to give a schematic interpretation to such words, failing which section

147 would give arbitrary powers to the Assessing Officer to reopen the assessments on

the basis of mere change of opinion. On that basis, the Apex Court concluded that even in

the case of assessment which is sought to be reopened within a period of four years from

the end of relevant assessment year, the concept of change of opinion is not given a gobye.

It was observed that, “Hence, after 1.4.1989, the Assessing Officer has power to

of the belief.”. The Apex Court noticed that previously, the parliament had introduced the

expression “opinion” under section 147 of the Act, however, on receipt of representations

from various quarters, the same was substituted as was originally used to “reason to

believe”.

15. In case of Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers

P. Ltd., (supra), the Apex Court observed that phrase “reason to believe” mean cause or

justification. If the Assessing Officer has cause or justification to know or subjective

satisfaction that income had escaped assessment, it can be stated to have reason to believe

that income chargeable to tax had escaped assessment. It was observed as under :

 “Section 147 authorises and permits the Assessing Officer to assess or reassess

16. It would, thus, emerge that even in case of reopening of an assessment which was

previously accepted under section 143(1) of the Act without scrutiny, the Assessing

Officer would have power to reopen the assessment, provided he had some tangible

material on the basis of which he could form a reason to believe that income chargeable

to tax had escaped assessment. However, as held by the Apex Court in the case of

Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd.,

(supra) and several other decisions, such reason to believe need not necessarily be a firm

final decision of the Assessing Officer.

17. If we accept such proposition, the petitioner's apprehension that the Assessing Officer

would arbitrarily exercise powers under section 147 of the Act to circumvent the scrutiny

proceedings which could not be framed in view of notice under section 143(2) having

become time barred, would be taken care of. To reiterate, even for reopening of an

assessment which was accepted previously under section 143(1) of the Act without

scrutiny, the Assessing Officer should have reason to believe that income chargeable to

tax has escaped assessment.

18. Reverting to the facts of the present case, we notice that in two out of four reasons

recorded by the Assessing Officer for reopening the assessment, he stated that he need to

verify the claims. In the second ground, he had recorded that admissibility of the bad

debts written off required to be verified. In the fourth ground also, he had recorded that

admissibility of royalty claim was required to be verified. We are in agreement with the

contention of the counsel for the petitioner that for mere verification of the claim, power

for reopening of assessment could not be exercised. The Assessing Officer in guise of

power to reopen an assessment, cannot seek to undertake a fishing or roving inquiry and

seek to verify the claims as if it were a scrutiny assessment.

19. With respect to other two grounds, however, we find that the Assessing Officer had

some material at his command to form a belief that income chargeable to tax had escaped

assessment. Ground No.1 pertained to the claim of deduction under section 80HHC of the

Act and the Assessing Officer was of the opinion that the Central as well as the State

Sales Tax and other income in the net profit would not qualify for deduction under

section 80HHC of the Act. It may be that he referred to the decisions of the Apex Court

in the case of Sterling Foods Ltd., however, mere wrong reference to a judgement would

not invalidate the ground if otherwise was valid in law. Equally, in the third ground, the

Assessing Officer noted that the assessee had debited warranty expenses of

Rs.1,43,48,347/- to the P & L Account, out of which an amount of Rs.1,05,48,633/- was

incurred during the financial year under consideration. He was, therefore, of the opinion

that remaining amount of Rs.37,99,714/- is not allowable expenditure. We are of the

opinion that such reason also would permit the Assessing Officer to reopen the

assessment. The Assessing Officer has found that a claim not arising during the year

under consideration was made. He desires to disallow such a claim. It cannot be stated

that the ground was not germane. The counsel for the petitioner, however, vehemently

contended that the petitioner's claim in this respect has been accepted by this Court. He

drew our attention to an order dated 27.12.2011 passed in Tax Appeal No.2087 of 2010,

wherein this Court had rejected the revenue's appeal in which one of the issues was with

respect to such warranty expenditure. Counsel for the revenue, however, pointed out that

the Department has not accepted this decision of the High Court.

20. In view of the above discussion, we do not find that the notice for reopening is invalid

or lacks jurisdiction. The petition is, accordingly, dismissed. Rule is discharged. Interim

relief granted earlier stands vacated.

[AKIL KURESHI, J.]

[HARSHA DEVANI, J.]