No reopening in the absense of tangible material even when only intimation u/s 143(1) was issued originaly


Gujrat High Court in Inductotherm (India) Pvt. Ltd. vs CIT has held that reopening of aseessment u/s 147/148 would be invalid when no new material has come before the AO even when no assessment u/s 143(3) was framed earlier but only an intimation u/s 143(1)(a) was issued.

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.  
Full Judgement is as follows:

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

SPECIAL CIVIL APPLICATION No. 858 of 2006

INDUCTOTHERM (INDIA) PVT.LTD. (FORMERLY INDUCTOTHERM INDIA
- Petitioner(s)

Versus

M.GOPALAN,DY.COMMISSIONER OF INCOME-TAX OR HIS SUCCESSOR -
Respondent(s)

Appearance :
MR RK PATEL for Petitioner
MR MANISH BHATT for Respondent

CORAM : HONOURABLE MR.JUSTICE AKIL KURESHI

and

HONOURABLE MS.JUSTICE HARSHA DEVANI

Date : 06/08/2012

ORAL JUDGMENT

(Per : HONOURABLE MR.JUSTICE AKIL KURESHI)

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
on 28th October, 2002 showing total income at Rs.7,23,29,973/-. The case was
processed under section 143(1) on 16th January, 2003. On perusal of the case
records, it is noticed that there is escapement of income chargeable to tax on the
following points.

[1] The assessee company has claimed deduction under section 80HHC at
Rs.59,86,965/-. The involvement of CST & ST in the total turnover and other
income in the net profit should not be allowable for the purpose of deduction
under section 80HHC calculation relying on the decision in the case of Sterling
Foods Ltd.

[2] Admissibility of bad debts written off at Rs.74,73,003/- is to be verified.

[3] The assessee had debited warranty expenses at Rs.1,43,48,347/- to the P & L
Account, out of which an amount of Rs.1,05,48,633/- has actually incurred during
the financial year under consideration. Therefore, the remaining amount of
Rs.37,99,714/- is not allowable expenses under the I. T. Act.

[4] Admissibility of Royalty claimed at Rs.62,92,773/- is to be verified.
However, due to wrongful claim of deduction under section 80HHC, excess claim
of warranty expenses etc. income chargeable to tax has escaped assessment
within the meaning of section 147 of the I. T. Act, 1961. Under the circumstances,
the assessment for Assessment Year 2002-03 is hereby reopened. Issue notice
under section 148 of the I. T. Act, 1961.”

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
to be applicable to the facts of the case. Therefore, in my humble submission, the most
proper remedial action to set right the audit objections appears to be recourse to section
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
above that under the first proviso to the newly substituted section 143(1), with effect from
June 1, 1999, except as provided in the provision itself, the acknowledgment of the return
shall be deemed to be an intimation under section 143(1) where (a) either no sum is
payable by the assessee, or (b) no refund is due to him. It is significant that the
acknowledgment is not done by any Assessing Officer, but mostly by ministerial staff.
Can it be said that any assessment is done by them? The reply is an emphatic no. The
intimation under section 143(1)(a) was deemed to be a notice of demand under section
156, for the apparent purpose of making machinery provisions relating to recovery of tax
applicable. By such application only recovery indicated to be payable in the intimation
became permissible. And nothing more can be inferred from the deeming provision.
Therefore, there being no assessment under section 143(1)(a), the question of change of
opinion, as contended, does not arise.”.

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
reopen, provided that there is tangible material to come to the conclusion that there is
escapement of income from assessment. Reasons must have a live link with the formation
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
income chargeable to tax if he has reason to believe that income for any
assessment year has escaped assessment. The word reason in the phrase reason
to believe would mean cause or justification. If the Assessing Officer has cause or
justification to know or suppose that income had escaped assessment, it can be
said to have reason to believe that an income had escaped assessment. The
expression cannot be read to mean that the Assessing Officer should have finally
ascertained the fact by legal evidence or conclusion. The function of the Assessing
Officer is to administer the statute with solicitude for the public exchequer with
an inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court in
Central Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR 662], for
initiation of action under section 147(a) (as the provision stood at the relevant
time) fulfillment of the two requisite conditions in that regard is essential. At that
stage, the final outcome of the proceeding is not relevant. In other words, at the
initiation stage, what is required is reason to believe, but not 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 a requisite belief. Whether the materials would conclusively prove the
escapement is not the concern at that stage. This is so because the formation of
belief by the Assessing Officer is within the realm of subjective satisfaction (see
ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)] ;
Raymond Woollen Mills Ltd. v. ITO [ 1999 (236) ITR 34 (SC)].”

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.]



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