2010 (4) TMI 431 - HC - Income Tax

Re-assessment - reopening of an assessment - Amendment with effect from Finance Act 2009 by inserting an explanation - Section 147 of the Income Tax Act 1961 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year he may subject to the provisions of Sections 148 to 153 assess or reassess such income 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 . The proviso deals with reopening of an assessment upon the expiry of a period of four years from the end of the relevant assessment year and does not fall for interpretation in this appeal. - Held that - upon the formation of a reason to believe that income chargeable to tax has escaped assessment for any assessment year the Assessing Officer may assessee or reassess such income and also any other income chargeable to tax which comes to his notice subsequently during the proceedings as having escaped assessment. The word and also are used in a cumulative and conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by Parliament.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether, upon issuance of a notice under Section 148 of the Income Tax Act, 1961 read with Section 147, the Assessing Officer (AO), if he does not assess or reassess the income which formed the basis of the notice under Section 148, is nonetheless entitled to independently assess or reassess any other income which does not form the subject matter of the notice. This question arose in the context of reassessment proceedings initiated by the Revenue for assessment years 1994-1995 and 1995-1996.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Whether the Assessing Officer can assess or reassess income other than that which formed the basis of the notice under Section 148, especially when the original income forming the basis of the notice is not assessed or reassessed.

Relevant Legal Framework and Precedents:

Section 147 of the Income Tax Act empowers the AO to reassess income if he has reason to believe that income chargeable to tax has escaped assessment. Section 147(1) states that the AO may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently during the course of proceedings under this section.

Section 148 requires the AO to issue a notice to the assessee before reassessment, specifying the reasons for reopening the assessment.

Explanation 3 to Section 147, inserted by the Finance (No.2) Act, 2009 (effective retrospectively from 1 April 1989), clarifies that the AO may assess or reassess income in respect of any issue which has escaped assessment and comes to his notice subsequently during the proceedings, even if the reasons for such issue were not included in the notice under Section 148(2).

Prior to this amendment, certain High Courts (Punjab & Haryana High Court in Vipan Khanna and Kerala High Court in Travancore Cements Limited) had held that the AO was restricted to assessing or reassessing only those incomes which formed the basis of the reasons recorded in the notice under Section 148. If other income chargeable to tax came to the AO's notice during proceedings but was unrelated to the original issue, the AO had to issue a fresh notice under Section 148(2) for reassessment on that income.

On the other hand, the Rajasthan High Court in Commissioner of Income Tax v. Shri Ram Singh interpreted the language of Section 147 to mean that the AO could assess or reassess other income only if he also assessed or reassessed the income which formed the basis of the reason to believe. If the AO found that the original income did not escape assessment, then he could not independently assess other income without issuing a fresh notice.

The Supreme Court in Commissioner of Income-tax v. Sun Engineering Work Limited (pre-amendment context) held that "escaped assessment" includes both non-assessment and under-assessment, and that once an assessment is validly reopened, the AO has jurisdiction to levy tax on the entire escaped income. However, reassessment proceedings cannot be converted into an appeal or revision to seek relief on items concluded in the original assessment.

Court's Interpretation and Reasoning:

The Court analyzed the language of Section 147(1) post-amendment, focusing on the conjunctive phrase "and also" used in the provision. It held that the words "and also" are cumulative and conjunctive, not alternative. Thus, the AO must assess or reassess (i) the income in respect of which he has formed a reason to believe that it has escaped assessment, and (ii) any other income chargeable to tax which comes to his notice subsequently during the course of proceedings.

The Court emphasized that the AO cannot skip assessing or reassessing the original income which formed the basis of the notice and proceed to assess other income independently. If the AO accepts the assessee's objections and decides that the original income did not escape assessment, he cannot then assess other income without issuing a fresh notice under Section 148.

The Court noted that Explanation 3 to Section 147 was inserted by Parliament to correct an incorrect judicial interpretation that restricted the AO's power to only those issues specified in the reasons recorded in the notice under Section 148. Explanation 3 allows the AO to assess or reassess income on issues not included in the original reasons if such issues come to his notice during proceedings.

However, Explanation 3 does not override the substantive conditions of Section 147. It cannot be used to bypass the requirement that the AO must have a reason to believe that income has escaped assessment and must issue a valid notice under Section 148. If the AO finds that the original reason to believe is invalid, he cannot proceed to assess other income independently without fresh notice.

Key Evidence and Findings:

The Court considered the legislative history, including the Memorandum explaining the Finance (No.2) Bill, 2009, which clarified that the amendment was intended to negate the judicial restriction on the AO's powers. It also reviewed precedents from various High Courts and the Supreme Court to understand the evolution of the law and the impact of the amendment.

Application of Law to Facts:

In the present appeals, the AO had issued notices under Section 148 based on certain reasons. The question was whether the AO could assess income other than that which formed the basis of the notice, especially when the original income was not assessed or reassessed. Applying the interpretation of Section 147(1) and Explanation 3, the Court held that the AO must assess or reassess the original income first. If he does not do so, he cannot independently assess other income without issuing a fresh notice.

Treatment of Competing Arguments:

The Revenue argued that the AO could assess other income independently if it came to his notice during the proceedings, even if the original income was not assessed or reassessed. The assessee argued that the AO's power to assess other income is contingent upon assessing the original income which formed the basis of the notice.

The Court sided with the assessee's interpretation, relying on the plain language of Section 147(1) and the legislative intent behind Explanation 3. It rejected the Revenue's argument as inconsistent with the statutory language and legislative intent.

Conclusions:

The Court concluded that the AO cannot assess or reassess income which does not form the subject matter of the notice under Section 148 independently if the original income which formed the basis of the notice is not assessed or reassessed. Explanation 3 allows the AO to assess other income only in conjunction with assessing the original income. If the AO accepts the assessee's contention that the original income did not escape assessment, a fresh notice is necessary to assess other income.

3. SIGNIFICANT HOLDINGS

"Upon the formation of a reason to believe under Section 147 and the issuance of a notice under Section 148(2), the Assessing Officer must assess or reassess (i) such income and also (ii) any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section."

"The words 'and also' are used in a cumulative and conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by Parliament."

"Explanation 3 to Section 147 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under Section 148. However, Explanation 3 does not override the necessity of fulfilling the conditions set out in the substantive part of Section 147."

"If after issuing a notice under Section 148, the Assessing Officer accepts the contention of the assessee and holds that the income which he had initially formed a reason to believe had escaped assessment has, as a matter of fact, not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under Section 148 would be necessary."

"The question of law is answered against the Revenue and in favour of the assessee."