REASSESSMENT AFTER FOUR YEARS UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

INTRODUCTION

In view of the proviso to Section 147 of the Income Tax Act, 1961 (‘Act’ for short) where an assessment under Section 143(3) had been made for the assessment year in question, no action could be taken for reassessment under Section 147 after the expiry of four years from the end of the relevant assessment year, unless it could be shown that any income chargeable to tax, had escaped assessment for such assessment year, by reason of failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Section 142(1) or Section 148 or to disclose fully and truly all material facts necessary for assessment for that assessment year.

Case laws

Jurisdiction

The Assessing Officer has no jurisdiction to reopen the assessment unless the assessee had disclosed fully and truly all primary facts.   The following case laws substantiate the same:

In ‘Commissioner of Income Tax V. Cholamandalam Investment and Finance Co. Limited’ –2007 (10) TMI 276 - MADRAS HIGH COURT it was held that after expiry of four years from the relevant assessment year, where the assessee had disclosed fully and truly all primary facts in relation to his claim for depreciation the initiation of reassessment proceedings on the ground that the claim for depreciation, had not been explained would be without jurisdiction, illegal, invalid and void ab initio.

In ‘Mimic (India) Private Limited and another V. Dy. Commissioner of Income Tax and others’ - the Court held that even if the income in the assessment year 1983-84 has escaped assessment, it is not on account of failure of the petitioner company to disclose facts, materials for assessment, truly and fully.   The assessing authority thus lacked jurisdiction to re-open reassessment that had been concluded over four years having elapsed from the end of the relevant assessment year.

Reasons to be recorded

Even the Assessing Officer has jurisdiction to issue notice for reopening the assessment he is to record reasons to open it beyond the period of four years from the end of the relevant assessment years.

In case of sending notice for reassessment In ‘Director of Income Tax V. Prudential Assurance Co. Limited’ –2013 (2) TMI 290 - BOMBAY HIGH COURT the High Court held that the notice of reopening was issued on March 31, 2010 which is beyond a period of four years from the end of the relevant assessment year 2003-04.   The reasons recorded for reopening the assessment does not allege that there has been any failure on the part of the respondent assessee to disclose fully and truly all material facts necessary for the purpose of assessment. Therefore on the above basis itself, the notice is not sustainable.  

Escaped assessment

In view of the provisions of the Act the Assessing Officer is having jurisdiction to reopen the proceedings beyond a period of 4 years if he has reasonable belief that the income charge to tax has escaped assessment.   The following case laws are related to this aspect:

In ‘Chimanlal and sons V. Deputy Commissioner of Income Tax’ –2013 (7) TMI 617 - GUJARAT HIGH COURT the High Court found that the petitioner received subsidy from the State Government at the rate of 30% of the investments in the eligible assets which included building, plant and machinery.   Such amount was sanctioned and paid in the year 1995.   The Court was not called upon to decide whether such receipt of subsidy was taxable or, as contended by the petitioner being in the nature of capital receipt, was not eligible to tax.   Suffice it to say either on accrued or actual receipt, the taxable event did not arise during the year under consideration. If such subsidy receipt invited tax, the petitioner ought to have been taxed at the relevant time in the previous assessment year corresponding to the previous year when such subsidy was paid.   In the previous years relevant to the assessment year 2004-05 nothing has happened which would permit the department to collect tax on such receipt.   Because the petitioner changed the nature of treatment for accounting purpose to such subsidy amount received in the year 1995 would not permit the Revenue to examine the taxability of such receipt in the assessment year 2004-05.   Only on this ground the High Court held that the Assessing Officer’s belief that income chargeable to tax during the year under consideration had escaped assessment lacks validity.

In ‘Ilag Industries Private Limited V. Assistant Commissioner of Income Tax and another’ –2013 (1) TMI 287 - GUJARAT HIGH COURT the assessment provisionally framed after scrutiny was sought to be reopened beyond a period of four years.   Hence it was necessary that the income chargeable to tax had escaped assessment for the reason of the assessee failing to disclose fully and truly all material facts for the purpose of assessment.   There was not an iota of such allegation either in the reasons recorded or anywhere such allegation either in the reasons recorded or anywhere else.   The Assessing Officer in the original assessment had examined the claim of the assessee pertaining to deduction under Section 80HHC of the Act at considerable length.   Various aspects were gone into and disallowances to the extent found required were made.   Apart from there being nothing on the record to suggest that the Assessing Officer formed a belief that the income chargeable to tax has escaped assessment due to the reason of the assessee failing to disclose fully and truly all material facts, the case would be one of mere change of opinion.   The notice of assessment was not valid.

Notice based on audit

In ‘FAG Bearings India Limited V. Deputy Commissioner of Income Tax’ –2013 (7) TMI 618 - GUJARAT HIGH COURT the notice for re-opening was issued beyond a period of four years from the end of relevant assessment year.   For the Assessment Officer to assume jurisdiction for re-opening the assessment both the conditions of belief that-

• Income chargeable to tax has escaped assessment; and
• The assessee failing to disclose truly and fully all material facts

must be satisfied.   The assessee had made several claims in the return filed supported by documents.   During the course of the scrutiny assessment these claims were the subject matter of reasons recorded was examined by the Assessing Officer.   The assessee pointedly brought to the notice of Assessing Officer such claims.   It may be that in the ultimate order of assessment that the Assessing Officer passed, these specific issues were not recorded.   However this would be entirely from suggesting that such issues escaped the notice of the Assessing Officer for the reasons of the assessee failing to disclose truly and fully all material facts.   Additionally in the petitioner itself the assessee had categorically averred that the Assessing Officer had issued the notice dated 19.8.1999 at the behest of the audit party calling for the explanation of the assessee.   It was further averred that the letter was issued under audit objections only. This had not been denied.   The notice was not valid and liable to be quashed.

Failure of assessee to disclose facts

If the assessee failed to disclose the facts fully and truly then the Assessing Officer may re-open the proceedings beyond the limit of four years.

In ‘Balar Exports V. Deputy Commissioner of Income Tax’ –2011 (4) TMI 1036 - Gujarat High Court the assessee was engaged in the business of export of diamonds.   The Assessing Officer for the Assessment year 2003-04 allowed the deduction under Section 80HHC as found admissible but the assessment was reopened beyond four years on the grounds that-

• The assessee had undervalued the closing stock of polished diamonds;
• The assessee purchased rough diamonds and undervalued the closing stock of rough diamonds; and
• The assessee had diverted borrowed funds for interest free loans.

The High Court found that the assessee had enclosed the details of valuation of polished diamonds and the methodology for working out the average cost of polished diamonds.   It was after such detailed exercise undertaken by the Assessing Officer he framed his original assessment.   There was no failure on the part of the assessee to disclose fully and truly all material facts for the purpose of assessment.   The reasons recorded were not sufficient to permit re-opening of the assessment.

The assessee had been adopting a particular methodology for valuing in closing stock.   For the purpose of closing stock, the assessee had accepted certain valuation for its polished and unpolished diamonds and rejects.   Such methodology may or may not be fully acceptable. The question was whether all facts were presented before the Assessing Officer when the original assessment was being framed.   On perusal of details of documents on record, disclosures made by the assessee, answers to the queries raised by the Assessing Officer could not be blamed for failure to disclose fully and truly all facts necessary for assessment of the income.   All the details required by the Assessing Officer in regard to loans and advances.   It could not be stated that the assessee had not fully and truly disclosed material facts necessary.   Being satisfied with the details given in disclosing the Assessing Officer did not make any additions in the assessment order ultimately passed.   The reasons recorded would not permit reopening of the assessment beyond four years.

In ‘Parasuraman Pottery works Co Limited V. Income Tax Officer’ – 1976 (11) TMI 1 - SUPREME Court the apex court held that certain claims which was made at the rate higher than what was legally permissible, assessment with reference to the same was sought to be reopened beyond the period of four years.

In ‘T.J. Agro Fertilizers P Limited V. Deputy Commissioner of Income Tax (Special Civil Application No. 9008 of 1997, dated 16.08.2007) the court quashed the notice for reopening observing that though there was no discussion regarding the specific claim, at the most it may be a case of wrong claim made by the assessee, but relevant material was there before the Assessing Officer to disallow the claim.   When the material facts were before the Assessing Officer, there was no justification to issue notice under Section 148 of the Act after the expiry of four years from the end of the Assessment year.

In ‘Shirish C. Parikh V. Income Tax Officer’ –2013 (7) TMI 847 - GUJARAT HIGH COURTthe Court held that a perusal of the reasons recorded indicated that the sole ground on which assessment was sought to be re-opened was that the assessee had been allowed exemption for the purchase he had produced receipt showing deposit of the amount with two different parties.   According to the Income Tax Officer, since the receipts filed could not prove the investments made for purchase of flat and also no evidence like purchase deed etc., were obtainable on record, this amounted to failure on the part of the assessee to disclose fully and truly all material facts.   A perusal of the prescribed return form as existing at the relevant time and the notes there to indicated that there was requirement of producing any document like purchase deed etc.,   The assessee was required to state material facts in respect of the claim for exemption under Section 54 of the Act which he had duly stated.   Hence merely the Assessing Officer who had sought to re-open the assessment found the proof submitted by the assessee at the times of assessment proceedings to be not sufficient for the purpose of admitting the claim, it could not be said that there was any failure on the part of the assessee as to invoke the provisions of Section 147 of the Act.   The notice under Section 148 of the Act, therefore, could not be sustained.

In ‘Garden finance Limited V. Assistant Commissioner of Income Tax’ – 2012 (9) TMI 333 - Gujarat High Court the assessee claimed depreciation at 40% on the written down value of commercial vehicles purchased earlier.   It also claimed part depreciation at the higher rate on vehicle purchased in the second half of the year and which were leased out to another company.   In the scrutiny assessment, the Assessing Officer with reference to depreciation claimed, raised a specific query and called upon the assessee to justify the claim giving detail of vehicles on which depreciation at 40% was claimed.   In reply the assessee made a detailed representation.   Depreciation was granted at the higher rate.   A notice of reassessment was issued after four years on the ground that the assessee was not entitled to the higher rate of depreciation.

The High Court was of the view that this was not a case where income chargeable to tax could be stated to have escaped assessment for the reason of the assessing failing to disclose truly and fully all material facts.   Therefore the mandatory condition to enable the Assessing officer to reopen the assessment beyond the period of four years not having been satisfied the notice must be quashed.

In ‘National Dairy Development Board V. Deputy Commissioner of Income tax’ – 2011 (3) TMI 1391 - Gujarat High Court the notice issued under Section 148 whereby the assessment for the assessment year 2003-04 was sought to be reopened after the expiry of a period of four years from the end of the relevant assessment year.   The Assessment Officer reopened the assessment on two grounds:

• While computing the taxable income from the net profit and income and expenditure account, the assessee had deducted under the head ‘provisions written back’.   The Assessing Officer was opined that the written back provision was the income of the assessee and had escaped assessment.   The ground of reopening was based on the material disclosed by the assessee;
• In view of the introduction of explanation 6(b) to Section 43 of Finance Act, 2008 which has been made retrospectively effective from 01.04.2003, the Assessing Officer was of the view that the assessee had been allowed excessive depreciation.

The High Court held that in either case, there was nothing whatsoever in the reasons recorded to indicate that there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the assessment under consideration.   By virtue of the second proviso to Section 147 of the Act income involving matters which are subject matter of any appeal, reference or revision has expressly been taken out of the purview of the section.   This had been the subject matter of the appeal and would not fall with the ambit of Section 147.   In the circumstances the Court held that the assumption of jurisdiction under Section 147 of the Act was not valid and as such the notice under Section 148 of the Act could not be sustained.

CONCLUSION

From the above discussions it may be concluded that the Assessing Officer has jurisdiction to re-open the assessment beyond the period of four years only-

• Income chargeable to tax has escaped assessment; and
• The assessee failing to disclose truly and fully all material facts.

Further the Assessing Officer is to record reasons for his satisfaction that the income chargeable to tax has escaped assessment or the assessee had failed to disclose truly and fully all material facts.