Tuesday, July 13, 2010

Supreme Court again reiterates that income- tax assessments cannot be reopened on mere change of opinion!

[Note , this mailer's comment: The latest amendment, seems not discussed in the folowing article, though the article is useful in many sence to understand the re-opening in its own. So, emailed to you. ]


By T.N. Pandey  Ex-chairman, CBDT 

The author, in this article, has examined the latest deci-sion of the Supreme Court concerning `reopening' of com-pleted assessment. According to the Apex Court, the assess-ments cannot be reopened merely because by re-evalua-tion of the situation existing at the time of making the original assessment, the Assessing Officer feels that, for example, what he did not tax earlier can be taxed because of another view which should have been followed. Doing so would tantamount to `reviewing' the earlier decision which is not permitted. According to the Apex Court, re-opening cannot be done unless there is `tangible material' justifying such action. 

 

 

1.       Introduction Every tax legislation has to have provisions to bring to tax incomes that have escaped assessments. Section 147 and other regulatory sections following the main provision in the Income-tax Act, 1961 (Act) have been enacted to rope in incomes that have escaped assessment. The provisions in the Act in this regard can be examined under two heads, namely:—  (i) Law as was before the amendments made by the Direct Tax Laws (Amendment) Act, 1987 (1987 Act) as subsequently amended by the Direct Tax Law (Amendment) Act, 1989 (1989 Act).  (ii) The law as it exists presently after the amendments by the two Acts (supra). 

2.       Law before April 1, 1989   Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. These are as follows :  (i) Clause (a) empowered the Income-tax Officer to assess or re-assess the income escaping assessment, if he had reason to believe that income had escaped assessment on account of omission or failure on the part of the assessee to file a return of income for an assessment year or to disclose fully and truly all material facts necessary for assessment for that year.  (ii) Clause (b) empowered the Income-tax Officer to reopen an assessment, notwithstanding the fact that there had been no omission or failure, as mentioned in clause (a), on the part of the assessee if the Income-tax Officer, on the basis of information in his possession, had reason to believe that income had escaped assessment for the relevant assessment year. 

3.       Need for change  A new scheme for income-tax assessment was introduced by the 1987 Act because of urgent need to reduce the Income-tax Department's workload by greater reliance on voluntary compliance. The 1981 Act, therefore, substituted a new section 143 in the Act to introduce the new scheme of assessment after the filing of the return. The new scheme envisaged that passing of assessment orders will not be necessary in each and every case meaning thereby that application of mind by the Assessing Officers in all cases will not be necessary except in the cases which are picked up for scrutiny and where regular order of assessment is passed under section 143(3). This scheme required rationalization of law and procedure in regard to provisions for reopening of assessments to tax escaped incomes especially in non-scrutiny cases in sections 147, 148 and other connected sections. 

4.       Changes made by the two amendments Acts  (a) Separate provisions contained in clauses (a) and (b) of the old section have been merged into a single new section, which provides that if the Assessing Officer is of the opinion that income chargeable to tax for any assessment year has escaped assessment, he can assess or reassess the same after recording in writing the reasons for doing so.  (b) The requirement in the old provisions that the Income-tax Officer should have `reason to believe' or `information' in possession before taking action to assess or reassess the income escaping assessment, was dispensed with. Thus, virtually completed assessments could be reopened if in the opinion of the Assessing Officer income has escaped assessment. A number of representations were received against the omission of the words `reason to believe' from section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well-settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989 again amended section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'.  Other aspects of changes, namely, time - limitations, etc., for reopening the cases made by the 1987 and 1989 Acts not being relevant in the present context are not being discussed.  Controversies concerning re-opening of cases as per the changed law 

5.       Considerable controversies arose in regard to the interpretation of new law concerning re-opening of completed assessments. One objection which led to considerable litigation related to the issue as to whether a completed assessment can be reopened merely on the ground of change of opinion by the Assessing Officer. The views expressed by the Courts pre and post April 1, 1989 have been that the assessments cannot be reopened merely on the changed views of the Assessing Officers `without anything more'. In CIT v. Bhanji Lavji [1971] 79 ITR 582, the Apex Court decided that an assessment cannot be reopened only because of change of opinion on the part of the Assessing Officer. Similar views have been expressed by various High Courts also. In Sirpur Paper Mills Ltd. v. ITO [1978] 114 ITR 404 (AP), the High Court has held that re-assessment cannot be made on fresh opinion on the same facts. In Kamalchand v. ITO [1981] 128 ITR 290/[1980] 4 Taxman 216 (MP), an assessment was sought to be reopened by the Assessing Officer on the ground that his predecessor-in-office had committed an error in allowing certain deductions. The Madhya Pradesh High Court held that since no fresh information had come into possession of the Assessing Officer, the assessment could not be reopened. The Court held that it amounts only to change of opinion without anything else.  The Allahabad High Court in J.P. Bajpai (HUF) v. CIT [2004] 140 Taxman 34 held that the responsibility of the assessee is limited to the disclosure of all primary facts and nothing beyond. Once the assessee has disclosed all the primary facts that is the end of his duty. It is then for the assessing authority to draw the proper conclusions from those facts. If the conclusions drawn by the Assessing Officer from the primary facts disclosed by the assessee are erroneous, the assessing authority cannot reopen the assessment merely on the basis of a change in opinion. A mere change in opinion would not confer jurisdiction upon the Assessing Officer to initiate a proceeding under section 147.  Latest decision of the Supreme Court in the case of CIT v. Kelvinator (India) Ltd. 

6.       The latest decision on the issue being discussed is from the Supreme Court in the above mentioned case dated January 18, 2010 reported in [2010] 1 taxmann.com 27 where the Court has affirmed the two decisions of the Delhi High Court - CIT v. Kelvinator of India Ltd. [2002] 123 Taxman 433 (FB) and CIT v. Eicher Ltd. [2007] 163 Taxman 259 saying that assessment cannot be reopened merely on change of opinion. The important observations of the Apex Court in its decision are mentioned in later discussion. 

 

(a) "...post April 1, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words `reason to believe' failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of `mere change of opinion' which cannot be per se reason to reopen." 

 

(b) There is conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-condition and if the concept of `change of opinion' is removed, then in the garb of reopening the assessment, review would take place. 

 

(c) On and after April 1, 1989, the concept of `change of opinion' has as an inbuilt test to check abuse of power by the Assessing Officer. Hence, from April 1, 1989, the Assessing Officer has power to reopen, provided 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. This view gets support from the changes made to section 147. Under the Direct Tax Laws (Amendment) Act, 1987, the Parliament not only deleted the words `reason to believe' but also inserted the word `opinion' in section 147 of the Act. However, on receipt of representations from the companies against omission of the words `reason to believe', the Parliament re-introduced the said expression and deleted the word `opinion' on the ground that it would vest arbitrary powers in the Assessing Officer. 

 

(d) The Court has said that its view also get supports from the CBDT's Circular No. 549, dated October 31, 1989 wherein the position in this regard has been explained thus :  "7.2 Amendment made by the Amending Act, 1989, to re-introduce the expression `reason to believe' in section 147. A number of representations were received against the omission of the words `reason to believe' from section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well-settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is, of the opinion.' Other provisions of the new section 147, however, remain the same." 

7.       Summing up  The legal position now is that a completed assessment cannot be reopened merely on the basis of change of opinion unless there is `tangible material' to justify re-opening.



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