Gujarat H.C : Reopening of assessment is permissible even if there was no scrutiny assessment, provided there is reason to believe that income chargeable to tax has escaped assessment

High Court Of Gujarat

Inductotherm (India) (P.) Ltd. vs. M. Gopalan, DCIT

Assessment Year : 2002-03

Section : 147, 143(1), 143(2)

Akil Kureshi And Ms. Harsha Devani, JJ.

Special Civil Application No. 858 Of 2006

August  6, 2012

ORDER

Akil Kureshi, J. – The petitioner has challenged a notice dt. 20th Dec., 2004 issued by the respondent Dy. CIT under sec. 148 of the IT Act, 1961 (“the Act” for short). The petitioner has also challenged the subsequent notices issued by the respondent under sec. 143(2) of the Act. However, the principal challenge of the petitioner is to the notice dt. 20th Dec., 2004 issued by the AO seeking to reopen the assessment of the petitioner for the asst. yr. 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 asst. yr. 2002-03, the petitioner filed its return of income on 28th Oct., 2002. On such return, the AO sent intimation under sec. 143(1) of the Act on 16th Jan., 2003.

2.2 It is not in dispute that during the statutory period envisaged under sec. 143 of the Act, the AO issued no notice under sec. 143(2) of the Act. Such period expired on 1st Nov., 2003. The return of income, thus, remained at the stage of intimation under sec. 143(1) of the Act and was never taken in scrutiny.

2.3 The AO, however, issued the impugned notice on 28th Dec., 2004 seeking to reopen the assessment for the asst. yr. 2002-03. In response to such notice, the petitioner issued a communication dt. 30th Dec., 2004 and besides objecting to the reopening of the assessment, also demanded that the reasons recorded by the AO may be supplied. The respondent-AO did not supply the reasons. Instead, he issued a notice dt. 21st Oct., 2005 under sec. 143(2) of the Act, stating that there were certain points with respect to return of income for the asst. yr. 2002-03 on which he would like to have further information.

2.4 The petitioner thereupon wrote a letter dt. 8th Nov., 2005 and reiterated the request for supply of the reasons recorded by the AO for reopening the assessment. He referred to the decision of the Apex Court in case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963. He also relied on the decision of this Court in case of Arvind Mills Ltd. v. Asstt. CWT [2004] 270 ITR 467/[2005] 144 Taxman 290 in support of such a prayer.

2.5 In response to such letter, the AO supplied the reasons recorded under his communication dt. 8th Nov., 2005. Such reasons read as under:

“In this case, the assessee company has filed its return of income for asst. yr. 2002-03 on 28th Oct., 2002 showing total income at Rs. 7,23,29,973. The case was processed under sec. 143(1) on 16th Jan., 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 sec. 80HHC at Rs. 59,86,965. The involvement of CST and SST in the total turnover and other income in the net profit should not be allowable for the purpose of deduction under sec. 80HHC calculation relying on the decision in the case of Sterling Foods Ltd. (supra).

(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 A/c, out of which an amount of Rs. 1,05,48,633 has actually been incurred during the financial year under consideration. Therefore, the remaining amount of Rs. 37,99,714 is not allowable expenses under the

(4) Admissibility of royalty claimed at Rs. 62,92,773 is to be verified. However, due to wrongful claim of deduction under sec. 80HHC, excess claim of warranty expenses etc., income chargeable to tax has escaped assessment within the meaning of sec. 147 of the IT Act, 1961. Under the circumstances, the assessment for asst. yr. 2002-03 is hereby reopened. Issue notice under sec. 148 of the IT Act, 1961.”

2.6 Upon receipt of such reasons, the petitioner raised detailed objections to the notice of reopening under communication dt. 16th Nov., 2005. It was contended that in absence of any material to tax the income, even in proceedings under sec. 147 of the Act, it would not be open for the AO to proceed. The petitioner placed considerable reliance on the expression “reason to believe” used in sec. 147 of the Act. Such objections were disposed of by an order dt. 12th Jan., 2006. At that stage, the petitioner filed the present petition and challenged the impugned notice issued by the respondent-AO.

3. Appearing for the petitioner, Shri R.K. Patel contended that the notice is invalid. The AO 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 AO before issuing notice. In this respect, counsel pointed out that though immediately upon receipt of notice under sec. 148 of the Act, the petitioner demanded a copy of the reasons recorded by the AO, such reasons were not supplied for a long time. In the meantime, notices were issued under sec. 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 sec. 143(2) of the Act. He submitted that time-limit provided in the proviso to sec. 143(2) of the Act, must be given its due weightage. If the AO for any reason failed to issue such a notice within the time-limit, he cannot proceed under sec. 147 for taking such a return in scrutiny.

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

(a) In case of Dy. CIT v. Maxima Systems Ltd. [2012] 344 ITR 204 (Guj.), wherein a Division Bench of this Court observed that assessment which was framed under sec. 143(3) of the Act pursuant to a notice under sec. 143(2) which was served beyond the period of limitation prescribed under the proviso, was not a valid assessment.

(b) In case of Asstt. CIT v. Hotel Blue Moon [2010] 321 ITR 362/188 Taxman 113 (SC) wherein the Apex Court held that notice under sec. 143(2) of the Act was mandatory even in the block assessment proceedings if the AO desired to complete such assessment under sec. 143(3) of the Act.

(c) In case of Kanubhai M. Patel (HUF) v. Hiren Bhatt or His Successors to Office [2011] 334 ITR 25/202 Taxman 99/12 taxmann.com 198 (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 ss. 147, 148 and 149 of the Act.

(3) The third contention of the counsel was that the reasons recorded by the AO were not germane. Such reasons only recorded that the AO 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 sec. 143(1) of the Act.

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

(a) In case of Bakulbhai Ramanlal Patel v. ITO [2011] 56 DTR 212 (Guj.), wherein a Division Bench of this Court finding that all reasons recorded by the AO for reopening of assessment, only provided that the AO 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 sec. 143(1) of the Act without any scrutiny.

(b) In case of Balkrishna Hiralal Wani v. ITO [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 AO 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 AO 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 Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316, the Revenue would have much greater latitude for reopening the assessment.

(3) He further submitted that the reasons recorded by the AO 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 reopen an assessment, the AO must record his reasons before issuing notice for reopening. In that view of the matter, the question of such reasons having been recorded before issuance of notice assumes 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 AO and signed by himself are found at p. 324 which is immediately after p. 323 which is the notice for reopening of the assessment. Immediately after the reasons recorded at p. 325, is the acknowledgement receipt of service of the notice dt. 20th Dec., 2004, issued under sec. 148 of the Act. Further we find that the AO had drawn a note-sheet in which on 20th Dec., 2004, he recorded that, “Notice under sec. 148 issued after recording reasons for reopening.” Such note-sheet also contains reference to subsequent notice under sec. 143(2} issued on 8th Nov., 2005 and other details.

7. We also notice that the audit party had brought certain discrepancies to the notice of the AO. The AO thereupon examined such issues and wrote to the CIT on 17th Oct., 2003, that in view of such issues, remedial action is required to be taken. He noted that the assessment was accepted under sec. 143(1) of the Act and therefore, remedial actions available would be proceedings under sec. 263 of the Act, or under sec. 147 of the Act or under sec. 154 of the Act. In the concluding portion of his letter, he stated thus, “Secs. 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 sec. 147. Approval may kindly be accorded.”

7.1 Such approval was granted by the CIT under communication dt. 16th Feb., 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 by one Shri James Kurian, Asstt. CIT, 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 CIT and the CIT 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 AO had not recorded reasons before issuance of the notice. Firstly, the reasons recorded are found on the file immediately after the original notice under sec. 148 of the Act. Though such reasons are not dated, the note-sheet maintained by the AO 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 AO. He mulled over various options available to the Revenue and suggested to the CIT that the best option would be to exercise powers under sec. 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 AO before issuance of notice.

10. This brings us to the second limb of the petitioner’s challenge namely, that the power under sec. 147 of the Act cannot be exercised to circumvent the proceedings under sec. 143(3) of the Act because the notice under sec. 143(2) of the Act has become time-barred and further that in any case, reasons recorded would not permit the AO to reopen the assessment.

11. It is undoubtedly true that proviso to sec. 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 sec. 143(2) of the Act within the time permitted, scrutiny assessment under sec. 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 AO cannot try to scrutinize the return. This aspect substantially overlaps with the later contention of the petitioner that the reasons recorded by the AO 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 AO without any assessment, merely issued an intimation under sec. 143(1) of the Act accepting such return. In that view of the matter, it cannot be stated that the AO formed any opinion with respect to any of the aspects arising in such return. In such a case, scope for reopening such assessment under sec. 147 of the Act as compared to an assessment which was previously framed under sec. 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 Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) noticed such distinction and noted that the scheme of sec. 143(1) and 143(3) of the Act is entirely different. It was noticed that after 1st April, 1989, the provisions contained in sec. 143 underwent substantial changes. It was noticed that the intimation under sec. 143(1) of the Act is given without prejudice to the provisions of sec. 143(3) of the Act and though technically the intimation would be deemed to be demand notice under sec. 156, that did not per se preclude the right of the AO to proceed under sec. 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 AO 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 sec. 143(1), w.e.f. 1st June, 1999, except as provided in the provision itself, the acknowledgement of the return shall be deemed to be an intimation under sec. 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 acknowledgement is not done by any AO, 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 sec. 143(l)(a) was deemed to be a notice of demand under s. 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 sec. 143(l)(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 sec. 143(1) of the Act as compared to a return of which scrutiny assessment under sec. 143(3) of the Act is framed, the basic requirement of sec. 147 of the Act that the AO has reason to believe that income chargeable to tax has escaped assessment is not done away with. Sec. 147 of the Act permits the AO to assess, reassess the income or recompute 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 sec. 143(1) of the Act or a scrutiny assessment has been framed under sec. 143(3) of the Act. A common requirement in both of cases is that the AO 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 CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC), in the context of amended provision of sec. 147 w.e.f. 1st April, 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 sec. 147 would give arbitrary powers to the AO 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 go-bye. It was observed that, “Hence, after 1st April, 1989, the AO 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 sec. 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 Rajesh Jhaveri Stock Brokers (P) Ltd. (supra), the Apex Court observed that phrase “reason to believe” means cause or justification. If the AO 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 :

“Sec. 147 authorises and permits the AO 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 AO 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 AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO 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 (sic—Supreme Court) in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 98 CTR (SC) 161 : [1991] 191 1TR 662 (SC), for initiation of action under s. 147(a) (as the provision stood at the relevant time) fulfilment 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 AO is within the realm of subjective satisfaction [see ITO v. Selected Dalurband Coal Co. (P.) Ltd. [1996] 132 CTR 162 (SC)/[1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO [1999] 152 CTR 418 (SC)/[1999] 236 ITR 34 (SC)”

16. It would, thus, emerge that even in case of reopening of an assessment which was previously accepted under sec. 143(1) of the Act 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. However, as held by the Apex Court in the case of 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 AO.

17. If we accept such proposition, the petitioner’s apprehension that the AO would arbitrarily exercise powers under sec. 147 of the Act to circumvent the scrutiny proceedings which could not be framed in view of notice under sec. 143(2) having become time-barred, would be taken care of. To reiterate, even for reopening of an assessment which was accepted previously under sec. 143(1) of the Act without scrutiny, the AO 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 AO 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 royally 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 AO 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 AO 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 sec. 80HHC of the Act and the AO was of the opinion that the Central as well as the State Sales-taxes and other income in the net profit would not qualify for deduction under sec. 80HHC of the Act. It may be that he referred to the decision of the Apex Court in the case of CIT v. Sterling Foods [1999] 104 Taxman 204 however, mere wrong reference to a judgment would not invalidate the ground if otherwise was valid in law. Equally, in the third ground, the AO noted that the assessee had debited warranty expenses of Rs. 1,43,48,347 to the P&L A/c, 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 AO to reopen the assessment. The AO 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 dt. 27th Dec., 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.

[Citation : 356 ITR 481]