Scope of Reasons vis-à-vis Reassessment under Section 148

Introduction

The Income Tax Act, 1961 is in itself a complete code concerning the procedure of completing assessments/reassessments qua the assessees subject to the embedded riders in forms of sanctions/approvals of the competent authority, time-constraints subject to residential status/ location of the source of income and monetary ceilings applicable. Recording of reasons to believe that there is escapement of income is a sine qua non and condition precedent for exercising any remedial action under section 148 of the Income Tax Act, 1961. One of the predominant conditions which embark upon the incessant journey to litigation under section 148 is the mandate of the recording of reasons to believe as to escapement of income prior to issuance of notice to the assessees concerned. This apart, addition on the issue forming the subject matter of notice under section 148 again occupies a predominant position in the lawful completion of assessments taken up. A moot question that arises for consideration is as to whether the proceedings framed pursuant to the issuance of notice under section 148 can be sustained when no addition has been made in respect of the issues forming part of the notice and taken up for consideration by the department. Hon’ble Income Tax Appellate Tribunal, Pune `B’ Bench Prabhakar Damodar Gawande vs. ITO (2019) 181 DTR (Pune)(Trib) 14in principal dealt with the issue extensively by resorting to the pronouncements of Hon’ble Bombay High Court in CIT vs. Jet Airways (I) Ltd (2011) 239 CTR (Bom) 183and Hon’ble Delhi High Court in CIT vs.Cheil Communications India (P) Limited (2013) 259 CTR (Del) 296 : (2013) 354 ITR 549 (Del).

Facts

The assessee.Prabhakar Damodar Gawande was in the profession of running coaching classes. The assessing officer initiated reassessment proceedings in respect of the previous year 2007-08 relevant to the assessment year 2008-09 by recording reasons as to the excess capital balance of Rs.4 lakhs availed by the assessee. Accordingly, the addition of Rs.4 lakhs was made apart from the disallowance of 15% of the expenditure claimed to amount to Rs.81,405/- for the year under consideration. As the assessee remained unsatisfied with the findings of the learned assessing officer, the assessment framed was contested before the CIT (Appeals). The Commissioner (Appeals) upheld the additions made apart from upholding the initiation of reassessment proceedings. Further challenging the action, the assessee traveled to the Hon’ble ITAT for redressal of his grievances in the matter concerned. The Hon’ble ITATin introspection of the matter, examined the reasons recorded by the assessing officer while proceeding with section 148 notice. It was stated in the reasons that `It was observed by the investigation wing that the assessee has taken opening capital balance as on 01^st April 2008 at Rs.23,29,401/- as against the closing balance as on 31^st March 2008 at Rs.19,29,401/-. The excess capital balance of Rs.4 lakhs has been taken by the assessee. On examining the reasons recorded, the assessing officer was of the opinion that owing to excess capital availed by Rs.4 lakhs, an addition was warranted in the reassessment proceedings. The Hon’ble ITAT opined that what was in the challenge before it was the matter pertaining to the previous year 2007-08 i.e. for the period range of 01^st April 2007 to 31^st March 2008 relevant to the assessment year 2008-09. The assessee availed excess capital of Rs.4 lakhs as on 01^st April 2008 which forms part of the previous year 2008 – 09 relevant to the assessment year 2009-10. As the excess capital was recorded in the books for the financial year 2008-09 relevant to the assessment year 2009-10, no addition can be made to the previous year ending 31^st March 2008 i.e. for the relevant assessment year 2008-09 under consideration. So the addition of Rs.4 lakhs made by way of re-assessment stood deleted.

The assessee also challenged the findings of the assessing officer pertaining to disallowance of Rs.81,405/- being 15% of the expenditure in the absence of original bills or vouchers concerned. In light of examining the grievance of the assessee, the Hon’ble ITAT also took note of the reasons recorded by the assessing officer as to the excess capital availed amounting to Rs.4 lakhs and also a Tax Evasion Petition (TEP) detailing undisclosed investment made by the assessee in certain properties. Since the assessment was completed by making an addition of Rs.4 lakhs apart from disallowing a sum of Rs.81,405 towards the expenditure, no addition was made on account of excess investments disclosed in the available.

The reasoning of the Hon’ble Bench

The Hon’ble ITATobserved in the governing set of circumstances vide Para No.6 & 7 of its pronouncement as under:-

6. Section 147 of the Act 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…’. A bare perusal of the above provision manifests that the AO is fully empowered to bring to tax any other income which has escaped assessment and which comes to his notice subsequently in the course of proceedings u/s 147, apart from the income escaping assessment on which the AO formed reason to believe about the escapement of income and issued notice u/s 148. The use of words ‘and’ between the income escaping assessment forming reasons to believe for issuing notice u/s 148 and other income chargeable to tax which escaped assessment and comes to the notice of the AO in the course of the proceeding, amply shows that the existence of the former is a pre-condition for taxing the latter. To put it simply, if the grounds set out in the re-assessment notice are nonexistent, i.e., either no addition is made on such grounds or the addition so made does not finally pass the scrutiny by the appellate forums, then, obviously, no further addition can be made for income which comes to his notice during the course of proceedings u/s 147. Without there being such a deterrent, the AO could have got unhindered powers to initiate re-assessment at the drop of a hat without any legally sustainable reasons and then made other additions resulting in a multiplicity of proceedings, which the legislature has sought to curb. Any lawful jurisdiction to make an addition on account of other incomes coming to the notice of the AO during the course of proceedings u/s 147 can be acquired only on the foundation of a validly acquired jurisdiction on legally sustainable items of income escaping assessment forming reasons for issuing notice u/s 148. In other words, if the AO fails to acquire a valid jurisdiction to make re-assessment on the basis of his reasons, then, he is also debarred for making additions for other incomes chargeable to tax which escaped assessment and come to his notice subsequently in the course of proceedings u/s 147. The Hon’ble Bombay High Court in CIT vs. Jet Airways (I) Ltd. (2011) 331 ITR 236 (Bom) has held to this extent. A similar view has been taken by the Hon’ble Delhi High Court in CIT vs. Chiel Communications India Pvt. Ltd. (2013) 354 ITR 549 (Del).

The Tribunal particularly observed that the use of words `and’ between the income escaping assessment forming reasons to believe for issuing notice under section 148 and other income chargeable to tax which escaped assessment and comes to the notice of the Assessing Officer in the course of the proceedings under the Act amply demonstrates that existence of the former is a precondition for taxing the latter. To put it in a simple condition, where either no addition is made on such grounds forming part of reassessment notice or the addition so made does not finally pass the scrutiny by the appellate forums, then without any dispute, no further additions can be made to the income which subsequently comes to the notice of the assessing officer in the course of proceedings under section 147 of the Act. If an assessing officer fails to acquire lawful jurisdiction to make reassessment on the basis of his reasons recorded, then he is prohibited from making additions for other incomes chargeable to tax which escaped assessment and come to his notice subsequently. It is also pertinently added here that the findings of the Hon’ble Bombay High Court in CIT vs. Jet Airways (I) Ltd (2011) (supra)are very significant while understanding the repercussions of the issues assessing officer can travel to apart from the issues forming part of notice issued under section 148. The Hon’ble High Court was confronted with the substantial question as to whether whereupon the issuance of a notice under section 148, read with section 147, the Assessing Officer does not assessor, as the case may be, reassess the income which he has reason to believe had escaped assessment and which formed the basis of a notice under section 148, it is open to the Assessing Officer to assess or reassess independently any other income, which does not form the subject-matter of the notice. The Hon’ble High Court observed in the governing circumstances of the case vide Para No.11, 15 & 16 of its pronouncement in Jet Airways case (supra):-

The rival submissions which have been urged on behalf of the revenue and the assessee can be dealt with, both as a matter of the first principle, interpreting the section as it stands and on the basis of precedents on the subject. Interpreting the provision as it stands and without adding or deducting from the words used by Parliament, it is clear that upon the formation of a reason to believe under section 147 and following the issuance of a notice under section 148, the Assessing Officer has the power to assess or reassess the income, which he has reason to believe had escaped assessment and also any other income chargeable to tax. The words “and also” cannot be ignored. The interpretation which the Court places on the provision should not result in diluting the effect of these words or rendering any part of the language used by Parliament otiose. Parliament has used the words “assess or reassess such income and also any other income chargeable to tax which has escaped assessment”, the words “and also” cannot be read as being in the alternative. On the contrary, the correct interpretation would be to regard those words as being conjunctive and cumulative. It is of some significance that Parliament has not used the word “or”. The Legislature did not rest content by merely using the word “and”. The words “and”, as well as “also” have been used together and in conjunction.

The Shorter Oxford Dictionary defines the expression “also” to mean ‘further, in addition, besides, too’. The word has been treated as being relative and conjunctive. Evidently, therefore, what Parliament intends by use of the words “and also” is that the Assessing Officer, upon the formation of a reason to believe under section 147 and the issuance of a notice under section 148(2) 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 ‘such income’ refers to the income chargeable to tax which has escaped assessment and in respect of which the Assessing Officer has formed a reason to believe that it has escaped assessment. Hence, the language which has been used by Parliament is indicative of the position that the assessment or reassessment must be in respect of the income in respect of which he has formed a reason to believe that it has escaped assessment and also in respect of any other income which comes to his notice subsequently during the course of the proceedings as having escaped assessment. If the income, the escapement of which was the basis of the formation of the season to believe is not assessed or reassessed, it would not be open to the Assessing Officer to independently assess only that income which comes to his notice subsequently in the course of the proceedings under the section as having escaped assessment. If upon the issuance of a notice under section 148(2), the Assessing Officer accepts the objections of the assessee and does not assess or reassess the income which was the basis of the notice, it would not be open to him to assess income under some other issue independently. Parliament when it enacted the provisions of section 147 with effect from 1-4-1989 clearly stipulated that the Assessing Officer has to assess or reassess the income which he had reason to believe had escaped assessment and also any other income chargeable to tax which came to his notice during the proceedings. In the absence of the assessment or reassessment of the former, he cannot independently assess the latter.

15. Parliament, when it enacted the Explanation (3) to section 147 by the Finance (No. 2) Act, 2009 clearly had before it both the lines of precedent on the subject. The precedent dealt with two separate questions. When it affected the amendment by bringing in Explanation 3 to section 147, Parliament stepped in to correct what is regarded as an interpretational error in the view which was taken by certain courts that the Assessing Officer has to restrict the assessment or reassessment proceedings only to the issues in respect of which reasons were recorded for reopening the assessment. The corrective exercise embarked upon by “Parliament in the form of Explanation 3 consequently provides that the Assessing Officer may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings through the reasons for such issue were not included in the notice under section 148(2). The decisions of the Kerala High Court in Travancore Cements Ltd.’s case (supra) and of the Punjab & Haryana High Court in Vipan Khanna’s case (supra) would, therefore, no longer hold the field. However, insofar as the second line of authority is concerned, which is reflected in the judgment of the Rajasthan High Court in Shri Ram Singh’s case (supra), Explanation 3 as inserted by Parliament would not take away the basis of that decision. The view which was taken by the Rajasthan High Court was also taken in another judgment of the Punjab & Haryana High Court in CIT v. Atlas Cycle Industries [1989] 180 ITR 319¹. The decision in Atlas Cycle Industries’ case (supra) held that the Assessing Officer did not have jurisdiction to proceed with the reassessment, once he found that the two grounds mentioned in the notice under section 148 were incorrect or non-existent. The decisions of the Punjab & Haryana High Court in Atlas Cycle Industries’ case (supra) and of the Rajasthan High Court in Shri Ram Singh’s case (supra) would not be affected by the amendment brought in by the insertion of Explanation 3 to section 147.-
16. Explanation 3 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 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Explanation 3 by the Finance Act (No. 2) of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income (“such income”) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has 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 legality of which would be tested in the event of a challenge by the assessee.

 On a similar note, the Hon’ble Delhi High Court in CIT vs.Cheil Communications India (P) Ltd(supra) inherently relied upon the pronouncement of the Hon’ble Bombay High Court in Jet Airways case (supra) to observe that:-

17. In the case of Jet Airways (supra), the Bombay High Court held as under:

“….Interpreting the provision as it stands and without adding or deducting from the words used by Parliament, it is clear that upon the formation of a reason to believe under section 147 and following the issuance of a notice under section 148, the Assessing Officer has the power to assess or reassess the income which he has reason to believe had escaped assessment, and also may other income chargeable to tax. The words ‘and also’ cannot be ignored. The interpretation which the court places on the provision should not result in diluting the effect of these words or rendering any part of the language used by Parliament otiose. Parliament has used the words ‘assess or reassess such income and also any other income chargeable to tax which has escaped assessment’, the words ‘and also’ cannot be read as being in the alternative. On the contrary, the correct interpretation would be to regard those words as being conjunctive and cumulative. It is of some significance that Parliament has not used the word ‘or’. The Legislature did not rest content by merely using the word ‘and’. The words ‘and’ as well as ‘also’ have been used together and in conjunction.”

“……………Evidently, therefore, what Parliament intends by use of the words ‘and also’ is that the Assessing Officer, upon the formation of a reason to believe under section 147 and the issuance of a notice under section 148(2) 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 word ‘such income’ refers to the income chargeable to tax which has escaped assessment and in respect of which the Assessing Officer has formed a reason to believe that it has escaped assessment. Hence, the language which has been used by Parliament is indicative of the position that the assessment or reassessment must be in respect of the income in respect of which he has formed a reason to believe that it has escaped assessment and also in respect of any other income which comes to his notice subsequently during the course of the proceedings as having escaped assessment. If the income, the escapement of which was the basis of the formation of the reason to believe is not assessed or reassessed, it would not be open to the Assessing Officer to independently assess only that income which comes to his notice subsequently in the course of the proceedings under the section as having escaped assessment. If upon the issuance of a notice under section 148(2), the Assessing Officer accepts the objections of the assessee and does not assess or reassess the income which was the basis of the notice, it would not be open to him to assess income under some other issue independently. Parliament when it enacted the provisions of section 147 with effect from April 1, 1989, clearly stipulated that the Assessing Officer has to assess or reassess the income which he had reason to believe had escaped assessment and also any other income chargeable to tax which came to his notice during the proceedings. In the absence of the assessment or reassessment of the former, he cannot independently assess the latter.”

“……………Section 147 has this effect that the Assessing Officer has to assess or reassess the income (‘such income’) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has 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 legality of which would be tested in the event of a challenge by the assessee.”

Conclusion

The pronouncements of the Hon’ble Bombay High Court in Jet Airways case (supra) and the Hon’ble Delhi High Court in Cheil Communications India (P) Ltd (supra)were taken into consideration by the Hon’ble ITAT(Pune Bench) to conclude that once additions have not been sustained/made on the issues forming part of notice issued under section 148 of the Income Tax Act, 1961, no further addition can be made to the issues found subsequently in the course of proceedings under section 147 of the Income Tax Act, 1961. Another contributory factor leading to massive litigation is the outbreak of Explanation 3to section 147 by Finance (No. 2) Act of 2009. The effect of the Explanation is that once an Assessing Officer has formed a reason to believe that income chargeable to tax has escaped assessment and has proceeded to issue a notice under section 148, it is open to him to assess or reassess income in respect of any other issue through reasons for such issues had not been forming part of the reasons recorded under section 148(2) of the Income Tax Act, 1961. It is also to be simultaneously considered that courts are leaning down in favor of the proposition that once issues forming part of the notice issued under section 148 do not succeed with the assessing authority, venturing into other issues which subsequently comes into the notice will not be of any assistance to the authority concerned while framing assessment/ reassessment under section 148.

Sameer Bhatia is an Advocate practising in Punjab & Haryana High Court