Introduction
1. Issue of notice u/s 148 for assessment/reassessment as provided u/s 147 has long been a contentious issue between taxpayers and Department. For administrative reasons the AO uses every kind of information which comes to his possession as a basis of reopening of assessment. If the conditions laid down in Sections 147, 148, 149 and 151 are not strictly followed by the AO, the reassessment process is quashed. The view of the Department is that on mere technical reasons the Courts have been quashing the reopening which has led to alleged leakage of Revenue. As a result, Law has been amended from time-to-time in order to plug the perceived loop holes. In this article, the provisions of law relating to reopening, ingredients of reasons to be recorded and views held by the Court in recent judgments on the subject have been highlighted and briefly summed uphead-wise.
Law relating to reopening
2. Sections 147, 148, 149 and 151 have following main ingredients for reopening the assessment:
(i) The AO has reasons to believe that-
(ii) income chargeable to tax has escaped assessment.
(iii) Where assessment has been framed under section 143(3), and notice is to be issued after four years from the relevant assessment year, the AO has to record that the escapement of income chargeable to tax has taken place by reason of the failure on the part of the assessee to make a return under section 139, or in response to notice under section 142(1), or under section 148, or to disclose fully and truly all material facts necessary for his assessment.
(iv) That such reasons are recorded in writing before issuing notice under section 148.
(v) Wherever required, sanction has to be taken from higher authority in accordance with Section 151 before issue of notice.
(vi) Limitation to issue notice u/s 148, in general is four years from the end of relevant assessment year.
(vii) Where income escaping assessment is 1 lakh or more, the limitation to issue notice u/s 148 is six years from the relevant assessment year.
(viii) For assessing income in relation to any asset (including financial interest in any entity) located in a foreign country,the limitation provided is sixteen years from the relevant assessment year.
The contents of the reasons
3. The reasons recorded before issuance of notice u/s 148 should reflect following ingredients:
(i) Name of the assessee, (ii) assessment year involved, (iii) whether assessee has filed return of income or not for that year, (iv) declared income and assessed income, whether assessment was made u/s 143(1) or section 143(3), (v) the nature of information and source thereof, (vi) nature of receipt/income, which has escaped, (vii) how such receipt/ income is chargeable to tax, (viii) such income belongs to the assessee or is assessable in his hand, i.e., there is a live nexus, (ix) amount of escaped income, (x) wherever required, to point out that escapement has taken place due to failure on the part of assessee to disclose fully and truly all material facts relevant for assessment, (xi) satisfaction of the AO.
Belief should be of the jurisdictional AO
4. Where original assessment has been framed (either u/s 143(1) or u/s 143(3)), the jurisdiction of the AO over the assessee is certain and known. Therefore, notice u/s 148 can be issued only by that AO who has jurisdiction over the assessee. Notice issued by any other officer will be invalid. [refer- Asstt. CIT v. Resham Petrotech Ltd. [2012] 21 taxmann.com 161/136 ITD 185 (Ahd.); Dr. Mrs. K.B. Kumar v. ITO [2011] 47 SOT 192/12 taxmann.com 318 (Delhi) (URO); Dushyant Kumar Jain v. Dy. CIT [2016] 66 taxmann.com 126/237 Taxman 646 (Delhi)]. Therefore, notice issued by the AO-Delhi against an assessee assessed in Kolkata was held invalid. [refer- Smt. Smriti Kedia v. UOI [2011] 339 ITR 37/[2012] 20 taxmann.com426(Cal.)]. Where assessment has not been made/return has not been filed at all, the jurisdiction will be based with any AO as per Section 120.
Nature of belief and reasons recorded for reopening assessment
5. It has been held that while recording the reasons, the AO need not establish the escapement of income. The belief at that time is only prima facie and not conclusive. Reasons should not depict gossip, rumour or suspicion. The belief must be held in good faith; it cannot be merely a pretence. The expression “believe” in Section 147 requires an objective satisfaction based on definite material and information, howsoever insufficient it is. The sufficiency of the material cannot be gone into, but relevancy certainly can be gone into. The reasons for the belief should have a rational connection or a relevant bearing on the formation of the belief and should not be extraneous or irrelevant. [refer- Pannalal Mahesh Chandra Jewellers v. Dy. CIT [2010] 188 Taxman 95 (All.)] That is, there must be live nexus between information, assessee and escaped income. Absence of material and nexus of the material with the assessee and escaped income will invalidate reopening of assessment. Formation of belief in this manner is a mandatory condition for acquiring jurisdiction to issue notice u/s 148. Further, conditions of quantum of income which has escaped assessment, required for invoking Section 149(1)(b) must be complied with and must be reflected from the reasons. [refer- Novo Nordisk India (P.) Ltd. v. Dy. CIT [2018] 95 taxmann.com 225 (Karn.)]. As observed above, recording of reasons for reopening assessment completed u/s 143(1) is also necessary but there is no onus on the AO to record in the reasons that income has escaped assessment due to failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment, as such condition is required to reopen the original assessment completed u/s 143(3). [refer- CIT v. Kiranbhai Jamnadas Sheth (HUF) [2013] 39 taxmann.com 116/221 Taxman 19 (Guj.) (Mag.)]
Recording of reasons is necessary even in assessments completed u/s 143(1)
6. It is incorrect to infer that the Hon’ble Supreme Court in CIT v. Zuari Estate Development & Investment Co. Ltd. [2015] 373 ITR 661/63 taxmann.com 177/[2016] 236 Taxman 1 (SC) has held that where the original return has been accepted by intimation u/s 143(1), there could be no change of opinion and further that in such cases there is no requirement for the AO to record reasons to believe that income chargeable to tax has escaped assessment, before issuing notice u/s 148. The Law on this point is governed by the decision of the Hon’ble Apex Court in Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 wherein it is held that even in cases where no assessment order is passed, and assessment is completed by intimation under section 143(1), it is necessary to record reasons that income chargeable to tax has escaped assessment before exercising jurisdiction u/s 148. [refer- Khubchandani Healthparks (P.) Ltd. v. ITO [2016] 68 taxmann.com 91/384 ITR 322 (Bom.)]
Where reasons recorded by the AO were not provided to the assessee
7. Failure on the part of the AO, to furnish recorded reasons for issue of reopening notices to assessee before completing of assessment would make reassessment order passed in pursuance of such notice bad in law. Reference may be made to (i) CIT v. Trend Electronics [2015] 61 taxmann.com308/379 ITR 456 (Bom.), (ii) Suez Tractebel S.A. v. Dy. DIT [2013] 35 taxmann.com 419/[2013] 143 ITD 614 (Bang.-Trib.)
Objections and their disposal
8. The AO after issue of notice is required to furnish to the assessee reasons recorded by him for reopening the assessment. The assessee has a right to file objections to such reopening as held by the Hon’ble Apex Court in G.K.N. Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963. The AO thereafter is bound to dispose of preliminary objections against reopening by passing a speaking order before proceeding with the assessment in respect of the assessment year for which such notice has been issued. [refer- Arvind Mills Ltd. v. Asstt. CWT [2014] 270 ITR 469/141 Taxmann 210 (Guj.); Banaskantha District Oilseeds Growers Co-op. Union Ltd. v. Asstt. CIT [2015] 59 taxmann.com 328 (Guj.); Pr. CIT v. Sagar Developers [2016] 72 taxmann.com 321 (Guj.); Simaben Vinodrai Ravani v. ITO [2017] 79 taxmann.com 15/394 ITR 778 (Guj.); Scan Holding (P.) Ltd. v. Asstt. CIT [2018] 90 taxmann.com 396/402 ITR 290 (Delhi). The disposal of objections, along with assessment order, or through a non-speaking order is not sustainable. If objections are not disposed of through speaking order, then the reassessment order cannot be sustained. The assessment has been set aside to the file of AO for first disposing of the objections and then, if required, to proceed with the reassessment. A different view has been taken by the Hon’ble Allahabad High Court in CIT v. Shyam Cold Storage [2013] 31 taxmann.com 358/215 Taxman 669 to the effect that, if the assessee participated in reassessment proceedings without raising any such objection then reopening can not be held invalid and matter has to be decided on merits.
Information received should show live nexus with assessee and escapement of income
9. Where information received by the AO from other Agencies has enough material indicating that assessee has certain receipts having revenue character which have not been offered for tax then issuance of notice u/s 148 would be justified as live nexus of the information with the assessee is clearly indicated and, thus, income having escaped assessment can be prima facie believed. For example, (i) statement of partners admitting receipt of income not offered to tax (refer- Atul Ratilal Makadia v. ITO [2018] 94 taxmann.com 435 (Guj.) (ii) A pen drive recovered by police from assessee and forwarded to revenue containing various credit entries not disclosed by assessee in the return. [refer- Chetan Gupta v. Asstt. CIT [2013] 34 taxmann.com 306/144 ITD 344 (Delhi – Trib.)]
Information from investigation wing
10. Where the name of the assessee figures in the information received and income escaping assessment, such as statements and other data indicating that assessee has received money in the form of share capital, share premium, unsecured loans, etc., from companies which were found to provide accommodation entries, then Courts have held that there is a live nexus between information, assessee and escapement of income. Issuance of notice u/s 148 based on such information was found to be valid. [refer- MSK Real Estates (P.) Ltd. v. Dy. CIT [2018] 95 taxmann.com 241 (Guj.); A.G. Holdings (P.) Ltd. v. ITO [2012] 21 taxmann.com 34/207 Taxman 117/[2013] 352 ITR 364 (Delhi); Jayant Security & Finance Ltd. v. Asstt. CIT [2018] 91 taxmann.com 181/254 Taxman 81 (Guj.); KhatuShyam Processors (P.) Ltd. v. Dy. CIT [2018] 94 taxmann.com 429 (Guj.); Pankaj Hospital Ltd. v. CIT [2014] 44 taxmann.com 230/223 Taxman 22 (All.)
Where information is not specific about escapement of income
11. When information received does not contain any specific material indicating escapement of income of the assessee then drawing satisfaction and issuance of notice u/s 148 will not be valid. For example, mere AIR information that there is a cash deposit in the bank account of the assessee will not be enough for issue of section 148 notice as cash deposit in bank account would not necessarily be of income character. It could be agriculture receipt, capital receipt, savings, gifts, inheritance, etc. There could not be any cause and effect relationship between reasons recorded on the basis of mere cash deposit and income escaping assessment. [refer- Bir Bahadur Singh Sijwali v. ITO [2015] 53 taxmann.com 366/68 SOT 197 (Delhi-Trib.); Gurpal Singh v. ITO [2016] 71 taxmann.com 108/159 ITD 797 (Amritsar – Trib.); Saraf Gramodyog Sansthan v. ITO [2007] 108 ITD 115 (Agra)]
Material used for reopening assessment should be relevant
12. The belief formed about escapement of income for recording reasons to reopen the assessment is only prima facie. However, the material on the basis of which such belief is formed should be relevant. Such material coming from independent source may not be complete or full, may prove to be incorrect on inquiry, but before reopening assessment, the AO must be able to infer in good faith that income of the assessee is chargeable to tax and has escaped assessment. Thus, relevancy of material for formation of belief is crucial. The Courts have held following information and material, relevant for reopening of assessment: (i) letter from Mining Department giving a reasonably specific estimate of excessive coal-mining said to have been done by assessee over and above figure disclosed by it in its returns. [refer- ITO v. Selected Dalurband Coal Co. (P.) Ltd. [1996] 217 ITR 597 (SC)], (ii) information gathered by Excise department from statements of partners of assessee-firm that assessee had not disclosed certain amount of fees collected from students. [refer- ABC Classes PRS v. Pr. CIT [2017] 79 taxmann.com 312/[2016] 387 ITR 119 (All.)], (iii) information from Government agency under the DTAA that assessee had received certain amount from a Japanese company which was not shown in books of account by assessee [refer- Mitsui & Co. India (P.) Ltd. v. ITO [2012] 26 taxmann.com 1/[2013] 213 Taxman 32 (Delhi)] (iv) information from PDIT (Investigation) that assessee had received bogus loss from his broker by client code modification. [refer- Rakesh Gupta v. CIT [2018] 93 taxmann.com 271 (Punj. & Har.)], (v) information that assessee has not correctly disclosed External Development Charges (EDC). [refer- Greater Mohali Area Development Authority v. Dy. CIT [2018] 93 taxmann.com 441 (Punj. & Har.)], (vi) information that assessee has undisclosed bank account in foreign countries. [refer- Pradeep Dayanand Kothari v. Asstt. CIT [2016] 69 taxmann.com 408 (Chennai – Trib.)], (vii) information that assessee has shown sale proceeds of agriculture land as agriculture income. [refer- Ayush Agrotech (P.) Ltd. v. Pr. CIT [2018] 89 taxmann.com 63 (Raj.)], (viii) information that assessee has taken bogus purchase entries from two parties. [refer- Peass Industrial Engineers (P.) Ltd. v. Dy. CIT [2016] 76 taxmann.com 122 (Guj.)]
Notice issued without application of mind
13. It is necessary that before issuance of notice u/s 148 the AO should apply his mind to the material before him and such application of mind should be reflected from the reasons recorded. The specific material which shows nexus of the assessee with the escaped income must be referred to in the reasons recorded. If inspite of having material before him and there is no indication from the reasons that while recording them, the AO applied his mind, the issuance of notice u/s 148 cannot be upheld. For example, where during the course of survey, lot of material was found but reasons did not indicate as to which material is relevant to show that income has escaped assessment, reopening was held not justified [refer- Dy. CIT v. Dr. M.J. Naidu [2017] 85 taxmann.com 206 (Visakhapatnam – Trib.)]
Impermissible considerations to reopen assessment completed u/s 143(3)
14. Where assessment has been completed u/s 143(3) after taking into consideration all the materials on the record, then reopening of assessment on certain subjective considerations or on suspicion or gossip is not permitted by the Courts. For example, (i) assessment where addition was made on the basis of stamp duty valuation on sale of land could not be reopened on the basis of DVO’s report for the same piece of land. [refer- Akshar Infrastructure (P.) Ltd. v. ITO [2017] 79 taxmann.com 239/246 Taxman 353/393 ITR 658 (Guj.)], (ii) income from sale of embedded software was assessed as royalty after detailed consideration and no new facts came to knowledge of the AO. [refer- Alcatel-Lucent France v. Asstt. DIT [2016] 69 taxmann.com 379/204 Taxman 414/384 ITR 113 (Delhi)], (iii) Non-filing of return of income and/or not obtaining of PAN [refer- General Electoral Trust v. ITO [2017] 81 taxmann.com 276 (Bom.)], (iv) Accounting Standards under which books of account were maintained were not recognized by department [refer- High Energy Batteries (India) Ltd. v. ITO [2012] 21 taxmann.com 513 (Mad.)], (v) no nexus of the assessee with the alleged sale of steel by the clients of the assessee [refer- Hindustan Dorr Oliver Ltd. v. P.K. Kedia Dy. CIT [2008] 305 ITR 282 (Bom.)], (vi) for obtaining separate confirmations from the sundry creditors, even though, other details were filed during original assessment proceedings. [refer- Orient News Prints Ltd. v. Dy. CIT [2017] 78 taxmann.com 108/393 ITR 527 (Guj.)], (vii) merely because purchase amount remained outstanding for long [refer- Sandeepkumar Mithulal Mehta v. ITO [2017] 81 taxmann.com 336 (Gujarat)], (viii) reopening assessment to consider nature of goodwill, even though no depreciation was allowable on goodwill [refer- Supreme Treves (P.) Ltd. v. Dy. CIT [2009] 182 Taxman 216/[2010] 323 ITR 323 (Bom.)], (ix) to reopen the assessment solely on the basis of the return of income and the enclosures thereto, being the financials and the deed of partnership [refer- TANMAC India v. Dy. CIT [2017] 78 taxmann.com 155 (Mad.)], (x) notification on the basis of which assessment was reopened was quashed. [refer- Ultra Marine Air Aids (P.) Ltd. v. IAC [2011] 12 taxmann.com 436/201 Taxman 69 (Mag.)/332 ITR 273 (Delhi)], (xi) where issue of deduction u/s 80-IA(4) was examined by AO and was allowed in appeal by the CIT(A) reopening on the same issue will not be permissible. [refer- Gujarat Enviro Protection & Infrastructure Ltd. v. Dy. CIT [2018] 91 taxmann.com 186 (Guj.)], (xii) On the basis of observations by another officer in another year that assessee is charging on money on sale of flats cannot justify issue of notice for an earlier assessment year after four years of original assessment made u/s 143(3). [refer- Sopan Infrastructure (P.) Ltd. v. ITO [2017] 78 taxmann.com 170/391 ITR 107 (Guj.)], (xiii) reopening assessment for carrying out roving inquiries. [refer- CIT v. S & S Power Switchgear Ltd. [2018] 92 taxmann.com 429 (Mad.)], (xiv) no reopening for correcting mistake in the assessment order. [refer- Swati Saurin Shah v. ITO [2016] 70 taxmann.com 72 (Guj.)], (xv) no reopening for carrying out deeper scrutiny [refer- CIT v. Batra Bhatta Co. [2008] 174 Taxman 444 (Delhi)]
Reopening on change of opinion
15. The Hon’ble Supreme Court has laid down the test in the CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312, whether the AO had tangible material to come to the conclusion that there is an escapement of income from assessment. The Supreme Court has held that the ‘reason to believe’ that any income chargeable to tax has escaped assessment cannot be founded on a mere change of opinion. The power to reassess is not in the nature of a power to review. Where during the course of original assessment proceedings the assessee has produced all the documents including books of account and other material, submitted documentary evidence in support of his case, answered all the queries then issue of notice u/s 148 for reconsideration of certain issue, examined and considered in the original proceedings, will constitute change of opinion. For example, (i) to recompute capital gains by taking cost of acquisition on the basis of opinion of an officer of different range [refer- Asiatic Oxygen Ltd. v. Dy. CIT [2015] 60 taxmann.com 265/372 ITR 421 (Cal.)], (ii) where AO had in the original assessment proceedings examined the effect of insertion of definition of charitable purpose w.e.f. 01-04-2009 and its effect on the assessee’s activity being in the nature of charitable purpose, then any attempt to re-examine said issue was considered as change of opinion. [refer- Friends of WWB, India v. Dy. DIT (Exemption) [2017] 84 taxmann.com 31 (Guj.)], (iii) It was held to be change of opinion as while framing assessment u/s 143(3) of the Act, the AO consciously chose to make disallowance of only small amount u/s 80-IB(8A), the assessment was sought to be reopened after four years to disallow entire claim u/s. 80-IB(8A). [refer- Lambda Therapeutic Research Ltd. v. Asstt. CIT [2018] 90 taxmann.com 308/402 ITR 177 (Guj.)], (iv) since in original assessment the AO had examined the issue of off market transactions and concluded that loss suffered by assessee could not be disallowed, it was not permissible to reopen assessment to disallow that loss. [refer- Prudent Finance (P.) Ltd. v. Asstt. CIT [2016] 75 taxmann.com 110/389 ITR 488 (Guj.)], (v) notice u/s 148 cannot be issued to reinvestigate the matter concluded on the basis of documents submitted earlier. [refer- ITO v. Smt. Payal Gupta [2008] 24 SOT 30 (Chd.) (URO)], (vi) when in the original assessment proceedings payment was accepted as discount then to reopen the assessment to hold the payment as commission will be a change of opinion. [refer- Gujarat Tea Processors & Packers Ltd. v. Dy. CIT [2012] 28 taxmann.com 187/220 Taxman 426 (Guj.)], (vii) when it was accepted in the original proceedings that assessee has not done any business with its AE then to reopen the assessment by holding that certain amount received from AE was taxable u/s 9(1) was only a change of opinion. [refer- Ess Distribution (Mauritius) S.N.C.E.T Compagnie v. Asstt. CIT [2017] 87 taxmann.com 16/251 Taxman 369/399 ITR 362 (Delhi)], (viii) the issue of addition of provision for deferred taxation while computing book profit u/s 115JB was considered by the AO in original assessment proceedings and no addition was made by accepting the explanation of the assessee that provision is made according to accounting standards, then reopening without any further material would be a change of opinion. [refer- M.J. Pharmaceuticals Ltd. v. Dy. CIT [2008] 167 Taxman 136/297 ITR 119 (Bom.)], (ix) where after detailed enquiry, the AO passed an assessment order accepting the sale consideration of the copyright as provided by the assessee, then to hold that part of sale consideration was to be disallowed as it was excessive, on the basis of internal audit report was a change of opinion. [refer- Jagran Prakashan Ltd. v. CIT [2014] 48 taxmann.com335/226 Taxman 36/367 ITR 534 (All.)], (x) the Hon’ble Bombay High Court in Idea Cellular Ltd. v. Dy. CIT [2008] 301 ITR 407 (Bom.) held that once all the material with regard to particular issue is before the AO and he chooses not to deal with the same, it cannot be said that he had not applied his mind to all the material before him.
Reopening on the basis of opinion of audit party
16. Opinion of audit party is not considered as information which would justify reopening of assessment. For example, (i) opinion of audit party that applicability of provisions of section 64(1)(i) has not been considered (even though all material facts were before AO) [refer- CIT v. Mrs. Padmani G. Thadani [2010] 8 taxmann.com 262 (All.)], (ii) where the issues whether income accrued on sale of prepaid coupon of mobile phones in current year or in future and whether royalty paid to Wireless Planning Commission of GOI is revenue or capital in nature was examined in original assessment, reopening on the opinion of audit party was not permissible. [refer- Vodafone West Ltd. v. Asstt. CIT [2013] 37 taxmann.com 158/[2014] 226 Taxman 39 (Guj.)] (Mag.), (iii) where the query raised by the audit party was based on the wrong understanding of accounting principles and it failed to differentiate between business expenditure and personal expenditure then reopening on the opinion of audit party will not be justified. [refer- Jagat Jayantilal Parikh v. Dy. CIT [2013] 32 taxmann.com 161/215 Taxman 444 (Guj.)]. Where AO does not accept the audit objections and furnished an explanation to audit objection then he cannot on the same set of facts form a belief that income has escaped assessment. Thus, the AO cannot take a somersault. That is on one hand he refuses to accept audit objections and on the other hand he issues notice to the assessee u/s 148. But he can form his own belief at the time of reopening the assessment by applying his mind while issuing notice of reopening, (iv) where an issue was subject matter of consideration on the part of the AO in the original assessment, reassessment is not permissible even within the four-year time limit on the basis of audit objections without there being any fresh material. [refer- Smt. Shalu Sachdeva v. Asstt. CIT [2015] 59 taxmann.com 366 (Jodhpur-Trib.)]
Subsequent material cannot be used to justify reasons recorded
17. It is well-settled that the challenge to the reopening of assessment proceedings can be resisted only on the basis of the reasons recorded at the time of issuing the notice and no further reasons can be added to or supplemented to support reasons recorded while issuing the notice u/s 148. Thus, the Revenue cannot look beyond the reasons furnished to the assessee to test the validity of the notice issued to reopen the assessment. In other words, subsequent material like affidavit, inquiry reports, search and survey, subsequent assessment orders or reports of experts or discovery of new items of escapement of income on “post reasons” inquiries cannot be used to justify, to supplement, to support, to augment, to improve, to subtract, or to explain, reasons recorded before issue of notice u/s 148. The reasons have to examined on standalone basis as they wereat the time of recording. [refer- Aroni Commercials Ltd. v. Asstt. CIT [2014] 52 taxmann.com 113/367 ITR 405 (Bom.); Hindustan Lever Ltd. v. R.B. Wadkar, Asstt. CIT (No. 1) [2004] 268 ITR 332/137 Taxman 479 (Bom.); CIT v. Living Media India Ltd. [2013] 35 taxmann.com 105/359 ITR 106 (Delhi); Asiatic Oxygen Ltd. v. Dy. CIT [2015] 60 taxmann.com 265/372 ITR 421 (Cal.)]. Thus, Justification for reopening of assessment has to be tested only on strength of order recording reasons for reopening under section 148(2). [refer- PVP Ventures Ltd. v. Asstt. CIT [2016] 65 taxmann.com 221 (Mad.)]
Concept of fully and truly disclosing all material facts necessary for assessment
18. The expression “omission or failure to disclose fully and truly all material facts”—refers only to facts within the knowledge of the assessee at the material time. Expression “Fully” refers to complete set of facts as opposite to partial or hiding something relevant. The expression “truly” refers to correct facts as opposite to concocted, false or made up. If facts are full but are not true or if they are true but are not complete, then AO will get jurisdiction to issue notice u/s 148. In any case, there should be some material evidence on record with the AO which would atleast prima facie indicate that assessee ought to have disclosed something more than what he has done and what he has disclosed is not prima facie true. Mere reconsideration or review of same material will not vest jurisdiction on the AO to reopen the assessment. Wherever reopening is sought to be done after four years from the original assessment which was completed u/s 143(3) it is necessary for the AO to record in the reasons that there is a failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment. Reopening will be quashed if such belief is not recorded in the reasons. For example, (i) no allegation in the reasons that the assessee had failed to fully and truly disclose material facts to claim deduction under section 80M [refer- CIT v. Jubilant Organosys Ltd. [2016] 65 taxmann.com 193 (All.)], (ii) reopening assessment on claim of depreciation on ‘plant and machinery’ and ‘land and building’ given on lease without belief that there was a failure on part of assessee to fully and truly disclose all material facts, reopening of assessment was not valid. [refer- ACI Oils (P.) Ltd. v. Dy. CIT [2015] 57 taxmann.com 260/370 ITR 561 (All.)], (iii) where assessee had fully and truly disclosed all relevant materials in respect of investment in purchase of silver sold for purpose of assessment for year under consideration, reopening was not justified [refer- CIT v. Surendra Chand Bansal [2013] 38 taxmann.com 216/218 Taxman 159 (All.) (Mag.)], (iv) reopening after four years on ground that subsidy received by assessee was chargeable to tax, but there was no allegation of failure by assessee to disclose material facts truly and fully, held invalid [refer- Nezone Foods (P.) Ltd. v. Asstt. CIT [2015] 59 taxmann.com 71/69 SOT 734 (Gauhati – Trib.)], (v) Assessment was reopened to make disallowance under section 80-IC as condition of that section was not fulfilled, but reopening quashed as there was no failure to disclose truly and fully material facts [refer- Shivalik Bimetal Controls Ltd. v. ITO [2013] 31 taxmann.com 132/215 Taxman 441 (Delhi)], (vi) material particulars required to be disclosed referred to in first proviso to section 147 not only refers to details in return but also to explanations and details furnished during course of assessment proceedings. [refer- Honda Siel Power Products Ltd. v. Dy. CIT [2011] 10 taxmann.com 2/197 Taxman 415/[2012] 340 ITR 53 (Delhi).
Addition of another item of escaped income
19. Addition of another item of escaped income will be justified provided reopening made is held valid. This is in view of expression “assess or reassess such income and also any other income chargeable to tax which has escaped assessment” used in Section 147. It has been held that the words ‘and also’ cannot be read as being in the alternative. On the contrary, the correct interpretation is that words “and also” are conjunctive and cumulative. It means the AO must assess that income in respect of which assessment has been reopened and in addition to that he can assess or reassess any other item which comes to his knowledge during the course of reassessment. It was held by the Hon’ble Kerala High Court in Travancore Cements Ltd. v. Asstt. CIT [2009] 179 Taxman 117/[2008] 305 ITR 170 (Kerala) and by the Hon’ble Punjab and Haryana High Court in Amrinder Singh Dhiman v. ITO [2005] 142 Taxman 322/[2004] 269 ITR 378 (Punj. & Har.) that the escaped income for which re-assessment proceedings are initiated should continue to exist so as to clothe the Assessing Officer with jurisdiction to assess or reassess any other escaped income chargeable to tax and which has come to his notice subsequently in the course of the reassessment proceedings. Explanation 3 was inserted by the Finance Act, 2009 w.r.e.f. 1-4-1989 so as to explain that even if the item of income in respect of which assessment is reopened is not assessed to tax the AO can assess other items of income subsequently noticed. [refer- Instant Holdings Ltd. v. Dy. CIT [2014] 44 taxmann.com 386 (Mum.-Trib.); CIT v. Best Wood Industries & Saw Mills [2011] 11 taxmann.com 278/331 ITR 63 (Ker.) (FB); Padinjarekara Agencies (P.) Ltd. v. Asstt. CIT [2014] 52 taxmann.com 441/[2015] 152 TTD 296 (Cochin – Trib.)]. A tentative reading of the Explanation 3 may indicate that even if reasons for assessing other item of escaped income (came to the notice of the AO during the course of reassessment proceedings) are not included in the reasons recorded on the original issue (for which reasons were recorded and on the basis of which notice u/s 148 was issued), the AO may assess or reassess such other item of escaped income. This Explanation does not dilute or restrict the scope of the expression “assess or reassess such income and also any other income” which can also mean that the item of other income can be assessed only if “such income” (for which notice u/s 148 was issued) is assessed to tax. Keeping this interpretation in mind the Hon’ble Madras High Court in Martech Peripherals (P.) Ltd. v. Dy. CIT [2017] 81 taxmann.com 73/394 ITR 733 (Mad.) has taken a view that Explanation 3 supports the view that if notice for reopening of the assessment was issued on one aspect, and in the course of reassessment proceedings another aspect was discovered, the reassessment order would be valid, only if, the aspect, which led to the reopening of assessment, continues to form part of the reassessed income.
Law regarding multiple notices issued u/s 148
20. The law regarding multiple notices u/s 148 issued by the AO has been explained by Hon’ble Gujarat High Court in A G Group Corpn. v. Harsh Prakash [2013] 35 taxmann.com 48/216 Taxman 108/353 ITR 158. It has been explained that if in the earlier notice a fatal error like non-recording of reasons has been crept in and such reassessment has been set aside then, in law, no notice u/s 148 existed and the AO will be free to issue another notice, provided jurisdictional and limitation aspects are satisfied. Thus, there is no bar against reopening the assessment once again on the same grounds. The Vishakhapatnam Bench of ITAT in ITO v. Rajeev Builders [2011] 9 taxmann.com 242/47 SOT 33 similarly held that there is no provision under the Act which debars revenue from reopening assessment on second time for reasons which were never adjudicated upon and held invalid. But where first notice u/s 148 was dropped on the basis of explanation furnished by the assessee on the issue on which notice was issued then issuance of second notice u/s 148 on the same issue was held totally impermissible. [refer- Kunal Organics (P.) Ltd. v. Dy. CIT [2014] 44 taxmann.com 323/225 Taxman 403 (Guj.)]. On the other hand, if the reasons for issuance of two notices are different and otherwise satisfy jurisdictional and limitation conditions, then second notice cannot be held invalid. [refer- Pr. CIT v. Sun Pharmaceuticals Industries Ltd. [2017] 86 taxmann.com 148/251 Taxman 76 (Guj.)]. But where reassessment proceedings initiated on one issue was set aside by the Tribunal and this order was confirmed by the Hon’ble High Court then issuance of second notice on another issue was impermissible as proceedings were already pending before the AO and other issue could have been considered by virtue of the Explanation 3 of Section 147. [refer- Rallis India Ltd. v. Dy. CIT [2018] 89 taxmann.com 88 (Bom.)].
Sanction/approval by the Higher Authority
21. Section 151(1) provides that notice u/s 148 after expiry of four years from the relevant assessment year shall be issued by the AO only when PCCIT/CCIT/PCIT/CIT is satisfied on the reasons recorded by the AO that it is a fit case for the issue of such notice. Section 151(2) provides that if the notice u/s 148 in cases other than those covered in Section 151(1) is to be issued by an AO who is below the rank of JCIT, then that officer can issue notice only when JCIT is satisfied on the reasons recorded by the AO. In a case where provision of Section 151(2) was applicable and JCIT had granted approval but erroneously files were also put up for recording satisfaction by the CIT, this fact will not vitiate the notice. [refer- Mayurbhai Mangaldas Patel v. ITO [2018] 93 taxmann.com 220/256 Taxman 91 (Guj.)]. Where application of mind by Addl. CIT while recording satisfaction on the reasons recorded by the AO is reflected from the fact that entire papers and reasons were placed before him and he recorded that it is fit case for issuance of notice u/s 148, the notice cannot be quashed. [refer- Baldevbhai Bhikhabhai Patel v. Dy. CIT [2018] 94 taxmann.com 428 (Guj.)]. But mere mentioning “approved” by CIT at the bottom of the reasons recorded by the AO will not reflect application of mind by the CIT. [refer- Amarlal Bajaj v. Asstt. CIT [2013] 37 taxmann.com 7/60 SOT 83 (Mum. – Trib.); Hirachand Kanuga v. Dy. CIT [2015] 56 taxmann.com 199/68 SOT 205 (Mum. – Trib.) (URO)]. Therefore, notice issued after recording satisfaction by sanctioning authority in mechanical manner and without application of mind is liable to be quashed. [refer- CIT v. S. Goyanka Lime & Chemical Ltd. [2015] 64 taxmann.com 313/[2016] 237 Taxman 313 (SC)]. Also, where sanction was required to be taken from JCIT but was taken from CIT, then notice so issued, thereafter, was held invalid. [refer- CIT v. SPL’S Siddhartha Ltd. [2012] 17 taxmann.com 138/204 Taxman 115 (Mag.)/345 ITR 223 (Delhi); Jai Prakash Ahuja v. ITO [2014] 48 taxmann.com 86/[2015] 152 ITD 592 (Luck.-Trib.)]. Similarly, where sanction was required to be taken from CIT but was taken from JCIT/Addl. CIT, the reassessment proceedings were quashed as such error could not be cured by Section 292B. [refer- Dhadda Exports v. ITO [2015] 58 taxmann.com 176/232 Taxman 407/377 ITR 347 (Raj.); DSJ Communication Ltd. v. Dy. CIT [2014] 41 taxmann.com 151/222 Taxman 129 (Bom.)] A contrary view has been taken by the Hon’ble Calcutta High Court in Prem Chand Shaw (Jaiswal) v. Asstt. CIT [2016] 67 taxmann.com 339/238 Taxman 423/383 ITR 597 (Cal.) that when reasons on the basis of which approval was granted could not be assailed, then mere not recording satisfaction (in detail) by the sanctioning authority will not vitiate the reassessment proceedings.
Block assessment and issue of notice u/s 148
22. Proviso to the Section 158BC(a) provides that no notice u/s 148 is required to be issued for the purposes of proceedings under Chapter XIV-B. Therefore, where a block assessment has been framed, issue of notice u/s 148 has been held invalid. [refer- Cargo Clearing Agency (Gujarat) v. Jt. CIT [2008] 307 ITR 1; Asstt. CIT v. Radheshyam B. Agrawal [2015] 61 taxmann.com 50/170 TTJ 371 (Pune – Trib.); Western India Bakers (P.) Ltd. v. Dy. CIT [2003] 87 ITD 607 (Mum.)]
Defect in the Notice u/s 148 and section 292B/292BB
23. Section 292B provides that any notice, assessment, summons or proceedings will not be invalid for reason of any mistake or defect, etc., if they are in substance and effect in conformity with or according to the intent and purpose of the Act. Further, Section 292BB provides that a notice issued will not be invalid if the assessee has appeared in the proceedings/cooperated in inquiry/ assessment, if the assessee has not raised objections before the completion of assessment proceedings. The Hon’ble Apex Court in Sky Light Hospitality LLP v. ACIT [2018] 92 taxmann.com 93/254 Taxman 390 (SC) held that a wrong name mentioned in the notice u/s 148 is only a clerical error and will not invalidate the reassessment proceedings if assessee has participated in those proceedings. It is submitted that issue of limitation for issuing notice u/s 148 was not involved in the above decision and, therefore, will not be covered by Section 292B. [refer- Alamelu Veerappan v. ITO [2018] 95 taxmann.com 155 (Mad.)] Therefore, where AO did not issue notice u/s 143(2) within specified time, the defect could not be cured by Section 292B. [refer- Sanjeev R. Arora v. Asstt. CIT [2013] 29 taxmann.com 287/[2014] 150 ITD 267 (Mum.-Trib.)]
Conclusion
24. A glance at the law explained by the Courts shows that the AO has to make strict compliance with the conditions mentioned in the Act for issuing notice u/s 148. The reasons must contain all the ingredients required for drawing satisfaction. Wherever necessary, sanction from the competent authority should be taken. A wrong sanction or non-application of mind while granting sanction may invalidate the proceedings. The information/material relied for reopening must be relevant. A prima facie inquiry should be carried out indicating application of mind by the AO. The information so received should not always be believed at face value. It is only in limited area that the action of the AO can be protected u/s 292B/292BB.
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