AO reassessment valid in case assessment completed u/s 143(3)

  was completed under section 143(3) of the Income Tax Act, 1961.

Let’s discuss a case where AO after completion of assessment on further scrutiny of the accounts noticed that the assessee had given interest free loans to sister concerns out of borrowed funds. In this case excess deduction of interest granted under section 36(1)(iii) of the Income Tax Act, 1961 had to be disallowed. To disallow the same AO issued reassessment notice u/s 147.

The notice was cancelled by Tribunal on the ground that it was a change in opinion.

In the case of COMMISSIONER OF INCOME TAX vs. POPULAR VEHICLES & SERVICES LTD. high court held that Tribunal was not justified in cancelling the reassessment if reassessment notice was timely made within four years. As per the order of High Court only two conditions are required to be satisfied for reopening an assessment:

·        Escapement of income chargeable to tax in the assessment and

·        reason available with the AO to believe that chargeable income has escaped assessment

In the given case AO had not discussed the matter in the regular assessment but allowed deduction in terms of the claim made in the returns. There is no point that proves that AO made a change in opinion. Also, there is no presumption anywhere in the provisions of the Act to the effect that every regular assessment completed is after due consideration of every claim under the provisions of the Act. Accordingly, the notice issued by AO is valid.

The case has been reproduced below for reference:

COMMISSIONER OF INCOME TAX vs. POPULAR VEHICLES & SERVICES LTD.

HIGH COURT OF KERALA

This is an appeal filed by the Revenue against the order of the Tribunal confirming order of the first appellate authority cancelling reassessment completed under s. 147 of the IT Act on the respondent-assessee for the asst. yr. 2001-02. We have heard standing counsel appearing for the appellant and Sri. P. Balakrishnan, counsel appearing for the respondent-assessee.

2. The respondent-assessee’s returns filed for the asst. yr. 2001-02 was first processed under s. 143(1)(a) and thereafter a regular assessment was completed under s. 143(3) of the Act. However, the AO on further scrutiny of the accounts noticed that the assessee from out of borrowed funds invested Rs. 84,12,500 in various sister concerns as interest free loans. The total deduction towards interest paid was Rs. 308.36 lakhs and the entire claim was allowed as a deduction under s. 36(1)(iii) of the Act. The AO noticed that in view of the diversion of interest bearing loan to sister concerns, as interest free loans, there is excess deduction of interest granted under s. 36(1)(iii) and in order to disallow proportionate interest attributable to interest free loans given to sister concerns and to assess such escaped income, the assessment was reopened and completed under s. 147 of the Act. When the assessee challenged the assessment in appeal before the CIT(A), he allowed the same both on merits and on the ground that the revised assessment under s. 147 is invalid. The second appeal filed by the Revenue before the Tribunal was rejected by the Tribunal without going into merits of the case but by holding that the CIT(A) is justified in cancelling reassessment completed under s. 147 as the same is only on account of change of opinion of the AO on the entitlement of deduction of interest claimed and allowed in the original assessment.

3. Standing counsel appearing for the Revenue referred to the Tribunal’s order and contended that the Tribunal has dismissed the Departmental appeal just by following the decision of a Full Bench of the Delhi High Court in CIT vs. Kalvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB), which according to him, stands overruled by later decision of the Supreme Court in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 210 CTR (SC) 30 : (2007) 291 ITR 500 (SC).

4. Before proceeding to consider the validity of revised assessment completed under s. 147 we have gone through the regular assessment completed under s. 143(3) which assessment is an order in few lines without any discussion and so much so the assessee’s claim for deduction wherein the alleged excess relief under s. 36(1)(iii) is stated to be allowed, is not discussed or considered by the AO. On the other hand, deduction was allowed in terms of the claim made in the return and so much so we have to hold that change of opinion which is found to be the basis for cancelling the reassessment does not apply because the matter was not considered in details in the regular assessment and no opinion was expressed by the AO. The question therefore to be considered is whether, when assessment is completed under s. 143(3), there is a presumption that the AO has considered eligibility for deduction of all the claims so that any reversal of the same in the reassessment could be treated as on account of change of opinion. It has to be necessarily found out from the statutory provisions authorising income escaping assessment under s. 147 of the Act. For easy reference we extract hereunder the said section :

Income escaping assessment.

147. If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to153, 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, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned hereafter in this section and in ss. 148 to 153 referred to as the relevant assessment year :

Provided that where an assessment under sub-s. (3) of s. 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under s. 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

Explanation 1. : Production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation 2. : For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment; namely—

(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income tax;

(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

(c) where an assessment has been made, but—

(i) income chargeable to tax has been underassessed; or

(ii) such income has been assessed to too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.

Before proceeding to consider the applicability of the section to the facts of this case, we have to observe that the finding of the Full Bench of the Delhi High Court in the above-referred decision on the scope of s. 147 after the amendment by Finance Act, 1987 w.e.f. 1st April, 1989 is exactly contrary to the finding of the Supreme Court in the later judgment above referred in as much as the Supreme Court has held that the amendment introduced w.e.f. 1st April, 1989 has brought out substantial difference in the meaning and content of the section, whereas according to the Delhi High Court, the amendment is inconsequential. The Supreme Court has held that if ingredients of s. 147 are fulfilled, then the AO is free to initiate proceedings under s. 147. We have to therefore examine whether the section applies to the facts of this case.

5. Here again, we have to clarify that the Tribunal has wrongly assumed that reassessment was completed beyond four years from the end of the relevant assessment year and there is no failure on the part of the assessee to make full and true disclosure of material facts necessary for assessment as referred to in the first proviso to the section. Standing counsel pointed out that reassessment proceedings under s. 147 was initiated within the four year period from the end of the relevant assessment year and therefore the first proviso to s. 147 has no application and the Tribunal’s finding to the contrary is factually incorrect. Amended provisions of s. 147 effective from 1st April, 1989 authorise income escaping assessment if the AO has reason to believe that income chargeable to tax has escaped assessment for any assessment year. Therefore only two conditions are required to be satisfied for reopening an assessment, that is escapement of income chargeable to tax in the assessment and reason available with the AO to believe that chargeable income has escaped assessment. In this case the AO on reexamination of the accounts noticed that assessee which has paid Rs. 3 crores towards interest on borrowings in the accounting year relevant for the assessment year advanced above Rs. 84 lakhs as interest free loans to sister concerns and so much so the entire borrowings was not for business purposes and hence deduction of interest allowed under s. 36(1)(iii) is excessive relief granted in assessment. In this context Expln. 2 to s. 147 has to be referred to which exhaustively states certain cases where income chargeable to tax has escaped assessment. Under sub-cl. (iii) of cl. (c) of Expln. 2, if income has been made the subject of excessive relief under the Act, then the same is one of the circumstances of income escaping assessment. Therefore if excessive deduction of interest is allowed under s. 36(1)(iii) then certainly it is a case of income escaping squarely covered by Expln. 2 to s. 147 of the Act. Even though counsel for the assessee submitted that when the claim was allowed in the original assessment any proposal for subsequent disallowance of relief granted originally in the assessment either fully or partially should be taken as on account of change of opinion, we are unable to accept the same because in the first place the AO has not discussed the matter in the regular assessment but allowed deduction in terms of the claim made in the returns. There is no embargo in s. 147 against the AO reexamining the assessment file and re-appreciating theevidence, and accounts in support of the claim and arriving at a conclusion which may attract s. 147. There is no presumption anywhere in the provisions of the Act to the effect that every regular assessment completed is after due consideration of every claim under the provisions of the Act. On the other hand, the scope of Expln. 2 to s. 147 is such that the AO is free to reexamine the correctness of a regular assessment and decide whether the tax assessed, rate applied, relief and allowances granted, etc., are in terms of the provisions of the Act and if not to revise the assessment in terms of s. 147 of the Act. When the scope of the section after amendment is large enough to cover situations whereby deductions have bee wrongly or excessively granted, the Tribunal has no authority to restrict the powers of the AO by holding that change of opinion is not a ground to reopen the assessment under s. 147 of the Act. Even though assessee’s counsel submitted that the decision of the Supreme Court referred to does not apply to this case, in as much as assessment involved in this case is under s. 143(1), whereas the assessment involved in the Supreme Court case is regular assessment, we do not think there is any difference between the proceedings completed under s. 143(1) and the regular assessment under s. 143(3) of the Act, if income chargeable to tax has escaped assessment within the meaning of Expln. 2 to s. 147 of the Act.

We therefore allow the appeal by reversing the order of the Tribunal and by restoring the Departmental appeal to file of the Tribunal for decision on merits after hearing both sides.

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