Every person who earns is required to furnish his return of income to the Income Tax Department, provided the earning is chargeable to tax. Return of income tax is then examined by the income tax department and consequently they specifies correction, if any. Such process in which the return is examined by the Income Tax Department is called “Assessment” . This Assessment includes re-assessment as well under section 147 in accordance with the section 2(8) of the Income Tax Act, 1961.
In order to determine whether the income disclosed by the assessee and the tax payable on it is correct or not, the procedure adopted is known as “Assessment or “Re-assessment”. Significantly, sections 147 and 148 of Income Tax Act empowers the Income Tax Department to assess, re-assess or re-compute income, etc., when there is likelihood of escapement of the same.
Also, in certain cases there may not be escape of whole income from assessment, but of some, or income has been assessed at a low rate or excessive allowance or loss, for instance- depreciation, etc. have been allowed. In such cases, the Assessing Officer (A.O.) has been given the power to assess or reassess such income or re-compute the loss or allowance, as the case may be. The provisions regarding assessment or reassessment are dealt under sections 147 to 153. Provisions under these sections manifest that powers of the A.O. to re-initiate a completed assessment are not unlimited or luxuriant. The following is the order of procedure of Assessment/ Reassessment:
1. Examination of the information by the Assessing officer (A.O.)
2. Formation of Belief
3. Recording of Reasons
4. Issuance of Notice under section 148
5. Filing of Return
6. Obtaining copy of Reasons Recorded
7. Filing objections by Assessee & Disposal of Objections By A.O
8. Reassessment Proceedings
1. EXAMINATION OF THE INFORMATION BY THE ASSESSING OFFICER
Section 147 provides for the Income Escaping Assessment. It empowers the AO to assess or reassess any income escaping assessment, provided certain pre-requisites are met. The initial step in assessment or reassessment is the examination of the information by the A.O. There is general rule according to which an assessment can be opened only within 4 years from the end of relevant “Assessment Year”. Still, there are two exceptions to such rule, provided under provisos to section 147:
i. Proviso first – When income has escaped assessment by reason of failure on part of the assessee to disclose entirely and truly all material facts necessary for his assessment.
ii. Proviso second – When income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year, it is not necessarily to be a failure on the part of assessee.
In accordance with the explanation 3 to section 147, the A.O. has the power to assess or reassess on any issue, coming to his notice in the due course of the proceedings. He is obligated under this section to assess, reassess or re-compute the loss or the depreciation allowances or any other allowance, as the case may be, for the assessment year . In the matter of CIT v. Best Saw Mills, the Hon’ble High Court of Kerala , decided that in the process of income escaping assessment, if A.O comes to know that any other item of income also have escaped from original assessment, then he is bound to assess such item(s) of income during reassessment under section 147 as well.
2. FORMATION OF BELIEF (REASON TO BELIEVE)
After the examination of whether income or part of income has escaped the assessment or not, under section 147, the next thing to be considered is the existence of “reasons to believe”. Starting words of section 147: 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……, suggests that for the assessment process to start by A.O., there must be reason to believe that income chargeable to tax has escaped assessment. Here in this section, reason to believe is of utmost importance so that A.O. may act in an accountable manner. It ensures A.O may act on direct or circumstantial evidence but not on mere suspicion or rumor. In absence of adequate reasons the reassessment was set aside.
Additionally, time and again in various cases, it has been the subject of contention. The words “reason to believe” demands A.O. to act honestly and reasonably and upon reasonable grounds. For the purpose section 147, reason to believe is applicable in the following :
a) Evidence in possession of AO that the assessee has understated his income
b) Evidence in possession of AO that the assessee has claimed excessive loss/ deductions, allowances, reliefs.
The test for the determination for the initiation of reassessment proceedings is the prima facie existence of some material, which can aid the reopening of the case by the department. In the matter of CIT v. Indo Arab Air Services , the court held that mere information that huge cash deposits were made in the bank accounts could not give the A.O. prima facie belief that income has escaped assessment. The A.O. is required to form prima facie opinion(s) in relation to tangible material which provides the nexus or the link having reason to believe that income has escaped assessment. The A.O. is also supposed to examine whether the assessee has disclosed the cash deposits in the return of income so as to form an opinion that income has escaped assessment.
It is sufficient if there is presence of belief that income has escaped assessment/ reassessment, further the question whether reasons are sufficient or adequate, it is not upon the courts to decide. However, it is open to the assessee to indicate that A.O. acted in absence of any belief or that belief was malafide or that it was based on non-specific, immaterial, irrelevant and vague information. When the reason to believe recorded are immaterial and does not make relevant considerations and that Assessing Officer’s reason to believe lacks reasonableness, the reopening of the assessment would not be allowed.
Another requirement of the section 147 is that the belief must be of jurisdictional A.O. and not of any other A.O. or authority or department. Hence, the jurisdiction of A.O. to reopen an assessment under section 147 requires issuance of a valid notice and if the same is absent, the entire proceedings taken by the A.O. would become void for want of jurisdiction. In Swati Malove Divetia v. ITO reopening of assessment under section 147 merely on the issue of cash deposit at the time of demonetization period was set aside, since jurisdictional aspect was completely ignored by the A.O.
3. RECORDING OF REASONS
After the A.O. forms the opinion that due to excessive loss or depreciation allowance, the income chargeable to tax has escaped assessment, the A.O. is required to record the reasons and disclose by what process of reasoning, he formed such belief. Section 147 bars the A.O. from merely recording the reason of excessive loss or depreciation allowance or other deductions without disclosing the reasons of such beliefs.
In the present stage of recording reasons and next stage i.e. issuing notice under section 148, A.O. is only supposed to reach a prima facie conclusion that income had escaped assessment. It is not for A.O. to build a guaranteed or firm case against the assessee before the issuance of notice. The A.O. is not expected to produce a complete investigation prior to the issuing of notice as was decided in the matter of ITO Vs. Smt. Gurinder Kaur.
It has been cleared in various cases including in CIT v. Shiv Ratan Soni that recording of reasons before issuing notice is mandatory and upon contradictions in note sheet recording reasons, if reasons were not recorded before issuance of notice and instead were antedated, reassessment in pursuance of such notice was declared without jurisdiction
Similarly, an assessment cannot be reinitiated merely to evaluate the genuineness of the expenses. In the matter of Dhruv Parul bhai Patel v. ACIT, it was emphasized that a notice for reopening the assessment has to be sustained and supported only on the basis of reasons recorded by the AO and not with the help of irrelevant or extraneous ground, material or possible improvement.
4. ISSUANCE OF NOTICE UNDER SECTION 148
The mere requirement as discussed above, for initiating proceedings under section 148 is that there must be reasons to justify belief regarding the escapement and suppression of income, the same must be recorded before issuance of notice in accordance with section 148 and revelation of the reasons in the notice is not called for.
After the stage of recording of reasons is over, intimation to the assesses by A.O. is followed. Issuing of a notice under section 148 is very crucial and mandates A.O. to serve it properly to the assessee. It is well-settled that if notice is not properly served, the assessment as well as reopening would be illegal. For instance if notice under section 148 is sent on a wrong address and served on a person who is neither employee nor authorized agent of assessee, is not a valid exercise and therefore, the consequent assessment is bad in law. Upon the issuance of notice, the assesse is required to provide the following:
a) Income returns of assessee
b) The income returns of a person other than the assessee in question, who is supposed to be assessed as per the provisions of the Income Tax Act i.e. during the year before the assessment year of relevance.
In the matter of Chaya Sinha v. ACIT, ITA it was held by the court that a separate notice should be issued under section 148 if A.O. come to know that any other income chargeable to tax has also escaped the assessment for the particular assessment year, when the proceeding under section 147 is ongoing for the another assessment year. The separate process will include separate recording of reasons in accordance with section 148(2) and issuance of separate notice under section 148.
5. FILING OF RETURN
Subsequent to the serving of notice under section 148 by the A.O., the assessee is duty bound to file tax returns for the escaped income for the relevant assessment year. The assessee need to provide income returns either within a 30 day notice period; or within a duration that has been expressly mentioned in the notice served by the A.O. When the assesse is providing income returns of any other assessable person, then it will be required by the assessee to furnish the income returns in the form and manner, prescribed in the Act. It might be required that any other relevant particulars be furnished.
Section 148 requires the period in which return is to be filed must be included in the notice. Such return shall be treated as a return furnished under section 139 and for that reason A.O. will be needed to serve notice under section 143(2) within a period of 12 months from the end of the month in which return was furnished.
When the assessment is made in accordance with section 143(3), no action can be taken after the expiry of four years from the end of relevant Assessment Year. But, if any income chargeable to tax has escaped assessment due to the failure on the part of the assessee to file return under section 139 or in response to a notice under section 142(1) or section 148 or to reveal entirely and truly all material facts required for the assessment. Again, no action shall be taken after the expiry of 16 years where income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year.
6. OBTAINING COPY OF REASONS RECORDED
After filing return the assessee can ask for reasons recorded by the A.O. for the assessment. In CIT v. Videsh Sanchar Nigam Ltd. , it was held that when the reassessment order is passed by the A.O. without providing reasons recorded, if asked by the assessee, is invalid. It is not sufficient if A.O. provides only gist of reasons, the same is not equivalent to the reasons that A.O. is supposed to record as per section 148(2). It will ultimately amount to failure on part of A.O. to furnish reasons to the assessee when requested and demanded repeatedly.
7. FILING OBJECTIONS BY ASSESSEE & DISPOSAL OF OBJECTIONS BY A.O.
Next step after obtaining of reasons recorded is the filing of objections by the assessee, if he chooses to and then the disposal of the same by the A.O. Assessee is entitled to submit the objections regarding the assessment or reassessment process. During this stage the assessee in order to prove that income in question had not escape the assessment, advance all the argument in one’s favour and provide all the essential details. Subsequently, A.O has to pass the speaking order on objection raised by assessee.
The A.O. is bound to dispose-off preliminary objections that assessee has raised against reasons recorded for reopening assessment by passing speaking order i.e. before proceeding with assessment starts was held in Banaskantha District Oilseeds Growers Co-op. Union Ltd. v. Asst. CIT. Likewise, one of the notable decision of the Supreme Court, on this topic, is GKN Driveshaft (India) Ltd. v. ITO. In the instant case it was decided that A.O. is under obligation to first dispose-off the objections raised by assessee and thereafter frame the reassessment order.
Later on, the same court in Home Finders Housing Ltd. Vs ITO held non-compliance of directions provided in GKN Driveshaft (India) Ltd v. ITO regarding the disposal of objections by passing a speaking order is a “procedural irregularity” which could be cured by remitting matter to authority.
In the matter of K. S. Suresh v. Dy. CIT the court decided that if assessee has objected to reasons for reopening assessment and A.O. passes order without considering assessee’s objection, the orders shall be quashed.
In the matter of Asian Paint Ltd. vs. Dy. CIT the Hon’ble Bombay High Court held that it is mandatory for the A.O to dispose-off the objects raised by assessee and accordingly pass the assessment order. Further, A.O. is not supposed to proceed with assessment for 4 weeks thereafter.
However, if the delay is on the part of the assessee in filing objections to the reasons and because of that A.O. is left with little time to dispose of the objections and pass the assessment hastily before it gets time barred, then decision of Asian Paints cannot be applied in such cases, which states that A.O. should not pass the assessment order for 4 weeks. For that a writ petition to challenge the reopening should not be entertained as well.
8. REASSESSMENT PROCEEDINGS
The A.O. is required to dispose-off the objection by specking order, but if the same is not done and assessment proceeding has been started by A.O., then the Assessee may file application under section 144A before the Additional or Joint Commissioner of Income Tax. Moreover, if this application is rejected by the said authority, assessee is entitled to file writ petition in the High Court.
Alternatively, if assessee wants, he can assist for assessment proceeding and provide all the documents required during the procedure of assessment. Afterwards, if the assessee is not satisfied with the order then he may go for appeal before the Commissioner of Income Tax (CIT) against the order of Assessment. Section 153 provides that an assessment or reassessment under section 147 must be completed within 9 months from the end of the financial year in which the notice in accordance with section 148 was served.
Since the object and purpose of the proceeding under section 147 are not for the benefit of assessee but for revenue, an assessee cannot be allowed to change the reassessment proceedings as his appeal or revision, in disguise, and access relief in respect of items which were earlier rejected or claim relief in respect of items not claimed in the prior assessment proceedings, except if they are not related to “escaped income”, and re-agitate the deduced matters.
Even in cases where the claims of the assessee during the course of reassessment proceedings related to the escaped assessment are accepted, still the allowance of such claims has to be obviated to the extent to which they reduce the income to that of earlier assessed. Basically, the income for purposes of reassessment cannot be reduced beyond the income assessed earlier. This was held in CIT Vs. Sun Engineering Works P. Ltd.
Similarly, no reassessment proceedings can be initiated so long as assessment proceedings pending on the basis of return already filed are not terminated held in H.E.H. The Nizam’s supplemental family Trust vs. CIT.
CONCLUSION
The Re-opening of assessment or reassessment is an indispensable procedure under Income Tax Act, 1961. Its scope and effect are wide enough to include assessing, reassessing or re-computing of income, turnover etc. The provisions regarding assessment or reassessment are dealt under sections 147 to 153. Section 147 empowers assessing officer with huge, but limited power of assessment against the assessee. Time and again Apex Court and various High Courts have laid down guidelines, to be followed during the different stages of procedure. In spite of expressed provisions and judicial pronouncements, varied kinds of issues crop up during reassessment proceedings. It is required that assessment is done scrupulously and finality should be given to it instead of leaving matters unresolved for the reassessment. It is pertinent to say that “assessment should be recognized as a matter of principle and re-opening as an exception”.
Time and again the Supreme Court and various High Courts have laid down guidelines, to be followed during the different stages of procedure. In spite of expressed provisions and judicial pronouncements, various kinds of issues crop up during reassessment proceedings. It is required that assessment is done scrupulously and finality should be given to it instead of leaving matters unresolved for the reassessment. It is pertinent to say that ‘assessment should be recognised as a matter of principle and reopening as an exception’.