By TIOL News Service

NEW DELHI, APRIL 25, 2018: THE ISSUE IS - Whether the intention of the Legislature while making invocation of Sec 147 conditional is to allow the Revenue to adopt liberal interpretation of the expression 'reason to believe'. AND THE ANSWER IS NO.

Facts of the case:

The assessee company, engaged in developing and exporting computer softwares, had returned loss. During the assessment proceeding, the ITO noted that the assessee had declared its income from software development and HR development divisions but also claimed expenses commonly for both without recording any basis and issued SCN in this regard. The proceedings finally ended with a rectification of the assessment order u/s 154. The ITO arrived at an income of Rs. 31,63,570/- which was fully set-off against the loss brought forward and the income was assessed as 'Nil'.

Again, on 10.02.2005, a re-opening notice u/s 148 was served on the ground that the deduction u/s 10A was allowed in excess and the income had escaped assessment. To which, the assessee had objected while filing a detailed reply. However, the objections were rejected and reassessment was done by the Revenue. In Writ, the High Court set aside the SCN as well as the re-assessment order.

the Apex Court held that,

++ the language of Sec. 147 makes it clear that the ITO certainly has the power to re-assess any income which escaped assessment for any AY subject to the provisions of Ss 148 to 153. However, the use of this power is conditional upon the fact that the ITO has some 'reason to believe' that the income has escaped assessment. The use of the words 'reason to believe' in Sec. 147 has to be interpreted schematically as the liberal interpretation of the word would have the consequence of conferring arbitrary powers on the ITO who may even initiate such re-assessment proceedings merely on his 'change of opinion' on the basis of same facts and circumstances which has already been considered by him during the original assessment proceedings. Such could not be the intention of the legislature. The said provision was incorporated in the scheme of the Act so as to empower the Assessing Authorities to re-assess any income on the ground which was not brought on record during the original proceedings and escaped his knowledge; and the said fact would have material bearing on the outcome of the relevant assessment order;

++ sec. 147 does not allow the re-assessment of an income merely because of the fact that the ITO has a change of opinion with regard to the interpretation of law differently on the facts that were well within his knowledge even at the time of assessment. Doing so would have the effect of giving the ITO the power of review and Sec. 147 confers the power to re-assess and not the power to review. The word 'change of opinion' implies formulation of opinion and then a change thereof. In terms of assessment proceedings, it means formulation of belief by an ITO resulting from what he thinks on a particular question. It is a result of understanding, experience and reflection;

++ before interfering with the proposed re-opening of the assessment on the ground that the same is based only on a change in opinion. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the ITO any opinion on the questions that are raised in the proposed re-assessment proceedings. Every attempt to bring to tax, income that has escaped assessment, cannot be absorbed by judicial intervention on an assumed change of opinion even in cases where the order of assessment does not address itself to a given aspect sought to be examined in the re-assessment proceedings;

++ the question as to how and to what extent deduction should be allowed u/s 10A. Hence, initiation of the re-assessment proceedings u/s 147 by issuing a notice u/s 148 merely because of the fact that now the ITO is of the view that the deduction u/s 10A was allowed in excess, was based on nothing but a 'change of opinion' on the same facts and circumstances which were already in his knowledge even during the original assessment proceedings. Therefore, we are of the view that disputed judgment and order of the High Court dated 24.02.2006 does not call for any interference.

(See 2018-TIOL-151-SC-IT)