JULY 08, 2009

Amendment proposed in Budget and reassessment proceedings u/s 147

By Kapil Goel, CA

IN context of reassessment/assessment under section 147 of the Income Tax Act, dealing with “income escaping assessment”, empowered Assessing Officer to assess issues other than on which reopening is made under section 148 of the Act. That is, section 147 empowered AO to assess/reassess other income escaping assessment coming to his notice post initiation of reassessment proceedings and recording reasons under section 148.

In aforesaid connection, there Kerala High Court in case of Travancore 305 ITR 170 while allowing assessee’s WRIT petition, quashed notices issued post initiation of reassessment proceedings, which sought to assess “other issues” interalia observing as under:

“…In other words, when proceedings are already on in respect of one item in respect of the income for which he had already recorded reasons is it necessary that he should record reasons for assessing or reassessing any of the items which are totally unconnected with the proceedings already initiated. Suppose under two heads, income has escaped assessment and those two heads are interlinked and connected, the proceedings initiated or notice already issued under Sub-section (2) of Section 148 would be sufficient if the escaped income on the second head comes to the knowledge of the officer in the course of the proceedings. But if both the items are unconnected and totally alien then the assessing authority has to follow Sub-section (2) of Section 148 with regard to the escaped income which comes to his knowledge during the course of the proceedings. The expression "subject to the provisions of Sections 148 to 153" in Section 147 lends support to the above view.”

Further Delhi High Court in Jai Bharat Maruti case ( 2009-TIOL-192-HC-DEL-IT) has latestly followed Kerala High Court to conclude as under:

“12. Applying the aforesaid principle, it is clear that the proceedings under Section 147 of the Act cannot impinge upon items which have no connection or relation with items of income and/or expenditure which form the basis of a notice under Section 148(1) of the Act…….The other items with respect to which additions and disallowances had been made and which are discussed in the body of our judgment while discussing the orders of the authorities below had no connection with the reasons articulated on 27.03.1997 which form the basis of the notice issued under Section 148(1) of the Act. In our view the assessment order in so far as it dealt with items other than those which formed the basis of the reasons disclosed on 27.03.1997 are bad in law or stood vitiated in law.

13. The Division Bench of the Kerala High Court in the case of Travancore Cements Ltd. vs ACIT (2008) 219 CTR 359 came to the same conclusion. The observations of the Division Bench in paragraphs 8 to 11 at pages 366 - 367 being apposite are extracted hereinbelow:-…”

Apparently to overcome the aforesaid principle of Kerala High Court, an amendment has been proposed in Income Tax Act, explained in Memorandum to Finance No 2 Bill 2009 in following words:

“Some Courts have held that the Assessing Officer has to restrict the reassessment proceedings only to issues in respect of which the reasons have been recorded for reopening the assessment. He is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent.

With a view to further clarifying the legislative intent, it is proposed to insert an explanation in section 147 to provide that the assessing officer may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub-section (2) of section 148”

However, in opinion of author, following dimensions/propositions in section 147 has not been tinkered in subject amendment:

a) In case no addition is made on reopening issue/ground (being parent issue) then no addition is possible on other issues as section 147 uses the phrase “and also any other income which comes to the notice…”. Refer :

Delhi ITAT latest 26 June 2009 Ruling in Ch Ranjit Singh ITA 257/2002 (Ex MP- Son of Ch Devi Lal)

Raj HC in Shree Ram Singh (2008-TIOL-340-HC-RAJ-IT);

CJ International (2008-TIOL-583-ITAT-DEL);

b) Addition on other issues cannot be made under reassessment proceedings by making roving/fishing enquiries that is (Per Delhi ITAT in Poonam Rani Singh 97 ITD 390):

“8) The Assessing Officer can exercise power under section 147 in relation to other items of income which were not the basis for formation of belief or reasons to believe for issuing notice under section 148 but for assessing such income he should indicate that any material or information has come to his notice during reassessment proceedings through external or internal source but he cannot reassess any item of income only after gathering general information or on conducting general probe from the assessee during the course of reassessment proceedings.”