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Gruh Finance Ltd. v. Joint Commissioner Of Income-Tax (Assessment)
Structured Summary of the Opinion (N. Bhatt, J.)
Factual and Procedural Background
This group comprises three petitions filed at the stage of a show-cause notice under Article 226. The petitioners are assessees who challenge notices issued under section 148 of the Income-tax Act, 1961 (IT Act) seeking reassessment for the assessment year 1996-97 (financial year 1995-96). The petitioners contend reassessment is without jurisdiction because it amounts to a mere "change of opinion" — the relevant facts and material were already considered at the original assessment. The Revenue's position, reflected in the reasons recorded for issuing the section 148 notices, is that information received by the Department suggested the assessee purchased and leased machinery (Sheltting Line Tube Mill) of value Rs. 1,47,81,250 to a related group and claimed depreciation which was bogus because the machinery either did not exist or its real worth was only 10–20% of the book value; as a consequence, depreciation had been allowed in the original scrutiny assessment but a mistake was discovered. The original assessments were completed under section 143(3) of the IT Act. The notices under section 148 were issued on the grounds set out in an order dated 24th November, 1999 (quoted in the record).
Legal Issues Presented
- Whether the issuance of reassessment notices under section 148 of the Income-tax Act, 1961, on the facts of these petitions, amounts to a mere "change of opinion" (which would not permit reassessment) or is justified by the discovery of a mistake such that the assessing authority had "reason to believe" that income had escaped assessment within the meaning of section 147.
- Whether, on the material before the Court at the interim stage (stage of issuance of notice under section 148), there is a jurisdictional bar on the respondent authority to issue reassessment notices, barring the exercise of extraordinary jurisdiction under Article 226.
Arguments of the Parties
Petitioners' Arguments
- Reassessment cannot be made on the basis of a mere "change of opinion" because, they say, all relevant facts and material were considered by the Assessing Officer (AO) at the time of the original assessment.
- Therefore, the impugned notices under section 148 are without jurisdiction.
Revenue's Arguments
- The Revenue contends that the assessee claimed depreciation as a deduction on non-existent machinery (or machinery whose real worth was a small fraction of book value), and this constituted a bogus claim discovered after the original assessment.
- Because the depreciation claim was not consciously considered at the time of the original assessment (even though depreciation under s.32 read with s.43(6) had been allowed), the discovery of the bogus claim/mistake gives the AO "reason to believe" under section 147 to issue notices under section 148; therefore, there is no jurisdictional bar.
Other Submissions Referred in the Opinion
- Learned counsel Mr. Shah submitted that the competent authority must still examine the merits after giving the assessee an opportunity of hearing and that the Court's prima facie observations at the interim stage should not influence the final decision on merits; the Court recorded that its observations were prima facie and should not prejudice the merits hearing.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Praful Chunilal Patel & Ors. vs. Asstt. CIT (1999) 236 ITR 832 (Guj) : TC S51.4077 | Interpretation of section 147 and the meaning of "reason to believe" in the context of reassessment; supportive authority for allowing reassessment where a mistake is discovered and there is reason to believe income has escaped assessment. | The Court treated this decision as reinforcing the view taken in the present group of petitions and held that the present cases are, prima facie, covered by the observations and ultimate view in Praful Chunilal Patel's case. |
| Garden Silk Mills (P) Ltd. vs. Dy. CIT (1999) 237 ITR 668 (Guj) | Provides discussion distinguishing a mere change of opinion from cases where a mistake is discovered; the Court's observations at p.673 set out the distinction and relevant principles regarding conscious consideration of material by the AO and the bar on reassessment for mere change of opinion. | The assessees relied on this decision; the Court expressly agreed with the distinction laid down and applied that distinction to conclude that where a mistake (not mere change of opinion) is detected, reassessment is permissible. |
| Garden Silk Mills Ltd. vs. Dy. CIT (No. 1) (1996) 222 ITR 27 (Guj) : TC 51R.1521 | Held that where the AO was aware of the investment and fluctuations, applied his mind and allowed depreciation after considering material on record, a notice issued after four years could not be sustained if there was no failure by the assessee to disclose material facts — illustrating the principle that mere change of opinion is impermissible. | The Court observed that this decision cannot assist the petitioner where a mistake is detected that was not consciously considered at the first assessment; it was used to highlight the distinction between cases of proper application of mind (bar to reassessment) and cases where a mistake is discovered (allowing reassessment). |
| Garden Silk Mills Ltd. vs. Dy. CIT (No. 2) (1996) 222 ITR 68 (Guj) : TC 51R.1520 | Similar principle as No.1: where the AO had applied mind in first assessment, reassessment cannot be based on a mere change of opinion; but where an error or mistake is detected, it is not a mere change of opinion and reassessment can be justified. | The Court relied on the distinction articulated to demonstrate that when an error or mistake is detected which was not earlier considered, the case is not one of mere change of opinion and reassessment under section 147/148 is permissible; the present case was examined in light of these principles. |
Court's Reasoning and Analysis
The Court proceeded through the following analytical steps, grounded in the text of the opinion:
- Framing of the legal question: The Court identified the central question whether the reassessment notices under section 148 were based on a mere "change of opinion" (which would not confer jurisdiction) or whether there was a proper "reason to believe" (under section 147) arising from a discovered mistake that justified reassessment.
- Acknowledgement of the statutory principle: The Court observed that, following amendment to section 147, a mere change of opinion does not, by itself, empower the Assessing Officer to initiate reassessment. Nevertheless, where a mistake is discovered in the original assessment, section 147 (within four years) can be attracted even if the material existed earlier but was not properly considered.
- Examination of the record and the reasons for issuing notices: The Court examined the order dated 24th November 1999 placed on record which records information from the DDI (Investigation) that the assessee had claimed depreciation on machinery that either did not exist or was grossly overvalued, and thus a bogus depreciation claim had been made and allowed in the original scrutiny assessment under section 143(3).
- Legal meaning of "reason to believe": The Court discussed the expression "reason to believe" in section 147 as meaning some cause, ground or justification for believing that income has escaped assessment or that there was a mistake; that expression supports reassessment where there is a discovered mistake.
- Application of precedent and doctrinal distinction: The Court referred to and relied on prior decisions (Praful Chunilal Patel; Garden Silk Mills decisions) that distinguish cases where the AO had applied his mind (mere change of opinion — reassessment barred) from cases where a mistake was discovered or the material was not consciously considered (reassessment permissible). The Court stated it was in respectful agreement with this distinction.
- Factual application: On the facts before it (prima facie, at the interim stage), the Court found that information suggested depreciation had been allowed in respect of machinery that was not in existence and that this aspect had not been consciously considered at the time of the first assessment — indicating a mistake rather than a mere change of opinion. Accordingly, the AO had jurisdiction under amended section 147 to issue notices under section 148.
- Limitation of the Court's view to a prima facie stage: The Court expressly described its conclusions as prima facie observations made at the stage of issuance of notice under section 148. It emphasized that these observations should not influence the competent authority's final decision on the merits after giving the assessee an opportunity to be heard and after consideration of materials.
- Jurisdictional conclusion: The Court held that there was no jurisdictional defect in issuing the notices; therefore, the exercise of extraordinary jurisdiction under Article 226 was not called for in the absence of any jurisdictional issue.
Holding and Implications
Holding: The Court's final order dismissed the petitions. The core ruling can be stated as: THE PETITIONS ARE DISMISSED.
Immediate consequences (direct effect on the parties):
- The petitions challenging the section 148 notices were dismissed by the High Court.
- Notice in each petition was directed to stand discharged (as recorded by the Court).
- Any interim relief previously granted, if any, would cease to have effect ("would not assume any survival value").
- No order as to costs was made.
Broader implications and precedent: The Court recorded that its decision was a prima facie view at the interim stage and did not purport to decide the merits of the reassessment itself. The opinion applies and adopts the distinction between a mere change of opinion and reassessment justified by discovery of a mistake (as discussed in cited precedents). The Court did not purport to lay down a new, expansive precedent beyond applying existing authorities and principles to the facts; the decision chiefly confirms that where a mistake is prima facie discovered (e.g., allowance of depreciation on allegedly non-existent machinery not consciously considered earlier), the AO has jurisdiction under section 147/148 to proceed with reassessment subject to the assessee's right to be heard on merits.
Note: This summary is confined strictly to information contained in the provided opinion and does not add or infer facts or reasoning beyond that text.
N. Bhatt, J.
1. In this group of three petitions, at the stage of show-cause notice, the petitioners-assessees, have invoked extraordinary, plenary, equitable and discretionary jurisdiction of High Court under Art. 226 of the Constitution of India, a common question has surfaced for our consideration and adjudication i.e., whether in exercise of powers by the respondent authority, for reassessment and resultant notices under s. 148 of the IT Act, 1961 to the petitioners, at this stage, prima facie, could be said to be passed on "change of opinion" or on new opinion on finding out mistake upon the existing material or could it be said that there is total lack of jurisdiction ?
2. The case of the petitioner in each petition is that the impugned notice is without jurisdiction, as reassessment cannot be made on the basis of "change of opinion" since all the relevant facts and entire material had been considered by the AO at the relevant time. Whereas, Revenue has contended that assessee has claimed depreciation as deduction on non-existent machinery and bogus claim was found and depreciation, thereon, claimed was not, consciously considered. Therefore, there is no question of bar of the jurisdiction.
3. We have heard, extensively, the rival submissions made on behalf of the parties and materials emerging from record in light of the relevant proposition of law.
4. It is true that even after the amendment in the provisions of s. 147 of the IT Act, 1961, a mere change of opinion, ipso facto, would not confer or empower the AO to embark upon reassessment exercise. Notwithstanding that, power to make assessment or reassessment within four years of the end of the relevant assessment year, would be attracted even in the cases where there has been complete disclosure of all relevant facts upon which the assessment might have been based at the first instance, but for or in case of a mistake, as per amended provisions of s. 147 of IT Act.
5. The assessment of the return for the relevant years has been done under s. 143(3) of the IT Act. Record of these petitions indicates the order dt. 24th November, 1999, placed along with the affidavit-in-reply. It is the order showing reasons for issuance of notice under s. 148 of it act which reads as under :
"As per the information received from DDI (Inv.) Unit-II, Khanpur under No. F. No. G-18/DD-II/KNP/2(35)/1998-99, dt. 19th June, 1999, it is seen that assessee during the Financial year 1995-96 corresponding to asst. yr. 1996-97 purchased and leased the machinery (Sheltting Line Tube Mill) amounting to Rs. 1,47,81,250 to Rajendra Group of Companies and claimed depreciation as deduction against its income in respect of machinery that either did not exist or the real worth of these machinery was only 10 per cent to 20 per cent of the value recorded in the books. In this way the assessee has claimed bogus depreciation on non-existent machinery. Since the above amount of income appears to be escaped from taxable income for asst. yr. 1996-97. It is mandatory to issue notice under s. 148 of the it act to cover the above income and tax the same accordingly, a notice under s. 148 is therefore, issued to the assessee for this purpose."
6. It could very well be seen from the aforesaid reasons that depreciation claimed on the machinery which was non-existent, as per the information received by the Department, whereas, in scrutiny assessment, depreciation under s. 32 r/w s. 43(6) of the IT Act had been claimed and accepted. Thus, it was noticed that there was a bogus claim and mistake was discovered.
7. Expression "reason to believe" employed in s. 147 of the it act would mean some cause or justification if the competent authority has a cause or ground or some justification that some income has escaped assessment or that there was a mistake in making assessment. In the peculiar facts and special circumstances emerging from the record, we are extremely unable to uphold the contention raised on behalf of the petitioner that the respondent authority has no jurisdiction to issue impugned notices under s. 148 of the IT Act, 1961 as it involved only a mere "change of opinion".
8. This Court in Praful Chunilal Patel & Ors. vs. Asstt. CIT (1999) 236 ITR 832 (Guj) : TC S51.4077 has observed in this behalf while interpreting the provisions of s. 147 of the it act and expression "reason to believe" which are relied on on behalf of the respondents, are also material for reinforcing the view which we are taking in this group of petitions.
9. Whereas, learned counsel for the assessee has placed reliance on the observations made by this Court in the decision in Garden Silk Mills (P) Ltd. vs. Dy. CIT (1999) 237 ITR 668 (Guj). He placed reliance on relevant observations at p. 673 which read as under :
Even the decision of this Court in Garden Silk Mills Ltd. vs. Dy. CIT (No. 1) (1996) 222 ITR 27 (Guj) : TC 51R. 1521 cannot assist the petitioner because in that case it was held that the AO was aware about the investment and fluctuations in the exchange rate and depreciation had been allowed after considering the material on record and further that the notice was issued after four years and there was no failure on the part of the assessee to disclose material facts necessary for assessment. Reliance placed on the case of that very assessee, reported in the same volume at p. 68. Garden Silk Mills Ltd. vs. Dy. CIT (No. 2) (1996) 222 ITR 68 (Guj) : TC 51R.1520 also cannot help the petitioner, because in that case the Court found that in the first assessment the AO had applied his mind in the computation of income and that there cannot be a mere change of opinion. When, at the first assessment all the relevant aspects are considered and there is proper application of mind for ascertainment of the amount of taxable income and of the tax payable thereon then in the absence of any error or mistake being discovered or found, the AO later on cannot merely for the sake of giving a different opinion, change the earlier opinion. However, in cases where are error or mistake is detected, it can never be said that there is only a mere change of opinion. The mistake or error which is detected and which constituted a valid decision or cause to form a belief in the first assessment as a result of which the income has escaped assessment, would constitute a reason to believe that the income had escaped assessment and such cases where mistake and errors are detected and which constitute a valid justification or cause to form a belief sought to be corrected, cannot be said to be cases or mere change of opinion.' We are in respectful agreement with the aforesaid enunciation of distinction between the change of opinion and finding erroneous nature of earlier assessment on detection of mistake on an issue which was not earlier considered by the AO. The present case may be examined in the light of the principles noticed above. No return has been filed. However, the reasons recorded by the AO has been placed on record which are identical in all the three cases except for the amount and the name of the assessee.
10. We have also, seriously, considered the entire case law from which aforesaid paragraphs are relied on. Insofar as expression "reason to believe" and "change of opinion" are concerned, we are of the view that though the material was available on record, at the time of first assessment, when no conscious consideration of the material is made and a mistake has been committed, it would not, in any case, create an embargo or a ban on the competent officer to exercise powers under the amended s. 147 of the IT Act, 1961, as prima facie, there could not be "change of opinion" in that factual scenario. It has also been shown to us on behalf of an assessee. If conscious application of mind is made to the relevant facts and material available or existing at the relevant point of time while making assessment and again different or divergent view is sought, it would tantamount to "change of opinion", whereas, in the case of existing material, no conscious attempt has been made, it would tantamount to mistake in not considering the relevant point or proposition and it would not be a "change of opinion". As in the present case, prima facie upon information, the Department noticed that depreciation was claimed and approved in respect of a machinery which was not at all in existence and that aspect was not, consciously, considered, at the time of first assessment, as otherwise there was no question of granting depreciation, thereon, claimed by the assessee.
11. In our, prima facie view, therefore, this group is also covered by the observations and ultimate view taken by this Court in Praful Chunilal Patel's case (supra). We need not divulge ourselves further on meticulous discussion. Otherwise also, there is no fit case for exercise of extraordinary jurisdiction under Art. 226 of the Constitution, in absence of any jurisdictional issue. Authority has jurisdiction.
12. Learned counsel Mr. Shah, at this stage, submitted that since again the competent authority is required to examine the merits after giving an opportunity of hearing to the assessee, and material, it may be observed that the observations made, hereinbefore, may not come in the way of the point/issue being decided on merits as ours is a prima facie view in absence of material. In fact, this requires no clarification as such. However, this Court has dealt with the point prima facie, at the interim stage, i.e. at the stage of issuance of notice under s. 148 of the it act, where the party has to appear and show cause, the decision on merits will be upon the material that may be placed/submitted. So, observations made, at this stage, obviously, would not and should not influence and colour the vision of the competent authority while making final decision upon merits after hearing and considering the materials.
13. In the result, these petitions are dismissed. Notice in each petition shall stand discharged. Obviously, interim relief, if any, would not assume any survival value. No order as to costs.
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