Citation Codes

Equivalent Citations

citation codes

Case Number

I.T.A No. 1628 of 2009

Advocates

: Sri. Jose Joseph, SC, for Income Tax
: Sri. P. Balakrishnan (E)

Judges

C.N Ramachandran Nair
V.K Mohanan, JJ.

Acts

sub-section (3) of section 143 or this section
sub-section (1) of Section 142 or section 148
Section 36(1)(iii)
FINANCE ACT 1987

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Smart Summary

Summary of Judgment

Factual and Procedural Background

This appeal was filed by the revenue against the Tribunal's order which confirmed the cancellation by the CIT (Appeals) of a reassessment completed under Section 147 of the Income Tax Act for the assessment year 2001-02. The respondent-assessee's return for that year was processed initially under Section 143(1)(a) and then a regular assessment was completed under Section 143(3). In the original assessment the assessee's claim for interest deduction of Rs. 308.36 lakhs (allowed under Section 36(1)(iii)) was recorded, and subsequently the assessing officer, on further scrutiny, discovered that Rs. 84,12,500 was advanced as interest-free loans to sister concerns from borrowed funds. The assessing officer reopened the assessment under Section 147 to disallow the proportionate interest attributable to those interest-free advances. The CIT (Appeals) allowed the assessee's appeal both on merits and on the ground that the reassessment under Section 147 was invalid. The Tribunal dismissed the departmental appeal, holding that the reassessment was occasioned by a change of opinion of the assessing officer and that the CIT (Appeals) was justified in cancelling the reassessment. The present High Court judgment considers the correctness of that outcome.

Legal Issues Presented

Whether the reassessment action under Section 147 of the Income Tax Act was validly initiated in the present case.
Whether a reassessment that reverses an allowed deduction can be treated as reopening based on a mere "change of opinion" when the original regular assessment did not discuss or consider the claim in detail.
Whether the first proviso to Section 147 (the four-year limitation and exceptions) applied to bar reopening in this case.
What is the effect of the post-1.4.1989 amendment to Section 147 (Finance Act, 1987 amendment) on the power of the assessing officer to reopen assessments and on the correctness of the Tribunal's reliance on the Delhi High Court Full Bench decision in Kelvinator.

Arguments of the Parties

Appellant (Revenue) — Arguments

The Tribunal followed the Full Bench decision of the Delhi High Court in Commissioner of Income-Tax v. Kelvinator of India Ltd. (256 I.T.R. 1), but that decision has been overruled or is in conflict with a later decision of the Supreme Court in Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. (291 I.T.R. 500).
The reassessment proceedings under Section 147 were initiated within the four-year period from the end of the relevant assessment year, so the first proviso to Section 147 that could bar action after four years had no application in this case.

Respondent (Assessee) — Arguments

Counsel for the assessee submitted that when a claim was allowed in the original assessment, any subsequent proposal to disallow that relief should be treated as arising from a change of opinion, barring reopening under Section 147.
Counsel for the assessee also submitted that the Supreme Court decision relied upon by the revenue did not apply because the Supreme Court case concerned a regular assessment, whereas the present case involved assessment under Section 143(1) (this point was raised as distinguishing the precedents).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income-Tax v. Kelvinator of India Ltd., 256 I.T.R. 1 (Full Bench, Delhi High Court)	Held that the 1989 amendment to Section 147 was inconsequential (per the Tribunal's reliance) and supported restrictions on reopening assessments where the action was said to be a change of opinion.	The court noted that the Tribunal had followed this Full Bench view but treated it as contrary to the later Supreme Court decision; the High Court concluded the Kelvinator Full Bench position is inconsistent with the Supreme Court's interpretation of the post-1989 Section 147.
Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd., 291 I.T.R. 500 (Supreme Court)	Held that the amendment effective from 1.4.1989 brought a substantial change in the meaning and content of Section 147, and if the ingredients of Section 147 are fulfilled the assessing officer is free to initiate proceedings under it.	The High Court relied on this Supreme Court pronouncement to hold that, where the statutory ingredients of Section 147 (as amended) are satisfied, reassessment may be validly initiated; this view supported reversing the Tribunal's cancellation of reassessment in the present case.

Court's Reasoning and Analysis

The court proceeded in a stepwise analytical manner based strictly on the material and statutory provisions reproduced in the opinion:

Examination of the original assessment: The court observed that the regular assessment completed under Section 143(3) was a short order "in few lines" and that the assessee's interest deduction claim was allowed "in terms of the claim made in the return" without any detailed discussion or consideration by the assessing officer. Consequently, the court held that the doctrine of "change of opinion" would not apply where there was no prior considered opinion by the assessing officer in the original assessment.
Statutory framework — Section 147: The court quoted Section 147 including the first proviso (four-year limitation) and Explanation 2 which enumerates cases deemed to be escapement of income (including where "income has been made the subject of excessive relief" — Explanation 2(c)(iii)). The court emphasized the amended scope of Section 147 effective from 1.4.1989.
Characterisation of the Tribunal's factual finding on time bar: The court found that the Tribunal had wrongly assumed reassessment was completed beyond four years. Standing counsel for revenue had pointed out reassessment was initiated within the four-year period, so the first proviso to Section 147 did not apply to bar reopening in this instance.
Two statutory conditions for reopening after amendment: The court identified the two requisite conditions under the amended Section 147 — (a) escapement of income chargeable to tax for the assessment year, and (b) a reason in possession of the assessing officer to believe that such income has escaped assessment.
Application of facts to statutory test: On re-examination of the accounts the assessing officer found that the assessee had paid about Rs. 3 crores as interest on borrowings during the relevant year but had advanced Rs. 84,12,500 as interest-free loans to sister concerns. The assessing officer concluded that not all borrowings were for business purposes and that the deduction allowed under Section 36(1)(iii) therefore represented "excessive relief" within the meaning of Explanation 2(c)(iii) to Section 147. The court held that this circumstance plainly amounts to escapement of income covered by Explanation 2.
On the "change of opinion" contention: The court rejected the assessee's submission that reopening was impermissible because the original allowance precluded reassessment as a mere change of opinion. The court reasoned that (a) the regular assessment did not contain a considered discussion or opinion; (b) there is no embargo in Section 147 preventing an assessing officer from reexamining the assessment file and reappreciating evidence; and (c) there is no statutory presumption that every regular assessment has considered every claim in detail. Thus, a subsequent reappraisal that discloses escapement of income falls within the scope of Section 147.
Precedential conflict and correct approach: The court observed that the Delhi High Court Full Bench decision in Kelvinator (which the Tribunal followed) is contrary to the Supreme Court's later decision in Rajesh Jhaveri. The Supreme Court found that the 1989 amendment broadened Section 147 and permitted reopening where its ingredients are satisfied; the High Court accepted the Supreme Court's view as controlling.
Distinction between assessments under Sections 143(1) and 143(3): Although the assessee's counsel attempted to distinguish the Supreme Court authority on the basis that that case involved a regular assessment, the High Court saw no material difference between proceedings completed under Section 143(1) and Section 143(3) insofar as Explanation 2 to Section 147 applies to escapement of income.
Conclusion of analysis: Given that the reassessment was initiated within the four-year period and that the assessing officer had reason to believe that excessive relief had been granted (i.e., escapement of income under Explanation 2(c)(iii)), the court concluded that the reopening under Section 147 was legally permissible. The Tribunal had no basis to restrict the assessing officer's power to reconsider the assessment on these facts.

Holding and Implications

Core Ruling: The High Court allowed the revenue's appeal, reversed the order of the Tribunal, and restored the departmental appeal to the file of the Tribunal for decision on merits after hearing both sides.

Implications:

Direct effect on the parties: The Tribunal's cancellation of the reassessment under Section 147 is set aside; the departmental appeal is reinstated before the Tribunal for merits adjudication.
On broader legal consequences: The opinion adopts and applies the Supreme Court's interpretation of the post-1.4.1989 Section 147 (as cited), treating the amended Section and Explanation 2 as expansive enough to permit reopening where excessive relief has been allowed. The opinion does not purport to lay down a new precedent beyond applying the existing Supreme Court authority; it focuses on the correctness of the Tribunal's application of the law to the facts of this case.

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The Commissioner Of Income Tax Petitioner v. Popular Vehicles & Services Ltd.

JUDGMENT

Ramachandran Nair, J.

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 Section 147 of the I.T Act on the respondent-assessee for the assessment year 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 assessment year 2001-02 was first processed under Section 143(1)(a) and thereafter a regular assessment was completed under Section 143(3) of the Act. However, the assessing officer 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 Section 36(1)(iii) of the Act. The assessing officer 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 Section 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 Section 147 of the Act. When the assessee challenged the assessment in appeal before the CIT (Appeals), he allowed the same both on merits and on the ground that the revised assessment under Section 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 (Appeals) is justified in cancelling reassessment completed under Section 147 as the same is only on account of change of opinion of the assessing officer 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 Commissioner Of Income-Tax v. Kelvinator Of India Ltd., 256 I.T.R 1, which according to him, stands overruled by later decision of the Supreme Court in ASST. CIT v. RAJESH JHAVERI STOCK BROTKERS P. LTD., 291 I.T.R 500.

4. Before proceeding to consider the validity of revised assessment completed under Section 147 we have gone through the regular assessment completed under section 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 Section 36(1)(iii) is stated to be allowed, is not discussed or considered by the assessing officer. 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 re-assessment does not apply because the matter was not considered in details in the regular assessment and no opinion was expressed by the assessing officer. The question therefore to be considered is whether, when assessment is completed under Section 143(3), there is a presumption that the assessing officer 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 Section 147 of the Act. For easy reference we Section:

Icssessment.

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, 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 sections 148 to 153 referred to as the relevant assessment year.

Provided that where an assessment under sub-section (3) of section 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 section 139 or in response to a notice issued under sub-section (1) of Section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

Explanation 1.-- Production before the Assessing Officer of account books or other evidece from which material evidence could with due diligence have been discovered by the assessing officer 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 furished by the assessee but no assessment has been made and it is noticed by the assessing officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

(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 Section 147 after the amendment by Finance Act 1987 with effect from 1.4.1989 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 with effect from 1.4.1989 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 Section 147 are fulfilled, then the assessing officer is free to initiate proceedings under Section 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 Section 147 was initiated within the four year period from the end of the relevant assessment year and therefore the first proviso to Section 147 has no application and the Tribunal's finding to the contrary is factually incorrect. Amended provisions of section 147 effective from 1.4.1989 authorise income escaping assessment if the assessing officer 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 assessing officer to believe that chargeable income has escaped assessment. In this case the assessing officer 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 Section 36(1)(iii) is excessive relief granted in assessment. In this context Explanation 2 to Section 147 has to be referred to which exhaustively states certain cases where income chargeable to tax has escaped assessment. Under sub-clause (iii) of clause (c) of Explanation 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 Section 36(1)(iii) then certainly it is a case of income escaping squarely covered by Explanation 2 to Section 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 assessing officer 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 Section 147 against the assessing officer reexamining the assessment file and reappreciating the evidence, and accounts in support of the claim and arriving at a conclusion which may attract Section 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 Explanation 2 to Section 147 is such that the assessing officer 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 Section 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 Assessing Officer by holding that change of opinion is not a ground to reopen the assessment under Section 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 Section 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 Section 143(1) and the regular assessment under Section 143(3) of the Act, if income chargeable to tax has escaped assessment within the meaning of Explanation 2 to Section 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.

The Commissioner Of Income Tax Petitioner v. Popular Vehicles & Services Ltd.

Summary of Judgment

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant (Revenue) — Arguments

Respondent (Assessee) — Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

The Commissioner Of Income Tax Petitioner v. Popular Vehicles & Services Ltd.

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