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Commissioner Of Income Tax, Delhi v. Kelvinator Of India Limited .
Factual and Procedural Background
This batch of civil appeals was filed by the Income-tax Department against assessees. The controversy centres on reassessment proceedings under Section 147 of the Income-tax Act, 1961. After hearing counsel on both sides, the Supreme Court was required to decide whether the legislative amendments made to Section 147—effective from 1 April 1989—had eliminated the judicially recognised limitation that an assessment cannot be reopened merely on a “change of opinion”.
Legal Issues Presented
- Whether, after the substitution of Section 147 by the Direct Tax Laws (Amendment) Act, 1987 (effective 1-4-1989), the doctrine of “change of opinion” no longer restricts an Assessing Officer’s power to reopen a concluded assessment.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Court undertook a comparative analysis of three statutory versions of Section 147:
- Pre-1987 version: Reopening permitted only if (a) the assessee failed to disclose material facts or (b) new information surfaced—both requiring a “reason to believe”.
- 1987 amended version (operative briefly before 1-4-1989): The phrase “reason to believe” was deleted and replaced by the Assessing Officer’s “opinion”, thereby broadening power.
- Post-1989 version (in force for the appeals): Parliament reinstated “reason to believe” and removed the word “opinion”.
From these changes the Court derived several principles:
- The post-1989 Section 147 keeps the power to reopen assessments “much wider” than the pre-1987 version because it dispenses with the twin conditions in clauses (a) and (b). Nevertheless, the statutory phrase “reason to believe” imposes a threshold that must be satisfied.
- A mere change of opinion cannot constitute “reason to believe”. Accepting the Department’s contention would convert reassessment into an impermissible review, a power the Assessing Officer does not possess.
- The doctrine of “change of opinion” operates as an “in-built test” to prevent abuse. Reopening is valid only where there is “tangible material” having a live nexus with the formation of belief that income escaped assessment.
- Circular No. 549 dated 31-10-1989 confirmed Parliament’s intent to reinstate “reason to believe” precisely to avoid arbitrary reassessments based solely on a change of opinion.
Holding and Implications
HELD: The civil appeals filed by the Department are dismissed.
Consequently, the doctrine of “change of opinion” continues to constrain reassessment proceedings even after 1-4-1989. The immediate effect is that the impugned reassessment notices/orders, which were predicated solely on a change of opinion, cannot stand. The judgment affirms legislative intent and safeguards taxpayers against arbitrary reopening, but it does not create a new precedent beyond clarifying the continued applicability of the established doctrine.
S.H Kapadia, J.— Heard learned counsel on both sides. A short question which arises for determination in this batch of civil appeals is, whether the concept of “change of opinion” stands obliterated with effect from 1-4-1989 i.e after substitution of Section 147 of the Income Tax Act, 1961 by the Direct Tax Laws (Amendment) Act, 1987?
2. To answer the above question, we need to note the changes undergone by Section 147 of the Income Tax Act, 1961 (for short, “the Act”). Prior to the Direct Tax Laws (Amendment) Act, 1987, Section 147 read as under:
“147. Income escaping assessment.—If—
(a) the Income Tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year to the Income Tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income Tax Officer has in consequence of information in his possession reason to believe that 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 or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in Sections 148 to 153 referred to as the relevant assessment year).”
(emphasis supplied)
3. After enactment of the Direct Tax Laws (Amendment) Act, 1987 i.e prior to 1-4-1989, Section 147 of the Act reads as under:
“147. Income escaping assessment.—If the assessing officer, for reasons to be recorded by him in writing, is of the opinion 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):”
(emphasis supplied)
4. After the Amending Act, 1989, Section 147 reads as under:
“147. Income escaping assessment.—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):”
(emphasis supplied)
5. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the assessing officer to make a back assessment, but in Section 147 of the Act (with effect from 1-4-1989), they are given a go-by and only one condition has remained viz. that where the assessing officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1-4-1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the assessing officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen.
6. We must also keep in mind the conceptual difference between power to review and power to reassess. The assessing officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place.
7. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the assessing officer. Hence, after 1-4-1989, the assessing officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act. However, on receipt of representations from the companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the assessing officer.
8. We quote hereinbelow the relevant portion of Circular No. 549 dated 31-10-1989, which reads as follows:
“7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in Section 147.—A number of representations were received against the omission of the words ‘reason to believe’ from Section 147 and their substitution by the ‘opinion’ of the Assessing Officer. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in a number of court rulings in the past and was well settled and its omission from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended Section 147 to reintroduce the expression ‘has reason to believe’ in the place of the words ‘for reasons to be recorded by him in writing, is of the opinion’. Other provisions of the new Section 147, however, remain the same.”
(emphasis supplied)
9. For the aforestated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs.
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