Reassessment u/S. 147 - Effect of
Explanation 3 to Section 147
by Ms.B.Mala
Associate, Subbaraya Aiyar
Padmanabhan & Ramamani (SAPR) Advocates
Judicial
pronouncements
The Punjab & Haryana High Court
in Vipan
Khanna vs, CIT (255 ITR 220), held that the jurisdiction of the ITO in
proceedings under s. 147 is confined only to such income which has escaped tax
or has been underassessed and does not extend to revising, reopening or
reconsidering the whole assessment. In the present case, the assessee was
required to furnish information on issues in respect of which there is no
allegation of any escapement or underassessment of income either in the reasons
recorded or during the course of proceedings under s. 147, and this was
tantamount to reviewing the whole assessment. There is no gainsaying the fact
that in proceedings under s. 147 it is only the escaped income which has to be
assessed or reassessed. When proceedings under s. 147 are initiated, the
proceedings are open only qua items of underassessment. The finality of
assessment proceedings on other issues remains undisturbed. It makes no
difference whether the assessment proceedings have become final on account of
framing of an assessment under s. 143(3) or on account of non-issue of a notice
under s. 143(2) within the stipulated period.
The High Court of Kerala in Travancore
Cements Ltd.. vs. Asst CIT (305 ITR 170) held that AO gets jurisdiction
under s. 148 to assess or reassess the income which has escaped assessment only
after sub-s. (2) of s. 148 is complied with. If two items of income are unconnected
and totally alien the assessing authority has to follow sub-s. (2) of s. 148
with regard to the other item of escaped income which comes to his knowledge
during the course of the proceedings. The Expression "subject to the
provisions of ss. 148 to 153" in s. 147 lent support to this view. The
Assessing Officer could not make any fishing enquiry on concluded matters
unconnected with the issue on the basis of which proceeding under s. 147 was
initiated since the date of completing the regular assessment under s. 143(3)
had already expired items unconnected with escapement for which notice is
given.
Introduction
of Explanation 3
The Government did not wait too long
to react to these decisions, and responded by introducing an Explanation to
Section 147 by Finance (No. 2)Act 2009 with retrospective effect from 1-4-1989
The Explanation reads as under
“Explanation
3.—For the purpose of assessment or reassessment under this section, the
Assessing Officer may assess or reassess the income in respect of any issue,
which has escaped assessment, and such issue comes to his notice subsequently
in the course of the proceedings under this section, notwithstanding that the
reasons for such issue have not been included in the reasons recorded
under sub-section (2) of section 148.”.
The reasons for the insertion of
Explanation 3 are to be found in the Memorandum Explaining the Provisions of
Finance (No. 2) Bill of 2009. The Memorandum treats the amendment to be
clarificatory and contains the following explanation:
"Some Courts have held that the AO 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 s 147 to provide that the AO 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-s. (2) of s148."
The Parliament, when it enacted the
Expln. (3) to s147 by the Finance (No. 2) Act, 2009 clearly had before it both
the lines of precedent on the subject. The precedent dealt with two separate
questions.
1) When it effected the amendment by bringing in Expln. 3 to
s 147, Parliament stepped in to correct what it regarded as an interpretational
error in the view which was taken by certain Courts that the AO has to restrict
the assessment or reassessment proceedings only to the issues in respect of
which reasons were recorded for reopening the assessment. The corrective
exercise in the form of Expln. 3 consequently provides that the AO may assess
or reassess the income in respect of any issue which comes to his notice
subsequently in the course of the proceedings though the reasons for such issue
were not included in the notice under s148(2). Explanation 3 lifts the embargo,
which was inserted by judicial interpretation, on the making of an assessment
or reassessment on grounds other than those on the basis of which a notice was
issued under s. 148 setting out the reasons for the belief that income had
escaped assessment. The decisions of the Kerala High Court in Travancore Cements Ltd.'s case (305 ITR 170
) and of the Punjab & Haryana High Court in Vipan Khanna's case (255 ITR 220) would, therefore, no longer hold
good.
2) However, insofar
as the second line of authority is concerned, which is reflected in the
judgment of the Rajasthan High Court in Shri Ram Singh's case (306 ITR 343),
the Expln. 3 as inserted by Parliament would not take away the basis of that
decision. It is only when, in proceedings under s. 147 the AO, assesses or
reassesses any income chargeable to tax, which has escaped assessment for any
assessment year, with respect to which he had 'reason to believe' to be so,
then only, in addition, he can also put to tax, the other income, chargeable to
tax, which has escaped assessment, and which has come to his notice
subsequently, in the course of proceedings under s. 147. The AO does not have
jurisdiction to proceed with the reassessment, once he finds that the grounds
mentioned in the notice under s 148 were incorrect or non-existent. The view
which was taken by the Rajasthan High Court was also taken in another judgment
of the Punjab & Haryana High Court in CIT vs. Atlas Cycle Industries (180 ITR 319).
The
Explanation 3 cannot override the necessity of fulfilling the conditions set
out in the substantive part of s147. An Explanation to a statutory provision is
intended to explain its contents and cannot be construed to override it or
render the substance and core nugatory. S 147 has this effect that the AO has
to assess or reassess the income ("such income") which escaped
assessment and which was the basis of the formation of belief and if he does
so, he can also assess or reassess any other income which has escaped
assessment and which, comes to his notice during the course of the proceedings.
However, if after issuing a notice under s 148, he accepts the contention of
the assessee and holds that the income which he has initially believed had escaped
assessment, has as a matter of fact not escaped assessment, it is not open to
him to independently assess some other income. If he intends to do so, a fresh
notice under s 148 would be necessary.
This
view has been confirmed by the Bombay High Court in CIT v Jet Airways (I) Ltd. (331
ITR 236)
Conclusion
The effect of s. 147 as it now
stands after the amendment of 2009 can be summarised as follows : (i) The AO
must have reason to believe that any income chargeable to tax has escaped
assessment for any assessment year; (ii) Upon the formation of that belief and
before he proceeds to make an assessment, reassessment or recomputation, the AO
has to serve on the assessee a notice under sub-s. (1) of s. 148; (iii) The AO
may assess or reassess such income, which he has reason to believe, has escaped
assessment 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 the section; and (iv) though the notice under s. 148(2) does
not include a particular issue with respect to which income has escaped
assessment, he may nonetheless, assess or reassess the income in respect of any
issue which has escaped assessment and which comes to his notice subsequently
in the course of the proceedings under the section
The insertion of Explanation 3 gives
the assessing Officer the jurisdiction to assess or reassess the income which
escaped assessment and which was the basis of the issue of notice, and if he
does so, he can also assess or reassess any other income which has escaped
assessment which, comes to his notice during the course of the proceedings.
However, if after issuing a notice under s 148, he accepts the contention of
the assessee that the income which he had believed had escaped assessment, had
as a matter of fact not escaped assessment, it is not open to him to
independently assess some other income.
The reassessment would, in such a
case not be valid.
