Reopening under IT Act: Effect of Explanation 3 to Section 147

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.