HC upholds AO's reopening of assessment under Section 147 with valid reason to believe income escaped assessment

Export Credit Guarantee Corporation of India Ltd. Versus The Additional Commissioner of Income Tax & Ors.

Export Credit Guarantee Corporation of India Ltd. Versus The Additional Commissioner of Income Tax & Ors. - [2013] 350 ITR 651

ISSUES:

Whether the Assessing Officer had 'reason to believe' under Section 147 of the Income Tax Act, 1961, to reopen an assessment within four years from the end of the relevant assessment year.Whether the reopening of assessment can be sustained where the original assessment order is silent on the issues forming the basis of reopening.Whether the Assessing Officer can reopen an assessment merely on the basis of a 'change of opinion.'Whether reliance on accounting notes and undisclosed material can constitute tangible material justifying reopening.Whether the Assessing Officer has jurisdiction to make income additions under Section 44 read with Rule 5(a) of the Income Tax Rules.Whether liabilities arising from events occurring after the balance-sheet date can be disallowed as deductions in the relevant assessment year.Whether capital nature expenses such as ISO certification fees can be disallowed as revenue expenses.Whether prior period expenses and income adjustments should be added back to income if not relating to the relevant previous year.

RULINGS / HOLDINGS:

The reopening of assessment within four years is valid if the Assessing Officer has 'reason to believe' based on 'tangible material' that income has escaped assessment; this does not require conclusive proof but a 'cause or justification' for such belief.The fact that the original assessment order is silent on the points forming the basis for reopening indicates the Assessing Officer did not apply his mind to those issues, justifying reopening under Section 147.The Assessing Officer cannot reopen an assessment merely on a 'change of opinion;' there must be tangible material leading to a reason to believe that income has escaped assessment.Accounting notes disclosing a change in accounting policy and undisclosed recoveries constitute tangible material sufficient to form a reason to believe for reopening.The Assessing Officer has no jurisdiction under Section 44 read with Rule 5(a) to make income additions; however, this issue pertains to merits and is not determinative at the reopening stage.Liabilities arising from events occurring after the balance-sheet date are not allowable as deductions in the relevant assessment year if the liability was not crystallized before the balance-sheet date.Expenses such as ISO certification fees, if providing an enduring benefit, are capital in nature and should be disallowed as revenue expenses; however, this merits determination post reopening.Prior period expenses and income adjustments not relating to the relevant previous year should be added back to income to prevent escapement of income.

RATIONALE:

The Court applied the statutory framework of Section 147 of the Income Tax Act, 1961, as interpreted by the Supreme Court in Commissioner of Income Tax vs. Kelvinator India Ltd. and Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd., emphasizing the requirement of 'reason to believe' based on 'tangible material' and rejecting reopening on mere change of opinion.The Court distinguished the power to 'reassess' under Section 147 from the power to 'review,' holding that the Assessing Officer must have tangible material that was overlooked or ignored at the time of original assessment.The Court recognized that the proviso to Section 147 requiring full disclosure of material facts applies only to reopening after four years, not within four years, where the test is broader.The Court declined to decide on the merits of income additions or disallowances at the reopening stage, leaving such determinations to the Assessing Officer upon reassessment.The Court emphasized that the reopening notice is valid if even a single ground is supported by tangible material and reason to believe, thereby upholding the Assessing Officer's jurisdiction to reopen the assessment.No interference was warranted under Article 226 of the Constitution as the Assessing Officer acted within jurisdiction and the legal tests for reopening were satisfied.