2013 (2) TMI 292 - HC - Income Tax

Assessing Officer cannot exceed stated reasons for reopening assessment under Section 147 when original basis fails

Gujarat HC ruled that Assessing Officer cannot travel beyond stated reasons for reopening assessment under Section 147. Court held that Explanation 3 to ... Validity for reopening of Assessment u/s 147 - Whether the ITAT was right in law in coming to the conclusion that when on the ground on which the reopening of assessment is based, no additions are made by the Assessing Officer in the order of assessment, he cannot make additions on some other grounds which did not form part of the reasons recorded by him - The assessee contended that the Assessing Officer had no jurisdiction to travel beyond the reasons for reopening the assessment. Held That:- Explanation (3), Section 147 of the Act, however, by no stretch of imagination, can be construed as to provide that if the reason on which the assessment is reopened fails, the AO still can proceed to assess some other income which according to him had escaped assessment and which came to his light during the course of the assessment. For assuming jurisdiction to frame an assessment under Section 147 what is essential is a valid reopening of a previously closed assessment. If the very foundation of the reopening is knocked out, any further proceeding in respect to such assessment naturally would not survive. If the stand of the revenue is accepted, a very incongruent situation would come about if ultimately the AO were to drop the ground on which notice for reopening had been issued but to chase some other grounds not so mentioned for issuance of the notice. In such a situation, even if a case where notice for reopening has been issued beyond a period of four years, the assessment would continue even though on all the grounds on which the additions are being made, there was no failure on the part of the assessee to disclose true and full material facts. In such a situation an important requirement of failure on part of the assessee to disclose truly and fully all material facts would be totally circumvented. As already noted, except for the Punjab and Haryana High Court in case of Majinder Singh Kang v. Commissioner of Income-Tax and Anr. [2012 (6) TMI 616 - PUNJAB AND HARYANA HIGH COURT] all courts have uniformly taken a view that Explanation 3 to Section 147 of the Act does not change the situation insofar as the present controversy is concerned. Leading decision of Bombay High Court in case of CIT. v. Jet Airways (I) Ltd. [2010 (4) TMI 431 - BOMBAY HIGH COURT] has been followed by different High Courts wherin the High Court, in its elaborate decision considering the statutory provisions, different judicial pronouncements and the explanatory memorandum for introduction of Explanation 3 to Section 147 ruled in favour of the assessee. Punjab and Haryana High Court in case of Majinder Singh Kang v. Commissioner of Income-Tax and anr (supra) of course has sounded a different note, however, the explanatory memorandum to Explanation 3 to Section 147 of the Act was not brought to the notice of the High Court in the said decision. The High Court gave considerable importance on such Explanation 3 to Section 147 and the language used therein. In the result, we answer the question in the affirmative i.e. in favour of the assessee and against the revenue. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered in this judgment is whether, upon reopening an assessment under Section 147 of the Income Tax Act, 1961, the Assessing Officer (AO) is restricted to making additions or reassessments only on the grounds recorded in the reasons for reopening the assessment, or whether the AO may make additions on other grounds not mentioned in the reasons recorded. Specifically, the question arises when the AO, after reopening the assessment on certain grounds, does not make any addition on those grounds but makes additions on other grounds not forming part of the reasons recorded. The substantial question framed is:'Whether the Income-tax Appellate Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment is based, no additions are made by the Assessing Officer in the order of assessment, he cannot make additions on some other grounds which did not form part of the reasons recorded by him.'Additionally, the judgment considers the effect and scope of Explanation 3 to Section 147 of the Income Tax Act, which was introduced retrospectively from 01.04.1989 to clarify the powers of the AO in reassessment proceedings.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether the AO can make additions on grounds not mentioned in the reasons for reopening the assessment under Section 147, especially when no addition is made on the grounds recorded for reopening.Relevant Legal Framework and Precedents:Section 147 of the Income Tax Act empowers the AO to reassess income if he has reason to believe that income chargeable to tax has escaped assessment. The section allows the AO to assess or reassess such income and also any other income chargeable to tax which comes to his notice subsequently in the course of proceedings. Section 148 requires the AO to issue a notice for reopening, recording reasons for doing so.Explanation 3 to Section 147, introduced retrospectively from 01.04.1989, clarifies that the AO may assess or reassess income in respect of any issue which comes to his notice subsequently during reassessment proceedings, notwithstanding that the reasons for such issue were not included in the reasons recorded under Section 148(2).Key precedents considered include:CIT v. Jet Airways (I) Ltd. (Bombay High Court) - Held that if the AO does not assess income on the grounds recorded for reopening, he cannot assess income on other grounds not mentioned in the reasons. The Court interpreted Explanation 3 as clarificatory, not expanding the AO's powers beyond the original statutory scheme.Ranbaxy Laboratories Ltd. v. CIT (Delhi High Court) - Agreed with Jet Airways, emphasizing that while Explanation 3 allows assessment of other income coming to notice during proceedings, it does not authorize a 'roving inquiry' unrelated to the grounds for reopening without fresh notice.Assistant CIT v. Major Deepak Mehta (Chhattisgarh High Court) - Followed the Jet Airways view, underscoring the limited scope of reassessment proceedings.CIT v. Shri Ram Singh (Rajasthan High Court) - Held that if the income forming the basis of reopening is found to be explained, the AO's jurisdiction to reassess ceases, and he cannot assess other income not part of the reasons recorded.CIT v. Atlas Cycle Industries (Punjab and Haryana High Court) - Similar view stating that if grounds for reassessment do not exist, reassessment is invalid.Majinder Singh Kang v. CIT (Punjab and Haryana High Court) - A contrasting view holding that Explanation 3 empowers the AO to make additions on grounds not mentioned in the reasons for reopening if such income comes to notice during reassessment proceedings.Court's Interpretation and Reasoning:The Court analyzed the statutory provisions, legislative history, and judicial pronouncements. It observed that Section 147, prior to Explanation 3, allowed the AO to reassess income which escaped assessment and any other income that came to notice during reassessment proceedings. However, the AO's jurisdiction is predicated on a valid reopening of assessment based on recorded reasons. If the AO fails to find escaped income on the grounds recorded for reopening, the reopening itself becomes invalid, and the AO loses jurisdiction to reassess on other grounds.The Court emphasized that Explanation 3 was introduced as a clarificatory amendment to settle divergent judicial opinions, particularly to counter the restricted view that the AO could only reassess on grounds recorded in the reopening notice. The explanatory memorandum to Explanation 3 clarified that the AO may assess income on issues coming to notice during reassessment, even if not included in the reasons recorded. However, this does not mean the AO obtains unfettered power to make additions unrelated to the original grounds for reopening.The Court relied on the principle that powers to reopen assessments are exceptional and must be strictly construed. Allowing the AO to make additions on unrelated grounds without valid reopening would encourage arbitrary exercise of power and undermine procedural safeguards.Key Evidence and Findings:In the present case, the AO issued notice under Section 148 for reopening on the ground that the assessee had wrongly claimed deduction under Section 80HHC by including export incentives. However, in the reassessment order, the AO did not disturb the deduction under Section 80HHC, which was the basis for reopening. Instead, the AO made additions on unrelated grounds such as unexplained cash credits and unverifiable purchases.The Tribunal found that since the AO did not make any addition on the grounds recorded for reopening, the reassessment order was without jurisdiction and bad in law. The Tribunal relied on the Jet Airways decision and similar precedents to hold that the AO cannot make additions on other grounds not forming part of the reasons recorded if no addition is made on the grounds recorded.Application of Law to Facts:The Court applied the settled legal principles to the facts and concluded that the AO's reassessment order was invalid because it did not assess income on the grounds recorded for reopening but made additions on unrelated grounds. The Court held that the reopening was not validly exercised, and therefore the AO lacked jurisdiction to make additions on other grounds.Treatment of Competing Arguments:The revenue contended that Explanation 3 to Section 147 empowers the AO to make additions on any grounds that come to his notice during reassessment, even if not mentioned in the reopening reasons, and that the AO's jurisdiction is not limited to the grounds recorded. The revenue relied on the Punjab and Haryana High Court decision in Majinder Singh Kang and argued that the AO's powers are plenary once reopening is valid.The Court distinguished this view by emphasizing the clarificatory nature of Explanation 3 and the necessity of a valid reopening as the foundation for jurisdiction. The Court noted that allowing the AO to proceed on unrelated grounds without valid reopening would defeat the purpose of procedural safeguards and the legislative intent behind Section 147 and 148. The Court found the reasoning in Jet Airways and allied decisions more consistent with the statutory scheme and principles of law.3. SIGNIFICANT HOLDINGSThe Court held that:'If upon the issuance of a notice under section 148(2), the Assessing Officer accepts the objections of the assessee and does not assess or reassess the income which was the basis of the notice, it would not be open to him to assess income under some other issue independently.'This principle was affirmed as the core legal position governing reassessment proceedings under Sections 147 and 148.The Court further clarified that Explanation 3 to Section 147 is clarificatory and does not expand the AO's powers beyond the statutory scheme. The power to reopen assessment is exceptional and must be strictly construed, requiring a valid foundation in recorded reasons. If the grounds for reopening fail, the AO loses jurisdiction to assess on other grounds not recorded.Accordingly, the Court dismissed the revenue's appeals and upheld the Tribunal's order quashing the reassessment order.