2024 (9) TMI 1711 - HC - Income Tax

Reassessment proceedings under Section 148(2) must stick to originally recorded reasons, cannot be expanded later

PR. COMMISSIONER OF INCOME TAX (CENTRAL) -1 Versus M/s MIDEAST INTEGRATED STEELS LTD

The Delhi HC held that reassessment proceedings must be confined to items specifically mentioned in the AO's recorded reasons under Section 148(2) for ... Validity of reopening of assessment - whether AO is empowered to assess or reassess income in respect of any issue that has escaped assessment, notwithstanding the reasons recorded under sub-section (2) of Section 148 not alluding to or forming the basis for reopening the assessment? - HELD THAT:- The Income Tax Appellate Tribunal ultimately bore in consideration the decision of the Court in Ranbaxy Laboratories Ltd. [2011 (6) TMI 4 - DELHI HIGH COURT] to hold that the reassessment shall stand confined to items which had been mentioned or taken note of by the AO while forming the opinion that income had escaped assessment. Ranbaxy had principally held that unless additions are made on that score, no further additions would be sustained. As decided in ATS Infrastructure Limited [2024 (7) TMI 1441 - DELHI HIGH COURT] enunciation with respect to the indelible connection between Section 148A(b) and Section 148 A(d) are clearly not impacted by Explanation 3. As we read Sections 147 and 148, we come to the firm conclusion that the subject of validity of initiation of reassessment would have to be independently evaluated and cannot be confused with the power that could ultimately be available in the hands of the AO and which could be invoked once an assessment has been validly reopened. Explanation 3, or for that matter, the Explanation which presently forms part of Section 147, would come into play only once it is found that the power to reassess had been validly invoked and the formation of opinion entitled to be upheld in light of principles which are well settled. Explanations would be applicable to issues which may come to the notice of the AO in the course of proceedings of reassessment subject to the supervening requirement of the reassessment action itself having been validly initiated. Explanation 3, cannot consequently be read as enabling the AO to attempt to either deviate from the reasons originally recorded for initiating action u/s 147/148 of the Act nor can those Explanations be read as empowering the AO to improve upon, supplement or supplant the reasons which formed the bedrock for initiation of action under the aforenoted provisions. Decided against revenue. ISSUES PRESENTED and CONSIDEREDThe core legal issue presented and considered in this judgment revolves around the interpretation of Explanation 3 of Section 147 of the Income Tax Act, 1961. Specifically, the question is whether the Assessing Officer (AO) is empowered to assess or reassess income in respect of any issue that has escaped assessment, notwithstanding the reasons recorded under sub-section (2) of Section 148 not alluding to or forming the basis for reopening the assessment. This issue arose in the context of the AO not making any additions concerning issues that were the subject matter of the notices under Sections 147/148 of the Act.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework involves Sections 147 and 148 of the Income Tax Act, 1961, which govern the reassessment of income that has escaped assessment. Explanation 3 of Section 147 is pivotal in determining the scope of the AO's power to reassess income. The court also considered the precedent set in Ranbaxy Laboratories Ltd. v. Commissioner of Income Tax, which held that reassessment should be confined to items mentioned or noted by the AO while forming the opinion that income had escaped assessment.Court's Interpretation and ReasoningThe Court interpreted Section 147 as embodying the power to assess, reassess, and recompute income. Once the power to reassess is validly invoked, the original assessment ceases to exist, allowing the AO to undertake a fresh assessment of the entire income that may have escaped assessment. However, the Court emphasized that if no additions or modifications are warranted under the heads that formed the basis for the initiation of action under Section 148, the AO cannot make additions in respect of other items forming part of the original return.Key Evidence and FindingsThe Court found that the Tribunal correctly applied the principles established in Ranbaxy Laboratories Ltd., confining reassessment to items explicitly mentioned or considered by the AO in the original notice under Section 148. The Court noted that the Tribunal's decision aligned with the legal position that the AO's power to reassess is not unlimited and must adhere to the reasons initially recorded for reopening the assessment.Application of Law to FactsIn applying the law to the facts, the Court concluded that the AO's power to reassess is contingent upon the valid initiation of reassessment proceedings. Explanation 3 cannot be used to deviate from or supplement the original reasons recorded for initiating action under Sections 147/148. The Court held that the Tribunal's decision to confine the reassessment to the items mentioned in the original notice was correct and in line with established legal principles.Treatment of Competing ArgumentsThe Court acknowledged the competing interpretations of Explanation 3, as evidenced by the doubts expressed in Principal Commissioner of Income Tax v. Jakhotia Plastics Pvt. Ltd. However, the Court reaffirmed the legal position established in Ranbaxy Laboratories Ltd., emphasizing the need for a valid initiation of reassessment proceedings and the limitations on the AO's power to reassess income.ConclusionsThe Court concluded that the Tribunal was correct in its interpretation and application of the law, holding that the AO's power to reassess is limited to the issues that formed the basis for the original notice under Section 148. Explanation 3 does not empower the AO to reassess income beyond the scope of the original reasons recorded for reopening the assessment.SIGNIFICANT HOLDINGSThe Court held that the Tribunal's decision was correct, as it adhered to the legal principles established in Ranbaxy Laboratories Ltd. The core principle established is that the AO's power to reassess is limited to the issues that formed the basis for the original notice under Section 148, and Explanation 3 does not allow for deviation from or supplementation of those reasons.Final Determinations on Each IssueThe Court answered the question of law in the negative, affirming that the Tribunal correctly confined the reassessment to the items mentioned in the original notice under Section 148. The appeals were dismissed, upholding the Tribunal's decision and reinforcing the limitations on the AO's power to reassess income.