Reopening assessment under Section 147 cannot be used for review when original scrutiny already considered relevant aspects

Kerala HC held that reopening of assessment under Section 147 cannot be used for review purposes. The court found that the assessing officer had already considered the relevant aspects during original scrutiny assessment under Section 143, making the reopening merely a review rather than based on proper reasons to believe. Since mere change of opinion cannot justify invoking Section 147, the reopening was impermissible and the assessee's appeal was allowed.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

• Whether the reasons recorded by the assessing authority for reopening the assessment under Section 147 of the Income Tax Act are sufficient and valid to justify reassessment.
• Whether the reopening of assessment amounts to a mere change of opinion, which is impermissible under the law.
• Whether the assessing authority was required to pass a separate order on the objections submitted by the petitioner before proceeding with reassessment under Section 147.
• Whether the impugned reassessment order suffers from limitation under Section 153 of the Income Tax Act.
• Whether the petitioner was prejudiced by the composite order passed without a separate speaking order on objections.
• Whether the materials relied upon by the assessing authority, including survey under Section 133A, justify reopening the assessment.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reasons for Reopening Assessment under Section 147

The legal framework under Section 147 permits reopening of assessment if the assessing officer has reason to believe that income chargeable to tax has escaped assessment. The Court examined whether the reasons recorded (Ext.P5) fulfill this criterion.

The petitioner company had filed returns and undergone scrutiny assessment under Section 143(3), during which detailed queries were raised (Ext.P14) and responded to (Ext.P15). These queries covered the very issues cited as reasons for reopening, namely:

• Capitalization of self-constructed units and claim of depreciation;
• Depreciation on computer software;
• Recognition of income on work-in-progress of turnkey projects.

The Court observed that since these issues were raised and responded to during the original assessment, the assessing officer is presumed to have considered them. Reliance was placed on the judgment of the Bombay High Court in Marico Ltd, which was upheld by the Supreme Court, holding that when an assessing officer raises a query and the assessee responds, acceptance of the submission is presumed unless otherwise indicated.

The Court held that reopening the assessment on these grounds would amount to a review or change of opinion, which is impermissible under settled law. The Court reiterated the principle that Section 147 cannot be invoked for review of an assessment.

Requirement of Separate Speaking Order on Objections

The petitioner contended that the assessing authority erred by not passing a separate order on the objections submitted prior to reassessment. The learned Standing Counsel relied on a judgment of this Court in Palakkad District Co-operative Bank Ltd., which held that when a composite order is passed, absence of a separate order on objections is not fatal unless prejudice is shown.

The Court noted that the petitioner did not demonstrate any prejudice caused by the absence of a separate order. Hence, the Court concluded that the omission to pass a speaking order on objections is not a serious infraction in the present case.

Limitation under Section 153

The petitioner argued that the reassessment order dated 27.12.2010 (Ext.P12) was served only on 5.1.2011, and there is no evidence of dispatch before 31.12.2010, thus rendering the order barred by limitation.

The Court observed that there was no clarity or material on the date of dispatch, and the limitation contention was not raised in the writ petition but only in the reply affidavit. Consequently, the Court declined to consider the limitation issue, noting that the Department had no opportunity to address it.

Justification for Reopening Based on Survey and Impounded Documents

The Department relied on a survey conducted under Section 133A on 12.3.2010, which revealed excess depreciation claims and incorrect computation of estimated profits from turnkey projects, as well as improper depreciation on computer software.

The Court noted that these facts formed the basis for initiating proceedings under Section 147. However, since the petitioner had already furnished detailed explanations and documents during the original assessment, and these issues were known to the assessing authority, reopening was deemed to be a mere change of opinion.

Application of Law to Facts and Treatment of Competing Arguments

The Court applied the settled legal principle that reopening under Section 147 must be based on tangible material indicating escaped income and cannot be used to revisit issues already considered. The petitioner's submissions and documentary evidence during the original assessment were held to constitute sufficient disclosure.

The Department's argument that survey findings justified reopening was rejected on the ground that the same aspects had been previously scrutinized. The Court found no new material justifying reassessment.

The petitioner's contention regarding limitation was not entertained due to procedural default and lack of evidence. The absence of a separate order on objections was held to be non-prejudicial and therefore not fatal.

3. SIGNIFICANT HOLDINGS

"It is well settled that the power under Section 147 of the Income Tax Act cannot be invoked for a review of the assessment. Mere change of opinion cannot be a reason for the assessing officer to invoke Section 147."

"When a query was raised by the assessing officer during the assessment proceedings and the assessee had responded to that query, it is to be presumed that the assessing officer has accepted the assessee's submissions."

"The omission to pass a speaking order on receipt of objections from the assessee cannot be considered as fatal in this case, as no serious prejudice has been established."

"The reasons recorded for reopening the assessment do not disclose any new material which was not available to the assessing authority at the time of the original assessment. Hence, the reopening amounts to impermissible change of opinion."

The Court quashed the impugned reassessment order (Ext.P12) dated 27.12.2010, thereby holding that the reopening of assessment was unjustified and illegal.

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