The power of reassessment has been provided under the Act to safeguard the interest of the revenue to re-assess the cases wherein there is escapement of income which could not be traced out at the time of regular assessment.
Within the ambit of Re-assessment, provisions of section 147 to 153 of the Income Tax Act are considered. Thus Re-assessment is a power given to the AO to assess the income of the assessee from a scratch on a “reason to believe” that income has escaped assessment.
Basic section for Re-assessment-section 147-“Income Escaping Assessment”.
Where the AO has the “reason to believe” that any income chargeable to tax has escaped assessment for any assessment year he may assess or re-assess such income or any other income chargeable to tax. The provision of section 147 laid down the following cases wherein it is deemed that income has escaped assessment,
When there can be escapement of income?
|Where no return has been furnished by the assessee.||If the AO has the reason to believe that total income or total income of any other person in respect of which the assessee is assessable has exceeded the maximum amount chargeable to tax.|
|Where Return of income has been furnished.||If the AO has the reason to believe that the assessee has claimed excessive loss, deduction, allowance or relief.|
|Where the assessee has to file a Report u/s 92E in respect of an international transaction.||If the AO has the reason to believe that the assessee has entered into an international transaction but then also he has not filed report u/s 92E|
|Where assessment has been carried out in case of the assessee.||If the AO has the reason to believe that:|
|Where the Assessee is in possession of a foreign asset (including financial interest in any entity) then it is his responsibility and also a requirement under the act to disclose the same in the return of income.||If the AO has the reason to believe that though the assessee is in possession of a foreign asset but he has not disclosed the same.|
Further, according to provision of section 147 when any income chargeable to tax is subject matter of appeal, reference or revision then such income cannot be reassessed.
Here, it is important to note is that within the ambit of section 147 it is not only Re-assessment that is covered but also normal assessment i.e. assessing the income of assessee for the first time, as the wordings of section goes like ”the AO may assess or re-assess such income or any other income chargeable to tax”.
Normally the income of the assessee is assessed for the first time U/s.143 (3) of the Act if his case is selected for regular assessment by issuance of notice u/s 143(2) of the Act. However if the case of the assesse is not selected for regular assessment, the provision of section 147 can be invoked by the AO provided it is noticed by him that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return of income.
Important words/phrases (Reason to Believe):
The AO should have Reason to Believe i.e. should have justification and a strong belief for initiating the proceedings under the act that the income chargeable to tax has escaped assessment. Further Reason to believe is different from Reason to suspect and Change of Opinion. Reason to suspect is just that the AO thinks due to some reasons there is a possibility of escapement of income, he has a suspicion but he does not form a strong base for his reasons as to why he thinks that these reasons are valid. Mere suspicion cannot be a reason for him to believe that income has escaped assessment. If the AO is able to convert his suspicion into a strong belief but the belief so formed is based on the facts of original assessment (reasons on the basis of which additions in original assessment were made) then they are not valid reasons because now he is looking the same facts from a different angle, from a different point of view. This is mere Change of Opinion which cannot be the base to record reasons u/s 148(2).The expression 'change of opinion' means formation of opinion and a change thereof. In the context of section 147 it implies that the AO should have formed an opinion at the first instance, i.e. at the time of proceedings of original assessment and now by initiation of the reassessment proceeding, the Assessing Officer proposes or wants to take a different view of his opinion under original assessment.This can be relied upon on the basis of judgment held in case of Satnam Overseas vs. Addl. Commissioner of Income Tax,(2010) 329 ITR 237 (Delhi) stating that if AO fails to do what he ought to do during original assessment proceedings and seeks that to be a reason for initiation of reassessment proceedings than it cannot be a valid ground for invoking section 147. In the instance case the only reason given for seeking reopening of the assessment was suppression of sale, on account of not considering the average price of closing stock in valuation of sales. Clearly, there was no new material which had come to the notice of the Assessing Officer which caused him to seek reopening of the assessment. Thus, the new logic which had been formed by the Assessing Officer for seeking reopening of the assessment were nothing but a change of opinion and a new approach to the existing facts and materials and thus it was held that initiation of reassessment proceedings were invalid.
This also holds true even if the AO at the time of original assessment and at the time of initiation of proceedings u/s 147 are different because AO under whose jurisdiction the proceedings of 147 are, is taking a different view from that of the AO under whose jurisdiction the proceedings of 143(3) were completed, this out and out Change of Opinion as the preceding AO has already applied his mind and considered all the material facts while passing the order and now the succeeding AO is just looking that material from a different point of view. The same view is taken in case of H. K. Buildcon Ltd. v. Income-tax Officer (2011) 339 ITR 535 (Guj.).
The AO should have such information/material after the original assessment into his possession on the basis of which he can draw a bonafide belief that income has escaped assessment. He should be able to form a Link between the material in possession and belief derived. When the reasons are recorded u/s 148(2) it should clearly bring out the link of reasoning between the material and belief of escapement and prima-facie belief that income has escaped assessment.
Many a times the reason for re-opening of the cases is Audit Objection i.e. the objections raised by the Auditor. It is not the AO who has the reason to believe that income has escaped assessment but the Auditor has the same. It is on their direction that such matters come to the notice of AO and then he forms a reason to believe. If the AO feels that there is no ground to form reasons, he may before rejecting the objection, support his contention by gathering further information u/s 133(6) to verify the Audit Objection and try to form reason to believe on the basis of such new information gathered.
Explanation 3 to Section 147:
The bare text of the explanation is quoted below:
“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.”
Here, the AO may assess or re-assess “other issues” which comes to his notice during the re-assessment proceeding and make additions relating to it only if the AO has assessed or re-assessed that income on the basis of which reason to believe for escapement has been made. If the AO has not made any additions relating to income which forms the part of reasons recorded and instead makes addition on some other issues than the same cannot be within the meaning of explanation 3. Here stress is given on words “and also” which is interpreted as cumulative and not independent i.e. if the AO has assessed the income which forms part of reasons recorded and makes addition relating to it, then he can go for making additions relating to any other issue, as laid down in the judgment of Ranbaxy Laboratories Ltd. v. CIT (2011) 336 ITR 136 (Delhi).
Issue and Validity of Notice: (Section 148 and 149):
Notice for re-assessment and filing of return u/s 148 has to be issued within four years from the end of the relevant assessment year for which re-assessment has to be made subject to the following:
Period to be considered
|Where any income chargeable to tax has escaped assessment due to the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment||Notice has to be issued within 6 years from the end of the assessment year.|
|Where the income that has escaped assessment amounts to or is likely to amount to Rs 1,00,000 or more.||Notice has to be issued within 6 years from the end of the assessment year.|
|Where the income that has escaped assessment is pertaining to any foreign asset of the assessee.||Notice has to be issued within 16 years from the end of the assessment year.|
Here it is important to note that Re-assessment proceedings may be invoked more than once u/s 147 in respect of the same assessee for the same assessment year within the time frame as mentioned above.
Objection to Reassessment:
An assessee may raise objection on the reasons formed by the AO. The AO is to take note of these objections and has to dispose of the same before commencing reassessment by passing a “Speaking Order”. In GKN Driveshafts (India) Limited Vs. ITO, (2003) 259 ITR19 (SC), the Supreme Court held that-
“When a notice under section 148 is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notice. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order”
Time limit for completion:
The Reassessment proceedings have to be completed within one year from the end of the financial year in which notice u/s 148 is served as laid down in section 153(2). On completion of re-assessment the order is passed u/s 147 and if re-assessment is after regular assessment u/s 143(3) than order is passed u/s 147 r.w.s. 143(3).
Thus, if proper actions available to the Department are taken to collect information and are properly used into the proper recording of reasons, and care is taken to strictly follow all the procedures and time-frames, there is no reason why the re-opened assessments, in genuine cases, would not be in the favour of Revenue.