An order passed without discussion is liable for reopening.

EMA India vs. ACIT (Allahabad High Court)

In respect of AY 2000-01, the assessee filed a ROI. In the accompanying balance sheet it was disclosed that prior period expenditure of Rs. 5,41,850 was debited to the P&L A/c and that interest of Rs. 8,34,720 receivable from a particular party had not been accounted for as income. The AO passed an order u/s 143(3) in which he did not make any addition on account of the aforesaid two items. Subsequently (within four years), he issued a notice u/s 148 in which he took the view that income had escaped assessment as the prior period expenditure was not allowable as a deduction and the interest on advances was assessable. The assessee filed a writ petition on the ground that there being a disclosure of the material facts and the implied acceptance of the stand of the assessee vide the s. 143 (3) order, the reopening was based on a change of opinion. HELD, dismissing the Petition:



(i) Reassessment is permissible where the AO has passed an assessment order without any application of mind. If the order of assessment does not contain any discussion on a particular issue, the same may be held to have been rendered without any application of mind. On facts, as there was no discussion by the AO in the s. 143 (3) order about the prior period expenditure and the non-offering of interest income, there was no application of mind by the AO and he was entitled to reopen;




(ii) The judgement of the Full Bench of the Delhi High Court in CIT vs. Kelvinator of India Ltd. 256 ITR 1 where it was held that when an order u/s 143 (3) is passed, a presumption is raised that it has been passed on application of mind and that the Revenue cannot support reopening on the ground of non-application of mind because that would amount to giving a premium to an authority to take benefit of its own wrong cannot be followed as it is contrary to the law laid down by the Supreme Court in Kalyanji Mavji 102 ITR 286, Indian Eastern Newspaper Society 119 ITR 996 and A. L. A. Firm 189 ITR 285 where it was held that if the AO had not considered the material on record and subsequently came across it, the case fell within the scope of s. 147(b) and could be reopened. The Full Bench also did not consider the effect of Explanations 1 & 2 to s. 147;



(iii) If the reassessment is within 4 years, the fact that the assessee has made a disclosure of material facts is not a defense in view of Expl. 1;



(iv) The effect of Expl. 1 to s. 147 is that the assessee does not discharge his duty by merely producing the books of account or other evidence. He has to further bring to the notice of the Assessing Officer particular items in the books of account or portions of document which are relevant. The fact that from the books produced, the AO could have found out the truth does not preclude him from exercising the power to re-assess the escaped income;



(v) On facts, though the books of account including audit report, profit and loss account, balance sheet and other documents were filed before the AO at the time of passing of the s. 143 (3) order and it was stated in the balance sheet that the amount of Rs. 8, 34,720 was not credited in the profit and loss account, still it does not amount to disclosure under Expl. 1 to s. 147 since the same could have been discovered by the AO only with due diligence.


Note: Kelvinator 256 ITR 1 (Del) (FB) has been followed by the Bombay High in Asian Paints 308 ITR 195.


See Also Idea Cellular 301 ITR 407 (Bom), Hari Iron 263 ITR 437 (P&H) and Eicher 294 ITR 310 (Bom) where it was held that the fact that there is no discussion in the assessment order does not mean there is no application of mind.

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AO deemed to have applied his mind if facts are on record and reopening u/s 147 on change of opinion is not permissible even within 4 years

In CIT vs. Kelvinator of India Ltd. 256 ITR 1 the Full Bench of the Delhi High Court was considering a case of reopening u/s 147 within 4 years from the end of the assessment year. The Court held that when a regular order of assessment is passed in terms of section 143 (3) of the Act, a presumption can be raised that such an order has been passed on application of mind. It was held that if it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving premium to an authority exercising quasi-judicial function to take benefit of its own wrong. It was held that section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceedings upon a mere change of opinion. On appeal by the department to the Supreme Court, HELD dismissing the appeal:



Though the power to reopen under the amended s. 147 is much wider, one needs to give a schematic interpretation to the words “reason to believe” failing which s. 147 would give arbitrary powers to the AO to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. One must also keep in mind the conceptual difference between power to review and power to re-assess. The AO has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the AO. Hence, after 1.4.1989, the AO has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. This is supported by Circular No.549 dated 31.10.1989 which clarified that the words “reason to believe” did not mean a change of opinion.


Note: The judgements of the Bombay High Court in Asteroid Trading 308 ITR 190 & Asian Paints 308 ITR 195 are impliedly approved while that of the Allahabad High Court in EMA India 30 DTR (All) 82 (which had dissented from the Full Bench judgement in Kelvinator) is impliedly overruled. See Also Idea Cellular 301 ITR 407 (Bom), Hari Iron 263 ITR 437 (P&H) and Eicher 294 ITR 310 (Del) where it was held that the fact that there is no discussion in the assessment order does not mean there is no application of mind.

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Reopening u/s 147 not valid if there is no finding regarding failure to disclose material facts

In AY 2002-2003, the assessee claimed deduction u/s 80-IB (10) of Rs. 3.85 crs which was allowed by the AO vide s. 143 (3) order. The assessment was reopened u/s 147 after the expiry of four years from the end of the assessment year on the ground that the claim for deduction u/s 80IB (10) included ineligible items of other income such ’society deposit’, ’stilt parking’ and sundry credit balances and that income had thereby escaped assessment. The assessee filed a writ petition to challenge the s. 148 notice. HELD upholding the challenge:



(i) Under the proviso to s. 147, an assessment made u/s 143 (3) can be reopened after the expiry of 4 years from the end of the assessment year only if there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment;



(ii) On facts, the assessee had furnished details of the claim u/s 80IB (10) including the break up of the other income. Even the recorded reasons showed that the inference that the income has escaped assessment was based on the disclosure made by the assessee itself. Further, there was no finding in the recorded reasons that that there was a failure to disclose necessary facts;



(iii) Accordingly, the condition precedent to a valid exercise of the power to reopen the assessment was absent. An exceptional power has been conferred upon the Revenue to reopen an assessment after a lapse of four years and the conditions prescribed by the statute for the exercise of such a power must be strictly fulfilled and in their absence, the exercise of power would not be sustainable in law.

Note: In Kelvinator (Supreme Court) it was held that reassessment even within 4 years had to based on “tangible material” and could not be based on ‘change of opinion”

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s.153A does not authorize de novo assessment. Non-pending assessments do not abate. Additions must be confined to search material

S. 153A provides that where a search is initiated u/s 132 the AO shall “assess or reassess the total income of six assessment years immediately preceding the assessment year” relevant to the previous year in which the search is conducted or requisition is made. The 1st Proviso states that the AO shall “assess or reassess the total income in respect of each assessment year falling within such six assessment years” while the 2nd Proviso states that the assessment or reassessment relating to the said six assessment years “pending” on the date of initiation of the search under section 132 shall “abate“. In the assessee’s case, search action was initiated and assessments under s. 153A were framed for six assessment years making various additions. The assessee claimed that the additions were not tenable as regular returns had been filed where the particulars relating to the additions had been disclosed and the same had been accepted u/s 143 (1) and also that no material had been found during the search to justify the additions. The revenue claimed that the effect of the Provisos to s. 153A was that all assessments abate and there had to be a de novo assessment in which the AO was not confined to the material found during the search. HELD rejecting the claim of the Revenue:



(i) S. 153A does not authorize the making of a de novo assessment. While under the 1st Proviso, the AO is empowered to frame assessment for six years, under the 2nd Proviso, only the assessments which are pending on the date of initiation of search abate. The effect is that completed assessments do not abate. There can be two assessments for the same assessment year. Assessments which are not pending before the AO on the date of search but are pending before an appellate authority will survive.



(ii) An assessment can be said to be “pending” only if the AO is statutorily required to do something further. If a s. 143 (2) notice has been issued, the assessment is pending. However, the assessment in respect of a return processed u/s 143 (1) is not “pending” because the AO is not required to do anything further about such a return.



(iii) The power given by the 1st Proviso to “assess” income for six assessment years has to be confined to the undisclosed income unearthed during search and cannot include items which are disclosed in the original assessment proceedings.



(iv) On facts, as the returns had been processed u/s 143 (1), the assessments were not “pending” and as no material was found during the search, the additions could not be sustained.

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Dispute Resolution Panel (DRP) is an optional remedy

F. No. 142/22/2009-TPL (Pt. II)
Central Board of Direct Taxes,
Department of Revenue,
Ministry of Finance,
Government of India,
New Delhi 110001

20th January 2010

The Director General of Income-tax (International Taxation),
Room No. 406, Drum Shape Building,
I. P. Estate, Delhi.

Subject: Clarification regarding filing of Objections before Dispute Resolution Panel (DRP) – reg

A new section 144C was inserted in the Income-tax Act, 1961 vide Finance (No. 2) Act of 2009. Section 144C provides for constitution of a Dispute Resolution Panel (DRP) to decide cases of an eligible assessee as defined in sub-section (15) of section 144C of the Income-tax Act. The Dispute Resolution Panel Rules were notified vide SO No. 2958 (E) dated 20th November 2009.

2. A query has been raised as to whether it is compulsory for an assessee to file an objection before the DRP or whether he can choose to file an appeal through the normal appellate channel of CIT (Appeals).

3. The provisions of sub-section (2) to sub-section (5) of section 144C are quite clear that a choice has been given to the assessee either to go before the DRP or to prefer the normal appellate channel. It is again clarified that it is the choice of the assessee whether to file an objection before the Dispute Resolution panel against the draft assessment order or not to exercise this option and file an appeal later before CIT (Appeals) against the assessment order passed by the Assessing Officer.

4. This position may also be brought to the notice of taxpayers at large.

C. S. Kahlon,
Member (L&C).