Taxable income escaped assessment must carry reasons for re-opening assessment.

1. The assessee had three manufacturing units - one located at place 'P' and two at place 'A'. The two manufacturing units of the assessee located at plce 'A' were entitled to the benefit of deduction under section 80-IA (of Income Tax Act, 1961)/80-IB.

2. The assessee filed its return of income claiming deduction under section 80-IA (of Income Tax Act, 1961)/80-IB in respect of two manufacturing units situated at place 'A'. Along with its return of income, the assessee had filed auditor certificates in respect of its two manufacturing units.

3. The assessee had also filed a note indicating the manner in which it had worked out its claim for deduction under section 80-IA (of Income Tax Act, 1961). The note indicated that the expenses were allocated between the three manufacturing units on basis of their turnover.

4. During the regular assessment proceedings, the Assessing Officer sought the information/clarification from assessee in respect of the working of its claim for deduction under section 80-IA (of Income Tax Act, 1961)/80-IB.

5. In response the assessee gave details of the manner in which the expenses had been allocated amongst the three manufacturing units.

6. The Assessing Officer thereupon passed an order under section 143(3) (of Income Tax Act, 1961) accepting the assessee's claim for deduction under section 80-IA (of Income Tax Act, 1961)/80-IB.

7. Subsequently, the impugned notice under section 148 (of Income Tax Act, 1961) was issued by the Assessing Officer, seeking to re-open the assessment by recording a reason that there was inappropriate allocation of expenses between the various units eligible and those not eligible for deduction under section 80-IA (of Income Tax Act, 1961).

The assessee thus filed instant writ petition challenging validity of reassessment proceedings.

On appeal HC held as under:

8. The law on re-opening of an assessment under the Act is fairly settled. An assessment once made, is final. The Assessing Officer can re-open an assessment only in accordance with the express provisions provided in section 147 (of Income Tax Act, 1961)/148. This is for the reason that there is a finality/sanctity attached to an assessment order. It is only on the Assessing Officer strictly satisfying the provisions of section 147 (of Income Tax Act, 1961) that it acquires jurisdiction to re-open an assessment. Section 147 (of Income Tax Act, 1961) clothes the Assessing Officer with jurisdiction to re-open an assessment on satisfaction of the following:

(a) The Assessing Officer must have reason to believe that

(b) Income chargeable to tax has escaped the assessment, and

9. In cases where the assessment sought to be reopened is beyond the period of four years from the end of the relevant assessment year, then an additional condition is to be satisfied, viz.: there must be failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment 8. Admittedly in this case, the impugned notice has been issued within a period of four years from the end of the relevant assessment year, i.e. assessment year 2002-03. In such cases, the Assessing Officer would be clothed with jurisdiction to issue a notice for re-opening of an assessment if he has reason to believe that income chargeable to tax has escaped the assessment. The requirement of failure to make true and full disclosure as provided in the proviso to section 147 (of Income Tax Act, 1961) is not to be satisfied for issuing of reopening notice within the period of four years from the end of the relevant assessment year. Thus, in the absence of cumulative satisfaction of reason to believe and in the absence of any income chargeable to tax escaping assessment, the Assessing Officer is not empowered with jurisdiction to reopen an assessment.

10. The powers to re-open an assessment is not a power to review an order of assessment. Further, a change of opinion on the part of the Assessing Officer in issuing the reopening notice, from the opinion formed on the very issue during regular assessment proceedings would result in the same ceasing to be a reason to believe.

11. Further, a notice for re-opening of an assessment would stand or fall on the basis of the reasons recorded at the time of issuing a notice for re-opening of an assessment. The reasons are required to be read as recorded by the Assessing Officer and the same cannot be improved upon either by substitution, addition or deletion.

12. Thus, the validity of a notice for re-opening of an assessment is to be examined on the basis of the reasons recorded at the time of issuing the notice for re-opening an assessment. The impugned notice cannot be supported any additional material which does not find a place in the reasons recorded at the time while issuing the notice.

13. In this case, the impugned notice has been issued within a period of four years from the end of the relevant assessment year. In such a case, the Assessing Officer acquires jurisdiction to issue the impugned notice, if he has reason to believe that income chargeable to tax has escaped assessment. The assessee submits that the objections taken by assessee that the impugned notice has been issued on mere change of opinion, has not been dealt with in the impugned order which results in the assessee's submission of change of opinion, being accepted. It must follow that there is no reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped assessment. This submission is not factually correct. The order has in fact, held that there is no change of opinion in issuing the impugned notice although not supported by reasons. Therefore, the contention of the petitioner that the petition be allowed only on the above basis cannot be accepted.

14. Similarly, the contention of revenue that merely because petitioner had not contested the fact of escapement of income in its objections to the reasons recorded, it must conclusively follow that the impugned notice is valid in law and this court should not interfere is not acceptable. The petitioner had in its objections questioned the jurisdiction of the Assessing Officer to issue the impugned notice on the ground that there was no reason to believe on the part of the Assessing Officer this on the basis of the impugned notice is a change of opinion. This is evident from the fact that the opinion on the issue of allocation of expenses for claiming deduction under section 80-IA (of Income Tax Act, 1961)/IB was formed during the regular assessment proceedings. As observed above, the jurisdiction to issue a notice is acquired on satisfaction of twin conditions, i.e., reason to believe and escapement of income tax in case of assessment being sought be opened within a period of less then four years from the end of assessment year. Besides, the issue of escapement of income chargeable to tax is also an issue on merits and may not in particular facts establish ex facie absence of jurisdiction.

15. In the present facts, the petitioner had along with its return of income filed its computation of income wherein claim for deduction under section 80-IA (of Income Tax Act, 1961)/IB was made. Besides the auditor's certificate as required under section 80-IA(8) (of Income Tax Act, 1961) to claim to deduction was also filed along with a note indicating the basis of allocation of expenditure amongst its three manufacturing units was also filed. These were all primary documents which would not normally escape examination during the scrutiny proceedings. This is also evident from the fact that during assessment proceedings, the Assessing Officer had called upon the petitioner to furnish details with regard to its claim for deduction under section 80-IA (of Income Tax Act, 1961)/IB including the method/manner of allocation of expenditure amongst its three manufacturing units.

16. The petitioner by its letter submitted various details of allocation of expenses supporting its note filed along with the return of income that the expenditure had been allocated actual basis, turn over basis and time spent basis amongst the three manufacturing units. The aforesaid allocation of expenses on different basis was on the basis of the nature of expenditure. The Assessing Officer was satisfied with the petitioner's response and consequently in the assessment order under section 143(3) (of Income Tax Act, 1961) accepted the petitioner's claim for deduction under section 80-IA (of Income Tax Act, 1961)/IB of Rs.2.08 crores. This establishes that an opinion was formed in respect of allocation of expenses amongst the three manufacturing units for deduction under section 80-IA (of Income Tax Act, 1961)/IB while passing an order of assessment.

17. Moreover in this case, it is evident from the letter addressed by the Assessing Officer to the petitioner containing the reasons recorded for issuing the impugned notice also records the fact that during the regular assessment proceedings, the petitioner has been asked to furnish details in support of the claim for deduction under section 80-IA (of Income Tax Act, 1961)/IB. The letter further records that the details sought for were furnished and it is now observed that there has been a disproportionate distribution of expenses between various units belonging to the petitioner for claiming deduction under section 80-IA (of Income Tax Act, 1961)/IB. This is a further indication of the fact that the Assessing Officer had during the regular assessment proceedings for assessment year 2002-03 sought information in respect of the allocation of expenses and the explanation offered by the petitioner was found to be satisfactory. This is evident from query and the petitioner's response to the same, explaining the manner of distribution of common expenses for delaying the process of claiming deduction under section 80-IA (of Income Tax Act, 1961)/IB. All this would indicate that Assessing Officer had formed an opinion while passing the assessment order.

18. Therefore, as there is a change of opinion in issuing the impugned notice having regard to the opinion formed while passing the assessment order under section 143(3) (of Income Tax Act, 1961), the Assessing Officer would cease to have any reason to believe. Moreover, the power to re-assess under section 147 (of Income Tax Act, 1961)/148 is not a power to review an order of assessment passed under section 143(3) (of Income Tax Act, 1961).

19. It is further submitted by the revenue that so far as letter issued by the Assessing Officer is concerned, same was of general nature and particulars furnished by the petitioner in response to the same are voluminous and, therefore, not indicative of any application of mind on this issue by the Assessing Officer.

20. It was noted from records that, the Assessing Officer had raised queries with regard to the allocation for expenditure between the three manufacturing units of the petitioner which could only be raised on consideration of the claim and consequently accepted on consideration of the reply. Thus, it is not a case where the Assessing Officer overlooked/ignored the material and/or the issue which now forms the basis of issuing the impugned notice for re-opening of the assessment order for assessment year 2002-03.

21. In was next contended by the revenue that in the present case, the impugned notice does not emanate from any change of opinion but on account of communication dated 15-1-2007 received by the Assessing Officer from Additional Commissioner who had assessed the petitioner to tax for the assessment year 2004-05. The aforesaid communication is not even referred to in the reasons recorded while issuing the impugned notice dated 14-3-2007. On the contrary, the communication dated 6-8-2007 which contains the reasons recorded at the time of issuing the impugned notice refers to the details furnished by the petitioner during the regular assessment proceedings and it is now observed therefrom that the allocation of common expenses between the three manufacturing units belonging to the petitioner is disproportionate.

22. As pointed out above, it is well settled that re-opening notice has to stand or fall on the basis of the reasons recorded at the time of issuing the notice for re-opening. It is not open to the Assessing Officer to improve upon the reasons recorded at the time of issuing the notice either by adding and/or substituting the reasons by affidavit or otherwise. The tangible material, i.e., letter dated 15-1- 2007 on which the revenue relies upon for issuing of the notice, could have undoubtedly been the basis for issuing the impugned notice even if the same has been obtained in assessment proceedings for a subsequent assessment year provided the same was the basis of the impugned notice and so recorded in the reasons in support of the impugned notice.

23. In these circumstances, the reliance by the revenue upon the letter dated 15-1-2007 from the Additional Commissioner cannot be read into the reasons recorded while issuing the impugned notice.

24. It was lastly contended by revenue that the impugned notice is only for re-assessment for assessment year 2002-03. At this stage, the revenue is not required to establish the case to the hilt, but only required to make out a prima facie case in support of its stand. There can be no dispute to the above proposition. It is submitted that during the course of re-assessment proceedings, the petitioner would have opportunities to satisfy the authorities that there has been no escapement of income and the allocation of the common expenses between the three manufacturing units for the purposes of claiming deduction under section 80-IA (of Income Tax Act, 1961)/IB is in accordance with law.

25. However, issue being examined is whether the Assessing Officer has jurisdiction to issue the re-opening notice. Once an assessment order is being passed, it has some sanctity. If the assessment order is to be disturbed, then the Assessing Officer must strictly satisfy the condition precedent as provided under section 147 (of Income Tax Act, 1961)/148 before he can issue a notice, seeking to re-open an assessment. In this case, as pointed out above, there has been a change of opinion on the part of the Assessing Officer in issuing a notice and, therefore, he has no reason to believe that income chargeable to tax has escaped assessment.

26. In these circumstances, the jurisdictional requirement for issuing a notice is not satisfied and, therefore, the impugned notice and the consequent order disposing of the objections, are not sustainable.

27. For the reasons indicated above, the impugned notice issued under section 148 (of Income Tax Act, 1961) is set aside. Petition allowed. [Para 22]

Case Referene-GKN Sinter Metals Ltd. v. Ms. Ramapriya Raghavan, Assistant Commissioner of Income-tax, Circle 2(1)

HIGH COURT OF BOMBAY