GST is just round the corner, with the Government targeting 1st April, 2017 as the official kick-in date. Finance Ministry seems to be working over time to get all the blocks in place before the new tax is rolled out. A draft law is already in public domain. To understand GST, therefore, one needs to understand the concept behind the tax and the levy as envisaged by the Model GST law:

Concept

GST or Goods and Services Tax is an value-added tax to be levied on supply of goods and services and is directed towards taxing final consumption. As an indirect tax, it is something which would be levied on the supplier who will pass on the duty incidence to the recipient of the supply. Tax which is collected from me by the one who sold goods or provided services to me can ordinarily be set-off against the tax which is payable by me on the goods and services which I supply. The tax paid on earlier transaction is taken as input tax credit or set-off against the tax payable on the next transaction. Reduced to an example:

“If A sells goods worth &#8377 100 (basic price) to B on which GST leviable is 10% (say), then A will charge &#8377 110 to B. A will keep &#8377 100 with himself and remit &#8377 10 (GST collected from B) to the Government. When B sells those goods to C for &#8377 140 (basic price), the total GST-inclusive price will be &#8377 154 [&#8377 140 (Basic Price) + &#8377 14 (GST 10%)]. B will then take set-off of &#8377 10 which was the GST collected from him on the earlier transaction of purchase and pay only &#8377 4 as tax.”

Our GST laws are inspired by the VAT and GST laws of a host of countries, but more particularly by that of New Zealand. The New Zealand GST system has long been hailed as a more broad-based, efficient and neutral system than other comparable systems. The broad sweep of the levy, narrow list of exemptions and an efficient set-off mechanism ensures that business does not bear the tax and everything is passed on to the consumer as far as possible. As the Supreme Court of New Zealand has said in Glenharrow Holdings (NZSC 116 SC 59) “Because of the credit-offset mechanism for inputs, sales between registered persons are tax neutral. So are sales between unregistered persons because the regime does not apply to them”

Structure

Now, GST in India will be levied under Article 246A of the Constitution. The Union will levy its own Central GST (“CGST” ) applicable on all “intra-State”  supplies throughout India. The various States will levy their own State GST (“SGST” ) which will cover all “intra-State”  supplies in the State. On all inter-State supplies, the Union can levy Integrated GST (“IGST” ) and the States are constitutionally barred from taxing inter-State transactions.

What is this “intra-state”  and “inter-state”  supply? These concepts have been explained in the the Model IGST law. Very broadly, an “intra-state”  supply is a supply which originates as well as is consumed within a state. An “inter-state”  supply is a supply which originates in one State, but is consumed in some other State. Under our Constitution, Parliament has the sole authority to determine which sale is “intra-state”  and which sale is “inter-state” , “in course of import”  or “in course of export”. This has been done to avoid the pre-Constitution fiasco where Provinces would try to tax a sale based on any remote nexus that it enjoyed with that Province. That situation was recounted vividly by the Supreme Court in the celebrated Bengal Immunity Company case [(1955) 2 SCR 605]

“In exercise of the legislative power conferred upon them in substantially similar terms by the Government of India Act, 1935, the Provincial Legislatures enacted sales-tax laws for their respective Provinces, acting on the principle of territorial nexus referred to above; that is to say, they picked out one or more of the ingredients constituting a sale and made them the basis of their sales-tax legislation. Assam and Bengal made among other things the actual existence of the goods in the Province at the time of the contract of sale the test of taxability. In Bihar the production or manufacture of the goods in the Province was made an additional ground. A net of the widest range perhaps was laid in Central Provinces and Berar where it was sufficient if the goods were actually ‘found’ in the Province at any time after the contract of sale or purchase in respect thereof was made. Whether the territorial nexus put forward as the basis of the taxing power in each case would be sustained as sufficient was a matter of doubt not having been tested in a Court of law. And such claims to taxing power led to multiple taxation of the same transaction by different Provinces and cumulation of the burden falling ultimately on the consuming public. This situation posed to the Constitution makers the problem of restricting the taxing power on sales or purchases involving inter-State elements, and alleviating the tax burden on the consumer”.

The GST regime also seeks to ensure that only one State can tax a supply as far as SGST is concerned. To that end, only one legislature, that is Parliament, controls the law defining inter-State supplies.

“Goods”

GST is levied on “supply of goods and services”  within the State (Section 7 Model CGST law). “Goods”  and “services”  are defined in the Model law itself. “Goods”  are defined in Section 2(48) as follows:

“2(48) “goods”  means every kind of movable property other than actionable claim and money but not includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply;

Explanation: For the purpose of this clause, the term ‘movable’ property shall not include any intangible property”

Section 2(48) borrows the definition of “goods”  from the Sale of Goods Act, 1930 and thus also includes “securities”. This is in contrast with similar definition under the Sales tax laws which used the Sale of Goods Act, 1930 definition but consciously excluded “securities”. Securities were of course kept out since the policy was that transactions in securities should not be subjected to State laws to avoid burdening the markets. This policy has now been departed with.

The definition of goods and services, is important since primarily the place and time of supply rules differ for goods and services. The inclusion of securities in the definition of goods will create problems in case of demat securities when place of supply rules are sought to be applied to it. The GST place of supply rules for goods follow the old “movement”  and “location”  pattern of sales tax. Thus, where goods do not move, the place of supply is where the goods are located at the time of delivery and that State gets the right to tax. In case of demat securities, this is bound to cause problems.

The “movement”  and “location”  conundrum under sales tax has also led to a welcome change in the GST regime. All intangible property has been put outside the remit of the term “goods”  and within “services”. Sales Tax Laws also allowed states to tax intra-State sales and Parliament would tax inter-State sales. An inter-state sale, under sales tax, would ordinarily arise if the sale occasioned “movement”  of goods etc. across state frontiers. If there was no movement across state frontiers, then the state where goods are located would get the right to tax. Inter-State sales carried a much lesser rate of tax and import and export were not subject to sales tax. The criteria to determine if a sale is in course of import or export also followed the “movement”  pattern similar to inter-State sales. In cases of intangibles like trademark, copyright and patent, the claim of inter-State, import or export sale was not accepted by the sales tax authorities in some States like Maharashtra on the basis that a trademark, a copyright or a patent could not move and therefore even if a assignment takes place anywhere in the world, the same was liable to be taxed in India. So far so good. A further question would then arise as to which State can tax the sale, a copyright, patent and trademark being present throughout India at the same time and whether all 29 states can tax the entire sale consideration or whether the sale consideration was to be apportioned and what should be the basis of such apportionment. We will thankfully be spared this nightmare under the GST law. All intangible property will be classified as a service whose place of supply rules are better suited for things like copyright, patent and trademark.

“Services”

Moving on, “services”  is defined in section 2(88) as:

“2(88) “services”  means anything other than goods

Explanation: Services include intangible property and actionable claim but does include money”

Services is defined in a rather expansive manner. The definition of service “anything other than goods”  has been borrowed from the New Zealand GST law. But as held in New Zealand in Case S65 (1996) 17 NZTC 7408, howsoever wide the definition of service may seem, it has its limitation. In that case, payments made under an order of a disciplinary tribunal to reimburse the costs and expenses of the winning party were held not to be consideration for supply of any “services”  since ordinarily a supply of services has to be for the benefit of the recipient and not against him.

The definitions of “goods”  as well as “services”  exclude “money”. It is one of the fundamental principles of all VAT/GST jurisdictions that supply of money is not to be taxed. This exclusion makes sure that when monetary consideration is supplied for the supply of goods and services, that consideration itself is not to be taxed as supply of money.

The definitions of “goods”  excludes “actionable claim”. Sales tax law also excluded actionable claim from definition of “goods”. But the definition of “services” here covers “actionable claim”  specifically, whereas the service tax law excluded “actionable claim”  from definition of “services”  in that law. Actionable claim is defined in Section 2(1) of the Model CGST law. Assignment of a debt is thus a service, debt being an actionable claim.

There is one more snag in the definition of “service”. It seems wide enough to cover immovable property even though we have been always told that real estate will be kept outside the scope of GST. I expect some clarification one way or the other from the Empowered Committee on this in the coming weeks.

“Business”

Before we proceed to the meaning of the term “supply” , it is important to go through the definition of business. All supplies have not been brought to tax under this Act, only those supplies which are “in the course of or furtherance of business”  are taxed.

“Business”  is defined in Section 2(17) of the Model CGST law as:

“(17) “business”  includes –

(a) any trade, commerce, manufacture, profession, vocation or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any transaction in connection with or incidental or ancillary to (a) above;

(c) any transaction in the nature of (a) above, whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital assets and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members, as the case may be;

(f) admission, for a consideration, of persons to any premises; and

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation.”

“Business”  under this Act includes trade, commerce, manufacture, vocation, profession as well as any other similar activity. Sub-clause (a) makes pecuniary benefit irrelevant to the enquiry. “Pecuniary”  is anything which is money or whose value can be expressed in monetary terms. The concept of pecuniary benefit is similar to that of “profit motive”  in income tax and sales tax. Just like sales tax, “profit motive”  has been made irrelevant even here.

A transaction which is incidental or ancillary to a trade, commerce, manufacture, profession, vocation or other similar activity will be covered by sub-clause (b). Similarly, an isolated transaction which is in nature of trade, commerce, manufacture, profession, vocation or any other similar activity will be covered by sub-clause (c). In cases covered by sub-clause (b) and (c), pecuniary benefit will again be irrelevant due to the reference to sub- clause (a).

Sub-clauses (d) to (g) deal with special situations which otherwise may not have been considered business.

“Supply”

Now, the definition of “supply” , which is exclusively dealt with by Section 3, says:

“3. Meaning and scope of supply

(1) Supply includes

(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and

(c) a supply specified in Schedule I, made or agreed to be made without a consideration.

(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

(2A) Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

(3) Subject to sub-section (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as—

(i) a supply of goods and not as a supply of services; or

(ii) a supply of services and not as a supply of goods; or

(iii) neither a supply of goods nor a supply of services.

(4) Notwithstanding anything contained in sub-section (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.

All forms of supply are covered by sub-clause (1)(a), whether sale, barter, exchange, licence, rental, lease or disposal. The tax is on “supplies of goods and services”  which are “made for consideration”. The “supply for consideration”  formula is also used in the EU VAT directive, New Zealand, Australian and Canadian GST laws. “Supply for consideration”  postulates a link between “supply”  and “consideration”  which is a sufficient nexus as opposed to remote, imaginary or fantastic nexus.

Sub-clause (b) declares importation of services as “supply”. For importation of services to be treated as supply, it is not necessary that the supply has to be for consideration or that it has to be in course of or furtherance of business.

Schedule I supplies are deemed to be supplies irrespective of whether the same are made or agreed to be made for consideration. Schedule I lists the following supplies:

“SCHEDULE I

1. Permanent transfer/disposal of business assets

2. Temporary application of business assets to a private or non-business use

3. Services put to a private or non-business use

4. Assets retained after de-registration

5. Supply of goods and/or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business

Provided that the supply of goods by a registered taxable person to a job-worker in terms of section 43A shall not be treated as supply of goods.”

Clause 5 of this Schedule I should be of some interest, because it makes the requirement of consideration irrelevant for all supplies. This Schedule I has been borrowed from the UK VAT Act, but in the UK the requirement of consideration is the norm and the Government has to specifically notify a supply for the purpose of taking away the requirement of consideration. As such, clause 5 conflicts directly with the provisions of section 3(1)(a).

Sub-clause (2) of section 3 speaks of a Schedule II which classifies a supply as either a supply of goods or of services. This would be important since the place and time of supply rules for goods as well as services differ.

Sub-clause (3) empowers the Central Government (State Government in case of SGST) to notify whether a particular supply is a supply of goods or services or neither.

“Consideration”

“Consideration”  which is defined in Section 2(28) of the Model CGST law:

“(28) “consideration”  in relation to the supply of goods and/or services to any person, includes

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods and/or services, whether by the said person or by any other person;

(b) the monetary value of any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of goods and/or services, whether by the said person or by any other person:

Provided that a deposit, whether refundable or not, given in respect of the supply of goods and/or services shall not be considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply.”

Consideration is very widely defined. It can be either monetary or non-monetary in form. Apart from payments, consideration can take the form of an act or forbearance (Forbearance here would mean a party refraining from exercising their rights for consideration). It is not necessary that consideration be provided voluntarily. The consideration has to be “in respect of, in response to, or for the inducement of”  a supply. These words, borrowed from New Zealand, have been held there to imply that some binding obligation (even if not enforceable in Court) is created between the supplier and the recipient and the the obligations of supply and consideration are reciprocal in nature.

Consideration can move from the supply recipient or “any other person”. Thus third party consideration is sufficient consideration.

Proviso to Section 2(28) of the Model GST law speaks about deposits which are given in respect of supply of goods and services. Such deposits, whether refundable or not, are not to be treated as consideration till the supplier applies them as consideration for the supply.

1. Introduction

The provisions of Section 271(1) providing for penalty on concealment of Income and/or furnishing inaccurate particulars of Income has been in the statute book for more than 56 years. Major legal issues arising in penalty proceedings have to a greater extent been settled and practically it was this settled law which had to be applied to the facts of each case. Yet due to almost automatic initiation and consequent levy of penalty by Assessing Officers for additions or disallowances made under scrutiny assessment had given rise to proliferation of litigation. In CIT v. Reliance Petro Products 322 ITR 158, the Supreme Court stated: “If we accept the contention of the revenue then in case of every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the legislature”.

Hence in view of the fact that several legal issues stood concluded and in order to cut wasteful litigation and also infuse a sense of responsibility and accountability both upon the tax-payer and the revenue the Income Tax Simplification Committee headed by Justice
R. V. Easwar in the year 2015 recommended that the scope of Section 273B should be suitably enlarged to provide that penalty for concealment of income or furnishing inaccurate particulars thereof will not be imposed where any addition or disallowance is made without any evidence or in a routine manner or on estimate and in cases where the Assessing Officer takes a view which is different from the bona fide view adopted by the assessee on any issue involving the interpretation of any provision of the Income- tax Act or any other law in force and which is supported by any judicial ruling.

However, instead of implementing the recommendation, the Finance Act, 2016 effectively replaces Section 271 by inserting a new Section 270A under Chapter XXI which provides for penalty on under-reporting of income and misreporting of income. Hence, from AY 2017-18 there will be no penalty for concealment of income or furnishing inaccurate particulars of income u/s. 271(1)(c) but there will be penalty for under-reporting of income and misreporting of income. According to the memorandum to the Finance Bill this amendment is done in order to rationalise and bring objectivity, certainty and clarity in the penalty provisions.

Whether the new provisions achieve the desired object or it is simply a case of unsettling settled laws resulting in more litigation or it is just an old wine in new bottle will be unearthed as we look at the provisions and analyse them hereinafter.

2. Scheme of Section 270A

Under the new section, the cases for levying penalty have been bifurcated as under-reporting of income and misreporting of income. Provisions of the section are explained hereunder:

A. The AO/CIT(A)/CIT/ Pr. CIT may, during the course of any proceedings under this Act, may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any on the unreported income. [Sub-section (1)]

It may be noted that the Finance Bill did not contain the phrase “during the course of any proceedings under this Act”. This led to the issue whether penalty proceedings can now be initiated after the completion of the assessment proceedings or independent of assessment proceedings or as under Section 271 they will have to be initiated during the course of assessment proceedings itself. The addition of this phrase has settled this issue. Further implications of this phrase are analysed in later portion of this article.

B. As per sub-Section (2), in following cases a person shall be considered to have under-reported his income:

In case of normal assessment

(i) The income assessed is greater than the income determined in the return processed under clause (a) of sub-Section (1) of section 143;

(ii) Where no return of income has been furnished, the income assessed is greater than the maximum amount not chargeable to tax;

In case of reassessment

(iii) The income reassessed is greater than the income assessed or reassessed immediately before such re-assessment;

In case where income is assessed under 115JB/ 115JC.[MAT/AMT]

(iv) The amount of deemed total income assessed or reassessed as per MAT/AMT is greater than the deemed total income determined u/s.143(1)(a)

(v) Where no return of income has been filed, the amount of deemed total income assessed as per MAT/AMT is greater than the maximum amount not chargeable to tax,;

(vi) The amount of deemed total income reassessed as per the provisions of section MAT/AMT is greater than the deemed total income assessed or reassessed immediately before such reassessment. [This provision was not there in the Finance Bill.]

In case where returned loss is reduced or converted into income

(vii) The income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

Thus, essentially under-reported income will not cover the difference between returned income and income determined u/s 143(1)(a) and consequently no penalty will be levied on the same. It would be important to note that From AY 2017-18 apart from (i) arithmetical error. and (ii) incorrect claim apparent from the return following adjustments will also form part of S.143(1)(a):

(i) Disallowance of set off of loss where return is filed beyond due date.

(ii) Disallowance of deduction where return is filed beyond due date.

(iii) Form 26AS or Form 16A or Form 16 adjustments.

C. Amount of under-reported income or computation of under-reported income. [Sub-section(3)]

In a case where return is furnished and assessment is made for the first time. [Eg.- (Assessment order u/s 143(3)]	The amount of under reported income in case of all persons shall be the difference between the assessed income and the income determined under section 143(1)(a). Thus adjustments made while determining income u/s 143(1)(a) will not be considered as under-reported Income.
In a case where no return has been furnished and the income has been assessed for the first time.	The amount of under-reported income is proposed to be: For a company, firm or local authority, the assessed income; For a person other than company, firm or local authority, the difference between the assessed income and the maximum amount not chargeable to tax.
In case of any person, where income is not assessed for the first time. [ Eg- Order u/s 147 r/w 143(3), etc.]	The amount of under reported income shall be the difference between the income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order. As per Explanation (a) to sub-section (3) “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated. Hence preceding order could be an order u/s 143(3), 147, 254 r.w 143(3), 263 r.w. 143(3) etc.
Where under reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC,	The amount of total under reported income shall be determined in accordance with the following formula- (A – B) + (C – D) where, A = Income assessed as per normal provision. B = Income assessed as per normal provision (-) Under reported Income C = the total income assessed as per the provisions contained in section 115JB or section 115JC; D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under reported income. However, where the amount of under reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D. [A very common example will be disallowance u/s 14A]
Where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income.	The amount of under reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed. Here, due to the use of the phrase “loss claimed” an issue will arise whether under-reported income will be the difference between returned loss and assessed income/loss or it will be difference between loss determined u/s 143(1)(a) and assessed income /loss. This issue is explained in the illustration given hereinafter.

D. Exclusion from under-reported Income i.e. the under-reported income for the purposes of section 270A shall not include (Sub-section (6)]

Explanation is offered

a) Where the assessee offers an explanation and the income-tax authority is satisfied that the explanation is bona fide
and all the material facts have been disclosed;

[This provision is substantially similar to Explanation B to s.271(1)(c).]

Estimated Income

b) Where such under-reported income is determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the assessing authority, but the method employed is such that the income cannot properly be deducted therefrom;

[Eg- G.P. is enhanced or ad-hoc disallowance of expenditure etc without rejecting books of accounts.]

c) Where the assessee has, on his own, estimated a lower amount of addition or disallowance on the issue and has included such amount in the computation of his income and disclosed all the
facts material to the addition or disallowance;

[Eg.- Disallowance u/s 14A]

Transfer Pricing

d) Where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X and disclosed all the material facts relating to the transaction;

Search

e) Where the undisclosed income is on account of a search operation and penalty is leviable under section 271AAB

E. Under-reported income is on account of misreporting [Sub-section (8) and (9)]

Where the under-reporting is because of misreporting than provision of sub-section(6) [exclusions from under-reported income] shall not apply.

The cases of Misreporting are as under:

a) Misrepresentation or suppression of facts;

– An issue will arise as to the meaning and scope of the terms misrepresentation and suppression.

b) Failure to record investments in the books of account;

c) Claim of expenditure not substantiated by any evidence;

– An issue may arise as to the implication of the word “any”.

d) Recording of any false entry in the books of account;

e) Failure to record any receipt in books of account having a bearing on total income; and

f) Failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

F. Rate of penalty and Tax Payable. [Sub-Section (7), sub-Section (8) and sub-section (10) ]

In case of under-reporting of income – 50% of tax payable on under-reported income.

In case of misreporting – 200% of tax payable on under-reported income.

As per the Finance Bill, Tax payable in respect of the under-reported income shall be the amount of tax calculated [sub-section (10)]:

i. In case of company, firm or local authority – on such income as if such income were the total income

ii. In other case – 30% of the amount of under-reported income.

• Thus, slab benefit was not available.

As per the Finance Act, Tax Payable is as under :

Return not filed and income assessed for the first time	Tax calculated on (under-reporting of income + basic exemption) [Slab benefits available]
Total income as per immediate prior order/ where intimation is a loss.	Tax calculated on under-reported income as if it were the total income. [Slab benefits available, Loss can’t be set off against under-reported income.]
Other cases	X – Y X – Tax calculated on (Under reported income + Income as per immediate prior order/intimation) Y – Tax on Income as per immediate prior order/ intimation. [Virtually tax on under-reported income but with slab benefits]

How s.270a will be implemented

Thus, first step will be to identify whether there is under-reported income in terms of sub-section (2) and sub-section (3). If there is under-reported income then the second step will be to identify which additions or disallowances constituting under-reported income are additions or disallowances which are on account of misreporting. Thereafter the third step would be to apply sub-section (6) to additions or disallowances to which misreporting does not apply and calculate total under-reported income and total misreporting income. Then calculate tax payable on under-reported income(without misreporting) and apply requisite penalty rate and calculate penalty amount. Then calculate tax payable on under-reported income (on account of misreporting) and apply requisite penalty rate and calculate penalty amount.

G. Under-reported income in a case where the source of any receipt, deposit or investment is linked to earlier year. [ Sub-Section (4), and Sub-Section(5)].

Section 270A(4) is somewhat similar to erstwhile explanation 2 to section 271(1) and provides that where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in any preceding assessment year and no penalty was levied in such preceding assessment year then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment. Further, section 270A(5) specifies that the amount for the purpose of sub-section (4) shall firstly be from the immediately preceding assessment year and then from the year preceding that and so on.

PARTICULARS	SITUATION 1	SITUATION 2
Addition of suppressed sale in : AY 2014-2015 AY 2015-2016 AY 2016-2017	60 30 20	60 30 20
Investment in AY 2017-2018 claimed out of above addition.	10	90
Under-reported income of each year	AY 16-17 – 10	AY 16-17 – 20 AY 15-16 – 30 AY 14-15 – 50

H. No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year. [Sub-section (11)]

I. The order imposing penalty under section 270A should be in writing [Sub-section (12)]

3. Illustrations [Kindly refer the Section]

ILLUSTRATION 1
Returned Income	100 [ 14A disallowance Rs 5]
STEP 1 – 143(1)(a)- adj [&#8377 20]	120 [ 100 + 20]
STEP 2 – 143(3) – 14A[ ESTIMATE] &#8377 10 – Foreign Travel &#8377 10 – Miscellaneous &#8377 5	145 [ 120+ 25]
STEP 3 – SUB-SECTION (2)	145 > 120
STEP 4 – SUB-SECTION (3)(i) – Under-reported Income	25 [145-120]
STEP 5 – SUB-SECTION(6) and (9) – EXCLUSION and MISREPORTING – 14A. [EXCLUDED] – FT [ NOT EXCLUDED] – Miscellaneous [MISREPORTING] – HENCE, Under-reported Income	15 [25-10]
STEP 6 – SUB-SECTION(10) – TAX PAYABLE (TP) X – 15+120 = 135 Y – 120 X-Y – 15 Tax	&#8377 4.5 (30%)
STEP 7 PENALTY[ SUB-SECTION(7)&(8) Bifurcation of tax payable on UI and M is implicit. Hence, On 10 TP will be 3. Penalty@50% On 5 TP will be 1.5. Penalty @200% Total Penalty	1.5 3 4.5

ILLUSTRATION 2
143(3)	145
ADD – BOGUS PURCHASES U/S 37	50
Income reassessed u/s 147	195 [145 +50]
Sub-Section (2)(b)	195>145
Sub-Section (3)(ii)-Underreported Income	50 [195-145]
Where Only notices not served etc	Issue will be between Sub-Section (6) [Exclusion] v. Sub-section (9)[ Misreporting] For misreporting issue will be between Sub-Section(9)(a)[Misrepresentatio] v/s (9)(b) [Any evidence]
OTHER CONSEQUENCES SAME AS ILLUSTRATION 1.

 

ILLUSTRATION 3 [LOSS]
RI	(20)
143(1)(a)	(10)
143(3)	10
Sub-Section (2)(g)	Attracted.
SUB-SECTION (3) As per Sub-Section(3)(i)(a)[Scenario 1] As per Explanation(b) – [Loss Claimed interpretation][Scenario 2] [Results in UI being difference between 143(1)(a) and RI.]	20 [10-(-10)] 30 [10-(-20)]
SUB-SECTION (10) Sub-Section (10)(b) is attracted Sub-Section (10)(c) is attracted. Scenario 1 X – 20 + (10)= 10 Y – (10) X-Y – 20	Either 20 or 30 Scenario 2 X – 30 +(10) = 20 Y – (10) X-Y – 30

RI

BP

ILLUSTRATION 4 [Book Profits]
AMOUNT	50 (tax @ 15)	200 (Tax @ 37)
143(1)(a)	100 (tax @ 30)	200
143(3)	150 (tax @ 45)	225(Tax @ 41.62)

Scenario 1 – Only Sub-section 2(a) and sub-Section (3)(i)(a) is applicable and proviso is not applicable as income is assessed under normal provisions. UI 50 Tax 15 Penalty 7.5 Hence, no penalty on adjustment under S.115JB.

Scenario 2 – Sub-Sections 2(a) and (d) are attracted Sub-Section (3)(i)(a) and proviso are attracted. UI A-B + C-D = 150-100 + 225-200 = 75. Hence, penalty on both will be levied. Tax – X – Y X=UI+143(1)(a)=75+200 Y = 200 X-Y = 75. Tax – 30% on 50 and 18.5% on 25. [Any other interpretation will make the provisions unworkable] Penalty – Depending on whether adjustments are classified as Misreporting or not.

4. Analysis of Section 270A

(i) Meaning/Definition – Exhaustive or inclusive

The Income-tax Act does-not define the terms “under-report” or “misreporting”. It merely gives instances which will constitute misreporting (Sub-section (9)) and which will not constitute under-reporting (sub-section (6)). Hence, for the purposes of interpretation and deciding various legal issues which will crop up it is necessary to find out the ordinary or dictionary meaning.

ORDINARY MEANING

UNDER-REPORT

THE FREEDICTIONARY – To report as less or fewer than is correct.

CAMBRIDGE DICTIONARY – To record that you have earned less than you really have on your tax return.

MERRIAM WEBSTER – To report to be less than is actually the case.

OXFORD DICTIONARY – Fail to report (something) fully.

• Thus, the ordinary meaning does suggest some sort of deliberate attempt to Under-report income.

MISREPORTING

ORDINARY MEANING

OXFORD DICTIONARY – Give a false or inaccurate account of (something), A false or incorrect report.

THE FREE DICTIONARY – To report falsely or inaccurately, an inaccurate or false report/ to report mistakenly or falsely, An inaccurate or wrong report.

The term falsity is defined as wrong and untruthful assertion of a fact known to the person. The term failure is defined as the neglect or omission of expected or required action.

• Thus, the term misreporting clearly represents existence of a guilty mind on the part of the assessee.

MEANING AS PER THE SCHEME OF SECTION 270A

UNDER-REPORT

• Under the provisions of section 270A a difference has to be made between the terms “Under-reported his Income” and “Under-reported Income”.

• As per Sub-Section (1) person is liable to penalty when that person has under-reported his income. Sub-section (2) lays down cases when a person shall be considered to have under-reported his income. It lays down six cases which essentially refer to cases where an assessment takes place and there is an addition or disallowance. The cases to a great extent manifest the ordinary meaning of the term “Under-report”. Sub-section (2) is exhaustive.

• Once sub-section (2) is triggered then the amount of under-reported income is to be computed under sub-section (3) which essentially is the difference between assessed income and income as per intimation or reassessed income and assessed income. This is the under-reported income of the person. This under-reported income computed under sub-section (3) is to be further adjusted by reducing those additions / disallowances which satisfy the conditions of sub-section (6). Thus, sub-section (6) gives the “Under-reported Income” on which penalty would be finally levied.

• The sub-section (6) gives five scenarios when a particular addition /disallowance or amount of income will not form part of Under-reported Income computed under sub-section (3). Sub-section (6) uses the term “shall not include”. The Apex Court in Narpatchand A Bhandari v. Shantilal Moolshankar Jain AIR 1993 SC 1712 was considering the scope of definition of landlord in the Explanation to Section 13(1)(g) which stated that Landlord will not include a rent-farmer or rent collector or estate manager. The Apex court held that a mortgagee with possession would qualify as a landlord as it is not specifically excluded. Thus, scenarios which are not specifically excluded by sub-section (6) would be scenarios where penalty would be imposed. Thus, the exclusion under sub-section (6) is exhaustive. The exhaustive nature of sub-section (2) and sub-section(6) are in line with the object of bringing clarity in penalty provisions which was lacking in the erstwhile section 271.

• However on must note that Sub-clause(a) of Sub-section(6) is a general/universal clause which will help assessee to raise all bona fide defences against levy of penalty.

MISREPORT

As per sub-section (8) of section 270A if under-reporting is in consequence of misreporting then the exclusions provided in sub-section (6) will not apply. Further sub-section (9) gives six cases of mis-reporting. These cases are manifestation of the ordinary meaning of misreporting in the context of Income Tax act. Thus enumeration of six cases will make the meaning of misreporting exhaustive. Also as the ordinary meaning suggest culpability or existence of guilty mind, bona fide inadvertence or mistake in not recording investments or not recording any receipt in books of accounts etc can always be taken up as a defence.

(ii) BURDEN OF PROOF

POSITION UNDER UNDER SECTION 271(1)(C)

• Both the words concealment and furnishing inaccurate particulars in the context of section 271(1)(c) indicate prima facie the intention of an assessee to hide his income or particulars thereof from the department. Consequently these words cast a burden on the department to prove the guilty mind as well as concealment. This legal position was confirmed by the Apex court in CIT v. Anwar Ali (1970) 76 ITR 696 (SC), Jain Brothers v. UOI (1970) 77 ITR 107 (SC), Hindustan Steel Ltd v. CIT (1972) 83 ITR 26 (SC) and CIT v. Khoday Eswaras and sons (1972) 83 ITR 369 (SC).

• To get over this interpretation of law, Explanation 1 was introduced in section 271(1)(c). This explanation shifts the burden of proof from the Asessing.Officer. to the assessee. Instead of the A.O. being under an obligation to establish the mala fides of the assessee, the burden is on the assessee to establish his bona fides and innocence.

POSITION UNDER SECTION 270A

UNDER-REPORTED INCOME.

• A person has under-reported his income as per sub-section (2) the moment there is a difference between assessed income and income as per intimation or reassessed income and assessed income and further the said difference is also his under-reported income as per sub-section (3). Thus till this stage i.e., whether a person has “under-reported his income” there is no question of burden of proof as per the mechanism provided to compute under-reported income of a person. It is simply automatic.

• The amount of under-reported income computed under sub-section (3) can be brought down or reduced or eliminated only in terms of sub-section (6). Clause (a) of sub-section (6) requires assessee to offer a bona fide explanation and substantiate such explanation with material facts. It is similar to Explanation 1(B) to Section 271(1)(c). Hence, the initial burden will be on the assessee to show that the benefit of exclusion under sub-section (6) is available to the assessee. Similarly in case of transfer pricing additions the initial burden will be on the assessee. In case of estimated addition referred to in clause (b) to sub-section (6) burden will be on the assessee to show that the accounts are correct and complete.

MISREPORTING

• As already discussed the term misreporting as well as six cases of misreporting will involve some sort of a deliberate attempt to misreport on the part of the assessee. Thus by applying the decisions rendered under section 271(1)( c) prior to insertion of Explanation 1 such as Anwar Ali (supra) etc, it can fairly be concluded that the burden is on the Assessing Officer to prove that there is misreporting.

• Further as sub-section (6) of Section 270A is not applicable or provision similar to Explanation 1 to Section 271(1)(c) is not incorporated for misreporting, the initial burden will not be on the assessee even if penalty under section 270A is held to be a civil liability. The Pune Tribunal in Kanbay software India P Ltd v DCIT [2009] 122 TTJ 721 (Pune) while dealing with the observation of Supreme Court in case of Union of India v. Dharamendra Textile Processors [2008] 306 ITR 277 (SC) to the effect that penalty under section 271(1)(c) is to provide remedy for loss of revenue and is a civil liability held that judgment in Dharamendra Textile Processors case (supra) does not make a radical change in scheme of section 271(1)(c) but it re-emphasises paradigm shift on burden of proof as brought about by Explanation to section 271(1)(c). Thus, since no such explanation similar to explanation 1 is appended to misreporting the initial burden of proof will be on the revenue. Hence, it will be for the revenue to prove that there is misrepresentation, suppression, failure and falsity in terms of six cases of misreporting.

HOW TO DISCHARGE THE BURDEN.

• Before analysing how an assessee can discharge the burden cast on him under sub-section (6), it is important to keep in mind the fundamental legal proposition that Assessment proceedings are not conclusive for levying. This was the position under section 271(1)(c) and same is the position under section 270A as sub-section (6) provides the scenario when though there is under-reported income as per sub-section (2) and (3) said under-reported income would not be exigible to penalty. Thus, assessment proceedings and penalty proceedings are separate and distinct. Thus the law as applicable under the current regime of section 271(1)(c) will also be applicable to Section 270A.

• Findings in Assessment proceedings don’t operate as res-judicata in penalty proceedings. This proposition is laid down by the decision in CIT v. Dharamchand L. Shah (1993) 204 ITR 462 (Bom.) which decision was rendered in the context of Section 271(1)(c). Further in Vijay power generators ltd v. ITO (2008)6 DTR 64 (Del) it is held that “It is well settled that the findings rendered in the assessment proceedings though they constitute good evidence do not constitute conclusive evidence in penalty proceedings. During penalty proceedings, there has to be reappraisal of the very same material on the basis of which the addition was made and if further material is adduced by the assessee in the course of the penalty proceedings, it is all the more necessary that such further material should also be examined in an attempt to ascertain whether the assessee concealed his income or furnished inaccurate particulars thereof.”

• Thus, under penalty proceedings Assessee can discharge his burden by relying on the same material on the basis of which assessment is made by contending that all necessary disclosures of material facts were made and that the explanation of assessee was bona fide. Further if there is any material or additional evidence which was not produced during assessment proceedings same can be produced in penalty proceedings as both assessment and penalty proceedings are distinct and separate.

(iii) REQUIREMENT OF MENS REA

• Under section 271(1)(c) the meaning of “Concealment” and “furnishing inaccurate particulars” contained an element of culpable mental state. The Apex Court in Dilip N. Shroff v. CIT [(2007) 291 ITR 519] held therein that in order to attract the penalty under Section 271(1)(c), mens rea was necessary, as according to the Court, the word “inaccurate” signified a deliberate act or omission on behalf of the assessee. It went on to hold that clause (iii) of Section 271(1) provided for a discretionary jurisdiction upon the assessing authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was further held that the assessee must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of mens rea was essential.

• However, subsequently it was on the point of mens rea that the judgment in Dilip N. Shroff v. CIT [supra] was upset by the decision in Union of India v. Dharamendra Textile Processors (2008) 306 ITR 277 after quoting from Section 271 extensively and also considering Section 271(1)(c), the Court came to the conclusion that since Section 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing return, there was no necessity of mens rea. The Court went on to hold that the objective behind enactment of Section 271(1)(c) read with the Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under Section 276-C of the Act.

• From the scheme of section 270A it appears that where there is under-reporting or misreporting of income, the objective is to remedy loss to the revenue and is thus a strict and civil liablity not requiring existence of mens -rea. This issue will be settled only through litigation. However the burden to prove misreporting will be on the revenue as explained earlier.

(iv) Whether levy of penalty u/s. 270A is automatic

POSITION UNDER SECTION 271(1)(C)

• After the decision of Apex court in UOI v. Dharmendra Textiles (Supra) in the context of Section 271(1)(c) it was understood by the revenue authorities that penalty proceedings are automatic and that penalty is to be levied the moment addition is made or confirmed. This erroneous understanding was set at naught by the Apex Court in Union of India vs Rajasthan Spinning & Weaving Mill (2009) 180 Taxmann 609(SC) wherein it is held as under:

“At this stage, we need to examine the recent decision of this Court in Dharamendra Textile (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam,J.) was a party to the decision in Dharmendra Textile and we see no reason to understand or read that decision in that manner.”

• In CIT v. M/s Sidhartha Enterprises (2009) 184 Taxman 460 (P & H)(HC) it was held that “the judgment in Dharmendra Textile cannot be read as laying down that in every case where particulars of income are inaccurate, penalty must follow. Even so, the concept of penalty has not undergone change by virtue of the said judgment. Penalty is imposed only when there is some element of deliberate default and not a mere mistake. In view of the finding that the furnishing of inaccurate particulars was simply a mistake and not a deliberate attempt to evade tax, penalty was not leviable.”

• Hence, penalty u/s. 271(1)(c) is not automatic but discretionary and that the assessing officer must exercise the discretion judicially.

POSITION UNDER SECTION 270A

UNDER-REPORTED INCOME

Sub-section (1) of section 270A uses the term “may”. Further sub-section (6) provides for situations when it cannot be said that there is under-reported income. Hence, just because a person has under-reported his income in terms of sub-section (2) and (3) would not automatically lead to the conclusion that penalty u/s 270A is leviable.

MISREPORTING

• As the burden of proving misreporting will be on the assessing officer, penalty for misreporting cannot be automatic unless AO is satisfied about misrepresentation, suppression, failure and falsity on the part of the Assessee with some degree of deliberateness on the part of the assessee.

• Thus, a bona-fide mistake or reliance on expert professional opinion would continue as a defence for assessee from levy of penalty even in cases of mis-reporting.

(v) Can penalty u/s. 270A be levied on an incorrect legal claim/debatable issue

POSITION UNDER SECTION 271(1)(C)

The Delhi High Court in New Holland Tractors India P Ltd. v. CIT [2015] 275 CTR 291 (Delhi) has held that penalty u/s 271(1)(c)read with Explanation 1 clause (B)cannot be levied where a legal or a debatable claim is rejected. On this aspect, useful reference can be made also to the following observations of the Supreme Court in the case of Reliance Petroproducts (P.) Ltd.,(supra):-

“11. The learned counsel argued that “submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income”. We do not think that such can be the interpretation of the words concerned. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars.”

Thus penalty u/s 271(1)(c) cannot be levied on an incorrect legal claim.

POSITION UNDER SECTION 270A

• In the case of under-reported income, clause (a) of sub-section (6) of Section 270A is similar to Explanation 1 clause (B). Hence, where a debatable issue is involved or an incorrect legal claim is involved then penalty under section 270A for under-reporting of income would not be leviable. Obviously, such under-reporting of income cannot be as a consequence of misreporting.

(vi) Commencement of penalty proceedings and initiation of penalty and recording of satisfaction

POSITION UNDER SECTION 271(1)(C)

• Section 271(1) reads ” If the assessing officer or……..in the course of any proceedings under this Act , is satisfied that any person-………….he may direct that such person shall pay by way of penalty” [ emphasis supplied]

• The Apex Court in CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 (SC) has held that penalty proceedings cannot be commenced by the ITO before the completion of the assessment proceedings by the ITO. However, the power to impose penalty depends upon the satisfaction of the ITO in the course of proceedings under the Act ie it could not be exercised if he is not satisfied about the existence of conditions for penalty before the proceedings are concluded. Satisfaction before conclusion of the proceeding under the Act, is a condition for the exercise of the jurisdiction. Considering the said decision, the Bombay High Court in CIT v. Dajibhai Kanjibhai [1991] 189 ITR 41 (Bom) has held that AO must “record” his satisfaction during the course of assessment proceedings. The Full bench of the Delhi High Court in CIT v. Rampur Engg Co Ltd [2009] 309 ITR 143 (Delhi) has held that the “power to impose penalty under section 271(1) depends upon satisfaction of Assessing Officer in course of assessment proceedings and it cannot be exercised if he is not satisfied and has not recorded his satisfaction about existence of conditions specified in clauses (a), (b) and (c) of sub-section (1) of section 271 before proceedings are concluded.” 

• Hence, there has to be satisfaction, such satisfaction has to be recorded, recording must be before completion of assessment proceedings and penalty proceedings though initiated before completion of assessment proceedings they will have to commence after passing of assessment order.

• After taking note of the judicial pronouncements in this regard, the Legislature thought it fit to insert Section 271(1)(B), which reads as under:

“271(1)(B) Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c).” 

The above provision came up for interpretation before the Delhi High Court in the case of Ms. Madhushree Gupta v. Union of India [2009] 309 ITR 143(Del) wherein the Delhi High Court held that both in post amendment and pre amendment there is not much difference and the satisfaction is required to be arrived in the course of assessment proceedings and should be discernable in the assessment order.

• The Karnataka High Court in CIT v. Manjunath Cotton and Ginning Factory [2013] 359 ITR 565 (Karnataka) interpreted the term “Direction” in Section 271(1B) and held at para 50 that

“………..The meaning of the word direction is of importance. Merely saying that penalty proceedings are being initiated will not satisfy the requirement. The direction to initiate proceedings should be clear and not be ambiguous…………As the words used in the legal fiction or the deeming provisions of Section 271(1B) is Direction, it is imperative that the assessment order contains a direction. Use of the phrases like (a) penalty proceedings are being initiated separately and (b) penalty proceedings under Section 271(l)(c) are initiated separately, do not comply with the meaning of the word direction as contemplated even in the amended provisions of law………..A direction by a statutory authority is in the nature of an order requiring positive compliance. When it is left to the option and discretion of the ITO whether or not take action, it cannot be described as a direction.”

Following the above ratio, in CIT v. MWP Ltd [2014] 264 CTR 502 (Karn) wherein the assessment order it was recorded “Penalty u/s. 271(1)(c) initiated separately.” penalty was deleted.

• Thus there has to be a satisfaction and direction to initiate penalty should be clear, unambiguous and akin to an order requiring positive compliance.

POSITION UNDER SECTION 270A.

• Section 270A (1) reads as under :

“The AO/CIT(A)/CIT/ Pr. CIT may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any on the unreported income.”

• As pointed out earlier, the Finance Bill did not contain the phrase “during the course of any proceedings under this act”. However with the introduction of the said phrase which also existed under section 271(1) and the interpretation of section 271(1) given by the courts as pointed out above it can be concluded that penalty proceedings can commence only after completion of assessment proceedings but there has to be a direction to initiate penalty proceedings before the completion of assessment proceedings. Obviously such direction has to form part of the assessment order.

• At the first glance of section 270A(1) there seems to be no requirement for AO to have satisfaction and record such satisfaction as was required under the erstwhile section 271(1) as the term satisfaction is not used in S.270A(1).

• However my view is that there is an implied requirement. This is because the term “may” which qualifies the term “direct” indicates that penalty is not automatic and thus if penalty is to be initiated, AO must be satisfied of the quantum of under-reported income or misreporting and only upon such satisfaction or application of mind he can direct during the course of any proceedings under this act that any person who has under-reported his income shall be liable to pay a penalty. Also, the term “direct” or “direction” as pointed out above in CIT v. Manjunath Cotton and Ginning Factory(supra) itself requires AO to pass an order requiring positive compliance.

• The conclusion is further strengthened by the language used in Section 270AA(3) being “……., where the proceedings for penalty under section 270A has not been initiated under the circumstances referred to in sub-section (9) of the said section 270A”.

• Hence, if in an assessment an expenditure is disallowed or there is estimation, there will be an unreported income under Sub-section(2) and (3) of S.270A. When the said expenditure is being disallowed / income is estimated, AO has a choice to decide whether to direct levy of penalty or not, which will depend on satisfaction of AO as to applicability of Sub-Section (6) in the facts of the case. Thus if AO is satisfied [ie after application of mind] that sub-section (6) will not apply or that expenditure disallowed is on account of misreporting, he will have to direct the levy of penalty under section 270A and such direction will have to be recorded in the assessment order.

(vii) Whether penalty under section 270A is leviable on adjustments to book profit when income is assessed under normal provisions

Only where the income computed u/s. 115JB/ 115JC is deemed to be the total income of the assessee, is the formula ‘(A-B) + (C-D)’ applicable. Where the income is finally assessable under normal provisions only, then any adjustment in Book profit u/s. 115JB and 115JC may not attract penalty.

(viii) Whether penalty u/s. 270A can be levied on agreed addition

POSITION UNDER SECTION 271(1)(C)

• There may be cases where assessee agrees to an addition during assessment proceedings, or during survey or does not prefer an appeal. An issue arose whether in such situation penalty u/s 271(1)(c) would be automatic particularly in view of deeming fiction u/s Explanation1 to Section 271(1)(c ). In Sir Shadilal Sugar and General Mills Ltd. v. CIT (1987) 168 ITR 705(SC) it was held as under:

“We find that the assessee admitted that these were the incomes of the assessee but that was not an admission that there was deliberate concealment. From agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission”

• The Apex Court in the case of K. P. Madhusudan v. CIT (2001) 251 ITR 99 has held that decision in Shadilal’s case (Supra) is no more good law after insertion of Expl-1. After the decision in the case of K. P. Madhusudan, it was noticed that just because the assessee has agreed for the addition, the penalties were levied u/s 271(1)(c). It is to be stated that the above decision in the case of K. P. Madhusudan is not to be interpreted as meaning that in an agreed addition, penalty would automatically follow. It simply holds that under the Explanation 1, the assessee should show that his failure to return correct income was not due to fraud or neglect. No separate enquiry is necessary for imposing penalty but the assessee is at liberty to show his bonafides in the penalty proceedings and if he does, no penalty can be imposed. This decision of Supreme Court had been so considered and analysed in the following decisions.

i. ITO v. Smt. DevibaiParmani [84 ITD 342]

ii. Dy. Director of Income Tax v. Chirag Metal Rolling Mills Ltd. [305 ITR 29 (MP)]

iii. CIT v. P. Govindswamy [263 ITR 509]

• Infact, In CIT v. Suresh Chandra Mittal (2000) 241 ITR 124 (M.P.) after considering Explanation 1 Upheld decision of the Tribunal in which the Tribunal held as under:

“The assessee had no chance of carrying through his explanation and the Assessing Officer too did not record any finding as to the acceptability or otherwise of the explanation of the assessee. Under these circumstances the proviso to Explanation 1 to section 271 is not attracted. The Revenue did not at all discharge the burden to prove that there was concealment of income by the assessee. It simply rested its conclusion on the act of voluntary surrender by the assessee, which obviously was done in good faith and to buy peace.” 

The above decision is upheld by the Supreme Court in CIT v. Suresh Chandra Mittal (2001) 251 ITR 9 (SC). Thus it can be fairly concluded that once assessee gives a bona fide explanation for agreeing to addition then the burden shifts on the revenue to prove concealment. This position is further fortified by the apex Court in MAK Data P Ltd. v. CIT (2013) 358 ITR 593(SC) wherein it is held as under :

“The AO, in our view, shall not be carried away by the plea of the assessee like “voluntary disclosure”, “buy peace”, “avoid litigation”, “amicable settlement”, etc. to explain away its conduct. The question is whether the assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. Explanation to Section 271(1) raises a presumption of concealment, when a difference is noticed by the AO, between reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise.” 

• It may also be noted where declaration is made during survey and the due date of return has not expired and declared amount is offered for tax then there can be no penalty u/s. 271(1)(c) read with Explanation 1 as held in following decisions:

i) Shri Dilip M. Shah Mumbai v. ACIT ITA 4413/Bom/98 A.Y. 1994- 95 dt. 25/1/1999.

ii) CIT v. SAS Pharmaceuticals (2011) 335 ITR 259 (Del.)(HC).

iii) ACIT v. Crescent Property Developers ITA No. 2770/M/2012, Dt. 19/6/2014.

POSITION UNDER SECTION 270A

• This issue has to be seen in the light of section 270AA which provides for immunity from penalty under section 270A if tax and interest is paid. Thus, if assessee chooses not to challenge the assessment order, then he can apply for immunity under section 270AA and subject to the provisions of section 270AA assessee will be granted immunity from penalty.

• However, when assessee becomes ineligible to apply for immunity u/s 270AA say for instance assessee agrees to some addition and files appeal for some other addition or assessee agrees for addition but the charge is of misreporting etc then the issue arises whether
penalty on agreed additions will be leviable or not.

• As far as Under-reported Income is concerned, the ratio deciphered above in the context of Section 271(1)(c) would also apply to Section 270A in view of clause (a) to sub-section (6) to Section 270A which permits assessee to give a bona-fide explanation. However if it is proved that the agreed addition is on account of misreporting then penalty under section 270A would certainly be leviable.

(ix) Whether issue of show cause notice is mandatory for levying penalty u/s. 270A.

• Section 274 of the Income Tax Act which provides for opportunity of hearing before imposing penalty would apply to Section 270A also.

• If the provisions of section 270A are interpreted in the manner that the assessment order must record a proper direction as to whether penalty is initiated for under-reporting or misreporting then even the show cause notice must be in consonance with such direction and the final penalty order must be in consonance with the show cause notice.

• Thus, it cannot be that SCN is for under-reporting and penalty is levied for misreporting. Even in the context of Section 271(1)(c) it has been held that show cause notices for penalty must strike either concealment if penalty is levied on furnishing inaccurate particulars and vice versa and further penalty order cannot levy penalty on concealment if show cause notice is for furnishing inaccurate particulars and vice -versa. For this proposition reliance can be placed on various decisions such as Commissioner of Income-tax v. SSA’S Emerald Meadows [2016] 73 taxmann.com 248 (SC), CIT v. Manjunath Cotton and Ginning Factory ( 2013) 359 ITR 565(Karn)(Para 59-61 and 63), Suvaprasanna Bhatacharya v ACIT ITA No 1303/Kol/2010 AY 06-07, Dt 6-11-2015 (Kol).(Rel para 8),New SorathiaEngg. Co (2006) 282 ITR 642 (Guj), CIT v. LakhdhirLalji [1972] 85 ITR 77 (GUJ.) and CIT v. Manu Engg. Works [1980] 122 ITR 306 (GUJ). The ratio of these decisions would also apply to SCN issued u/s 274 r.w.S 270A.

(x) Certain inconsistencies which need to be addressed

• As per Section 270A, where no return has been filed, the clause specifies that under-reported income shall be difference between the assessed income and maximum amount not chargeable to tax in case of persons other than company, firm and local authority. No exception is carved out in case where tax has been paid but only return is not filed.

• No clarity on rate of tax to be taken in case of firm, company or local authority say where a company which opts for section 115BA (25 %) etc. Further, as per the formula, under-reported income includes addition under normal provision as also under MAT/AMT provision which totals up to form the under-reported income. Then what shall be the rate applicable to compute the tax payable in such case is not clear.

• Section 246A which provides for appealable order before Commissioner (Appeals) specifically provides that order imposing penalty u/s 271(1) is appealable. However, the Finance Act,2016 does not amend section 246A to specifically provide that order imposing penalty under section 270A will be appealable. Section 246A(1)(q) provides that an order imposing penalty under Chapter XXI is appealable and as Section 270A is in chapter XXI, order imposing penalty under section 270A will be appealable. However a specific amendment will avoid controversy.

5. Amendments consequential to insertion of section 270A

SECTION AMENDED	EXISTING PROVISION	AMENDMENT
271A	Section 271A provides for penalty where there is failure of keep, maintain or retain books etc.	Section 271A is without prejudice to the provisions of section 271 and therefore consequential amendment is made to make it without prejudice to provisions of section 270A also.
271AA	Section 271AA provides for penalty in respect of Transfer Pricing documents	Section 271AA is without prejudice to the provisions of section 271 and therefore consequential amendment is made to make it without prejudice to provisions of section 270A also.
271AAB	Section 271AAB provides for penalty for specified assessment years in case where search is initiated.	Section 271AAB provides for penalty in case of specified assessment years where search has taken place. Those assessment years are outside the ambit of section 271(1)(c) as per section 271AAB(2). Now, amendment is made to keep those assessment years outside the ambit of section 270A also.
273A	Section 273A provides for the power of Pr. CIT/ CIT to reduce or waive penalty levied u/s 271(1)(iii) if the conditions given are fulfilled.	Section 273A is proposed to apply to section 270A and the Pr. CIT/CIT shall have the power to waive or reduce penalty levied under the said section 270A. Section 273A however does not substitute the words concealment of income and furnishing inaccurate particulars of Income by Under-reported Income giving rise to an anamoly.
279	Section 279 provides that prosecution it to be at the instance of the Pr. CCIT, CCIT, Pr. CIT, CIT. Sub-section (1A) provides that where the penalty u/s 271(1)(iii) has been waived off or reduced u/s 273A, then no such person shall be proceeded against.	Section 279(1A) is amended to provide that where the penalty u/s 270A has been waived or reduced u/s 273A then no prosecution can be initiated.

6. Insertion of new section – 270aa – immunity from imposition of penalty, etc.

The new section 270AA provides for immunity from penalty u/s. 270A and prosecution u/s. 276C in certain cases.

Pre-condition for immunity

An assessee may make an application to the Assessing Officer for grant of immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, provided he pays the tax and interest payable as per the order of assessment or reassessment within the period specified in such notice of demand and does not prefer an appeal against such assessment order.

Time limit for making application

The assessee can make such application within one month from the end of the month in which the order of assessment or reassessment is received in the form and manner, as may be prescribed.

Conditions for grant of Immunity

Immunity from initiation of penalty and proceeding under section 276C will be granted if the penalty proceedings under section 270A has not been initiated on account of misreporting u/s 270A.

Time limit for passing order.

The Assessing Officer shall pass an order accepting or rejecting such application within a period of one month from the end of the month in which such application is received. However, in the interest of natural justice, no order rejecting the application shall be passed by the Assessing Officer unless the assessee has been given an opportunity of being heard.

Binding Effect

The order of Assessing Officer under the said section shall be final.

Effect of order under Section 270AA accepting the application.

No appeal under section 246A or an application for revision under section 264 shall be admissible against the order of assessment or reassessment referred to in clause (a) of sub-section (1), in a case where an order under section 270AA has been made accepting the application.

Remedy against order rejecting application.

By virtue of amendment in section 249 and section 253, an appeal against order of rejection passed under section 270AA is to be made before the Commissioner (Appeals) within thirty days of the receipt of the notice of demand relating to an assessment order. The period beginning from the date on which such application is made to the date on which the order rejecting the application is served on the assessee shall be excluded for calculation of the thirty days period.

ANALYSIS

• In case of penalty on under-reported income which is not as a consequence of misreporting AO is bound to grant immunity subject to fulfilment of other conditions.

• In case of misreporting AO has a discretion.

• It appears that where penalty is levied on certain additions on ground of mis-reporting and certain additions on ground of only under-reporting than assessee will have to make a choice whether to file appeal or make application for immunity as he cannot file appeal on penalty levied on mis-reported income and immunity application for under-reported income.

• There is no bar to filing appeal against quantum order with application for condonation of delay after rejection of application for immunity.

• There is no specific bar prohibiting revision u/s 263 of order accepting immunity application.

7. Conclusion

The analysis of new section 270A indicates that there will be number of issues on which both the assessee and revenue will be at loggerheads. In fact majority of those issues would be the ones which are settled u/s 271(1). Hence, to a substantial extent section 270A will either result in either unsettling settled principles of law or will confirm them but only after litigation. It will be like old wine in new bottle. Hence, this article is made comprehensive so as to give complete up-to-date picture of position u/s 271(1) as well. The object of introducing Section 270A will be defeated. According to me , the Government must invite views on this Section and decide whether the same needs to be scrapped or retained. The implementation of Easwer committee recommendations as referred in the introduction of this article appears to have been a better way forward.

The scope and effect of a reopening of assessment is still shrouded in mystery even after various judgments of the Supreme Court and High courts. Reassessment is one of the distinguishing weapons in the armoury of the Department, empowers the Assessing Officer to assess, reassess or recompute income, turnover etc, which has escaped assessment. A number of intricate issues crop up during the reassessment proceedings. Some of the issues are been dealt with hereunder:

1. Preconditions

1.1 It is well known that powers of the Assessing Officer to reopen a completed assessment are not unfertile. Sec. 147 and Section 148 of the Act contains the perquisite conditions to be fulfilled for invoking the jurisdiction to reopen the assessment.

1.2 The general principle is that once an assessment is completed it becomes final. Section 147 empowers the Assessing Officer to reopen an assessment if the conditions prescribed therein are satisfied. The conditions are:

i) The Assessing Officer has to record the reason for taking action under section 147. It is on the basis of such reasons recorded in the file that the validity of the order reopening a assessment has to be decided. Recorded reasons must have a live link with the formation of the belief.

ii) The Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year.

iii) The jurisdictional condition under section 147 is the formation of belief by the Assessing Officer that income chargeable to tax has escaped assessment for any assessment year.

iv) No action can be initiated under section 147 after the expiry of 4 years from the end of the relevant assessment year unless the income chargeable to tax has escaped assessment by reason for the failure on the part of the taxpayer to disclose fully and truly all material facts necessary for his assessment..

2. Procedure to challenge the reassessment proceedings

2.1 The Apex Court in the case of
GKN Driveshafts (India) Ltd. v. DCIT (2003) 259 ITR 19 (SC)
has laid down the procedure to challenge the reassessment proceedings.

When a notice under section 148 of the Income-tax Act, 1961, is issued, the proper course of action

(a) Is to file the return,

(b) If he so desires, to seek reasons for issuing the notices.

(c) The Assessing Officer is bound to furnish reasons within a reasonable time.

(d) On receipt of reasons, the assessee is entitled to file objections to issuance of notice, and

(e) The Assessing Officer is bound to dispose of the same by passing a speaking order.

(f) The assessee if desires can file a writ challenging the order or can proceed with the assessment. However the assessee has still a right to challenge the reopening of assessment after the assessment order is passed, before Appellate Authority.

2.2 The courts have consistently held that the precondition are jurisdiction conferring on the AO to reopen the assessment and their non-fulfilment renders the initiation itself ab-initio void. The High Court in appropriate cases has power to issue an order prohibiting the Income-tax Officer from proceeding to reassess the income when the conditions precedent do not exist. It is well-settled however that though the writ of prohibition or certiorari will not issue against an executive authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts, will issue appropriate
orders or directions to prevent such consequences.

The Courts have consistently warned the department not to harass taxpayers by reopening assessments in a mechanical and casual manner. The Pr CIT were directed to issue instructions to AOs to strictly adhere to the law explained in various decisions and make it mandatory for them to ensure that an order for reopening of an assessment clearly records compliance with each of the legal requirements. The AOs were also directed to strictly comply with the law laid down in GKN Driveshafts (supra) as
regards disposal of objections to reopening assessment:

Pr. CIT v. Samcor Glass Ltd. (Delhi); www.itatonline.org;

CIT v. Trend Electronics( 2015) 379 ITR 456 (Bom.)(HC).

3. Alternative remedy not a bar to entertain a Writ

3.1 The Income-tax Act provides a complete machinery for the assessment/reassessment of tax, imposition of penalty and for obtaining relief in respect of any improper orders passed by the Revenue Authorities. The assessee cannot be permitted to abandon that machinery and to invoke the jurisdiction of the High Court under Article 226 of the Constitution when he has adequate remedy open to him by an appeal to the Commissioner of Income Tax (Appeals). As the said statutory remedy is an effective and efficacious one, the Writ Court should not entertained the Writ Petition.

However this principle of alternate remedy ought not to apply to a case where the Assessing Officer passes a reassessment order without following the GKN Driveshafts (India) Ltd. v. ITO (2003) 259 ITR 19 (SC) procedure of passing an order on objections and waiting 4 weeks thereafter as held in
Allana Cold Storage Ltd. v. ITO (2006) 287 ITR 1 (Bom.)(HC), Kamlesh Sharma (Smt.) v. B. L. Meena, ITO (2006) 287 ITR 337 (Delhi) (HC).

3.2 In the case of CIT v. Chhabil Das Agarwal. (2013) 357 ITR 357 (SC)
the Assessing Officer issued a notice u/s 148 reopening the assessment and pursuant thereto passed a reassessment order u/s. 147. The assessee filed a Writ Petition in the High Court to challenge the said notice and reassessment order. The High Court entertained the Writ Petition and quashed the re-assessment order. On appeal by the department to the Supreme Court HELD reversing the High Court:

The assessee cannot be permitted to abandon that machinery and to invoke the jurisdiction of the High Court under Article 226 of the Constitution when he has adequate remedy open to him by an appeal to the CIT (Appeals). As the said statutory remedy is an effectual and efficacious one, the Writ Court ought not to have entertained the Writ Petition filed by the assessee.

3.3 The Hon'ble Bombay High Court in the case of
Aroni Commercials Ltd v. ACIT observed that the argument, based on
JCIT v. Kalanithi Maran, that this Court should not exercise its writ jurisdiction under Article 226 of the Constitution of India and the petitioner should be left to avail of the statutory remedies available under the Act is not acceptable. Writ Petition challenging lack of jurisdiction to issue s. 148 notice on the ground that it is based on
‘change of opinion’ & preconditions of s. 147 are not satisfied is maintainable.

3.4 A similar view has been taken in yet another case by the Hon'ble Bombay High Court in case of
Crompton Greaves Ltd. v. ACIT (2015) 275 CTR 49 / 229 Taxman 545 (Bom).

Thus the facts in the case of Chhabil Das Agarwal (supra) were different and distinguishable namely that the reassessment order was passed and thereafter the notice and the said order was challenged by way of writ.

4. Reasons – Recorded to be supplied and objections to be disposed off

4.1 Assessing Officer should dispose off the assessee objection and serve the order on assessee. Assessing Officer should not proceed with assessment for 4 weeks thereafter. Reference can be made to decision of
Hon. Bombay High Court Asian Paint Ltd. v. Dy. CIT 296 ITR 96 (Bom)

4.2 Reassessment framed by the Assessing Officer without disposing of the primary objection raised by the assessee to the issue of reassessment notice issued by him was liable to be quashed. In the case of of
IOT Infrastructure and Eng. Services Ltd. v. ACIT (2010) 329 ITR 547 (Bom) the Hon. Bombay High Court set aside the assessment for fresh hearing in case.

4.3 Similar view was taken in the case of
Allana Cold Storage v. ITO (2006) 287 ITR 1 (Bom.)
wherein following the order passed by Supreme Court in the case of GKN Driveshaft matter was setaside to pass fresh order holding that the Reasons for notice must be given and objections of assessee must be considered.

4.4 Where the Order passed within four weeks from date of rejection of
assessee’s objections- Reassessment was held to be bad in law in the case of
Bharat Jayantilal Patel v. UOI (2015) 378 ITR 596 (Bom.)(HC)

Disposal of objections
– To be linked with recorded reasons

4.5 In the case Pransukhlal
Bros. v. ITO (2015) 229 Taxman 444 (Bom.)(HC) where in Assessment of the assessee was reopened. The recorded reasons stated that the assessee had taken accommodation entries from a Surat based diamond concern and this information (according to the recorded reasons) was obtained by the Department from search and survey action on the said diamond concern. The assessee objected to the recorded reasons which were disposed of by the by AO referring to investigation carried out by Sales Tax authorities, display of names of parties on the website of Sales Tax department. Held, since these facts were even remotely adverted to in the recorded reasons, and hence, the order disposing of objections was held unsustainable in law with fresh opportunity to AO to dispose of the objections keeping in mind the recorded reasons.

4.6 However recently the Hon'ble Bombay High Court in the case of
Bayer Material Science Pvt. Ltd. v. DCIT(2016) 382 ITR 333 (Bom.)(HC) held that non-disposal of objections and providing the assessee with the recorded reasons towards the end of the limitation period and passing a reassessment order without dealing with the objections results in gross harassment to the assessee which the Pr. CIT should note and take remedial action :

5. Communication of reasons
– Mandatory

5.1 For passing an order under section 147 recording of reasons u/s. 148 and communication thereof to party concern is mandatory.

Gujarat Fluorochemicals Ltd v. DCIT (2008) 15 DTR (Guj.) 1

Nandlal Tejmal Kothari v. Inspecting ACIT (1998) 230 ITR 943 (SC)

5.2 However if assessee does not ask for s. 147 reasons and object to reopening, ITAT cannot remand to AO and give assessee another opportunity:

CIT v. Safetag International India Pvt. Ltd. (Delhi High Court)

5.3 In the case of
CIT v. Videsh Sanchar Nigam Ltd. (2012) 340 ITR 66 (Bom.) the Tribunal following the judgment of Bombay High Court in
CIT v. Fomento Resorts and Hotels Ltd. ITA no 71 of 2006 dated 27th November, 2006, has held that though the reopening of assessment was within three years from the end of relevant assessment year, since the reasons recorded for reopening of the assessment were not furnished to the assessee till date the completion of assessment, the reassessment order cannot be upheld, moreover, Special Leave Petition filed by revenue against the decision of this court in the case of
CIT v. Fomento Resorts and Hotels Ltd., has been dismissed by Apex Court, vide order dated July 16, 2007. The court dismissed the appeal of the revenue.

• The Mumbai ITAT followed the above decision and quashed the reassessment proceedings in the following cases :

• Tata International Ltd. v. Dy. CIT (2012) 52 SOT 465 (Mum.)

• Telco Dadajee Dhakjee Ltd. v. DCIT (Mum.) (TM) – itatonline.org

• Muller & Philips (India) Ltd. v. ITO (Mum.)(Trib.); www.itatonline.org

• Jeevanlal Jain ITA No. 910/M/2014 dt 13-1-2016, Bench J; (Mum.) (Trib.)

5.4 Not giving copy of recorded reasons
– Assessment records not traceable

Before the Tribunal the question of supply of reasons recorded by the AO was raised by the assessee and it went to the root of the matter, the Bench directed the Departmental Representative to produce the records to verify as to whether the reasons were recorded by the AO and whether same were supplied to the assessee. The AO appeared with the assessment records but the relevant records were not traceable or were not available.

It was found that even after completion of the assessment/appellate proceedings the assessee was requesting the AO to supply him the copy of the reasons. But, till the date of hearing i.e. on 19-9-2014 i.e. even after 18 years of the issuance of notice u/s. 148 of the Act, the AO is not been able to prove that the assessee was supplied copy of the reasons recorded. Hence, the assessment was quashed.

Vinoda B. Jain v. JCIT, ITA No. 676/M/2014 dt. 24/9/2014, AY 1991-92, (Mumbai ITAT) (www.ctconline.org)

6. New reasons cannot be allowed to be introduced or supplied

6.1 New reasons cannot be allowed to be introduced or supplied by way of affidavit. Validity of an order must be judged by the reasons so mentioned therein. Reasons recorded cannot be supplemented by filing affidavit or making oral submission.

Hindustan Lever Ltd. v. R. B. Wadkar 268 ITR 332 (Bom)

Mohinder Singh Gill v. Chief Election AIR 1978 SC 851

Mrs. Usha A. Kalwani v. S. N. Soni 272 ITR 67 (Bom)

Godrej Industries Ltd. v. B. S. Singh, Dy. CIT (2015) 377 ITR 1 (Bom.)

6.2 Reason must be based on the relevant material on record at the time of recording reasons. 3i Infotech Ltd. v. ACIT (2010) 329 ITR 257 (Bom.)

6.3 If the recorded reasons show contradiction and inconsistency it means necessary satisfaction in terms of the statutory provision has not been recorded at all. The Court cannot be called upon to indulge in guess work or speculate as to which reason has enabled the AO to act. On said issue reassessment was quashed:

Plus Paper Food Pac Ltd. v. ITO(2015) 374 ITR 485 (Bom.)(HC)

6.4 Proper reasons to believe is must, even if there is no assessment u/s. 143(3)
– Only reasons recorded by Assessing officer must be considered.

Prashant S. Joshi v. ITO 324 ITR 154 (Bom)

6.5 It is well settled that the reasons recorded for reopening the assessment have to speak for themselves. The reasons must provide a live link to the formation of the belief that income had escaped assessment. These reasons cannot be supplied subsequent to the recording of such reasons either in the form of an order rejecting the objections or an affidavit filed by the Revenue

Sabharwal Properties Industries Pvt. Ltd. v. ITO (2016) 382 ITR 547 (Delhi)(HC)

6.6 Once a query has been raised during the assessment proceedings and the assessee has responded to the query to the satisfaction of AO, it must apply that there is due application of mind by the AO to the issue raised. It is not open to the AO 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
– Reassessment was quashed.

GKN Sinter Metals Ltd. v. Ramapriya Raghavan (Ms.), ACIT (2015) 371 ITR 225 (Bom.)(HC)

7. Succeeding Assessing Officer cannot improve upon the reasons which were originally communicated to the assessee

7.1 In the case of
Indivest Pvt. Ltd. v. ADDIT (2012) 250 CTR 15/206 Taxman 351 (Bom.)

The assessee company filed its return of income for the A.Y. 2006-07 on 31st Oct., 2006 declaring nil income. The assessee claimed that profits earned from the transactions in Indian securities are not liable to tax in India in view of Article 7 of the India-Singapore treaty because the assessee company did not have PE in India. The assessment was reopened on the ground that no foreign companies are allowed to invest through stock exchange in India unless it is approved as FII by the regulatory authorities viz. RBI, SEBI. etc. According to the Assessing Officer the gain earned on investment as FII is liable to be taxed under section 115AD. The reassessment notice was challenged before the Court, the Court held that the attention was drawn to the notice of Assessing Officer that the assessee is not an FII and that provisions of section 115AD would not be attracted. The Assessing Officer attempted to improve upon the reasons which were originally communicated to the assessee. Those reasons constitute the foundation of action initiated by the Assessing Officer for reopening of assessment. Those reasons cannot be supplemented or improved upon subsequently. The court held that in the absence of any tangible material assessment could not be reopened under section 147, further succeeding Assessing Officer has clearly attempted to improve upon the reasons which were originally communicated to the assessee which was not permissible.

7.2 Similarly in the case Varshaben Sanatbhai Patel v. ITO (2016) 282 CTR 75 (Guj.)(HC)
it was observed that since the belief of the AO was not based upon the material on record, but on some other material from an external source which did not find reference in the reasons recorded by him, it was held that the basic requirement of section 147 was not satisfied

Reopening is not permissible on borrowed satisfaction of another Assessing Officer

7.3 Assessing Officer recording reasons for assessment and Assessing Officer issuing notice under section 148 must be the same person. Successor Assessing Officer cannot issue notice under section 148 on the basis of reasons recorded by predecessor Assessing Officer. Notice issued invalid and deserves to be quashed.

– Hyoup Food and Oil Industries Ltd. v. ACIT (2008) 307 ITR 115 (Guj.)

– CIT & Anr v. Aslam Ullakhan (2010) 321 ITR 150 (Kar.)

Notice u/s. 148 invalid as it was issued on direction of CIT.

Reasons to be formed only by jurisdictional Assessing Officer and not any other Assessing Officer, and issuance of notice is mandatory

7.4 The basic requirement of section 147 is that the Assessing Officer must have a reason to believe that any income chargeable to tax has escaped assessment and such belief must be belief of jurisdictional Assessing Officer and not any other Assessing Officer or authority or department. Therefore the jurisdiction of AO to reopen an assessment under section 147 depends upon issuance of a valid notice and in absence of the same entire proceedings taken by him would become void for want of jurisdiction. (A.Y. 2006-07)

ACIT v. Resham Petrotech Ltd. (2012) 136 ITD 185 (Ahd.)(Trib.)

7.5 Assessment in Kolkata
– Reassessment notice in Delhi, such reassessment is held to be without jurisdiction. (S. 127)

Assessment having been made by AO in Kolkata, in the absence of any order under section 127 transferring the case, reassessment notice issued by AO at Delhi and all subsequent proceedings based on said notice are without jurisdiction.

Smriti Kedia (Smt.) v. UOI (2012) 71 DTR 245 / 250 CTR 221 (Cal.)

Similarly in the case of ITO v. Rajender Prasad Gupta (2010) 48 DTR 489 (JD)(Trib.)

Assessee was assessed at Suratgarh, Notice issued by ITO at Delhi , matter later transferred to ITO Suratgarhs, however AO did not issued fresh notice or recorded reasons
– Held ITO did not have jurisdiction notice invalid.

8 Reasons – Non-application of mind

8.1 Reassessment merely on the basis of investigation wing held to be not valid

Notice issued after the expiry of four years from the end of the relevant assessment year by the Assessing Officer merely acting mechanically on the information supplied by the Investigation wing about the accommodation entries provided by the assessee to certain entities without applying his own mind was led to be not justified. (A.Y. 2004-05, 2006-07)

CIT v. Kamdhenu Steel & Alloys Ltd. (2012) 248 CTR 33 (Delhi)(High Court)

CIT v. Multiplex Trading & Industrial Co. Ltd. (2015) 128 DTR 217/63 taxmann.com 170 (Delhi)(HC)

8.2 In the case of
ACIT v. Dhariya Construction Co (2010) 328 ITR 515 (SC) wherein it was held that the opinion of DVO per se is not an information for the purpose of reopening assessment under section 147 of the Act

8.3 Similarly in the case of CIT v. Indo Arab Air Services (2016) 130 DTR 78/ 283 CTR 92 (Delhi)(HC) it was held that mere information that huge cash deposits were made in the bank accounts could not give the AO prima facie belief that income has escaped assessment. The AO is required to form
prima facie opinion based on tangible material which provides the nexus or the link having reason to believe that income has escaped assessment. The AO was also required to examine whether the cash deposits were disclosed in the return of income to form an opinion that income has escaped assessment.

8.4 The power to reopen an assessment is conditional on the formation of a reason to believe that income chargeable to tax has escaped assessment. The power is not akin to a review. The existence of tangible material is necessary to ensure against an arbitrary exercise of power.

Aventis Pharma Ltd. v. ACIT (2010) 323 ITR 570 (Bom.)

9. Reason to believe of the AO

9.1 The Apex Court in the case of
Calcutta Discount Co. Ltd. (1961) 41 ITR 191 (SC) analysed the Phrase "reason to believe" and observed that "It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be
drawn." 

It is not for somebody else to tell the assessing authority what inferences, whether of facts or law, should be drawn.

In the case of CIT v. Greenworld Corporation (2009) 314 ITR 81 (SC) it was held that the assessment order passed on the dictates of the higher authority being wholly without jurisdiction, was a nullity..

9.2 Reopening of assessment on basis of letter of Commissioner (Appeals) containing identical facts stated by assessee was held not valid.
[United Shippers Ltd. v. ACIT (2015) 371 ITR 441 (Bom.)]

9.3 Similarly in case of
Sun Pharmaceutical Industries Ltd. v. Dy.CIT (2016) 381 ITR 387 (Delhi)(HC). The notice under section 148 was issued as a result of Instruction No. 9 of 2006 dated November 7, 2006 issued by the Central Board of Direct Taxes. These audit objections were not accepted by the Assessing Officer. CBDT instruction directing remedial action in case of audit objections – Notice based solely on such instruction not valid.

Reasons to believe – Survey

9.4 Detection of excess stock or unaccounted expenditure on renovation of business premises at the time of survey u/s. 133A in a subsequent year, could not constitute reason to believe that such discrepancies existed in earlier years also and, therefore, reopening of assessments for those years on the basis of aforesaid reason to believe was not valid.

CIT v. Gupta Abhushan (P) Ltd. (2008) 16 DTR (Del) 76

9.5 Reasons recorded prior and subsequent to survey not satisfying requirement of law
– Nothing before Assessing Officer to record belief that escapement has taken place -Notice is not valid.

Hemant Traders v. ITO (2015) 375 ITR 167 (Bom.)(HC)

9.6 AO can assume jurisdiction under this provision only if he has sufficient material before him; he cannot form belief on the basis of his whim and fancy and the existence of material must be real. Further, there must be nexus between the material and escapement of income. Statement recorded at the time of survey does not have evidentiary value, therefore, cannot be the basis for reopening. Reassessment proceedings initiated u/s. 148 by AO based on survey statement was held to be invalid and thereby were quashed.

Alfa Radiological Centre Pvt. Ltd. v. ITO (2015) 44 ITR 184 (Chandigarh )(Trib.)

9.7 Irrelevant and non-existing reasons

Balakrishna H. Wani v. ITO 321 ITR 519 (Bom)

Notice based on suspicion and surmise
– Notice is not valid. The requirement of law is "reason to believe" 
and not reason to "suspect".

Krown Agro Foods P. Ltd. v. ACIT (2015) 375 ITR 460 (Delhi) (HC)

10. No reassessment just to make an enquiry or verification

No reopening to make fishing inquiries.

a) Bhor Industries Ltd. v. ACIT
– [(2004) 267 ITR 161 (Bom)]

b) Hindutan Lever Ltd. v. R. B. Wadkar, ACIT
– [(2004) 268 ITR 332 (Bom)]

c) Bhogwati Sahakari Sakhar Karkhana Ltd. v. Dy. CIT [(2004) 269 ITR 186 (Bom)]

d) Ajanta Pharma Ltd. v. ACIT
– [(2004) 267 ITR 200 (Bom)]

e) Pr. CIT v. G & G Pharma India Ltd. (Delhi)(HC) ; www.itatonline.com

f) Reassessment – Distinction between reason to believe and reason to suspect.

Universal Power Systems (P) Ltd. v. Asst. CIT [48 ITR (Tribunal) 191 (Chennai)]

The assessment reopened merely to verify discrepancy- i.e. variation between Income declared by assessee and Income shown in TDS Certificate i.e. case reopened on reasons to suspect is not valid.

g) No reason to believe that income has escaped assessment
– Assessing Officer wanted to inquire about source of funds of an immovable property purchased by assessee
– No reason to issue notice for reassessment.

CIT v. Maniben Velji Shah (2006) 283 ITR 453 (Bom.)(High Court)

h) The AO has mechanically issued notice u/s. 148 of the Act, on the basis of information allegedly received by him from the Directorate of Income Tax (Investigation), New Delhi. AO has not applied his mind so as to come to an independent conclusion that he has reason to believe that income has escaped during the year.
Banke Bihar Properties Pvt. Ltd. v. ITO (Delhi)(Trib); www.itatonline.org

New Amendments made by Finance Act, 2016.

• Pr. DGIT/DGIT has power to collect information as per section 133C. Now provided that Pr. DGIT/DGIT may process such information or document and make available the outcome to the AO

• Expln. 2 to 147 : Additional clause (ca) inserted

11. Expl. 3 to Sec. 147: Any Other Income

11.1 If Assessing officer does not assess income for which reasons were recorded u/s. 147 he cannot assess other income u/s. 147.

CIT v. Jet Airways (I) Ltd. (2011) 331 ITR 236 (Bom)

• Once Asst is open – any other income can be considered. Expl 3 to sec 147:

CIT v. Best Wood 331 ITR 63 Ker FB.

11.2 Though Explanation 3 to s. 147 inserted by the F Y 2009 w.r. e.f
1-4-1989 permits the AO to assess or reassess income which has
escaped assessment even if the recorded reasons have not been
recorded with regard to such items, it is essential that the items
in respect of which the reasons had been recorded are assessed. If
the AO accepts that the items for which reasons are recorded have
not escaped assessment, it means he had no "reasons to believe that income has escaped
assessment"  and the issue of the notice becomes invalid. If so, he has no jurisdiction to assess any other income.

Ranbaxy Laboratories Ltd v. CIT (2011) 60 DTR 77(Delhi) (High Court)

(Jet Airways supra followed).

11.3 Similar view was taken in
Hotel Regal International & Anr. v. ITO (2010) 320 ITR 573 (Cal)
wherein the Petitioner were called upon to file objection to the notice u/s. 148 proposing to reopen the assessment on ground that &#8377 73,219 had escaped asst. Now the authorities could not shift their stand and pass on order on other ground that valuation report received subsequent to passing of the order disposing the objection the Assessing Officer must consider the material and pass speaking order. Assessment quashed.

A Reference can also be made to following decisions :

• ITO v. Bidbhanjan Investment & Trading Co. (P) Ltd. ( 2011) 59 DTR 345 ( Mum) (Trib)

• Dy. CIT v. Takshila Educational Society (2016) 131 DTR 332/ 284 CTR 306 (Pat.) (HC)

• Anugrah Varhney v. ITO (Agra)(Trib.); www.itatonline.org

12 Procedural defect: Service of Notice etc. : S. 292BB

12.1 No notice u/s. 148 having been served on the assessee prior to reopening of assessment, Asst. made u/s. 147 was bad in law; argument based on S. 292BB was not sustainable on the facts of the case.

CIT v. Mani Kakkar (2009) 18 DTR (Del) 145 (Asst yr 2001-2002)

12.2 Issue of notice beyond
limitation period: Expression "to issue"  – Meaning send out – Notice signed on 31-3-2010 sent to speed post on 7/4/2010
– Notice issued after six years for the relevant A.Y. 2003-04

Kanubhai M. Patel (HUF) v. HIren Bhatt (2010) 43 DTR 329 (Guj.)

12.3 Notice issued within period of limitation but send after that period
– Direction to ascertain when the notice had been dispatched by reg. post.

CIT v. Major Tikka Khushwat Singh 212 ITR 658 (SC)

R.K. Upadhaya v. Shanabhai P. Patel (1987) 166 ITR 163 (SC)

12.4 The notice prescribed by section 148 cannot be regarded as a mere procedural requirement. It is only if the said notice is served on the assessee that the ITO would be justified in taking proceedings against the assessee. If no notice us issued or if the notice issued is shown to be invalid, then the proceedings taken by the ITO would be illegal and void.

Y. Narayan Chetty v. ITO (1959) 35 ITR 388 (SC),

CIT v. Thayaballi Mulla Jeevaji Kapasi (1967) 66 ITR 147 (SC)

CIT v. Kurban Hussain Ibrahimji Mithiborwala (1971) 82 ITR 821 (SC)

12.5 Notice issued to individual. His HUF cannot be assessed on the ground that notice was issued to individual who was Karta of HUF. Defect of jurisdiction.

Suraj Mal HUF v. ITO (2007) 109 ITD 327 (Del.)(TM).

12.6 Assessment
– Amalgamation – Transferor company – Scheme of amalgamation sanctioned by the High Court
– No proceedings can be initiated against the transferor company.

Khurana Engineering Ltd. v. DCIT (2013) 217 Taxman 75 (Guj.)(HC)

12.7 Similarly in the case of Techpac Holdings Ltd. v. Dy. CIT [(2016) 135 DTR (Bombay HC) 322] it was held that service of notice u/s. 148 on the assessee company’s subsidiary was not valid service of notice,.

Service by affixture

12.8 Where notice was not sent by registered post nor served upon assessee in any other manner whatsoever, proceedings for assessment were void.

CIT v. Harish J. Punjabi (2008) 297 ITR 424 (Del.)

Invalid Service of notice not a procedural defect. No material to prove efforts made by Department to serve notice in normal course.
Arunlal v. ACIT (2010) 1 ITR 1 (Trib.) (Agra) (TM)

12.9 Similarly in case of
ITO v. Om Praksh Kukreja (2016) 134 DTR (Chd,. Trib.) 208 it was held that where A.O having served the notice under S.148 by affixture at a wrong address where the assessee was not residing it cannot be said that the notice u/s. 148 was served upon the assessee and therefore the resultant reassessment proceedings were invalid and bad in law.

12.10 A strict procedure has to be followed for service by affixture. If done improperly, the notice and the resultant assessment order are null and void

(i) As per sub-section (1) of section 282, the notice is to be served on the person named therein either by post or as if it was a summons issued by Court under the Code of Civil Procedure, 1908 (V of 1908). The relevant provision for effecting of service by different modes are contained in rules 17, 19 and 20 of Order V of CPC. Rules 17, 19 and 20 of Order V of CPC lay down the procedure for service of summons/notice and, therefore, the procedure laid down therein cannot be surpassed because the intention of the legislature behind these provisions is that strict compliance of the procedure laid down therein has to be made. The expression after using all due and reasonable diligence’ appearing in rule 17 has been considered in many cases and it has been held that unless a real and substantial effort has been made to find the defendant after proper enquiries, the Serving Officer cannot be deemed to have exercised
‘due and reasonable diligence’. Before taking advantage of rule 17, he must make diligent search for the person to be served. He therefore, must take pain to find him and also to make mention of his efforts in the report. Another requirement of rule 17 is that the Serving Officer should state that he has affixed the copy of summons as per this rule. The circumstances under which he did so and the name and address of the person by whom the house or premises were identified and in whose premises the copy of the summon was affixed. These facts should also be verified by an affidavit of the Serving Officer.

(ii) The reason for taking all these precautions is that service by affixture is substituted service and since it is not direct or personal service upon the defendant, to bind him by such mode of service the mere formality of affixture is not sufficient. Since the service has to be done after making the necessary efforts, in order to establish the genuineness of such service, the Serving Officer is required to state his full action in the report and reliance can be placed on such report only when it sets out all the circumstances which are also duly verified by the witnesses in whose presence the affixture was done and thus the affidavit of the Serving Officer deposing such procedure adopted by him would also be essential. In the instant case, the whole thing had been done in one stroke. It was not known as to why and under which circumstances another entry for service of notice by affixture was made on 27-7-2012 when sufficient time was available through normal service till 30-9-2012. Nor there is any entry in the note-sheet by the AO directing the Inspector for service by affixture and had only recorded the fact that the notice was served by the affixture. It appears that the report of the Inspector was obtained without issuing any prior direction for such process or mode. In view of the above, it is clear that there was no valid service of notice u/s.143(2) by way of affixation and the assessment made on the basis of such invalid notice could not be treated to be valid assessment and, hence, such assessment order deserves to be treated as null and void and liable to be quashed and annulled.

Sanjay Badani v. DCIT (ITAT Mumbai)

13. Notice u/s. 143(2) is Mandatory

13.1 Issue of a notice u/s.143(2) is mandatory. The failure to do so renders the reassessment void (CWT v. HUF of H. H. Late Shri. J.M. Scindia (2008) 300 ITR 193 (Bom). S.292BB was inserted w.e.f. 1-4-2008 and came into operation prospectively for AY 2008-09 and onwards.

• CIT v. Salman Khan (Bom.)(HC) www.itatonline.org.

• CIT v. Mundra Nanvati (Bombay High Court) 227 CTR 387 Bom.

• CIT v. Virendra Kumar Agarwal Appeal No. 2429 OF 2009 Dt. 7/1/2010 (Bom.)

• Dy. CIT v. Dharampal Satyapal Ltd. (2016) 130 DTR 241 (Delhi)(Trib.)

13.2 One should note that a Jurisdictional error cannot be cured by section 292BB. A reference can be made to a recent decision of Delhi High Court in the case
PCIT v. Silver Line (2016) 383 ITR 455 (Delhi)(HC).

14. No reassessment u/s. 148, if assessment or reassessment is pending

14.1 So long the asst. proceedings are pending the AO cannot have any reason to believe that income for that year has escaped asst (period for issue of notice u/s. 143(2) had not expired)

CIT v. Qatalys Software Technology 308 ITR 249 (Mad.)

14.2 When time limit for issue of notice under section 143(2) has not expired, Assessing Officer cannot initiate proceedings under section 147.

Super Spinning Mills Ltd. v. Addl. CIT (2010) 38 SOT 14 (Chennai)(TM)(Trib.)

14.3 Notice under section 148 cannot be issued for making reassessment, when time limit is available for issue of notice under section 143(2) for making an assessment under section 143(3). A reference can be made to following decisions in favour as well as against the assessee on the issue :

CIT v. TCP Ltd. (2010) 323 ITR 346 (Mad.)

Trustees of H.E.H. The Nizam’s Supplemental Family Trust v. CIT
– [(2000) 242 ITR 381 (SC)]

Ghanshyamdas v. Regional Assistant Commissioner of Sales Tax
– [(1964) 51 ITR 557 (SC)]

CIT v. S. Raman Chettiar
– [(1965) 55 ITR 630 (SC)]

Commercial Art Press v. CIT
– [(1978) 115 ITR 876 (All)]

A.S.S.P & Co. v. C.I.T
– [(1988) 172 ITR 274 (Mad.)]

CIT v. P. Krishnakutty Menon
– [(1990) 181 ITR 237 (Ker.)]

Indian Tube Co. Ltd. v. ITO
– [(2005) 272 ITR 439 (Cal.)]

CIT v. Rejendra G. Shah (247 ITR 372) (Bom.) [in favour of assessee]

Jimmy F. Bilimoria [ITA No.6063/Mum/2012] (Against the assessee)

XL India Business Services (P.) Ltd. v. ACIT (2014) 67 SOT 117/167 TTJ 467 (Delhi )(Trib.)(In context to reference to TPO. In favour of assessee)

CIT. v. Shamlal Bajaj (2014)222 Taxman 173 (Mag.) (Mad.)(HC)

S.147 : Reassessment
– Non-initiation of action u/s. 143(2) though time is available. Reassessment is held to be valid. (Against the assessee)

CIT v. Jora Singh (2013) 215 Taxman 424 / 262 CTR 630 (All.)(HC)

15. Reopening beyond 4 years

15.1 Tribunal having concluded that all the material facts were fully and truly disclosed by the assessee at the time of original assessment, invoking the provisions of S. 147 after the expiry of four years from the end of the relevant asst. year was not valid.

German Remedies Ltd. v. DCIT (2006) 287 ITR 494 (Bom)

CIT v. Former Finance (2003) 264 ITR 566 (SC)

Tata Business Support Services Ltd. v. Dy. CIT (2015) 232 Taxman 702 (Bom.)(HC)

Tirupati Foam Ltd. v. Dy. CIT (2016) 380 ITR 493 (Guj.)(HC)

Gujarat Eco Textile Park Ltd. v. ACIT (2015) 372 ITR 584 (Guj.)(HC)

Nirmal Bang Securities (P) Ltd. v. ACIT. (2016) 382 ITR 93 (Bom.)(HC)

15.2 There was no tangible material before the Assessing Officer to form the belief that the income had escaped assessment and therefore, reopening of assessment under section 147 was not valid.

Balakrishna Hiralal Wani v. ITO (2010) 321 ITR 519 (Bom.)

15.3 Where the deduction under section 80-IB of the Act was allowed to the assessee by the Assessing Officer in the original assessment order under section 143(3) of the Act after considering the audit report in Form 10CCB and the other details filed by the assessee, it cannot be said that there was a failure on the part of the assessee to disclose fully and truly all the facts for the assessment so as to invoke the provisions of section 147 for re-examining the deduction under section 80-IB of the Act, after expiry of four years from the end of the assessment year.

Purity Techtextile (P) Ltd. v. ACIT & Anr. (2010) 325 ITR 459 (Bom.)

Failure to disclose all material facts was not mentioned in the recorded reasons-reassessment was held to be not valid

15.4 Notice after expiry of four years
– As there is no allegation in the reasons for failure to disclose material facts necessary for assessment reopening beyond four years was held to be not valid.

The assessment was completed under section 143 (3) on 14th December, 2007 accepting the melting loss at 7.75 percent. The notice for reopening was issued on the ground that in the similar line of business other assessee have claimed the melting loss at 5.5 percent. The objection of assessee was rejected by the Assessing Officer. The assessee challenged the reopening by writ petition. The court allowed the writ petition and held that there is no allegation in the reasons which have been disclosed to the assessee that there was any failure on his part to fully and truly disclose material facts necessary for assessment and therefore reopening beyond four years was not valid. (A.Y. 2005-06)

Sound Casting(P) Ltd v. Dy.CIT (2012) 250 CTR 119 (Bom.)

Tao Publishing (P) Ltd. v. Dy.CIT (2015) 370 ITR 135 (Bom.)

Tata Business Support Services Ltd. v. DCIT(2015) 121 DTR 222/ 232 Taxman 702 (Bom)

15.5 Beyond four years
– Reassessment held to be not valid in the absence of any new or additional information.

Where the assessee had made full and true disclosure and also there was a note by the auditor in his audit report, reopening of assessment beyond the period of four years was held to be not valid notwithstanding the fact that for subsequent assessment year a similar addition had be made by the assessing officer. Assessment cannot be reopened on the basis of a mere change of opinion. There should be some tangible material with the assessing officer to come to the conclusion that there is an escapement of income. A mere change of opinion on the part of the Assessing Officer in the course of assessment for a subsequent year cannot justify the reopening of an assessment.(A.Y. 2006-07)

NYK Line (India) Ltd. v. Dy. CIT (2012) 68 DTR 90 (Bom)(High Court)

15.6 Reassessment
– Despite "Wrong Claim" , reopening invalid if failure to disclose not alleged

It is necessary for the AO to first state that there is a failure to disclose fully and truly all material facts. If he does not record such a failure he would not be entitled to proceed u/s. 147. There is a well known difference between a wrong claim made by an assessee after disclosing all the true and material facts and a wrong claim made by the assessee by withholding the material facts.

Titanor Components Limited v. ACIT (2011) 60 DTR 273 (Bom.)

16. Approval and sanction

16.1 CIT having mechanically granted approval for reopening of assessment without application of mind, the same is invalid and not sustainable.

German Remedies Ltd vs. Dy. CIT (2006) 287 ITR 494 (Bom) (Asst Yr. 1997-99)

CIT v. Suman Waman Chaudhary (2010) 321 ITR 495 (Bom)

SLP dismissed on 12-2-2008 (2009) 312 ITR 339 (St.)

CIT v. S. Goyanka Lines & Chemical Ltd. (2016) 237 Taxman 378 (SC)

United Electrical Company (P) Ltd v. CIT & Ors (2002) 258 ITR 317 (Del)

Asiatic Oxygen Ltd. v. Dy. CIT (2015) 372 ITR 421 (Cal.) (HC)

16.2 Merely affixing a
‘yes’ stamp and signing underneath suggested that the decision was taken by the Board in a mechanical manner as such, the same was not a sufficient compliance under section 151 of the Act. (A. Y. 1965-66)

Central India Electric Supply Co. Ltd. v. ITO (2011) 51 DTR 51 (Del.)(H C)

16.3 Sanction of Commissioner instead of JCIT renders reopening is void

There is no statutory provision under which a power to be exercised by an officer can be exercised by a superior officer. When the statute mandates the satisfaction of a particular functionary for the exercise of a power, the satisfaction must be of that authority. Where a statute requires something to be done in a particular manner, it has to be done in that manner (SLP’s Siddhartha Ltd. followed)(A.Y. 2004-05)

Ghanshyam K. Khabrani v. ACIT (Bom)(High Court) www.itatonline.org

DSJ Communication Ltd. v. Dy.CIT (2014) 222 Taxman 129 (Bom.)(HC)

17. Disclosure of primary facts : No power to review

17.1 Order of Assessing officer u/s. 143(3) reflects that the primary facts relating to case was before the Assessing Officer therefore there was disclosure of all primary facts relating to claim of deduction u/s. 80-IB(10).

Mistry Lalji Narsi Development Corp. v. ACIT (2010) 229 CTR 359 (Bom.)

17.2 Allowance of bad debt was specifically raised in the original assessment proceedings and on receiving explanation from assessee the claim of assessee was allowed, reassessment held to be invalid.(A. Y. 2004-05)

Yash Raj Films P. Ltd. v. ACIT (2011) 332 ITR 428 (Bom.)

17.3 Assessment order is not a scrap of paper & AO is expected to have applied his mind. Reopening on ground of "oversight, inadvertence or mistake" is not permissible.

CIT v. Jet Speed Audio Pvt. Ltd. (2015) 372 ITR 762 (Bom.)

17.4 The Court held that AO has no power to review assessment order under shelter of re-opening of assessment under sections 147/148, therefore, it was not open for AO to re-look at same material only because he was subsequently of view that conclusion arrived at earlier was erroneous.

Housing Development Finance Corporation Ltd. v. J. P. Janjid (2014) 225 Taxman 81(Mag.) / (Bom.)(HC); CIT v. Amitabh Bachchan [2012] 349 ITR 76 (Bom.) (HC),

17.5 All facts were before AO at the time of original assessment as well as reopened asst. Even assuming that he failed to apply his mind, assessment cannot be reopened u/s. 147.

Asian Paints Ltd. v. CIT [2009] 308 ITR 195 (Bom.) (HC).

17.6. In the absence of any fresh material
– Reopening would amount to change of opinion. The CIT- 8. v. M/s. Advance Construction Co. Pvt. Ltd. [Income Tax Appeal No. 77 of 2014; dt 28-6-2016 (Bombay High Court)]

Statement of unconnected person

17.7 In the absence of any material before the AO a statement by an unconnected person did not constitute reason to believe that assessee income had escaped assessment especially when the assessee had produced all the material and relevant facts and therefore the reassessment proceedings could not be sustained.

Praful Chunilal Patel v. M.J. Makwana, ACIT (1999) 236 ITR 832 (Guj) (Asst year 1991-1992)

JCIT & Ors v. George Williamson (Aassam) Ltd (2002) 258 ITR 126 (Guj)

Reassessment based on statement of third party-Assessee not given opportunity to be heard-Reassessment not valid.

Kothari Metals v. ITO (2015) 377 ITR 581 (Karn.)(HC)

Share premium amount-No lack of disclosure or suppression of any material facts – No tangible reasons in notice – Notice not valid.

Alliance Space P. Ltd. v. ITO (2015) 375 ITR 473 (Bom.)(HC)

18. Disclosure in balance sheet also amounts to disclosure

CIT v. Corporation Bank Ltd (2002) 254 ITR 791 (SC)

Arthus Anerson & Co. v. ACIT (2010) 324 ITR 240 (Bom)

Considering the decision against of Dr.
Amin’s Pathology Lab v. P.N. Prasad (2001) 252 ITR 673 (Bom)

CIT v. Lincoln Pharmaceuticals Ltd. (2015) 375 ITR 561 (Guj.)(HC)

19. Full and true disclosures of all material facts

ICICI Securities Ltd. v. ACIT (2015) 231 Taxman 460 (Bom.)(HC)

Business India v. DCIT(2015) 370 ITR 154/299 Taxman 289 (Bom.) (HC)

Prashant Project Ltd. v. Asst. CIT (2011) 333 ITR 368 (Bom)

Hindustan Petroleum Corporation Ltd. v. Dy. CIT (2010) 328 ITR 534(Bom)

Betts India (P.) Ltd. v. Dy. CIT (2015) 235 Taxman 77 (Bom.)(HC)

Kimplas Trenton Fittings Ltd. v. ACIT (2012) 340 ITR 299 (Bom.)

Hamdard Laboratories (India) & Anr. v. ADIT(E) (2015) 379 ITR 393 (Delhi)(HC)

20. Reassessment within four years: Asst. completed u/s. 143(3)

20.1 An asst. order passed after detailed discussion cannot be reopened within a period of 4 years unless the AO has reason to believe that there is to some inherent defect in the assessment.

German Remedies Ltd. v. DCIT & Ors (2006) 285 ITR 26 (Bom)

Siemens Information System Ltd. v. ACIT (2007) 295 ITR 333 (Bom)

Godrej Agrovet Ltd. 323 ITR 97 (Bom)

Capgemini India (P.) Ltd. v. ACIT (2015) 232 Taxman 149 (Bom.)(HC)

20.2 Change of opinion
– Within period of four years

Once an assessment has been completed under section 143(3) after raising a query on a particular issue and accepting assessee’s reply to the query. Assessing Officer has no jurisdiction to reopen the assessment merely because the issue in question is not specifically adverted in the assessment order, unless there tangible material before the Assessing Officer to come to the conclusion that there is escapement of income. (Asst Year 1998-99).

Asst CIT v. Rolta India Ltd. (2011)132 ITD 98 (Mumbai) (TM ) (Trib)

20.3 Change of opinion
– reopening not permissible

Commissioner of Income Tax-3 v. SICOM LTD. [Income Tax Appeal No 137 of 2014 dt : 8-8-2016 (Bombay High Court)].

21. Reassessment – Change of opinion

21.1 Change of opinion

Amendment as per Direct Tax Laws (Amendment) Act, 1989 w.e.f. April 1, 1989 as also of sec. 148 to 152 have been elaborated in Circular No. 549, dated October 31, 1989. A perusal of clause 7.2 of the said circular makes it clear that the amendments had been carried out only with a view to allay fears t hat the omission of the expression reason to
believe"  from sec. 147 would give arbitrary power to AO to reopen past assessments on a mere change of opinion i.e. a more change of opinion cannot form basis for reopening a completed assessment.

CIT v. Kelvinator of India Ltd (2002) 256 ITR 1 (Del) (FB) (Asst Yr. 1997-1998)

Approved by Supreme Court in (2010) 320 ITR 561 (SC)

21.2 In determining whether commencement of reassessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage.

Raymond Woollen Mills Ltd. v. ITO And Others (1999) 236 ITR 34 (S.C.)

21.3 Points not decided while passing assessment order under section 143(3) not a case of change of opinion. Assessment reopened validly.

Yuvraj v. Union of India (2009) 315 ITR 84. (Bom.)

21.4 Change of opinion : Case laws

No new material brought on records
– Reassessment on change of opinion of officer not valid.

a. Asteroids Trading & Investment P. Ltd. v. DCIT (2009) 308 ITR 190 (Bom)

b. Asian Paints Ltd. v. DCIT (2008) 308 ITR 195 (Bom) (198)

c. ICICI Prudential Life Insurance Co. Ltd. (2010) 325 ITR 471 (Bom)

d. Aventis Pharma Ltd. v. Astt. CIT (2010) 323 ITR 570 (Bom) (577)

e. Nirmal Bang Securities (P) Ltd. v. ACIT. (2016) 382 ITR 93 (Bom.)(HC)

f. Change of opinion-Labour charges- Subsequent assessment year
– Reassessment was held to be bad in law:

CIT v. Srusti Diam (2015) 232 Taxman 127 (Bom.)(HC)

22. Re-assessment – Audit objection

22.1 AO having communicated to the auditor that a certain decision of a HC did not apply to the facts of the petitioners case but later rejected the objections raised by the petitioner to the notice u/s. 148 taking a contrary view without giving any reason as to why he has departed from the earlier view that the decision was not applicable, there was total non application of mind on the part of AO; matter remanded back to AO for de-novo consideration.

Asian Cerc Information Services (P) Ltd v. ITO (2007) 293 ITR 271 (Bom)

22.2 AO having allowed assessee’s claim for depreciation in the regular assessment and reopened the assessment pursuant to audit objection, it cannot be said that he had formed his own opinion that the income had escaped assessment, and the reopening being based on mere change of opinion, same was not valid.

IL & FS Investment Managers Ltd. v. ITO & Ors(2008) 298 ITR 32 (Bom) (Asst Year 2003-2004)

Vijaykumar M. Hirakhanwala (HUF) v. ITO & Ors (2006) 287 ITR 443 (Bom) (Asst year 1997-1998 to 1999-2001 to 2002-2003)

CIT v. Lucuns TVS Ltd. 249 ITR 306 (SC)

Prothious Engineering Services Pvt. Ltd. v. ITO (2016) 46 ITR 438 (Mum.)(Trib)

Purity Tech Textiles Pvt. Ltd. v. ACIT (2010) 325 ITR 459 (Bom)

CIT v. DRM Enterprises (2015) 230 Taxman 61/ 120 DTR 401(Bom.)(HC)

22.3 Audit objection cannot be the basis for reopening of assessment to income tax by the revenue.

Indian & Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC).

22.4 Reassessment was not valid as the AO held no belief on his own at any point of time that income of assessee had escaped asst. on account of erroneous computation of benefit u/s 80HHC and was constrained to issue notice only on the basis of audit object.

Adani Exports v. DCIT (1999) 240 ITR 224 (Guj) (Asst Yr 1993-94)

22.5 S. 147: If AO contests the audit objection but still reopens to comply with the audit objection, it means he has not applied his mind independently and the reopening is void:

Raajratna Metal Industries Ltd v. ACIT (Gujarat High Court).

National Construction Co. v. Jt. CIT (2015) 234 Taxman 332 (Guj.)(HC)

• Assessing Officer tried to justify his order and requested to drop the proceedings. Notice based solely on opinion of audit party
– Not valid

Shree Ram Builders v. ACIT (OSD) (2015) 377 ITR 631 (Guj.)(HC)

22.6 Audit objection vis-Ã -vis debatable issue

Letter written by AO to CIT showing that AO himself found that the issue on which reassessment was sought was debatable, reasons recorded by A.O did not meet the requirements of law.

Sunil Gavaskar v. ITO (2016) 134 DTR (Mumbai ITAT) 113.

22.7 CBDT instruction directing remedial action in case of audit objections. Notice based solely on such instruction (CBDT Instruction No. 9 of 2006). No failure to disclose fact. No allegation that material facts had not been disclosed. Notice was held not valid.

Sun Pharmaceutical Industries Ltd. v. Dy.CIT (2016) 381 ITR 387/ 237 Taxman 709(Delhi)(HC)

22.7 Assessing Officer disagreeing with audit objection yet issuing notice
-Reassessment was held to be not valid

AVTEC Ltd. v. DCIT(2015) 370 ITR 611 (Delhi)(HC)

23. Reassessment – Interpretation of High Court decision

Reopening of assessment on the basis of wrong interpretation of High Court decision was invalid.

Assam Co. Ltd. v. UOI & Ors (2005) 275 ITR 609 (Gau)

24. Direction of the higher authorities

24.1 Revisional authority having directed the AO to adjudicate specific issues which were addressed and examined by him, asst made by the AO on a higher total income by assuming more powers than that of the revisional authority is patently illegal and without jurisdiction.

N. Seetharaman v. CIT (2008) 298 ITR 210 (Mad)

(Asst yr. 1989-90 to 1999-2000)

24.2 The Assessing Officer for the assessment year 2000-01 recorded a specific note in the assessment order which indicated that the assessment order was passed under the dictates of the Commissioner. The Supreme Court in the challenge to the reopening for the same assessment year held that the assessment order passed on the dictates of the higher authority being wholly without jurisdiction, was a nullity. Therefore with a view to complete the justice to the parties. The Supreme Court directed that the assessment proceedings should be gone through again.

CIT v. Greenworld Corporation (2009) 314 ITR 81 (SC).

25. Supreme Court decision cannot be the basis for reopening

The ITO cannot seek to reopen an assessment under section 147 on the basis of the Supreme Court decision in a case where assessee had disclosed all material facts.

Indra Co. Ltd. v. ITO (1971) 80 ITR 559 (Cal.)(Asst yr 1959-60)

SESA Goa ltd v. Jt CIT 2007 294 ITR 101 (BOM)

CIT v. ITW India Ltd. (2015) 377 ITR 195 (P & H)(HC)

Subsequent High court decision – beyond 4 year Discloure of complete facts. Reopening bad in law.

Contrary decision:

Kartikeya International v. CIT (2010) 329 ITR 539 (All.)

Asst. CIT v. Central Warehousing Corp.(2012) 67 DTR 356 (Delhi)

26. Reassessment based on retrospective amendment not justified

• Denish Industries Ltd. v. ITO ( ) 271 ITR 340 (Guj.) (346) SLP dismissed ( ) 275 ITR 1 (St.)

• Rallies India Ltd. v. ACIT (2010) 323 ITR 54 (Bom)

• SGS India Pvt. Ltd. v. ACIT (2007) 292 ITR 93 (Bom)

Law in subsequent A.Y. is different, reopening not proper.

• Siemens Information Ltd. (2007) 293 ITR 548 (Bom)

Notice u/s. 148 based on amended law not applicable to relevant A.Y.

• Sadbhav Engineering Ltd. v. Dy. CIT ( ) 333 ITR 483 (Guj.)

• Kalpataru Sthapatya (P) Ltd. (2012) 68 DTR 221 (Guj)(High Court).

• Reopening, even within 4 years, on basis of retrospective amendment to section 80-IB(10) is held to be invalid.:

Ganesh Housing Corporation Ltd. v. Dy. CIT (Guj.)(High Court) www.itatonline.org

• Reassessment held to be invalid only on the basis of retrospective amendment as there is no failure to disclose fully and truly all material facts. [S. 80-IB(10)]

Assessee claimed the deduction under section 80(IB)(10) after enquiry the deduction was allowed. The amendment was introduced by Finance Act, 2009, inserting Explanation with retrospective effect from 1st April, 2001 which denied benefit of deduction under section 80-IB(10) to works contractors execution housing project. The only reason for issuing the notice, was amendment brought in the statute book with retrospective effect. The said notice was challenged before the High Court. High Court quashed the notice and held that reopening only on the basis of retrospective amendment of law is not justified. (A. Y. 2004-05).

Pravin Kumar Bhogilal Shah v. ITO (2012) 66 DTR 236 (Guj.)(High Court)

Vinayak Construction v. ITO (2012) 66 DTR 233 (Guj.)(High Court)

27. Appeal pending from original assessment order. Reassessment cannot be done as the order merged with order of higher authorities

Proviso to section 147 has been inserted by Finance Act, 2008, w.e.f. 2008.

(2008) 298 ITR 163 (st), – Notes on clauses.

(2008) 298 ITR St. 222 to 224 Memorandum explaining the provision.

Metro Auto Corporation v. ITO (2006) 286 ITR 618 (Bom)

Vodafone Essar Gujarat Ltd. v. ACIT (2010) 37 DTR 259 (Guj.)

Appeal was pending before ITAT and the matter was subject matter of appeal before CIT(A). No Reassessment. Once an issue is subject matter of appeal before Tribunal , issuance of notice of reassessment on said ground hasto be considered bad in law. (A.Y. 2000-01).

Chika Overseas (P) Ltd v. ITO ( 2011) 131 ITD 471 (Mum) (Trib).

ICICI Bank Ltd. v. Dy. CIT (2012) 246 CTR 292/ 204 Taxman 65 (Mag.)(Bom.)(High)

• Reassessment
– Change of opinion – Beyond four years – Third proviso – Merger – There was no failure on part of assessee to disclose full and true particulars, and order of original assessment was merged with order of the appellate Authority, hence the reassessment held to be invalid

• CIT v. Reliance Energy Ltd. (2013) 81 DTR 130 / 255 CTR 357 (Bom.)(HC)

• Allanasons Ltd. v. ACIT (2015) 230 Taxman 436 (Bom.)(HC)

• GTL Ltd. v. Asst CIT (2015) 37 ITR 376 (Mum.)(Trib.).

28. Jurisdiction – Reassessment

Jurisdiction can be challenged in second appeal

Investment Corpn Ltd v. CIT (1992) 194 ITR 548 (Bom) (556)

N. Nagaganath Iyer v. CIT (1996) 60 ITR 647 (Bom) (655)

Hemal Knitting Industries v. ACIT (2010) 127 ITD 160 (Chennai)(TM)

– Rule 27 of ITAT Rules: Reassessment ground can be raised.

– If assessee does not ask for the reasons recorded and object to reopening, ITAT cannot remand to Assessing officer and give assessee another opportunity.
CIT v.
Safetag Int. India Pvt. Ltd. dt. 3-2-2011 (Del.) (H.C.)

29. Rectification proceedings initiated and dropped

29.1 Dept. having taken one of the two possible views in the matter of calculation of deduction u/s. 10B and 80HHE asst. cannot be reopened by taking the other view more so when the CIT(A) has already quashed the rectification us. 154 which was made on the very same ground.

Westun Outdoor Interactive (P) Ltd v. A.K. Phute, ITO & Ors. (2006) 286 ITR 620 (Bom) (Asst yr 2000-2001)

29.2 Allowance u/s. 80HHC having been granted by the ITO in rectification proceedings. The remedy the against lay with the dept. either u/s. 154 or S. 263 and not S. 147 further reassessment having been made on a date earlier than fixed same was bad.

Smt. Jamila Ansari v. ITO & Anr (1997) 225 ITR 490 (Addl)

29.3 Sec. 147 viz-a-viz Sec.154

Section 147 reopening for rectifying sections 154 mistakes are invalid.

• Hindustan Unilever Ltd. v. Dy. CIT (2011) 325 ITR 102 (Bom.)

• CIT v. EID Parry Ltd. [(1995) 216 ITR 489 (Mad)]

The jurisdiction under sections 147(b) and 154 are different but in cases where they seem to overlap, the ITO may choose one in preference to the other and once he has done so, he should not give it up at a later stage and have recourse to the other.

• Reassessment – Rectification pending
– (S.154)

When proceedings under section 154 were pending on the same issue and not concluded , parallel proceedings under section 147 initiated by the Assessing Officer are invalid ab initio, especially when except the return and its enclosures, no other material or information was in the possession of the assessing Officer.( Asst year 2004-05).

Mahinder Freight Carriers v. Dy CIT (2011) 56 DTR 247 (Mum) (Trib).

• Berger Paint India Ltd. v. ACIT & Ors. [(2010) 322 ITR 369 (Cal)]

• Jethalal K. Morbia v. ACIT [(2007) 109 TTJ (Mum) 1]

Followed in:

• S.M. Overseas P. Ltd. v. ACIT [(2009) 23 DTR (Del) (Trib) 29]

29.4 Against:

• CIT v. India Sea Foods [(2011) 54 DTR (Ker) 223]

• Accordingly, the fact that there were section 154 proceedings is not a bar to the section 147 proceedings. It was further held that the scope of section 154 & 147 / 148 are different and it cannot be said as a general principle that if notice under section 154 is issued, then notice under section 147 / 148 is barred or prohibited (Hindustan Unilever Ltd. 325 ITR 102 (Bom.) distinguished). (A. Y. 2000-2001)

Honda Siel Power Products Ltd. v. Dy. CIT( 2011) 197 Taxman415 (Delhi). Assessee’s SLP dismissed Honda Siel Power Products Ltd v. DCIT ( SC).www.itatonline.org.

30. Reopening based on valuation report

30.1 AO had no jurisdiction to reopen the concluded assessments on the strength of valuation report of valuation officer obtained subsequently and that too not in exercise of powers u/s. 55A impugned notices under S. 148 quashed.

Prakash Chand v. Dy. CIT & Ors. (2004) 269 ITR 260 (MP) (Asst yr 1997-2001)

30.2 Assessing Authority having made a detailed enquiry before making the assessment of the petitioner u/s. 143(3) the impugned notice u/s. 148 was issued only on the basis of change of opinion and was therefore, invalid, notice was also illegal on the ground that it was based on the valuation report of cost of construction.

Girdhar Gopal Gulati v. UOI(2004) 269 ITR 45 (All)

30.3 Mere DVO’s report cannot constitute reason to believes that income has escaped assessment for the purpose of initiating reassessment and therefore tribunal was justified on holding that the reassessment proceedings initiated on the basis of DVO’s report were invalid ab initio, more so when it has found that the DVO’s report sufers from various defects and mistakes.

CIT v. Smt. Meena Devi Mansighka (2008) 303 ITR 351

30.4 Valuation report cannot by itself form the basis

Where apart from the valuation report which was relied upon by the ITO there was no material before him to come to the prima facie conclusion that the assessee had received the higher consideration than what had been stated in the sale deed, reassessment would not be justified.

ITO v. Santosh Kumar Dalmia (1994) 208 ITR 337 (Cal.)(Asst yr 1973-74)

ITO v. Shiv Shakti Build Home (P) Ltd. ( 2011) 141 TTJ 123 ( Jodhpur) (Trib).

Reopening of the assessment
– Based on the opinion given by the District Valuation Officer

Reopening of the assessment – based on the opinion given by the District Valuation Officer
– opinion of the DVO per se is not an information for the purposes of reopening assessment under section 147 of the Income-tax Act, 1961
– Held that the Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon
– Department was not entitled to reopen the assessment.

Assistant CIT v. Dhariya Construction Co. (2010) 328 ITR 0515.

31. Reassessment jurisdiction is available for benefit of revenue only

31.1 Since the proceedings under section 147 are for the benefit of the revenue and in the assessee, and are aimed at gathering the escaped income of the revenue and an assessee and are aimed at gathering the escaped income of an assessee the same cannot be allowed to be converted as revisional or review proceedings at the instance of the assessee, thereby making the machinery workable.

CIT v. Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC).

31.2 Proceeding under section 147 are for the benefit of the revenue and not the assessee and hence the assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision in disguise and seek relief in respect of items earlier rejected, or claim relief inrespect of items not claimed in the original assessment proceedings unless relatable to the escaped income and reagitate concluded matters. Allowance of such a claim in respect of escaped assessment in the case of reassessment has to be limited to the extent to which they reduce the income to that originally assessed. Income for the purpose of reassessment cannot be reduced beyond the income originally assessed.

K. Sudhakar S. Shanbhag v. ITO (2000) 241 ITR 865 (Bom.)

CIT v. Caixa Economica De Goa (1994) 210 ITR 719 BOM.

Assessee having not claimed deduction under section 80HHC, in its return because it had only income from other sources and no business income, claim made in the revised return by filing audit report under section 147
due to disallowances under section 43B is
upheld.

ITO v. Tamil Nadu Minerals Ltd. (2010) 124 ITD 156 (Chennai)(TM).

31.3 Ignorance of board circular is not sufficient to reopen

The mere fact that the ITO was not aware of the circular of the board is not sufficient to reopen the assessment.

Dr. H. Habicht v. Makhija (1985) 154 ITR 552 (Bom.) (Asst Yrs. 1975-1977)

32. When intimation under section 143(1) is issued

32.1 So long as the ingredients of section 147 are fulfilled, Assessing Officer is free to initiate proceeding under section 147 even where intimation under section 143(1) has been issued; as intimation under section 143 (1) (a) is not assessment there is no question of treating re assessment in such a case as based on change of opinion.

Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC) (Asst Yr. 2001-02)

32.2 Original assessment completed under section 143(1)
– Intimation is not an assessment-No question of change of opinion

CIT v. Zuari Estate Development and Investment Co. Ltd. (2015) 373 ITR 661(SC).

32.3 It is open to the assessee to challenge a notice issued u/s.148 as being without jurisdiction for absence of reason to believe even in case where the assessment has been completed earlier by intimation u/s 143(1) of the Act.

The law on this point has been expressly laid down by the Apex Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra) and the same would continue to apply and be binding upon us. Thus, even in cases where no assessment order is passed and assessment is completed by Intimation under Section 143(1) of the Act, the sine qua non to issue a reopening notice is reason to believe that income chargeable to tax has escaped assessment. In the above view, it is open for the petitioner to challenge a notice issued under Section 148 of the Act as being without jurisdiction for absence of reason to believe even in case where the Assessment has been completed earlier by Intimation under Section 143(1) of the Act

Khubchandani Healthparks Pvt. Ltd. v. ITO (Bom.)(HC); www.itatonline.org

32.4 No reassessment if no ‘reason to believe’ even in cases of section 143(1)

A. [Even in case of assessment under section 143(1)]:

1. Prashant Joshi v. ITO [(2010) 324 ITR 154 (Bom)]

Even if there is no assessment u/s. 143(3), reopening u/s. 147 is bad if there are no proper
"reasons to believe"  recorded by the AO.

2.
Bapalal & Co. v. Jt. CIT – [(2007) 289 ITR 37 (Mad)]

4. Aipta Marketing P. Ltd. v. ITO – [(2008) 21 SOT 302 (Mum.)]

5. Pirojsha Godrej Foundation v. A.D.I.T. (E)
– [(2010) 133 TTJ (Mum) 194]

6. Rajgarh Liquors v. CIT – [(2004) 89 ITD 84 (Ind.)]

Where only intimation was issued u/s. 143 (1) and no notice was issued u/s. 143(2) within the prescribed time limit, a substantive right is created of not being put to scrutiny could be said to have accrued and could not be snatched away by resorting to other provisions of the Act.

7. Assessment u/s 143(1) – Reopening on mechanical basis void even
where section 143(3) assessment not made.

For purpose of reopening of assessment under section 147, Assessing Officer must form and record reason before issuance of notice under section 148. The reasons so recorded should be clear and unambiguous and must not be vague. There can not be any reopening of assessment merely on the basis of information received without application of mind to the information and forming opinion thereof.

Sarthak Securities Co. (P.) Ltd. v. ITO (2010) 329 ITR 110

B. [Within four years]

1. Asian Paints v. Dy. CIT & Anr.
– [(2009) 308 ITR 195 (Bom)]

2. Audco India Ltd. v. ITO
– [(2010) 39 SOT 481 (Mum)]

3. Dy. CIT v. Pasupati Spinning & Weaving Mills Ltd.
– [(2010) 6 ITR (Trib) 689 (Del)]

33. Section 150 : Limitation prescribed

33.1 The Section 150 of the Act provides that notwithstanding the limitation prescribed under section 149, notice under section 148 may be issued at any time for the purpose of making an assessment or reassessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceedings under the Act by way of appeal, reference or revision or by a court in any proceeding under any other law.

33.2 ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC)
held that the word "finding"  can be only that which is
necessary for the disposal of an appeal in respect of an assessment
of a particular year. The apex court further held that the appellate
authority may incidentally find that the income belongs to another
year, but that is not a finding necessary for the disposal of an
appeal in respect of the assessment year in question. Similarly, the
expression "direction"  has been construed by the apex court to mean a direction which the appellate or revisional authority as the case may be, is empowered to give under the sections mentioned therein.

33.3 Apart from the above, section 150(1) of the Act provides that the power to issue notice under section 148 of the Act in consequence of or giving effect to any finding or direction of the appellate/revisional authority or the court is subject to the provision contained in section 150(2) of the Act. Section 150(2) provides that directions under section 150(1) of the Act cannot be given by the appellate/revisional authority or the court if on the date on which the order impugned in the appeal was passed, the reassessment proceedings had become time-barred.

K. M. Sharma v. Ito 254 ITR 772 (SC)

33.4 According to s. 150(2), the provisions of s. 150(1) shall not apply where, by virtue of any other provision limiting the time within which action for assessment, reassessment or recomputation may be taken, such assessment, reassessment or recomputation is barred on the date of the order which is the subject-matter of the appeal, reference or revision in which the finding or direction is contained. Thus, s. 150(2) enacts a well-settled principle of law that an appellate or revisional authority cannot give a direction which goes to the extent of conferring upon the AO if he is not lawfully seized of jurisdiction.

33.5 Similarly Bombay High court in the case of Rakesh N Dutt v. Asst CIT (2009) 311 ITR 247 wherein it was held, that the Tribunal had held that the addition of &#8377 90 lakhs, if at all permissible legally, it could be considered in the hands of the two companies and not in the hands of the assessee. There was no finding that the amount of &#8377 90 lakhs was liable to be taxed in the hands of the assessee. Consequently, reopening of the assessments by invoking the provisions of section 150 of the Act could not be sustained. Once it was held that section 150 of the Act was not applicable, then the reopening of the assessment beyond the period of six years from the end of the relevant assessment year would be time barred.

33.6 The Tribunal do not have power to give any finding or direction in respect of another year / period which is not before the authority as held by Supreme Court in CIT v. Green World Corporation 314 ITR 81 (SC).

33.7 The decision of the apex court in the case of CIT v. Green World Corporation 314 ITR 81 (106) SC wherein it was observed that the provision of s. 150 although appears to be of a very wide amplitude, but would not mean that recourse to reopening of the proceedings in terms of ss. 147 and 148 can be initiated at any point of time whatsoever. Such a proceedings can be initiated only within the period of limitation prescribed therefore as contained in s. 149. Sec. 150(1) is an exception to the aforementioned provision. It brings within its ambit only such cases where reopening of the proceedings may be necessary to comply with an order of the higher authority. For the said purpose, the records of the proceedings must be before the appropriate authority. It must examine the records of the proceedings. If there is no proceeding before it or if the assessment year in question is also not a matter which would fall for consideration before the higher authority, s. 150 will have no application.

33.8 Finding or direction. (S.149.).

Sec 148 r.w.s 150: Reopening of assessment
– Based on Tribunal "finding or direction "  in respect of any other year or period – Beyond six years
– Not valid.

During the year ending 31-3-2000, (A.Y. 2000-01) the assessee had entered into an Development Agreement. The building was to be completed within 21 months (AY 2002-2003). However the Original Agreement was not materialised and was supplemented by Second agreement prepared on 8-4-2002 (i.e A.Y 2003-04). The Assessing Officer had assessed the capital gain in A.Y. 2002-03. On appeal to
Hon’ble ITAT the assessee appeal was allowed and held that the amount assessed as capital gains was not liable to be taxed in A.Y. 2002-03. In order to disposed of the appeal the
Hon’ble ITAT incidentally observed that the capital gain should have been assessed in A.Y. 2000-01. The Assessing officer issued notice under Section 148 dated 24-8-2007 on basis of the observation of ITAT order. On appeal challenging the reopening of assessment the Tribunal Held:

The observation of the Tribunal
for the purpose of deleting the addition in respect of the AY:
2002-03 cannot be treated to be a ‘finding’ for reopening the AY 2001-02 as the appeal for said assessment year has not been before the Tribunal for adjudication. The observation of the Tribunal that
‘the case of the assessee is to be brought to tax for assessment year 2000-01 and not assessment 2002-03 as done by the Assessing
Officer’ is incidental for holding the addition made in the year 2002-03 is not justifiable and the same cannot be the basis for having recourse to section 150 of the Act by holding it as
‘finding or direction’. Section 150(1) is an exception which brings within its ambit only such cases where reopening of the proceedings may be necessary to comply with an order of the higher authority. Since the observation of the Tribunal that
‘the case of the assessee is to be brought to tax for assessment year 2000-01’,
does not require compliance by the authorities below so far as the
assessment year 2000-01 is concerned, taking recourse to section 150
of the Act by holding the same as ‘finding’ of the Tribunal is not legally tenable.

Shri Anil Suri v. ITO 11(1)(3); ITA No. 1640/M/2010; dtd. 16-4-2014 (Mum. ITAT).

• Assessment having not been reopened to give effect to the order of the CIT(A). According to the Assessing Officer because of giving effect to the order made by the CIT(A), will result in to escapement of income. The court held that section 150 did not apply. As there was no failure on the part of assessee to disclose fully and truly all material facts, reassessment is clearly time barred. (A.Y. 1988-89).

Harsiddh Specific Family Trust v. JCIT ( 2011) 58 DTR 149 ( Guj.) (High Court).

• Since no findings or directions had been given in assessment year 1992-93 to tax the receipt in question in assessment year 1994-95 under appeal which is also inherently impossible in view of the findings that it is capital receipt ,provisions of section 150 would apply in the case of the assessee and reopening of the assessment made after a period
of six years from the end of the assessment year was clearly time barred.
(A.Y. 1994-95).

Vadilal Dairy International Ltd. v. Asst CIT (2011) 140 TTJ 371 (Ahd) (Trib).

33.9 Finding given by Tribunal could not enable Assessing Officer to extend period of limitation
-Order barred by limitation

EskayK'n' IT (India) Ltd. v. Dy. CIT (2015) 229 Taxman 204 (Bom.)(HC)

33.10 Power of Appellate authority

Section 150 does not enable or require an appellate authority to give any directions for reopening of assessment, but it deals with a situation in which a reassessment is to be initiated to give effect to finding or
direction of appellate authority or Court.
(A.Y. 2002-03).

Sujeer Properties (AOP) v. ITO ( 2011) 131 ITD 377 (Mum) (Trib).

34. Section 153
– Time limits for Reassessment

• The order u/s. 147 has to be passed within one year from the end of the financial year in which the notice u/s. 148 has been served.
– section 153(2)

• If during the reassessment a reference is made to TPO then time limit will
be two years from the end of the
F.Y. in which the notice u/s. 148 has been served.

Finance Bill 2016 – Limits in both the above cases has been reduced by 3 months
– Reduced to 9 months and 21 months respectively.

Beloved Brothers and Sisters in the AIFTP family,

At the outset, we convey our good wishes and greetings to all of you in connection with two festivals in this month of which one is completed just now with the devotional poojas to Godess Durga for 9 days. We all have invoked the blessings of the Godess.
It is a success of good over bad. Now we have another festival in
this month of a very illuminating and glittering one – Diwali on 29th October, 2016 when we all worship Godess of wealth and prosperity and this is also a festival in succession bringing happiness coupled success over the evil things and demonly acts. The evil or demon is not to be seen elsewhere but within ourselves and the very object and purpose coupled with mythological ideology is to keep ourselves purified against impurities and inculcate a habit of a happy journey of humanity in the society in all assistance, love, affection and service towards the fellow human beings. We pray Godess of wealth and prosperity to shower her merciful and blissful blessings on all of us in all respects.

Friends, we are successful in our efforts halfway through by convincing the Ministry of Finance, Government of India, Revenue for inclusion of the tax practitioners for the purpose of preparation of the returns as well as representation on behalf of the assessees before the authorities. To this effect, you are all aware that Rules 24 and 25 of Draft Rules have provided for a positive and affirmative inclusion of all tax practitioners. Please be reminded that the Federation at the National level does pursue the policy of inclusion only and we do not believe in exclusion as all categories of tax professionals are equally near and dear to us.

What remains to pursue and have
fulfilled is replacement of the word ‘audit’ as used in section 42 of Model GST Draft Law by certification or verification as various columns in Form GST 9 indicates only necessity for certification of the turnovers in the annual or consolidated returns together with proof of payment of tax. We have pleaded with the Ministry of Finance that in view of the policy of the Government of India in relation to GST
regime namely "One Nation – One tax" , there shall be no scope for any commodity classification involving a decision on rate of tax and on supply of either goods or services, the rate of tax leviable either in CGST/IGST or SGST is one rate leaving no scope for any kind of audit and that too GST being an indirect taxation law not involving commodity classification issue with varied rates of taxes. The books of account shall not require audit under GST as such books of account even for GST purpose were already subjected a thorough/rigorous
audit by the Chartered Accountant under the provisions of Income-tax Act 1961.

We are hopeful that the Federation would be able to achieve this part of the issue also at the earliest point of time and would be able to fulfil its word to its members.

Friends, one more news to share by which our Federation must be overwhelmingly happy and jubilant that our member from Chennai, a leading practising advocate Dr. Anita Sumanth who is the daughter of the Past National President of the Federation Late V. Ramachandran has recently been elevated as Judge to the High Court of Madras and we are informed that she has taken Oath of office as judge of the High Court on 5-10-2016. Thus this is a one more addition of colourful feather in the cap of the Federation and we all believe that Dr. Justice Anita Sumanth shall prove herself as the best choice as the product of AIFTP to be the Judge of the High Court for serving the institute of justice as well as the Indian public.

Let us all gear up to the much awaited glorious function 40th year Foundation Day Celebrations on 11-11-2016 at Pune and all the arrangements are in progress and we once again appeal to all of you to make it a grand success with your affectionate participation.

Dr. M. V. K. Moorthy
National President

WHY IS THE GOVernment NOT APPOINTING THE
VICE-PRESIDENTS OF THE ITAT? WHETHER THE MOVE
OF THE GOVernment TO MERGE THE ITAT WITH
OTHER TRIBUNALS IS JUSTIFIED?

The Tax Bar has failed to understand why the Government is not keen on appointing 8 Vice-Presidents in the ITAT. The last appointments of Vice-Presidents were on 24-11-2009, however, thereafter till date, no further appointments of Vice-Presidents have been made. The Tax Bars across the country have made representations to the Government to appoint the Vice-Presidents at the earliest from amongst the Members who are eligible. When a person serves the institution with honesty and integrity, he expects a promotion which he deserves as a matter of right. By not appointing deserving members as Vice-Presidents, the morale of the honourable members may go down. By appointing the Vice-Presidents, the administration of the ITAT will improve and taxpayers will be benefitted. The Honourable members being in judicial service, cannot make this representation to the Government. In
R. S. Mittal v. UOI, JT 1995(3) SC 417 (420/421), the Apex Court directed that the recommendations of the Selection Board for recruitment of
Tribunal’s Members headed by a sitting Judge of the Supreme Court must be placed before the
Appointment’s Committee of Cabinet (ACC) expeditiously and preferably within two months from the date of recommendation and a time bound procedure should be followed. In the Finance Act, 2016 w.e.f. 1-6-2016, the Govt. has abolished the post of Senior Vice-President. No explanation was given in the notes on clauses as to why the Senior Vice-President post was abolished. It is Bar Associations which can take up such important issues with the Government. We make an appeal to all the stakeholders in the interest of the institution that the issue may be taken up with the Hon'ble Prime Minister of India and Honourable Law Minister. If no response is received, as a Bar, being the custodian of the Institution, we may have to knock the doors of the Judiciary.

There is apprehension amongst the Tax Bar that the Government is keen to merge the ITAT with other similar Tribunals. Possibly the (bureaucrats) who have moved the idea, may not be aware of the functioning of this great institution. One will appreciate that this institution is functioning under the Ministry of Law and Justice, whereas, many of the Tribunals such as Central Excise Customs and Service Tax Appellate Tribunal (CESTAT) and even Authority for Advance Rulings function under the Ministry of Finance. Even the selection process of the Members of the ITAT is done by the committee headed by a senior Judge of Supreme Court in a completely transparent manner. We are of the firm opinion that any move by the Government to merge the ITAT with any other Tribunal will destroy the independence of the institution. For example a member appointed in Securities Appellate Tribunal (SAT), if he is transferred to ITAT to discharge the duty as a member of ITAT, can he do justice to the job? Can he decide extremely complicated issues of taxation? We therefore appeal to all the stakeholders including various Tax Bar Associations that they must oppose any such move by the Government All those concerned may express their views and it should be a national movement to save the institution. When there was a move to bring National Tax Tribunals to take away the jurisdiction of the High Courts, all the Bar Associations across the country strongly opposed it and ultimately the Apex Court struck down the National Tax Tribunal Act. We hope all those who are concerned with the judicial independency of the institution must join together and bring to the notice of the Government that merging the ITAT with other institutions is neither in the interest of taxpayers nor in the interest of the country.

We hope that Government will interact with the stakeholders before they introduce any provision to merge the ITAT with other Tribunals.

 

Dr. K. Shivaram
Editor-in-Chie