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Judgment
R.V. Easwar, J.—The substantial question of law proposed by the Revenue in this appeal u/s 260A of the Income Tax Act, 1961 (''Act'' for
short) is, in short, whether the Income Tax Appellate Tribunal is right in law in holding that the reassessment proceedings u/s 147 were not validly
initiated. The assessee is a company and for the assessment year 2002-03 it filed a return of income on 31st October, 2002 declaring a total
income of Rs. 4,45,35,395/-. The return was processed u/s 143(1) on 27th February, 2003; the income returned was accepted. Included in the
return was a claim of Rs. 8,74,20,642/- u/s 80HHC and Rs. 13,35,65,316/- u/s 10B. The assessee was a 100% export-oriented undertaking and
was entitled to substantial amounts as duty drawback, DEPB, premium on DEPB and on sale of quota etc. These were all declared in the profit
and loss account and the computation of income.
On 15th August, 2005, a notice u/s 148 of the Act was issued reopening the assessment on the ground that income chargeable to tax had
escaped assessment. According to the reasons recorded u/s 148(2) for reopening the assessment, the assessee was wrong in treating the proceeds
of sale of quota as part of the export turnover for claiming deduction u/s 80HHC. It was also the opinion of the Assessing Officer that the sale
proceeds of the quota cannot be considered as export turnover but represented business income covered u/s 28(iv) and had to be reduced to the
extent of 90% from the business income as provided by Explanation (baa) to section 80HHC. Not doing so resulted in excessive allowance of the
deduction u/s 80HHC and consequently in escapement of income chargeable to tax.
In response to the notice u/s 148 the assessee filed a return on 22nd August, 2005 declaring total income at the same figure as in the original
return of income; it also questioned the jurisdiction of the Assessing Officer to reopen the assessment and proceed with the reassessment
proceedings. In the course of the reassessment proceedings the Assessing Officer dealt with the assessee''s objection to the issue of notice u/s 148.
He held that the assessee''s case was covered by clause (c) of Explanation 2 below Section 147, which provides that claiming excessive deduction
would amount to a case of income escaping assessment. He thus rejected the assessee''s objection. On merits he held that the assessee was not
entitled to any deduction u/s 80HHC in respect of the premium on sale of quota. He also held that the assessee was not entitled to the DEPB of
Rs. 2,55,74,491/-. The claim u/s 80HHC was thus revised downward to Rs. 6,83,94,510/- as against Rs. 8,74,20,642/- claimed in the original
return which was accepted u/s 143(1). The reassessment order was accordingly passed on 31st October, 2006. assessment years 1999-2000
and 2003-04 vide order dated 21st November, 2008 and that there was no fresh material which came to the notice of the Assessing Officer after
the original return was processed u/s 143(1) and having regard to the orders of the Tribunal (supra) and the instruction of the CBDT dated 23rd
February, 1998 regarding the treatment to be given to the premium received on transfer of quotas, there was no escapement of income and thus
the notice was without jurisdiction. Reference was made to the judgment of the Supreme Court in the case of Commissioner of Income Tax, Delhi
Vs. Kelvinator of India Limited, . Several other authorities were adverted to by the Tribunal and eventually it was observed as under:-
For the above discussion, we hold that since there was no tangible material available with the AO to form the requisite belief of escapement of
income, the reopening of the completed assessment is unsustainable in the eye of law. The same is, therefore, cancelled.
In the above view of the matter, the Tribunal did not examine the merits of the disallowances/additions made in the reassessment order.
The Revenue is in appeal before us. The following substantial question of law arises and is framed:-
Was the Tribunal right in law in holding that in the absence of any tangible material available with the Assessing Officer to form the requisite belief
regarding escapement of income, the reopening of the assessment made u/s 143(1) is bad in law?
The Tribunal has extracted the reasons recorded by the Assessing Officer for reopening the assessment. They are as follows:-
On going through the return of income filed by the assessee, it is revealed that while deducting 90% of other income from the profit of business,
premium on sale of quota of Rs. 17,54,174/- included in the sales was not considered. Therefore omission to deduction 90% of Rs. 17,54,174/-
from the profit of business resulted in excess allowance of deduction u/s 80HHC of the Income Tax Act, 1961. In view of these facts there is
reason of believe that the income chargeable to tax has escaped assessment.
We think that the point taken on behalf of the assessee that even an assessment made u/s 143(1) of the Act can be reopened u/s 147 only subject
to fulfillment of the conditions precedent, which include the condition that the Assessing Officer must have ""reason to believe"" that income
chargeable to tax has escaped assessment, is sound. It is true that no assessment order is passed when the return is merely processed u/s 143(1)
and an intimation to that effect is sent to the assessee. However, it has been recognised by the Supreme Court itself in Assistant Commissioner of
Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., , a decision that was relied upon by the revenue, that even where proceedings u/s 147
are sought to be taken with reference to an intimation framed earlier u/s 143(1), the ingredients of Section 147 have to be fulfilled; the ingredient is
that there should exist ""reason to believe"" that income chargeable to tax has escaped assessment. This judgment, contrary to what the Revenue
would have us believe, does not give a carte blanche to the Assessing Officer to disturb the finality of the intimation u/s 143(1) at his whims and
caprice; he must have reason to believe within the meaning of the Section. It would be appropriate to reproduce the following portions from the
judgment:-
The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the
provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the
circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction u/s
147(a) two conditions were required to be satisfied : firstly the Assessing Officer must have reason to believe that income, profits or gains
chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by
reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year.
Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice u/s 148 read
with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for
whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be
noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the
main provision and not the proviso.
So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding u/s 147 and failure to take steps u/s 143(3)
will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation u/s 143(1) had been issued.
The inevitable conclusion is that the High Court has wrongly applied Adani Exports Vs. Deputy Commissioner of Income Tax, which has no
application to the case on the facts in view of the conceptual difference between section 143(1) and section 143(3) of the Act.
We have searched the judgment in vain for the liberty said to have been given to the Assessing Officer by the above judgment that the finality of an
intimation u/s 143(1) can be disturbed even by dispensing with the requirement of "" reason to believe"". On the contrary the observations extracted
above reiterate that the intimation can be disturbed by initiating reassessment proceedings only ""so long as the ingredients of Section 147 are
fulfilled"" and with reference to Section 143(1) vis-a-vis Section 147, the only ingredient is that there should be reason to believe that income
chargeable to tax has escaped assessment and it does not matter that there has been no failure or omission on the part of the assessee to disclose
full and true particulars at the time of the original assessment. There is nothing in the language of Section 147 to unshackle the Assessing Officer
from the need to show ""reason to believe"". The fact that the intimation issued u/s 143(1) cannot be equated to an ""assessment"", a position which
has been elaborated by the Supreme Court in the judgment cited above, cannot in our opinion lead to the conclusion that the requirements of
Section 147 can be dispensed with when the finality of an intimation u/s 143(1) is sought to be disturbed. We are at pains to point out this position,
which seems fairly obvious to us, because of the argument frequently advanced before us on behalf of the Revenue in other cases as well, under the
misconception, if we may say so with respect, that an intimation u/s 143(1) can be disturbed on any ground which appeals to the Assessing
Officer. The consequence of countenancing such an argument could be grave. The expression ""reason to believe"" has come to attain a certain
signification and content, nourished over a long period of years by judicial refinement painstakingly embarked upon by great judges in the past. The
expression has been judicially interpreted in a particular manner. When Section 147 was recast with effect from 1st April, 1989, the legislature
sought to replace the expression ""reason to believe"" with the expression ""for reasons to be recorded by him in writing"". But there were
representations against the proposal and bowing to them the original expression was restored. This aspect of the matter has been brought out by
the Supreme Court in Commissioner of Income Tax vs. Kelvinator of income tax & Anr. (supra) in the following words:-
However, one needs to give a schematic interpretation to the words ""reason to believe"" failing which, we are afraid, section 147 would give
arbitrary powers to the Assessing Officer to reopen assessments on the basis of ""mere change of opinion"", which cannot be per se reason to
reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no
power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain preconditions and if the concept of
change of opinion"" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take
place. One must treat the concept of ""change of opinion"" as an in-built test to check abuse of power by the Assessing Officer. Under the Direct
Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words ""reason to believe"" but also inserted the word ""opinion"" in section 147
of the Act. However, on receipt of representations from the companies against omission of the words ""reason to believe"", Parliament reintroduced
the said expression and deleted the word ""opinion"" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote
hereinbelow the relevant portion of Circular No. 549 dated October 31, 1989 ([1990] 182 ITR (St.) 1 29,), which reads as follows :
7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression ''reason to believe'' in section 147A number of representations
were received against the omission of the words ''reason to believe'' from section 147 and their substitution by the ''opinion'' of the Assessing
Officer. It was pointed out that the meaning of the expression, ''reason to believe'' had been explained in a number of court rulings in the past and
was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere
change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression ''has reason to
believe'' in place of the words for reasons to be recorded by him in writing, is of the opinion''. Other provisions of the new section 147, however,
remain the same.
It would be appropriate at this juncture to take a brief survey of a few decisions of the Supreme Court which have infused meaning and content
to the expression ""reason to believe"" appearing in Section 147.
A constitution bench of the Supreme Court in A.N. Lakshmana Shenoy Vs. The Income Tax Officer, Ernakulam and Another, , speaking
through S.K. Das, J. held that an assessment cannot be reopened on the basis of a mere guess, gossip or rumour. This was in the context of the
pre-1948 law relating to reassessment under which the Assessing Officer was empowered to reopen the assessment on the basis of ""definite
information"". Though this judgment is based on the phraseology of Section 34 of the 1922 Act as it existed before 1948 which did not contain the
expression ""reason to believe"", that principle was adopted by the Supreme Court while dealing with Section 34 of the Act after the amendment
made in 1948. In that year the words ""definite information"" were replaced by the words ""reason to believe"". While expatiating on the new words, a
three-Judge Bench of the Supreme Court speaking through V. Ramaswami, J., in S. Narayanappa and Others Vs. Commissioner of Income Tax,
Bangalore, opined as under:-
Again the expression ""reason to believe"" in section 34 of the income tax Act does not mean a purely subjective satisfaction on the part of the
income tax Officer. The belief must be held in good faith: it cannot be merely a pretence. To put it different, it is open to the court to examine the
question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or
irrelevant to the purpose of the section. To this limited extent, the action of the income tax Officer in starting proceedings u/s 34 of the Act is open
to challenge in a court of law (see Calcutta Discount Co. Ltd. v. income tax Officer, Companies District 1, Calcutta).
In Sheo Nath Singh Vs. Appellate Assistant Commissioner of Income Tax, Calcutta, the Supreme Court (Hegde J) observed as under:-
There can be no manner of doubt that the words ""reason to believe"" suggest that the belief must be that of an honest and reasonable person based
upon reasonable grounds and that the income tax Officer may act on direct or circumstances evidence but not on mere suspicion, gossip or
rumour. The income tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is
not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the
reasons for the belief cannot be investigated by the court.
It was further observed that the reasons themselves cannot be stated to be beliefs, which would be an obvious self-contradiction.
The entire law as to what would constitute ""reason to believe"" was summed up by H.R. Khanna, J. speaking for the Supreme Court in Income
tax Officer, Calcutta and Others Vs. Lakhmani Mewal Das, . The following principles were laid down:-
(a) The powers of the Assessing Officer to reopen an assessment, though wide, are not plenary.
(b) The words of the statute are ""reason to believe"" and not ""reason to suspect"".
(c) The reopening of an assessment after the lapse of many years is a serious matter. Since the finality of a judicial or quasi-judicial proceedings are
sought to be disturbed, it is essential that before taking action to reopen the assessment, the requirements of the law should be satisfied.
(d) The reasons to believe must have a material bearing on the question on escapement of income. It does not mean a purely subjective satisfaction
of the assessing authority; the reason be held in good faith and cannot merely be a pretence.
(e) The reasons to believe must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates
that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation is belief regarding
escapement of income.
(f) The fact that the words ""definite information"" which were there in section 34 of the Act of 1922 before 1948, are not there in section 147 of the
1961 Act would not lead to the conclusion that action can now be taken for reopening an assessment even if the information is wholly vague,
indefinite, far-fetched or remote.
In Commissioner of Income Tax vs. Kelvinator of income tax & Anr. (supra) the Supreme Court observed as under:-
However, one needs to give a schematic interpretation to the words ""reason to believe"" failing which, we are afraid, section 147 would give
arbitrary powers to the Assessing Officer to reopen assessments on the basis of ""mere change of opinion"", which cannot be per se reason to
reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no
power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain preconditions and if the concept of
change of opinion"" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take
place. One must treat the concept of ""change of opinion"" as an in-built test to check abuse of power by the Assessing Officer.
It was also observed that after 1.4.1989 the Assessing Officer has power to reopen provided there is ""tangible material"" to come to the conclusion
that there is escapement of income. This judgment has laid emphasis on two more aspects: that there can be no review of an assessment in the
guise of reopening and that a bare review without any tangible material would amount to abuse of the power.
Having regard to the judicial interpretation placed upon the expression ""reason to believe"", and the continued use of that expression right from
1948 till date, we have to understand the meaning of the expression in exactly the same manner in which it has been understood by the courts. The
assumption of the Revenue that somehow the words ""reason to believe"" have to be understood in a liberal manner where the finality of an
intimation u/s 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption
because of the language employed in Section 147; it makes no distinction between an order passed u/s 143(3) and the intimation issued u/s
143(1). Therefore it is not permissible to adopt different standards while interpreting the words ""reason to believe"" vis-�-vis Section 143(1) and
Section 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable
in the interpretation of the expression when it is applied to the reopening of an assessment earlier made u/s 143(3) cannot apply where only an
intimation was issued earlier u/s 143(1). It would in effect place an assessee in whose case the return was processed u/s 143(1) in a more
vulnerable position than an assessee in whose case there was a full-fledged scrutiny assessment made u/s 143(3). Whether the return is put to
scrutiny or is accepted without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other
consequence, which is somewhat graver, would be that the entire rigorous procedure involved in reopening an assessment and the burden of
proving valid reasons to believe could be circumvented by first accepting the return u/s 143(1) and thereafter issue notices to reopen the
assessment. An interpretation which makes a distinction between the meaning and content of the expression ""reason to believe"" in cases where
assessments were framed earlier u/s 143(3) and cases where mere intimations were issued earlier u/s 143(1) may well lead to such an unintended
mischief. It would be discriminatory too. An interpretation that leads to absurd results or mischief is to be eschewed.
Certain observations made in the decision of Rajesh Jhaveri (supra) are sought to be relied upon by the revenue to point out the difference
between an ""assessment"" and an ""intimation"". The context in which those observations were made has to be kept in mind. They were made to point
out that where an ""intimation"" is issued u/s 143(1) there is no opportunity to the assessing authority to form an opinion and therefore when its
finality is sought to be disturbed by issuing a notice u/s 148, the proceedings cannot be challenged on the ground of ""change of opinion"". It was not
opined by the Supreme Court that the strict requirements of section 147 can be compromised. On the contrary, from the observations (quoted by
us earlier) it would appear clear that the court reiterated that ""so long as the ingredients of section 147 are fulfilled"" an intimation issued u/s 143(1)
can be subjected to proceedings for reopening. The court also emphasised that the only requirement for disturbing the finality of an intimation is that
the assessing officer should have ""reason to believe"" that income chargeable to tax has escaped assessment. In our opinion, the said expression
should apply to an intimation in the same manner and subject to the same interpretation as it would have applied to an assessment made u/s
143(3). The argument of the revenue that an intimation cannot be equated to an assessment, relying upon certain observations of the Supreme
Court in Rajesh Jhaveri (supra) would also appear to be self-defeating, because if an ""intimation"" is not an ""assessment"" then it can never be
subjected to section 147 proceedings, for, that section covers only an ""assessment"" and we wonder if the revenue would be prepared to concede
that position. It is nobody''s case that an ""intimation"" cannot be subjected to section 147 proceedings; all that is contended by the assessee, and
quite rightly, is that if the revenue wants to invoke section 147 it should play by the rules of that section and cannot bog down. In other words, the
expression ""reason to believe"" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made u/s
143(3) and another applicable where an intimation was earlier issued u/s 143(1). It follows that it is open to the assessee to contend that
notwithstanding that the argument of ""change of opinion"" is not available to him, it would still be open to him to contest the reopening on the ground
that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable
to tax has escaped assessment. In doing so, it is further open to the assessee to challenge the reasons recorded u/s 148(2) on the ground that they
do not meet the standards set in the various judicial pronouncements.
In the present case the reasons disclose that the Assessing Officer reached the belief that there was escapement of income ""on going through
the return of income"" filed by the assessee after he accepted the return u/s 143(1) without scrutiny, and nothing more. This is nothing but a review
of the earlier proceedings and an abuse of power by the Assessing Officer, both strongly deprecated by the Supreme Court in CIT vs. Kelvinator
(supra). The reasons recorded by the Assessing Officer in the present case do confirm our apprehension about the harm that a less strict
interpretation of the words ""reason to believe"" vis-�-vis an intimation issued u/s 143(1) can cause to the tax regime. There is no whisper in the
reasons recorded, of any tangible material which came to the possession of the assessing officer subsequent to the issue of the intimation. It reflects
an arbitrary exercise of the power conferred u/s 147. For the above reasons, we answer the substantial question of law framed by us in the
affirmative, in favour of the assessee and against the Revenue. The appeal of the Revenue is accordingly dismissed. There shall be no order as to
costs.