Reassessment Proceedings under Section 147 of the Income Tax Act: Issue and Service of Notice
[Swastik Sharma is a second-year B.A.LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow.]
The early Victorian approach that taxing statutes should be interpreted in favour of the assessee is no more followed in the contemporary commercial India, where tax evasion is rampant. Initiation of reassessment proceedings by the Assessing Officer (AO) under section 147 of the Income Tax Act, 1961 (Act) is very frequently brought to litigation. As per section 147, reassessment proceedings can be initiated if the AO has “reasons to believe” that any income chargeable to tax has escaped assessment.
Reopening of assessment proceedings under section 147 should not be understood as a power to review the original assessment order. The AO does not have any jurisdiction to review its own order. If the AO tries to review its original assessment order under the garb of section 147, it would be devoid of legality.
Issue and Service of Notice
The obligatory procedure for initiation of reassessment proceedings requires that a notice be issued under section 148 before the expiry of the limitation period prescribed under section 149. The Supreme Court in 1964 in the case of Banarasi Devi v Income-Tax Officer, Kolkata, taking into consideration section 34 of the Income Tax Act, 1922 (Old Act) equated the term “service” with the term “issue” and hence, as long as the Old Act was in operation, it was mandatory that the notice be served before the limitation period.
But the Apex Court changed its view in 1987 in RK Upadhyaya v Shanabhai P Patel to hold that the requirement of issue of notice is satisfied when a notice is actually issued. This change in the opinion of the Court occurred after enactment of the Income Tax Act, 1961. What was compressed in section 34 of the Old Act has now been spread out in sections 147, 148 and 149 of the new Act. High Courts have interpreted this new ruling in favour of the revenue and have held that though there is a requirement that notice be served to the assessee or his representative, it is not mandatory to serve it before the expiration of the limitation period.
Moreover, taxing statutes have to be interpreted very strictly, and hence it can be easily comprehended that the limitation period prescribed under section 149 is only for the “issue” of notice and not the “service” of notice. Though it is not necessary that the notice be served to the assessee within the limitation period, what is still necessary is that it be served within a reasonable time after issuance of such notice.
“Reasons to Believe” recorded by the Assessing Officer
The AO must record his “reasons to believe” before issuing a notice under section 148. This is because, in absence of such reasons, the reopening of assessment would simply be based on a mere “change of opinion”, which is not permissible. These reasons recorded, also, cannot be supplemented by affidavits. Any substitution, addition, deletion or inferring from reasons not recorded cannot be done to the “reasons to believe”. They have to be read literally.
It is also required that the AO has some tangible material before him upon which he has formed his belief. The material which was already disclosed before him in the original assessment proceedings would not amount to such tangible material, but that disclosure must be full and true. It is interesting to note that section 34 of the Old Act called for "definite information" in the hands of the AO for reopening of assessment. Non-usage of these words in the Act, however, does not mean that the information used as a basis of reopening can be vague. Further, if the AO reopens an assessment claiming that he failed to form an opinion over a certain material, the reopening would still be invalid. This is because the assessment order is not a scrap of paper and the AO is expected to apply his mind to the material before him and hence cannot claim “oversight” as a defence.
If the AO feels that the income chargeable to tax has escaped assessment, he must give a reason; he must disclose through such reasons some tangible material upon which he has formed his “reasons to believe”. Though the existence of belief can be challenged by the assessee, the sufficiency of reasons for the belief cannot be. This, however, does not mean that every material for the “reasons to believe”, howsoever vague and indefinite or distant, would warrant the formation of the belief. The reason must have a natural, intelligible and rational nexus with the formation of the belief, which shall also be disclosed by the AO. Still, it is not necessary that the AO should finally ascertain his belief by legal evidence or conclusive investigation.
If it is a case of reopening of assessment under proviso to section 147, then merely recording "reasons to believe" without mentioning any reason recorded that there was failure on the part of the assessee is not sufficient to open reassessment. Here, while recording “reasons to belief”, the AO must put explicitly in writing that it was on the failure on the part of the assessee that the income escaped assessment. How the failure occurred must also be described by the AO.
Remedies available to the Assessee
The assessee can ask for reasons recorded by the AO and it would be imperative for the AO to provide the same; else, the reassessment proceedings would be invalid. For reopening of assessment under proviso to section 147, it is required that the assessee fails to perform its duties in the original assessment; this could inter alia be failure on the part of the assessee to make a return under section 139 or to disclose fully and truly all material facts necessary for his assessment. Full and true disclosure must be done not only at the stage of filing of the return, but also during the entire process of assessment.
True and full disclosure by the assessee for the purposes of proviso to section 147 would mean all the relevant facts and evidences for the assessment proceedings. It is, indeed, the duty of the assessee to bring to the notice of the Income Tax Officer particular items in the books of account or portions of documents which are relevant. Thus, disclosure of mere material facts before the AO is not sufficient. This is primarily because explanation 1 to section 147 is prejudicial to the assessee and favours the revenue. A detail available on the paper filed before the AO does not by its mere availability becomes an information. It becomes so only if, and when, its implication is recognised. Even if the AO could have gotten all the necessary information by being diligent from checking the material before him, he is still not precluded from exercising his jurisdiction, because that is not the same thing as saying that the assessee had placed before the AO truly and fully all material facts necessary for the purpose of assessment. The ultimate objective of the Act is to not let any revenue escape out of public coffers.
If the assessee proves that he has fulfilled his duties provided under section 147, then the reassessment proceedings under section 147 will be declared invalid; if a reassessment order has been passed, then such an order will be quashed. If the notice is not served upon him in time or served upon him in an improper manner, then also he can raise objections relating to the validity of service of that notice, provided he raises them before the completion of such reassessment.
If the assessee is served with such notice after the expiry of limitation period, and if he does not raise any objection to it, then he is estopped by contending the validity of service of notice. This is due to the application of section 292BB of the Act. In such a case, though the assessee cannot raise any objections regarding the “service” of notice, he is not estopped to raise objections regarding the “issue” of notice. This is, again, because taxing statutes have to be interpreted very strictly and section 292BB merely talks about “service” of notice and not “issue” of notice. The date of issue of notice would be the date on which it was handed over for service to the proper officer; if sent through post/email, it would be the date on which it was posted/emailed. Merely signing the notice by the AO could not be equated with issuance of notice as contemplated under section 149. If the notice is handed over to the process server, and the notice is returned as “not-received”, then the date of fresh issuance of the notice will be the new date of issue of notice.
It is quite obvious that the Act is bent towards the revenue because the ultimate objective of the Act is to not let any revenue creep out of public coffers. Leniency has been shown by the courts towards the AO even if he fails to perform his acts with due diligence. Non-usage of the words "definite information" under section 147 has definitely comforted the AO to some extent. Now the sufficiency of reasons for the belief cannot be challenged. In the present scenario, to avoid being troubled repeatedly, the assessee should furnish every relevant fact and material evidence to substantiate its claim, even if it seems to be remote.