Section 147: Power of Review V/s Power to Re Assess:

Brief Overview of Section 147 of Act The provisions of section 147 empower the Assessing Officer, to reopen an assessment if he has
“ reason to believe ” that income has escaped assessment.
The important words under section 147 are ‘has reason to believe’
and these words are stronger than the words ‘is satisfied’. The belief entertained by the Assessing
Officer must not be arbitrary or irrational. It must be reasonable or in other words
it must be based on reasons which are relevant and material.
(Section 149) Time Limit for issue & service of notice under said section is –
Four years from the end of relevant assessment year

Exception:

1. Six years from end of relevant assessment year if escaped amounts is one lakh
rupees or more

2. Sixteen years if escapement is in relation to any asset (including financial
interest in any entity) located outside India.
Note: Section 148 : The Assessing officer shall before issuing any notice under
this section record his reasons for issuing the notice. In other words it is
necessary on part of AO to record his reasons why he/she believe that certain
income has escaped assessment.

What to do when notice u/s 148 is received:

When a notice u/s 148 is received the assesse is asked to file a return of the
relevant assessment year. After filling the return the assesse should ask for the
copy of reasons recorded for issue of notice u/s 148 and can file objection to the
issuance of notice.

The assesse should ask specifically assessing officer to pass
a speaking order by disposing off the objections giving reference of
the Judgment of Honourable Supreme Court in GKN Driveshaft’s (India) Ltd vs
ITO (2003) 259 ITR 19 (SC) . The objections should be filled giving reasons for
challenging the legality of the notice u/s 148. All this procedure has been laid
down by the Honourable Supreme court in GKN Driveshaft’s (India) Ltd case.

This procedure has been provided by the Honourable Supreme court to enable the
assesse to file writ petition before the respective High court challenging the
legality of the notice u/s 148 before the assessment is completed.
From the above literature, it is very clear and settled position that AO must have
valid reason to believe that certain income which would have chargeable to tax
has escaped assessment for any assessment year. But it does not mean that AO
has the power to review the cases for which assessment has already been
completed. Review here includes change in Opinion too with regard to any
particular transactions or matter.

In support of above statement, reference is drawn to some landmark judicial
pronouncements including decision given by our apex court:

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

2. Calcutta Discount Co. Ltd. v. ITO(SC) :
The expression “reason to believe” postulates belief and the existence of reasons for
that belief. The belief must be held in good faith, it cannot be merely a pretence. The
expression does not mean a purely subjective satisfaction of the Income-tax Officer.
It contemplates existence of reasons on which the belief is founded, and not merely a
belief in the existence of reasons inducing the belief. In other words, the Income-tax
Officer must on information at his disposal believe that income has been under-
assessed by reason of failure fully and truly to disclose all material facts necessary
for assessment. Such a belief may not be based on mere suspicion. It must be
founded upon information

3. Chugamal Rajpal v. S.P. Chaliha (SC):
In the instant case, the Assessing Officer sought to reopen the assessment on
the basis of some communications received from the Commissioner of Bihar and
Orissa. He did not mention the facts contained in those communications. All that
he said was that from those communications ‘it appeared that the persons
(alleged creditors) were name-lenders and the transactions were bogus’. He had
not even come to a prima facie conclusion that the transactions to which he
referred were not genuine transactions. The Court held that the Assessing Officer
only appeared to have a vague feeling that the transactions might be bogus. This
does not satisfy the basic requirements of reassessment which requires that the
Assessing Officer must have a prima facie ground before taking action under
section 148 of the Act.

4. Direct Information (P) Ltd v. ITO ( Bombay High Court) :
The power to reopen an assessment is not a power to review an assessment
already made, but a power to reopen where there is reason to believe that
income has escaped assessment. Consequently, unless the Assessing Officer has
tangible material before him on the basis of which he comes to that conclusion,
the reopening of an assessment cannot be permitted merely on the ground that
there is a change in the view of the Assessing Officer and he subsequently
believes that the earlier view was incorrect. If that were to be permitted, the
Assessing Officer would exercise the power to reopen assessments arbitrarily.

5. SGS India (P) Ltd v. ACIT (Bombay High Court) :
In the aforesaid decision the Bombay High Court has held that reassessment
merely for the purpose for reviewing the original assessment is not valid.

6. K Menon V. ITO (Bombay High Court):
Though the power to reopen is much wider, but the interpretation that the words
“reason to believe” must receive an interpretation which is in consonance with
the scheme of the law. There cannot be arbitrary powers to the Assessing Officer
to reopen assessment on the basis of mere change of opinion. The Assessing
Officer has no power to review. He has only a power to reassess. In the garb of
reopening the assessment review cannot take place. 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 in terms of s. 147.
So it is very clear now that the intention of legislature is to give power to AO to
re-open only those cases where he has recorded reason to believe that income
has escaped assessment and that too can be opened within the time frame as
provided under section 149. So to conclude, AO has never ever given power to
Re-view what has been already decided or assessed provided assesse has made
full and true disclosure at time of initial assessment.

Any contrary view is welcomed.
Author may be reached at vijaybansal8320@gmail.com or +91 9820149229.