In a reprieve to the assessees, the Supreme Court has ruled that the Income-Tax Department cannot re-open the assessment cases arbitrarily but on the basis of some tangible material. If armed with unrestricted power to re-open the cases against assessees, it will amount to review of the assessment by the assessing authority, said the apex court.

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 assessing officer, said a three-judge bench headed by justice SH Kapadia.

According to section 147 of the Income-Tax Act amended by virtue of the Direct Tax Laws (Amendment) Act of 1989 which came into effect from April 1, 1989, cases could be re-opened if the assessing officer has reason to believe that the income has escaped assessment.

The court, however, said: 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 re-open assessments on the basis of mere change of opinion, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The assessing officer has no power to review; he has the power to re-assess.

The court noted that after April 1, 1989, the assessing officer has power to re-open, provided there is tangible material to come to the conclusion that there is escapement of income from assessment. However, reasons must have a live link with the formation of the belief, it said.

The court dismissed a bunch of appeals of the Income-Tax Department against the assessees. The issue before the court was whether by virtue of the Direct Tax Laws (Amendment)Act of 1989, the condition of change of opinion stood obliterated for re-opening of assessment cases.

The court pointed out that under Direct Tax Laws (Amendment) Act,1987, the words reason to believe was deleted and the word opinion was inserted in section 147 of the Act. However, on receipt of representations from the companies against omission of the words reason to believe, Parliament re-introduced it and deleted the word opinion on the ground that it would vest arbitrary powers in the hands of assessing officer.

To substantiate its order, the apex court also perused a circular issued by the government on October 31, 1989 reiterating the same thing.

Prior to Direct Tax Laws (Amendment) Act, 1987, the assessing officer was empowered to make back assessment on fulfilment of two conditions. But section 147 of the Act was amended which came into effect from April 1, 1989, these two conditions were given a go-by.

The only condition remained was that where the assessing officer has reason to believe that income has escaped assessment, it confers jurisdiction to re-open the assessment. Therefore, after April 1, 1989, the revenues power to re-open the cases was widened.

According to the unamended section 147 of the Act, on fulfilment of two conditions, the assessing officer was empowered to re-open the cases. First, if the assessing officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return under section 139 of the Act for any assessment year to the income-tax officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year.

Second, notwithstanding that there has been no omission or failure on the part of the assessee, the income- tax officer has in consequence of information in his possession has reason to believe that income chargeable to tax has escaped assessment for any assessment year.