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Reopening tax assessments
September, 22nd 2007

An interesting question arises whether reassessment proceedings can be initiated where no assessment has been made under section 143 of the Act, though a return of income was filed.

H. P. Ranina

The Tax department has been armed with powers to reopen an assessment within the stipulated period from the end of the assessment year by issuing a notice under section 148. The time limit for issue of notice is a maximum of six years from the end of the relevant assessment year, where the income that has escaped tax is likely to be Rs 1 lakh or more.

The stringent provisions for reopening require that the Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment.

An interesting question arises whether the reassessment proceedings can be initiated where no assessment has been made under section 143 of the Act, though a return of income was filed.

It is trite that the words assess, reassess or recompute are not synonymous with each other. An assessment must entail a conscious and concerted calculation carried out by the officer with a view to determine the amount of tax payable by any person. The exercise of assessment commencing with section 139 and ending with section 143 cannot be treated as being identical to or overlapping section 147/148/149. They are predicated on different circumstances and operate in disparate dimensions.

Likely scenarios

The Income-tax law makes it incumbent upon every person whose total income exceeds the maximum amount not chargeable to income-tax to file a return of income in order to kick-start the normal assessment procedure. However, it may happen that a person fails to file a return of income even though he is liable to pay tax. It could also happen that a person may file a return of income incorrectly offering for purposes of taxation a sum lower than the correctly calculated income. Both these situations have been obviously kept in view in Explanation 2 to section 147 and in its clauses (a) and (b).

In either event, the Assessing Officer would invoke the powers conferred upon him by section 147 of the Act, culminating in the completion of the assessment. It is also conceivable that the incorrectness of the return may not be detected or noticed within the time period set down in section 153. In these circumstances, if the Assessing Officer has reason to believe, predicated on information received by him, that income chargeable to tax has escaped assessment, he would invoke the powers under section 147.

On the other hand, where a return of income has been filed but has been taken at its face value, without any proceedings under section 143 having been conducted, no assessment would obviously have been undertaken. After the expiry of the time period set down in section 153, this situation can be remedied by the Assessing Officer by invoking section 147. The word assessment has been defined in the Act in a most unsatisfactory manner, merely by stating that it includes reassessment.

Defining assessment

A more comprehensive definition is readily available in the Australian decision titled Batagol v. Federal Commissioner of Taxation (109 CLR 243) in these words: assessment means the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case.

This point was considered by the Delhi High Court in KLM Royal Dutch Airlines v. Assistant Director of Income-tax (292 I.T.R. 49). The assessee, a non-resident company, was engaged in the business of operation of aircraft in international business as well as rendering of technical services to other airlines.

For assessment year 2002-03, it claimed exemption in respect of the income from rendering technical services as covered under article 8 of the Double Taxation Avoidance Agreement between India and the Netherlands but no assessment was made under section 143(3).

Notice under section 148 was issued to the assessee on the ground that the income from rendering technical services was taxable in India in view of two Delhi Bench orders of the Tribunal. The assessee filed objections to the initiation of reassessment proceedings. Subsequently, a letter was issued by the Assessing Officer to the assessee, granting it a final opportunity to comply with the notice issued under section 142(1), failing which he would make the assessment under section 144. Notice under section 142(1) for the assessment year 2003-04 was issued to furnish details of all foreign payments made in connection with operations in India, including payments relating to engineering and technical handling services.

The Delhi High Court held that where an assessment has not been framed at all, it is not possible to posit that income has escaped assessment. While the assessment proceedings remain inchoate, no fresh evidence or material could possibly be unearthed. If any such material or evidence is available, there would be no restrictions or constraints on its being taken into consideration by the Assessing Officer for framing the assessment under section 143(3).

If such assessment is not framed before the expiry of the period of limitation for a particular assessment year, it would have to be assumed that since proceedings had not been initiated under section 143, the return had been accepted as correct.

Legal interpretation

In Punjab Tractors Ltd v. Joint C.I.T. (254 I.T.R. 242) (P & H), it was held that it is not necessary that assessment should have been finalised under section 143(3) before it can be reopened under section 147, since an intimation under section 143(1) operates as an order of assessment, unless the Assessing Officer proceeds to give notice under section 143(2) and passes an order under section 143(3).

This understanding of the law has been articulated by the Division Bench of the Allahabad High Court in Pradeep Kumar Har Saran Lal v. Assessing Officer (229 I.T.R. 46) which, in turn, followed the view of the Calcutta High Court in Jorawar Singh Baid v. C.I.T. (Assessment) (198 I.T.R. 47). In these cases, it was held that the power that can be exercised under section 143(2) to correct the assessment made under section 143(1) does not exclude the power of the Assessing Officer to reopen the assessment under section 147.

Therefore, the reassessment under section 147 would not be vitiated where the Assessing Officer failed to invoke his power to correct the assessment already completed under section 143(1). However, where even an order under section 143(1) has not been passed, reassessment would not be permissible.

(The author, a Mumbai-based advocate)
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