S. 147: AO cannot assess other escaped income if original reason dropped

The AO issued a notice u/s 148 to reopen the assessment for AY 2003-04 on the ground that the assessee had wrongly computed s. 80HHC deduction. However, in the reassessment order, the AO did not make any addition for the s. 80HHC claim and made additions in respect of other unconnected issues. The Tribunal held that as the AO had made no addition in respect of the issue for which the s. 148 notice was issued, he had no jurisdiction to assess any other income. On appeal by the department to the High Court, HELD dismissing the appeal:

S. 147 empowers the AO to reopen an assessment if he has reason to believe that income has escaped assessment. If the requirements of giving jurisdiction to the AO to reopen the assessment are satisfied, he may also assess any other escaped income which comes to his notice subsequently in the course of the proceedings. Prior to the insertion of Explanation 3 to s. 147 by the Finance Act 2009 w.r.e.f. 1.4.1989, it was clear that if the reason for which the assessment is reopened fails, the AO could not proceed to assess other income which had escaped assessment. For assuming jurisdiction to frame an assessment u/s 147 what is essential is a valid reopening. If the very foundation of the reopening is knocked out, any further proceeding in respect to such assessment naturally would not survive. Explanation 3 to s. 147 does not change this position. Explanation 3 to s. 147 was inserted to counter the view taken by some courts (Atlas Cycle Industries 180 ITR 319 (P&H) & Travancore Cements 305 ITR 170 (Ker)) that even if the jurisdiction was validly exercised, the AO could not assess the other escaped income that was not referred to in the reasons. It merely clarifies the existing law and does not expand the powers of the AO u/s 147. If the AO drops the ground for which the notice for reopening was issued, it means he had no “reason to believe” that income had escaped assessment and so he has no jurisdiction to assess the other escaped income (Jet Airways 331 ITR 236 (Bom), Ranbaxy Laboratories 336 ITR 136 (Del) & Major Deepak Mehta 344 ITR 641 (Chhattisgarh) followed; Majinder Singh Kang 344 ITR 358 (P &H) not followed)