‘Reason to believe' must be of the AO

Where the income chargeable to tax has escaped assessment, it is usual for the tax department to invoke reassessment provisions. The law however, has some safeguard measures such as sanction, time limit, disclosure of reasons and coverage of incomes in reassessment proceedings.

Where the assessment is completed after examination of books of account known as ‘scrutiny assessment' the time limit for reopening the case is only four years if there was no failure on the part of the taxpayer as regards true and full disclosure. Where the disclosure on the part of the taxpayer is not complete, the reduced time limit of four years will not apply. In the recent times, there have been many court decisions moderating the issue of reassessment in spite of amendments in law and aggressive pursuance of cases based on audit objections.

Coverage of incomes

Where an assessment is reopened and the reasons thereof are disclosed to the taxpayer, if the original reasons are ultimately dropped, the tax officer cannot tax any other item of income in reassessment proceedings. The original reason must compulsorily continue to survive, so that any other income not taxed previously could also be subjected to tax in the reassessment. Such kind of interpretation could be found in CIT v. Jet Airways (I) Ltd 331 ITR 236 (Bom) and Ranbaxy Laboratories Ltd v. CIT 336 ITR 136 (Del.)

Opinion of Assessing Officer

The Gujarat High Court in Cadila Health Care's case (Writ No.15566 of 2011 decided on 14.12.2011) discussed the issue of formation of belief for reopening the case. The assessment was completed under section 143(3) which was reopened subsequently.

The taxpayer challenged the reopening of the case since the reason for reopening was stated as non-deduction of tax at source which required disallowance of expenditure to the extent of Rs 51.94 lakh. The taxpayer raised a plea that there was no failure of full and true disclose of all material facts necessary for assessment and hence no reopening could be made after the expiry of four years from the end of the relevant assessment year in which the order was passed.

The revenue contended that the reopening of assessment was consequent to audit objection and therefore there was some fresh information which prompted the triggering of reassessment provisions.

The court called for the records of the Department and found that there was an internal communication wherein the incumbent tax officer had concluded that disallowance of expenditure by invoking Section 40(a)(ia) would not apply. Notwithstanding such internal communication based on the audit objection measures were taken for reopening the case.

The court held that the tax officer had concluded that there was no escapement of income based on the findings of audit party but ultimately the notice was issued on the insistence of the audit party. It held that the tax officer based on his own opinion could only invoke reassessment provisions and when his opinion is contrary to that of audit party, the issue of notice as a matter of routine does not have the sanction of law.

Opinion of audit party

It is worth recalling that mere information furnished by the audit party with no other information remaining with tax officer is not eligible for reopening of the case as held in CIT v. Lucas T.V.S. Ltd 249 ITR 306 (SC). The audit party can point out factual errors to prompt rectification or reassessment and the interpretation of the audit party is not binding on the tax officer. [Refer CIT v. P.V.S.Beedies Pvt Ltd 237 ITR 13 (SC) and Indian & Eastern Newspaper Society v. CIT 119 ITR 996 (SC)].

Change of opinion of the tax officer does not entitle him to reopen the case. However, where intimation under section 143(1) is issued, reassessment is possible as there was no application of mind as much as to term it as change of opinion. [Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd 291 ITR 500 (SC)].