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[2010] 191 Taxman 333 (Kerala)

[2010] 191 Taxman 333 (Kerala)

HIGH COURT OF KERALA
Commissioner of Income-tax*
v.
Popular Vehicles & Services Ltd.
C.N. RAMACHANDRAN NAIR AND V.K. MOHANAN, JJ.
IT APPEAL NO. 1628 OF 2009
JANUARY 7, 2010

Section 147 of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure
of primary facts - Assessment year 2001-02 - Whether there is no presumption anywhere
in provisions of Act to effect that every regular assessment completed is after due
consideration of every claim under provisions of Act and on other hand, scope of
Explanation 2 to section 147 is such that Assessing Officer is free to re-examine
correctness of a regular assessment and decide whether tax assessed, rate applied, relief
and allowances granted, etc., are in terms of provisions of Act and if not, to revise
assessment in terms of section 147 - Held, yes - Whether there is no difference between
proceedings completed under section 143(1) and regular assessment under section
143(3), if income chargeable to tax has escaped assessment within meaning of
Explanation 2 to section 147 - Held, yes
FACTS

The assessee's return filed for the relevant assessment year was first processed under section 143(1)(a) and
thereafter, a regular assessment was completed under section 143(3). However, the Assessing Officer, on
further scrutiny of the accounts, noticed that the assessee had diverted interest bearing loans to sister
concerns as interest-free loans and, there-fore, there was excess deduction of interest granted under section
36(1)(iii). In order to disallow proportionate interest attributable to interest-free loans given to sister
concerns and to assess such escaped income, the Assessing Officer reopened assessment and completed
the same under section 147. The Commissioner (Appeals) allowed the assessee's appeal, both on merits
and on the ground that the revised assessment under section 147 was invalid. On the revenue's appeal, the
Tribunal upheld the order of the Commissioner (Appeals) holding that the reassessment was made only on
account of change of opinion of the Assessing Officer on the entitlement of deduction of interest claimed
and allowed in the original assessment.
On appeal :
HELD

In the instant case, the regular assessment completed under section 143(3) was an order in few lines
without any discussion and, so much so, the assessee's claim for deduction wherein the alleged excess
relief under section 36(1)(iii) was stated to be allowed, was not discussed or considered by the Assessing
Officer. On the other hand, deduction was allowed in terms of the claim made in the return and, so much
so, change of opinion which was found to be the basis for cancelling the reassessment did not apply
because the matter was not considered in details in the regular assessment and no opinion was expressed
by the Assessing Officer. The question, therefore, to be considered was whether when an assessment is
completed under section 143(3), there is a presumption that the Assessing Officer has considered
eligibility for deduction of all the claims so that any reversal of the same in the reassessment could be
treated as on account of change of opinion. [Para 4]
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Amended provisions of section 147 effective from 1-4-1989 authorise income escaping assessment if the
Assessing Officer has reason to believe that income chargeable to tax has escaped assessment for any
assessment year. Therefore, only two conditions are required to be satisfied for reopening an assessment,
that is, escapement of income chargeable to tax in the assessment and reason available with the Assessing
Officer to believe that chargeable income has escaped assessment. In the instant case, the Assessing
Officer, on re-examination of the accounts, noticed that the assessee, which had paid Rs. 3 crores towards
interest on borrowings in the accounting year relevant for the assessment year, advanced above Rs. 84
lakhs as interest- free loans to sister concerns and, so much so, the entire borrowings were not for business
purposes and, hence, deduction of interest allowed under section 36(1)(iii) was excessive relief granted in
assessment.Explanation 2 to section 147 exhaustively states certain cases where income chargeable to tax
has escaped assessment. Under sub-clause (iii) of clause (c ) of the Explanation 2, if income has been
made the subject of excessive relief under the Act, then the same is one of the circumstances of income
escaping assessment. Therefore, if excessive deduction of interest was allowed under section 36(1)(iii),
then certainly it was a case of income escaping assessment, squarely covered by the Explanation 2 to
section 147. Even though the assessee submitted that when the claim was allowed in the original
assessment any proposal for subsequent disallowance of relief granted originally in the assessment either
fully or partially should be taken as on account of change of opinion, yet such submission could not be
accepted because in the first place the Assessing Officer had not discussed the matter in the regular
assessment, but allowed deduction in terms of the claim made in the returns. There is no embargo in
section 147 against the Assessing Officer re-examining the assessment file and reappreciating the evidence
and accounts in support of the claim and arriving at a conclusion which may attract section 147. There is
no presumption anywhere in the provisions of the Act to the effect that every regular assessment completed
is after due consideration of every claim under the provisions of the Act. On the other hand, the scope of
the Explanation 2 to section 147 is such that the Assessing Officer is free to re-examine the correctness of
a regular assessment and decide whether the tax assessed, rate applied, relief and allowances granted,
etc., are in terms of the provisions of the Act and if not, to revise the assessment in terms of section 147.
When the scope of the section after amendment is large enough to cover situations whereby deductions
have been wrongly or excessively granted, the Tribunal had no authority to restrict the powers of the
Assessing Officer by holding that change of opinion was not a ground to reopen the assessment under
section 147. There is no difference between the proceedings completed under section 143(1) and regular
assessment under section 143(3) if income chargeable to tax has escaped assessment within the meaning
of the Explanation 2 to section 147. Therefore, the revenue's appeal was to be allowed by reversing the
order of the Tribunal and by restoring the departmental appeal to the file of the Tribunal for decision on
merits after hearing both sides. [Para 5]
CASES REFERRED TO

CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1/123 Taxman 433 (Delhi) [Para 3] and Asstt. CIT v.
Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) [Para 3].
P.K.R. Menon and Jose Joseph for the Applicant. P. Balakrishnan for the Respondent.
JUDGMENT

C.N. Ramachandran Nair, J. - This is an appeal filed by the revenue against the order of the Tribunal
confirming order of the first appellate authority cancelling reassessment completed under section 147 of
the Income-tax Act on the respondent-assessee for the assessment year 2001-02. We have heard standing
counsel appearing for the appellant and Sri P. Balakrishnan, counsel appearing for the respondent-assessee.
2. The respondent-assessee's returns filed for the assessment year 2001-02 was first processed under
section 143(1)(a) and thereafter a regular assessment was completed under section 143(3) of the Act.
However, the Assessing Officer on further scrutiny of the accounts noticed that the assessee from out of
borrowed funds invested Rs. 84,12,500 in various sister concerns as interest-free loans. The total
deduction towards interest paid was Rs. 308.36 lakhs and the entire claim was allowed as a deduction
under section 36(1)(iii) of the Act. The Assessing Officer noticed that in view of the diversion of interest
bearing loan to sister concerns, as interest- free loans, there is excess deduction of interest granted under
section 36(1)(iii) and in order, to disallow proportionate interest attributable to interest-free loans given to
sister concerns and to assess such escaped income, the assessment was reopened and completed under
section 147 of the Act. When the assessee challenged the assessment in appeal before the CIT (Appeals),
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he allowed the same both on merits and on the ground that the revised assessment under section 147 is
invalid. The second appeal filed by the revenue before the Tribunal was rejected by the Tribunal without
going into merits of the case but by holding that the CIT (Appeals) is justified in cancelling reassessment
completed under section 147 as the same is only on account of change of opinion of the Assessing Officer
on the entitlement of deduction of interest claimed and allowed in the original assessment.
3. Standing counsel appearing for the revenue referred to the Tribunal's order and contended that the
Tribunal has dismissed the departmental appeal just by following the decision of a Full Bench of the Delhi
High Court in CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 , which according to him, stands overruled
by later decision of the Supreme Court in Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291
ITR 500.
4. Before proceeding to consider the validity of revised assessment completed under section 147 we have
gone through the regular assessment completed under section 143(3) which assessment is an order in few
lines without any discussion and so much so the assessee's claim for deduction wherein the alleged excess
relief under section 36(1)(iii) is stated to be allowed, is not discussed or considered by the Assessing
Officer. On the other hand, deduction was allowed in terms of the claim made in the return and so much so
we have to hold that change of opinion which is found to be the basis for cancelling the reassessment does
not apply because the matter was not considered in details in the regular assessment and no opinion was
expressed by the Assessing Officer. The question, therefore, to be considered is whether, when assessment
is completed under section 143(3), there is a presumption that the Assessing Officer has considered
eligibility for deduction of all the claims so that any reversal of the same in the reassessment could be
treated as on account of change of opinion. It has to be necessarily found out from the statutory provisions
authorising income escaping assessment under section 147 of the Act. For easy reference we extract
hereunder the said section :
"147. Income escaping assessment.—If the Assessing Officer has reason to believe that any income
chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of
sections 148 to 153, assess or reassess such income and also any other income chargeable to tax
which has escaped assessment and which comes to his notice subsequently in the course of the
proceedings under this section, or recompute the loss or the depreciation allowance or any other
allowance, as the case may be, for the assessment year concerned hereafter in this section and in
sections 148 to 153 referred to as the relevant assessment year :
Provided that where an assessment under sub-section (3) of section 143 or this section has been made
for the relevant assessment year, no action shall be taken under this section after the expiry of four
years from the end of the relevant assessment year, unless any income chargeable to tax has escaped
assessment for such assessment year by reason of the failure on the part of the assessee to make a
return under section 139 or in response to a notice issued under sub-section (1) of section 142 or
section 148 or to disclose fully and truly all material facts necessary for his assessment, for that
assessment year.
Explanation 1.—Production before the Assessing Officer of account books or other evidence from
which material evidence could with due diligence have been discovered by the Assessing Officer will
not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases
where income chargeable to tax has escaped assessment; namely:—

(a) where no return of income has been furnished by the assessee although his total income
or the total income of any other person in respect of which he is assessable under this
Act during the previous year exceeded the maximum amount which is not chargeable to
Income-tax;
(b) where a return of income has been furnished by the assessee but no assessment has
been made and it is noticed by the Assessing Officer that the assessee has understated
the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) where an assessment has been made, but—

(i) income chargeable to tax has been under assessed; or

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(ii) such income has been assessed to too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act
has been computed."
Before proceeding to consider the applicability of the section to the facts of this case, we have to observe
that the finding of the Full Bench of the Delhi High Court in the above referred decision on the scope of
section 147 after the amendment by Finance Act, 1987 with effect from 1-4-1989 is exactly contrary to the
finding of the Supreme Court in the later judgment above referred inasmuch as the Supreme Court has
held that the amendment introduced with effect from 1-4-1989 has brought out substantial difference in the
meaning and content of the section, whereas according to the Delhi High Court, the amendment is
inconsequential. The Supreme Court has held that if ingredients of section 147 are fulfilled, then the
Assessing Officer is free to initiate proceedings under section 147. We have to therefore examine whether
the section applies to the facts of this case.
5. Here again, we have to clarify that the Tribunal has wrongly assumed that reassessment was completed
beyond four years from the end of the relevant assessment year and there is no failure on the part of the
assessee to make full and true disclosure of material facts necessary for assessment as referred to in the
first proviso to the section. Standing counsel pointed out that reassessment proceedings under section 147
was initiated within the four year period from the end of the relevant assessment year and therefore, the
first proviso to section 147 has no application and the Tribunal's finding to the contrary is factually
incorrect. Amended provisions of section 147 effective from 1-4-1989 authorise income escaping
assessment. If the Assessing Officer has reason to believe that income chargeable to tax has escaped
assessment for any assessment year. Therefore, only two conditions are required to be satisfied for
reopening an assessment, that is escapement of income chargeable to tax in the assessment and reason
available with the Assessing Officer to believe that chargeable income has escaped assessment. In this
case, the Assessing Officer on re-examination of the accounts noticed that assessee which has paid Rs. 3
crores towards interest on borrowings in the accounting year relevant for the assessment year advanced
above Rs. 84 lakhs as interest- free loans to sister concerns and so much so, the entire borrowings was not
for business purposes and hence deduction of interest allowed under section 36(1)(iii) is excessive relief
granted in assessment. In this context Explanation 2 to section 147 has to be referred to which
exhaustively states certain cases where income chargeable to tax has escaped assessment. Under sub-
clause (iii) of clause (c) of Explanation 2, if income has been made the subject of excessive relief under
the Act, then the same is one of the circumstances of income escaping assessment. Therefore, if excessive
deduction of interest is allowed under section 36(1)(iii), then certainly it is a case of income escaping
squarely covered by Explanation 2 to section 147 of the Act. Even though counsel for the assessee
submitted that when the claim was allowed in the original assessment any proposal for subsequent
disallowance of relief granted originally in the assessment either fully or partially should be taken as on
account of change of opinion, we are unable to accept the same because in the first place, the Assessing
Officer has not discussed the matter in the regular assessment but allowed deduction in terms of the claim
made in the returns. There is no embargo in section 147 against the Assessing Officer re-examining the
assessment file and reappreciating the evidence, and accounts in support of the claim and arriving at a
conclusion which may attract section 147. There is no presumption anywhere in the provisions of the Act
to the effect that every regular assessment completed is after due consideration of every claim under the
provisions of the Act. On the other hand, the scope of Explana-tion 2 to section 147 is such that the
Assessing Officer is free to re-examine the correctness of a regular assessment and decide whether the tax
assessed, rate applied, relief and allowances granted, etc., are in terms of the provisions of the Act and if
not to revise the assessment in terms of section 147 of the Act. When the scope of the section after
amendment is large enough to cover situations whereby deductions have been wrongly or excessively
granted, the Tribunal has no authority to restrict the powers of the Assessing Officer by holding that
change of opinion is not a ground to reopen the assessment under section 147 of the Act. Even though
assessee's counsel submitted that the decision of the Supreme Court referred to does not apply to this case,
inasmuch as assessment involved in this case is under section 143(1), whereas the assessment involved in
the Supreme Court case is regular assessment, we do not think there is any difference between the
proceedings completed under section 143(1) and the regular assessment under section 143(3) of the Act, if
income chargeable to tax has escaped assessment within the meaning of Explanation 2 to section 147 of
the Act.

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We therefore, allow the appeal by reversing the order of the Tribunal and by restoring the departmental
appeal to file of the Tribunal for decision on merits after hearing both sides.
■■

*In favour of revenue

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