Commissioner of Income Tax vs Popular Vehicles and Services Ltd.

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 u/s 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.

The respondent-assessee''s returns filed for the assessment year 2001-02 was first processed u/s 143(1)(a) and thereafter a regular assessment was completed u/s 143(1) 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 u/s 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 u/s 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 u/s 147 of the Act. When the assessee challenged the assessment in appeal before the CIT (Appeals), he allowed the same both on merits and on the ground that the revised assessment u/s 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 u/s 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.

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 : 161 Taxman 316, which according to him, stands overruled by later decision of the Supreme Court in Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., .

Before proceeding to consider the validity of revised assessment completed u/s 147 we have gone through the regular assessment completed u/s 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 u/s 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 u/s 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 u/s 147 of the Act. For easy reference we extract hereunder the said section:

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 - 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 - 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 u/s 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

(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 u/s 147. We have to therefore examine whether the section applies to the facts of this case.

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 u/s 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 u/s 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 u/s 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 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 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 u/s 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 u/s 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 u/s 143(1) and the regular assessment u/s 143(1) of the Act, if income chargeable to tax has escaped assessment within the meaning of Explanation 2 to Section 147 of the Act.

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.