Tax / Income Tax : Role and Power of Income Tax Department in Reopening the Income Tax Assessments under Income-tax Act, 1961

Tax / Income Tax : Role and Power of Income Tax Department in Reopening the Income Tax Assessments under Income-tax Act, 1961

The decision of CIT v. Kelvinator of India Ltd [2010] GCtR 5571 (SC) has explained noting Direct Tax Laws (Amendment) Act, 1987 and S.147 of Income-tax Act, 1961, that from the changes made to Section 147 of the Income-tax Act, 1961 it can be noted that prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment.

Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess.

But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. 

Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. This view gets support from the changes made to Section 147 of the Act. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act.

Parliament re-introduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer.