S.147 – Section 147 principles summarized.

The following principles of law are discernible from the various decisions of the courts: (i) The court should be guided by the reasons recorded for the reassessment and not by the reasons or explanation given by the Assessing Officer at a later stage in respect of the notice of reassessment. To put it in other words, having regard to the entire scheme and the purpose of the Act, the validity of the assumption of jurisdiction under section 147 can be tested only by reference to the reasons recorded under section 148(2) of the Act and the Assessing Officer is not authorised to refer to any other reason even if it can be otherwise inferred or gathered from the records. The Assessing Officer is confined to the recorded reasons to support the assumption of jurisdiction. He cannot record only some of the reasons and keep the others up his sleeve to be disclosed before the court if his action is ever challenged in a court of law. (ii) At the time of the commencement of the reassessment proceedings, the Assessing Officer has to see whether there is prima facie material, on the basis of which, the Department would be justified in reopening the case. The sufficiency or correctness of the material is not a thing to be considered at that stage. (iii) The validity of the reopening of the assessment shall have to be determined with reference to the reasons recorded for reopening of the assessment. (iv) The basic requirement of law for reopening an assessment is application of mind by the Assessing Officer, to the materials produced prior to the reopening of the assessment, to conclude that he has reason to believe that income has escaped assessment. Unless that basic jurisdictional requirement is satisfied—a postmortem exercise of analysing the materials produced subsequent to the reopening will not make an inherently defective reassessment order valid. (v) The crucial link between the information made available to the Assessing Officer and the formation of the belief should be present. The reasons must be self-evident, they must speak for themselves. (vi) The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. To put it in other words, something therein, which is critical to the formation of the belief must be referred to. Otherwise, the link would go missing. (vii) The reopening of assessment under section 147 is a potent power and should not be lightly exercised. It certainly cannot be invoked casually or mechanically. (viii) If the original assessment is processed under section 143(1) of the Act and not section 143(3) of the Act, the proviso to section 147 will not apply. In other words, although the reopening may be after the expiry of four years from the end of the relevant assessment year, yet it would not be necessary for the Assessing Officer to show that there was any failure to disclose fully or truly all the material facts necessary for the assessment. (ix) In order to assume jurisdiction under section 147 where assessment has been made under sub-section (3) of section 143, two conditions are required to be satisfied: (a) The Assessing Officer must have reason to believe that the income chargeable to tax has escaped assessment; (b) Such escapement occurred by reason of failure on the part of the assessee either to make a return of income under section 139 or in response to the notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all the material facts necessary for his assessment for that purpose. (x) The Assessing Officer, being a quasi-judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. (xi) While the report of the Investigation Wing might constitute the material, on the basis of which, the Assessing Officer forms the reasons to believe, the process of arriving at such satisfaction should not be a mere repetition of the report of the investigation. The reasons to believe must demonstrate some link between the tangible material and the formation of the belief or the reason to believe that the income has escaped assessment. (xii) Merely because certain materials which is otherwise tangible and enables the Assessing Officer to form a belief that the income chargeable to tax has escaped assessment, formed part of the original assessment record, per se would not bar the Assessing Officer from reopening the assessment on the basis of such material. The expression “tangible material” does not mean the material alien to the original record. (xiii) The order, disposing of objections or any counter-affidavit filed during the writ proceedings before the court cannot be substituted for the “reasons to believe”. (xiv) The decision to reopen the assessment on the basis of the report of the Investigation Wing cannot always be condemned or dubbed as a fishing or roving inquiry. The expression “reason to believe” appearing in section 147 suggests that if the Income-tax Officer acts as a reasonable and prudent man on the basis of the information secured by him that there is a case for reopening, then section 147 can well be pressed into service and the assessments be reopened. As a consequence of such reopening, certain other facts may come to light. There is no bar or any legal embargo under section 147 for the Assessing Officer to take into consideration such facts which come to light either by discovery or by a fuller probe into the matter and reassess the assessee in detail if circumstances require. (xv) The test of jurisdiction under section 143 of the Act is not the ultimate result of the inquiry but the test is whether the Income-tax Officer entertained a “bona fide” belief upon the definite information presented before him. Power under this section cannot be exercised on mere rumours or suspicions. (xvi) The concept of “change of opinion” has been treated as an inbuilt test to check abuse. If there is tangible material showing escapement of income, the same would be sufficient for reopening the assessment. (xvii) It is not necessary that the Income-tax Officer should hold a quasi-judicial inquiry before acting under section 147. It is enough if he on the information received believes in good faith that the assessee’s profits have escaped assessment or have been assessed at a low rate. However, nothing would preclude the Income-tax Officer from conducting any formal inquiry under section 133(6) of the Act before proceeding for reas sessment under section 147 of the Act. (xviii) The “full and true” disclosure of the material facts would not include that material, which is to be used for testing the veracity of the particulars mentioned in the return. All such facts would be expected to be elicited by the Assessing Officer during the course of the assessment. The disclosure required only reference to those material facts, which if not disclosed, would not allow the Assessing Officer to make the necessary inquiries. (xix) The word “information” in section 147 means “instruction or knowledge derived from the external source concerning the facts or particulars or as to the law relating to a matter bearing on the assessment. An information anonymous is information from unknown authorship but none the less in a given case, it may constitute information and not less an information though anonymous. This is now a recognized and accepted source for detection of large scale tax evasion. The non-disclosure of the source of the information, by itself, may not reduce the credibility of the information. There may be good and substantial reasons for such anonymous disclosure, but the real thing to be looked into is the nature of the information disclosed, whether it is a mere gossip, suspicion or rumour. If it is none of these, but a discovery of fresh facts or of new and important matters not present at the time of the assessment, which appears to be credible to an honest and rational mind leading to a scrutiny of facts indicating incorrect allowance of the expense, such disclosure would constitute information as contemplated in clause (b) of section 147. (xx) The reasons recorded or the material available on record must have nexus to the subjective opinion formed by the Assessing Officer regarding the escapement of the income but then, while recording the reasons for the belief formed, the Assessing Officer is not required to finally ascertain the factum of escapement of the tax and it is sufficient that the Assessing Officer had cause or justification to know or suppose that the income had escaped assessment. Hemjay Construction Co. Pvt. Ltd. through Deenaben Yogeshbhai Shah v. ITO [2019] 419 ITR 39 (Guj).