THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOCHI I vs. M/S.COCHIN INTERNATIONAL AIRPORT LTD

JUDGMENT

S.V. Bhatti, J.

The Principal Commissioner of Income Tax, Kochi-I,/ Revenue is the appellant. M/s. Cochin International Airport Ltd, Kochi/assessee is the respondent.

assessment under Section 143(3) of the Act. The next stage from which the controversy arises was by issuing to the assessee a notice dated 28.03.2011 under Section 148 of the Act. By order dated 24.10.2011, the Assessing Officer completed the reassessment under Section 143(3), read with Section 147 of the Act. The Commissioner of Income Tax (Appeals)-II (for short, ‘the CIT (A)), by order dated 30.06.2014, allowed the assessee’s appeal, principally on the ground that the initiation of the reassessment under Section 147 of the Act does not comply with the requirement of Section 147. The Revenue filed an appeal before the Tribunal in ITA No.463/Coch/2014, and by the impugned order, the Revenue’s appeal stood dismissed. Hence, the second appeal at the instance of the Revenue.

“1. Whether on the facts and in the circumstances of the case - i) Should not the Income Tax Tribunal have -4-

considered the issue of re-assessment within four years unfettered by the findings of the CIT(Appeals)? ii) Is not the order of the ITAT against the decision of the Supreme Court in 291 ITR 500 (Jhaveri's case)? iii) Is there an aspect of compulsion at all on the Assessing Officer and is not such an approach only in the imagination of ITAT and wrong?

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The construction of a machinery provision should be to effectuate a charging section and the courts/Tribunal in interpreting such a provision, the commendable rule, i.e. which makes the machinery workable applied. Stepping up the argument by a comparison between the expression used in Section 147, pre and post-amendment, the learned counsel argues that the analogy which was adopted for the expression used in Section 147, prior to 01.04.1989, ought not to be applied in appreciating whether initiation for reassessment is valid and legal by the bar now applied by the CIT(A) or the Tribunal.

requirement under Section 147 is that the Assessing Officer has ‘reason to believe’. Therefore, the approach by the CIT(A) suffers from serious fallacy and is liable to be set aside. It is forcefully argued that for the formation of the belief, the Assessing Officer has sufficient discretion. The internal audit objection is certainly valid or constitutes valuable information, which the Assessing Officer cannot ignore for proceeding to determine the income escaping assessment. Through judicial pronouncement or interpretation of Section 147, no attempt is made to exclude the audit objections from being considered by the Assessing Officer. The CIT (A) and the Tribunal have interfered with the order of the assessment dated 24.010.2011 on a completely erroneous view of the matter. Therefore, it is argued that substantial question no.2, namely, initiation and the completion of reassessment, is taken up and completed in accordance with the law. Subject to such view on substantial question no.2, being taken by this Court, the other questions -7- the information/internal audit objections, reason to believe that any income chargeable to tax has escaped assessment for the assessment year 2006-07 still initiated reassessment. The chronology demonstrates the incurable fallacy or illegality in the initiation of reassessment. In other words, in the absence of reason to believe for reassessment, the steps fail as being illegal.

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the letter dated 18.04.2011 addressed by the assessee to the Assessing Officer requesting for supplying of reasons believed for initiation of reassessment. On 26.05.2011, the Assessing Officer communicated the reasons for reassessing the income on the return filed for the year 2006-07. The assessee filed a reply on the merits of the matter without prejudice to the primary objection on challenging the initiation as not conforming to the requirement of Section 147 of the Act. The order of reassessment dated 24.10.20211 was made. The assessee filed an appeal before the CIT(A) and by order dated 30.06.2011, the CIT(A), on verification of the record by the Assessing Officer, categorically found that the initiation of the reassessment is without believing the reason/information received by the Assessing Officer. Therefore, in the absence of a challenge to the conclusions recorded by the CIT(A) or Tribunal, the legal arguments now raised on the nature of satisfaction under Section 147 as subjective and the subjective -9-

satisfaction has been interfered with by the CIT(A) without there being any material is a contention not available in the circumstances of the case. In other words, the Revenue does not have a case that the noting by CIT(A) on the reason to believe is incorrect or contested. The consequence is that the grounds in law are academic.

raised ground on the basis for the Commissioner to conclude that the Assessing Officer did not believe the information but still initiated reassessment. In the said background, it is argued that the Tribunal rightly concurred with the view taken by the CIT(A), and no question of law under Section 260A of the Act is available. The Revenue does not assail that the Assessing Officer possesses the jurisdiction to initiate reassessment even without complying with the minimum requirement of Section 147 of the Act. In the absence of a reason to believe, according to him, ex post facto, the same cannot be cured, and the assessment order is liable to be set aside and correctly set aside by CIT(A) and the Tribunal. The case stands on the litmus test of whether the initiation is on the internal audit objections as reason to believe or the independent of such opinion the Assessing Officer issued notice under Section 147 of the Act.

a ground for reopening, relied on judgments reported in Commissioner of Income Tax v. Kelvinator of India Ltd and another4, Commissioner of Income Tax v. SFIL Stock Broking Ltd5, and Indian and Eastern Newspaper Society (supra) both to distinguish the proposition for which the Revenue is relying on, that in fact to support the case of the assessee.

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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): xxx xxx xxx With effect from 01.04.1989 Section 147 empowers the Assessing Officer as follows: A) has reason to believe that any income chargeable to the tax has escaped assessment for any assessment year has been empowered. i) to assess or reassess, ii) such income, and iii) also, any other income chargeable to tax a) which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under Section 147. B) to recompute i) the loss or ii) the depreciation allowance or iii) any other allowance, as the case may be, for the relevant assessment year.

unamended Section 147, it would be clear that the scope of reassessment has been widened under the amended Section 147 of the Act. At present, the only requirement in Section 147 is ‘reason to believe’. Therefore, that reason has to be a reason a prudent person believes, and reason need not necessarily be due to the failure of the assessee to disclose fully or partially a few material facts relevant to the assessment. In spite of Section 147 widening the scope of assessment/power of the Assessing Officer still, the primary condition of the reasonable belief for initiation is one of the important requirements for assessment or reassessment, as the case may be.

Revenue and preventing unwanted and unnecessary hardship to the assessee. The formation of belief by the Assessing Officer is necessary. The Section does not require or expect a conclusive finding on the proposed points on which reassessment is initiated. The reason for the above could be that the formation of such an opinion at that stage without hearing the assessee should not be expected from the Assessing Officer, for a step initiated with such a conclusive finding would prejudice the assessee's interest. The case on hand does not turn on the interpretation of Section 147. Section 147 is machinery provision. But the question is whether the setting in motion of a machinery provision complies with the requirement of Section 147. Therefore, much depends on the expression ‘reason to believe’. The expression ‘reason to believe’ explained in IPCA laboratories Ltd. vs. Gajanand Meena, Deputy CIT & another6, is as follows:

6 2001 215 ITR 420 (Bom.)

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“Therefore, the present case is one of those cases which the legislature, by a deeming section, has said that such cases would constitute cases of income escaping assessment. This is demonstrated by the reasons given by the assessing officer. Hence, the aforestated judgments cited on behalf of the assessee do not apply to the facts of the present case. We may also mention that the expression "reason to believe" refers to the belief which prompts the assessing officer to apply Section 147 to a particular case : that it will depend on the facts of each case ; that the belief must be of an honest and reasonable person, based on reasonable grounds ; that the assessing officer is required to act, not on mere suspicion, but on direct or circumstantial evidence ; that the expression-reason to believe" does not mean a subjective satisfaction on the part of the assessing officer. In the present case, we are satisfied that the reasons for the belief have a rational connection with the formation of the belief. Hence, the validity of the impugned notice is sustained.” The judgments reported in Vishnu Borewell v ITO7, Central India Electric Supply Co. Ltd v. ITO 8 , and Principal CIT v. Shodiman Investments Pvt. Ltd9 are to the same effect.

7 (2002) 257 ITR 512, 516- 17(Ori.) 8 (2011) 333 ITR 237, 9 (2020) 422 ITR 337. -16-

circumstances which are noted in the preceding paragraphs. The case on hand deals with the assessment year 2006-07. On 30.12.2008 assessment order under Section 143(3) was made. On 28.03.2011, notice of reassessment was issued to the assessee. On 18.04.2011, the assessee requested the supply of reasons to believe by the Assessing Officer for initiating action under Section 147. On 26.05.2011, the communication was given, setting out the reason for reassessing the return filed by the assessee for the assessment year 2006-07. The crux of the controversy is that CIT(A) summoned the record and recorded the following finding: “In view of the forgoing, it was contended that the assessing officer has not sufficiently discussed the issues involving large amount of additions, nor required the assessee to produce any details, except calling for the assessee to furnish replies on the reasons of reopening as communicated, which itself were not clear or self explanatory. Also the assessing officer did not consider the explanations offered by the assessee in their letter dated 08.07.2011, and the assessment was made on an arbitrary basis, without affording reasonable opportunity for the assessee to be heard.

interesting to note from the assessment records that there were audit objections on as many as 10 issues and AO has not accepted all of these objections, but it is stated in the proposal for reopening the case under section 147 that the action is being taken as a matter of abundant caution. 5.3.1 It is felt that merely change of opinion in the mind of AO on interpretation of law based on audit objections, majority of which were even not acceptable to the AO, cannot be the basis for forming 'reason to believe' for reopening the assessment. If at all the case was being reopened, the AO should have reopened only on the points where it was felt that the audit objection is right and acceptable. Section 147 does not empower the Assessing Officer to review on the same set of facts in the assessment order, which had already been framed, merely by fresh application of mind based on the opinion of some other agency to its own decision or to the decision of predecessor.” (Emphasis added)

certainly believed though not all of the internal audit objections, but at least a few. The assessee’s argument is equally quick that the formation of reasonable belief is not operated in a fluid state of affairs, i.e. what is accepted as reason and what is not a reason believed while deciding to reopen. The Assessing Officer is certainly within his jurisdiction to accept such of the reasons furnished by the internal audit as necessitating initiation of assessment or reassessment. But the above narrative leaves the same question unanswered, whether the Assessing Officer did so.

“ 7. We have heard the rival submissions and perused the material on record. In the instant case, there are ten reasons to reopen the assessment and the same evident from the letter dated 26th May 2011 written by the AO to the assessee (Page 5 of the paper book filed by the assessee). The CIT(A), after perusal of the assessment records had categorically held that the ten reasons stated for reopening the assessment is based on the objections of the audit party and the AO did not accept the opinion of the audit party on all the -19-

reasons mentioned for reopening the assessment, however, as an abundant caution, proceedings u/s 147 were initiated by the AO. This categorical findings of the CIT(A) has not been dispelled by the revenue before us. the ten reasons stated for reopening the assessment, we find that none of the reasons are pure factual errors/omissions where there is no dispute involved. An audit opinion in regard to application or interpretation of law cannot be treated as reason for reopening the assessment. The above said proposition of law is well settled by the judgment of the Hon'ble Apex Court in the case of Indian and 7.1 Further, the Hon'ble High Court of Gujarat in the Taxmann 465), held that a re-opening of the assessment where the AO has acted only under compulsion of audit party and not independently, action of re-opening assessment in such case would be vitiated. Reliance is also placed on the judgment of the Hon'ble Gujarat High Court in the case of Jagat accordingly.”

setting in motion the procedure stipulated in Section 147, i.e. the Assessing Officer has reason to believe is the sine qua non. The input in our considered view in a given case received from the internal audit party can be treated as a reason, but that information the Assessing Office must believe as a reason to proceed for assessment or reassessment as the case may be. The section as it stands is wide in scope than the unamended Section 147. It is well settled that the exercise of power or jurisdiction is preceded by a condition precedent for compliance, then such condition precedent in the manner required by Section 147 is complied with. The steps initiated thereafter would be legal and valid. The converse of the said consideration is that the steps are initiated even without reason to believe the initiation of the assessment or reassessment, as in the case on hand, is undoubtedly illegal.

initiation, and consideration of those circumstances both by the CIT(A) and the Tribunal, we are convinced that the authorities had taken a view available in the circumstances of the case, and no exception could be taken. The arguments raised assailing such findings are untenable. For the above reasons, substantial question no.2 is answered in favour of the assessee and against the Revenue.

As already noted, the question nos. 1(i) to (iii) focused on the ex post facto of the assessment or reassessment. The -22-

case on hand fails at the threshold. Therefore, these questions need not be considered independently as are not available and answered accordingly.

The appeal fails, dismissed. S.V.BHATTI JUDGE BASANT BALAJI JUDGE JS -23-