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Synopsis

The Supreme Court has on January 23, 2024 said that a mere change of opinion cannot be a ground for reopening of assessment and a defective return cannot be regarded as invalid until the assessing officer intimated about it.

A bench of Justices B V Nagarathna and Ujjal Bhuyan allowed appeals filed by M/s Mangalam Publications, Kottayam against the Kerala High Court's order which had reversed findings of the Income Tax Appellate Tribunal that had decided in favour of the assessees by setting aside the orders of reassessment.

The appellants contended that there was no specific information before the assessing officer wherefrom he could form a reason to believe that income exigible to income tax had escaped assessment for the three assessment years for 1990 – 1991, 1991–1992 and 1992 -1993.

They said that it was the change of view of the assessing officer upon assessing the comparative accounts of the partners that led to the reassessments which was not based on any fresh material or evidence. It is evident that the assessing officer had only reviewed the original assessments on the basis of a fresh application of mind to the same set of facts. Therefore, it is a clear case of change of opinion leading to reassessment proceedings which is not permissible in law, they said.

The bench, however, pointed out that post April 01, 1989, the power to reopen assessment was much wider. However, this court cautioned that one needs to give a schematic interpretation to the words “reason to believe”, otherwise Section 147 of the Income Tax Act would give arbitrary powers to the assessing officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen, it said.

"Before interfering with the proposed reopening of the assessment on the ground that the same is based only on a change of opinion, the court ought to verify whether the assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which is the basis of the alleged escapement of income that was taxable. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the assessing officer any opinion on the questions that are raised in the proposed reassessment proceedings," the bench said.

In the case, the bench noted what the assessing officer did was to cull out the figures discernible from the balance sheet for the assessment year 1989-90 obtained from the South Indian Bank and compared the same with the balance sheet submitted by the assessee before the assessing officer for the assessment year 1993-94 and thereafter arrived at the conclusion.

The assessing officer could not have placed reliance on such balance sheet submitted by the assessee allegedly for the assessment year 1989-90 to the South Indian Bank for obtaining credit. Dehors such balance sheet, there was no other material in the possession of the assessing officer to conclude that income of the assessee for the three assessment years had escaped assessment, the bench said.

The court noted that Section 139 places an obligation upon every person to furnish voluntarily a return of his total income if such income during the previous year exceeded the maximum amount which is not chargeable to income tax. 

"Once the primary facts are disclosed by the assessee, the burden shifts onto the assessing officer. It is not the case of the revenue that the assessee had made a false declaration. On the basis of the “balance sheet” submitted by the assessee before the South Indian Bank for obtaining credit which was discarded by the CIT(A) in an earlier appellate proceeding of the assessee itself, the assessing officer upon a comparison of the same with a subsequent balance sheet of the assessee for the assessment year 1993-94 which was filed by the assessee and was on record, erroneously concluded that there was escapement of income and initiated reassessment proceedings," the bench said.

Having taken note of the fact that an assessment order under Section 143(3) is preceded by notice, enquiry and hearing under Section 142(1), (2) and (3) as well as under Section 143(2), the bench said, "If that be the position and when the assessee had not made any false declaration, it was nothing but a subsequent subjective analysis of the assessing officer that income of the assessee for the three assessment years was much higher than what was assessed and therefore, had escaped assessment. This is nothing but a mere change of opinion which cannot be a ground for reopening of assessment."

The bench also pointed out that a return filed without the regular balance sheet and profit and loss account may be a defective one but certainly not invalid. A defective return cannot be regarded as an invalid return. The assessing officer has the discretion to intimate the assessee about the defects and it is only when the defects are not rectified within the specified period that the assessing officer may treat the return as an invalid return. 

"Ascertaining the defects and intimating the same to the assessee for rectification, are within the realm of discretion of the assessing officer. It is for him to exercise the discretion. The burden is on the assessing officer. If he does not exercise the discretion, the return of income cannot be construed as a defective return. As a matter of fact, in none of the three assessment years, the assessing officer had issued any declaration that the returns were defective," the bench said.

In the instant case, the bench said that the assessee had asserted both in the pleadings and in the oral hearing that though it could not file regular books of account along with the returns for the three assessment years under consideration because of seizure by the department, nonetheless the returns of income were accompanied by tentative profit and loss account and other details of income like cash flow statements, statements showing the source and application of funds reflecting the increase in the capital and current accounts of the partners of the assessee etc, which were duly enquired into by the assessing officer in the assessment proceedings. 

The court, therefore, held that the Tribunal was right in concluding that the reassessments for the three assessment years under consideration were not justified and the high court had erred in reversing such findings.

Case Title: M/s Mangalam Publications, Kottayam Vs Commissioner of Income Tax, Kottayam