Assessment and Reassessment
CA. Dr. Girish Ahuja
M.Com., Ph.D, FCA
Chartered Accountant
After submission of return of income by the assessee to the Income-tax Department, the process of assessment
commences. In some cases, the assessment may be taken up by the Assessing Officer, even though the return of
income is not submitted, although the assessee was required to do so. The Assessing Officer can make the
assessment in any of the following ways:
(i) Summary Assessment
On the basis of the return of income [u/s 143(1)].
(ii) Scrutiny Assessment
On the basis of return of income and hearing further additional
evidence [u/s 143(3)].
(iii) Best Judgment Assessment
Under section 144
1. Inquiry before assessment [Section 142]
I. Service of a Notice [Section 142(1)]: For the purpose of making an assessment, the Assessing Officer may
take any/all of the following steps:
(i) serve a notice under section 142(1)(i) to the person requiring him to furnish a return of his income, or the
income of any other person in respect of which he is assessable under the Act, in the prescribed form and
within the time specified in the notice, if the person has not filed a return of income within the time allowed
under section 139(1) or before the end of the relevant assessment year.
(ii) serve a notice under section 142(1)(ii) to any person who has filed a return of income/fringe benefits or not
to produce or cause to be produced such accounts or documents as the Assessing Officer may require.
However, the Assessing Officer shall not require the assessee to produce any accounts relating to a period
more than three years prior to the previous year. Further, the notice under this clause can be sent only when
the return has been submitted under section 115WD(1), (3) and (4) or under section 139 [i.e. u/s 139(1) or
139(3) or 139(4) or 139(4A) or 139(5)] or when the time allowed under section 115WD(1) or 139(1), as the
case may be, for furnishing the return has expired and the return is not submitted.
Example: For making an assessment of assessment year 2009-10 the Assessing Officer can ask for books
of account for previous years 2005-06, 2006-07 and 2007-08 besides, of course, for previous year 2008-09
which is in question.
Only 3 years' books of account can be summoned: The officer, however, may not summon accounts
relating to a period more than 3 years prior to the accounting year in question. Should a notice calling for
account books for a period more than 3 years prior to the accounting year be issued, the same may be
regarded as consisting of two parts, one for the period of three years for which the books can be rightly
called for, and another for the period beyond three years for which the books cannot be called for. The
latter part of the notice may be regarded as unauthorised and illegal, but to the extent to which the former
part is legal, the assessee should produce books for the three years; and if he fails to do so, he would be
regarded as being in default and liable to best judgment assessment; [Calcutta Chromotype Pvt. Ltd. v ITO
(1974) 95 ITR 595 (Cal)].
(iii) serve a notice under section 142(1)(iii), to any person who has filed a return of income/fringe benefits or in
whose case the time allowed under section 139(1) for furnishing the return has expired, to furnish, in
writing and verified in the prescribed manner information in such form and on such points and matters as
he may require. The Assessing Officer may also ask for a statement of all assets and liabilities of the
assessee whether included in the accounts or not. However, prior approval of the Joint Commissioner of
Income-tax will be required, if the Assessing Officer requires the assessee to furnish a statement of assets
and liabilities not included in the accounts. Statement of assets and liabilities can be asked for any number
of previous years.
1.
Notice under section 142(1)(i) or (ii) or (iii) can be served only for the purpose of making an assessment under the Incometax Act.
2.
Notice under section 142(1)(i) to file a return of income can be served only after the time allowed under section 139(1) has
expired.
3.
Further, the notice 142(1)(ii) or (iii) can be served whether the return of income/fringe benefits has been submitted or not
but it can be served only after the time allowed under section 115WD(1) or 139(1), as the case may be, has expired.
4.
The law does not provide any time limit for service of notice under section 142(1)(i) for filing the return but as per general
provision, a return cannot be filed after the expiry of one year from the end of the relevant assessment year
5.
If the assessee has not furnished the return of income within the time allowed under section 139(1), it is not mandatory for
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the Assessing Officer to serve notice under section 142(1)(i) for filing the return of income in case he wishes to make best
judgment assessment under section 144. In that case, he shall have to follow the procedure given under section 144.
6.
Where the notice u/s 142(1) was served to the assessee, calling for certain information, and the Assessing Officer also
intimated to the assessee that his claim of residential status as not ordinarily resident was rejected and he was treated as
ordinary resident, it was held that the determination of residential status after hearing the evidence was part of assessment
u/s 143(3) and the issue could not have been determined in notice u/s 142(1) while calling the information. [Vijay Mallya v
ACIT & Others (2004) 266 ITR 329 (Cal)].
Form of verification under section 142 [Rule 14]: The information which a person is required by the
Assessing Officer to furnish under section 142(1)(iii) shall be verified in the following manner, namely:
"I declare that to the best of my knowledge and belief, the information furnished in the
statement/statements is correct and complete and other particulars shown therein are truly stated."
II. Make Inquiry [Section 142(2)]: For the purpose of obtaining full information in respect of income or loss
of any person, the Assessing Officer may make such inquiry, as he considers necessary. While section 142(1)
empowers the Assessing Officer to collect information from the assessee himself, section 142(2) on the other hand,
empowers him to collect information from sources other than the assessee.
The assessing authority is competent to make an enquiry relating to the cost of construction of a building
constructed by the assessee and also to call for reports on the valuation of the cost of construction from the valuation
officer in view of the provision of sections 131, 133(6) and 142(2). [ITO v Gita Rani Banik (2001) 251 ITR 712
(Gau)].
III. Audit of Accounts [Sections 142(2A) to (2D)]: The Assessing Officer may, at any stage of the
proceedings before him, direct the assessee to get the accounts audited by a Chartered Accountant nominated by the
Chief Commissioner/Commissioner of Income-tax. Such a decision may be taken by the Assessing Officer, if:
(a) having regard to the nature and complexity of the accounts of the assessee, and
(b) the interest of the revenue,
he is of the opinion that it is necessary so to do. The Assessing Officer can issue such directions only with prior
approval of the Chief Commissioner/Commissioner of Income-tax. [Section 142(2A)].
However, W.e.f. 1-6-2007, the Assessing Officer shall not direct the assessee to get the accounts so audited
unless the assessee has been given a reasonable opportunity of being heard.
Direction of audit can be given even if the accounts are already audited under the Income-tax Act or under any
other law [Section 142(2B)].
Form and time limit for submission of report [Section 142(2C) and Rule 14A]: The Chartered Accountant
shall submit the audit report in Form No. 6B to the assessee who will in turn submit it to the Assessing Officer
within such period as may be specified by the Assessing Officer. Such period may, however, be extended by the
Assessing Officer suo motu or on the request of the assessee and for any good and sufficient reasons. The aggregate
of the period originally fixed and the extended period(s) shall not, in any case, exceed 180 days from the date on
which the directions for audit were received by the assessee.
Audit expenses [Section 142(2D)]: The remuneration and expenses of, and incidental to such audit shall be
determined by the Chief Commissioner/Commissioner of Income-tax and shall be paid by the assessee and in the
event of assessees default in making payment, the amount payable shall be recovered from the assessee in the
manner provided for collection and recovery of tax.
However, where any direction for audit under section 142(2A) is issued by the Assessing Officer on or after 16-2007, the expenses of and incidental to such audit (including the remuneration of the accountant) shall be
determined by the Chief Commissioner or Commissioner, in accordance with such guidelines as may be prescribed
and the expenses so determined shall be paid by the Central Government.
1.
The direction to get accounts audited can be issued only in the course of assessment proceeding which is pending and not
after the completion of assessment. [Kumar Films Pvt. Ltd. v CIT (2002) 258 ITR 257 (Patna)]. Further the assessment also
includes reassessment.
2.
No appeal is possible against the orders under section 142(2A) for audit of accounts.
Special audit under section 142(2A) cannot be ordered only on basis of doubt regarding correctness of
accounts: The twin pre-conditions justifying the special audit under section 142(2A) of the Income-tax Act, 1961
are, the nature and complexity of the accounts and the interests of the Revenue. Before an approval is sought for, the
assessing authority must form an opinion as regards the said twin conditions. There should be an honest attempt to
understand the books of account of the assessee. There has to be an application of mind on the part of the assessing
authority. Complexity of the accounts cannot be equated with doubts being entertained by the assessing authority
either with regard to the correctness thereof or the need for obtaining certain vital information not ascertainable from
the accounts. The satisfaction is to be based upon objective considerations. [Bata India Ltd v CIT (2002) 257 ITR
622 (Cal)].
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The approval of the Commissioner for special audit should not be mechanical: It is the duty of the
Commissioner to examine whether the Assessing Officer has examined the books of accounts properly before giving
his approval for the special audit under section 142(2A). Approval of special audit cannot be given by the
Commissioner mechanically. In the instant case the Assessing Officer, had neither formed any opinion nor given a
direction for production of the accounts. The Commissioner should have examined whether the proposal of the
Assessing Officer for special audit deserved to be approved. The High Court, therefore, set aside the order for
special audit under section 142(2A). [West Bengal State Co-operative Bank Ltd. v Joint Commissioner of Income
Tax (2004) 267 ITR 345 (Cal)].
Special audit can be ordered even if tax audit has been conducted under section 44AB: Special audit can also
be ordered so as to protect the interest of the revenue. Such object may or may not be achieved by the audit
contemplated by section 44AB. [Super Cassettes Industries Ltd. v Asst CIT (1999) 102 Taxman 202 (Del)].
The power under section 142(2A) can be invoked when the Assessing Officer finds that accounts are
complicated. The overlapping in certain situation with regard to section 44AB and section 142(2A) do not render the
provisions either void or superfluous. [Narinder Singh Atwal v DCIT (1998) 231 ITR 641 (Cal)].
IV. Opportunity of being heard [Section 142(3)]: The Assessing Officer shall give an opportunity to the
assessee of being heard in respect of any information gathered by the Assessing Officer on the basis of the aforesaid
inquiry under section 142(2) or on the basis of the audit conducted as per section 142(2A) above, where the
Assessing Officer proposes to utilise such information for the purpose of any assessment. However, no such
opportunity is necessary when the assessment is made under section 144.
V. Consequences of non-compliance of section 142(1) and section 142(2A): Failure to comply with notice
under section 142(1) or to get accounts audited as per directions issued under section 142(2A) may result in:
(a) Best judgment assessment under section 144;
(b) Penalty under section 271(1)(b) which has been fixed at Rs. 10,000)1;
(c) Prosecution under section 276D with rigorous imprisonment which may extend to one year or with fine
which will not be less than Rs. 4 or more than Rs. 10 for every day during which the default continues, or
with both;
(d) Issue of a warrant of authorisation under section 132 for conducting search.
If the assessee proves that the non-compliance with the direction under section 142(2A) was not because of his
fault but negligence or refusal of the auditor, then best judgment assessment shall not be made and the proceedings
shall be dropped.
In Swadeshi Polytex Ltd. v ITO (1983) 144 ITR 171 (SC) the Supreme Court set aside an assessment made
under section 144(1)(b) because of the refusal of the nominated auditor to undertake the audit for a frivolous reason
and directed the assessment to be done afresh.
2. Estimates by Valuation Officer in certain cases [Section 142A] [W.r.e.f. 15-11-1972]
Assessing Officer can refer to the Valuation Officer, the estimation of valuation of any investment [Section
142A(1)]: Where an estimate of the value of any investment referred to in section 69 or section 69B or the value of
any bullion, jewellery or other valuable article referred to in section 69A or section 69B is required for the purposes
of making any assessment or re-assessment, the Assessing Officer may require the Valuation Officer to make an
estimate of the same and report to the Assessing Officer.
Valuation Officer has the same powers as given under Wealth-tax Act [Section 142A(2)]: The Valuation
Officer to whom such a reference is made as above shall, for the purpose of dealing with such reference, have all the
powers that he has under section 38A of the Wealth-tax Act, 1957.
Report of the Valuation Officer to be considered by Assessing Officer for making assessment or reassessment
[Section 142A(3)]: On receipt of the report from the Valuation Officer, the Assessing Officer may after giving the
assessee an opportunity of being heard, take into account such report in making such assessment or reassessment.
Section 142A not applicable for completed assessment [Proviso to section 142A]: The provisions of section
142A shall not apply in respect of an assessment made on or before the 30-9-2004 and where such assessment has
become final and conclusive on or before that date.
3. Assessment on the basis of return [Section 143(1)] [W.e.f. assessment year 2008-09]
Where a return has been made under section 139 or in response to a notice under section 142(1), such return
shall be processed in the following manner, namely—
(a) the total income or loss shall be computed after making the following adjustments, namely:—
(i) any arithmetical error in the return; or
1
Upto 31-5-2001, it could vary from Rs. 1,000 to Rs. 25,000.
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(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return;
(b) the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a);
(c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the
tax and interest, if any, computed under clause (b) by any tax deducted at source, any tax collected at
source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or
any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on
self-assessment and any amount paid otherwise by way of tax or interest;
(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be
payable by, or the amount of refund due to, the assessee under clause (c); and
(e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted
to the assessee:
An intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is
adjusted but no tax or interest is payable by, or no refund is due to, him:
No intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year
in which the return is made.
Where, after making the above adjustments either no sum is payable by the assessee or no refund is due to him,
the acknowledgment of the return shall be deemed to be intimation under section 143(1).
Meaning of incorrect claim: An incorrect claim apparent from any information in the return shall mean a
claim, on the basis of an entry, in the return,—
(i) of an item, which is inconsistent with another entry of the same or some other item in such return;
(ii) in respect of which the information required to be furnished under this Act to substantiate such entry has
not been so furnished; or
(iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been
expressed as monetary amount or percentage or ratio or fraction.
Scheme for centralized processing: For the purposes of processing of returns under section 143(1), the Board
may make a scheme for centralised processing of returns with a view to expeditiously determining the tax payable
by, or the refund due to, the assessee as required under the said sub-section.
For the purpose of giving effect to the scheme, the Central Government may, by notification in the Official
Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply
with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no
direction shall be issued after 31-3-2009.
1.
In case, intimation, which is also treated as notice of demand, is issued, the tax and interest payable mentioned in the
intimation should be paid within 30 days from the receipt of the intimation. In case, such tax or interest is not paid within 30
days, the assessee shall be deemed to be in default and liable to interest under section 220 on the amount of tax and
interest not paid and penalty u/s 221 in respect of tax not paid.
2.
No intimation under section 143(1) shall be sent after the expiry of one1 year from the end of the financial year in which the
return of income is made. If any return is revised as per section 139(5), the limitation period of one year shall commence
from the end of the financial year in which such revised return was filed.
It may be noted that the above limitation period of one year is only for sending the intimation and not for issuing of cheque
of refund which can be granted at any time.
Intimation under section 143(1) is not an assessment order. The legislative interest is very clear from the use of the word
"intimation" as substituted for "assessment". The intimation issued to the assessee is deemed to be a notice of demand
under section 156 for the purpose of recovering tax. Intimation under section 143(1) is issued without prejudice to the
provisions of section 143(2) and therefore, the regular assessment, including reassessment is not affected whatsoever by
the issue of intimation under section 143(1). [CIT v Rajesh Jhaveri Stock Brokers Pvt. Ltd. (2007) 291 ITR 500 (SC)].
3.
4.
5.
All the returns of income submitted u/s 139 or under section 142(1) are initially processed u/s 143(1). However, some
returns out of these are selected for scrutiny for which notice is required to be served u/s 143(2).
4. Regular/Scrutiny Assessment — On the basis of return of income and after hearing
additional evidence [Section 143(3)]
4a Compulsory Service of Notice [Section 143(2)]: Where the return has been made under section 139 or in
response to notice under section 142(1), the Assessing Officer shall if he considers it necessary or expedient to
ensure that—
(i) the assessee has not understated the income; or
(ii) has not computed excessive loss; or
(iii) has not underpaid the tax in any manner,
serve a notice on the assessee under section 143(2) requiring him to attend his office or produce or cause to be
1
Upto 31-5-2001, it was 2 years from the end of the assessment year in which the income who first assessable.
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produced any evidence on which the assessee may rely in support of the return on a date to be specified in the
notice.
However, no notice under section 143(2) shall be served on the assessee after the expiry of 6 months1 from the
end of the financial year2 in which the return is furnished.
1.
Notice under section 143(2) cannot be served if no return has been furnished by the assessee and as such no assessment
can be made under section 143(3) in this case.
2.
If notice under section 143(2) is not served, an assessment cannot be made under section 143(3).
3.
No notice under section 143(2) can be served on the assessee after the expiry of 6 months from the end of the financial
year in which the return/revised return is furnished e.g. if the return of income is furnished on 10-7-2008 notice under
section 143(2) can be served upon the assessee upto 30-9-2009 which is 6 months from the expiry of the financial year. It
may be noted that the notice should be served upon the assessee on/before the last date. For example, if the notice is
issued on 29-9-2009 but served upon the assessee on 2-10-2009, it will not be a valid notice as it should have been served
by 30-9-2009.
4.
Besides serving a notice under section 143(2), the Assessing Officer normally also serves a notice under section 142 for
producing books of account, statement of assets and liabilities, etc.
5.
Notice under section 142(1)(ii) and (iii) can be served even if no return has been made by the assessee.
Judicial decisions: (1) Wherever an assessment is sought to be made under section 143(3), issuing and serving
of valid notice under section 143(2) is a precondition and is mandatory. [Rattan Lal Tiku v CIT (1974) 97 ITR 553
(J&K)].
(2) No specific form has been prescribed in the Income-tax Rules, 1962 for the notice. Almost invariably a
printed form is used for this purpose. Be that as it may, the notice must give the assessee an option to attend in
person or to produce the relevant evidence. A notice under this sub-section not giving the option is not valid.
In case the Assessing Officer feels that the personal attendance of the assessee is necessary, a notice under
section 131 can be issued.
Where the hearing notice contains an insignificant error, provided it does not mislead the assessee, the notice
will not be bad or illegal. Such a defect in notice may also be saved by the provisions of section 292B. [Rajamani
Devi v CIT (1937) 5 ITR 631 (All)].
(3) A fresh notice under section 143(2) must be served on the assessee if he furnishes a revised return under
section 139(5). [Gopaldas Parshottamdas v CIT (1941) 9 ITR 130 (All)]. Where the assessment is completed
without issuing a fresh notice under section 143(2) in respect of the revised return, the assessment is liable to be set
aside for a fresh assessment after service of such notice. [Intercraft India v CIT (1985) 154 ITR 662 (Del)].
However, the setting aside of the assessment made under section 143(3) on the basis of the original return is not
possible where the revised return is not a valid one. [CIT v Girishchandraharidas (1992) 196 ITR 833 (Ker)].
(4) Burden was upon the revenue to prove that the notice under section 143(2) was served upon the assessee
within the prescribed time of 12 months (now 6 months from the end of the financial year in which return was
furnished). If the revenue failed to prove that notice under section 143(2) was served on the assessee, the assessment
order is not valid. [CIT v Lunar Diamonds Ltd. (2006) 281 ITR 1 (Del)].
(5) Where notice under section 143(2) is issued by registered post on the last day of the period of limitation, it
could not be said to have been served in time. [CIT v Inderpal Malhotra (2008) 171 Taxman 359 (Del)].
Notice deemed to be valid in certain circumstances [Section 292BB] [Inserted by the Finance Act, 2008,
w.e.f. 1-4-2008]: Where an assessee has appeared in any proceeding or cooperated in any inquiry relating to an
assessment or reassessment, it shall be deemed that any notice under any provision of this Act, which is required to
be served upon him, has been duly served upon him in time in accordance with the provisions of this Act and such
assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice
was—
(a) not served upon him; or
(b) not served upon him in time; or
(c) served upon him in an improper manner.
However, nothing contained in this section shall apply where the assessee has raised such objection before the
completion of such assessment or reassessment.
4b Consequences of failure to comply with notice under section 143(2): The consequence of a default in
complying with the notice under section 143(2), may entail an ex parte, best judgment assessment under section
144. Such a default may also attract penalty under section 271(1)(b) which has been fixed at Rs. 10,000].
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2
The words in italics are applicable w.e.f. 1-4-2008. Prior to 1-4-2008, no notice under section 143(2) could be served on the
assessee, after the expiry of 12 months from the end of the month in which return was furnished.
Ibid.
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5. Assessment after evidence [Section 143(3)]
The Assessing Officer, on the day specified in the notice under section 143(2) or as soon afterwards, as may be,
shall, by order in writing, make an assessment of the Total Income or the loss of the assessee and determine the sum
payable by him or refund of any amount due to him on the basis of such assessment. The assessment shall be made
after taking into consideration the following:
(i) such evidence as the assessee may produce on the dates specified, from time to time and such other
evidence as the Assessing Officer may require on specified points;
(ii) all relevant material gathered by him.
Deduction/exemption or relief not claimed in return can be claimed under scrutiny assessment: When a notice
under section 143(2) has been issued and the proceedings of assessment under section 143(3) are in progress, the
assessee can put forth any claim for deduction/exemption or relief which were not claimed in the return of income
and the same shall have to be considered by the Assessing Officer.
Assessment of certain institutions without giving exemption available u/s 10 [First proviso to section
143(3)]: In the case of an institution or association which is required to furnish a return of income under section
139(4C), the Assessing Officer shall not make an assessment order of the total income or loss of such scientific
research association referred under section 10(21), news agency referred under section 10(22B), association or
institution or fund or trust or university or other educational institution or any hospital or other medical institution
referred under section 10(23A) or 10(23B) or 10(23C)(iv), (v), (vi) and (via) without giving effect to the provisions
of section 10, unless—
(i) he has intimated the Central Government or the prescribed authority, the contravention of the provisions
contained in such clauses where in his view such contravention has taken place, and
(ii) the notification issued or approval granted to such a body has been rescinded or withdrawn.
Generally the income of the above institution is exempt under the various clauses of section 10 mentioned above. However, the
Assessing officer can deny the exemption to them in the assessment order to be passed by him if the conditions mentioned in
clauses (i) and (ii) are satisfied.
6. General principles of assessment
6a Nature of proceedings
Proceedings are quasi-judicial: The proceedings for assessment before the Assessing Officer are described as
quasi-judicial in character. It has been observed that, before the stage when he issues a notice under sub-section (2)
of section 143, his proceedings are purely administrative. After the receipt of the return also the Assessing Officer is
entitled to make private enquiries as to whether there is reason to suspect that the return is incorrect or incomplete.
No objection can be taken to such enquiries behind the back of the assessee at that stage, as they are all
administrative. They assume a quasi-judicial character only after the issue of notice under sub-section (2) of this
section. This is so because the Assessing Officer is not a court, civil or revenue (though he has the same powers as
are vested in a court for the limited purposes mentioned in section 131) and the proceedings before him are not
strictly judicial proceedings, though they are deemed to be such for limited purposes. [Indian & Eastern Newspaper
Society v CIT (1979) 119 ITR 996 (SC); Gurmukh Singh (Seth) v CIT (1944) 12 ITR 393].
Rule of natural justice to be followed: Though the Assessing Officer is not fettered by technical rules of
evidence and pleadings, he is not absolved of the obligation to comply with the fundamental rules of justice which
have come to be known in administrative law as the principles of jurisprudence. [Jagga Row (A.V.N.) v CIT (1987)
166 ITR 862 (AP)].
6b Hearing and gathering of evidence
(A) Assessee should be heard: An assessment under section 143(3) can be made only after the assessee has
been heard fully in three respects:
(a) he should be given an opportunity to produce the evidence on which he relies in support of the return;
(b) if, in respect of the evidence so produced or in view of other material gathered by the officer, he requires
any clarifications or evidence on any specific points he should give the assessee an opportunity to furnish
or produce the same; and
(c) if the Assessing Officer has gathered material on which he desires to rely, he should disclose to the assessee
the substance of such material and give him an opportunity to have his say in regard thereto.
(B) Gathering of material
(1) Officer may make private inquiries to gather material: Such enquiries may be carried out privately or
confidentially. He can also summon witnesses and record their statements in the presence of the assessee or even
behind his back. Only, he should satisfy himself as to the correctness of the information and as has already been
pointed out, the substance of any information sought to be used against the assessee should be put to him and he
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should have a fair opportunity. It is upto the assessee to avail of it: constant with the principles of natural justice, to
rebut the same. It is, however, not always essential that a personal hearing should be given to the assessee. [Chiranji
Lal Steel Rolling Mills v CIT (1972) 84 ITR 222 (P&H); Namasivayam Chettiar (S.N.) v CIT (1960) 38 ITR 579
(SC); Abdul Razak v CIT (1935) 3 ITR 361 (Pat); Balasubramanian (P.N.) v ITO (1978) 112 ITR 512 (AP); Bagsu
Devi Bafna v CIT (1966) 62 ITR 506 (Cal); Kashmir Vastralaya v CIT (1978) 112 ITR 630 (Pat)].
(2) Reference to Valuation Officer only in pending cases: There should be a pending assessment for exercise of
the power to issue commission. Where a return had been processed under section 143(1) and no notice under section
143(2) had been issued, there can be no inference of any pendency of proceedings, so that reference to the District
Valuation Officer to estimate the cost of construction was not valid. The reassessment based upon such report would
also be consequently invalid. [Arjun D. Bharad (Dr.) v ITO (2003) 259 ITR (AT) (Nag) 1].
(3) Officer cannot rely on third party statement without giving the assessee copies and right to cross-examine
the deponent: Where the Assessing Officer relies on the statement of a witness, or evidence allegedly given or a
copy of accounts allegedly produced before some other authority by the assessee, the assessee be given, if he
requires it and the circumstances warrant it, an opportunity to cross-examine the witness or official. [Vasantlal &
Co. (C) v CIT (1962) 45 ITR 206 (SC)].
(4) Summons to witness for examination: For the purpose of gathering relevant material, the Assessing Officer
can issue summons under section 131 for the examination of witnesses and production of documents from third
parties to ascertain the assessee's income. He can secure information and guidance by examining rivals in the trade
of the assessee, or experts or past employees under the assessee, or managers who are acquainted either with the
particular business of the assessee or the class of business in the neighbourhood. He may examine his own
inspectors or surveyors if they can aid him and give information. He can rely upon his local knowledge and the
previous history of the case. He can take into account the capital employed in the business. This, however, as
pointed out in CIT v Radha Kishna Nandlal (1975) 99 ITR 143 (SC) will be relevant but not conclusive as profits do
not always or wholly depend on the amount of capital employed.
(5) Kinds of material which the Assessing Officer may use: He can refer to materials gathered by him in the
course of an earlier assessment which has been set aside but for being re-done. He can refer to the assessment
proceedings of previous years for a standard to be applied to the assessee, though such assessment might have been
made on a best judgment estimate. He can take into consideration the volume of the business turned over by the
assessee and in a money-lending business, the volume of the loans advanced on mortgage or simple bonds and the
probability of normal recoveries and collections. He may also take into account the quantity of stocks carried by the
assessee from year to year and whether the same is increasing or decreasing, the local reputation that the assessee
holds in the business field and the position that he occupies in the market, the style of living of the assessee and any
acquisition of property by him during recent years, the increase in his total resources and lastly, the rate of profit
earned generally in the business by other businessmen in the line. Where the Assessing Officer relies upon this lastmentioned basis, he should furnish to the assessee details of the cases which he considers comparable, such as, the
magnitude of the turnover, or the nature of the contracts entered into by them whether forward or ready, etc. It is not
enough that he chooses comparable cases and puts them to the assessee. This principle has now been statutorily
declared. [Joseph Thomas & Bros. v CIT (1968) 68 ITR 796 (Ker)].
(C) Nature of evidence
Assessment must be supported by material: The language of section 143(3) makes it clear that the assessment
order should be based on the evidence before the officer.
(1) Material and evidence — connotation of: The material or evidence on which taxing authorities may rely
under the Income-tax Act is not confined to direct testimony by witnesses. Though the word used in the section is
evidence, it is not necessary, as already pointed out, that only evidence that would pass muster in a civil or criminal
court should be relied on by the Assessing Officer. All relevant circumstances which have a bearing on the issue
which are revealed during the course of assessment would be covered by the statement material or evidence on
which the Assessing Officer could rely. [Mangalchand Gobardhan Das v CIT (1954) 26 ITR 706 (Assam)].
(2) Assessing Officer not fettered by technical rules of evidence: The word material, it has been held, clearly
shows that the Assessing Officer is not fettered by the technical rules of evidence and the like and that may act on
material which may not strictly speaking be accepted as evidence in a court of law. Such evidence need not
necessarily be direct evidence.
(3) Suspicion not tantamount to evidence: However, the mere existence of reasons for suspicion would not
tantamount to evidence. But it should not be based on mere suspicion, conjecture or guess work or on irrelevant or
inadmissible material. [Dhirajlal Girdharilal v CIT (1954) 26 ITR 736 (SC)].
(4) Past history: The past history of an assessee is legitimate material that can be made use of in making an
assessment but that may not be sufficient by itself, without more, to justify assessment in a particular year. There
must be some material relatable to the accounting year which, taken with the past history, may reasonably entitle the
income-tax authorities to hold that there must be some concealed income during the accounting year which is liable
8
to assessment.
(5) Comparable cases: One of the standards generally applied in estimating the profits of an assessee is the rate
of profit disclosed (or applied) in comparable cases. But in such cases, though the assessee need not be told the
identity of the comparable cases, he is entitled to get so much of the information regarding the same as can be
possibly disclosed by the department and as may be necessary to enable him to show cause why the rate disclosed or
applied in the comparable case should not be applied to his case. [Dhakeswari Cotton Mills Ltd. v CIT (1954) 26
ITR 775 (SC)].
(6) Affidavits: Evidence may be tendered on an affidavit before the Assessing Officer. Such evidence is legal
and can be acted upon by the assessing/appellate authorities. Should the Assessing Officer, or the Deputy
Commissioner (Appeals) or the Appellate Tribunal regard the same as not sufficient proof of the contents thereof,
they should cross-examine the deponent and, if dissatisfied, call upon the assessee to produce documentary evidence
in support of the contents of the affidavit. If no such thing is done, the affidavit by itself should be regarded as
sufficient proof. This was so held by the Supreme Court in Mehta Parikh & Co v CIT (1956) 30 ITR 181 (SC).
The rule laid down by the Supreme Court in Mehta Parikhs case cannot be construed to lay down the
proposition that unless the deponent is cross-examined, the affidavit cannot be rejected. That decision only lays
down that if there is no material whatsoever on record for doubting the veracity of the statements made in the
affidavit and if the deponent has also not been subjected to cross-examination for bringing out the falsity of his
statements, then the tribunal will not be justified in doubting the correctness of the statements made by the deponent
in the affidavit. [Gunwanthibai Ratilal (Smt.) v CIT (1984) 146 ITR 140 (MP)].
The finding arrived at in such a case would, according to the Supreme Court, be a finding based on pure
surmise. Where the affidavit itself constituted the evidence for a particular act such as, for example, a declaration
that certain property in the assessee's hands is joint family property, it cannot be rejected without valid reason.
[Lakshmi Narain Gadodia & Co. In re (1943) 11 ITR 491 (Lah)].
It cannot be rejected merely on the ground that it is not supported by documentary evidence unless there is
material to suggest that some documentary evidence exists and has not been produced by the assessee despite his
being required to do so. [Sohan Lal Gupta (L.) v CIT (1958) 33 ITR 786 (All)].
(7) Books of account: Books of account maintained in the regular course of business are relevant and constitute
a very good piece of evidence of their contents. They need not be formally proved as in a court of law. [CIT (Addl) v
Jay Engineering Works Ltd. (1978) 113 ITR 389 (Del)].
Their probative value would however, depend on the circumstances and the manner of their maintenance.
(8) Photostat copies and tapes: The photostat copy of a document in the absence of the original, or evidence
regarding the circumstances in which it was taken, has very little evidentiary value. [Moosa S. Madha & Azam S.
Madha v CIT (1973) 89 ITR 65 (SC)].
There will be similar difficulty in acting upon what purports to be a tape recorded conversation. These types of
material have, therefore, to be acted upon with great care and circumspection.
(D) Assessment
Determination of income and tax: The assessment order should determine not only the total income of the
assessee but also the amount payable by him. The Assessing Officer should apply his mind to the facts before him,
apply the relevant law and come to a positive conclusion that the income assessed belongs to the assessee before
him. The assessments under the Act have to be made every year and even if there is a dispute regarding the
ownership of the income, the officer must come to a conclusion and cannot hold up his decision till the dispute is
resolved in the ordinary courts. [CIT v Hirjee (H.) (1953) 23 ITR 427 (SC)].
(1) Piecemeal or tentative assessment — not permissible: The officer must assess the total income of the
assessee in accordance with the provisions of the Act. It is not open to him to assess the income from one or more
sources and leave the others undetermined. He cannot make piecemeal assessments nor can he make a provisional or
tentative assessment. [Asharfi Lal v ITO (1967) 66 ITR 63 (All)].
(2) Determination of tax payable must be in the assessment order itself: The determination of the tax payable by
the assessee is as much mandatory as the determination of his income. Where the order determining the total income
is passed within the prescribed time limit but the tax payable is not determined within the prescribed time limit,
assessment would be time barred. [CIT v Purshottamdas T. Patel (1994) 209 ITR 52 (Guj)].
(3) When is an assessment complete: An assessment is complete only when tax is computed by the Assessing
Officer under his signature. Mere determination of income or wealth does not complete an assessment, if tax is not
computed. Computation of tax however may have been done not as part of assessment order but as part of the
record. Even an initial would do in the place of signature but the basic requirement is that the tax should have been
computed under the signature of the Assessing Officer and if it is not dose the assessment could not be treated as
having been completed. [CWT v Dhansukhlal J. Gajjar (1999) 237 ITR 537 (Guj)].
9
(4) Order to be in writing: Section 143(3) contemplates two processes: one, the assessment of the total income
and second, the determination of the sum payable by the assessee. It also requires the officer to make an order in
writing. It should also be signed by the officer though the statute does not explicitly say so, as no order in writing
can be ascribed to a person unless he has subscribed his signature or initial thereto.
(5) Entry in order sheet — Whether amounts to assessment: An entry in the order sheet could be an order of
assessment. If the order is not a speaking one, it may violate the principles of natural justice. A cryptic entry in the
order sheet merely recording the fact of completion of the assessment of a particular sum as income is against the
requirement of law. [Sewduttoy Rambullav & Son v CIT (1993) 204 ITR 580 (Cal)].
(6) Protective assessment: The Assessing Officer may often have to assess the same income in more than one
place. Sometimes they may be made by different officers as, for example, where an officer assessing A thinks that
certain income belongs to him but another officer assessing B is of the opinion that the income is his. Sometimes the
same officer may find that an assessee before him is returning a particular income but is of the opinion that it should
be assessed in the hands of a firm or a family and not in the hands of the person who returned it. It has been held by
the Supreme Court in Lalji Haridas v ITO (1961) 43 ITR 387, that the officer may, when in doubt, to safeguard the
interests of the Revenue assess it in more than one hand. But this procedure can be permitted only at the stage of the
assessment as, at higher levels, it is possible for the appellate or revisional authority to give a clear finding as to the
assessee who is liable to be so assessed leaving the one who is aggrieved to get redress by appropriate proceedings.
In any event, if, at the stage of the Tribunal or High Court it is found that the same income is assessed in both places,
the Department should provide relief suo motu to one of them. [ITO v Bachu Lal Kapoor (1966) 60 ITR 74 (SC)].
It may be noted that Income-tax Department in this case cannot recover the tax from both the assessees in
respect of the same income.
There can be precautionary assessments but not protective recovery. [CIT v Cochin Co. Pvt. Ltd. (1976) 104
ITR 655 (Ker)].
But where an assessment is intended to be protective, it should be so expressed. [CIT v Khalid Mehdi (1987)
165 ITR 685 (AP)].
Under the law, a protective order of an assessment can be passed but not the protective order of penalty. [CIT v
Beharilal Payarelal (1983) 141 ITR 32 (Pun); Metal Stores v CIT (1990) 186 ITR 612 (Gau)]. In other words,
penalty cannot be imposed on the strength of a protective assessment.
Further, where the Assessing Officer characterizes an assessment as protective but fails to make a substantive
assessment, it is the protective assessment which will be treated as substantive and final. An appeal against the
protective assessment should ordinary await the outcome in the substantive assessment so that the protective
assessment can be in conformity with the substantive assessment. [CIT v Surendra Gulab Chand Modi (1983) 140
ITR 517 (Guj)].
Protective assessment is permissible in law. It is occasioned where an income is offered by one person, while
the Revenue considers that such income is assessable in the hands of another. In such a case, the Revenue has the
right to assess the income offered protectively, so that in case its inference that such income is assessable in the
hands of another person is not sustained in appeal, the protective assessment becomes final. Such a course of action
was endorsed by the Supreme Court in Lalji Haridas v ITO (1961) 43 ITR 387. Where an addition was made
protectively in the hands of the daughter, while substantively in the hands of the father. In the father's hands, the
addition was deleted. Thereupon, the daughter who had not initially filed an appeal against the assessment in her
case in view of the fact that the assessment was described as protective, filed a delayed appeal after the assessment
in the hands of the father became final. The High Court found that the delay could not be condoned, since it was
inordinate. It was found that the claim that notice was not properly served was incorrect. In such cases, the person
against whom protective assessment is made does not get relief automatically, because the addition itself has to be
disputed on the merits by the person on whom the protective assessment is made by filing a regular appeal in time.
[Latha Chandy v CIT (2003) 260 ITR 385 (Ker)].
Protective assessment becomes redundant when the other assessment becomes final: The same income cannot
be assessed in two hands, but protective assessment is temporarily justified, when there is dispute as to the person in
whose hands the income is required to be assessed. Where an assessee offers an income, while the Revenue finds it
assessable in another's hands, as long as finality as regards the correct person in whose hands it is assessable is
reached, the other assessment is also required. But once finality is reached, the assessment in the other's hands could
probably be corrected even as a mistake apparent from the records in view of the fact, that cross reference is bound
to have been made to the assessment in the other case, so that the records of the other case could well form part of its
records. The redundant assessment can certainly be cancelled under section 264 after waiving the delay on an
application by the Commissioner. [Latha Chandy v CIT (2003) 260 ITR 385 (Ker)].
(7) Service of order on assessee: It is nowhere mentioned in the statute that the assessment order would have to
be served on the assessee. All that is required is that the notice of demand specifying the sum payable should be
10
served on the assessee in the prescribed form and would be accompanied by an assessment form i.e; F. No. 7. Thus,
it has been held that the failure of the Assessing Officer to serve a copy of assessment order on the assessee cannot
be said to render the assessment order illegal though it is eminently desirable for him to do so. [Sivalingam Chettier
(V.S.) v CIT (1966) 62 ITR 678 (Mad)].
It is, however, desirable that copies of the order computing the income as well as the tax are served on the
assessee so that he can file an effective appeal when he receives the consequential demand notice. [Kalyankumar
Ray v CIT (1991) 191 ITR 634 (SC)].
(8) Reference to wrong section in the assessment order does not vitiate the assessment: It is now settled law that
a wrong reference to the power under which an order is made does not per se vitiate the order, if there is some other
power under which the order could be lawfully made. [Hukumchand Mills Ltd v State of MP (1964) 52 ITR 583
(SC)].
(9) Wrong mentioning of date on assessment order does not vitiate the assessment: A wrong mentioning of date
on the assessment order would make the assessment order neither non est nor void where it is established beyond
doubt that it was merely due to inadvertence. [Bidyut Prova Raha v ITO (1971) 79 ITR 187 (Assam)].
(10) Assessment order should be a speaking order: It is necessary to emphasise that judicial and quasi-judicial
authorities should always give the reasons in support of their conclusions. Thus, a non-speaking order without
giving reasons is invalid and is liable to be quashed. [Baidya Nath Sarma v CWT (1983) 140 ITR 801 (Gau)].
(11) Effect of quashing of order: An assessment order can also be quashed for its failure to comply with
principles of natural justice. The effect of the quashing of an order for failure to comply with the principles of
natural justice has been explained in Guduthur Bros v ITO (1960) 40 ITR 298 (SC). In case of assessment
proceedings the effect of such an order is to leave the proceedings open from the stage at which the invalidity crept
in. In such cases it is open to the officer to start the proceedings again from that stage and complete the assessment
afresh if otherwise permissible in law.
(12) Assessment on basis of an invalid return: Assessment on the basis of an invalid or nonest return is void ab
initio [Maya Debi Bansal v CIT (1979) 117 ITR 125 (Cal)]. However, such order remains in effect and continues to
operate until its invalidity is declared by the court. Upon such declaration, the order goes out of existence as from
the date on which it was made. But until then, void order is voidable and it continues to operate against the person
against whom it was made and he is bound by the consequences flowing from the order. [Indomarine Agencies
(Kerala) (P.) Ltd. v STO (1980) 45 STC 163 (Ker)].
(13) On remand, the entire assessment does not become open: Where the assessment is set aside by the Tribunal
and the matter remanded to the Assessing Officer, it is not open to him to introduce into the assessment new sources
of income so as to enhance the assessment. Any power to enhance is confined to the old sources of income which
were the subject matter or appeal. [Kartar Singh v CIT (1978) 111 ITR 184 (P&H)].
(14) Where the assessment is set aside, could it be redone by the Assessing Officer: Unless the appellate order,
while setting aside the assessment requires the Assessing Officer to redo the assessment, it cannot be redone,
because the normal powers of confirmation, reduction, enhancement or annulment do not require a fresh assessment,
while the power to pass such orders has to be understood as ordinarily unavailable for the class of orders of
annulment. Unless the order setting aside directs a fresh assessment it cannot be understood as authorising such
assessment. [Fu Sheen Tannery v ITO (2003) 262 ITR 456 (Cal)].
(15) Assessment once made is final: It is now a well settled principle that an assessment once made is final and
that it is not open to the department to go on making fresh computation and issuing fresh notices of demand to the
end of all time. [ITO v Habibullah (S.K.) (1962) 44 ITR 809 (SC)].
(16) Law applicable: In the case of assessment of income and determination of tax liability, the relevant law to
be applied is the law as in force on the first day of the assessment year. [CIT v Isthmian Steamship Lines (1951) 20
ITR 572 (SC)].
(17) Year of assessment: It is not open to the Assessing Officer to make assessment in respect of a year other
than the assessment year for which the return is filed. Thus, in respect of a return filed for assessment year 1973-74,
assessment cannot be made for assessment year 1974-75. [CIT v Amaimugan Transports Pvt. Ltd. (1995) 215 ITR
553 (Mad)].
(18) Additional claim of the assessee to be considered: During the course of proceedings under section 143(3),
the assessee can make a claim for any exemption or deduction or relief which he could not claim in the return of
income furnished by him.
7. Best Judgment Assessment [Section 144]
The Assessing Officer, after taking into account all relevant material which he has gathered, is under an
obligation to make an assessment of the total income or loss to the best of his judgment and determine the tax
payable by the assessee in the following cases:
11
(i) where any person fails to make the return under section 139(1) and has not made a return or a revised
return under section 139(4) or section 139(5);
(ii) where any person fails to comply with all the terms of a notice issued under section 142(1); or fails to
comply with the directions issued under section 142(2A) for getting the account audited.
(iii) where any person, having made a return, fails to comply with all the terms of a notice issued under section
143(2);
7a Opportunity must be given to the assessee: The best judgment assessment can only be made after giving
the assessee an opportunity of being heard by giving notice to the assessee to show cause why the assessment should
not be completed under section 144. However, it will not be necessary to give such notice where a notice under
section 142(1) has already been issued prior to making assessment under this section.
The Assessing Officer cannot assess income under section 144 for an assessment below the returned income or cannot assess
the loss higher than the returned loss.
Judicial decisions: (1) Even where such show-cause notice was required under a statutory rule, the same was
held to be mandatory and the non-issuance of such notice was held to vitiate the best judgment assessment [Padam
Chand v CST (1986) 62 STC 195 (All); Makhali Wine Store v CST (1987) 67 STC 416 (All)].
(2) Opportunity must be real and effective: The opportunity given to the assessee to be heard must be real and
reasonable. If an assessee, who is asked to furnish certain particulars or submit explanations within a specified time,
prays for further time stating his difficulties and/or reasons, his prayer should be considered judiciously. Sometimes,
proceedings for assessment for a number of years are taken up together and the assessee is asked to appear and
produce evidence in support of his returns. It might not be possible for the assessee to submit such evidence
instantaneously or at short notice, and may pray for further time to do so. Such prayers cannot be summarily rejected
without considering the grounds given by the assessee merely because the assessing officer is hard-pressed for time
and has to complete the assessment by a specified date or for administrative expediency. Such a rejection would
amount to denial of reasonable opportunity of hearing to the assessee and vitiate the assessment. [Dwijendra Kumar
Bhattacharjee v Superintendent of Taxes (1990) 78 STC 393 (Gau)].
(A) Cases where Best Judgment Assessment held justified
(1) Filing of a return in a status different from the status for which notice was issued — can lead to best
judgment assessment: An Assessing Officer would be justified in proceeding on the basis that no return was filed by
the assessee where no return was filed by the assessee in the status of an individual in response to the notice issued
by the Assessing Officer. The return filed by the assessee in the status of a Hindu undivided family had to be
ignored by the Assessing Officer and he would be justified in making the assessment under section 147(a) read with
section 144 in the status of an individual for non-compliance with the notice under section 148. [CIT v Venugopal
(K.L.) (1986) 162 ITR 551 (Karn)].
(2) Incomplete, unsigned or unverified return may lead to best judgment assessment: A best judgment
assessment can be made when the return filed is woefully incomplete or not signed and verified. [Behari Lal
Chatterji v CIT (1934) 2 ITR 377 (All)].
(3) Where there is default in complying with a notice under section 142(1), assessment can be made under
section 144 even after the issue of a notice under section 143(2) and even though the notice under section 143(2) is
fully complied with. [Harmukhari Dulichand v CIT (1928) 3 ITC 198 (Cal)].
(4) Effect of the assessees not relying on any evidence or documents in support of the return: But where an
assessee, served with a notice to produce evidence, merely said that he had no evidence to produce and that the case
may be decided on the materials before the Assessing Officer without even filing any affidavit to the effect that he
had no evidence in his possession, it was held that there was no compliance with the notice and the Assessing
Officer could validly make an assessment to the best of his judgment. [Mohanlal Hardeodas (Firm of) v CIT (1930)
4 ITC 90 (Pat)].
(B) Cases where Best Judgment Assessment held not justified
(1) No best judgment where mistake is insignificant: No recourse can be had to best judgment assessment where
mistakes in the accounts are insignificant. [CIT v Padamchand Ramgopal (1970) 76 ITR 719 (SC)].
(2) Notice under section 142(1) must be issued before the return is filed: If, however, a notice under section
142(1) is issued after a return is filed and there is no notice under section 143(2), an assessment under section 144
cannot be made. [Rajmani Devi v CIT (1937) 5 ITR 631 (All)].
(3) Court held that if for a frivolous reason the chartered accountant declines to undertake the audit of the
appellant company's accounts, obviously, the company could not be held responsible. There was neither default nor
failure to comply with the direction issued under section 142(2A) on the part of the appellant company so as to
attract the provisions of section 144(b) of the Act. [Swadeshi Polytex Ltd. v ITO (1983) 144 ITR 171 (SC)].
(4) Letter from the Assessing Officer to produce evidence does not constitute notice under section 143(2) —
12
hence does not confer jurisdiction for assessment under section 144: Where a notice under section 143(2) of the Act
was issued to the assessee and the notice was complied with by the production of certain books of account on behalf
of the assessee. The case was transferred from one Assessing Officer to the other. The latter Assessing Officer
issued a letter purported to be a notice under section 143(2) calling upon the assessee to produce further evidence. It
was held that the letter could not be said to constitute a notice under section 143(2). [Mohini Debi Malpani v ITO
(1970) 77 ITR 674 (Cal)].
(5) Mere rejection of the evidence produced by the assessee cannot lead to best judgment assessment: The mere
fact that the Assessing Officer does not accept that as conclusive of the matter does not bring the case within section
144 and any best judgment assessment made in this regard by the Assessing Officer would have to be struck down.
[Raghunath Mahadev v CIT (1925) 2 ITC 94 (Pat)].
(6) Illegal notice under section 143(2) — cannot result in best judgment assessment: Where the jurisdiction of a
notice under section 143(2) is not valid and there has been non-compliance with the same by the assessee, the
Assessing Officer cannot resort to section 144 and make an assessment to the best of his judgment. [Rajmani Devi v
CIT (1937) 5 ITR 631 (All)].
(7) Failure to comply with summons under section 131 cannot bring about an assessment under section 144: An
ex parte best judgment assessment under section 144 can only be made for defaults specified in that section. Noncompliance with a summons requiring production of books of account and other documents, etc; is not such a
specified default and, therefore, it cannot result in an ex parte best judgment assessment. [ITO v Luxmi Prasad
Goenka (1977) 110 ITR 674 (Cal)].
Where an assessee has submitted a loss return, the Assessing Officer cannot determine the income as nil merely
because the assessee did not respond to the notice. He has to determine the loss on the basis of available material on
record and on applying his mind. [CIT v Ranicherra Tea Co. Ltd. (1994) 207 ITR 979 (Cal)].
7b Assessment on rejection of accounts: Section 145(3) empowers the Assessing Officer to reject the account
books which are unreliable, false or incorrect or incomplete. The Assessing Officer can reject the books of account
on the following grounds and may make the assessment in the manner provided in section 144:
(a) He is not satisfied about the correctness or completeness of the accounts of the assessee.
(b) Although the accounts of the assessee are correct and complete to the satisfaction of the Assessing Officer
but the method of accounting employed is such that, in the opinion of the Assessing Officer, profits cannot be
correctly arrived therefrom.
(c) Where the method of accounting adopted by the assessee has not been regularly followed by him, or
(d) Where the Accounting Standards notified by the Central Government from time to time have not been
regularly followed by the assessee.
In view of the above the Assessing Officer may reject the books even if the method of accounting is acceptable
to him if the entries in the books are found to be false or fabricated. Conversely the account books may be accepted
as true but the method of accounting may be rejected by the Assessing Officer as improper.
The expression "method of accounting" in the section has reference to the pattern, system or principles on the
basis of which the accounts of an assessee are maintained and not to its other aspects, such as, language, currency,
etc. The assessee may keep his accounts in any language he chooses. Accounts in India are maintained in English,
Hindi or other regional languages and in certain scripts employed by certain communities, such as, Modi and the
like.
Whether the assessment on rejection of accounts is to be made under section 144 or 143(3)/147: Section 144
prescribes for best judgment assessment only in case of 3 failures mentioned in para 7. In case, the Assessing Officer
rejects the accounts on any of the grounds mentioned above, the Assessing Officer has to make the assessment under
the relevant section i.e. 143(3) or 147 in which the assessment proceedings were going on. But such assessment has
to be done in the manner provided under section 144 i.e. he will have to make the assessment to the best of his
judgment. The assessment in this case is not to be done under section 144 but in the manner provided in 144.
The assessment, that has to be made after rejection under section 145(3) of the evidence or books produced is
not an assessment under section 144 but it is only an assessment under section 143(3) which is to be made in the
manner provided in section 144. In such cases, the Assessing officer has to give an opportunity to the assessee to
contradict the material upon which the former wants to base his estimate. [Addl. ITO v Ponkunnam Traders (1976)
102 ITR 366 (Ker)].
If an assessee is carrying on more than one business, he can follow cash system of accounting for one business and mercantile
system (accrual system) of accounting for other business. Similarly, if he had more than one sources of income under the head
income from other sources, he can follow accrual system for one source of income under the head income from other sources,
he can follow accrual system for one and cash system for other sources of income.
7c Cases where rejection of accounts held justified
(1) Unexplained cash credit may justify rejection of book results: The presence of unexplained cash credits may
13
justify not only their treatment as income from disclosed or undisclosed sources but also, in appropriate cases, the
rejection of the book results. [Abdul Khadar Pvt. Ltd. v CIT (1960) 38 ITR 341 (Mad)].
(2) Discrepancy between the stocks as per accounts and as shown to bank may justify rejection of accounts:
Where there was a huge difference between stock of goods as per the accounts and the stock position as shown to
the bank for securing overdrafts and there was no material to corroborate the figures shown in the account books, the
rejection of accounts was held to be justified. [Murugappa Chettiar (S.) v CIT (1988) 174 ITR 245 (Ker)].
(3) Where the assessee engaged in bidi manufacturing business having several factories and branches did not
record day-to-day production of bidis and could not produce day-to-day registers showing the quantity of bidis
manufactured and of bidi leaves consumed in each factory, his accounts were liable to be rejected. [Bastiram
Narayandas Maheshri v CIT (1994) 210 ITR 438 (Bom)].
(4) Detection of fictitious purchase invoices involving large amounts justifies rejection of books of account.
[Vijay Proteins Ltd. v ACIT (1996) 55 TTJ 76 (Ahd) (AT)].
(5) There was a search in assessee's premises as well as at the premises of its directors and other related
concerns and persons. The Settlement Commission found that books were not complete and were defective and
inspired little confidence about their veracity. Hence, net profit had to be estimated. [I.T. Settlement Commission v
Saraf Textile Mills (P.) Ltd. (1996) 130 Taxation 550 (Del)(ITSC)].
(6) Non-maintenance of stock register, coupled with other factors, rejection may be held justified.
[Namasivayam Chettiar (S.N.) v CIT (1960) 38 ITR 579 (SC)].
(7) It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the
true state of accounts and the correct income can be deducted therefrom. It is incorrect to say that the officer is
bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been
questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in
the earlier years. [CIT v British Paints India Ltd. (1991) 188 ITR 44 (SC)].
(8) Where the payment were made by the assessee by way of post dated cheques, it does not amount to actual
payment and the books are unreliable if they incorporate these payments. The books of accounts were rightly
rejected under section 145. [Oriental Textiles v CIT (2005)273 ITR 47(All)].
7d Rejection of accounts held not justified
(1) Insignificant mistakes in accounts cannot lead to rejection of account: The fact that the Assessing Officer
has found some faults with the accounts will not necessarily bring the case within the scope of the first proviso to
this section. In CIT v Padamchand Ramgopal (1970) 76 ITR 719 (SC) the Supreme Court observed that
insignificant mistakes cannot afford a ground for resorting to this section. So long as it is not impossible to deduce
the true income from the accounts maintained by the assessee, its computation cannot be made in any other way.
The fact that the assessee's accounts did not contain the income from paddy and miscellaneous produces, which was
negligible, did not stand in the way of accepting the assessee's rubber accounts, and likewise it did not justify the
rejection of the pepper accounts of the assessee.
(2) Assessing Officer must record clear finding before the rejection of accounts: Assessing Officer cannot reject
the method of accounting merely because, in his view, a different system of accounting would be better suited. [CIT
v Margadarsi Chit Funds Pvt. Ltd. (1985) 155 ITR 442 (AP)].
(3) The assessee, according to the Assessing Officer, showed low gross profits. But he neither recorded a clear
finding that the assessee's system of accounting was such that correct profit could not be deduced from its books, nor
pointed out inherent defects in the system of accounting, which the assessee could rebut. The addition of Rs. 25,000
to the trading account was deleted. [ITO v Highway Service Station (1991) 58 Taxman 254 (Asr) (AT)].
(4) The assessee, an LIC agent, maintained regular books of account. No defects were shown in the
maintenance of books. The accounts were rejected whimsically, and income estimated. Unless the system of
accounts is rejected or books of account are rejected on proper basis or no books of account are maintained, the
income disclosed cannot be disturbed. [ITO v Amar Singh Jain (1992) 43 TTJ 11 (Jp)(AT)].
(5) The Income-tax Authorities and the Tribunal made addition to gross profit mainly on the ground that the
assessee could not have sustained a loss in supply of rice to Government under levy orders to the extent claimed
because according to them, quality of rice supplied by dealers was always much inferior. The addition on this
ground without any acceptable reason was not justified. [Shree Ambikaji Rice Mills v CIT (1991) 192 ITR 189
(Pat)].
(6) In case a stock register of goods is not maintained, it may normally not be taken as a defect justifying
rejection of books of account. It may be a reason for the assessing officer to scrutinise the case with caution. [Pandit
Bros. v CIT (1954) 26 ITR 159 (Punj)].
(7) Where, in a wholesale business, the weight-wise record was not maintained but a number-wise quantitative
14
stock tally was maintained, the rejection of book profits was not justified. [Durai Raj (M.) v CIT (1972) 83 ITR 484
(Ker)].
8. Power of Joint Commissioner to issue directions in certain cases [Section 144A]
A Joint Commissioner may:
(a) on his own motion; or
(b) on a reference being made to him by the Assessing Officer; or
(c) on the application of an assessee
call for and examine the record of any proceeding in which an assessment is pending. Thereafter, if he considers
that:
(a) having regard to the nature of the case; or
(b) the amount involved; or
(c) for any other reason,
it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Assessing
Officer to enable him to complete the assessment.
The powers of the Joint Commissioner are wide and he can issue directions to the Assessing Officer for any
reasons that he thinks are necessary. The directions to the Assessing Officer are binding in nature and the assessee
has a recourse to agitate in appeal if the Assessing Officer does not follow the directions.
However, no directions which are prejudicial to the assessee shall be issued before an opportunity is given to
the assessee to be heard.
Direction as to the lines on which an investigation connected with the assessment should be made, shall not be
deemed to be a direction prejudicial to the assessee.
Section 144A is indeed an effective tool for seeking intervention of higher authorities on interpretation and
resolution of vexed issues arising during the course of assessment.
Conditions to be satisfied before invoking section 144A: The provisions of section 144A can only be evoked if:
(a) notice under section 143(2) has been issued, and
(b) the assessment proceedings as a consequence of the notice are pending.
Assessment includes reassessment and hence direction under section 144A can be given even when any reassessment is
pending.
Assessment/Reassessment of Income/Re-computation of loss or Allowance in certain cases
There may be cases where certain incomes have escaped assessment or income has been assessed at a low rate
or excessive loss or allowances like depreciation, etc. have been allowed.
In such cases, the Assessing Officer is empowered to assess/reassess such income or recompute the loss or
depreciation allowance or any other allowance, as the case may be, for the assessment year concerned, i.e., for the
relevant assessment year.
The provisions regarding assessment/reassessment and re-computation are covered under sections 147 to 153.
9. Income Escaping Assessment [Section 147]
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 provisions of sections 148 to 153:
(a) assess or reassess such income which has escaped assessment;
(b) recompute the loss or depreciation allowance or any other allowance as the case may be,
for the assessment year concerned i.e. the relevant assessment year.
During the course of proceedings under section 147, if any other income chargeable to tax has also escaped
assessment for the relevant assessment year and it comes to the notice of the Assessment Officer, he can assess or
reassess that income also.
Amendment made by the Finance Act, 2008 w.e.f. 1-4-2008
The Assessing Officer may assess or reassess such income, other than the income involving matters which are
the subject matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.
The words 'if the Assessing Officer has reasons to believe', in this section are stronger than the words 'if the
15
Assessing Officer is satisfied'. [Ganga Saran & Sons Pvt. Ltd. v ITO (1981) 130 ITR 1 (SC)] However, they suggest
that the belief must be that of an honest and reasonable person based on reasonable grounds and that the Assessing
Officer may act under this section on direct or circumstantial evidence but not on mere suspicion or rumour.
In an assessment, reassessment or re-computation made under this section, the tax shall be chargeable at the rate or rates at
which it would have been charged had the income not escaped assessment. [Section 152(1)] i.e. tax shall be charged at the rate or
rates of the relevant assessment year of which income has escaped assessment.
Reassessment proceedings may be taken more than once under this section in respect of the same assessee for
the same assessment year. [R. Kakkar Glass and Crockery House v CIT (2002) 254 ITR 273 (P&H)]. But second
assessment proceedings cannot be started while the first are pending. [Comunidado of Chicalim v ITO (2001) 247
ITR 271 (SC)].
10 Issue of notice where income has escaped assessment [Section 148]
Before making the assessment/reassessment or re-computation under section 147, the Assessing Officer shall
serve on the assessee a notice requiring him to furnish a return of his income or income of any person in respect of
which he is assessable during the previous year corresponding to the relevant assessment year [even though it has
already been furnished earlier under section 139 or 142(1)] within such period as may be specified in the notice. The
return filed in response to notice under section 148(1) shall be treated as if such return was a return required to be
furnished under section 139 and therefore the Assessing Officer shall have to serve a notice under section 143(2)
within a period of 12 months from the end of the month in which the return is furnished by the assessee to make the
assessment under section 147 read with section 143(3). However, notice served under section 143(2) before 1-102005 shall be valid even if it was served after the expiry of 12 months.
Before issuing notice under section 148, the Assessing Officer is required to record his reasons for doing so.
1.
If the return of income is not furnished within the time allowed in the notice issued under section 148, the assessee shall
be liable to pay interest under section 234A(3), for late filing of return or for not filing the return of income, if the income
has already been determined under section 143(1) or if the assessment already has been done under section 143(3) or
144 or 147.
On the other hand, if the assessee had not furnished the return of income in respect of any assessment year and no
assessment of such assessment year was done under section 144, then interest for late filing of return in response to a
notice given under section 148, shall be leviable under section 234A(1) instead of section 234(3).
2.
The assessee is required to file return in response to notice under section 148 even if he had duly filed the return of
income in the normal course under section 139/142(1).
10a Separate notice under section 148 has to be given for each assessment year for which income has
escaped assessment: For making assessment or re-assessment under section 147 a separate notice under section 148
is required to be issued by the Assessing Officer for each assessment year for which the income has escaped
assessment.
During the course of proceeding under section 147 for a particular assessment year, if any other income chargeable to tax has
also escaped assessment for that particular assessment year and it comes to the notice of the Assessing Officer, he can assess
or reassess that income also but he cannot do so for any other assessee year unless a separate notice under section 148 is
issued.
10b Judicial decisions: (1) Income cannot be said to have escaped assessment if the proceedings have not
culminated in a final assessment. [CIT v Sayed Rafiqur Rahman (1991) 189 ITR 476 (Pat)]. Where an order of
remand has been passed, the assessment proceedings become pending and pending such proceedings, notice under
section 148 cannot be issued. [Jhunjhunwala Vanaspati Ltd. v ACIT (2004) 137 Taxman 335 (All)].
(2) Unless the return of income already filed is disposed of, notice for reassessment under section 148 cannot be
issued i.e. no reassessment proceedings can be initiated so long as assessment proceedings pending on the basis of
the return already filed are not terminated. [Trustees of H.E.H. The Nizam's Supplemental Family Trust v CIT (2000)
242 ITR 381 (SC)].
(3) Original assessments for Assessment Years 1981-82 to 1983-84 were completed, otherwise than in the status
of HUF. The Income-tax Officer reopened the assessments and assessed the assessee in the status of HUF. It was
held that the issue of status was already decided finally and reopening of the assessments was without jurisdiction.
[CIT v Lakshmikutty Amma (T.) (1995) 211 ITR 1014 (Ker)].
(4) The assessment order was set aside by the Appellate Assistant Commissioner. But the Assessing Officer
issued notice under section 148. Held: Assessing Officer was not justified in initiating reassessment proceedings.
[Saqi Brothers v ITO (1996) 54 TTJ 306 (Chd) (AT)].
(5) Where the Assessing Officer's comes into possession of fresh information or new facts, which lead him to
form a reasonable belief that income has escaped assessment, he can reopen the assessment. [Phool Chand Bajrang
Lal v ITO (1993) 203 ITR 456 (SC)].
(6) The Assessing Officer must make independent enquiries for arriving at the prima facie conclusion that
income of the assessee had escaped assessment: The Assessing Officer acted merely on the basis of information
16
received from another officer by result of a survey conducted by such officer. The Assessing Officer without
forming any opinion/belief of his own and without gathering any further material or enquiry initiated proceedings
for reopening. It was held that the Assessing Officer had not made an independent enquiry for arriving at the prima
facie conclusion that income of the assessee had escaped assessment and therefore the proceedings under section
148 were not valid. [Jt. CIT v George Williamson (Assam) Ltd. (2003) 258 ITR 126 (Gau)].
(7) It will be mandatory to serve a notice under section 148 before initiating any reassessment against the
assessee. This will be the principle of natural justice and the mandatory provisions of section 148 ought to have been
followed by the Revenue. The principle of audi alteram partem should have been followed by the Revenue. Hence,
the reassessment done without serving notice under section 148 was bad in law. [Braham Prakash v ITO (2005)275
ITR 242 (Del)].
(8) Where proceedings under section 147 are initiated, it was held the proceedings are open only qua items of
under-assessment. The finality of assessment proceedings on other issues remains undisturbed. The High Court
observed that it does not make a difference whether the assessment proceedings have become final on account of
framing an assessment under section 143(3) or on account of non-issue of a notice under section 143(2) within the
stipulated period. A general inquiry could only be made by the Assessing Officer by issuing a notice under section
143(2) within the stipulated period. After the expiry of the stipulated period, the Assessing Officer cannot seek
material unconnected for the reasons of reassessing the income. The High Court held that the Assessing Officer
could not be allowed to make fishing inquiry to probe if any other income had escaped assessment or not. [Amrinder
Singh Dhiman v Income Tax Officer-cum-Assessing Officer (2004) 269 ITR 378 (P&H)].
(9) Where the assessee was allowed depreciation on certain leased vehicles and subsequently the Assessing
Officer had determined that the relevant agreements were with a view to finance the vehicles and not leasing
agreements. This finding of the Assessing Officer was also affirmed by the CIT (Appeals). It was held that the
Assessing Officer had sufficient reasons to believe that income of the assessee had escaped assessment to issue
notice under section 148 of the Act. [Syal Leasing Ltd. v Assistant Commissioner of Income-tax (2004) 266 ITR 639
(P&H)].
(10) Affixation of notice can be done only when assessee or his authorized agent refuses to sign
acknowledgement or could not be found. Hence where a factory was closed due to Holi festival and the security
guard refuses to receive the notice, affixation of notice is not proper as the security guard by no strech of
imagination be said to be the agent of assessee and as a such reassessment proceeding done were bad in law as no
proper service of notice issued under section 148 was effected. [CIT v Hotline International Pvt. Ltd. (2007) 161
Taxman 104 (Del).
10c Recording of reasons necessary before issue of notice: (1) Where in the notings recording of reasons by
the Income-tax Officer were not found for the reopening under section 148 as required under sub-section thereof, the
High Court held proceedings lacked jurisdiction. [CIT v Kerala State Cashew Development Corporation (1992) 198
ITR 520 (Ker)].
(2) It was imperative for the Income-tax Officer to have recorded his reasons as required by section 148(2),
before initiating reassessment proceedings otherwise notice issued under section 148 shall be illegal. [CIT v Sukh
Lal Ice Cold Storage Co. (1992) 196 ITR 562 (All)]. However, in Sukhlal Ice & Cold Storage Co. v ITO (1993) 199
ITR 129 (All) after the notice issued under section 148 was held illegal, another notice was issued on a subsequent
date by setting out the necessary reasons and removing the defect pointed out earlier. This notice was served on the
assessee with in the period of limitation, the court against a writ petition filed by the assessee, held that there were
no earlier proceedings subsisting on the date when the second notice was served on the assessee as the earlier
proceedings under section 147 was without jurisdiction. However, the second notice was held valid.
(3) In case where the reasons recorded were not relevant to the issues involved in reopening the assessment, the
High Court, after going through the records, observed: It is evident that the Income tax Officer is merely trying to
rectify the mistake committed by him. The reassessment proceedings were not valid. [Baldeo Ram Salig Ram Ltd. v
ITO (1991) 189 ITR 554 (All)].
(4) Reasons indicating the Assessing Officers satisfaction for reopening the assessment, though not stated in the
notice, if present on record with the Assessing Officer, reopening is valid. [ITO v Biju Patnaik (1991) 188 ITR 247
(SC)].
(5) It is mandatory under section 148(2) for the Income-tax Officer to record his reasons before issuing any
notice under this section; any anterior note made by the officer in the order-sheet for some other purpose is not
sufficient for the purpose of section 148(2). [CIT v Kerala State Cashew Development Corporation (1992) 198 ITR
520 (Ker)].
10d Should the recorded reasons be disclosed to the assessee?: Another question which has been often
considered by the courts is whether it is necessary for the Assessing Officer to disclose to the assessee the reasons
recorded; and if they have to be disclosed, at what stage?
17
The following are some decisions where the question is considered:
(1) The assessee called for the reason on the basis of which the assessment was reopened. Despite specific
request, the reasons were not communicated, notice was quashed. [Milan Supari Stores v ACIT (1992) 194 ITR 72
(MP)].
(2) When the assessment was reopened by issue of a notice under section 148(2), the assessee, in a writ petition,
claimed that he was not supplied with the copies of the reasons recorded by the Income-tax Officer for reopening the
assessment. The Income-tax Officer in a counter-affidavit stated that the assessee has been informed in writing that
he could take inspection of the reasons recorded after he filed the return. Held: Since the assessee had furnished the
return he should be supplied substance of the reasons recorded or a certified copy of the reasons. [Jawaharlal Gupta
v ITO (1992) 196 ITR 147 (All)].
(3) While it is not incumbent on the Income-tax Officer to disclose the reasons for issuing the notice under
section 148 at the time of the issue of the notice, once the assessee challenges the existence or validity of such
reasons in a proceeding under article 226 of the Constitution, the reasons should be disclosed at least in the affidavitin-opposition. The notice under section 148 was held to be not valid. [Govind Ballabh Parikh v ITO (1995) 214 ITR
519 (Raj)].
(4) It was the right of the assessee to demand reasons for reopening and the Assessing Officer has no right to
refuse the same. [Hotel Ashoka & Raj Kumar (1994) 123 Taxation 632 (MP)].
(5) Reasons for reopening must be communicated to the assessee: Where notice under section 148 is issued to
assessee without assigning any reasons, assessee can seek reasons for issuing said notice and the Assessing Officer
is bound to furnish reasons within a reasonable time and if any objection were submitted, thereafter it was the duty
of the Assessing Officer to decide the same. [Gehna v Union of India (2004) 267 ITR 782 (Raj)].
(6) Powers of Assessing Officer and duties of the assessee before reassessments: The Supreme Court in the case
of GKN Driveshafts (India) Ltd. v ITO (2003) 259 ITR 19 (SC) has laid down the following principles which would
serve as valuable rules of guidance and as a binding precedent in cases where notice for reassessment is issued:
(i) Where a notice under section 148 is received, the proper course for the assessee is to file a return in
response to the same.
(ii) Afterwards, if he desires, the assessee can seek reasons for issue of such notice.
(iii) If the reasons are asked for, the Assessing Officer is obliged to supply such reasons within a reasonable
time.
(iv) On receipt of the reasons, the assessee can file his objections against the issuance of notice, and if so done,
the Assessing Officer is bound to dispose of the same by passing a speaking order even before proceeding
with the assessment.
The Supreme Court also directed that where assessment under section 148 had been completed over-ruling the
objections, the Commissioner of Income-tax (Appeals) should dispose of the same expeditiously.
The decision of the Supreme Court in G.K.N. Driveshaft's case no where lays down that the assessee is totally
debarred from approaching the High Court under article 226 of the Constitution of India, when exercise of the power
by the authority under section 148 of Income Tax Act, ex-facie appears to be without jurisdiction. The reasons in
support of his belief that income has escaped amount have to be cogent, convincing and existing and should not be
unreal or imaginary. The belief has to be bona fide and not a pretence. [Ajanta Pharma Ltd. v ACIT (2004) 267 ITR
200 (Bom). Also see Jaswant Kaur Sehgal (Smt.) v CIT (2004) 271 ITR 475 (Gau)].
Thus, where notice under section 148 is challenged at the initial stage itself before the Assessing Officer it shall
be obligatory on the part of the Assessing Officer to pass an interim order on such objections first before going
further into merits of the case. Where such objections were not accepted by the Assessing Officer in the interim
order the assessee can challenge such speaking order in a writ petition. [Garden Finance Ltd. v CIT (2004) 268 ITR
48 (Guj)(FB)].
(7) Where the assessee objects to the notice under section 148, the Assessing Officer must first pass a speaking
order on the validity of the notice: The assessee filed objections to the issue of jurisdiction but the Assessing Officer
without meeting such objections proceeded further to frame the assessment. The Court directed the Assessing
Officer to first pass a speaking order on the validity of notice of reopening after considering objections of the
assessee. [B.K. Jagan & Co. v CIT (2004) 136 Taxman 343 (P&H). See also Tolins Rubbers v Asstt. CIT (2004) 270
ITR 180 (Ker)]
10e Reasons to believe: (1) The Courts have held that while there must exist reasons for holding a belief of
escapement of income, the question whether the reasons were adequate or sufficient is not for the courts to decide.
Since the belief is that of an Income-tax Officer, sufficiency of the reasons for forming the belief is not for the court
to judge; but it is open to an assessee to establish that there in fact existed no belief or that the belief was not a bona
18
fide one or was based on vague, irrelevant and non-specific information. [Phool Chand Bajrang Lal v ITO (1993)
203 ITR 456 (SC)].
(2) In determining whether commencement of reassessment proceedings was valid it has only to be seen
whether there was prima facie some material on the basis of which the Department could reopen the case. The
sufficiency or correctness of the material is not a thing to be considered at this stage. [Raymond Woollen Mills Ltd. v
ITO (1999) 236 ITR 34 (SC)].
(3) It is trite law that when an assessee challenges a notice to re-open under section 147 on the ground that no
reasons under section 148 had been recorded or disclosed, the court must call for and examine the reasons, and, in
fact, ordinarily, the reasons are set out by the respondents to the writ petition in their counter. [Comunidado of
Chicalim v ITO (2001) 247 ITR 271 (SC)].
(4) A letter was written by the Chief Mining Officer to the Income-tax Officer informing him that inspection of
assessee's colliery showed, that there was under-reporting of raising figures to the extent indicated in the letter,
Held: The Income-tax Officer could form a belief on the basis of the letter that income had been under-assessed or
had escaped assessment. Hence the notice issued under section 148 read with section 147(a) on the basis of the letter
was valid. [ITO v Selected Balurband Coal Co. Pvt. Ltd. (1996) 217 ITR 597 (SC)].
(5) A letter was received from the ADI that hundi loans in the names specified therein, shown by the assessee
were fictitious. Held: There is a rational connection between this letter and the Income-tax Officers belief that
income had escaped assessment. Reassessment was valid. [Midland Fruit & Vegetable Products (India) Ltd. v CIT
(1994) 208 ITR 266 (Del)].
(6) The assessee had given confirmatory letter of the creditors in whose name loans were shown in assessee's
books of account. Later, when one of the creditors was examined, he admitted that the loans shown to have been
advanced were bogus. The assessment was reopened. It was held that there was adequate material for holding a
belief that income had escaped assessment. [Shah (P.M.) v CIT (1994) 209 ITR 135 (Bom)].
(7) A statement had been filed regarding assessee's claim for depreciation on plant and machinery. The
Assessing Officer had not applied his mind to these details. Subsequent reassessment proceedings to withdraw
depreciation is based on a mere change of opinion and is not allowed. [Allahabad Bank v CIT (1993) 199 ITR 664
(Cal)].
(8) If on reappraisal of the material considered by him during the original assessment, the Income-tax Officer
discovered that he had committed an error in consequence of which income has escaped assessment, it is not open to
him to reopen the assessment. [CIT v Punjab Financial Corpn. (1990) 183 ITR 438 (P&H)].
(9) But where original assessment was made under section 143(1) in a summary manner, and hence where
returned income was accepted in a mechanical manner without even writing a formal order, there is no question of
change of opinion of Assessing Officer and hence reopening of assessment was valid. [Kishore Textiles v ITO
(1995) 82 Taxman 312 (Jp) (AT)].
(10) Where the Assessing Officer had issued only intimation under section 143(1), it was held that there being
no assessment under section 143(1), the principal relating to change of opinion" shall not be applicable if
reassessment proceeding are undertaken under section 147. Further for the purpose of initiation of reassessment
proceedings what is required is "reason to believe" but not the established fact of escapement of income. At the
stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could
have formed the requisite belief. Even if reason to believe about escapement of income is prompted by audit
objection, the reassessment becomes valid. [Asst. CIT v Rajesh Jhaveri Stock Brokers Pvt. Ltd. (2007) 291 ITR
500 (SC)].
(11) Reassessment on the ground that the assessee had not disclosed the date of commercial production at the
time of original assessment, to disallow expenses prior to the date of production, was upheld on the ground that it
was on account of non-disclosure of primary facts and not for the reason of change of opinion. [Renusugar Power
Co. Ltd. v ITO (1979) 117 ITR 719 (All)].
(12) If the reassessment of a particular item of income has been set aside in an appeal, reassessment proceedings
cannot be started again in respect of same item of income on the same grounds. [CIT v V.R. Durgamba (1998) 233
ITR 96 (Mad)]
(13) Where an audit party points out certain facts which were not in the knowledge of the ITO when he made
the original assessment, it would constitute information. [Nagrath Chemicals Works (P) Ltd. v CIT (2004) 265 ITR
401 (All)]. However, if the audit party provides on opinion on any issue, the same shall not constitute information
for this purpose.
(14) The responsibility of the assessee is limited to the disclosure of all primary facts and nothing beyond. Once
the assessee has disclosed all the primary facts that is the end of his duty. It is then for the assessing authority to
draw the proper conclusions from those facts. If the conclusions drawn by the Assessing Officer from the primary
19
facts disclosed by the assessee are erroneous, the assessing authority cannot reopen the assessment merely on the
basis of a change of opinion. [J.P. Bajpai (HUF) v CIT (2004) 269 ITR 40 (All)].
If there is information regarding the law and not its interpretation by the audit party, and if the assessing
authority applies his mind to the said legal position and finds that it is a case for reopening, the reopening is valid
under section 147. [CIT v Juli Metal Works (2003) 263 ITR 287 (All)].
(15) Where the depreciation schedule had been filed which showed details of assets used for less than and more
than 180 days separately and the reassessment proceedings were initiated for withdrawing 50% of depreciation on
assets used for less than 180 days on basis of audit objection without application of mind by the Assessing Officer, it
was held that reassessment proceedings were not validity initiated. [Transworld International Inc. v Jt. CIT (2005)
273 ITR 242 (Del)].
(16) If the assessee has disclosed all primary facts, it is then for the Assessing Authority to draw the proper
conclusions from those facts. If the conclusion drawn by the Assessing Officer from the primary facts disclosed by
the assessee are erroneous, the Assessing Authority cannot reopen the assessment merely on the basis of change of
opinion.
(17) Once an assessment is proposed to be made under section 143(3), it is expected that the Assessing Officer
will make relevant and detailed enquiries to obtain the material he deems fit for finding out the correct income. The
Assessing Officer cannot issue notice under section 148 after the assessment has been made unless there is
deliberate concealment by the assessee or there is information that income has escaped assessment. [Girdhar Gopal
Gulati v UOI (2004) 140 Taxman 312 (All)].
(18) Where the only information in possession of the Assessing Officer is in the form of a statement of report
from a fellow jurisdiction to the effect that the assessee had taken a bogus entry of capital gains by paying cash
along with some premium for taking a cheque of that amount and the AO did not verify the correctness of the
information received or otherwise of such information for issuing notice under section 148 of the Act, merely
accepted the truth of the vague information in a mechanical manner. It was held that what has been recorded by the
Assessing Officer as his reason to believe is nothing more than a report given by him to the Commissioner of
Income Tax and such it was not a valid reason to initiate action under section 148. [CIT v Atul Jain (2007) 164
Taxman 33 (Del)].
11 Time limit and sanction for issue of notice [Section 149/151]
Section 149(1) provides that notice under section 148 can be issued only:—
(a) within four years from the end of the relevant assessment year for any income escaping assessment, or
(b) within six years from the end of the relevant assessment year in cases where the amount of income
escaping assessment is likely to be Rs. 1,00,000 or more for that year.
Further, before giving such notice, sanction to issue such notice has to be obtained in some cases from the
higher authority as per section 151. The provisions of section 149 and section 151 have been summarised as under:
Time limit and sanction of issue of notice [Section 149/151]
Situation
1. Where an
assessment order has
been passed under
section 143(3) or 147
2.
Where
no
assessment order has
been passed under
section 143(3) or 147
Upto 4 years from the end of
relevant assessment year
(i) Notice can be issued for what
ever be the amount of income
which has escaped assessment.
Beyond 4 years but upto 6 years from the end of
the relevant Assessment year
(i) Notice can be issued only if the income which
has escaped assessment is likely to be Rs.
1,00,000 or more for that year.
(ii) Notice can be issue only by
an Assessing Officer of the rank
of an Assistant Commissioner or
Deputy Commissioner. It can be
issued by the Assessing Officer
below the rank of Assistant
Commissioner, if the Joint
Commissioner is satisfied on the
reasons
recorded
by
the
Assessing Officer, that it is a fit
case for issue of such notice.
(i) Any Assessing Officer can
issue notice under section 148
himself.
(ii) Notice can be issued whatever
(ii) Notice can be issued only if the Chief
Commissioner or Commissioner is satisfied on
the reasons recorded by the Assessing Officer
aforesaid that is a fit case for issue of such notice.
(i) Notice can be issued only if the income which
has escaped assessment is likely to be Rs.
1,00,000 or more for that year.
(ii) Notice can be issued by Assessing Officer
20
be the amount of income which
has escaped assessment.
1.
2.
3.
below the rank of Joint Commissioner only if the
Joint Commissioner is satisfied that it is a fit case
for issue of such notice.
No notice can be issued under section 148 after the expiry of six years from the end of the relevant assessment year.
The notice under section 148 has to be issued and not served within the time period prescribed under section 149(1). If
the notice is issued within the time limit but served upon the assessee after the date it will still be a valid notice. It may
however be noted that notice must be served to the assessee before an assessment can be made under section 147. [R.K.
Upadhyaya v Shanabhai P. Patel (1987) 166 ITR 163 (SC)].
For the removal of doubts, it has been declared that the Joint Commissioner, the Commissioner or the Chief
Commissioner, as the case may be, being satisfied on the reasons recorded by the Assessing Officer about fitness of a
case for the issue of notice under section 148, need not issue such notice himself. [Explanation to section 151 inserted by
the Finance Act, 2008 w.r.e.f. 1-10-1998]
11a Circumstances where time limit given under section 149(1) is not relevant
(a) No action can be taken under section 147 after 4 years in some cases if assessment is made under section
143(3)/147 [Proviso to section 147 and Explanation 1 to section 147]: Where an assessment under section 143(3)
or 147 has already been made for the relevant assessment year, no action under section 147 is possible after the
expiry of 4 years from the end of the relevant assessment year unless any income chargeable to tax has escaped
assessment by reason of the failure on the part of the assessee to:
(a) make a return under section 139 or in response to a notice under section 142(1)/148; or
(b) disclose fully and truly all material facts necessary for his assessment for that assessment year.
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
of material facts.
Proviso to section 147 presupposes an assessment under section 143(3) or section 147. In the absence of such
assessment, benefit of this proviso cannot be taken by the assessee.
If the return under section 139/142(1)/148 has been furnished and all material facts relating to the assessment
for that previous year have been disclosed fully and truly, then notice cannot be served after the expiry of 4 years if
the assessment of that assessment year has been made under section 143(3) or 147.
Judicial decisions
1. Reassessment proceedings under section 147 are possible within 4 years inspite of complete disclosure of
material facts by the assessee but action after 4 years is not possible unless any of the above 2 conditions is satisfied.
[Praful Chunilal Patel Vasant Chunilal Patel v Asst. CIT (1999) 236 ITR 832 (Guj)].
2. Once the case is earlier scrutinized and assessed under section 143(3) and four years have passed since the
end of the relevant assessment year, the case will be covered by the condition stipulated in the proviso to section 147
and AO has to additionally record the finding not only the 'reason to belive' about the escapment of chargeable
income but also the fact that such escapment is on account of omission or commissions attributable to the assessee
concerned.
3. Having furnished all material facts, even if an assessee erroneously claims higher depreciation and the same
was allowed by the Assessing Officer, it will not be a case of failure to disclose fully and truly all material facts.
Hence, assessment cannot be reopened beyond 4 years. [ICICI Bank Ltd. v K.J. Rao (2004) 268 ITR 203 (Bom)].
4. In cases where the initiation of proceedings is beyond the period of four years from the end of the assessment
year, the Assessing Officer must necessarily record not only his reasonable belief that income has escaped
assessment but also the default or failure committed by the assessee. Failure to do so would vitiate notice and the
entire proceedings. Mere escape of income is insufficient to justify the initiation of action after the expiry of four
years. Such escapement must be by reason of the failure on the part of the assessee either to file a return referred to
in the proviso or to truly and fully disclose the material facts necessary for the assessment. [Fenner (India) Ltd. v
DCIT (2000) 241 ITR 672 (Mad)].
5. Where after a lapse of four years from the end of the relevant assessment year, the Assessing Officer issued
notices under section 148 to the assessee seeking to reopen its assessments for the relevant assessment years, the
High Court observed that nowhere in the reasons recorded by the Assessing Officer, it was stated that there was a
failure on the part of the assessee to disclose material facts in the return filed by him. In the absence of any failure
on the part of the assessee to disclose fully and truly all material facts, the reopening of assessments beyond the
period of four years is not sustainable. [Grindwell Norton Ltd. v Jagdish Prasad Jangid, Asst. CIT (2004) 267 ITR
673 (Bom)].
6. Where the reasons recorded for reopening of assessment after expiry of four years from the end of relevant
assessment year, do not contain an allegation that the assessee had failed to disclosed fully or truly all material facts
necessary for assessment, the notice under section 148 is not valid. [CIT v Indian Farmers Fertilizer Co-op. Ltd.
(2008) 171 Taxman 379 (Del)].
21
7. Assessment reopened on basis of law declared by Court is not a case of failure to disclose material facts by
the assessee and therefore no proceedings could have been initiated under section 148 beyond the expiry of 4 years
from the end of the relevant assessment year. [CIT v Bipin Vadilal (1999) 238 ITR 1022 (Guj)].
8. Reasons for reopening completed assessment: Where an assessee claimed certain sum by way of business
expenditure and the Assessing Officer allowed only a part of the claim but subsequently reopened the assessment
holding that the expenditure claimed by the assessee was in the nature of capital expenditure, it was held that the
Assessing Officer was not justified in reopening the assessment after four years as there being no failure on the part
of the assessee to disclose fully and truly all material facts. [Bhor Industries Limited v ACIT & Others (2003) 129
Taxman 574 (Bom)].
9. Where the assessee had disclosed all material necessary for assessment and thereafter claimed exemption
thereon by treating itself to be an industrial undertaking on basis of interpretation of law, such conduct of assessee
will not amount to failure to disclose all material facts under section 147. Accordingly, the writ petition was allowed
and notice was quashed on the ground that it was issued after expiry of 4 years without assessee's default. [Simplex
Concrete Piles (India) Ltd. v Dy. CIT (2004) 134 Taxman 74 (Cal)].
(b) Agent of a non-resident [Section 149(3)]: If the person on whom a notice under section 148 is to be served
is a person treated as the agent of a non-resident under section 163 and the assessment, reassessment or
recomputation to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the
notice shall not be issued after the expiry of a period of two years from the end of the relevant assessment year.
However, notice to the non-resident can be issued as per the normal period prescribed under section 149 even
after finding that notice to the agent is time-barred under section 149(3) and hence invalid. [CIT v Claggett Brachi
& Co. Ltd (1989) 177 ITR 409 (SC)].
(c) No time limit for issue of notice for assessment in pursuance of order on appeal, etc. [Section 150(1)]:
Notice under section 148 may be issued at any time for the purpose of making an assessment or re-assessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed:
(a) by any authority in any proceeding under this Act by way of appeal or revision under sections
250/254/260A/262/263/264, or
(b) by a court in any proceeding under any other law.
It may be noted that a judgment given by a Court under any other law can also lead to reassessment and the
time limit prescribed under section 149 shall not be applicable. In other words, such notice can be issued at
any time to make assessment or reassessment in consequence of or in order to give effect to the finding or
direction contained in the order of:
(i) The Supreme Court passed under the provisions of Income-tax Act or any other law;
(ii) A High Court passed under the provisions of Income-tax Act or any other law;
(iii) CIT (Appeal) under section 250/ITAT under section 254/Commissioner under section 263 or 264 of
the Income-tax Act.
Further, order passed by Supreme Court will apply generally to all assessees and the order passed by the High
Court may apply only to the assessees who fall in the jurisdiction of the High Court but the order under section 250
or 254 or 263 and 264 will apply for the specific assessee.
Exception to section 150(1) [Section 150(2)]: The above provision that there will be no time limit to issue notice
under section 149(1) shall, however, not apply where any such assessment or reassessment as is referred to in subsection (1) to section 150 relates to an assessment year in respect of which an assessment or reassessment could not
have been made at the time the order which was the subject matter of appeal, reference or revision, as the case may
be, was made by reason of any other provision limiting the time within which any action for assessment or
reassessment may be taken.
Although the time limits prescribed in section 149 of the Income-tax Act, 1961, will not apply where
assessment proceedings are initiated by a notice to give effect to any finding or direction under section 150(1), but
under section 150(2), the period of limitation as laid down in section 149 shall come into play, if the action for
assessment or reassessment could not be initiated for an assessment year on the date of order which was the subject
matter of appeal, reference or revision. Thus, where the High Court by order dated 1-6-1977, enhanced
compensation and a further sum of Rs. 10,30,320 was paid to him as interest for the period 21-10-1966 to 30-6-1979
and the Assessing Officer treated the interest taxable in the assessment year 1980-81, in an order passed on 19-71983. On appeal, the Commissioner (Appeal) by his order dated 16-1-1984 accepted the claim of the assessee that
such interest was assessable only on accrual basis and directed the Assessing Officer to recompute the addition
accordingly. While giving effect to the order of Commissioner (Appeal) the Assessing Officer issued the notice
under section 148 dated 27-3-1984, to assess the interest on accrual basis in the corresponding assessment years
1967-68 to 1979-80.
22
On a writ petition against the reassessment proceedings, it was held by the Punjab and Haryana High Court, that
in this case, the question of limitation had also to be considered. In the present case, the assessment order which was
subject matter of appeal before the Commissioner (Appeal) for the assessment year 1980-81 was passed by the
Assessing Officer on 19-7-1983. Hence no preceding under section 147 could be initiated in the assessment years
for which the period of limitation of 4 years prescribed under section 149 had expired on that date. The years
involved in the present writ petitions were assessment years 1967-68 to 1979-80. The period of limitation of four
years prescribed under section 149 for the assessment years 1967-68 to 1978-79 had expired on or before 31-3-1983,
which was prior to the date of order dated 19-7-1983. These assessment years were clearly covered within the
exception provided by section 150(2). Consequently, the notice issued under section 148 dated 27-3-1984, in respect
of these years were clearly barred by limitation. The notice has to be quashed. However, as far as interest for the
assessment year 1979-80 was concerned; the notice is not barred by limitation. [Col. Sir Harindar Singh Brar v ITO
(2006) 282 ITR 371 (P&H)].
11b Section covers cases in which income chargeable to tax has escaped assessment and is only for the
benefit of the revenue: Keeping in view the object and purpose of the proceeding under section 147 which are for
the benefit of the revenue and not an assessee, an assessee cannot be permitted to convert the reassessment
proceedings as his appeal or revisions in disguise, and seek relief in respect of items earlier rejected or claim relief in
respect of items not claimed in the original assessment proceedings and re-agitate the concluded matter. Further,
assessee cannot re-agitate questions which had been decided in original assessment proceedings. It is only the under
assessment which is set aside and not the entire assessment. However, for bringing to tax income which had escaped
assessment, it would be open to an assessee to put forward claims for deduction of any expenditure in respect of that
income which escaped assessment. [CIT v Sun Engineering Works Pvt. Ltd. (1992) 198 ITR 297 (SC)].
12. When can the proceedings under section 147 be dropped [Section 152(2)]
Proceedings in respect of an assessment reopened under section 147 can be dropped if the following conditions
are satisfied:
(1) The assessee did not file any appeal to Commissioner (Appeals) or an application of revision under section
264 to the Commissioner of Income Tax against the original assessment year.
(2) The assessee can show that:
(a) he had been already assessed on an amount not lower than what he would be rightly liable for even if
the income alleged to have escaped assessment had been taken into account, or
(b) the original assessment of income had been properly made.
However in doing so, the assessee shall not be entitled to reopen matters concluded by an order under section
154, 155, 260, 262 or 263. Further in doing so, income cannot be reduced below the income originally assessed.
Similarly, loss cannot be assessed above the loss originally assessed.
Even though the original assessment order was the subject matter of appeal, the assessee is entitled to invoke
the provisions of section 152(2) with reference to an item which was not made the subject matter of appeal. [CIT v
Dharam Chand Jalan (1983) 140 ITR 972 (Bom)].
Besides the above, the proceedings under section 147 can be dropped:
(a)
If the proceedings under section 147 were started without giving notice under section 148.
(b)
If the notice issued under section 148 was time barred.
(c)
If the proceedings under section 147 were started by Assessing Officer who did not seek the prior approval of Joint
Commissioner of Income-tax in some cases/prior approval of Chief Commissioner or Commissioner in some cases as
per provisions of section 151.
(d)
If the proceedings were started under section 147 without Assessing Officer having reason to believe that income has
escaped assessment.
13. Time limit for completion of all assessments and reassessment [Section 153]
Section 153 prescribes time limit for completion of various assessments and reassessment which is as follows:
Time limit for completion
1.
Assessment u/s 143/144
[Section 153(1)]
21 months from the end of relevant assessment year in which the
income was first assessable. However, in a case where the
reference is made to Transfer Pricing Officer under section
92CA(1), the period of 21 months will be substituted by 33
months if such reference—
(a) was made before 1-6-2007 but order is passed by TPO on of
after 1-6-2007.
(b) is made on or after 1-6-2007
23
2.
3.
4.
Assessment u/s 115WE/115WF
[Section 153(1A)]
Assessment or re-assessment u/s
115WG
[Section 153(1B)]
Assessment/Re-assessment u/s 147
[Section 153(2)]
5.
Fresh assessment where original
assessment of income or fringe benefits
has been set aside or cancelled by
Appellate Authority u/s 250, 254, or by
CIT u/s 263 or 264
[Section 153(2A)]
6.
Where any proceeding initiated or the
order of assessment or reassessment
made under section 153A(1) relating to
assessment of search cases has been
annulled in appeal or other legal
proceedings and the assessment or
reassessment relating to assessment
year which was abated has revived
21 months from the end of relevant assessment year in which
fringe benefits were first assessable.
9 months from the end of the financial year in which the notice
under section 115WH was served.
9 months from the end of the Financial Year in which the notice
u/s 148 was served on the assessee.
However, in a case where the reference is made to Transfer
Pricing Officer under section 92CA(1), the period of 9 months
will be substituted by 21 months if such reference—
(a) was made before 1-6-2007 but order is passed by TPO on of
after 1-6-2007.
(b) is made on or after 1-6-2007
9 months from the end of the Financial Year in which such order
of set aside or canceling the order passed by the appellate
authority u/s 250 or 254 was received by the CIT/or order u/s
263 or 264 was passed by the CIT, as the case may be.
However, in a case where the reference is made to Transfer
Pricing Officer under section 92CA(1), the period of 9 months
will be substituted by 21 months if such reference—
(a) was made before 1-6-2007 but order is passed by TPO on of
after 1-6-2007.
(b) is made on or after 1-6-2007
The Commissioner (Appeals) cannot cancel/set aside the
assessment and refer back to the Assessing Officer for fresh
assessment. However, it can be set aside by ITAT or
Commissioner under section 263 or 264.
1 year from the end of the month of such revival or within the
time specified in this section i.e. section 153 or section 153B(1),
whichever is later.
The order of assessment or reassessment should be made before the expiry of limitation period, although the
order and demand notice under section 156 can be served even after the expiry of the period, but it should be
prepared before the expiry.
1.
If the assessment is canceled or set aside and a direction is given to make a fresh assessment, then the Assessing Officer
shall make the fresh assessment under the same section in which original assessment was made (i.e. under section
143(3)/144/147).
2.
Further, for making fresh assessment in the above case, no notice under section 143(2)/144/148 is required to be issued.
In this case notice on a plain paper shall suffice.
3.
Where an assessment is not set aside for fresh assessment but annulled, no extended limitation is available. However, if
the original time limit is available, the Assessing Officer may proceed from the stage at which illegality which resulted into
the annulment of the assessment supervened and make the assessment afresh. [CIT v Mrs. Ratanbai N.K. Dubhash
(1998) 230 ITR 495 (Bom)].
Time limit under section 153 does not apply to assessment of total income only, it applies to determination of
tax also: Unless the total income is determined and the determination of tax is also done, it cannot be said that the
process of assessment is complete. What section 153 requires is that the assessment should be completed within the
prescribed time limit. The words, "order of assessment" cannot be construed to mean assessment of total income
only. Those words would mean an order in writing whereby the total income of the assessee is assessed and the tax
payable by him is determined. When an order in writing in respect of both these things is passed, it can be said that
there is a complete order of assessment. These two steps may be taken simultaneously or separately, but both of
them will have to be taken within the time prescribed by the Act. [CIT v Purshottamdas T. Patel (1994) 209 ITR 52
(Guj)].
13a No time limit of assessment/reassessment in certain cases [Section 153(3)]: Notwithstanding anything
contained in section 153(1) and (2) but subject to provisions of section 153(2A), there is no time limit for making
24
the assessment/reassessment, recomputation of income or assessment or re-assessment of fringe benefits1, etc. in the
following cases:
(a) where the assessment/reassessment, etc. is made on the assessee or any person in consequence of, or to give
effect to, any findings or directions contained in order under sections 250, 254, 260, 262, 263 and 264 or
order of a court under any other law, and
(b) where in case of a firm an assessment is made on a partner of the firm in consequence of an assessment
made on the firm under section 147.
However, as per section 153(2A) if in the above case, the original assessment is set aside or cancelled, the
period for fresh assessment will be 9 months as given in point 3 above.
Thus, section 153(3) is applicable only when the assessment is not set aside but the assessment, re-assessment,
or re-computation is made on the assessee or any person in consequence of or to give effect to any finding or
direction contained in the order passed by—
(a) the Supreme Court, or
(b) the High Court, or
(c) CIT (Appeal)/ITAT/Commissioner under section 263 or 264, or
(d) any Court under any other law.
Where by an order under section 250, 254, 260, 262, 263 or 264, an income is excluded from the total income of the
assessee for the assessment year and is held to be the income of the assessee for another assessment year there will be no
limit for issue of notice under section 148 as per section 150(1) nor any time limit for completion of assessment under section
153 as such assessment shall be deemed to be one made in consequence of or to give effect to any finding or direction
contained in the said order. [Explanation 2 to section 153].
Similarly, where by an order under section 250, 254, 260, 262, 263 or 264 any income is excluded from the total income of
one person and is held to be the income of another person then there will be neither time limit for issue of notice under section
148 as per section 150(1) nor any time limit for completion of assessment under section 153 as such assessment shall be
deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order provided such
other person was given an opportunity of being heard before the said order was passed. [Explanation 3 to section 153].
Direction under section 250/254/263/264 is possible only in the following 2 cases:
(i) to exclude the income from total income of one assessment year and include the same in the total income of
another assessment year. [Explanation 2 to section 153(3)].
(ii) to exclude the income from the total income of one person and include the same in the total income of other
person. [Explanation 3 to section 153(3)].
13b Period of limitation to exclude certain period [Explanation 1 to section 153]: In computing the period
of limitation for the purposes of this section the following period shall be excluded:
(i) the time taken in reopening the whole or any part of the proceeding or in giving an opportunity to the
assessee to be reheard under the proviso to section 129 relating to change of incumbent of an office, or
(ii) the period during which the assessment proceeding is stayed by an order or injunction of any court, or
(iii) the period commencing from the date on which the Assessing Officer directs the assessee to get his
accounts audited under sub-section (2A) of section 142 and ending with the last date on which the assessee
is required to furnish a report of such audit under that sub-section, or
(iv) in a case where an application made before the Income-tax Settlement Commission under section 245C is
rejected by it or is not allowed to be proceeded with by it, the period commencing from the date on which
such application is made and ending with the date on which the order under section 245D(1) is received by
the Commissioner, or
(v) the period commencing from the date on which an application is made before the Authority for Advance
Ruling under sub-section (1) of section 245Q and ending with the date on which the order rejecting the
application is received by the Commissioner under sub-section (3) of section 245R, or
(vi) the period commencing from the date on which an application is made before the Authority for Advance
Rulings under sub-section (1) section 245Q and ending with the date on which the advance ruling
pronounced by it is received by the Commissioner under sub-section (7) of section 245R.
If, after the exclusion of the aforesaid period, the period of limitation available to the Assessing Officer for
making an order of assessment or reassessment, as the case may be, is less than sixty days, such remaining
period shall be extended to sixty days and the period of limitation shall be deemed to be extended
accordingly.
1
The words in italics inserted by the Finance Act, 2005.
25
The period during which the stay order staying the assessment proceedings was in operation is to be
excluded for the purpose of computing the period of limitation for making the order of assessment. [Auto &
Metal Engineers v Union of India (1998) 229 ITR 399 (SC)].
Time limit for completion of assessment or reassessment or re-computation where proceedings before the
Settlement Commission abates under section 245HA [Proviso 2 to Explanation 1 to section 153]: Where a
proceeding before the Settlement Commission abates under section 245HA, the period of limitation available under
this section to the Assessing Officer for making an order of assessment, reassessment or re-computation, as the case
may be, shall, after the exclusion of the period under section 245HA(4), be not less than one year; and where such
period of limitation is less than one year, it shall be deemed to have been extended to one year; and for the purposes
of determining the period of limitation under sections 149, 153B, 154, 155, 158BE and 231 and for the purposes of
payment of interest under section 243 or section 244 or, as the case may be, section 244A, this proviso shall also
apply accordingly.
14. Rectification of mistakes [Section 154]
(A) Rectification only when mistake apparent from the record and by the authority who passed the order
[Section 154(1)]: It may be possible that an Income-tax authority may commit a mistake while passing the order of
assessment, appeal, revision, etc. With a view to rectifying any mistake, apparent from the record, the income-tax
authority is empowered as under:
(a) The Assessing Officer is empowered to rectify any order of assessment or of refund or any other order
passed by him. Further, the Assessing Officer is also empowered to amend any intimation or deemed
intimation under section 143(1).
(b) The Commissioner is empowered to rectify any order passed by him in revision under section 263 or 264.
(c) The Commissioner (Appeals) may rectify any order passed by him under section 250
(d) Other Income-tax Authorities mentioned under section 116 may also amend any order passed by it.
(B) When can rectification be made [Section 154(2)]: The Income-tax authorities may make the rectification:
(a) on its own motion; or
(b) on application made by the assessee bringing the mistake to the notice of the authority concerned.
Where the authority concerned is Commissioner (Appeals), besides the above, such mistake can be brought to
his notice by the Assessing Officer also.
The Appellate Tribunal can rectify its order under section 254(2) but not under section 154 as it is not an
income-tax authority.
(C) Rectification can be done for any matter other than the matter considered and decided in appeal/revision
[Section 154(1A)]: Where any matter had been considered and decided in any proceeding by way of appeal or
revision, rectification of such matter cannot be done by Assessing Officer under section 154. However, the matter
which has not been considered and decided in the appeal/revision can be rectified under section 154.
(D) Opportunity of being heard is necessary if rectification results into enhancement, etc. [Section 154(3)]: If
such rectification order has the effect of enhancing an assessment, or reducing a refund, or otherwise increasing the
liability of the assessee the authority concerned must give a notice to the assessee of its intention to do so and an
opportunity of being heard must be given to the assessee.
(E) Order of rectification [Section 154(4)]: Where any rectification is made under this section, an order of
rectification shall be passed in writing by the income-tax authority concerned. Refusal to make rectification shall
also require an order under this section.
(F) Refund to be given in case rectification results into reduction of assessment [Section 154(5)]: Subject to
provisions of section 241 (relating to withholding of refund) where any such amendment has the effect of reducing
the assessment, the Assessing Officer shall make any refund which may be due to such assessee.
(G) Notice of demand to be issued in case rectification results in to enhancing the assessment, etc. [Section
154(6)]: Where any such amendment has the effect of enhancing the assessment or reducing a refund already made,
the Assessing Officer shall serve on the assessee a notice of demand in the prescribed form specifying the sum
payable, and such notice of demand shall be deemed to be issued under section 156 and the provisions of the
Income-tax Act shall apply accordingly.
(H) Time limit for rectification [Section 154(7)]: Rectification of an order can be made only within four years
from the end of the financial year in which the order sought to be amended was passed. However, this time
limitation shall not apply to cases where amendment is made under section 155.
(I) Time limit for passing an order of rectification if application for amendment made by the assessee under
section 154 [Section 154(8)]: Without prejudice to the provisions of section 154(7), where an application for
amendment under this section is made by the assessee on or after 1-6-2001 to an income-tax authority referred to in
section 154(1), the authority shall pass an order, within a period of six months from the end of the month in which
26
the application is received by it—
(a) making the amendment; or
(b) refusing to allow the claim.
Time limit gets freshly extended in case of rectification of rectified order: Order sought to be amended does
not necessarily mean the original order. It could be any order including the amended or rectified order. Thus for
subsequent rectification, the time limit of four years shall be from the end of the financial year in which the earlier
rectification order was passed. [Hind Wire Industries Ltd. v CIT (1995) 212 ITR 639 (SC)].
1.
For time limit of rectification, the word used in section 154(7) is "order" sought to be amended was passed. Since, an
intimation is not an order, it implies that there is no time limit for rectification of an intimation or deemed intimation.
2.
The power of rectification can be invoked with reference to the law prevailing at the time of the original order. The fact that
subsequent decisions may lead to a different inference cannot justify rectification. [CIT v India Cements Ltd. (2000) 241
ITR 62 (Mad)].
3.
It may be noted that if the appeal has been filed but the matter has not yet been considered and decided in appeal, the
rectification is still possible.
4.
The assessee can file an appeal or can make an application for revision under section 264 against the order of rectification
passed by the Assessing Officer.
Judicial decisions: 1. The Supreme Court in the case of T.S. Balaram, ITO v Volkart Bros (1971) 82 ITR 40,
held that "a mistake apparent on the record must be an obvious and patent mistake and not something which can be
established by a long-drawn process of reasoning on points on which there may be conceivably two opinions. A
decision on a debatable point of law is not a mistake apparent from the record."
A look at the records must show that there has been an error and that error may be rectified; Reference to
documents outside the records and the law is impermissible when applying the provisions of section 154. [CIT v
Keshri Metal Pvt. Ltd. (1999) 237 ITR 165 (SC)].
2. The possibility of forming a different opinion from the one expressed in the order passed under section
254(1) cannot be treated as a ground for entertaining an application under section 254(2). [Popular Engg. Co. v
ITAT (2001) 248 ITR 577 (P&H)].
3. Under section 154, the power to rectify the error must extend to the elimination of the error, even though the
error may be such as to go to the root of order and its elimination may result in the whole order falling to the ground.
[Blue Star Engineering Co. (Bombay) Pvt. Ltd. v CIT (1969) 73 ITR 283. See also CIT v S.S Gupta (2002) 257 ITR
440 (Raj)].
4. Absence of reasoning cannot be a mistake apparent from records as desiring any rectification under section
154: In estimating or assessing the taxable income and tax on income, it is not necessary to give reasons therefor
when the decision is in favour of the assessee. Therefore, absence of reasons cannot be a mistake apparent from the
records. [Vijay Mallya v Asstt CIT (2003) 133 Taxman 552].
5. Rectification of mistake of law: The Gujarat High Court in CIT v Subodhchandra S. Patel (2004) 138 Taxman
185 (Guj) held that non-consideration of a judgment of the jurisdictional High Court or the Apex Court would
always constitute a mistake apparent from record regardless of the judgment being rendered prior to or subsequent to
the order proposed to be rectified.
14a Clarifications from CBDT: Where an assessee moves an application under section 154 pointing out that in
the light of a later decision of the Supreme Court pronouncing the correct legal position, a mistake had occurred in
any of the completed assessments in his case the application shall be acted upon provided the same has been filed
within time and is otherwise in order. Where any such application already been rejected and the assessee files fresh
application within the statutory time limit the same may also be treated on par with the applications which may
either be pending or received after the issue of this circular. [Circular No. 68, dated 17-11-1971]
Quite often the notifications approving any fund or institution under section 10(23C(iv) and any association,
university, college or institution under section 35(1)(ii)/(iii) are issued much after the completion of assessments of
relevant persons for the relevant assessment years. The Assessing Officers have rejected applications under section
154 on the ground that the notification was issued subsequent to the passing of the assessment order and thus there
was no mistake on record. The Board has clarified that in view of the notification issued at a subsequent date but
which is applicable to the assessment year(s) involved in the application, there is a mistake apparent from record
which can be rectified under section 154. However, while disposing of the rectification applications, the Assessing
Officer must ensure that the conditions subject to which the approval was granted are satisfied. [Circular No. 725,
dated 16-10-1995]
In all case was where a valid application under clause (b) of sub-section (2) of section 154 had been filed by the
assessee within the statutory limit of 4 years but was not disposed of by the authority concerned within the time limit
specified under sub-section (7) of section 154 it may be disposed of by that authority even after the expiry of the
statutory time limit on merits and in accordance with law. [Circular No. 73, dated 7-1-1972].
27
Rectification of intimation or assessment: Where the sum of tax, duty, etc., referred to in the first proviso
under section 43B had in fact been paid on or before the due dates mentioned therein, but the evidence therefor had
been omitted to be furnished along with the return, the Assessing Officers can entertain applications under section
154 for rectification of the intimation under section 143(1)(a) [now 143(1)] or order under section 143(3), as the
case may be, and decide the same on the merits. [Circular No. 669, dated 25-10-1993].
15. Notice of demand [Section 156]
When any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the
Income-tax Act, the Assessing Officer shall serve upon the assessee a notice of demand in Form No. 7 specifying
the sum so payable.
Further as per section 220(1) the amount specified in the notice of demand should be paid within 30 days of the
service of notice at the place and to the person mentioned in the notice. However, the Assessing Officer in some
cases, with prior approval of Joint Commissioner can ask the assessee to deposit the amount in less than 30 days.
Section 156 provides for a vital step to be taken by the Assessing Officer without which the assessee cannot be
termed a defaulter. The use of the term "shall" in section 156 implies that service of the notice of demand is
mandatory before initiating recovery proceedings and constitutes the foundation of subsequent recovery
proceedings. [Sri Mohan Wahi v CIT (2001) 248 ITR 799 (SC)].
1.
For payment of advance tax, notice of demand in Form No. 28 under section 156 can be given by the Assessing Officer as
per section 210.
2.
Recovery proceedings would not accordingly be valid if the relevant notice of demand had not been served. [Sri. Mohan
Wahi v CIT (2001) 248 ITR 799 (SC)].
3.
An intimation issued for tax and interest found payable in consequences of processing of return of income under section
143(1) is also deemed to be a notice of demand issued under section 156.
4.
A fresh notice of demand is not required to be issued every time where the amount payable on earlier notice of demand is
reduced, but where such a demand is enhanced, a fresh notice of demand is required to be issued and served upon the
assessee for the additional amount payable.
5.
Where notice of demand in Form No. 28 is given by the Assessing Officer for payment of advance tax, then such advance
tax has to be paid in the installments prescribed in the notice of demand and as such the period of 30 days mentioned
above is not applicable in this case.
16. Intimation of Loss [Section 157]
Where in the course of the assessment of total income of any assessee, it is established that loss has taken place
which the assessee is entitled to have carry forward and set off under the provisions of section 72(1) or section 73(2)
or section 74(1) & (3) or section 74A(3), then the Assessing Officer shall notify the assessee by an order in writing,
the amount of such loss computed by him.