Delhi High Court: Enhancement of compensation after legal proceedings should be disclosed in the current relevant assessment year.

The Central India Electric Supply Co. Ltd. v. Income Tax Officer, on 28 January, 2011

Assessment Year: 1979-80

Question/s before the Hon’ble Court:

(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that re-assessment proceedings under Section 147(a) read with Section 148 of the Income-tax Act, 1961 had been rightly initiated against the assessee?

(2) Whether the Tribunal was right in holding that valid approval had been accorded by the Central Board of Direct Taxes under Section 151(i) of the Income-tax Act for re- opening of the assessment of the assessee?

Relevant facts: The assessee company was engaged in the generation and supply of electricity from its units at Bilaspur and Katni. These units were acquired by the Government of Madhya Pradesh in the year 1964 when the appellants licence expired & not renewed. The compensation for compulsory acquisition of both the units was fixed at Rs.5,85,000/- and paid to assessee in the year 1964 itself. It is not disputed that the assessee received some payment in the previous year 1978-79 relatable to the assessment year 1979-80 (after eliciting more compensation pursuant to legal proceedings). A notice dated 15.11.1981 under Section 148 of the IT Act was issued to the assessee appellant company requiring it to furnish its return for assessment.

Upholding the appeal of the assessee, the Hon’ble Court held that:

(1) They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable. This is completely absent in the present case.

(2) There is no finality emerging in matters of enhancement of compensation as none of the parties can contemplate in advance as to what would be the fate of the appeal proceedings. On receipt of the enhancement compensation, the appellant disclosed the same in its return as was the case in P.C. Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd.s case (supra); Harish Chandra & Ors.s case (supra); Hindustan Housing & Land Development Trust Limiteds case (supra); and New Friends Co-operative House Building Society Ltd. v. CIT & Anr. case (supra).

The decision is available here.

Delhi ITAT: Reasons for reopening assessment necessarily to be provided within time limit of section 149(1) i.e. 4 years or 6 years

Balwant Rai Mehta v. ITO, on 14^th January, 2011

Assessment Year: 2001-2002

Question/s before the Hon’ble Tribunal

Whether valid service of notice has been served upon the assessee within the limitation provided u/s 149 (1) (b) of the Act?

Relevant facts: AO sought to reopen the asstt. just two days prior of the expiry of the 6 years. He has served notice u/s 148 on 28th March, 2008. Such notice could be served upon the assessee upto 31st March, 2008. The reasons were not supplied to assessee by the AO by 31st March,. 2008 rather these were supplied to the assessee vide letter dated 15th May, 2008.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

“A plain reading of the above exposition of law at the end of Hon’ble Jurisdictional High Court make it clear that issuance of the notice and the communication and furnishing of reasons would go hand in hand. The reasons are to be supplied to the assessee before the expiry of period of 6 years. If it has not been done then validity u/s 148 could not be upheld… The notice could be served at any point of time before the expiry of 6 years, if AO has reasons to believe that income has escaped assessment but, such reasons are also to be communicated to the assessee before the expiry of the limitation otherwise validity of such notice could not be sustainable.”

The decision is available here.

2. CIT, Delhi v. Kelvinator of India Ltd. on 18th January, 2010

Question of Law: “Whether the concept of ‘change of opinion’ stands obliterated with effect from 1st April, 1989, i.e., after substitution of Section 147 of the Income Tax Act, 1961 by Direct Tax Laws (Amendment) Act, 1987?”

The Hon’ble Court held that:

“On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.

The decision can be accessed here.

3. Brij Lal & Ors. v. CIT, Jalandhar on 21st October, 2010

Questions of Law and the determination by the Hon’ble Court thereon:

“(I) Whether section 234B applies to proceedings of the Settlement Commission under Chapter XIX-A of the said Act?

(para) 11. Our detailed analysis shows that though Chapter XIX- A is a self-contained Code, the procedure to be followed by the Settlement Commission under sections 245C and 245D in the matter of computation of undisclosed income; in the matter of computation of additional income tax payable on such income with interest thereon; the filing of settlement application indicating the amount of income returned in the return of income and the additional income tax payable on the undisclosed income to be aggregated as total income shows that Chapter XIX-A indicates aggregation of incomes so as to constitute total income which indicates that the special procedure under Chapter XIX-A has inbuilt mechanism of computing total income which is nothing but assessment (computation of total income). To elaborate, under section 245C(1B), if the applicant has furnished a return in respect of his total income, tax shall be calculated on the aggregate of total income returned and the income disclosed in the settlement application as if such aggregate were total income. Under the Act, tax is payable on the total income as computed in accordance with the provisions of the Act. Thus, section 143(3) provision is sought to be incorporated in section 245C. When Parliament uses the words "as if such aggregate would constitute total income", it presupposes that under the special procedure the aggregation of the returned income plus income disclosed would result in computation of total income which is the basis for the levy of tax on the undisclosed income which is nothing but "assessment". Similarly, section 245C(1C) provides for deductions from the total income computed in terms of section 245C(1B). Thus, the special procedure under sections 245C and 245D in Chapter XIX-A shows that a special type of computation of total income is engrafted in the said provisions which is nothing but assessment which takes place at section 245D(1) stage. However, in that computation, one finds that provisions dealing with a regular assessment, self-assessment and levy and computation of interest for default in payment of advance tax, etc. are engrafted. [See sections 245C(1B), 245C(1C), 245D(6), 245F(3) in addition to sections 215(3), 234A(4) and 234B(4)].”

Thus, the Hon’ble Court held that section 234A, 234B and 234C are applicable as the provisions of Chapter XIX-A are akin to a return of income.

“(II) If answer to the above question is in the affirmative, what is the terminal point for levy of such interest - Whether such interest should be computed up to the date of the Order under section 245D(1) or up to the date of the Order of the Commission under section 245D(4)?
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(Para 12) Under sections 245C(1B) and (1C) the additional amount of income tax payable on the undisclosed income shall be on the total income as calculated under section 245C(1B). On computation of total income under sections 245C(1B) and (1C), interest follows such computation. It is important to note that interest follows computation of total income. Once such computation takes place under section 245C(1B) then section 234B(2) applies. The said sub-section deals with the situation where before determination of total income under section 143(1) or 143(3) tax is paid under section 140A or otherwise interest shall be calculated in accordance with section 234B(1) up to the date on which tax is so paid. In that sense an application under section 245C(1) is a return. Section 245C(1) deals with computation of total income.

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Thus, as stated above, sections 234A, B and C are applicable up to the stage of section 245D(1) order passed by the Settlement Commission.”

“(III) Whether the Settlement Commission could reopen its concluded proceedings by invoking section 154 of the said Act so as to levy interest under section 234B, though it was not so done in the original proceedings?

The point to be noted is that in computation of additional income tax payable by the assessee, there is no mention of section 154. On the contrary, under section 245I the order of the settlement Commission is made final and conclusive on matters mentioned in the application for settlement except in the two cases of fraud and misrepresentation in which case the matter could be re- opened by way of review or recall. Like ITAT, the Settlement Commission is a quasi-judicial body. Under section 254(2), the ITAT is given the power to rectify but no such power is given to the Settlement Commission. Thus, we hold that Settlement Commission cannot reopen its concluded proceedings by invoking section 154 of the Act. Lastly, one must keep in mind the difference between review/ recall of the order and rectification under section 154. The Schedule of Chapter XIX-A does not contemplate invocation of section 154 otherwise there would be no finality to the assessment by settlement which is different from assessment under Chapter XIV where there is an appeal, revision, etc. Settlement of liability and not determination of liability is the object of Chapter XIX-A.”

Thus, in conclusion the Hon’ble Court held at para 16 that:

“16. (1) Sections 234A, 234B and 234C are applicable to the proceedings of the Settlement Commission under Chapter XIX-A of the Act to the extent indicated hereinabove.

(2) Consequent upon conclusion (1), the terminal point for the levy of interest under section 234B would be up to the date of the order under section 245D(1) and not up to the date of the Order of Settlement under section 245D(4).

(3) The Settlement Commission cannot re-open its concluded proceedings by invoking section 154 of the Act so as to levy interest under section 234B, particularly, in view of section 245I.”

The decision can be accessed here.