The reopening of assessment under Section 148 of the Income Tax Act (the Act) has been a continuous saga of litigation and uncertainty. Even when it appears that some finality is emerging, a new issue arises and it goes through the entire gamut of litigation all over again. This issue has witnessed retrospective amendments also, to annul the decision of the Courts. A recent decision of the Hon’ble Karnataka High Court on this issue, in the case of N. Govindaraju vs. ITO, [TS-5339-HC-2015(Karnataka)-O] has raised concern and several questions in the minds of the taxpayers.

The crux of the decision is the interpretation of Explanation 3 of Section 147 and the issues that can be covered in the scope of reassessment. Essentially, the questions raised were twofold:

i) Once a case is reopened, can the Assessing Officer look into issues beyond the issue for which the assessment was reopened and

ii) In case the Assessing Officer is satisfied on the issue on which the reopening was made and does not make any addition, can he make additions on other issues, which came to his notice at the time of reassessment and which were not the reason for the reopening?

The answer to the first question is fairly simple. Explanation 3 to Section 147 of the Act, which was introduced in 2009, with retrospective effect from 1989, is clear that once an assessment is reopened, the A.O can proceed to assess the income in respect of any issue, even though the reasons for such issue have not been included in the reasons recorded for reopening. That is to say, once an assessment is reopened, the A.O can examine and make additions on all other issues, which were never part of the reopening.

The second question is whether the reassessment notice survives if the reason for which the assessment was reopened does not survive. The answer to this question involves the interpretation of the phrase “And Also” present in the section.

The Hon’ble Bombay High Court, in the case of Jet Airways, (2011) 331 ITR 236 had interpreted the phrase “and also” as being conjunctive and cumulative and not being in the alternative. Having held thus, the Hon’ble Bombay High court held that the scope of Sec 148 includes not only such income for which the assessment was reopened but also any other income which comes to the notice of the Assessing Officer subsequently in the course of reassessment proceedings. But the Hon’ble Bombay High court held that if the original reason for which the assessment was reopened does not survive, then the Assessing Officer cannot assess the income related to the other issues that came to notice during the reassessment proceedings.

However, the Hon’ble Karnataka High Court, in the present case, has disagreed with the Hon’ble Bombay HC on the interpretation of the phrase “and also”. The Hon’ble Karnataka HC has held that in the phrase “and also”, “and” is conjunctive but “also” is dis-junctive. Thus, when the section is read in full, “and also” cannot be said to be conjunctive.  In the light of this reasoning, the Hon’ble Karnataka HC held that the AO can independently assess any other income also, which does not form the subject matter of the notice, even if the original reason for which the assessment was reopened does not survive. While arriving at this decision, the Hon’ble Karnataka HC has explained the difference between “Explanation” and “Proviso” by stating that “Explanation” explains the contents of the main section whereas “Proviso” puts a condition on the main section and qualifies the same. Therefore, Explanation 3 to the Section support the main provision and has to be read hand-in-hand with the section.

While arriving at the decision, the Hon’ble HC has made some significant observations:-

The issuance of notice U/s 148 is justiciable and subject to jurisdictional scrutiny and therefore, if the assessee chooses not to challenge the notice, it is to be treated as Final.

Once the notice for re-opening is valid, the assessment proceedings and the assessment order passed would be deemed to have been set–aside. The A.Os have power to pass fresh assessment order with regard to the entire Income which has escaped assessment.

Insertion of explanation 3 is for the benefit of the revenue and not for the assessee.

Once the notice for re-opening is valid, additions can be made on all issues (including “any other” Income also) which may come to the notice of AO during the course of reassessment proceedings, though the reason for reopening itself does not survive.

This decision of the Hon’ble Karnataka HC has far reaching implications in the manner in which the powers of the AO to re-open assessments will be understood and implemented, some of which are as under:

The issuance of notice U/s 148 is not subject to appeal and the only remedy is to file writ petition before the HC. In the light of the observation that the notice is be treated as valid if not challenged,  does that mean that the tax payer has no option but to challenge the notice by filing writ petition at the stage of issuance itself.

The concept of “setting aside” of assessment has a specific connotation in the Income Tax Act. It is settled principle that setting aside of assessment U/s 263 of the Act is on different footing and governed by different set of principles. By observing that the proceedings and the assessment order gets set-aside once the assessment is re-opened, whether the concept of finality of assessment would get compromised remains to be seen.

It is true that the apex court has held in Sun Engineering works Vs. CIT, 198 ITR 297 that proceedings U/s 147 are for the benefit of the revenue and not the assessee. It is possible that this decision of the Hon’ble Karnataka HC may be interpreted by Revenue authorities to mean that re-assessment is virtually another fresh assessment, covering the entire gamut of issues all over again. This particular aspect can be a matter of concern, as we have seen instances where re-assessment notices are issued for making TP adjustments, even though the TPO had passed clean orders at the first instance.

In this particular case, the Hon’ble HC has decided the legal issue against the tax payer but has decided the merits of the case in favour of the tax payer. Therefore, it is likely that this particular case may not travel to the apex court on appeal. If that happens, this principle becomes applicable for all the taxpayers in Karnataka. 

Testing times ahead.