The finality of a concluded assessment is often questioned by resorting to rectification, revision and reassessment proceedings that can be initiated by the Income-Tax Department under the various provisions of the I-T law.

To safeguard the interests of the taxpayer, strict time limits are set for issue of notice for reopening a concluded assessment.

No assessment can be reopened on a mere change of opinion. There should be some information to indicate escapement of income and in such a contingency, assessment can be reopened within four years. If there is failure to disclose particulars relevant to the computation of the total income, then reassessment notice can be issued up to six years.

These are statutory provisions for protection against arbitrary reopening of assessments. The Bombay High Court has now introduced a judicial protection against reassessment and the views of the court can unsettle the very working of the I-T Department.

Metro Auto case

In Metro Auto Corporation vs Income-Tax Officer 2006 286 ITR 618 Bombay, Metro Auto Corporation's income for the assessment year 1999-2000 was found to be understated inasmuch as there was under-valuation of stock to the extent of Rs 2 lakh.

This amount was added in the assessment.

On appeal, the first appellate authority deleted the addition and the Revenue took up the matter in second appeal before the Appellate Tribunal, Bombay. Even as the appeal was pending, a reassessment notice was issued to the company on February 13, 2006, under Section 148 of the I-T Act.

The company promptly went to the High Court with a writ petition challenging the issue of the reassessment notice on the ground that proceedings were still pending with the Appellate Tribunal and there can be no question of income escaping assessment. It is not known on what ground the reassessment notice was issued. It is possible that the assessing officer (AO) issued the notice by way of abundant precaution to bring the sum of Rs 2 lakh to tax.

It would appear that the first appeal was allowed on the technical ground that the notice of hearing under Section 143(2) was issued after the expiry of the period of limitation. (It may be remembered that this part of the law has undergone a change in the Finance Act, 2006.)

Whatever the reasons, the fact remains that the assessment order was nullified and the order of the first appellate authority alone survived when the reassessment proceedings were initiated.

It was argued before the Bombay High Court that the assessment could not be treated as final as long as the appeal is pending. Surprisingly, the Bombay High Court accepted this argument and quashed the Notice dated February 13, 2006. It observed that the Revenue could take appropriate action if its second appeal before the Income-Tax Appellate Tribunal (ITAT) succeeded.

Far-reaching implications

The implications of this judgment can be far reaching. By the time, the appeal is disposed of, time limits for the issue of reassessment notice would have been over. The decision proceeds on the theory that the assessment order merges with the appellate order.

The first appellate authority has the power of enhancement of income. His powers are co-terminus with that of the AO. If there is any omission to account for income, which the AO discovers after the completion of the assessment, he can approach the first appellate authority with a request for enhancement and who, in turn, is bound to pass on order on such request.

But when it comes to the second appellate authority, it should be noted that no such powers of enhancement are conferred on the ITAT under the I-T Act, 1961.

The fetter now imposed by the Bombay High Court on the powers of the AO to reopen a completed assessment can make the entire process of reassessment unworkable. According to the court, because an appeal is filed, the AO loses the power to reopen the completed assessment. The court has sought to derive support from its earlier ruling in Ador Technopack Ltd vs Dr Zakir Hussein, Deputy CIT (2004 271 ITR 50 Bombay).

That was a case where the appellate authority set aside the assessment and reassessment notice was quashed on the ground that the set aside assessment was still pending. That case can have no impact on the process of reasoning adopted in the Metro case.

Reassessment notice on matters not considered in the original assessment and in the appeal can now be threatened by the mere filing of an appeal against the assessment. The Bombay High Court has read too much into Section 147.

As this is the only ruling on the subject, it can easily proliferate and hamper the work of the I-T Department all over India. It is necessary that the Bombay ruling should be immediately challenged before the Supreme Court.

T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax.)