Reassessment

The appellant-company, engaged in the business of manufacturing and trading of pharmaceuticals products, filed its return. The AO issued a notice under s 148 on the ground that the items, viz., club fees, gifts and presents and provision for leave encashment had escaped assessment. Pursuant to the assessee’s explanation, the AO accepted that these items had not escaped assessment. However, the AO passed an order under s 147 on the ground that the assessee has wrongly claimed a deduction under s 80HH and s 80-I on export incentives like duty drawback, profit on sale of REP licences and cash assistance, etc, even though these issues did not figure in the recorded reasons. In an appeal filed by the assessee, both the CIT(A) and the Tribunal upheld the action of the AO. Being aggrieved, the assessee has filed the present appeal.

The issue is whether the AO had jurisdiction to reassess other income under s 147, other than the issues in respect of which the proceedings were initiated, if the AO does not assess income for which reasons were recorded under s 147.

Though Explanation 3 to s 147 inserted by the Finance Act, 2009 w.e.f. 1 April 1989 provides that the AO may assess or reassess income which has escaped assessment even if the recorded reasons have not been recorded with regard to such items, but the AO has to assess or reassess the income which he had reason to believe had escaped assessment and also any other income chargeable to tax which came to his notice during the proceedings. In the absence of the assessment or reassessment the former, he cannot independently assess the latter. If the AO accepts the objections of the assessee that the items for which reasons are recorded have not escaped assessment and does not assess or reassess the income which was the basis of the notice, it means he had no “reasons to believe that income has escaped assessment” and the issue of the notice becomes invalid and it would not be open to him to assess income under some other issue independently.

Failure on part of AO to assess income for which reasons were recorded under s 147 renders assessment of other income under s 147 invalid — as held by DelHC in Ranbaxy Laboratories Limited v CIT — In favour of: The Assessee ; ITA No. 148/2008

Decided on: 3 June 2011