Supreme Court sets aside reassessment orders in Income Tax case: M/s Mangalam Publications vs. Commissioner of Income Tax (23 January 2024)

Introduction

Date of the Judgment: 23 January 2024
Citation: 2024 INSC 53
Judges: B.V. Nagarathna, J. and Ujjal Bhuyan, J.

Can an income tax assessment be reopened years after it was finalized, simply because the tax officer now has a different view? The Supreme Court recently tackled this question in a case involving M/s Mangalam Publications. The core issue was whether the Income Tax Department could reassess the income of the assessee based on a change of opinion, after the original assessment was completed. The Supreme Court, in this case, examined the legality of reassessment proceedings under Section 147 of the Income Tax Act, 1961, when the original assessment was completed under Section 143(3) of the same Act. The bench comprised Justices B.V. Nagarathna and Ujjal Bhuyan, with the judgment authored by Justice Ujjal Bhuyan.

Case Background

M/s Mangalam Publications, a partnership firm (later a company), was engaged in publishing newspapers and periodicals. For the assessment years 1990-91, 1991-92, and 1992-93, the firm filed income tax returns, but did not include balance sheets, citing the seizure of their books of accounts by the Income Tax Department in 1985. The assessing officer completed the assessments under Section 143(3) of the Income Tax Act, making some additions to the declared income.

Years later, the assessing officer, based on a comparison of the firm’s capital accounts in a balance sheet submitted to a bank for a loan in 1989 and the balance sheet for the assessment year 1993-94, concluded that the firm’s income had been under-assessed. Consequently, notices for reassessment were issued under Section 148 of the Income Tax Act. The reassessment orders were passed under Section 144/147 of the Act, determining significantly higher incomes.

Timeline:

Legal Framework

The case primarily revolves around the interpretation of Section 147 of the Income Tax Act, 1961, which deals with income escaping assessment.

Section 147 of the Income Tax Act, 1961 states that:
“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 the provisions of Sections 148 to 153, assess or reassess such income…”

Other relevant sections include:

• Section 139 of the Income Tax Act, 1961, which mandates the filing of income tax returns. Sub-section (9)(f) specifies that a return is defective if regular books of account are not maintained, and the return is not accompanied by a statement of turnover, gross profit, expenses, net profit, and other financial details.
• Section 143 of the Income Tax Act, 1961, which provides for assessment procedures. Sub-section (3) allows the assessing officer to make an assessment after considering the evidence and relevant materials.
• Section 148 of the Income Tax Act, 1961, which requires the assessing officer to issue a notice before making an assessment or reassessment under Section 147.
• Section 149 of the Income Tax Act, 1961, which prescribes the time limit for issuing a notice under Section 148, stating that no notice can be issued after four years from the end of the relevant assessment year. However, the proviso extends this period to ten years if income has escaped assessment amounting to Rs. 50,000 or more.

The interplay between these sections determines the legality of the reassessment proceedings.

Arguments

Appellant (Assessee):

• The assessee argued that the reassessment was based on a mere change of opinion by the assessing officer. The original assessments were completed under Section 143(3) of the Income Tax Act, after due consideration of all available information.

• The assessee contended that the balance sheet obtained from the South Indian Bank was prepared on a provisional basis for loan purposes and could not be the basis for reassessment.

• The assessee submitted that they had provided all necessary details, including cash flow statements and statements of source and application of funds. The non-submission of regular balance sheets was due to the seizure of their books of accounts by the department.

• The assessee argued that the assessing officer did not treat their returns as defective under Section 139(9)(f) of the Income Tax Act, and instead, completed assessments under Section 143(3). Therefore, the reassessment could not be justified on the ground of non-disclosure.

• The assessee relied on M/s Phool Chand Bajrang Lal Vs. Income Tax Officer, (1993) 4 SCC 77 and Srikrishna Private Limited Vs. ITO, Calcutta, (1996) 9 SCC 534, to argue that reassessment requires specific, reliable, and relevant information coming to the assessing officer’s possession subsequent to the original assessment.

• The assessee also relied on CIT, Delhi Vs. Kelvinator of India Limited, (2010) 2 SCC 723, to argue that a mere change of opinion is not a valid ground for reassessment.

Respondent (Revenue):

• The revenue argued that the assessee had not disclosed all material facts necessary for assessment, as required under Section 139(9)(f) of the Income Tax Act.

• The revenue contended that the increase in the capital accounts of the partners between 1985 and 1993, as revealed by the balance sheets, justified the reassessment.

• The revenue submitted that the assessing officer had made the reassessments based on the increase in capital in the balance sheets between the years ending 31.03.1989 and 31.03.1993 and it was not a case of change of opinion.

• The revenue relied on Calcutta Discount Company Limited Vs. Income Tax Officer, (1961) 41 ITR 1991, to argue that the duty of disclosing all primary facts relevant to assessment lies on the assessee.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, were valid in law.
2. Whether the reassessment was based on a change of opinion by the assessing officer.
3. Whether the assessee had failed to disclose fully and truly all material facts necessary for the original assessments.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• Calcutta Discount Company Limited Vs. Income Tax Officer, (1961) 41 ITR 1991 – Supreme Court of India: This case was cited to emphasize the duty of the assessee to disclose fully and truly all primary facts necessary for assessment.
• Income Tax Officer Vs. Lakhmani Mewal Das, 1976 (3) SCC 757; 1976 (103) ITR 437 – Supreme Court of India: This case was cited to explain that the expression “reason to believe” means reasons deducible from the materials on record and which have a live link to the formation of the belief that income chargeable to tax has escaped assessment.
• M/s Phool Chand Bajrang Lal Vs. Income Tax Officer, (1993) 4 SCC 77 – Supreme Court of India: This case was relied upon to emphasize that the assessing officer must have specific, reliable, and relevant information to reopen an assessment.
• Srikrishna Private Limited Vs. ITO, Calcutta, (1996) 9 SCC 534 – Supreme Court of India: This case was cited to highlight that the assessee has an obligation to make a full and true disclosure of all material facts.
• CIT, Delhi Vs. Kelvinator of India Limited, (2010) 2 SCC 723 – Supreme Court of India: This case was used to argue that a mere change of opinion is not a valid ground for reassessment.
• CIT Vs. Bimal Kumar Damani, (2003) 261 ITR 87 (Cal) – Calcutta High Court: This case was cited to define the meaning of ‘disclosure’.
• Techspan India Private Limited – Supreme Court of India: This case was cited to explain the expression “change of opinion”.

Legal Provisions:

• Section 139 of the Income Tax Act, 1961: Mandates the filing of income tax returns.
• Section 143 of the Income Tax Act, 1961: Provides for assessment procedures.
• Section 147 of the Income Tax Act, 1961: Deals with income escaping assessment.
• Section 148 of the Income Tax Act, 1961: Requires the assessing officer to issue a notice before making an assessment or reassessment under Section 147.
• Section 149 of the Income Tax Act, 1961: Prescribes the time limit for issuing a notice under Section 148.

Authorities Considered by the Court

Judgment

The Supreme Court held that the reassessment orders were not justified and set aside the High Court’s order, restoring the order of the Income Tax Appellate Tribunal.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court cited Calcutta Discount Company Limited [CITATION]* to affirm the duty of the assessee to disclose all primary facts but clarified that the duty does not extend beyond that.
• The Court used M/s Phool Chand Bajrang Lal [CITATION]* to reiterate that reassessment requires specific, reliable, and relevant information.
• The Court relied on CIT, Delhi Vs. Kelvinator of India Limited [CITATION]* to emphasize that a mere change of opinion is not a valid ground for reassessment.
• The Court referred to Srikrishna Private Limited [CITATION]* to highlight the obligation of the assessee to make a full and true disclosure of all material facts.
• The Court cited Income Tax Officer Vs. Lakhmani Mewal Das [CITATION]* to explain the meaning of “reason to believe”.
• The Court cited CIT Vs. Bimal Kumar Damani [CITATION]* to define the meaning of ‘disclosure’.
• The Court cited Techspan India Private Limited [CITATION]* to explain the expression “change of opinion”.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that a reassessment cannot be based on a mere change of opinion. The Court emphasized that the assessing officer had already completed the original assessments under Section 143(3) after due inquiry and consideration of the available facts. The subsequent reassessment was based on a comparison of financial statements, which the Court deemed a subjective analysis and a change of opinion rather than new evidence.

Fact:Law Ratio

The Court emphasized that the assessing officer had already completed the original assessments under Section 143(3) after due inquiry and consideration of the available facts.

The Court noted that the assessee had disclosed all primary facts and the non-submission of regular balance sheets was due to the seizure of their books of accounts.

The Court also pointed out that the assessing officer did not treat the returns as defective under Section 139(9)(f), and therefore, the reassessment could not be justified on the ground of non-disclosure.

The Court highlighted that the assessing officer’s reliance on the balance sheet submitted to the bank was improper as it was a provisional document.

The Court’s reasoning was based on a careful analysis of the facts and the applicable legal provisions. The Court’s logical reasoning for each issue is explained below:

The Court considered the argument that the assessing officer had not treated the returns as defective under Section 139(9)(f) of the Income Tax Act, which further supported the conclusion that the reassessment was not justified.

The Court also considered the argument that the balance sheet obtained from the South Indian Bank was prepared on a provisional basis for loan purposes and could not be the basis for reassessment.

The Court rejected the revenue’s argument that the increase in capital accounts justified reassessment, stating that it was a mere change of opinion.

The Court’s decision was based on the principle that reassessment cannot be based on a mere change of opinion.

The Court quoted from the judgment:

“…it was nothing but a subsequent subjective analysis of the assessing officer that income of the assessee for the three assessment years was much higher than what was assessed and therefore, had escaped assessment. This is nothing but a mere change of opinion which cannot be a ground for reopening of assessment.”

“A defective return cannot be regarded as an invalid return. The assessing officer has the discretion to intimate the assessee about the defect (s) and it is only when the defect (s) are not rectified within the specified period that the assessing officer may treat the return as an invalid return.”

“…while the duty of the assessee is to disclose fully and truly all primary and relevant facts necessary for assessment, it does not extend beyond this. Once the primary facts are disclosed by the assessee, the burden shifts onto the assessing officer.”

Key Takeaways

• Reassessment under Section 147 of the Income Tax Act cannot be based on a mere change of opinion by the assessing officer.
• The assessing officer must have specific, reliable, and relevant information to reopen an assessment.
• The assessee is obligated to disclose all primary facts necessary for assessment, but the burden shifts to the assessing officer once these facts are disclosed
• A provisional document, such as a balance sheet submitted to a bank for a loan, cannot form the basis of a reassessment.
• If the assessing officer does not treat a return as defective under Section 139(9)(f), then reassessment cannot be justified on the ground of non-disclosure.

Practical Implications:

• This judgment reinforces the principle that tax assessments cannot be reopened arbitrarily. It provides a safeguard against reassessments based on subjective interpretations by tax officers.
• Taxpayers are protected from reassessment proceedings if they have disclosed all primary facts and the reassessment is based on a change of opinion.
• Taxpayers are not required to provide every possible detail, but rather the fundamental information necessary for assessment.
• It emphasizes the need for the Income Tax Department to conduct thorough assessments in the first instance and not to rely on reassessment as a means to rectify errors or change their views.

Future Impact:

• This judgment will serve as a guiding precedent for cases involving reassessment under Section 147 of the Income Tax Act.
• It will likely lead to a more cautious approach by tax officers when considering reassessment, ensuring that there is a valid basis for reopening assessments.
• Taxpayers will have more confidence in the finality of assessments completed under Section 143(3), reducing the uncertainty and potential for prolonged litigation.
• It will bring more clarity on the scope of Section 147 of the Income Tax Act and the circumstances under which reassessment can be initiated.

Conclusion

The Supreme Court’s decision in the case of M/s Mangalam Publications vs. Commissioner of Income Tax is a significant ruling that reinforces the importance of finality in tax assessments. The Court has clearly stated that a reassessment cannot be based on a mere change of opinion by the assessing officer. This judgment provides much-needed clarity on the scope of Section 147 of the Income Tax Act and protects taxpayers from arbitrary reassessment proceedings. It emphasizes the need for the Income Tax Department to conduct thorough assessments in the first instance and not to rely on reassessment as a means to rectify errors or change their views.

In summary, the Supreme Court set aside the reassessment orders in this case, holding that the reassessment was based on a change of opinion and not on any new material or evidence. The Court restored the order of the Income Tax Appellate Tribunal, providing relief to the assessee and reinforcing the legal principle that a tax assessment cannot be reopened simply because the assessing officer now holds a different view.