Can the Tax Department Reopen Old Returns?

The two sides in this case were the tax department and a company. On one side stood the Commissioner of Income Tax, Delhi. On the other stood Kelvinator of India Limited. The reported judgment does not name the assessment years, the rupee amounts or the specific reopening notice. What it does record is the legal fight that made the case matter.

The tax department was the party that went to the Supreme Court. It appealed against two Delhi High Court orders. One was dated 19 April 2002, in I.T.C. No. 4 of 2000. The other was dated 15 May 2002, in I.T.A. No. 81 of 2000. Those appeals became Civil Appeal Nos. 2009–2011 of 2003, heard along with C.A. No. 2520 of 2008.

The Department's position, as the Court records it, was that the concept of "change of opinion" had been removed from the law after the 1989 amendment to Section 147.

The judgment is blunt about what that argument would produce. If the concept of change of opinion were removed, the Court said, "in the garb of re-opening the assessment, review would take place".

The Department lost. The Court dismissed its appeals and made no order as to costs. For any taxpayer holding a completed assessment, that result is the real story.

The Court began by setting out how Section 147 changed over time. Before the Direct Tax Laws (Amendment) Act, 1987, the section set out two conditions for reopening. The first was tied to the taxpayer's omission or failure to file a return or to disclose fully and truly all material facts. The second was tied to information in the Income-tax Officer's possession giving reason to believe that income had escaped assessment. The Court noted that fulfilment of those conditions alone conferred jurisdiction on the officer to make a back assessment.

The 1987 amendment deleted the words "reason to believe" and let the officer act if, for reasons recorded in writing, he was "of the opinion" that income had escaped assessment. Companies objected. Parliament then went back. The 1989 Amending Act restored "reason to believe" and dropped the word "opinion". As Section 147 stands with effect from 1 April 1989, the two earlier conditions are given a go-by. Only one remains: that the Assessing Officer has reason to believe that income has escaped assessment.

Circular No. 549 dated 31st October 1989 explained why Parliament restored the words. Representations had pointed out that dropping "reason to believe" would give the Assessing Officer arbitrary powers to reopen past assessments on mere change of opinion. The question before the Court was whether, after 1 April 1989, the concept of "change of opinion" stands obliterated. The Department said yes. The Court's reasoning went the other way.

Justice S.H. Kapadia wrote the judgment for the Bench. He began with the effect of the amendment. Since only one condition now remains, the power to reopen after 1 April 1989 is much wider. But the words "reason to believe" need a schematic interpretation. Otherwise Section 147 would give the Assessing Officer arbitrary powers to reopen assessments on the basis of "mere change of opinion", which the Court said cannot be per se reason to re-open. The Court also kept in mind the conceptual difference between the power to review and the power to re-assess. The Assessing Officer has no power to review, only the power to re-assess.

The Court then fixed the test. After 1 April 1989 the officer may reopen, provided there is "tangible material" to conclude that income has escaped assessment. On how the safeguard works, the Court said:

The Court added that "Reasons must have a live link with the formation of the belief." It closed two loopholes with that holding:

• Reopening is not a second look at the same file. Reassessment has to rest on a pre-condition, not on the officer's changed mind. Otherwise a review would take place in the garb of reopening.
• "Change of opinion" stays as a safeguard. The Court treated the concept as an in-built test to check abuse of power by the Assessing Officer. The power to reopen depends on tangible material, and the reasons must have a live link with the belief.

The Court's reasoning gives a clear way to sort situations. The table applies it to five common ones.

The judgment decides a legal test. It does not lay down a procedure, and this section stays within it.

• Documents to gather first: the completed assessment order for the year in question, the return and records behind it, and the notice reopening the year along with any reasons the officer gives. These show what the officer already examined and what he now relies on.
• The question to ask of those papers: what is the tangible material, and does it have a live link to the belief that income escaped assessment? If the papers show only a different view of the same facts, that is the situation the Court held insufficient.
• Forum and deadlines: the judgment names no appeal forum and states no filing deadline, so none is given here. This dispute itself travelled through the Delhi High Court (I.T.C. and I.T.A. proceedings) to the Supreme Court.