Goods and Services Tax refers to a tax on the supply of goods, services, or both, as defined under Article 366(12A) of the Constitution of India. This tax does not include taxes on the supply of alcoholic liquor for human consumption. Additionally, GST is not currently levied on petroleum products.
GST is classified as an indirect tax and applies to the supply of goods and services unless they fall under the category of exempted goods or services. A notable feature of the constitutional definition is the use of the term ‘supply’ rather than ‘sale’, thereby including stock transfers and branch transfers within the scope of GST.
GST is a destination-based tax, which means it is payable in the state where goods and services are finally consumed. Unlike origin-based taxes, the tax revenue under GST goes to the state of consumption. It has subsumed most earlier indirect taxes, streamlining the indirect tax regime in India.
Although alcohol for human consumption and petroleum products are excluded from GST, states retain the power to levy taxes on these items. Every person or taxpayer whose aggregate turnover exceeds the prescribed limit in a financial year and who is engaged in the taxable supply of goods or services must register in the state or union territory where the supply takes place.
GST is charged at prescribed rates by a registered person or taxpayer until the goods or services reach their final consumer. Once the goods or services reach the final consumer, there are no further taxable supplies.
Deficiencies in the Previous Indirect Tax Regime
The pre-GST structure of indirect taxes was riddled with multiple inefficiencies that hindered trade and business operations. One significant drawback was the imposition of Central Sales Tax on every interstate movement of goods. Even stock and branch transfers amzxz rvdgroh dstax, but the credit for such taxes was not fully available, resulting in a cascading effect of taxation.
The term ‘cascading effect’ refers to the phenomenon of tax on tax, which increases the cost of goods and services and complicates the tax structure.
Check posts across states led to the loss of significant man-hours and truck-hours, disrupting the smooth transportation of goods. Additionally, the central government lacked the power to tax goods beyond the manufacturing level. Though Central Sales Tax was collected by the Centre, it was retained by the states, leading to administrative complications.
Objectives and Benefits of GST Implementation
The Goods and Services Tax was introduced to overhaul the indirect tax system in India. One of the core objectives of GST is to establish uniform tax rates throughout the country, thus promoting a unified economic market. Prior to GST, states levied different rates of Sales Tax or VAT, causing price variations for the same goods across different regions.
GST eliminates the cascading effect of taxes by levying tax only on the net value addition at each stage of supply. This is achieved through the mechanism of input tax credit. Under GST, the final burden of tax is borne by the consumer, as the input tax credit allows businesses to offset the tax paid on inputs against their output tax liability.
The taxation process has been simplified under GST. Several indirect taxes that were previously levied by the central and state governments have now been consolidated into a single tax. These include Central Excise Duty, Service Tax, State VAT, Central Sales Tax, Additional Customs Duties, Entry Tax, Entertainment Tax, Luxury Tax, and Tax on Lotteries.
By merging various taxes into one, GST has reduced the burden on taxpayers and improved compliance. Businesses benefit from simplified returns, reduced paperwork, and fewer compliance requirements. This ease of doing business has made GST more efficient for enterprises.
The government also benefits from more effective tax administration. Instead of managing multiple tax lines, the administration now handles a single indirect tax. This enhances transparency and reduces the scope for tax evasion.
The introduction of GST is expected to increase foreign direct investment. A consistent and simplified tax structure creates a conducive environment for investors. The online nature of GST compliance, including return filing, registration, and payment, supports a corruption-free and user-friendly tax administration.
Small businesses benefit from the Composition Scheme under GST, which allows them to pay tax at a fixed rate on turnover with minimal compliance. This scheme is available to small taxpayers whose turnover does not exceed the specified limit and who engage only in intra-state supplies.
Logistics efficiency has also improved post-GST due to the removal of entry taxes and checkpoints. This has boosted productivity and reduced transportation time.
Another advantage is the creation of a common national market. GST has contributed to an increased tax-to-GDP ratio and long-term economic growth by eliminating tax disparities among states. It has also brought several unregulated sectors, such as textiles and construction, under the formal tax regime.
Characteristics of Goods and Services Tax
GST is characterized as a comprehensive indirect tax that subsumes multiple state and central levies under one umbrella. It replaces 17 different indirect taxes that existed before its implementation, unifying the tax regime and streamlining the taxation process.
Being a destination-based tax, GST is collected by the state in which goods or services are consumed. This aspect aligns GST with international standards of taxation and ensures revenue accrues to the state of final consumption rather than the state of origin.
The principle of One Nation, One Tax, One Market is embedded in the GST framework. Tax rates under GST are consistent across the country, eliminating disparities and fostering a unified domestic market. Earlier, different VAT or Sales Tax rates were prevalent across states.
GST applies to the supply of goods and services, a broader concept than the previous tax regime, which taxed manufacturing or sale. This includes transfers and stock movements that were previously non-taxable under the Sales Tax laws. Thus, even non-sale transactions like branch transfers fall within the ambit of GST.
One of the essential features of GST is the input tax credit mechanism. Tax is levied only on the value addition at each stage of the supply chain. Businesses can claim credit for the tax paid on inputs, thereby eliminating the cascading effect. This ensures that the final tax burden is limited to the value added and not on the total value of goods or services.
GST can only be collected by a registered person or taxpayer. Registration is mandatory for individuals or entities engaged in taxable supplies above the prescribed threshold. The term ‘person’ includes individuals, Hindu Undivided Families, companies, firms, LLPs, associations of persons, government bodies, corporations, cooperative societies, local authorities, and trusts.
The GST collected on outward supplies is payable to the government after adjusting the credit of input tax paid on inward supplies. If the input tax credit is more than the output tax liability, the balance is refundable by the government, subject to conditions.
GST operates under a multi-rate structure. The tax rates applicable to goods are 5 percent, 12 percent, 18 percent, 28 percent, and 3 percent, while services are taxed at 5 percent, 12 percent, 18 percent, and 28 percent. This system accommodates the classification of essential, standard, and luxury goods and services under different slabs.
Types of GST and Their Applicability
GST comprises four major types depending on the nature and location of the supply. These include Central GST (CGST), State GST (SGST), Union Territory GST (UTGST), and Integrated GST (IGST).
CGST is levied by the central government on intra-state supplies, meaning supplies within the same state. SGST is levied by the respective state government in such transactions. For example, if goods are supplied from Pune to Mumbai, CGST and SGST are both applicable.
UTGST applies in union territories that do not have a legislature, such as Chandigarh, Lakshadweep, and Andaman and Nicobar Islands. In such cases, UTGST is levied along with CGST on intra-union territory supplies.
IGST applies to inter-state supplies, including supplies between states and union territories or between union territories. IGST is also applicable to imports. This tax is levied and collected by the central government and later apportioned between the centre and the destination state as per the recommendation of the GST Council.
Under the dual GST model, intra-state supplies attract both CGST and SGST or UTGST, whereas inter-state supplies are subject to IGST alone. This dual model ensures that both the central and state governments derive revenue from intra-state transactions.
Special Provisions Related to Specific Goods
Certain goods are outside the purview of GST due to constitutional and legal provisions. Alcoholic liquor for human consumption is entirely excluded from GST, and states continue to levy excise duty and VAT on its manufacture and sale.
Tobacco and tobacco products, while covered under GST, also attract central excise duty. These products are generally taxed at the highest GST rate of 28 percent, along with an additional cess imposed to discourage their consumption.
Petroleum products, including crude oil, diesel, petrol, natural gas, and aviation turbine fuel, are currently excluded from GST. These products continue to attract excise duty and VAT. However, the GST Council holds the authority to include these products within the GST framework in the future.
Other fuel types not specifically excluded are already covered under GST. It is important to note that customs duties on imports, stamp duties, and motor vehicle taxes are unaffected by GST implementation and continue to be levied separately.
Validity of Reassessment – Information from Investigation Wing
The issue often arises whether information received from the Investigation Wing can form a valid basis for reopening the assessment. The courts have consistently held that such information can be used, provided the Assessing Officer applies an independent mind and arrives at a belief that income has escaped assessment. In Principal CIT v. Meenakshi Overseas (P) Ltd., the Delhi High Court ruled that reopening based solely on the report of the Investigation Wing without independent application of mind by the Assessing Officer is invalid. In Signature Hotels (P) Ltd. v. ITO, it was held that a reopening based on a vague and non-specific report is not sustainable.
Reopening Based on Third-Party Statement
Many cases address the issue of reopening assessment based on a statement made by a third party during a search or survey. In CIT v. Lovely Exports (P) Ltd., the Supreme Court held that if the names of share applicants are furnished, it is for the department to proceed against them, not against the assessee. In ITO v. Lakhmani Mewal Das, it was established that there must be a live nexus between the material and the belief formed. The mere fact that the person who gave a statement was connected to the assessee is not enough.
Reassessment in Case of Share Capital and Premium
A common reason for reopening assessments is the claim that the share capital or share premium received by the assessee is bogus. In PCIT v. NRA Iron & Steel (P) Ltd., the Supreme Court observed that where the assessee fails to provide a satisfactory explanation for the share applicants and the genuineness of the transaction, the revenue authorities are justified in treating such receipts as unexplained income. However, in PCIT v. Rakam Money Matters (P) Ltd., it was ruled that if during scrutiny assessment all necessary details were furnished and no adverse material was found, reassessment is not valid without fresh tangible material.
Use of Audit Objection as Reason for Reopening
The law is settled that an audit objection alone, without independent belief of the Assessing Officer, cannot justify the reopening of the assessment. In Indian and Eastern Newspaper Society v. CIT, the Supreme Court ruled that the opinion of an audit party on a point of law cannot be the basis for reopening. In CIT v. Lucas TVS Ltd., the Madras High Court emphasized that reassessment cannot be initiated merely because the audit objected. The Assessing Officer must apply an independent mind and not act on a mere audit objection.
Change of Opinion
A reassessment cannot be based on a mere change of opinion on the same facts examined earlier. In CIT v. Kelvinator of India Ltd., the Supreme Court laid down that there must be tangible material to justify reopening, and a mere change of opinion is not sufficient. This principle has been followed consistently, such as in Techspan India (P) Ltd. v. ITO, where it was reiterated that a review under the guise of reassessment is not permitted. In cases where the original assessment order discusses the very issue again sought to be reassessed, the courts have struck down such reopening.
Non-Disclosure of Material Facts
Section 147 permits reassessment even after four years only if there is failure on the part of the assessee to disclose fully and truly all material facts. In Hindustan Lever Ltd. v. R.B. Wadkar, the Bombay High Court stated that reasons must specify what material was not disclosed. In Wel Intertrade (P) Ltd. v. ITO, it was held that a reassessment cannot be initiated after four years unless it is clearly shown that there was a failure to disclose material facts. It is not enough for the Assessing Officer to claim that material was misinterpreted or that he formed a new view.
Reassessment Based on Supreme Court or High Court Judgments
Reassessment can be initiated based on a subsequent interpretation of law by the Supreme Court or a jurisdictional High Court. In Honda Siel Power Products Ltd. v. DCIT, the Supreme Court accepted that a subsequent ruling which alters the legal position could constitute a valid reason for reopening. However, this does not mean that all completed assessments can be reopened. If the interpretation applies retrospectively and materially affects the earlier determination, then reassessment may be justified. But this must still comply with the time limits and procedural safeguards.
Mere Disclosure of Material Facts Is Not Enough
In Raymond Woollen Mills Ltd. v. ITO, the Supreme Court emphasized that at the stage of issuing notice under Section 148, only the existence of a reason to believe that income has escaped assessment is required. Detailed verification or conclusive evidence is not required. However, where all material facts were disclosed during the original assessment and the Assessing Officer formed a view after due application of mind, then reassessment cannot be undertaken merely because a different view is possible, as clarified in CIT v. Usha International Ltd.
Recording of Reasons and Supply to Assessee
The Assessing Officer must record reasons before issuing a notice under Section 148. In GKN Driveshafts (India) Ltd. v. ITO, the Supreme Court ruled that upon request, the reasons must be furnished to the assessee. Failure to supply reasons renders the reassessment void. In CIT v. Videsh Sanchar Nigam Ltd., the Bombay High Court held that the non-supply of reasons denies the assessee an opportunity to object, which is a serious procedural defect. Courts have also ruled that reasons recorded cannot be supplemented or altered later by affidavit or oral explanation.
Reason to Believe vs. Reason to Suspect
The distinction between reason to believe and reason to suspect is critical. The Assessing Officer must have tangible material to form a reason to believe that income has escaped assessment. In ITO v. Lakhmani Mewal Das, the Supreme Court held that belief must be based on a direct nexus with the material. A suspicion, however strong, cannot justify reopening. Similarly, in Sheo Nath Singh v. AAC, the Supreme Court observed that belief must be honest and in good faith, not mere pretence.
No Reopening on Fishing or Roving Inquiry
Reassessment cannot be resorted to for conducting a fishing or roving inquiry. In CIT v. Atul Jain, the Delhi High Court held that reopening on vague allegations and without any specific material is invalid. In Orient Craft Ltd. v. CIT, it was observed that the Assessing Officer must indicate the basis of his belief and not merely assert that income has escaped assessment. In the absence of specific material linking the assessee to the alleged escapement, notice under Section 148 cannot be sustained.
Reopening Based on Search and Seizure
In cases of search and seizure, Section 153A is applicable. Reassessment under Section 147 cannot be initiated for the period covered under Section 153A unless the search is not relevant to the year under consideration. In CIT v. Kabul Chawla, the Delhi High Court held that no addition can be made under Section 153A in the absence of incriminating material found during the search. Similarly, reassessment under Section 147 without incriminating material from the search cannot be justified.
Second Reassessment on the Same Issue
A second reassessment on the same issue is generally not permissible unless there is fresh material. In Telco Dadajee Dhackjee Ltd. v. DCIT, the Bombay High Court held that once an issue has been considered in reassessment, it cannot be reopened unless there is a new basis. Courts have taken the view that repeated reopening on the same issue indicates abuse of power and causes undue harassment to the assessee. The law requires finality in assessment proceedings unless truly justified by fresh material.
Role of Sanctioning Authority
Section 151 provides for the sanction of specified authorities before issuing a notice under Section 148. The courts have stressed that such a sanction must be granted after a proper application of mind. In United Electrical Co. (P) Ltd. v. CIT, the Delhi High Court held that mechanical approval without examining the reasons is invalid. The order must reflect the conscious satisfaction of the superior officer. Absence of such satisfaction renders the notice under Section 148 void.
Effect of Retrospective Amendments
There have been instances where reassessment is based on retrospective amendment of law. Courts have held that while retrospective amendment may change the tax position, reopening on that basis must still comply with the procedure under Section 147. In BASF Ltd. v. DCIT, it was ruled that retrospective legislation cannot by itself constitute a reason to believe unless there is a failure to disclose material facts. Even then, such reopening must be within time and supported by relevant material.
Reassessment of Loss Returns
When a loss return is filed, and no assessment is made under Section 143(3), reassessment can still be initiated if there is a belief that loss has been underreported or fictitiously enhanced. In ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd., the Supreme Court clarified that an intimation under Section 143(1) is not an assessment and hence does not preclude reopening. However, where assessment has been completed under Section 143(3), reassessment requires tangible material to indicate escapement of income.
Doctrine of Merger
If an issue has been decided in appeal, reassessment on the same issue is not permissible due to the doctrine of merger. In CIT v. P.K. Narayanan, it was held that the appellate order supersedes the assessment order on those issues. Reopening is not allowed on issues already considered and decided by appellate authorities unless there is fresh material. This ensures consistency and avoids reopening settled matters without a valid reason.
Dual GST Model in India
India has adopted a dual GST model, meaning both the Central and State Governments levy tax on the same transaction. It is structured to ensure that the tax burden is shared between the Centre and the States. The Centre levies Central GST (CGST), and the States levy State GST (SGST) on intra-state transactions of goods and services. For inter-state transactions, the Centre levies Integrated GST (IGST), which is then apportioned between the Centre and the concerned State where goods or services are consumed. This model is implemented to avoid the cascading effect of taxes and to ensure that the tax burden is distributed fairly.
CGST, SGST, and IGST Explained
CGST is the tax collected by the Central Government on an intra-state supply of goods and services. SGST is collected by the respective State Government on the same intra-state supply. The revenue collected under CGST goes to the Centre, while SGST revenue goes to the respective State Government. In the case of inter-state supplies or imports, IGST is levied by the Central Government. The IGST rate is roughly equal to the sum of CGST and SGST. The revenue from IGST is shared between the Centre and the State where the goods or services are ultimately consumed. This mechanism ensures that tax revenue follows the destination principle, meaning taxes are paid where the goods or services are consumed rather than where they are produced.
Applicability of GST
GST applies to all goods and services except alcohol for human consumption. Petroleum products like crude oil, diesel, petrol, aviation turbine fuel, and natural gas are currently outside the purview of GST and continue to be taxed as per the existing laws. GST applies to all businesses, traders, manufacturers, and service providers. The threshold limits for registration under GST vary depending on the state and the type of supply. For example, the threshold limit for GST registration for goods suppliers is Rs. 40 lakhs in most states, while for service providers, it is Rs. 20 lakhs. However, these limits are lower in certain special category states.
Composition Scheme under GST
To ease the compliance burden on small taxpayers, the Composition Scheme under GST was introduced. Under this scheme, small taxpayers can pay tax at a fixed rate of turnover and are relieved from detailed compliance procedures. The scheme is available for taxpayers whose turnover is up to Rs. 1.5 crore in most states. For special category states, the limit is Rs. 75 lakh. Under this scheme, manufacturers pay tax at 1 percent, traders at 1 percent, and restaurants at 5 percent of their turnover. However, businesses under the composition scheme cannot claim input tax credit and cannot issue tax invoices to their customers.
Input Tax Credit Mechanism
A significant feature of GST is the seamless flow of input tax credit (ITC) across the supply chain. ITC means that the tax paid on purchases can be set off against the tax payable on sales. This mechanism eliminates the cascading effect of taxes, thereby reducing the overall tax burden on consumers. A registered person is eligible to claim ITC on the tax paid on goods or services used in the course or furtherance of business. However, there are specific conditions for availing of ITC. The recipient must possess a tax invoice, must have received the goods or services, the tax charged must have been paid to the Government, and the recipient must have filed a return. There are also certain restrictions and blocked credits under GST, such as for motor vehicles, personal consumption, and goods given as free samples.
GST Return Filing and Compliance
Under the GST regime, registered taxpayers are required to file various returns periodically. These returns include details of outward supplies, inward supplies, input tax credit claimed, and tax paid. The main returns under GST are GSTR-1 for outward supplies, GSTR-3B for summary return and tax payment, and GSTR-9 for annual return. Composition taxpayers file GSTR-4 quarterly. The returns are filed online through the GST portal. The system of return filing under GST is designed to ensure transparency, proper matching of invoices, and curb tax evasion. Delays or defaults in filing returns attract penalties and late fees. Hence, timely compliance is crucial for businesses to maintain their GST registration and avoid legal consequences.
GST and E-Way Bill System
The e-way bill is an electronic document generated on the GST portal for the movement of goods worth more than Rs. 50,000. It is a key compliance mechanism to monitor the movement of goods and prevent tax evasion. The e-way bill contains details of the consignor, consignee, goods being transported, and transporter details. It is mandatory for both inter-state and intra-state movement of goods. The e-way bill system is integrated with the GST network and facilitates faster movement of goods with minimal disruption at check posts. The system enables real-time tracking and verification of goods in transit, thus enhancing the efficiency of the supply chain.
Anti-Profiteering Measures Under GST
To ensure that the benefits of reduced tax rates and input tax credits are passed on to consumers, anti-profiteering provisions have been incorporated in the GST law. The National Anti-Profiteering Authority (NAA) has been set up to examine whether the reduction in tax rates or the benefit of ITC has been passed on to consumers by way of a commensurate reduction in prices. If found guilty, businesses can be ordered to reduce prices, return the overcharged amount to consumers, pay penalties, or even have their registration cancelled. This measure aims to protect consumer interests and uphold the fairness of the tax system.
GST Audit and Assessment
Audit under GST refers to the examination of records, returns, and other documents maintained by a registered person to verify the correctness of turnover declared, taxes paid, ITC claimed, and compliance with the provisions of GST law. The audit may be conducted by the taxpayer voluntarily or by the tax authorities. In cases where turnover exceeds a prescribed limit, an audit by a chartered accountant or cost accountant is mandatory. Assessment under GST is the determination of tax liability by the tax authorities. It includes self-assessment by the taxpayer, provisional assessment, scrutiny assessment, best judgment assessment, and summary assessment. Each type of assessment has its procedures and implications, designed to ensure that correct taxes are paid and compliance is maintained.
GST Council and its Role
The GST Council is the apex decision-making body for GST-related issues. It is constituted under Article 279A of the Constitution and comprises the Union Finance Minister (as Chairperson), the Union Minister of State for Finance, and the Finance Ministers of all the States. The Council makes recommendations on key issues such as tax rates, exemptions, threshold limits, and dispute resolution. It meets regularly to review the implementation of GST and make necessary amendments to the law. Decisions in the Council are taken by a three-fourths majority, ensuring representation from both the Centre and the States. The role of the GST Council is pivotal in maintaining cooperative federalism and achieving uniformity in tax policies across the country.
Challenges in GST Implementation
Despite its potential benefits, the implementation of GST has faced several challenges. One major issue has been the technical glitches in the GST portal, affecting return filing and invoice matching. The frequent changes in rules and procedures have led to confusion among taxpayers. Small businesses have found it difficult to comply with the complexities of GST, especially in terms of filing multiple returns and maintaining digital records. The delay in refund processing, especially for exporters, has impacted liquidity. Also, the classification of goods and services, determination of tax rates, and treatment of certain transactions under GST have given rise to disputes and litigation. Continuous efforts are needed to simplify the law, enhance the IT infrastructure, and provide robust support to taxpayers.
Impact of GST on Different Sectors
The impact of GST varies across different sectors of the economy. The manufacturing sector has benefited from the elimination of cascading taxes and easier interstate movement of goods. The logistics sector has seen reduced transit time and cost due to the removal of check posts. The services sector, which was earlier taxed only by the Centre, now faces compliance requirements from both the Centre and the States. The real estate sector has seen changes in tax liability with the introduction of GST on under-construction properties. The MSME sector has mixed experiences—while the Composition Scheme offers relief, the burden of compliance has increased for others. Overall, GST has brought significant structural changes but requires continued refinement for maximum benefit.
Presumption under Explanation 2 to Section 147
Explanation 2 to Section 147 provides deeming provisions that expand the scope of “income chargeable to tax has escaped assessment.” The Explanation outlines specific instances where the Assessing Officer can presume escapement of income, including where no return has been filed, where income has been understated, or where excessive loss, deduction, or allowance has been claimed. Courts have held that these deeming provisions operate automatically and independently of the main provision under Section 147. For example, if a return is not filed and the income exceeds the basic exemption limit, it is deemed that the income has escaped assessment. In Convergys India Services (P.) Ltd. v. ITO, the Delhi High Court ruled that the conditions under Explanation 2 provide a legal fiction that empowers the Assessing Officer to act, even without direct evidence of escapement, as long as the specific condition under the Explanation is satisfied. However, judicial interpretation has also cautioned that these presumptions do not override the requirement of “reason to believe.” That is, even in deemed cases, there must be some material basis for the belief formed by the Assessing Officer, and a mechanical application of the Explanation cannot justify reopening.
Reopening Beyond Four Years
The law provides for different time limits within which reassessment under Section 147 may be initiated. If four years have not lapsed from the end of the relevant assessment year, reassessment can be initiated if the Assessing Officer has “reason to believe” that income has escaped assessment. However, if more than four years have elapsed, an additional condition must be satisfied—that the escapement occurred due to the assessee’s failure to disclose fully and truly all material facts necessary for the assessment. This dual condition makes reopening beyond four years more stringent. In Hindustan Lever Ltd. v. R.B. Wadkar, the Bombay High Court clarified that the failure to disclose must be of material facts and not merely of inference, deduction, or interpretation. Therefore, even if the assessment was concluded under Section 143(1) or 143(3), unless there is a deliberate or inadvertent omission of factual information, reopening beyond four years cannot be sustained. Similarly, in CIT v. Foramer France, the Supreme Court ruled that if all material facts were disclosed and the Assessing Officer made a conscious decision, then even if that decision is erroneous, reassessment beyond four years is not permissible. Therefore, the judiciary has strictly construed this provision to protect finality and certainty in tax assessments.
Reopening After Intimation under Section 143(1)
The issuance of an intimation under Section 143(1) does not preclude reassessment under Section 147. However, courts have differentiated between reassessment after a scrutiny assessment under Section 143(3) and reassessment after an intimation under Section 143(1). Since no opinion is formed under 143(1), the principle of “change of opinion” does not apply. In ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd., the Supreme Court affirmed that when intimation under 143(1) is issued and later reassessment is done under Section 147, the Assessing Officer is not constrained by the doctrine of change of opinion. However, the reassessment still requires a reason to believe based on tangible material. The absence of scrutiny does not give carte blanche authority to the department to reopen merely based on suspicion. The belief must be based on information that suggests escapement, not conjecture or hypothesis.
Reassessment vs. Review: Scope of Judicial Review
Reassessment proceedings under Section 147 are quasi-judicial and subject to judicial scrutiny. Courts do not act as appellate authorities to evaluate the sufficiency of the material forming the basis of the belief. However, they are competent to examine whether the belief was based on any material or was merely a pretence. In Phool Chand Bajrang Lal v. ITO, the Supreme Court held that courts can interfere if the reasons recorded are vague or are based on no material or irrelevant material. The court’s role is limited to examining the existence of reasons and whether the belief is bona fide and not arbitrary. It is not within the court’s scope to judge the adequacy or correctness of those reasons. Thus, judicial review under Article 226 remains confined to procedural and jurisdictional aspects. Courts have intervened where reassessment was initiated on borrowed satisfaction, mechanical recording of reasons, or complete absence of new tangible material. This ensures a check against misuse of power by tax authorities while respecting the legislative intent of reining in tax evasion.
Reopening Based on Supreme Court or High Court Decisions
Assessments can be reopened under Section 147 if there is a subsequent decision of the jurisdictional High Court or the Supreme Court interpreting a provision differently from what was previously believed. In such cases, the interpretation becomes part of the law as it always stood, thus validating reassessment. In Kalyanji Mavji & Co. v. CIT, the Supreme Court held that a subsequent legal decision that exposes an error in the original assessment can constitute a reason to believe. However, this cannot be invoked to revisit a settled position where there was no failure to disclose material facts. In ITO v. Lakhmani Mewal Das, the Supreme Court warned against reassessment on flimsy grounds using later legal interpretations unless linked to facts that were not previously disclosed. Therefore, while decisions of higher courts can trigger reassessment, the precondition of reason to believe must still be grounded in the specific facts of the case and cannot be exercised indiscriminately.
Protective Assessment and Reassessment
Protective assessments are made to safeguard the interests of the revenue when the income is uncertain as to whoit pertains to. However, such assessments are distinct from reassessments under Section 147. A protective assessment can be made during original assessment proceedings, but reassessment under Section 147 cannot be undertaken on a protective basis. This is because Section 147 requires a definite reason to believe that income has escaped assessment in the hands of a specific assessee. Courts have clarified in CIT v. Smt. Saraswati Devi that reassessment cannot be made on protective grounds since it requires positive evidence that escapement occurred in the hands of the person being reassessed. Thus, protective reassessment is impermissible, and revenue must be specific in initiating reassessment proceedings.
Reassessment in the Case of Search and Seizure
Section 153A governs assessments after a search is conducted. However, the relationship between Sections 147 and 153A has been subject to litigation. Courts have ruled that once a search is conducted and the provisions of Section 153A are triggered, then the Assessing Officer must proceed under Section 153A and not under Section 147. In CIT v. Anil Kumar Bhatia, the Delhi High Court held that Section 153A is a special provision overriding Section 147. Hence, during the pendency of proceedings under Section 153A, reopening under Section 147 is not permissible. However, in cases where the search did not cover the assessee or certain years were not covered under Section 153A, then Section 147 may still apply. Therefore, applicability depends on the scope of the search and the assessment years covered. The legislative scheme is such that Section 153A overrides reassessment when a search is conducted, but Section 147 retains its relevance for other cases.
Use of Information from the Investigation Wing or Audit Objections
Information received from the Investigation Wing, audit parties, or other sources can be a valid basis for forming a reason to believe. However, the Assessing Officer must apply independent judgment and cannot reopen the case merely based on recommendations or suspicions of others. In Pr. CIT v. G & G Pharma India Ltd., the Delhi High Court quashed the reopening where the Assessing Officer mechanically relied on an Investigation Wing report without independent application of mind. Similarly, audit objections pointing out a possible error in assessment do not automatically justify reopening. In Indian and Eastern Newspaper Society v. CIT, the Supreme Court held that while factual audit objections may be valid information, an audit opinion on law is not. Therefore, while third-party information is permissible material, it must be critically analyzed and should form the basis of a genuine belief, not merely followed routinely.
Impact of Retrospective Amendments
Retrospective amendments to tax laws have often led to reassessment notices being issued to apply the amended provision. The courts have been divided on the permissibility of reassessment based solely on retrospective amendments. In general, retrospective amendments clarify the law as it always stood and can thus form the basis of reassessment. However, courts have cautioned that such reopening should still meet the threshold of “reason to believe” and not be used to overcome procedural bars. For example, if reassessment is sought after four years based on a retrospective amendment, the condition of failure to disclose material facts must still be satisfied. Retrospective law cannot override constitutional safeguards under Articles 14 and 19, nor can it validate reassessment in violation of procedural requirements. The principle is that while retrospective changes affect substantive law, reassessment must follow procedural legality and due process.
Conclusion
The jurisprudence on Sections 147 and 148 reveals a delicate balance between the revenue’s power to reopen assessments and the taxpayer’s right to certainty and finality. Courts have consistently emphasized that reassessment must not be a tool for review, nor should it be initiated mechanically or based on borrowed satisfaction. The principles of natural justice, fairness, and procedural compliance form the bedrock of valid reassessment. Each case must be assessed based on its facts, and while judicial precedents provide guidance, they also underscore the importance of statutory compliance. With the legal landscape evolving through both legislative amendments and judicial interpretation, the core message remains consistent: reassessment is a powerful tool, but one that must be exercised responsibly, fairly, and within the boundaries of the law.