The Principal Commissioner of Income Tax, Kochi-I v Cochin International Airport Ltd

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** # **THE HONOURABLE MR.JUSTICE S.V.BHATTI** **&** **THE HONOURABLE MR.JUSTICE BASANT BALAJI FRIDAY, THE 23[RD] DAY OF DECEMBER 2022 / 2ND POUSHA, 1944** ## **ITA NO. 10 OF 2017** **AGAINST THE ORDER IN ITA 463/COCH/2014 OF I.T.A.TRIBUNAL,COCHIN** **BENCH** ## **APPELLANT:** THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOCHI -I CENTRAL REVENUE BUILDING, I S PRESS ROAD, KOCHI-682018. BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX ## **RESPONDENT:** M/S.COCHIN INTERNATIONAL AIRPORT LTD 35, 4TH FLOOR, GCDA, COMMERCIAL COMPLEX, MARINE DRIVE, KOCHI 682031. BY ADVS. ABRAHAM JOSEPH MARKOS JOSEPH MARKOSE (SR.)(J-383) ISAAC THOMAS(K/571/2014) P.G.CHANDAPILLAI ABRAHAM(MAH/002141/2016) ALEXANDER JOSEPH MARKOS(K/001270/2018) SHARAD JOSEPH KODANTHARA(K/001677/2018) THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 23.12.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA No.10/2017 -2- ## **JUDGMENT** ## S.V. Bhatti, J. The Principal Commissioner of Income Tax, Kochi-I,/ Revenue is the appellant. M/s. Cochin International Airport Ltd, Kochi/assessee is the respondent. 2. The appeal is filed under Section 260A of the Income Tax Act, 1961 (for short, ‘the Act’) and arises from the order dated 27.07.2016 in ITA No.463/Coch/2014 of the Income Tax Appellate Tribunal, Cochin Bench, (for short, ‘the Tribunal’). The issues in the appeal relate to the assessment year 2006-07. 3. On 29.11.2006, the assessee filed returns for the assessment year 2006-07. On 07.11.2007, the Deputy Commissioner of Income Tax, Circle-1(1), Range-1, Ernakulam/Assessing Officer, served notice under Section 143(2) on the assessee. On 30.12.2008, the Assessing Officer made an ITA No.10/2017 -3- assessment under Section 143(3) of the Act. The next stage from which the controversy arises was by issuing to the assessee a notice dated 28.03.2011 under Section 148 of the Act. By order dated 24.10.2011, the Assessing Officer completed the reassessment under Section 143(3), read with Section 147 of the Act. The Commissioner of Income Tax (Appeals)-II (for short, ‘the CIT (A)), by order dated 30.06.2014, allowed the assessee’s appeal, principally on the ground that the initiation of the reassessment under Section 147 of the Act does not comply with the requirement of Section 147. The Revenue filed an appeal before the Tribunal in ITA No.463/Coch/2014, and by the impugned order, the Revenue’s appeal stood dismissed. Hence, the second appeal at the instance of the Revenue. 4. The Revenue raises the following substantial questions of law: “1. Whether on the facts and in the circumstances of the case - i) Should not the Income Tax Tribunal have ITA No.10/2017 -4- considered the issue of re-assessment within four years unfettered by the findings of the CIT(Appeals)? - ii) Is not the order of the ITAT against the decision of the Supreme Court in 291 ITR 500 (Jhaveri's case)? - iii) Is there an aspect of compulsion at all on the Assessing Officer and is not such an approach only in the imagination of ITAT and wrong? 2. Whether, on the facts and in the circumstances of the case, is not the initiation and completion of re-assessment in accordance with law and with jurisdiction? 3. Whether, on the facts and in the circumstances of the case, are not the findings of the Tribunal read in the light of the grounds raised, irrelevant unwarranted, besides the issue and uncalled for?” 5. We have heard the learned Senior counsel Sri. P.K.R Menon and Sri. Joseph Markose for the parties. 6. Sri. P.K.R. Menon appearing for the Revenue first argues the second substantial question, understandably the steps taken by the Assessing Officer or the view possible in the nature of the controversy, the legality of reassessment under Section 147 read with Section 143(3) of the Act is a _sin qua non_ . The learned counsel contends that Section 147 deals with machinery for assessment or reassessment, as the case may be. ITA No.10/2017 -5- The construction of a machinery provision should be to effectuate a charging section and the courts/Tribunal in interpreting such a provision, the commendable rule, i.e. which makes the machinery workable applied. Stepping up the argument by a comparison between the expression used in Section 147, pre and post-amendment, the learned counsel argues that the analogy which was adopted for the expression used in Section 147, prior to 01.04.1989, ought not to be applied in appreciating whether initiation for reassessment is valid and legal by the bar now applied by the CIT(A) or the Tribunal. 6.1 According to him, admittedly, in the case on hand, the reassessment of assessment for the assessment year 2006-07 is necessitated by the communication of audit objections. The internal audit objections do construe and consist information. There is no necessity in law for the Assessing Officer to agree with all the objections or record disagreement on a few audit objections communicated to the Assessing Officer. The ITA No.10/2017 -6- requirement under Section 147 is that the Assessing Officer has ‘reason to believe’. Therefore, the approach by the CIT(A) suffers from serious fallacy and is liable to be set aside. It is forcefully argued that for the formation of the belief, the Assessing Officer has sufficient discretion. The internal audit objection is certainly valid or constitutes valuable information, which the Assessing Officer cannot ignore for proceeding to determine the income escaping assessment. Through judicial pronouncement or interpretation of Section 147, no attempt is made to exclude the audit objections from being considered by the Assessing Officer. The CIT (A) and the Tribunal have interfered with the order of the assessment dated 24.010.2011 on a completely erroneous view of the matter. Therefore, it is argued that substantial question no.2, namely, initiation and the completion of reassessment, is taken up and completed in accordance with the law. Subject to such view on substantial question no.2, being taken by this Court, the other questions ITA No.10/2017 -7- would arise for decision. He relies on the judgments reported in _CIT vs P.V.S Beedies Pvt. Ltd[1]_ , _United Mercantile Co. Ltd vs. CIT_[2] , . _Indian and Eastern News Paper Society vs. CIT, New Delhi_[3] 7. Sri. Joseph Markose, as a preface, states that the citations relied on by the Revenue are distinguishable in all fours. According to him, the circumstances of the case are unique in the sense that the Assessing Officer, without believing the information/internal audit objections, reason to believe that any income chargeable to tax has escaped assessment for the assessment year 2006-07 still initiated reassessment. The chronology demonstrates the incurable fallacy or illegality in the initiation of reassessment. In other words, in the absence of reason to believe for reassessment, the steps fail as being illegal. 7.1 The learned Senior counsel invites our attention to > 1 (1999) 237 ITR 13 (SC) 2 (1967) 64 ITR 218 (Ker.) 3 (1979) 19 ITR 996 (SC) ITA No.10/2017 -8- the letter dated 18.04.2011 addressed by the assessee to the Assessing Officer requesting for supplying of reasons believed for initiation of reassessment. On 26.05.2011, the Assessing Officer communicated the reasons for reassessing the income on the return filed for the year 2006-07. The assessee filed a reply on the merits of the matter without prejudice to the primary objection on challenging the initiation as not conforming to the requirement of Section 147 of the Act. The order of reassessment dated 24.10.20211 was made. The assessee filed an appeal before the CIT(A) and by order dated 30.06.2011, the CIT(A), on verification of the record by the Assessing Officer, categorically found that the initiation of the reassessment is without believing the reason/information received by the Assessing Officer. Therefore, in the absence of a challenge to the conclusions recorded by the CIT(A) or Tribunal, the legal arguments now raised on the nature of satisfaction under Section 147 as subjective and the subjective ITA No.10/2017 -9- satisfaction has been interfered with by the CIT(A) without there being any material is a contention not available in the circumstances of the case. In other words, the Revenue does not have a case that the noting by CIT(A) on the reason to believe is incorrect or contested. The consequence is that the grounds in law are academic. 7.2 To put in briefly, the counsel argues that Section 147 enables the Assessing Officer to assess or reassess such income or any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section or re-compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. According to him, the initiation in the case on hand is without believing reasons. Therefore, the CIT(A), after verifying the record of the Assessing Officer, held that the initiation under Section 147 is illegal. In the appeal before the Tribunal, the Revenue has not ITA No.10/2017 -10- raised ground on the basis for the Commissioner to conclude that the Assessing Officer did not believe the information but still initiated reassessment. In the said background, it is argued that the Tribunal rightly concurred with the view taken by the CIT(A), and no question of law under Section 260A of the Act is available. The Revenue does not assail that the Assessing Officer possesses the jurisdiction to initiate reassessment even without complying with the minimum requirement of Section 147 of the _ex_ Act. In the absence of a reason to believe, according to him, _post facto,_ the same cannot be cured, and the assessment order is liable to be set aside and correctly set aside by CIT(A) and the Tribunal **.** The case stands on the litmus test of whether the initiation is on the internal audit objections as reason to believe or the independent of such opinion the Assessing Officer issued notice under Section 147 of the Act. 7.3 The counsel, for the proposition that audit objections do not form information and that mere change of opinion is not ITA No.10/2017 -11- a ground for reopening, relied on judgments reported in _Commissioner of Income Tax v. Kelvinator of India Ltd and another[4] , Commissioner of Income Tax v. SFIL Stock Broking Ltd_[5] , and _Indian and Eastern Newspaper Society_ (supra) both to distinguish the proposition for which the Revenue is relying on, that in fact to support the case of the assessee. 8. We have taken note of the rival contentions, perused the record, and the precedents relied on both sides. Substantial question no.2 has rightly been understood and argued by the learned Sr. Counsel as the starting point. The correctness and otherwise of the starting point would take the matter for examination of other issues. Therefore, at this stage of our consideration, we excerpt the operative portion of Section 147: **147. Income escaping assessment** .- 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 and also any other income chargeable to tax which has escaped assessment and > 4 [2010] 320 ITR 561 (SC) 5 [2010] 325 ITR 285 (Delhi) ITA No.10/2017 -12- which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year): xxx xxx xxx With effect from 01.04.1989 Section 147 empowers the Assessing Officer as follows: _A) has reason to believe that any income chargeable to the tax has escaped assessment for any assessment year has been empowered._ _i) to assess or reassess,_ _ii) such income, and_ _iii) also, any other income chargeable to tax_ - _a) which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under Section 147._ _B) to recompute_ _i) the loss or_ _ii) the depreciation allowance or_ _iii) any other allowance, as the case may be, for the relevant assessment year._ 9. On juxtaposition and bare reading of the amended and ITA No.10/2017 -13- unamended Section 147, it would be clear that the scope of reassessment has been widened under the amended Section 147 of the Act. At present, the only requirement in Section 147 is ‘reason to believe’. Therefore, that reason has to be a reason a prudent person believes, and reason need not necessarily be due to the failure of the assessee to disclose fully or partially a few material facts relevant to the assessment. In spite of Section 147 widening the scope of assessment/power of the Assessing Officer still, the primary condition of the reasonable belief for initiation is one of the important requirements for assessment or reassessment, as the case may be. 10. The expression ‘reason to believe’ this Court is prepared to interpret and assume as one having subjective satisfaction. However, recording the said satisfaction is a substantial requisite for clutching at the jurisdiction under Section 147 of the Act. This threshold verification is essential to ensure a fine balance between protecting the interest of the ITA No.10/2017 -14- Revenue and preventing unwanted and unnecessary hardship to the assessee. The formation of belief by the Assessing Officer is necessary. The Section does not require or expect a conclusive finding on the proposed points on which reassessment is initiated. The reason for the above could be that the formation of such an opinion at that stage without hearing the assessee should not be expected from the Assessing Officer, for a step initiated with such a conclusive finding would prejudice the assessee's interest. The case on hand does not turn on the interpretation of Section 147. Section 147 is machinery provision. But the question is whether the setting in motion of a machinery provision complies with the requirement of Section 147. Therefore, much depends on the expression ‘reason to believe’. The expression ‘reason to believe’ explained in _IPCA laboratories Ltd. vs. Gajanand Meena, Deputy CIT & another[6]_ , is as follows: > 6 2001 215 ITR 420 (Bom.) ITA No.10/2017 -15- “Therefore, the present case is one of those cases which the legislature, by a deeming section, has said that such cases would constitute cases of income escaping assessment. This is demonstrated by the reasons given by the assessing officer. Hence, the aforestated judgments cited on behalf of the assessee do not apply to the facts of the present case. We may also mention that the expression "reason to believe" refers to the belief which prompts the assessing officer to apply Section 147 to a particular case : that it will depend on the facts of each case ; that the belief must be of an honest and reasonable person, based on reasonable grounds ; that the assessing officer is required to act, not on mere suspicion, but on direct or circumstantial evidence ; that the expression-reason to believe" does not mean a subjective satisfaction on the part of the assessing officer. In the present case, we are satisfied that the reasons for the belief have a rational connection with the formation of the belief. Hence, the validity of the impugned notice is sustained.” The judgments reported in _Vishnu Borewell v ITO[7] , Central India_ _Electric Supply Co. Ltd v. ITO[8] , and Principal CIT v. Shodiman Investments Pvt. Ltd_[9] are to the same effect. 11. By keeping in perspective, the above precedents in our view, we examine the reason to believe recorded or stated by the Assessing officer in the case on hand. Since it is an essential test for examination, once again, we refer to the very > 7 (2002) 257 ITR 512, 516- 17(Ori.) > 8 (2011) 333 ITR 237, > 9 (2020) 422 ITR 337. ITA No.10/2017 -16- circumstances which are noted in the preceding paragraphs. The case on hand deals with the assessment year 2006-07. On 30.12.2008 assessment order under Section 143(3) was made. On 28.03.2011, notice of reassessment was issued to the assessee. On 18.04.2011, the assessee requested the supply of reasons to believe by the Assessing Officer for initiating action under Section 147. On 26.05.2011, the communication was given, setting out the reason for reassessing the return filed by the assessee for the assessment year 2006-07. The crux of the controversy is that CIT(A) summoned the record and recorded the following finding: “In view of the forgoing, it was contended that the assessing officer has not sufficiently discussed the issues involving large amount of additions, nor required the assessee to produce any details, except calling for the assessee to furnish replies on the reasons of reopening as communicated, which itself were not clear or self explanatory. Also the assessing officer did not consider the explanations offered by the assessee in their letter dated 08.07.2011, and the assessment was made on an arbitrary basis, without affording reasonable opportunity for the assessee to be heard. 5.3 I have gone through the assessment order, reasons for reopening the case and submissions of the assessee in this regard. It is seen that the reopening has been done on the basis of Revenue audit objections on as many as 10 issues. It is ITA No.10/2017 -17- interesting to note from the assessment records that there were audit objections on as many as 10 issues and AO has not accepted all of these objections, but it is stated in the proposal for reopening the case under section 147 that the action is being taken as a matter of abundant caution. 5.3.1 It is felt that merely change of opinion in the mind of AO on interpretation of law based on audit objections, majority of which were even not acceptable to the AO, cannot be the basis for forming 'reason to believe' for reopening the assessment. If at all the case was being reopened, the AO should have reopened only on the points where it was felt that the audit objection is right and acceptable. Section 147 does not empower the Assessing Officer to review on the same set of facts in the assessment order, which had already been framed, merely by fresh application of mind based on the opinion of some other agency to its own decision or to the decision of predecessor.” (Emphasis added) 12. The Commissioner found fault with the reopening of the assessment on two grounds, viz., that the Assessing Officer did not believe the internal audit objection, but as abundant caution initiated the reassessment. Secondly, that mere change of opinion is not a ground to reopen an assessment under Section 143(3) of the Act. 13. We take note of the argument of Sri. P.K.R Menon that when the Assessing Officer initiated reassessment, it means and presupposes that the Assessing Officer would have ITA No.10/2017 -18- certainly believed though not all of the internal audit objections, but at least a few. The assessee’s argument is equally quick that the formation of reasonable belief is not operated in a fluid state of affairs, i.e. what is accepted as reason and what is not a reason believed while deciding to reopen. The Assessing Officer is certainly within his jurisdiction to accept such of the reasons furnished by the internal audit as necessitating initiation of assessment or reassessment. But the above narrative leaves the same question unanswered, whether the Assessing Officer did so. 14. The Tribunal, on the grounds raised by the Revenue, considered and recorded the following findings: “ 7. We have heard the rival submissions and perused the material on record. In the instant case, there are ten reasons to reopen the assessment and the same evident from the letter dated 26th May 2011 written by the AO to the assessee (Page 5 of the paper book filed by the assessee). The CIT(A), after perusal of the assessment records had categorically held that the ten reasons stated for reopening the assessment is based on the objections of the audit party and the AO did not accept the opinion of the audit party on all the ITA No.10/2017 -19- reasons mentioned for reopening the assessment, however, as an abundant caution, proceedings u/s 147 were initiated by the AO. This categorical findings of the CIT(A) has not been dispelled by the revenue before us. the ten reasons stated for reopening the assessment, we find that none of the reasons are pure factual errors/omissions where there is no dispute involved. An audit opinion in regard to application or interpretation of law cannot be treated as reason for reopening the assessment. The above said proposition of law is well settled by the judgment of the Hon'ble Apex Court in the case of Indian and Eastern Newspaper Society vs ITO reported in 119 ITR 996. 7.1 Further, the Hon'ble High Court of Gujarat in the case of Vijay Rameshbhai Gupta Vs ACIT(215 Taxmann 465), held that a re-opening of the assessment where the AO has acted only under compulsion of audit party and not independently, action of re-opening assessment in such case would be vitiated. Reliance is also placed on the judgment of the Hon'ble Gujarat High Court in the case of Jagat Jayantilal Parikh vs DCIT reported in 355 ITR 400. 7.2 The CIT(A) had categorically found that the AO has acted only on compulsion of audit party and not independently. This categorical finding of the CIT (A) has not been dispelled before us. Therefore, the CIT(A) has rightly quashed the reassessment. It is ordered accordingly.” 15. The jurisdiction of the Assessing Officer is to reopen /reassess or assess the income or income escaped to tax under Section 147 of the Act. So, Section 147 is a machinery provision. Section 147 embodies a limited pre-condition for ITA No.10/2017 -20- setting in motion the procedure stipulated in Section 147, i.e. . the Assessing Officer has reason to believe is the _sine qua non_ The input in our considered view in a given case received from the internal audit party can be treated as a reason, but that information the Assessing Office must believe as a reason to proceed for assessment or reassessment as the case may be. The section as it stands is wide in scope than the unamended Section 147. It is well settled that the exercise of power or jurisdiction is preceded by a condition precedent for compliance, then such condition precedent in the manner required by Section 147 is complied with. The steps initiated thereafter would be legal and valid. The converse of the said consideration is that the steps are initiated even without reason to believe the initiation of the assessment or reassessment, as in the case on hand, is undoubtedly illegal. 16. Having considered the facts and circumstances of the case and by appreciating each one of the steps preceding the ITA No.10/2017 -21- initiation, and consideration of those circumstances both by the CIT(A) and the Tribunal, we are convinced that the authorities had taken a view available in the circumstances of the case, and no exception could be taken. The arguments raised assailing such findings are untenable. For the above reasons, substantial question no.2 is answered in favour of the assessee and against the Revenue. 17. This Court is not granting a right or relieving the Assessing Officer of an obligation under Section 147 of the Act. But this Court, in the case on hand, merely confirms a view taken by the CIT(A) and Tribunal. In other words, the reason which weighed with these two authorities remains unchallenged. The consequence of such a position is that the findings recorded by the CIT(A) and the Tribunal are accepted as tenable and available. As already noted, the question nos. 1(i) to (iii) focused on the _ex post facto_ of the assessment or reassessment. The ITA No.10/2017 -22- case on hand fails at the threshold. Therefore, these questions need not be considered independently as are not available and answered accordingly. The appeal fails, dismissed. Sd/- **S.V.BHATTI JUDGE** Sd/- **BASANT BALAJI JUDGE** _JS_ ITA No.10/2017 -23- ## APPENDIX OF ITA 10/2017 PETITIONER ANNEXURES ANNEXURE A COPY OF ASSESSMENT ORDER U/S.143(3) DATED 30.12.2008 FOR THE A.Y.2006-07 ANNEXURE B COPY OF ORDER U/S.143(3) r.w.s. 147 DATED 24.10.2011 FOR A.Y.2006-07 ANNEXURE C COPY OF THE APPELLATE ORDER IN APPEAL No.ITA-35/R1/E/CIT-(A)-II/2011-12 DATED 30.06.2014 ANNEXURE D ORIGINAL PLUS COPY OF THE ORDER OF THE ITAT, COCHIN BENCH COCHIN IN ITA No.463/COCH/2014 DATED 27.07.2016 FOR THE A.Y.2006-07