2019 (1) TMI 2078 - HC - Income Tax

Reopening assessment under s.147 invalid where income treatment repeats earlier scrutiny without fresh material; no s.14A addition

The Principal Commissioner of Income Tax-8 Versus Motilal R. Todi

HC held reassessment under s.147 invalid where the AO had already examined the issue of income from sale of shares in the original scrutiny assessment; ... Reopening of assessment u/s 147 - notice issued within the period of four years from the end of relevant assessment year - 'reason to believe' based on some tangible material - HELD THAT:- It is undisputed that only the question of income arising out of sale of shares was examined by the Assessing Officer during the scrutiny assessment, out of the three grounds mentioned by him in the reasons recorded. In other words, the remaining two grounds were never subjected to scrutiny during the original assessment. CIT (Appeals) had recorded that the issue of income arising out of sale of shares was examined in the original assessment. In fact, the reasons recorded also proceed on this admitted fact. If during such assessment the AO treated the income arising from such source as capital gain, any attempt on this part to tax the same as business income would be a change of opinion. When admittedly no new material is available with the AO to do so, permitting him to reassess the same income would amount to recognizing the review powers which he did not possess. There was no addition made by the AO himself in the assessment order with respect to the disallowance u/s 14A of the Act. The remaining addition made by the AO was of minuscule sum of Rs.24,000/­. For such a small sum we find it wholly unnecessary to admit the appeal. We clarify that other than these three items recorded in the reasons, during reassessment proceedings the Assessing Officer had not made any other addition. ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal was justified in not following a binding judgment of the Jurisdictional High Court holding that 'something tangible need not be new' for reopening of assessment? 2. Whether the facts are distinguishable because the reopening of the assessment was made within four years? 3. Whether 'reason to believe' based on some tangible material is sufficient for reopening of assessment? 4. Whether the Tribunal was justified in not deciding on merits the assessee's claim that income from share transactions was Short Term Capital Gain rather than business income, having regard to frequency and quantum of transactions? ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement of 'tangible material' and whether the Tribunal was justified in not following the Jurisdictional High Court decision Legal framework: Reopening of assessment under the Act requires that the Assessing Officer (AO) must have 'reason to believe' that income chargeable to tax has escaped assessment; judicial gloss requires the existence of material justifying that belief. The concept of 'tangible material' has been invoked by courts to test validity of reasons recorded. Precedent Treatment: The Tribunal relied on a High Court decision which emphasised that the AO must possess some fresh tangible material to justify reopening. Other High Court decisions (including larger bench and division bench decisions) have examined and, in some instances, explained or distinguished that approach. The Supreme Court has held that where original assessment was after scrutiny, the doctrine of change of opinion applies to grounds already considered. Interpretation and reasoning: The Court observed that insisting on tangible material in every case, even where reopening is within four years, risks importing an element of 'true and full disclosure' into the reopening test. The Court distinguished between situations where the matter was or was not subject to scrutiny in the original assessment. It held that where an issue was already examined in scrutiny assessment, treating the same issue differently on reassessment (absent fresh material) would amount to impermissible review/change of opinion. Ratio vs. Obiter: Ratio - Where the original assessment was after scrutiny and the AO had considered the issue, reopening on the same ground without fresh material is precluded by the change-of-opinion principle. Obiter - The broader proposition that 'something tangible need not be new' was discussed in light of conflicting High Court authorities, but the Court did not endorse a blanket rule overriding the change-of-opinion doctrine. Conclusion: The Tribunal was not justified in broadly treating lack of fresh tangible material as per se fatal where other grounds were not subject to scrutiny; however, because the key contested issue (treatment of share-sale income) had been considered in scrutiny, reopening on that point without new material would be impermissible. Issue 2 - Effect of reopening within four years and applicability of the change-of-opinion doctrine Legal framework: The statutory time-limit for reopening within four years engages a lower threshold for reason to believe than the longer period; nevertheless, judicially it has been held that when the original assessment followed scrutiny, reopening on grounds already considered is barred by the principle against change of opinion. Precedent Treatment: Supreme Court authority establishes that if an issue was subjected to scrutiny during original assessment, reopening on that same issue without fresh material is a prohibited change of opinion. Several High Courts have followed, explained, or distinguished authorities on whether the AO must have new material even within four years. Interpretation and reasoning: The Court applied the change-of-opinion principle to the present facts: assessment was after scrutiny; the question of taxability of share-sale income had been examined by the AO in the original assessment; therefore, reassessing that same issue as business income (when earlier treated as capital gain) without fresh material would amount to an impermissible review. The Court noted that only two other grounds in the reasons were not part of the original scrutiny. Ratio vs. Obiter: Ratio - Where reassessment is within four years but the issue was examined in scrutiny assessment, reassessment on that issue without fresh tangible material is barred as change of opinion. Conclusion: Reopening within four years does not permit reassessment on issues already scrutinised in original assessment absent fresh material; in the present case the reassessment on share-sale income was therefore untenable. Issue 3 - Sufficiency of 'reason to believe' based on tangible material for reopening Legal framework: Reopening requires recording of reasons constituting a belief that income has escaped assessment; courts have required that those reasons be based on material capable of sustaining such belief. The character and source of such material (whether within assessment records or external) are critical to legitimacy of reopening. Precedent Treatment: Judicial decisions vary: some authorities emphasise presence of fresh material outside the assessment record; others recognise that tangible material need not be new in all contexts. Supreme Court guidance limits reopening when scrutiny has already considered the matter. Interpretation and reasoning: The Court rejected a rigid rule that the AO must always possess material extraneous to assessment records; nonetheless, it affirmed that absence of new material makes reassessment on a scrutinised issue a change of opinion. The Court also observed that two of the three grounds in the reasons were not part of original scrutiny and therefore could, in principle, justify reopening if supported by material. Ratio vs. Obiter: Ratio - The sufficiency of 'reason to believe' depends on whether the matter was previously scrutinised; fresh material is required to reopen on a matter already examined. Obiter - The statement that 'something tangible need not be new' is not accepted as overriding the change-of-opinion prohibition in scrutiny contexts. Conclusion: 'Reason to believe' must rest on material appropriate to the context; where an issue was already subject to scrutiny, the AO needs fresh material to reopen; absence of such material invalidates reopening on that issue. Issue 4 - Failure to decide the merits whether share-sale receipts were Short Term Capital Gain or business income Legal framework: Appellate authorities ordinarily decide substantive tax classification issues where relevant and permissible; however, if the reassessment is invalid on jurisdictional grounds (e.g., change of opinion), merits need not be adjudicated. Precedent Treatment: Courts have sometimes declined to enter merits where reopening itself is struck down; conversely, where reopening is valid, merits are examined afresh. Interpretation and reasoning: The Tribunal confined itself to the validity of reopening and declined to decide the substantive classification. The Court found that because the share-sale issue had been examined in the original scrutiny assessment, reassessment on that point was a change of opinion and hence the Tribunal's limited scope did not prejudice the outcome. The Court also noted that no fresh material was produced and that other additions were minimal (a small disallowance), diminishing the utility of admitting the appeal solely to decide merits. Ratio vs. Obiter: Ratio - Where reassessment is invalid for jurisdictional reasons, appellate courts may decline to adjudicate the merits of the disputed tax classification. Obiter - The Court's observation on the quantum of the remaining addition being minuscule is a practical, non-binding consideration. Conclusion: The Tribunal's decision to confine itself to jurisdictional validity and not decide the merits was acceptable in the facts; the reassessment on share-sale income could not stand and the small remaining addition did not warrant interference. Overall Conclusion The Court held that reassessment on an issue already examined in scrutiny assessment is barred in the absence of fresh material and that, applying that principle, the reassessment in question could not be sustained as to the share-sale income; given the minimal remaining additions, the appeal was dismissed without disturbing the Tribunal's jurisdictional finding.