2025 (5) TMI 2033 - AT - Income Tax

AO's incorrect facts about original assessment under section 143(1) leads to invalid reassessment under section 147

Dharampal Premchand Ltd Versus DCIT, Central Circle-29, Delhi

The ITAT Delhi quashed the reassessment proceedings initiated under section 147. The AO incorrectly stated the original assessment was completed under ... Reopening of assessment u/s 147 - approval accorded u/s 151 - whether the original assessment was completed under section 143(1) or u/s 143(3) - HELD THAT:- On perusal of the proforma, we find that the Learned AO had stated that original assessment was completed only under section 143(1) and not 143(3) which is factually incorrect. Hence the proforma submitted by the Assessee before the Learned Principal CIT (PCIT) for seeking approval through Learned Additional CIT u/s 151 was based on incorrect assumption of fact. Both the authorities i.e. had not even examined this basic preliminary fact as to whether the original assessment was completed u/s 143(1) or u/s 143(3). Without such verification, they had granted their approval in a mechanical manner. Whether approval u/s 151 granted in a mechanical manner for reopening the assessment would become fatal to the reassessment proceedings or not? - We find that in the case of PCIT Vs. NC Cables Ltd [2017 (1) TMI 1036 - DELHI HIGH COURT] had also held the same, wherein, the approving authority had merely stated “approved” in the proforma while granting approval in terms of section 151. This approval was held by the Hon’ble Jurisdictional High court to be a mechanical approval. Admittedly, for the year under consideration, the reopening was made beyond the period of 4 years from the end of the relevant assessment year. We find that non-mentioning of the failure on the part of the Assessee to make full and true disclosure of all material facts relevant for the purpose of assessment by the Learned AO in the reasons recorded, would become fatal to the entire re-assessment proceedings per se. We hold that the reopening has been made in the instant case deserves to be quashed for more than one reason. Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDERED- Whether the assumption of jurisdiction under section 147 of the Income-tax Act, 1961 ('the Act') by the Assessing Officer ('AO') for reopening the assessment for AY 2014-15 was validRs.- Whether approval granted under section 151 of the Act for reopening the assessment was valid and not mechanical or without application of mindRs.- Whether the reopening was based on tangible material justifying reassessment or merely a change of opinion by the AORs.- Whether the failure of the Assessee to disclose full and true material facts was established as required for reopening beyond four years from the end of the relevant assessment yearRs.- Whether the reassessment proceedings initiated beyond the four-year period were valid in absence of such failure to disclose material factsRs.2. ISSUE-WISE DETAILED ANALYSISValidity of Assumption of Jurisdiction under Section 147The original return was filed declaring income of Rs. 36,96,45,100/-, and the original assessment was completed under section 143(3) on 23-12-2016 determining income at Rs. 47,73,75,770/-. The AO sought to reopen the assessment on the ground of accommodation entries allegedly taken from a third party, discovered during a search conducted on that party on 13-04-2017.The reopening was sought beyond four years from the end of the assessment year, thus requiring the AO to establish failure on the part of the Assessee to disclose fully and truly all material facts relevant to assessment. The reasons recorded for reopening did not mention any such failure.The Court noted that the AO had already examined the unsecured loans in the original scrutiny assessment, issuing a notice under section 142(1) and accepting the Assessee's explanations and confirmations. The reopening was thus an attempt to revisit a matter already considered, amounting to a change of opinion, which is impermissible under settled law. Reliance was placed on the Full Bench decision of the Jurisdictional High Court which held that reassessment cannot be based on change of opinion.Validity of Approval under Section 151The AO submitted a proforma for approval of reopening under section 151, stating incorrectly that the original assessment was completed only under section 143(1), whereas it was actually completed under section 143(3). The approving authorities granted approval mechanically without verifying this basic fact or applying independent mind.The Court referred to binding precedents including the Madhya Pradesh High Court decision upheld by the Supreme Court, and the Jurisdictional High Court decision in PCIT vs. NC Cables Ltd, which held that mere mechanical approval without recording satisfaction is invalid. The approval in the instant case was similarly mechanical and thus vitiated the reopening.Application of Law to Facts and Treatment of Competing ArgumentsThe Revenue argued that information obtained during the search on the third party constituted tangible material justifying reopening. The Court accepted that such information could be tangible material but emphasized that reopening beyond four years requires additional satisfaction of failure to disclose material facts, which was absent.The Assessee contended that the AO had already formed an opinion on the unsecured loans during original assessment and that reopening was a mere change of opinion. The Court agreed, holding that reassessment cannot be based on change of opinion.Further, the Court found the approval under section 151 was granted without proper examination, rendering the reopening invalid.3. SIGNIFICANT HOLDINGS'Section 151 of the Act clearly stipulates that the CIT (A), who is the competent authority to authorize the reassessment notice, has to apply his mind and form an opinion. The mere appending of the expression 'approved' says nothing. It is not as if the CIT (A) has to record elaborate reasons for agreeing with the noting put up. At the same time, satisfaction has to be recorded of the given case which can be reflected in the briefest possible manner. In the present case, the exercise appears to have been ritualistic and formal rather than meaningful, which is the rationale for the safeguard of an approval by a higher ranking officer.'The Court concluded that the reopening was invalid on multiple grounds: the approval under section 151 was mechanical; the reasons recorded did not mention failure to disclose material facts; the AO had already examined the relevant transactions in original assessment; and reopening beyond four years without such failure is impermissible.The reassessment proceedings were therefore quashed, and the appeal of the Assessee was allowed. Other grounds raised by the Assessee on merits were left open as the reassessment itself was invalidated.