2025 (6) TMI 1297 - AT - Income Tax

Revenue's appeal dismissed as assessment reopening beyond four years invalid without proving assessee failed to disclose material facts fully

The HC upheld CIT(A)'s dismissal of Revenue's appeal challenging reopening of assessment for AY 2008-09 under section 147 read with section 153C. The ... Reopening of assessment u/s 147 - reasons to believe - assessment has been reopened after four years on the basis of information received from SFIO, Ministry of Corporate Affairs, New Delhi HELD THAT:- Nowhere in the reasons specific allegations have been leveled against the assessee that the assessee has failed to disclose fully and truly all material facts necessary for its assessment. A reading of reasons also show that the allegation is against ABW Group of Companies and not the assessee in specific. Thus, by way of reopening of assessment the AO wanted to make a roving enquiry which is not permissible under law. The first proviso to section 147 of the Act mandates that no action u/s. 147 can be initiated after the expiry of four years from the end of relevant assessment year, unless, any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts. The reasons recorded for reopening are absolutely silent in this regard. The reasons only record the alleged modus operandi of ABW group to reduce the profits of the company and consequent reduction in the tax liability. The reasons for reopening stem from the information received from SFIO, Ministry of Corporate Affairs and not ‘reasons to believe’ of the AO. The reasons lack mandate of section 147 of the Act. Reopening of assessment after four years on such reasons is unsustainable - Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:(a) Whether the reopening of the assessment for the assessment year 2008-09 under section 147 read with section 153C of the Income Tax Act, 1961 (the Act) was valid and sustainable in lawRs.(b) Whether the reasons recorded by the Assessing Officer (AO) for reopening the assessment comply with the statutory requirements of section 147 of the Act, particularly regarding the disclosure of failure by the assessee to fully and truly disclose all material facts necessary for the assessmentRs.(c) Whether the reopening was based on the AO's own reasons to believe or was it merely based on information received from an external agency (SFIO, Ministry of Corporate Affairs) without independent satisfactionRs.(d) Whether the reopening beyond four years from the end of the relevant assessment year is permissible under the proviso to section 147 of the Act in the absence of specific failure by the assessee to disclose material factsRs.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (d): Validity of reopening of assessment beyond four years under section 147The reopening of assessment under section 147 of the Act is subject to strict procedural safeguards. The proviso to section 147 mandates that reopening beyond four years from the end of the relevant assessment year is permissible only if the AO has reason to believe that income chargeable to tax has escaped assessment due to failure by the assessee to disclose fully and truly all material facts necessary for assessment.In the present case, the AO reopened the assessment after four years based on information received from the Serious Fraud Investigation Office (SFIO) indicating a modus operandi adopted by the ABW group of companies, of which the assessee is a group company, involving entering into agreements to sell land at lower rates and subsequently cancelling them at higher rates to suppress profits and reduce tax liability.The AO recorded reasons stating that the income escaping assessment was substantial (several lakhs) and that reopening was justified under section 148 read with section 147. However, the reasons did not specifically identify any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Additionally, the reasons were directed against the ABW group collectively rather than the assessee specifically.The Court noted that the reasons for reopening lacked the essential element of 'failure to disclose' by the assessee, which is a mandatory prerequisite for reopening beyond four years. The reasons were also based on information received from an external agency (SFIO) rather than the AO's independent reasons to believe. This amounted to a roving enquiry, which is impermissible under law.Therefore, the reopening did not comply with the legal framework under section 147 and was held to be bad in law.Issue (b): Compliance of reasons recorded with statutory requirementsThe Court examined the reasons recorded by the AO in detail. The reasons mentioned the completion of earlier assessment under section 153C read with 153A at nil income and the receipt of information from SFIO regarding the alleged modus operandi of the ABW group to suppress income. The AO concluded that income had escaped assessment and issued notice under section 148.However, the reasons failed to specify the exact material facts that the assessee allegedly failed to disclose fully and truly. There was no mention of any specific transaction or omission by the assessee that justified reopening. The reasons were generic and related to the group as a whole rather than the assessee individually.The Court emphasized that for reopening beyond four years, the AO must record clear and specific reasons showing failure by the assessee to disclose material facts, which was absent here. The reasons must reflect the AO's own belief based on tangible material, not merely information from a third party.Accordingly, the Court held that the reasons recorded were not in conformity with the statutory mandate of section 147 and thus invalidated the reopening.Issue (c): Nature of AO's reasons to believe and reliance on external informationThe Court analyzed the nature of the AO's reasons to believe. It was observed that the reasons recorded were primarily based on information received from SFIO, a government agency under the Ministry of Corporate Affairs, rather than on independent satisfaction or investigation by the AO.While information from third parties can form the basis for reopening, the AO must independently evaluate and form a reason to believe that income has escaped assessment due to failure by the assessee to disclose material facts. Mere receipt of information without corroboration or independent satisfaction cannot justify reopening.In this case, the AO did not demonstrate any independent verification or formation of belief but relied solely on the SFIO's communication. This reliance was held to be insufficient to sustain reopening under section 147.Application of law to facts and treatment of competing argumentsThe Revenue contended that the reopening was justified as the assessee was part of the ABW group involved in dubious transactions to suppress income and reduce tax liability. The AO's detailed order identified specific instances and made additions under section 68 of the Act.The Court, however, found that the CIT(A) rightly held the reopening invalid because the statutory conditions for reopening beyond four years were not met. The Court agreed that the AO's reasons did not specify failure by the assessee to disclose material facts and were based on group-wide allegations rather than specific facts relating to the assessee. The reopening was therefore a roving enquiry, which is impermissible.The Court upheld the CIT(A)'s order dismissing the Revenue's appeal as devoid of merit.3. SIGNIFICANT HOLDINGSThe Court held:'Nowhere in the reasons specific allegations have been leveled against the assessee that the assessee has failed to disclose fully and truly all material facts necessary for its assessment. A reading of reasons also show that the allegation is against ABW Group of Companies and not the assessee in specific. Thus, by way of reopening of assessment the Assessing Officer wanted to make a roving enquiry which is not permissible under law.''The first proviso to section 147 of the Act mandates that no action u/s. 147 can be initiated after the expiry of four years from the end of relevant assessment year, unless, any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts. The reasons recorded for reopening are absolutely silent in this regard.''Moreover, the reasons for reopening stem from the information received from SFIO, Ministry of Corporate Affairs and not 'reasons to believe' of the AO. The reasons lack mandate of section 147 of the Act. Reopening of assessment after four years on such reasons is unsustainable.'Core principles established include:Reopening beyond four years under section 147 proviso requires specific failure by the assessee to disclose fully and truly all material facts.Reasons recorded must reflect the AO's own reasons to believe based on tangible material and not merely on information from third parties.Reopening cannot be used as a tool for roving or fishing enquiries.Group-wide allegations cannot justify reopening against an individual assessee without specific material against that assessee.Final determination: The reopening of the assessment was held to be bad in law and the order of the CIT(A) dismissing the Revenue's appeal was upheld.