Reassessment under Section 147 quashed as invalid reopening based on previously examined facts constitutes change of opinion

ITAT Ahmedabad quashed the reassessment order passed u/s 147 after finding the reopening invalid. The tribunal held that the reasons for reopening were already considered in the original assessment u/s 143(3) where no addition was made regarding unpaid share purchases. Since the reassessment was based on the same facts previously examined, it constituted a mere change of opinion rather than new material, making the reopening bad in law. The appellant's appeal was allowed and the reassessment order was declared void ab-initio.

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The core legal questions considered by the Tribunal in this appeal relate primarily to the validity of reopening the assessment under section 147 of the Income Tax Act, 1961, and consequential issues arising from additions made during reassessment proceedings. The key issues include:

1. Whether the reopening of the assessment for the assessment year 2012-13 via notice under section 148 is valid, considering the information relied upon was already available and formed part of the original assessment proceedings.

2. Whether the reopening was based on tangible new material or was merely a change of opinion, which is impermissible under the law.

3. Whether the Assessing Officer (AO) complied with procedural requirements, including furnishing of material relied upon and providing opportunity for cross-examination before initiating reassessment proceedings.

4. Whether the additions made during reassessment, particularly relating to unexplained income under section 69 on account of purchase consideration of shares, and disallowance of losses in trading of shares, were within the scope of the reassessment and justified on facts and law.

5. Whether the AO took inconsistent stands in treating certain transactions as bogus while accepting others as genuine, thereby affecting the credibility of the additions.

6. Whether the principles of natural justice and equity were adhered to in the reassessment proceedings, including adequate time and opportunity to the assessee to respond to show cause notices.

7. Whether the commission paid on share transactions, added notionally by the AO, was justified in light of the other contentions on the genuineness of transactions.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147/148

The legal framework governing reopening of assessments under section 147 mandates that reopening can only be done if the AO has "reason to believe" that income has escaped assessment, based on tangible new material. The reopening cannot be justified merely on a change of opinion or on vague, general information, or borrowed satisfaction from third parties. The AO must record reasons and provide the assessee with the material relied upon.

In the present case, the reopening notice dated 31-03-2019 was issued based on information received from DCIT, Central Circle-2(2), Mumbai, dated 05-12-2016. However, this information was already in possession of the AO at the time of original assessment completed on 31-03-2015 and during proceedings under section 153C for assessment years 2009-10 to 2014-15. The AO had not made any addition or reference to this information in those proceedings, indicating that the material was not new or fresh.

The Tribunal noted that the reasons recorded for reopening essentially reiterated the same facts and observations that were part of the original assessment order. This amounted to a mere change of opinion, which is impermissible under section 147. The reopening was therefore held invalid and bad in law. The Tribunal emphasized that "the reopening of the assessment u/s. 147 is merely a change of opinion and cannot be invoked u/s. 147 and thus the reopening of assessment is invalid and bad in law." The assessment order passed under section 143(3) read with section 147 was consequently quashed.

The Tribunal also observed procedural lapses such as failure of the AO to furnish copies of material relied upon, including statements recorded, and denial of adequate opportunity to the assessee to cross-examine witnesses or respond meaningfully to objections. The disposal of objections a day prior to the assessment order was treated as a formality that deprived the assessee of a fair hearing.

2. Additions Outside the Scope of Reassessment

The AO made various additions that did not form part of the reasons recorded for reopening and were raised only shortly before the limitation period expired. The Tribunal held that such additions are beyond the jurisdiction of reassessment proceedings and violate principles of natural justice, especially when the information was already available to the AO much earlier. The assessee was effectively denied a fair opportunity to respond. The Tribunal allowed the grounds challenging these additions on this basis.

3. Addition of Rs. 1,16,34,370/- as Unexplained Income under Section 69

The AO disallowed the purchase consideration of shares of Chandni Textile & Engineering Industries Ltd., Shri Ganesh Spinners Ltd., and Avance Technologies Ltd., treating the amount as unexplained income under section 69. The AO's reasoning was that the purchases were not recorded in the books and the funds utilized were unaccounted.

The assessee contended, supported by evidence filed during original assessment proceedings, that the purchases were duly accounted for in the books, transactions were verified by the AO during original assessment, and the shares were traded on recognized stock exchanges through registered brokers with payments through banking channels. The shares were held in demat accounts, and statutory levies like Securities Transaction Tax were paid. The Tribunal noted that the AO had already considered and verified these transactions in original assessment proceedings without making any addition, except for disallowing a trading loss on one company.

The Tribunal found the reopening and addition to be based on the same material already examined and was thus a change of opinion. It also noted contradictory stands taken by the AO in different cases of the assessee's group, where similar transactions were treated inconsistently. The Tribunal held that the addition was unjustified, arbitrary, and bad in law, and therefore, required deletion.

4. Additions on Account of Disallowance of Losses in Trading of Shares

The AO disallowed losses claimed on shares of Gujarat Meditech Ltd., Dhvanil Chemicals Ltd., and Shekhavati Poly Yarn Ltd., adding amounts aggregating to over Rs. 1.5 crores. The AO relied on third-party information alleging these companies were involved in accommodation entries and the transactions were not genuine.

The assessee rebutted these allegations with evidence of genuine trading on recognized exchanges, payment through banking channels, demat holdings, and payment of statutory levies. The Tribunal noted that the AO had accepted such transactions in earlier and subsequent assessment years without additions.

The Tribunal held that the additions were based on surmises and conjectures without fresh material and were inconsistent with the AO's earlier acceptance of similar transactions. The disallowance was therefore held to be unjustified and liable to be deleted.

5. Addition of Commission Paid on Share Transactions

The AO made a notional addition of Rs. 68,773/- as commission paid on purchase consideration of shares and loss incurred in trading, calculated at 0.25%. The assessee argued that since the underlying additions were themselves unjustified, the commission addition was also liable to be deleted.

The Tribunal agreed, observing that no such addition was made in other group entities on identical facts, and the commission addition was based on assumptions and conjectures. It was thus held to be unjustified.

6. Treatment of Competing Arguments and Procedural Fairness

The assessee raised strong objections regarding the procedural irregularities, including non-furnishing of material relied upon, failure to provide opportunity for cross-examination, and disposal of objections in a perfunctory manner. The Tribunal acknowledged these contentions, emphasizing the need for adherence to principles of natural justice in reassessment proceedings.

The AO's inconsistent approach in treating similar transactions differently across related entities was also noted as indicative of arbitrariness and lack of proper application of mind.

Conclusions:

The Tribunal concluded that the reopening of assessment was invalid as it was based on a change of opinion and not on any fresh tangible material. The reassessment order was therefore quashed as void ab initio. Since the foundation of reassessment was invalid, the Tribunal did not adjudicate the merits of the additions made.

Significant Holdings:

"The reopening of the assessment u/s. 147 is merely a change of opinion and cannot be invoked u/s. 147 and thus the reopening of assessment is invalid and bad in law."

"The very basis of the assessment order becomes infructuous and void ab-initio and therefore assessment passed u/s. 143(3) r.w.s. 147 of the Act is quashed."

"Additions made on the basis of the same material which was available at the time of original assessment u/s. 143(3) of the Act and without any fresh tangible material amount to change of opinion and are not permissible."

"Failure to furnish material relied upon and denial of opportunity to cross-examine witnesses violates principles of natural justice and renders the reassessment proceedings bad in law."

"Inconsistent and contradictory treatment of similar transactions across related entities indicates arbitrariness and lack of proper application of mind."

The Tribunal's final determination was to allow the appeal, quash the reassessment order, and delete all additions made pursuant to the invalid reopening.

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