2025 (7) TMI 683 - HC - Income Tax

Assessment reopening under section 147 invalid when based on change of opinion without fresh evidence

PRINCIPAL COMMISSIONER OF INCOME TAX-2, KOLKATA Versus GILLANDERS ARBUTHNOT AND CO. LTD.

PRINCIPAL COMMISSIONER OF INCOME TAX-2, KOLKATA Versus GILLANDERS ARBUTHNOT AND CO. LTD. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe Court considered the following core legal questions:a) Whether the reopening of the assessment under Section 147 of the Income Tax Act, 1961 was legally justified based on the Assessing Officer's reason to believe that income had escaped assessment, particularly when the reopening relied on fresh and new tangible evidence.b) Whether the reopening was invalid due to being a mere change of opinion, given that the recorded transactions had already undergone scrutiny during the original assessment, and the reopening was initiated on information received after the completion of the regular assessment.c) Whether the reassessment proceedings were correctly quashed by the Tribunal without adequately considering the alleged fictitious and suspicious nature of the transactions and the assessee's failure to establish their genuineness.2. ISSUE-WISE DETAILED ANALYSISIssue a: Validity of Reopening Based on Reason to BelieveRelevant legal framework and precedents: Section 147 of the Income Tax Act permits reopening of assessment if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment. The reopening must be based on tangible material or fresh information that was not available at the time of original assessment. The principle against reopening merely due to change of opinion is well-established in tax jurisprudence.Court's interpretation and reasoning: The Court examined whether the Assessing Officer had valid reasons to believe that income had escaped assessment, relying on a 'suspicious transaction report' related to the seller, M/s. S. R. Sales Corporation. However, the Court noted that the Assessing Officer did not reject or doubt the books of account or the documents produced by the assessee, including purchase bills, excise declarations, audited receipts, road permits, packing lists, and VAT-related documents. These documents were extensive and detailed, demonstrating the genuineness of the transactions.Key evidence and findings: The assessee had produced a comprehensive set of documents substantiating the purchases and payments through banking channels. The VAT documents, issued after thorough checks during interstate transit, further supported the genuineness. The audit report and balance sheet confirmed the utilization of raw materials for production and the maintenance of closing stock. None of these were disbelieved by the Assessing Officer or the first appellate authority.Application of law to facts: Since the Assessing Officer had accepted the documents during the original assessment and had no new tangible material discrediting them, the reopening could not be justified merely on the basis of the suspicious transaction report. The reopening was therefore held to be without valid reason to believe, amounting to an impermissible change of opinion.Treatment of competing arguments: The revenue argued that the reopening was justified based on fresh information from the Investigation Wing and the suspicious transaction report. The Court rejected this, emphasizing that the reopening must be supported by tangible evidence and cannot be sustained if the original records were accepted and not doubted.Conclusion: The reopening was invalid as it lacked a valid reason to believe that income had escaped assessment, being based on a mere change of opinion without new tangible evidence.Issue b: Reopening as Change of OpinionRelevant legal framework and precedents: The principle that reopening of assessment cannot be done merely on a change of opinion is well-settled. The original assessment had been completed after scrutiny under Section 143(3), with the books and documents accepted.Court's interpretation and reasoning: The Court noted that the transactions in question had already been scrutinized during the original assessment, and the reopening was initiated much later based on information received from the Investigation Officer. The reopening was effectively a re-examination of the same transactions without new material that would justify reopening.Key evidence and findings: The books of accounts and supporting documents were accepted in the original assessment. The reopening was based on information obtained post-assessment, but no new tangible evidence discrediting the transactions was brought forward.Application of law to facts: The reopening was held to be a prohibited change of opinion, as it sought to revisit concluded issues without fresh material, contrary to the settled legal position.Treatment of competing arguments: The revenue's reliance on the suspicious transaction report was found insufficient to overcome the principle against reopening on change of opinion.Conclusion: The reopening was invalid as it was based on a change of opinion rather than new tangible evidence.Issue c: Quashing of Reassessment Despite Alleged Fictitious TransactionsRelevant legal framework and precedents: Reassessment can be validly initiated if the assessee fails to establish the genuineness of transactions, especially where transactions are suspected to be fictitious or bogus.Court's interpretation and reasoning: The Court observed that the assessee had produced voluminous documentary evidence to establish the genuineness of the transactions, which were neither rejected nor doubted by the Assessing Officer or the first appellate authority. The Tribunal rightly took note of these facts and found no basis to hold the transactions as fictitious.Key evidence and findings: The documents included ledger accounts, purchase bills, excise and VAT documents, audited books, and bank payment proofs. The audit report and balance sheet corroborated the physical stock and production details.Application of law to facts: Since the assessee had satisfactorily demonstrated the genuineness of the transactions, the reassessment could not be sustained merely on suspicion without evidence discrediting the documents.Treatment of competing arguments: The revenue's contention regarding suspicion of bogus transactions was not supported by any material evidence that could override the documentary proof produced by the assessee.Conclusion: The reassessment proceedings were rightly quashed due to the absence of any credible basis to doubt the genuineness of the transactions.3. SIGNIFICANT HOLDINGSThe Court held that the reopening of assessment under Section 147 was not justified in the absence of a valid reason to believe that income had escaped assessment. It emphasized that 'the books of accounts have not been rejected' and 'the transaction cannot be doubted and assessment could not have been reopened.'The Court reiterated the principle that reopening cannot be based on a mere change of opinion, especially when the original assessment was completed after scrutiny and the transactions had been accepted.Further, the Court recognized the substantial documentary evidence produced by the assessee, including VAT documents issued after thorough checks, audit reports, and bank payment proofs, which established the genuineness of the transactions. The absence of any adverse remark or rejection of these documents by the Assessing Officer or appellate authorities was pivotal.Consequently, the Court concluded that the learned Tribunal was fully justified in setting aside the reopening of assessment and dismissed the appeal filed by the revenue, finding no substantial question of law arising for consideration.