2025 (10) TMI 233 - HC - Income Tax

Reassessment under Section 147 quashed where assessee disclosed full primary facts and AO's change of opinion invalidates reopening

HC held the reassessment invalid because the assessee had disclosed full and true primary facts in the return, so Section 147 could not be invoked. The ... Validity of reopening of assessment - Period of limitation - reasons to believe - whether true and primary facts are not divulged while filing the return of income? - HELD THAT:- Reopening of assessment can happen only if full and true facts are not divulged by the assessee. The facts in the case at hand are identical in the case of CALCUTTA DISCOUNT [1960 (11) TMI 8 - SUPREME COURT (LB)] as complete facts are already divulged by the assessee, which is clear from the chart quoted hereinabove. Therefore, the proceeding instituted does not comply with the requirement of Section 147 of the Act. Whether review or change of opinion of the AO can result in a proceeding of the kind impugned in the subject petition? - The coordinate bench in the case of EIT SERVICES [2023 (12) TMI 1135 - KARNATAKA HIGH COURT] considers this aspect as well and holds that mere change of opinion cannot result in reopening of assessment. The coordinate bench follows the judgment of the Apex Court in the case of KELVINATOR OF INDIA [2010 (1) TMI 11 - SUPREME COURT]. Thus, the change of opinion of the Assessing Officer cannot result in a proceeding under Section 148. Whether issuance of a second notice without withdrawing the first notice is invalid? - The notice so issued, which is second in line, in the teeth of subsistence of the notice, first in line, is contrary to law. If the notice itself was contrary to law, the proceedings taken up in a notice that was invalid, are all nullity in law. In view of the issues being answered by the Apex Court, coordinate bench of this Court and various High Courts, the orders impugned are rendered unsustainable. WP allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under Section 147 read with Section 148 of the Income Tax Act for the assessment year in question is barred by limitation because the proviso to Section 147 (four-year rule) applies. 2. Whether the assessee failed to 'disclose fully and truly all material facts necessary for his assessment' such that the exception in the first proviso to Section 147 is attracted. 3. Whether reassessment founded on mere change of opinion or re-examination of the same material is permissible under Section 147 (i.e., whether 'reason to believe' can be based on change of opinion without fresh tangible material). 4. Whether a second notice under Section 148 issued while an earlier Section 148 notice was subsisting (and without formal withdrawal of the first) is valid. 5. Whether the notice dated 23-03-2018 and/or the subsequent notice dated 29-03-2019 comply with the statutory requirement to record reasons for reopening under Section 148(2). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Limitation for reopening under Section 147 Legal framework: Proviso to Section 147 provides that where a scrutiny assessment under Section 143(3) has been completed, no action under Section 147 can be taken after four years from the end of the relevant assessment year unless income escaped assessment by reason of failure to make return or to disclose fully and truly all material facts. Precedent treatment: The Court adopts the settled approach that the four-year bar is absolute unless the statutory exception (non-disclosure of primary facts or failure to make return) is satisfied; reasons recorded must demonstrate connection with that exception. Interpretation and reasoning: The four-year period for the assessment year in question expired prior to issuance of the first impugned notice. No contemporaneous, adequate reasons were supplied with the first notice; the first notice on its face contained no reasons. The reasons later communicated relied upon an earlier order (dated much earlier) but did not demonstrate nondisclosure of primary facts at the time of filing. Ratio vs. Obiter: Ratio - where a completed scrutiny assessment exists, reopening beyond four years is impermissible unless the statutory exception is clearly available; reasons must support that exception. Conclusion: Reopening was barred by limitation in absence of validly establishing statutory exception. Issue 2 - Disclosure of primary facts (what constitutes 'disclose fully and truly all material facts') Legal framework: Obligation on assessee to disclose all primary facts necessary for assessment; Explanation to Section 147 clarifies that production of account books or other evidence from which material could with due diligence have been discovered does not necessarily amount to disclosure. Precedent treatment: The Court follows the principle that duty of disclosure extends to primary facts only; inferences are for the assessing authority; if primary facts were disclosed, reopening beyond four years is not permissible. Prior decisions emphasise that where primary facts are on record (audited financials, tax audit reports, Form 3CEB, Form 3CD, returns, accountant's declarations), the statutory exception is not attracted. Interpretation and reasoning: The material before the assessing officer at original assessment included audited financial statements, statutory tax audit disclosures, Form 3CEB/3CD entries and specific disclosure of payments to related/associated enterprises and claim of deductions under Section 10A/10AA. Transfer-pricing examination and incorporation of adjustments in assessment order demonstrate that primary facts were available and examined. The reasons later invoked (e.g., order under Section 201 dated earlier) did not show non-disclosure of primary facts at filing; rather they flow from material already in the assessment record. Ratio vs. Obiter: Ratio - if primary facts relevant to the issue were disclosed and considered in original assessment, the proviso exception is not satisfied; statements or documents already before the assessing officer cannot be re-characterised as non-disclosed to justify reopening. Conclusion: The statutory exception of failure to disclose primary facts is not made out; disclosure was full and true as regards payments and claim of deductions, hence reopening is impermissible. Issue 3 - Change of opinion / tangible material requirement Legal framework: Section 147 requires 'reason to believe'; jurisprudence construes 'reason to believe' so as not to permit reassessment on mere change of opinion. Reopening post-1989 must be based on tangible material and reasons must have a live link with formation of belief; reassessment cannot be a review of the same material. Precedent treatment: The Court follows authoritative rulings that mere reconsideration or change of opinion by assessing officer on the same material cannot be a ground for reopening; reopening must be founded on fresh tangible material or information not previously available/considered. Interpretation and reasoning: The assessing officer was aware of the payments to associated enterprises and had earlier assessed the return, incorporated transfer pricing adjustments, and passed orders under Section 201. Reopening five years later on the basis of the same material amounts to a change of opinion. The reasons communicated later do not demonstrate genuinely new tangible material that was unavailable or undisclosed earlier; they largely reiterate matters already before the officer. Ratio vs. Obiter: Ratio - reassessment cannot be based on mere change of opinion; 'reason to believe' requires tangible new material and a live link to the recorded reasons. Conclusion: The impugned proceedings represent impermissible change of opinion and are unsustainable for lack of fresh tangible material linking to escapement of income. Issue 4 - Validity of second notice while first notice subsisted (withdrawal requirement) Legal framework: Only one assessment/reassessment process can be in progress for a given year; a later notice cannot validly commence a fresh reassessment when earlier notice proceedings are subsisting unless the earlier notice is formally withdrawn or quashed. Precedent treatment: Courts have held that a return filed pursuant to an earlier notice is a return in law; an earlier valid notice (not withdrawn) precludes issuance of a subsequent notice for the same year. Mere intention to abandon is insufficient; withdrawal must be an affirmative act. Interpretation and reasoning: Here the first notice issued on 23-03-2018 remained unanswered as to reasons for a year; the second notice dated 29-03-2019 was issued without formal withdrawal of the earlier notice. The departmental stance that the first was 'abandoned' or not withdrawn was not supported by any formal record; the existence of the subsisting first notice rendered the second notice invalid. Ratio vs. Obiter: Ratio - a second reopening notice for the same assessment year is invalid if an earlier notice under Section 148 is subsisting and has not been formally withdrawn or set aside. Conclusion: The second notice is invalid insofar as it was issued in the teeth of a subsisting first notice that was not formally withdrawn. Issue 5 - Adequacy of recorded reasons under Section 148(2) Legal framework: Section 148(2) requires the Assessing Officer to record reasons before issuing a notice; those reasons must present a prima facie basis for forming the belief that income has escaped assessment and, where beyond four years, must demonstrate applicability of the proviso exception. Precedent treatment: Reasons must be specific and exhibit a live link with the belief; a notice devoid of reasons is vitiated. Interpretation and reasoning: The first notice contained no reasons and therefore failed Section 148(2). Reasons communicated much later relied on earlier departmental orders and did not show non-disclosure of primary facts. The absence of reasons contemporaneously recorded with the first notice and the reliance on pre-existing material cannot cure the statutory defect. Ratio vs. Obiter: Ratio - notices lacking contemporaneous, adequate recorded reasons under Section 148(2) are invalid; later articulation that does not reveal fresh undisclosed material cannot validate the reopening. Conclusion: The initial notice failed statutory requirement; the subsequently furnished reasons do not validate reopening especially given prior disclosure and other infirmities. Overall Conclusion The reopening proceedings were impermissible on multiple independent grounds: (a) the four-year bar under the proviso to Section 147 is not satisfied because primary facts were disclosed and examined in the original assessment; (b) reassessment is based on impermissible change of opinion rather than fresh tangible material; (c) the second notice was issued while the first notice subsisted and without formal withdrawal; and (d) the statutory requirement to record contemporaneous reasons under Section 148(2) was not complied with. These defects render the impugned notices and consequential orders unsustainable in law.