2025 (11) TMI 340 - HC - Income Tax

Reopening assessment under s.147 invalid where AO relied solely on DVO report without independent inquiries under s.148A(a)

HC held that reopening of assessment under s.147 was invalid where the AO relied solely on the DVO's report without making independent inquiries under ... Reopening of assessment u/s 147 - suppression of closing stock figure - matter was referred to the DVO, who vide his report valued the investment of Projects - HELD THAT:- The Hon’ble Apex Court in the case of Dhariya Construction Company [2010 (2) TMI 612 - SC ORDER] has held that the opinion of DVO per se is not an information for the purposes of reopening of an assessment u/s 147 of the Act and the Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon. In the facts of the present case the respondent AO has for the purpose of referring the matter to the DVO has relied upon the survey proceedings, but after the receipt of report of DVO, therein, the DVO has formed an opinion of excess investment made by the petitioner for the year under consideration, the Assessing Officer has not made any further inquiry which is contemplated u/s 148A(a) of the Act to verify any fact to support such conclusion arrived at by the DVO. AO has also not recorded any satisfaction about the correctness or otherwise of the contents of the report of the DVO. Assessing Officer could not have assumed the jurisdiction only on the basis of the report of DVO as the same cannot be considered as per se information for the purpose of reopening of the assessment. As relying on Aavkar Infrastructure Company [2015 (11) TMI 1313 - GUJARAT HIGH COURT] we are of the opinion that in the impugned order passed u/s 148A(d) of the Act, the respondent Assessing Officer could not come to a conclusion that it is fit case to reopen the assessment on the ground that the income chargeable to tax has escaped the assessment. Under the circumstance, the very assumption of jurisdiction under Section 147 of the Act on the part of the Assessing Officer while issuing the impugned notice under Section 148 of the Act is without authority of law and hence the same cannot be sustained. ISSUES PRESENTED AND CONSIDERED 1. Whether the opinion/report of the District Valuation Officer (DVO) can be treated as 'information' per se under the Scheme of the Income Tax Act for initiating reopening of assessment under Section 147 read with Section 148. 2. Whether the Assessing Officer (AO) complied with the statutory obligation to apply independent mind and verify relevant facts (including conducting inquiries contemplated by Section 148A(a)) and, on that basis, recorded a belief that income chargeable to tax had escaped assessment, prior to issuing notice under Section 148. 3. Whether an assessment/order passed thereafter (including assessment under Section 147 read with Section 144B) is valid where reopening is founded solely or predominantly on the DVO report without independent satisfaction by the AO (including interplay with an existing interim judicial restraint). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework: Section 147/148 (reopening) requires formation of belief that income chargeable to tax has escaped assessment; 'information' for reopening is defined in the Scheme (Explanation 1(i) to Section 148 includes information flagged under Board's risk management strategy). The DVO is empowered to value and report; the legal question is whether the DVO's opinion itself constitutes 'information' sufficient to support reopening. Issue 1 - Precedent Treatment: The Court relied on the principle established by the Apex Court that the opinion of the DVO per se is not 'information' for purposes of reopening and that the AO must apply his mind to any information collected and form a belief thereon. A similar approach by this High Court in prior decisions was followed (see cited municipal precedents in the judgment). Issue 1 - Interpretation and reasoning: The Court examined the notice under Section 148A(b), the DVO report and the AO's order under Section 148A(d), and found that the reopening for the assessment year was premised on the DVO's valuation showing higher investment such that Rs. 35,28,650 remained unexplained. The Court held that reliance upon the DVO report alone, without the AO conducting further inquiries or independently verifying the report's contents, cannot convert the DVO opinion into the statutory 'information' that justifies reopening. Issue 1 - Ratio vs. Obiter: Ratio - the DVO's opinion is not per se 'information' to reopen; AO must independently apply mind and verify facts before forming belief under Section 147. Obiter - references to Board's risk management strategy and Explanation 1(i) were considered but the controlling principle is the requirement of AO's independent satisfaction. Issue 1 - Conclusion: The DVO report alone did not amount to information permitting reopening; reopening initiated solely on DVO opinion is impermissible. Issue 2 - Legal framework: Section 148A(a) mandates enquiry to verify facts; Section 148A(d) requires disposal of objections after consideration. The AO must record satisfaction (formation of belief) founded on material that reflects application of mind, not merely mechanical adoption of third-party opinion. Issue 2 - Precedent Treatment: The Court followed authorities holding that where the AO relies solely on DVO findings without independent verification or reasons demonstrating application of mind, the AO's assumption of jurisdiction is unlawful. Issue 2 - Interpretation and reasoning: Factually, the Court found no evidence of inquiries envisaged by Section 148A(a) after receipt of the DVO report; AO did not record any satisfaction as to correctness/incorrectness of the DVO contents nor make further factual verification. The AO's disposal of objections merely adopted the DVO figure and concluded escapement of income without independent corroboration. The Court treated such conduct as failure to form the requisite belief on relevant material. Issue 2 - Ratio vs. Obiter: Ratio - AO must perform the verification/inquiry required by Section 148A(a) and independently record satisfaction before issuing notice under Section 148; absence of such steps renders reopening invalid. Obiter - references to how the AO might discharge the obligation in other factual matrices. Issue 2 - Conclusion: AO failed to apply independent mind and perform required verification; hence no valid belief under Section 147 was recorded and the reopening is without authority of law. Issue 3 - Legal framework: Validity of subsequent assessment depends on valid initiation of reassessment proceedings. Interim judicial directions restraining final orders bear on procedure; where final assessment is passed contrary to court's interim order, its validity requires scrutiny though primary test remains jurisdictional validity of reopening. Issue 3 - Precedent Treatment: The Court relied on its prior decisions applying the principle that a final order based on invalidly reopened proceedings must be quashed. The judgment refers to earlier High Court rulings that where only DVO report supports reopening, the resultant proceedings are unsustainable. Issue 3 - Interpretation and reasoning: The Court noted an earlier interim direction restraining finalization without court permission but proceeded on the narrower ground that the reopening itself was invalid. The assessment order under Section 147 read with Section 144B, having been made pursuant to an invalid notice and in absence of statutory satisfaction, lacks authority and cannot be sustained. The Court therefore quashed both the reopening order(s), the notice under Section 148 and the assessment order made thereafter. Issue 3 - Ratio vs. Obiter: Ratio - Where reopening is invalid for want of statutory satisfaction and independent application of mind, any subsequent assessment founded on such reopening is void. Obiter - discussion of the interim order breach is secondary to the jurisdictional defect, though it evidences procedural irregularity. Issue 3 - Conclusion: The Order under Section 148A(d), the Notice under Section 148 and the subsequent Assessment Order under Section 147 read with Section 144B were quashed and set aside as being without authority of law. Cross-reference: Issues 1 and 2 are interlinked: the legal infirmity in treating the DVO report as information (Issue 1) is compounded by failure to conduct the statutory verification and to record independent satisfaction (Issue 2), leading to the consequence stated in Issue 3.