2026 (2) TMI 267 - HC - Income Tax

Reopening of assessment for alleged missing certificate must rest on recorded reasons; absent support, reassessment invalid and appeal allowed.

Reopening an assessment under reason-to-believe/suspect must be justified by the reasons recorded; materials referred only in an affidavit cannot validate ... Reopening of assessment u/s 147 - “reason to believe” OR “reason to suspect” - only reason on the basis of which the impugned notice has been issued is that the claim for deduction of interest was allowed without a certificate [as contemplated in Section 24(b) of the IT Act] being on record. HELD THAT:- The only material which is not adverted to in the reasons, but is referred to in the Affidavit in Reply, is that there was an audit objection raised subsequent to the completion of the original assessment proceedings. We are of the view that it is now well settled by several judgments of this Court that the validity of the reopening has to be tested on the basis of the reasons recorded. We may refer only to the judgment in Hindustan Lever Limited [2004 (2) TMI 41 - BOMBAY HIGH COURT] that the validity of the reasons has to be adjudicated on the basis of what is stated therein and not by relying on something stated in the affidavit. As held by the Supreme Court in the case of Indian and Eastern Express Newspaper Limited [1979 (8) TMI 1 - SUPREME COURT (LB)] the factual material that was pointed out by the audit department viz., the absence of a certificate, cannot give Respondent No. 1 a valid basis to exercise the re-assessment proceedings. The judgment in Honda Siel Power Products Limited [2011 (2) TMI 1184 - DELHI HIGH COURT] relied upon by the Revenue is wholly in apposite. In the present case the sole allegation is the failure on the part of the Petitioner to furnish a certificate as mandated by the third proviso to Section 24(b). As we have stated hereinbefore, there is no statutory requirement to file any such certificate as the Petitioner’s case did not fall within the second proviso. The Delhi High Court was concerned with a case where admittedly the expenditure incurred to earn tax free income had to be disallowed. Merely because the provisions were introduced after the return of income was filed does not mean that there was no failure on the part of the Assessee to make a full and true disclosure in the course of the assessment proceedings, and hence, this judgment would not come to the assistance of the Revenue to validate the assumption of jurisdiction to make a re-assessment. Assessee appeal allowed. Issues: Whether the notice dated 28 March 2021 under Section 148 read with Section 147 of the Income-tax Act, 1961 (and the order dated 9 February 2022 disposing of objections) was validly issued/assumed where reopening was predicated on absence of a certificate under the third proviso to Section 24(b), more than four years after the assessment; and whether Explanation 1 to Section 147 or an audit objection supplied the requisite post-assessment tangible material or established a failure to disclose fully and truly all material facts.Analysis: Applicable legal framework includes the requirements for reopening under Section 147 (and the proviso applicable where original assessment under Section 143(3) was completed more than four years earlier), the need for a reason to believe that income has escaped assessment, the proviso that such escapement must result from failure to disclose fully and truly all material facts, the test that the belief must have a rational nexus to the material relied upon (not a mere change of opinion), the role of Explanation 1 to Section 147 regarding discovery of primary facts with due diligence, and the requirement of tangible material coming into the Assessing Officer's possession after completion of the original assessment. The recorded reasons relied solely on the absence of a certificate under the third proviso to Section 24(b) despite undisputed primary facts showing the property was let out and the annual value was not taken to be nil under Section 23(2). The third proviso's certificate requirement applies only where the second proviso (special capped deduction for certain self-occupied situations) is attracted; it was not attracted here. The reasons thus lacked a legally relevant link between the material and the belief of escapement; no fresh tangible material post-assessment was shown in the reasons; disclosures in the return and documents filed with it and in specific replies during assessment could not be equated to a failure to disclose within the proviso to Section 147 or to fall within Explanation 1 so as to sustain reopening.Conclusion: The notice under Section 148 dated 28 March 2021 and the order disposing of objections dated 9 February 2022 are quashed and set aside; the assumption of jurisdiction to initiate reassessment proceedings is not valid.