S. 148 Income Tax Act | Reassessment Based On Mere Change Of Opinion Without Concrete Evidence Not Justified: Gujarat High Court

The Gujarat High Court has reiterated that reopening of income tax assessment under Section 148 of Income Tax Act based on mere change of opinion without concrete material is not justified, when the return has been threadbare examined during initial assessment and approved without failure of disclosure.

It noted that as per the AO's own findings he was unsure about the actual escaped income which he had said will be finalized only on completion of proceedings, which the court termed as "vague observations".

The petitioner company challenged reopening of assessment notice under Section 148 of the Income Tax Act for AY 2017-18 relating to payments made to one Ruchita Chemicals LLP. Section 148 grants the authority to the tax office to issue notice to the assessee to assess or reassess such a person whose income has escaped assessment.

A division bench of Justice AS Supehia and Justice Pranav Trivedi referred to decision of the Supreme Court and held:

"...if there is no failure on the part of the assessee as to full and true disclosure, and the assessment has been threadbare examined and approved after calling for detailed explanation, the reopening of the assessment can be said to be premised on a change of opinion. In our considered opinion, the petitioner cannot be subjected to further reassessment in view of such vague observations recorded by the AO, particularly when the return of the petitioner had been accepted after detailed scrutiny of the documents presented by the petitioner, disclosing the purchases with Ruchita Chemicals LLP. Thus, on an overall appreciation of the facts and documents on record, we are of the opinion that the reopening of the assessment is nothing but a change of opinion by the AO and hence, the petitioner cannot be subjected to further scrutiny of reassessment". 

The petitioner company was engaged in the business of trading in textile fabrics and made certain purchases from Ruchita Chemicals LLP in the normal course of business and made various payments against such purchases to the said party.

The closing credit balance of Ruchita Chemicals LLP was Rs. 96,79,38,144, which is a part of the total trade payable of Rs. 1,12,43,13,194 reflected in the audited financial statements. The petitioner filed its return of income for AY 2017-18 on 30.10.2017 declaring total income at Rs. 11,09,730. The year under consideration was selected for scrutiny assessment by issuing statutory notice dated 10.08.2018 under Section 143(2) of the Act.

The Assessing Officer (AO), vide notice dated 19.08.2019 issued under Section 142(1) of the Act, called upon the petitioner to furnish various details including details pertaining to trade payables and purchases, which the petitioner furnished. The then AO, issued a notice dated 06.09.2019  under Section 142(1) of the Act, again called upon the petitioner to furnish various details including the previous details, which were furnished by petitioner.

Ultimately, assessment was framed under Section 143(3) through order dated 30.10.2019, and the "return of income was accepted".

Thereafter, the respondent issued a notice on 31.03.2024 under Section 148 of the Act stating that it had information based on a search action initiated under Section 132 in the case of the petitioner or in the case of a person in respect of whom the petitioner is assessable. 

It thereafter again issued a Section 142(1) notice to the petitioner to furnish various details including details on the source of payment of Rs. 7 crore to Ruchita Chemicals LLP. The petitioner,  furnished a detailed response. 

The respondent, on 31.12.2024 issued another notice under Section 142(1) asking the petitioner to furnish further details on claim of purchases and sales of goods, as mentioned in the petitioner's submissions. The petitioner  raised objections against the action of reopening the case of the petitioner for the year under consideration; this was disposed of holding that the  action of reopening is justified in law. Against this the petitioner moved the high court. 

The petitioner argued that respondent has acted illegally and without jurisdiction in issuing notice under Section 148 of the Act, which can be resorted to only if there is escapement of income chargeable to tax and there must be a live link or close nexus between the material before the AO and the opinion with regard to the escapement of income; such link is absent in the present case.

The tax authority argued that the reopening of assessment was based on new material from a search on a different entity. It was submitted that during the search conducted under Section 132 of Invent Assets Securitization and Reconstruction Private Limited on 08.12.2021, a statement was made by its CEO disclosing the modus operandi in diverting the funds.

On close scrutiny thereafter, the role played by Invent Assets along with its sister concerns including the petitioner, was uncovered and it was noticed that there was escapement of income.

The high court said:

"The respondents have miserably failed to point out any connection between the petitioner and Invent Assets, against whom the search under Section 132 of the Act was undertaken. Purchases to the tune of Rs. 7,00,00,000/- have been questioned by the AO only on presumption, without there being any concrete material....The entire case of the respondent hinges on presumptions arising from the search undertaken of Invent Assets, and there is no material connecting the petitioner with Invent Assets. An attempt has been made to connect the petitioner with Invent Assets merely because Rs. 7,00,00,000/- was given by Ruchita Chemicals LLP to Pioneer Management and Finance Consultancy". 

It further referred to the AO's communication under Section 142 and noted findings recorded by the communication clarifies that the "AO is not sure about the exact quantum" which has escaped assessment.

The court noted that as per the AO's findings, "his opinion is still in a state of flux, as he has specifically stated that the quantum of escapement “if any” will be finalized only upon completion of assessment proceedings".

"Thus, the observations recorded by the AO disclose that he himself is unsure about the actual escapement and has made it subject to the final outcome of the assessment proceedings," the court said. 

The petition was allowed and the notice dated 31.03.2024 issued under Section 148 was quashed. 

Case title: RAO TRADELINK PRIVATE LIMITED vs. INCOME TAX OFFICER

C/SCA /2650/2025

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