S. 147 Income Tax | Assessment Can Be Reopened Based On Fresh Material If No Opinion Was Formed In First Instance : Supreme Court

The Supreme Court observed that when the Revenue reopens an assessment based on fresh material suggesting income escaped assessment, the reopening cannot be rejected as a mere 'change of opinion' if the officer never examined or formed an opinion on the issue during the original assessment.

According to the Court, a change of opinion presupposes a conscious application of mind and the formation of an opinion in the original assessment, which the court must verify, either expressly or by necessary implication, before interfering with the reopening. However, when the Revenue never examined or formed an opinion on the specific issue in the original assessment, the Revenue is not precluded from reopening the assessment upon subsequently discovering material suggesting that income had escaped assessment.

A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran dismissed an assessee's appeal against the Delhi High Court's judgment justifying the reopening of an assessment by an AO, after finding that the reopening of an assessment was based on the facts which were never examined during the course of original assessment, as the reassessment was “based on the tangible material of the report of the Investigation Unit, Noida, prepared after the assessment, and which have a rational nexus and a live link with the belief formed by the AO.”

The case arose from the sale of shares in two companies by assessee, his brother and other shareholders. The transactions involved substantial consideration, and the assessees subsequently invested part of the sale proceeds in a residential property and claimed the benefit of Section 54F of the Income Tax Act.

During the original assessment proceedings, the Assessing Officer accepted the returned income. After the assessment, an investigation revealed that the shares appeared to have been overvalued when compared with the cost of the companies' land and buildings.

Based on the investigation report, the Revenue issued notices seeking to reopen assessments for the assessment years 2008-09 and 2009-10.

The assessees challenged the notices, contending that the share transactions had already been examined during scrutiny assessment and that reopening the assessments amounted to a mere change of opinion. They also argued that the Revenue could not rely on additional grounds subsequently introduced while rejecting their objections to the reopening.

The High Court had upheld the reassessment proceedings, prompting the assessees to approach the Supreme Court.

Affirming the impugned decision, the judgment authored by Justice Pardiwala upheld the reassessment notice issued to the Appellant-assessee, noting that the same cannot be rejected on a mere ground of a 'change of opinion', as the AO never formed an opinion on the fact of overvaluation of shares by the assessee during the original assessment, as the fact of overvaluation was only revealed in an investigation pursuant to an original assessment.

According to the Court, “the courts have only to see whether there is a rational connection or a live link between the material and the formation of the belief.”

The Court considered the investigation report to be tangible material to conclude that there was an escapement of income, warranting the AO to reopen the assessment.

“It is settled law that the AO must have some tangible material to conclude that there is escapement of income, and that the reasons must have a live link with the formation of the belief. The tangible material in the present case is the report of the Investigation Unit, Noida, which concluded, prima facie, that the shares of company no. 1 and company no. 2 respectively were overvalued. The expression “reason to believe” cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The present case is not one wherein it could be said that the AO had only a vague feeling on the basis of which he recorded that proper investigation was necessary.”, the Court observed.

“Where no opinion was formed in the first instance, the revenue is not precluded from reopening upon the discovery of facts suggesting that income has escaped assessment, and the notice here rests on the report of the Investigation Unit, Noida, which came after the assessment. Consequently, even in the case of Mr. Chetan Sabharwal, in view of the above, it cannot be said that the reason to believe constitutes a change of opinion.”, the Court added.

According to the Court, the following principles emerge on the expression “change of opinion” in the context of Section 147 of the Act:

"(i) A mere change of opinion cannot, per se, be a reason to reopen an assessment, as the AO has the power to reassess and not the power to review. The concept is an in-built test to check abuse of power, and after 01.04.1989 the AO may reopen only if there is tangible material, with the reasons having a live link with the formation of the belief;

(ii) A change of opinion implies the formulation of an opinion and then a change thereof. It presupposes a conscious application of mind and the formation of an opinion during the original assessment proceedings;

(iii) The court must verify whether the earlier assessment has, either expressly or by necessary implication, expressed an opinion on the matter which is the basis of the alleged escapement of income;

(iv) If the assessment order is non-speaking, cryptic or perfunctory, it may be difficult to attribute any opinion to the AO, and every attempt to tax escaped income cannot be absorbed by judicial intervention on an assumed change of opinion. Where there is a perceptible lack of any inquiry on the specific aspect, the plea of change of opinion is legally untenable;

(v) Where no opinion was formed in the first instance, the revenue may reopen upon the discovery of facts suggesting that income has escaped assessment. But where the point was well considered in the original proceedings, reassessment merely because the AO now takes a different view on the same facts is a change of opinion."

The appeal was dismissed.

Appearance:

For Petitioner(s) :Mr. Mukul Rohatgi, Sr. Adv. Mr. Ajay Vohra, Sr. Adv. Mr. Aniket Deepak Agrawal, AOR Mr. Abhisek Singhvi, Adv. Mr. Keshav Sehgal, Adv.

For Respondent(s) : Mr. K M Nataraj, A.S.G. Mr. Nisha Bagchi, Sr. Adv. Mr. Raj Bahadur Yadav, AOR Mr. Sudarshan Lamba, AOR Mrs. Gargi Khanna, Adv. Mr. Mohd Akhil, Adv. Ms. Indira Bhakar, Adv. Mr. B K Satija, Adv.