When Can Re-Assessment Be Opened U/s 147, 148 of Income Tax Act? Supreme Court Explains

While dealing with a tax case related to development of a housing project, the Supreme Court recently elucidated the position of law pertaining to reopening of assessments under Section 147 of the Income Tax Act, 1961.

A bench of Justices JB Pardiwala and KV Viswanathan referred to Section 147 (pre-2012) and Section 148 (pre-2006) of the IT Act and observed that power to reopen assessment is not confined to cases where the assessee has concealed income. It extends to all cases where the Assessing Officer has “reason to believe”, based on tangible material in his possession, that income has “escaped assessment”.

“Subject to the provisions and safeguards in the section, the Assessing Officer can reassess income for an assessment year irrespective of whether the original assessment was merely processed under Section 143(1) or assessed under Section 143(3) of the Act. The power to reopen assessment is not confined to cases where the assessee has concealed his income; it also extends to cases where though there has been no concealment by the assessee, the Assessing Officer has reason to believe, in consequence of tangible material in his possession, that income has escaped assessment.”

Interpreting “escaped assessment”, the Court said that the term not only covers cases which have not come to the notice of the Assessing Officer at all, but also to cases where assessment has been made but -

- income chargeable to tax has been under-assessed,

- such income has been assessed at too low a rate,

- such income has been made the subject of excessive relief under the Act,

- excessive loss or depreciation allowance or any other allowance under the Act has been computed.

In terms of the Court's observations, the two pre-conditions for exercise of jurisdiction to reopen an assessment under Sections 147 and 148 are:

- The Assessing Officer must have 'reason to believe' that 'income' chargeable to tax has 'escaped assessment;' and

- The Assessing Officer must record reasons for reopening of assessment before issuing notice under Section 148.

The judgment further clarified that “reason to believe” under Section 147 does not require an established fact of assessment. That is, the Assessing Officer need not have finally ascertained facts to prove escapement of income. It merely means cause or justification and a test of validity of reopening entails a limited enquiry into the “reasons recorded” under Section 148. The merits of the reopening cannot be gone into to justify or discredit it.

The case arose out of an AOP agreement entered into by the respondent-SPPL for a housing project. Clause 7 of the agreement provided that all sale proceeds from flat purchasers would first be received in the name of the AOP. Out of those receipts, SPPL would immediately become entitled to 35% of the gross collections, while the remaining 65% would be retained for meeting all project-related expenses.Only the balance remaining after expenses would ultimately accrue to the other member.

The Income Tax Department contended that SPPL's entitlement was not linked to actual profits of the AOP, but was instead a fixed share of gross revenue, making it taxable in SPPL's hands. However, the ITAT and Bombay High Court accepted SPPL's argument that the amount represented an exempt “share of profit” from the AOP, prompting the department to appeal to the Supreme Court.

Allowing the Revenue's appeal, the top Court observed that the 35% share of profit received by the respondent was a fixed share of gross revenue, making it a taxable income.

Referring to judicial precedents, it held that mere disclosure of the existence of the AOP and the quantum of income derived by the SPPL from the AOP at the time of original assessment, did not preclude the Assessing Officer from reopening assessment where fresh information emerged which prima facie indicated that certain income had escaped assessment.

It was noted that the Revenue had accepted SPPL's declaration regarding the income derived from the AOP at face value and not examined the fundamental nature of the income. That is, it did not question whether the income was indeed a share of the profit of AOP.

The Court also noted that a 'change of opinion' plea by the respondent presupposed formation of a previous opinion, but the same was apparently not formed.

“There is perceptible lack of any inquiry or adjudication regarding the specific terms of the AOP Agreement, particularly the nature of income under Clause 7. In the absence of such an initial inquiry, the plea of "change of opinion" is legally untenable. A change of opinion presupposes the existence of a previously formed opinion.

Where no such opinion was formed in the first instance, the Revenue is not precluded from reopening the assessment upon the discovery of facts suggesting that income has escaped assessment.

Thus, it can be concluded that since the Revenue had not formed any opinion on the fundamental nature of the income accrued to the SPPL from the AOP as to whether it is a share of profit or revenue, the Revenue retains the authority to reassess the income upon coming across information which prima facie indicates that the income is tax-liable revenue and not tax-exempt profit”, the Court observed.

The judgment further added that an Income Tax Officer may start reassessment proceedings either because some fresh facts come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. “In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but acting on fresh information.”

In the facts of the case, it was concluded that the Revenue's notices for reopening of SPPL's assessment were the result of the Revenue acting on fresh information and not merely change of opinion.

Cause Title: COMMISSIONER OF INCOME TAX III VS. M/S. SANAND PROPERTIES PVT. LTD.

Citation : 2026 LiveLaw (SC) 488

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