2025 (5) TMI 892 - HC - Income Tax

Reopening of assessment - basis of the materials collected during search and seizure operation - period of limitation - reason to believe or mere change of opinion - HELD THAT - The assessment was carried out at the first instance on the basis of the materials collected during search and seizure operation including the ledgers/cash book of different years found in the tally data of the petitioner and also the appraisal report based thereupon. Appraisal report was placed before the AO to examine the claim. If the same material formed the basis of the AO to pass the original assessment order the reopening of the assessment by issuance of notice u/s 148 of the Act would be a mere change of opinion of the AO and not a case of reason to believe on basis of the material which has subsequently come to his notice and/or which the assessee failed to truly and fully disclose during assessment proceedings. This is a case where the assessee had not submitted any books of account ledgers bills vouchers or supporting evidence and the AO proceeded to assess his returns on the basis of the materials collected during search and seizure operation including the appraisal report based upon that. Therefore reopening of assessment on the ground that the income liable to tax has escaped assessment as per the ingredients of Section 147 either on account of failure to truly and fully disclose the full details of the income derived by the petitioner or on the basis of materials subsequently coming to the notice of the Assessing Officer are not satisfied. Therefore the initiation of the reassessment proceedings by issuance of notice u/s 148 following the provisions of Section 147 is bad in law. The first issue is answered accordingly. Whether initiation of the proceedings was barred by limitation as provided u/s 149 (1) (b)? - We are satisfied that as per the existing provisions of Section 149 (1) (b) which stood amended by the Finance Act of 2021 with effect from 01.04.2021 the reassessment proceedings could be initiated beyond the period of four years up to six years counted from the end of the concerned assessment year i.e. 31.03.2015 up to 31.03.2021. Petitioner has wrongly interpreted the provisions of Section 149 (1) (b) in that regard as the relevant provisions of the Act quoted above do squarely indicate otherwise. As such the notice u/s 148 was not barred by limitation. Whether the PCIT was competent to grant permission for initiation of reassessment proceedings ? - We are once again clear in our mind that as per the provisions of Section 151 which stood before its amendment by the Finance Act of 2021 with effect from 01.04.2021 PCIT was fully competent to accord permission for reopening of assessment beyond the period of four years as prescribed under Section 149 (1) (b). Petitioner has laboured under a misconception of law in that regard. Therefore the issue is answered in favour of the revenue. Whether the notice u/s 148 uploaded on the portal on 01.04.2021 was beyond the period of limitation as the Assessing Officer was bound to issue notice for reopening assessment till 31.03.2021 and as such the same is bad in law ? - Division Bench of the Jharkhand High Court in case of Prakash Lal Khandelwal 2023 (3) TMI 1054 - JHARKHAND HIGH COURT had the occasion to examine the use of the expressions in different provisions of the Income Tax Act in the context of the language used in Section 153 (3). It was held that making of order issue of order and uploading of order on web portal or communication of order are all different acts or things. In the facts of the said case it was held that Section 153 (3) regulates only making of order. There is no restriction or limitation period prescribed under Section 153 (3) for issue of order uploading of order on web portal or communication of order . The opinion of the Apex Court as laid down in the case of CIT versus Mohammed Meeran Shahul Hameed 2021 (10) TMI 363 - SUPREME COURT while interpreting Section 263 of the Income Tax Act 1961 which uses similar expression like Section 153 (3) was also referred to and relied upon. The learned Court after going through the provisions of the Act the opinion of the Apex Court dispelled the contention of the petitioner that though the assessment order was dated 31.03.2021 but since it was uploaded on the next day i.e. 01.04.2022 the same was barred by limitation. It opined that different expression used by the Legislature at different places has certainly a different objective. Making of the order and communication of the order are two different things. Even the circular No.19 of 2019 dated 14.08.2019 relevant to the issue in the said case and relied upon by the assessee stipulated communication of the order and not making of the order as it said that every communication relating to assessment appeal order etc. shall have a DIN on the body of the order. On facts in the present case it is undisputed that the Assessing Officer had digitally signed the notice under Section 148 of the Act on 31.03.2021 at 7.01 p.m. As such it was not barred by limitation though it may have been uploaded on the portal on 01.04.2021. The instant issue is therefore answered against the assessee in favour of the revenue. We are of the considered opinion that the reopening of the assessment of the petitioner for the assessment year 2014-2015 as per the impugned notice dated 31.03.2021 under Section 148 following the provisions of Section 147 of the Act was bad in law. The materials relied upon by the Assessing Officer were not such which had subsequently come to his notice rather they were very much part of the assessment proceedings i.e. the appraisal report based on the search and seizure operation. The impugned notice dated 31.03.2021 and the order rejecting his objection dated 21.02.2022 are accordingly set aside. WP allowed.

Summary

The core legal questions considered by the Court in this matter are:

(i) Whether the reopening of the assessment for the assessment year 2014-2015 by issuance of notice dated 31.03.2021 under Section 148 of the Income Tax Act, 1961 was proper and valid in law;

(ii) Whether the impugned notice under Section 148 was barred by limitation as per the provisions of Section 149(1)(b) of the Income Tax Act;

(iii) Whether the Principal Commissioner of Income Tax (PCIT) was the competent authority to grant sanction for initiation of reassessment proceedings beyond the four-year period under Section 151 of the Act;

(iv) Whether the notice issued under Section 148 on 01.04.2021 was permissible in law given that the limitation period expired on 31.03.2021;

(v) Whether the reassessment proceedings were initiated on the basis of fresh material or merely on a change of opinion;

(vi) Whether the reopening was justified despite the matter being sub-judice before the Income Tax Appellate Tribunal;

(vii) Whether the proceedings initiated under Section 147/148 were bona fide and complied with the statutory requirements, including formation of "reason to believe" by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Validity of Reopening Assessment under Section 148/147

The legal framework governing reassessment proceedings is Sections 147 to 149 and 151 of the Income Tax Act, 1961, as applicable before amendments effective from 01.04.2021. Section 147 permits reopening if the Assessing Officer (AO) has reason to believe that income chargeable to tax has escaped assessment. Section 148 mandates issuance of notice before reassessment. Section 149 prescribes limitation periods, and Section 151 requires sanction from a higher authority for issuance of notice beyond four years.

Precedents such as the Apex Court decisions in Commissioner of Income Tax, Delhi vs. Kelvinator of India Ltd. and M/S Phool Chand Bajrang Lal vs. Income Tax Officer clarify that reassessment cannot be based on mere change of opinion but must be founded on tangible, fresh material that was not previously available or tends to expose untruthfulness in earlier disclosures. The AO must form a bona fide "reason to believe" based on specific, reliable, and relevant information.

In this case, the AO issued the notice under Section 148 relying on an appraisal report and audit objection dated 07.03.2017. However, the respondents admitted that the appraisal report was already available to the AO during the original assessment completed on 29.03.2016. The original assessment order was based on the same appraisal report and materials seized during a search and seizure operation, including tally data showing undisclosed investments and income. The petitioner had failed to produce any books of account or supporting documents during the original assessment.

The Court noted that reopening based on the same materials already considered in the original assessment amounts to mere change of opinion, which is impermissible. The reopening must be founded on fresh information that was not available earlier or which exposes the untruthfulness of the original disclosures. Here, no such fresh material was brought to light. The audit objection was based on the same appraisal report already in possession of the AO. Thus, the reassessment proceedings lacked a valid reason to believe and were bad in law.

2. Limitation under Section 149(1)(b)

Section 149(1)(b) permits issuance of notice under Section 148 beyond four years but within six years from the end of the relevant assessment year if the escaped income is Rs. 1 lakh or more. The assessment year under consideration is 2014-2015, so the limitation period for reopening extended up to 31.03.2021.

The petitioner contended that the notice issued on 01.04.2021 was beyond limitation. The respondents clarified that the Assessing Officer digitally signed the notice on 31.03.2021 at 7:01 p.m., and the delay in generation of the Document Identification Number (DIN) and email delivery on 01.04.2021 was due to automated software beyond the AO's control.

The Court relied on a Division Bench judgment of the Jharkhand High Court which distinguished between "making" or "issuing" an order and "uploading" or "communication" of the order on the web portal. The limitation applies to the date of issuance or making of the notice, not to the date of uploading or delivery. The Court found the AO had issued the notice within time, so the notice was not barred by limitation.

3. Competency of Principal Commissioner of Income Tax to Grant Sanction under Section 151

Section 151 requires sanction from the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner for issuance of notice beyond four years. The petitioner argued that the sanction was granted by the Principal Commissioner who lacked authority and that the sanction was invalid as it recorded zero income escaping assessment.

The Court held that the Principal Commissioner was competent to grant sanction under the pre-amendment provisions of Section 151. The petitioner's contention was based on a misconception of law. The sanction was valid and in accordance with the statutory scheme.

4. Effect of Subjudice Status of Related Appeals

The petitioner argued that reassessment was impermissible as the additions made in the original assessment had been deleted by the Commissioner of Income Tax (Appeals) and the matter was subjudice before the Income Tax Appellate Tribunal.

The Court observed that the issues before the Tribunal related to "undisclosed investment" and "undisclosed income" whereas the reassessment proceedings under Section 147/148 concerned escaped income due to underreported profits. These are distinct issues and do not bar reassessment. The pendency of appeals does not preclude the AO from reopening assessment if valid reasons exist.

5. Formation of "Reason to Believe" and Reliance on Audit Objection

The respondents contended that the AO formed a reason to believe based on audit objections highlighting discrepancies in net profit figures derived from tally data for the period 01.04.2013 to 22.08.2013. The petitioner countered that the audit objection and tally data were part of the original appraisal report available at the time of original assessment, thus not fresh material.

The Court emphasized the settled principle that reopening requires fresh tangible material or information exposing non-disclosure or untruthfulness. Reliance on the same appraisal report and audit objection already considered in the original assessment amounts to a change of opinion. The Court found no new material had come to the AO's notice after the original assessment. Therefore, the reason to believe was not validly formed.

6. Cooperation of the Petitioner and Evidentiary Basis

The respondents submitted that the petitioner failed to cooperate by not producing books of accounts, ledgers, bills, or vouchers during both the original and reassessment proceedings. The AO relied on seized materials and appraisal report to make additions.

While non-cooperation may justify adverse inferences, it does not validate reopening absent fresh material. The Court focused on the statutory requirements for reopening and found the procedural and substantive conditions for reassessment were not met.

Significant Holdings:

"The reopening of the assessment on the ground that income liable to tax has escaped assessment as per the ingredients of Section 147 of the Act either on account of failure to truly and fully disclose the full details of the income derived by the petitioner or on the basis of materials subsequently coming to the notice of the Assessing Officer are not satisfied. Therefore, the initiation of the reassessment proceedings by issuance of notice under Section 148 following the provisions of Section 147 of the Act is bad in law."

"Reopening of the assessment by issuance of notice under Section 148 of the Act would be a mere change of opinion of the Assessing Officer and not a case of reason to believe on basis of the material which has subsequently come to his notice and/or which the assessee failed to truly and fully disclose during assessment proceedings."

"The notice under Section 148 was issued by the Assessing Officer on 31.03.2021 at 7.01 p.m., within the prescribed time limit of six years as provided under Section 149(1)(b) of the Act. The generation of the DIN number and delivery on 01.04.2021 by the automatic computer system does not make the notice barred by limitation."

"The Principal Commissioner of Income Tax was competent to accord permission for reopening of assessment beyond the period of four years as prescribed under Section 149(1)(b)."

"The pendency of appeal before the Income Tax Appellate Tribunal on related issues does not bar the Assessing Officer from initiating reassessment proceedings on a distinct ground of escaped income."

In conclusion, the Court allowed the writ petition, quashed the notice under Section 148 dated 31.03.2021, and set aside the order rejecting the petitioner's objection dated 21.02.2022, holding the reassessment proceedings invalid and barred by law for lack of fresh material and proper reason to believe.