2025 (6) TMI 412 - HC - Income Tax

Reopening of assessment - Form 26AS was available on records for reason to believe for escapement of income - HELD THAT - It is clear from the findings recorded that there were apparent errors in the Form 26AS which could be discovered by merely looking at it. Certain entries were repeated and therefore the income from salaries returned by the petitioner did not conform to the TDS reflected in the Form 26AS. Plainly if there is material on record which on the face of it appears to be erroneous the same cannot be considered as a tangible material for forming a belief that the assessee s income had escaped assessment. Revenue s case that since the assessee s return was not picked up for scrutiny the extended period of limitation of six years would apply and therefore any material that could give rise to reason to believe that the assessee s income has escaped assessment would be sufficient to reopen the assessment - It is correct that where the return filed by the assessee has not been examined by issuance of notice u/s 143 (3) of the Act; therefore the question of change of opinion may not arise. However this is not an issue involved in this present petition. This is not a case where the assumption of jurisdiction has been faulted on the ground that there has been a change of opinion. In the present case we find that CIT(A) as well as the learned ITAT have been persuaded to accept that there was no tangible material for the AO to believe that the petitioner s income had escaped assessment on the basis of the quality of the material as available with the AO. Given the fact that there were apparent errors in the Form 26AS and if the duplicate entries were eliminated according to the AO there was only a difference of Rs. 1926/- in the income of salary as returned by the assessee and as reflected in the Form 26AS; we are unable to accept that Form 26AS would furnish any reason for the AO to believe that the assessee s income had escaped assessment. Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The Court considered the following core legal questions:

A. Whether the ITAT was justified in upholding the CIT(A)'s order relying on precedents that, according to the Revenue, had facts different from the present case (specifically, the judgments in CIT vs. Orient Craft Ltd. and CIT vs. Kelvinator of India Ltd.)?

B. Whether the ITAT erred in upholding the CIT(A)'s order that found the Assessing Officer (AO) did not possess tangible material to initiate reassessment proceedings under Section 147 of the Income Tax Act, 1961, despite the presence of Form 26AS showing a purported escapement of income?

C. Whether the ITAT erred in upholding the CIT(A)'s quashing of the reassessment order without examining the facts and merits of the case?

D. Whether the Revenue's reliance on extended limitation and the principle that any material giving reason to believe income has escaped assessment suffices to reopen assessment is legally sustainable in the facts of this case?

2. ISSUE-WISE DETAILED ANALYSIS

Issue A and B: Reliance on Precedents (Orient Craft Ltd. and Kelvinator of India Ltd.)

The Revenue challenged the ITAT's reliance on these precedents, arguing that the facts in those cases differ materially from the present facts. The Court examined the applicability of these precedents in the context of the present facts.

Relevant legal framework involves the principle that reopening of assessment under Section 147 requires tangible material to form a reason to believe that income has escaped assessment. The Supreme Court and High Courts have consistently held that mere suspicion or change of opinion does not justify reopening.

The Court noted that the precedents relied upon emphasize the need for tangible material and reason to believe, not mere discrepancies or clerical errors. The Court found no error in the ITAT's reliance on these precedents, as the principles enunciated therein remain applicable despite factual differences.

The Court reasoned that the presence of duplicate entries in Form 26AS, which inflated the TDS figures, undermined the quality of the material relied upon by the AO. Hence, the factual distinctions did not detract from the legal principle that reopening requires credible and tangible material.

Issue C: Tangible Material for Reopening under Section 147

The AO initiated reassessment based on a mismatch between the salary income declared by the assessee and the TDS reflected in Form 26AS. The AO noticed duplicate entries in Form 26AS, which inflated the TDS amount, leading to a perceived difference in income.

The CIT(A) and ITAT found that the only material on record was Form 26AS, which contained apparent errors and duplicate entries. This, the Court held, could not constitute tangible material to form a reason to believe that income had escaped assessment.

The Court emphasized that the mere existence of Form 26AS with inflated TDS entries, which could be identified as erroneous on the face of it, does not justify reopening. The Court applied the legal standard that tangible material must be credible and reliable, not tainted by obvious errors.

The Court also rejected the Revenue's contention that the extended limitation period of six years applies simply because the return was not scrutinized under Section 143(3). It clarified that this issue was not directly in dispute but noted that the principle does not override the requirement of tangible material.

Issue D: Quashing of Reassessment Order Without Merits Examination

The Revenue contended that the CIT(A) and ITAT erred in quashing the reassessment order without examining the facts and merits. The Court rejected this contention, observing that the jurisdictional question of whether reassessment could be initiated was a preliminary and threshold issue.

The Court held that if the AO lacks tangible material to form a reason to believe, the reassessment proceedings are invalid at inception and must be quashed without delving into the merits.

This approach aligns with established jurisprudence that protects taxpayers from arbitrary reopening and ensures that reassessment is based on a sound foundation.

3. SIGNIFICANT HOLDINGS

The Court held:

"If there is material on record which on the face of it appears to be erroneous, the same cannot be considered as a tangible material for forming a belief that the assessee's income had escaped assessment."

"Given the fact that there were apparent errors in the Form 26AS and if the duplicate entries were eliminated, according to the AO, there was only a difference of Rs. 1926/- in the income of salary as returned by the assessee and as reflected in the Form 26AS; we are unable to accept that Form 26AS would furnish any reason for the AO to believe that the assessee's income had escaped assessment."

The Court reaffirmed the core principle that reopening of assessment under Section 147 requires tangible, credible material and cannot be based on mere discrepancies or erroneous documents.

It further established that reliance on precedents emphasizing this principle remains valid despite factual differences.

Finally, the Court concluded that the reassessment proceedings initiated on the basis of flawed Form 26AS entries lacked jurisdictional foundation and were rightly quashed by the CIT(A) and ITAT.

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