2025 (6) TMI 1537 - AT - Income Tax

Validity of reassessment proceedings - case of the assessee is re-opened after a period of four years - tangible material - eligibility of reasons to believe - HELD THAT - CIT(A) as correctly as not a case of an assessee who has failed to furnish full and true particulars at the time of assessment. Where the assessee has discharged his duty and the assessment completed u/s 143(3) is to be reopened within the period of 4 years from the end of the assessment year the assessing officer has to either show that the disclosure by the assessee was not full and true or he has come into possession of some tangible material to come to the conclusion that there is escapement of income. The tangible material must have a live link with the formation of the belief regarding escapement of income. When there is no failure on the part of the assessee to furnish full and true particulars and there is no tangible material on the basis of which the assessing officer can allege escapement of income the only consequence would be that the assessing officer was exercising the power of review on the very same materials which he is presumed to have examined. The first proviso to section 147 can be resorted to only if the assessee has not discharged the duty. This is not allowed by the statute and higher courts. With these observations no other alternative but to annul the assessment - Appeal of the Revenue is dismissed.

Summary

Issues Presented and Considered

The core legal questions considered in this appeal are:

1. Whether the reassessment proceedings initiated under section 147 of the Income Tax Act, 1961 (the Act) for the assessment year 2007-08 were valid and legally sustainable, particularly considering the time limit and the material on which the Assessing Officer (AO) relied to form the "reason to believe" that income had escaped assessment.

2. Whether the AO had any new tangible material or information coming into possession after the original assessment under section 143(3) of the Act, which could justify reopening the assessment beyond the normal four-year period.

3. Whether the reopening of assessment was merely a change of opinion by the AO, which is impermissible under the law.

4. Whether the Revenue's grounds of appeal challenging the deletion of the addition and the validity of the reassessment proceedings were properly raised and substantiated.

Issue-wise Detailed Analysis

Validity of Reassessment Proceedings under Section 147

Legal Framework and Precedents: Section 147 of the Income Tax Act empowers the AO to reopen a completed assessment if he has "reason to believe" that income chargeable to tax has escaped assessment. The Supreme Court has clarified that such "reason to believe" must be based on tangible material and not mere suspicion or change of opinion. The reopening beyond four years is permissible only if the income has escaped assessment due to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Relevant precedents include the Supreme Court ruling in ITO v. Habibullah, which emphasized the necessity of tangible material for reopening, and the principle that mere change of opinion does not justify reassessment.

Court's Interpretation and Reasoning: The Commissioner of Income Tax (Appeals) [CIT(A)] held that the reassessment proceedings were invalid because the AO had reopened the assessment after four years without any new tangible material. The AO relied on observations from the High Court decision relating to AY 2005-06, which concerned a different year and was purely a question of fact. The CIT(A) emphasized that each assessment year is independent and that facts from one year cannot form the basis for reopening another year's assessment without new material.

The AO's reasons were based on a petition filed by the assessee itself in an earlier year and on the fact that the assessee showed excess income over expenditure. However, these facts were already disclosed and examined during the original assessment under section 143(3). The AO's reliance on these facts amounted to a mere change of opinion, which is not a valid ground for reopening.

Key Evidence and Findings: The assessee had disclosed all relevant facts, including payments of rent to a related party, during the original assessment and had responded to specific queries by the AO with full details and PAN information. The AO had issued a questionnaire and received full disclosure, which was examined before completing the original assessment. No new information or evidence came to the AO's notice after the original assessment to justify reopening.

Application of Law to Facts: The CIT(A) applied the legal principles to find that the reopening notice issued under section 148 was invalid. The AO did not have any new tangible material that would support the formation of a reason to believe that income had escaped assessment. The reassessment was therefore a case of impermissible change of opinion.

Treatment of Competing Arguments: The Revenue argued generally that the CIT(A)'s order should be set aside and the AO's order restored. However, the Revenue did not challenge the CIT(A)'s detailed findings on the invalidity of reassessment due to lack of new material and the four-year time bar. The Tribunal noted that the Revenue's grounds were general and did not specifically address the legality of the reassessment proceedings.

Conclusions: The reassessment proceedings were held to be invalid and the additions made on that basis were annulled. The appeal of the Revenue was dismissed accordingly.

Significant Holdings

The Tribunal preserved and relied on the following crucial legal reasoning from the CIT(A)'s order:

"Before issuing any notice U/S 148 the assessing officer must have reason to believe that any income chargeable to tax has escaped assessment. Reason to believe cannot be a reason to suspect merely. There must be a direct nexus between the material coming to the notice of the assessing officer and the formation of the belief that there has been escapement of income of the assessee from assessment in a particular year. The material for formation of belief must be relevant and not vague."

"If the entire material had been placed by the assessee before the Assessing Officer at the time when the original assessment was made and the Assessing Officer applied his mind to that material and accepted the view canvassed by the assessed, then without any new material coming into possession of the AO, that by itself would not give him a ground to conclude that income has escaped assessment and, therefore, the assessment needed to be reopened."

"Mere a reason is recorded will not constitute a valid reason and is not sufficient to issue notice u/s 148 of the Act. To constitute a valid reason to believe there must be some new material coming into light with the assessing officer, merely a change of opinion cannot constitute a reason to believe."

"Reopening of case under for assessment u/s 147 after expiry of 4 years cannot be justified unless the income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose all true & material facts necessary for his assessment."

"Reassessment proceedings will be invalid in case the assessment order itself records that the issue under consideration was raised and was decided subsequently. Reassessment proceedings in the said cases will be hit by principle of 'change of opinion'."

"The Supreme Court has reaffirmed the principle in ITO v. Habibullah, [1962] 44 ITR 809 SC HELD: there should be some 'tangible material' coming into the possession of the AO in such cases to enable him to resort to section 147."

Core Principles Established:

- The AO must have tangible, relevant new material to justify reopening an assessment beyond four years.

- Mere reliance on facts or judicial decisions relating to other assessment years does not constitute new material for reopening.

- Reopening on the basis of a mere change of opinion or re-examination of the same material is impermissible.

- Full and true disclosure by the assessee at the time of original assessment bars reopening unless suppression or concealment is established.

- Each assessment year is independent and cannot be reopened based on findings or disputes in other years without fresh material.

Final Determinations on Each Issue:

1. The reassessment proceedings initiated under section 147 for AY 2007-08 were invalid as they were based on a mere change of opinion without any new tangible material.

2. The AO did not have any new material coming into possession after the original assessment to justify reopening beyond the four-year limit.

3. The Revenue's general grounds of appeal challenging the CIT(A)'s order were insufficient and did not address the legality of reassessment effectively.

4. Consequently, the additions made in the reassessment order were annulled and the Revenue's appeal was dismissed.