Dropped Reassessment proceedings revived on change of opinion quashed

Dropped Reassessment proceedings revived by corrigendum on change of opinion without any new material not allowable.

In a recent judgment, Hon’ble High Court has held that once dropped Reassessment proceedings revived by corrigendum on change of opinion without any new material not allowable

ABCAUS Case Law Citation:
ABCAUS 4140 (2024) (07) HC

In the instant case, the assessee had filed a petition challenging the notice issued under Section 148 of the Income Tax Act, 1961 (the Act) pursuant to a corrigendum of the even date issued to the order under Section 148A(d) of the Act by the Assessing Officer (AO).

The petitioner was a company registered with the Registrar of Companies and had been regularly filing its Income Tax Return.

The AO issued a notice under Section 148 of the Act, proposing to reassess the income based on a belief that certain income had escaped assessment for the relevant Assessment Year. Later a show cause notice was issued under Section 148A(b) of the Act.

In response to the said notice, the petitioner duly filed a reply as required under Section 148A(c) of the Act, asserting that since it had not sold any immovable property during the concerned AY, therefore, no long-term capital gains could arise from such sale.

After duly considering the submissions, the AO accepted the reply and concluded that the petitioner’s claim regarding the purchase of property was correct. The petitioner had denied the alleged transaction which was further examined and found to be true.

Therefore, taking into consideration all the submissions, the AO passed an order under Section 148A(d) of the Act concluding that the reassessment proceedings could not continue under the given circumstances as it was not a suitable case for issuing a notice under Section 148 of the Act.

However, on the even date itself, the AO issued a corrigendum against the original order passed under Section 148A(d) of the Act, allowing the continuation of reassessment proceedings by issuing a notice under Section 148 of the Act, which had originally been dropped.

Before the Hon’ble High Court the petitioner submitted that the AO cannot be allowed to initiate proceedings of reassessment as per their opinion and convenience. According to him, the AO failed to provide any cogent reasoning in the corrigendum which was issued for opening reassessment. He, therefore, contended that the reasons to believe is imperative for initiation of reassessment which is missing in the case at hand.

It was further contended that it is well settled that a mere change of opinion would not constitute a reason to reopen the assessment proceedings and the said position is even more fortified with the fact that the alleged information provided with the show cause notice was incorrect and does not relate to the petitioner. The corrigendum would indicate that the case of the petitioner was being reopened on a mere suspicion for conducting roving enquiries which is completely impermissible as per the Act.

It was further canvassed before us that the AO failed to bring anything contrary on record against the submissions filed by the petitioner. It was further contented that the impugned proceedings by way of a corrigendum was only an afterthought and reflects a complete non-application of mind on the part of the Income Tax Department.

The Revenue submitted that the impugned notice had been issued after the final objections were raised by the Comptroller and Auditor General of India to the effect that the assessment had not been made in accordance with the provisions of the Act.

It was further contended that though the proceedings were dropped, however, upon further examination of the accounts of the petitioner, it was found that mere denial of transaction was not sufficient to terminate the proceedings. It was the contention that the transaction ought to have been fully investigated from the source and therefore, the AO had sufficient reasons to believe for the issuance of the impugned notice.

The Hon’ble High Court observed that Supreme Court has held that an audit by the Comptroller and Auditor General of India is principally intended for the purposes of satisfying itself with regard to the sufficiency of the rules and procedures prescribed for the purpose of securing an effective check on the assessment, collection and proper allocation of revenue. The relevant Internal Audit Manuals and Circulars indicate that Audit Department should not in any way substitute itself for the Revenue authorities in the performance of their statutory duties.

The Hon’ble High Court further observed that it had previously held that the audit objection constitutes merely an information and no more. The audit report objections cannot be a solitary basis to initiate reassessment proceedings.  

The Hon’ble High Court noted that the Supreme Court has held that for reopening an assessment under Section 147, there has to be certain „tangible material‟ to show that income has escaped assessment and non-satisfaction of this condition is an arbitrary action. It took a view that the concept of „change of opinion‟ is an in-built test to check abuse of power by the Revenue and the reasons recorded for opening reassessment must have a live link with the formation of the belief.

The Hon’ble High Court also observed that it had held that “tangible material‟ or factual information can be received from various external sources and the objections raised by an Audit Party is not absolutely barred. The factual information can come from various sources including an audit objection. But a blanket reliance should not be placed on such objection to initiate reassessment proceedings and the AO must apply its own mind.

The Hon’ble High Court observed that as evident from the impugned corrigendum that no new material had been found by the Revenue which would warrant reopening the assessment. A reading of the two notices would crystallize the fact that the corrigendum had been issued merely on the basis of a change of opinion as two different conclusions are being drawn on the basis of same material i.e., audited final accounts of the petitioner. Thus, the AO had apparently reviewed its own decision, which is not permissible as per the settled law.

The Hon’ble High Court stated that it is trite that under the guise of power vested in the Revenue to reassess an income which had escaped assessment upon production of fresh tangible material, it cannot be allowed to exercise the power of review.

The Hon’ble High Court held that the impugned proceedings were unsustainable and deserved to be quashed.

Accordingly, the Hon’ble High Court allowed the writ petition and quashed the notice issued via corrigendum alongwith all the consequential proceedings. 

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