SC explains meaning/scope of reason to believe u/s 147 and change of opinion by AO

Supreme Court explains meaning and scope of “reason to believe” u/s 147 and when reopening can be said to be mere change of opinion.

In a recent judgment, Hon’ble Supreme Court has explained the meaning and scope of “reason to believe” under Section 147 of Income Tax Act 1961 (1961 Act) and when the Assessing Officer can be said to have any tangible material or where the reopening of assessments can be said to be mere change of opinion.

ABCAUS Case Law Citation:
5147 (2026) (05) abacus.in SC

Important Case Laws relied upon by Parties:
Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd.
Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd.
GKN Driveshafts (India) Ltd. v. ITO
Calcutta Discount Co. Ltd. v. Income Tax Officer
M/s Phool Chand Bajrang Lal and Another v. Income Tax Officer

In the instant case, the question was as to whether the amount received to the assessee company from AOP(real estate developer) as share of profit was taxable or not? Notice issued u/s 148 stated that certain income of the the assessee derived from the AOP, chargeable to tax had escaped assessment within the meaning of sub-clause (iv) of clause (c) of Explanation (2) to Section 147 of the 1961 Act.

It was the Revenue’s case that the income accrued to the assessee from the AOP was not a share of the AOP’s profit but is a share of revenue and hence should have been taxed at the hands of the assessee, rather than being exempted as a profit of the AOP under Section 80IB(10) of the 1961 Act.

In the instant case, the Revenue had sought to reopen assessment on the basis of books of account and six documents impounded during the survey, carried out at the premises of the assessee. Alongside impounding the documents, the statement of one Director of the assessee, was recorded on oath under Section 131 of the Act.

The main contention of the assessee was that out of the six impounded documents, four were already with the Revenue at the time of scrutiny assessment under Section 143(3) and that the remaining two documents did not carry the matter any further.

It was also contended by the assessee that that disclosures regarding the AOP and the income derived from it had been made in its returns and the Revenue had even considered the same in the Assessment Order. Hence, the notice of reopening was bad in law as the reasons recorded are nothing but a mere change of opinion since the relevant facts and record had already been duly considered, appreciated and accepted by the Revenue at the time of original assessment. 

The Hon’ble Supreme Court observed that under Section 147 of the 1961 Act, 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. Also, 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.

The Hon’ble Supreme Court further observed that the expression “escaped assessment” is not restricted to those cases only which have not come to the notice of the Assessing Officer at all, but also applies to those cases where an assessment has been made but (i) income chargeable to tax has been under-assessed, or (ii) such income has been assessed at too low a rate, or (iii) such income has been made the subject of excessive relief under this Act, (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.   

The Hon’ble Supreme Court observed that the validity of the reopening has to be ascertained by limiting the enquiry to the ‘reasons recorded’ under Section 148 only, and the merits of the reopening cannot be looked into to justify or discredit the reopening. In other words, there can be a scenario where the ‘reasons recorded’ by the Revenue would justifiably give rise to a prima facie belief that income has escaped assessment, even though upon reopening of assessment, the belief turns out to be unfounded. In such a scenario, the reopening would remain valid, irrespective of the outcome arrived at. On the other hand, there can be a scenario where even though the merits indicate that income had escaped assessment, if the Revenue failed to record those reasons under Section 148, then the reopening in such a scenario would be invalid since the reopening cannot be justified by other reasons gathered subsequently at the merits stage.

The Hon’ble Supreme Court stated that to decide whether the Assessing Officer has a ‘reason to believe’ that income chargeable to tax has escaped assessment, it is only those materials which were before the Assessing Officer at the time of initiating proceedings that have to be taken into account, and not any further materials which subsequently came to light in the course of the proceedings under this section. The expression “reason to believe” has been interpreted by the Apex Court to mean that the Assessing Officer must have some ‘tangible material’ in his possession to come to the conclusion that there is escapement of income from assessment, before assuming jurisdiction under Section 147. In other words, this tangible material must provide him with the reason to believe that the income has escaped assessment.

The Hon’ble Supreme Court observed that it is settled law that mere intimation by an assessee of a transaction does not preclude the Assessing Officer from reopening assessment if there is tangible material to prima facie indicate that primary facts regarding the true nature of the transaction had not been brought to the notice of the Assessing Officer by the assessee.

The Hon’ble Supreme Court observed that the majority in the Constitution Bench decision of the Apex Court had observed that the duty to disclose all the primary facts relevant to a question before the assessing authority lies on the assessee and mere production of books of account and documents  does not fulfil that obligation, unless the assessing authority’s attention is brought to particular items in the account books, or particular portions of the documents which are relevant.

The Hon’ble Supreme Court further pointed out that as held by it, acquiring fresh information relating to a concluded assessment which goes to expose the falsity of a statement made by the assessee at the time of original assessment is different from drawing a fresh inference from the same facts and material which was available with the Assessing Officer at the time of original assessment proceedings. Where the transaction itself on the basis of subsequent information, is found to be a bogus transaction, the mere disclosure of that transaction at the time of original assessment proceedings, cannot be said to be disclosure of the “true” and “full” facts in the case, and the ITO would have the jurisdiction to reopen he concluded assessment in such a case.

The Hon’ble Supreme Court further stated that the validity of a reopening must be tested solely on the basis of the reasons recorded at the time of issuing the notice under Section 148. A document not referred to in those reasons recorded under Section 148 cannot be used to justify the validity of the reopening, as the assessee must not be deprived of a fair opportunity to dispute such grounds.

On the issue of whether the income received was share of profit, the Hon’ble Supreme Court observed that it is settled law that interpretation of a particular clause of an agreement is a question of law and not a question of fact. In order words, construction of a document constitutes a question of law.

The Hon’ble Supreme Court noted that assessee was entitled to withdraw a share of 35% of the gross sale proceeds rightaway, even before the expenses were deducted from the gross sale proceeds. It was from the remaining 65% that “all required and relevant expenditure for the purpose of the business of the AOP. which clearly indicated that the 35% was an income in the hands of the assessee nd a diversion for the AOP due to overriding title on the said 35%, created by AOP Agreement. Therefore, the 35% share attributable to assessee has to be taxed at the hands of the assessee itself, and not the AOP.

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