Reopening reasons must explain what material was not disclosed which the assessee ought to have disclosed.

Reopening reasons must explain what material was not disclosed which the assessee ought to have disclosed. Explanation-1 of section 147 do not relieves AO of burden of demonstrating the assessee’s failure.

Delhi High Court explains the jurisdictional requirement of reopening of income tax cases u/s 14/148 post amendment

ABCAUS Case Law Citation:
ABCAUS 2007 (2017) (07) HC

The Hon’ble High Court observed that the jurisdictional requirement that has to be fulfilled for justifying re-opening of assessment where an assessment originally has been made under Section 143(3) of the Act and where the re-opening is after the expiry of 4 years from the end of the relevant AY is that the Revenue has to show that some income chargeable to tax escaped assessment by reason of the failure on the part of the Assessee “to disclose fully and truly all material facts necessary for his assessment, for that assessment year”.

The Hon’bleHigh Court noted that Section 147 underwent a significant change by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1st April, 1989. The Supreme Court has held that after 1st April, 1989, the AO has the power to re-open the assessment in terms of first proviso to Section 147 of the Act “provided there is ‘tangible material’ to come to the conclusion that there is escapement of income from assessment.”

The Hon’ble High Court observed that It has been repeatedly emphasized in several decisions including the aforementioned decision of the Hon’ble Apex Court that the re-opening of an assessment on the same material that was available with an AO during the original assessment proceedings would be a case of mere change of opinion. 

The Hon’ble Delhi High Court explaind the provisions related to reopening as under: 

The burden is on the AO to show that there has been a failure by the Assessee 

1. What Explanation (1) does is to clarify that the mere production of the account books or other evidence by the Assessee before an AO from which the AO, with due diligence, could have discovered ‘material evidence’ would not necessarily amount to disclosure. In other words, the fact of production of the account books and other evidence should not be presumed to be the making of a disclosure of ‘all material facts’ by the Assessee. Nevertheless, the burden is on the AO to show that there has been a failure by the Assessee to disclose fully and truly all material facts necessary for the assessment. 

Explanation-1 may not lead to an automatic presumption of disclosure

2. In a situation where the Assessee has already produced all the account books and other evidence, while Explanation (1) may not lead to an automatic presumption of disclosure, unless there is some fresh tangible material available with the AO, he will not be able to show that there was a failure on the part of Assessee to disclose fully and truly all material facts. If the material is that which was already available during the original assessment proceedings, the AO will be unable to show that there has been a failure by the Assessee to disclose fully and truly all material facts. 

The Explanation-1 would not relieve the AO of the burden of demonstrating the Assessee’s failure 

3. The expression “will not necessarily amount to disclosure” as used in Explanation 1 to Section 147 of the Act brings in an element of subjectivity and also the requirement of assessing on a case-to-case basis where in fact there has been a full disclosure by virtue of the Assessee producing the account books and other evidence in the first instance. This explanation, therefore, would not relieve the AO of the burden of demonstrating the Assessee’s failure to make a full and true disclosure of all material facts necessary for the assessment for the AY in question. 

The reasons have to explain what the material was that was not disclosed by the assessee 

4. A second aspect of the matter is that the above jurisdictional requirement should be shown to have been fulfilled from the reasons for re-opening of the assessment. In other words, the reasons must speak for themselves. The mandatory jurisdictional requirement in terms of the first proviso to Section 147 of the Act will not be fulfilled if the reasons do not themselves clearly indicate that there was in fact a failure by the Assessee to make a full and true disclosure of all material facts. The reasons have to explain what the material was that was not disclosed by the Assessee which the Assessee ought to have disclosed in the first instance. This should be apparent from a reading of the reasons themselves. The reasons have to go beyond merely repeating the language of the provision regarding the failure of the Assessee to make a full and true disclosure of material facts. They should indicate in what manner was there such a failure.

The Hon’ble High Court clarified that in many of the cases, where the re-opening of an assessment is challenged, the Revenue tries to make up for the obvious defect in the reasons themselves which do not spell out the reasons by providing a justification at the stage of disposal of the objections or later in the counter-affidavit when the re-opening is challenged by a writ petition. This, again, is impermissible in law. Since the reasons must speak for themselves, a subsequent attempt to supply the omission at the stage of an order disposing of the objections raised by the Assessee or providing them in the counter-affidavit in reply to the writ petition or even worse, making good that defect in the course of arguments before the Court, will simply not suffice.